mdc20150930_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

84-0622967

(State or other jurisdiction

(I.R.S. employer

of incorporation or organization)

identification no.)

 

4350 South Monaco Street, Suite 500

80237

Denver, Colorado

(Zip code)

(Address of principal executive offices)

 

 

(303) 773-1100

(Registrant's telephone number, including area code)

 

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    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    No  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

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  

 

As of October 23, 2015, 48,886,424 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 
 

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

INDEX

 

 

 

 

Page
No.

Part I. Financial Information:

 

 
         

 

Item 1.

Unaudited Consolidated Financial Statements:

 

 
         

 

 

Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

1

 
         

 

 

Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014

2

 
         

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

3

 
         

 

 

Notes to Unaudited Consolidated Financial Statements

4

 
         

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 
         

 

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 
         
 

Item 3.

Defaults Upon Senior Securities

46

 
         
 

Item 4.

Mine Safety Disclosures

46

 
         

 

Item 5.

Other Information

46

 
         

 

Item 6.

Exhibits

47

 
       

 

Signature

47

 

 

 
(i)

 

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

(Unaudited)

         
ASSETS                
Homebuilding:                

Cash and cash equivalents

  $ 85,074     $ 122,642  

Marketable securities

    89,479       140,878  

Restricted cash

    4,800       2,816  

Trade and other receivables

    28,588       28,555  

Inventories:

               

Housing completed or under construction

    821,667       732,692  

Land and land under development

    957,695       935,268  

Total inventories

    1,779,362       1,667,960  

Property and equipment, net

    28,499       30,491  

Deferred tax asset, net

    115,145       140,486  

Metropolitan district bond securities (related party)

    24,074       18,203  

Prepaid and other assets

    72,448       67,996  

Total homebuilding assets

    2,227,469       2,220,027  

Financial Services:

               

Cash and cash equivalents

    37,921       31,183  

Marketable securities

    10,939       15,262  

Mortgage loans held-for-sale, net

    68,633       88,392  

Other assets

    5,906       3,574  

Total financial services assets

    123,399       138,411  

Total Assets

  $ 2,350,868     $ 2,358,438  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 41,514     $ 35,445  

Accrued liabilities

    106,918       115,117  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    846,907       846,450  

Total homebuilding liabilities

    1,010,339       1,012,012  

Financial Services:

               

Accounts payable and accrued liabilities

    54,164       57,268  

Mortgage repurchase facility

    43,755       60,822  

Total financial services liabilities

    97,919       118,090  

Total Liabilities

    1,108,258       1,130,102  

Stockholders' Equity

               

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding

    -       -  

Common stock, $0.01 par value; 250,000,000 shares authorized; 48,886,424 and 48,831,639 issued and outstanding at September 30, 2015 and December 31, 2014, respectively

    489       488  

Additional paid-in-capital

    916,975       909,974  

Retained earnings

    313,969       307,419  

Accumulated other comprehensive income

    11,177       10,455  

Total Stockholders' Equity

    1,242,610       1,228,336  

Total Liabilities and Stockholders' Equity

  $ 2,350,868     $ 2,358,438  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
- 1 -

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands, except per share amounts)

 
   

(Unaudited)

 

Homebuilding:

                               

Home sale revenues

  $ 454,740     $ 405,051     $ 1,293,457     $ 1,154,328  

Land sale revenues

    906       2,653       1,816       3,171  

Total home and land sale revenues

    455,646       407,704       1,295,273       1,157,499  

Home cost of sales

    (375,948 )     (338,037 )     (1,079,609 )     (953,690 )

Land cost of sales

    (819 )     (1,985 )     (1,944 )     (2,507 )

Inventory impairments

    (4,351 )     -       (4,701 )     (850 )

Total cost of sales

    (381,118 )     (340,022 )     (1,086,254 )     (957,047 )

Gross margin

    74,528       67,682       209,019       200,452  

Selling, general and administrative expenses

    (57,444 )     (50,512 )     (162,757 )     (148,652 )

Interest and other income

    838       5,926       5,412       24,088  

Interest expense

    -       -       -       (685 )

Other expense

    (350 )     (841 )     (2,539 )     (2,534 )

Loss on early extinguishment of debt

    -       -       -       (9,412 )

Other-than-temporary impairment of marketable securities

    (2,176 )     (4,293 )     (2,176 )     (4,293 )

Homebuilding pretax income

    15,396       17,962       46,959       58,964  
                                 

Financial Services:

                               

Revenues

    12,841       10,699       34,852       31,413  

Expenses

    (5,464 )     (5,643 )     (15,830 )     (16,182 )

Interest and other income

    885       906       2,885       2,395  

Financial services pretax income

    8,262       5,962       21,907       17,626  
                                 

Income before income taxes

    23,658       23,924       68,866       76,590  

Provision for income taxes

    (8,880 )     (8,466 )     (25,670 )     (28,086 )

Net income

  $ 14,778     $ 15,458     $ 43,196     $ 48,504  
                                 

Other comprehensive income (loss) related to available for sale securities, net of tax

    (226 )     (2,484 )     722       (4,203 )

Comprehensive income

  $ 14,552     $ 12,974     $ 43,918     $ 44,301  
                                 

Earnings per share:

                               

Basic

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

Diluted

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  
                                 

Weighted average common shares outstanding

                               

Basic

    48,785,973       48,625,685       48,756,265       48,607,425  

Diluted

    49,070,291       48,830,790       48,982,975       48,824,871  
                                 

Dividends declared per share

  $ 0.25     $ 0.25     $ 0.75     $ 0.75  

  

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
- 2 -

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Nine Months Ended

 
   

September 30,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 
   

(Unaudited)

 

Operating Activities:

               

Net income

  $ 43,196     $ 48,504  

Adjustments to reconcile net income to net cash used in operating activities:

               

Loss on early extinguishment of debt

    -       9,412  

Stock-based compensation expense

    6,589       4,754  

Depreciation and amortization

    3,084       2,928  

Inventory impairments

    4,701       850  

Other-than-temporary impairment of marketable securities

    2,176       4,293  

Loss (gain) on sale of marketable securities

    126       (7,622 )

Amortization of discount / premiums on marketable debt securities, net

    100       501  

Deferred income tax expense

    24,782       28,363  

Net changes in assets and liabilities:

               

Restricted cash

    (1,984 )     (839 )

Trade and other receivables

    (575 )     (5,821 )

Mortgage loans held-for-sale

    19,759       34,446  

Housing completed or under construction

    (89,841 )     (200,408 )

Land and land under development

    (25,805 )     (79,465 )

Prepaid expenses and other assets

    (8,072 )     (14,084 )

Accounts payable and accrued liabilities

    (4,722 )     932  

Net cash used in operating activities

    (26,486 )     (173,256 )
                 

Investing Activities:

               

Purchases of marketable securities

    (46,886 )     (409,846 )

Maturities of marketable securities

    1,510       165,089  

Sales of marketable securities

    94,910       372,301  

Purchases of property and equipment

    (830 )     (1,919 )

Net cash provided by investing activities

    48,704       125,625  
                 

Financing Activities:

               

Payments on mortgage repurchase facility, net

    (17,067 )     (31,292 )

Proceeds from issuance of senior notes

    -       248,375  

Repayment of senior notes

    -       (259,118 )

Advances on revolving credit facility

    -       10,000  

Dividend payments

    (36,646 )     (36,616 )

Proceeds from exercise of stock options

    665       63  

Net cash used in financing activities

    (53,048 )     (68,588 )
                 

Net decrease in cash and cash equivalents

    (30,830 )     (116,219 )

Cash and cash equivalents:

               

Beginning of period

    153,825       199,338  

End of period

  $ 122,995     $ 83,119  

  

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
- 3 -

 

  

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at September 30, 2015 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

2.

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We do not plan to early adopt the guidance and are currently evaluating the method of adoption and impact the pronouncement will have on our consolidated financial statements and related disclosures.

 

In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures ("ASU 2014-11"), which makes limited amendments to Accounting Standards Codification (“ASC”) Topic 860, "Transfers and Servicing." ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets. The only changes in ASU 2014-11 that are applicable to our consolidated financial statements are the disclosures for repurchase agreements effective for our fiscal periods beginning January 1, 2015 and interim periods beginning April 1, 2015. This guidance did not have a material impact on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends the consolidation requirements in ASC 810, primarily related to limited partnerships and variable interest entities. ASU 2015-02 is effective for our interim and annual reporting periods beginning January 1, 2016. Early adoption is permitted. This guidance is not expected to have a material impact on our consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs related to a recognized debt liability in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for our interim and annual reporting periods beginning January 1, 2016. Additionally, since ASU 2015-03 did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30) (“ASU 2015-15”) in August 2015. Under ASU 2015-15, an entity may present debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The guidance under these ASUs is not expected to have a material impact on our consolidated financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements (“ASU 2015-10”), which amends previously issued guidance on several topics. ASU 2015-10 is effective for our interim and annual reporting periods beginning January 1, 2016. The amendments in ASU 2015-10 are not expected to have a material impact on our consolidated financial statements.

 

 
- 4 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

3.

Segment Reporting

 

Our operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Chief Executive Officer and the Chief Operating Officer.     

 

We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

 

 

West (Arizona, California, Nevada and Washington)

 

Mountain (Colorado and Utah)

 

East (Virginia, Florida and Maryland, which includes Pennsylvania and New Jersey)

 

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“Mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“Other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

 

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in homebuilding operations.

 

The following table summarizes home and land sale revenues for our homebuilding operations and revenues for our financial services operations.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

 

 

(Dollars in thousands)

 
Homebuilding                                

West

  $ 229,743     $ 184,627     $ 624,261     $ 510,710  

Mountain

    147,166       144,442       428,080       392,052  

East

    78,737       78,635       242,932       254,737  

Total home and land sale revenues

  $ 455,646     $ 407,704     $ 1,295,273     $ 1,157,499  
                                 

Financial Services

                               

Mortgage operations

  $ 7,999     $ 6,416     $ 21,752     $ 18,887  

Other

    4,842       4,283       13,100       12,526  

Total financial services revenues

  $ 12,841     $ 10,699     $ 34,852     $ 31,413  

 

 
- 5 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes pretax income for our homebuilding and financial services operations:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 
Homebuilding                                

West

  $ 16,708     $ 12,402     $ 40,808     $ 41,747  

Mountain

    12,849       11,031       35,239       30,572  

East

    (691 )     1,138       (1,093 )     9,095  

Corporate

    (13,470 )     (6,609 )     (27,995 )     (22,450 )

Total homebuilding pretax income

  $ 15,396     $ 17,962     $ 46,959     $ 58,964  
                                 

Financial Services

                               

Mortgage operations

  $ 5,354     $ 3,327     $ 12,243     $ 10,387  

Other

    2,908       2,635       9,664       7,239  

Total financial services pretax income

  $ 8,262     $ 5,962     $ 21,907     $ 17,626  
                                 

Total pretax income

  $ 23,658     $ 23,924     $ 68,866     $ 76,590  

 

The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include cash and cash equivalents, marketable securities and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 
Homebuilding assets      

West

  $ 977,257     $ 893,970  

Mountain

    548,454       516,971  

East

    349,354       343,718  

Corporate

    352,404       465,368  

Total homebuilding assets

  $ 2,227,469     $ 2,220,027  
                 

Financial services assets

               

Mortgage operations

  $ 78,651     $ 94,265  

Other

    44,748       44,146  

Total financial services assets

  $ 123,399     $ 138,411  
                 

Total assets

  $ 2,350,868     $ 2,358,438  

 

4.

Earnings Per Share     

 

A company that has participating securities (for example, holders of unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method to calculate earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income). Currently, we have one class of security and we have participating security holders consisting of shareholders of unvested restricted stock. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding. The following table shows basic and diluted EPS calculations:

 

 
- 6 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands, except per share amounts)

 

Numerator

                               

Net income

  $ 14,778     $ 15,458     $ 43,196     $ 48,504  

Less: distributed earnings allocated to participating securities

    (25 )     (48 )     (73 )     (150 )

Less: undistributed earnings allocated to participating securities

    (6 )     (13 )     (15 )     (51 )

Net income attributable to common stockholders (numerator for basic earnings per share)

    14,747       15,397       43,108       48,303  

Add back: undistributed earnings allocated to participating securities

    6       13       15       51  

Less: undistributed earnings reallocated to participating securities

    (6 )     (13 )     (15 )     (51 )

Numerator for diluted earnings per share under two class method

  $ 14,747     $ 15,397     $ 43,108     $ 48,303  
                                 

Denominator

                               

Weighted-average common shares outstanding

    48,785,973       48,625,685       48,756,265       48,607,425  

Add: dilutive effect of stock options

    284,318       205,105       226,710       217,446  

Denominator for diluted earnings per share under two class method

    49,070,291       48,830,790       48,982,975       48,824,871  
                                 

Basic Earnings Per Common Share

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

Diluted Earnings Per Common Share

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

 

Diluted EPS for the three and nine months ended September 30, 2015 excluded options to purchase approximately 3.4 million and 3.9 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same periods in 2014, diluted EPS excluded options to purchase approximately 4.3 million and 4.5 million shares, respectively.

 

5.

Accumulated Other Comprehensive Income

 

The following table sets forth our changes in accumulated other comprehensive income (“AOCI”):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Unrealized gains (losses) on available-for-sale marketable securities 1 :

                               

Beginning balance

  $ 1,589     $ 5,346     $ 2,775     $ 7,655  

Other comprehensive income (loss) before reclassifications

    (2,853 )     (4,836 )     (3,753 )     (3,236 )

Amounts reclassified from AOCI 2

    1,714       1,862       1,428       (2,047 )

Ending balance

  $ 450     $ 2,372     $ 450     $ 2,372  
                                 

Unrealized gains on available-for-sale metropolitan district bond securities 1 :

                               

Beginning balance

  $ 9,814     $ 4,510     $ 7,680     $ 3,920  

Other comprehensive income before reclassifications

    913       490       3,047       1,080  

Amounts reclassified from AOCI

    -       -       -       -  

Ending balance

  $ 10,727     $ 5,000     $ 10,727     $ 5,000  
                                 

Total ending AOCI

  $ 11,177     $ 7,372     $ 11,177     $ 7,372  

       
 

(1)

All amounts net-of-tax.

 

(2)

See separate table below for details about these reclassifications which include gains or losses on sales of available-for-sale securities sold as well as any other-than-temporary impairments taken on available-for-sale securities during the period.

 

 
- 7 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table sets forth the activity related to reclassifications out of accumulated other comprehensive income related to available for sale securities:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

Affected Line Item in the Statements of Operations

 

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Homebuilding interest and other income

  $ (620 )   $ 1,167     $ (495 )   $ 7,528  

Other-than-temporary impairment of marketable securities

    (2,176 )     (4,293 )     (2,176 )     (4,293 )

Financial services interest and other income

    31       99       368       94  

Income before income taxes

    (2,765 )     (3,027 )     (2,303 )     3,329  

Provision for income taxes

    1,051       1,165       875       (1,282 )

Net income

  $ (1,714 )   $ (1,862 )   $ (1,428 )   $ 2,047  

 

6.

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

 

       

Fair Value

 

Financial Instrument

 

Hierarchy

 

September 30, 2015

   

December 31, 2014

 
       

(Dollars in thousands)

 

Marketable securities (available-for-sale)

                   

Equity securities

 

Level 1

  $ 100,418     $ 129,560  

Debt securities - maturity less than 1 year

 

Level 2

    -       1,511  

Debt securities - maturity 1 to 5 years

 

Level 2

    -       7,643  

Debt securities - maturity greater than 5 years

 

Level 2

    -       17,426  

Total available-for-sale marketable securities

  $ 100,418     $ 156,140  
                     

Mortgage loans held-for-sale, net

 

Level 2

  $ 68,633     $ 88,392  
                     

Metropolitan district bond securities (related party) (available-for-sale)

 

Level 3

  $ 24,074     $ 18,203  

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

 

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, and accrued liabilities. Fair value approximates carrying value.

 

Marketable Securities.  We have marketable debt and equity securities.  Our equity securities consist of holdings in corporate equities and holdings in mutual fund securities, which are primarily invested in debt securities. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. We measure the fair value of our debt securities using a third party pricing service that either provides quoted prices in less active markets for identical or similar securities or uses observable inputs for their pricing, both of which are level 2 inputs. As of September 30, 2015 and December 31, 2014, all of our marketable securities were treated as available-for-sale investments and, as such, we have recorded all of our marketable securities at fair value with changes in fair value being recorded as a component of AOCI.

 

 
- 8 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Each quarter we assess all of our securities in an unrealized loss position for potential other-than-temporary impairment (“OTTI”). Our assessment includes a consideration of many factors, both qualitative and quantitative, including the amount of the unrealized loss, the period of time the security has been in a loss position, the financial condition of the issuer and whether we have the intent and ability to hold the securities, among other factors. During the three and nine months ended September 30, 2015 and 2014, we recorded pretax OTTIs of $2.2 million and $4.3 million, respectively, for certain of our mutual funds that were in a loss position as of the end of each respective period. The OTTIs are included in other-than-temporary impairment of marketable securities in the homebuilding section of our consolidated statements of operations.

 

The following table sets forth the amortized cost and estimated fair value of our available-for-sale marketable securities:

 

 

   

September 30, 2015

 
       
   

Amortized

Cost

   

OTTI

   

Net Amortized Cost

   

Fair Value

 

 

 

(Dollars in thousands)

 
Homebuilding:                                

Equity securities

  $ 89,841     $ (2,176 )   $ 87,665     $ 89,479  

Debt securities

    -       -       -       -  

Total homebuilding available-for-sale marketable securities

  $ 89,841     $ (2,176 )   $ 87,665     $ 89,479  
                                 

Financial Services:

                               

Equity securities

  $ 12,026       -     $ 12,026     $ 10,939  

Debt securities

    -       -       -       -  

Total financial services available-for-sale marketable securities

  $ 12,026     $ -     $ 12,026     $ 10,939  
                                 

Total available-for-sale marketable securities

  $ 101,867     $ (2,176 )   $ 99,691     $ 100,418  

 

   

December 31, 2014

 
       
   

Amortized

Cost

   

OTTI

   

Net Amortized Cost

   

Fair Value

 
    (Dollars in thousands)  

Homebuilding:

                               

Equity securities

  $ 116,009     $ -     $ 116,009     $ 120,274  

Debt securities

    20,660       -       20,660       20,604  

Total homebuilding available-for-sale marketable securities

  $ 136,669     $ -     $ 136,669     $ 140,878  
                                 

Financial Services:

                               

Equity securities

  $ 9,028     $ -     $ 9,028     $ 9,286  

Debt securities

    5,930       -       5,930       5,976  

Total financial services available-for-sale marketable securities

  $ 14,958     $ -     $ 14,958     $ 15,262  
                                 

Total available-for-sale marketable securities

  $ 151,627     $ -     $ 151,627     $ 156,140  

 

 

As of September 30, 2015 and December 31, 2014, our marketable securities were in a net unrealized loss position totaling $1.4 million, before recognition of the OTTIs, and a net unrealized gain position totaling $4.5 million, respectively. Our marketable securities that were in unrealized loss positions, excluding those that were impaired as part of the OTTIs, aggregated to unrealized losses of $3.0 million and $3.1 million as of September 30, 2015 and December 31, 2014, respectively. The table below sets forth the aggregated unrealized losses for individual debt and equity securities that were in unrealized loss positions but did not have OTTIs recognized. We do not believe the decline in the value of these marketable securities as of September 30, 2015 is other-than-temporary.

 

 
- 9 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

   

September 30, 2015

   

December 31, 2014

 
   

Number of Securities in a Loss Position

   

Aggregate Loss Position

   

Aggregate Fair Value of Securities in a Loss Position

   

Number of Securities in a Loss Position

   

Aggregate Loss Position

   

Aggregate Fair Value of Securities in a Loss Position

 
   

(Dollars in thousands)

 
Type of Investment                                                

Debt

    -     $ -     $ -       52     $ (359 )   $ 14,536  

Equity

    13       (2,989 )     24,755       6       (2,738 )     74,999  

Total

    13     $ (2,989 )   $ 24,755       58     $ (3,097 )   $ 89,535  

  

The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities, which were included in either interest and other income in the homebuilding section or interest and other income in the financial services section of our consolidated statements of operations:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Gross realized gains on sales of available-for-sale securities

                               

Equity securities

  $ 980     $ 979     $ 1,855     $ 6,496  

Debt securities

    42       466       413       2,386  

Total

  $ 1,022     $ 1,445     $ 2,268     $ 8,882  
                                 

Gross realized losses on sales of available-for-sale securities

                               

Equity securities

  $ (1,604 )   $ (92 )   $ (2,161 )   $ (801 )

Debt securities

    (6 )     (87 )     (233 )     (459 )

Total

  $ (1,610 )   $ (179 )   $ (2,394 )   $ (1,260 )
                                 

Net realized gain (loss) on sales of available-for-sale securities

  $ (588 )   $ 1,266     $ (126 )   $ 7,622  

 

Mortgage Loans Held-for-Sale, Net.  As of September 30, 2015, the primary components of our mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At September 30, 2015 and December 31, 2014, we had $47.3 million and $74.2 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon Level 2 inputs, which were the quoted market prices for those mortgage loans. At September 30, 2015 and December 31, 2014, we had $21.3 million and $14.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.

 

Metropolitan District Bond Securities (Related Party).  The Metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our accompanying consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District, which are generally received in the fourth quarter, and are supported by an annual levy on the taxable assessed value of real estate and personal property within the Metro District’s boundaries. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments in perpetuity until the unpaid principal and accrued interest is paid in full. Since 2007 and through the first quarter of 2013, we accounted for these securities under the cost recovery method and they were not carried at fair value in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).

 

 
- 10 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

In the second quarter of 2013, we determined that these securities no longer were required to be accounted for under the cost recovery method due to an increase in the number of new homes delivered in the community coupled with improvements in property values within the Metro District. In accordance with ASC 310-30, we adjust the bond principal balance using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we update its fair value on a quarterly basis, with the adjustment being recorded through AOCI. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as they drive increases to the tax paying base for the Metro District, (2) the forecasted assessed value of those closed homes and (3) the discount rate. Cash receipts, which are typically only received in the fourth quarter, reduce the carrying value of the Metro Bonds. The table below provides quantitative data, as of September 30, 2015, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

 

  

   

Quantitative Data

 

Sensitivity Analysis

Unobservable Input

 

Range

   

Weighted Average

 

Movement in

Fair Value from

Increase in Input

 

Movement in

Fair Value from

Decrease in Input

Number of homes closed per year

    0 to 122       94  

Increase

 

Decrease

Average sales price

    $350K to $1.2 million       $400K  

Increase

 

Decrease

Discount rate

    5% to 12%       8.1 %

Decrease

 

Increase

 

The table set forth below summarizes the activity for our Metro Bonds:

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 22,259     $ 14,291     $ 18,203     $ 12,729  

Increase in fair value (recorded in other comprehensive income)

    1,472       798       4,815       1,757  

Change due to accretion of principal

    343       290       1,056       893  

Cash receipts

    -       -       -       -  

Balance at end of period

  $ 24,074     $ 15,379     $ 24,074     $ 15,379  

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

 

Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, including market prices of other homebuilder bonds.

  

   

September 30, 2015

   

December 31, 2014

 
   

Carrying

Amount

   

Fair Value

   

Carrying

Amount

   

Fair Value

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 246,907     $ 260,225     $ 246,450     $ 257,950  

5½% Senior Notes due January 2024

    250,000       284,258       250,000       242,608  

6% Senior Notes due January 2043

    350,000       254,033       350,000       296,555  

Total

  $ 846,907     $ 798,516     $ 846,450     $ 797,113  

 

 
- 11 -

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

7.

Inventories

 

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:

  

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Housing Completed or Under Construction:

               

West

  $ 417,403     $ 343,134  

Mountain

    272,727       220,489  

East

    131,537       169,069  

Subtotal

    821,667       732,692  

Land and Land Under Development:

               

West

    511,000       507,252  

Mountain

    251,943       277,583  

East

    194,752       150,433  

Subtotal

    957,695       935,268  

Total Inventories

  $ 1,779,362     $ 1,667,960  

 

 

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and speculative homes (defined as homes under construction without a sales contract and also referred to as “spec homes”). Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins. Included in land and land under development at September 30, 2015 was $6.9 million of land held for sale. We did not have any land held for sale at December 31, 2014.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable.  We evaluate inventories for impairment at each quarter end on a subdivision level basis as each subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

 

 

actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all direct incremental costs associated with the home closing, including sales commissions) for homes closed;

 

estimated future undiscounted cash flows and Operating Margin;

 

forecasted Operating Margin for homes in backlog;

 

actual and trending net and gross home orders;

 

base sales price and home sales incentive information for homes closed, homes in backlog and homes available for sale;

 

market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

 

known or probable events indicating that the carrying value may not be recoverable.

 

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its estimated fair value, which is determined using Level 3 inputs. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. The primary unobservable input used in our discounted cash flow model is the discount rate.

 

 
- 12 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

If land is classified as held for sale, we measure it at the lower of the carrying value or fair value less estimated costs to sell, in accordance with ASC 360. In determining fair value, we primarily rely upon the most recent negotiated price which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

 

Impairments of homebuilding inventory by segment for the three and nine months ended September 30, 2015 and 2014 are shown in the table below. In addition to the impairments shown below, using Level 2 inputs, we recorded $1.1 million of impairments on our land held for sale during the three and nine months ended September 30, 2015. No such impairments were recorded during the same periods in 2014.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

West

  $ -     $ -     $ -     $ -  

Mountain

    250       -       250       -  

East

    2,975       -       3,325       850  

Total Inventory Impairments

  $ 3,225     $ -     $ 3,575     $ 850  

 

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

 

   

Impairment Data

   

Quantitative Data

 
             

Three Months Ended

 

Total

Subdivisions

Tested

   

Inventory

Impairments

   

Fair Value of

Inventory

After

Impairments

   

Number of

Subdivisions

Impaired

   

Discount Rate

 
   

(Dollars in thousands)

 

March 31, 2015

    22     $ 350     $ 3,701       1       8.7 %

June 30, 2015

    22       -       -       -       N/A  

September 30, 2015

    18       3,225       14,836       5       12.0 - 15.0 %

Total

    62     $ 3,575     $ 18,537       6          
                                         

March 31, 2014

    16     $ -     $ -       -       N/A  

June 30, 2014

    16       850       4,285       2       11.0 - 13.8 %

September 30, 2014

    23       -       -       -       N/A  

Total

    55     $ 850     $ 4,285       2          

 

 
- 13 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

8.

Capitalization of Interest

 

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales as related units or lots are sold. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity.

 

The homebuilding interest expensed in the table below relates to the portion of interest incurred where our homebuilding debt exceeded our qualified inventory for such periods in accordance with ASC 835.

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Homebuilding interest incurred

  $ 13,265     $ 16,499     $ 39,821     $ 52,211  

Less: Interest capitalized

    (13,265 )     (16,499 )     (39,821 )     (51,526 )

Homebuilding interest expensed

  $ -     $ -     $ -     $ 685  
                                 

Interest capitalized, beginning of period

  $ 78,857     $ 80,936     $ 79,231     $ 74,155  

Plus: Interest capitalized during period

    13,265       16,499       39,821       51,526  

Less: Previously capitalized interest included in home and land cost of sales

    (12,878 )     (14,966 )     (39,808 )     (43,212 )

Interest capitalized, end of period

  $ 79,244     $ 82,469     $ 79,244     $ 82,469  

 

9.

Homebuilding Prepaid Expenses and Other Assets

 

The following table sets forth the components of homebuilding prepaid expenses and other assets:

  

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Land option deposits

  $ 14,971     $ 12,895  

Deferred marketing costs

    31,372       29,231  

Prepaid expenses

    5,705       5,104  

Goodwill

    6,008       6,008  

Deferred debt issuance costs, net

    11,757       13,004  

Other

    2,635       1,754  

Total

  $ 72,448     $ 67,996  

 

 

10.

Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

The following table sets forth information relating to homebuilding accrued liabilities:

 

   

September 30,

2015

   

December 31,

2014

 
   

(Dollars in thousands)

 

Customer and escrow deposits

  $ 24,381     $ 16,728  

Warranty accrual

    16,081       18,346  

Accrued compensation and related expenses

    21,859       27,541  

Accrued interest

    11,031       23,234  

Land development and home construction accruals

    9,723       10,108  

Other accrued liabilities

    23,843       19,160  

Total accrued liabilities

  $ 106,918     $ 115,117  

  

 
- 14 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table sets forth information relating to financial services accounts payable and accrued liabilities:

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Insurance reserves

  $ 46,685     $ 50,470  

Accounts payable and other accrued liabilities

    7,479       6,798  

Total accounts payable and accrued liabilities

  $ 54,164     $ 57,268  

 

11.

Warranty Accrual

 

Our homes are sold with limited third-party warranties. We record expenses and warranty accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Warranty accruals are established based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The establishment of warranty accruals for closed homes and the evaluation of our warranty accrual balance at period end are both based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

 

Our warranty accrual is included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.

 

The table set forth below summarizes warranty accrual, payment and adjustment activity for the three and nine months ended September 30, 2015 and 2014. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we reduced our warranty reserve by $0.2 million for the nine months ended September 30, 2015 compared to $0.5 million and $2.6 million, respectively, for the three and nine months ended September 30, 2014. There was no such adjustment for the three months ended September 30, 2015.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 17,253     $ 20,178     $ 18,346     $ 22,238  

Expense provisions

    1,536       1,206       3,980       3,363  

Cash payments

    (2,708 )     (1,758 )     (6,032 )     (3,900 )

Adjustments

    -       (525 )     (213 )     (2,600 )

Balance at end of period

  $ 16,081     $ 19,101     $ 16,081     $ 19,101  

 

12.

Insurance Reserves

 

The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments.

 

 
- 15 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The table set forth below summarizes the insurance reserve activity for the three and nine months ended September 30, 2015 and 2014. The insurance reserve is included as a component of accrued liabilities in the financial services section of the accompanying consolidated balance sheets.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 47,389     $ 49,363     $ 50,470     $ 49,637  

Expense provisions

    1,652       1,530       4,501       4,577  

Cash payments, net of recoveries

    (2,356 )     (1,424 )     (6,786 )     (4,745 )

Adjustments

    -       -       (1,500 )     -  

Balance at end of period

  $ 46,685     $ 49,469     $ 46,685     $ 49,469  

 

For the three and nine month periods ended September 30, 2014 and the three month period ended September 30, 2015, we had no insurance reserve adjustments. The $1.5 million adjustment to decrease our insurance reserve during the nine months ended September 30, 2015 primarily resulted from a decrease in insurance claim payment severity and frequency relative to prior period estimates.

 

In the ordinary course of business, we make payments from our insurance reserves to settle litigation claims arising primarily from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three and nine months ended September 30, 2015 and 2014 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

13.

Income Taxes

 

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 37.5% and 37.3% for the three and nine months ended September 30, 2015, respectively, compared to 35.4% and 36.7% for the three and nine months ended September 30, 2014, respectively. The rates for the three and nine months ended September 30, 2015 resulted in income tax expense of $8.9 million and $25.7 million, respectively, compared to income tax expense of $8.5 million and $28.1 million for the three and nine months ended September 30, 2014.

 

At September 30, 2015 and December 31, 2014 we had deferred tax assets, net of deferred tax liabilities, of $128.4 million and $153.5 million, respectively. Included in our deferred tax assets at September 30, 2015 are $19.6 million and $33.6 million of federal and state net operating loss carryforwards, respectively. Our net deferred tax assets at September 30, 2015 and December 31, 2014 were partially offset by valuation allowances of $13.2 million and $13.0 million, respectively, related to (1) various state net operating loss carryforwards where realization is more uncertain at this time due to the more limited carryforward periods that exist in certain states and (2) the portion of the amount by which the carrying value of our Metro Bonds for tax purposes exceeds our carrying value for book purposes, as we believe realization of that portion is more uncertain at this time.

 

 

14.

Senior Notes

 

The following table sets forth the carrying amount of our senior notes as of September 30, 2015 and December 31, 2014, net of applicable discounts:

  

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 246,907     $ 246,450  

5½% Senior Notes due January 2024

    250,000       250,000  

6% Senior Notes due January 2043

    350,000       350,000  

Total

  $ 846,907     $ 846,450  

 

On March 26, 2014, we redeemed our 5% Senior Notes due December 2014.  As a result of this transaction, we paid $259.1 million to extinguish $250 million in debt principal with a carrying value, including unamortized deferred financing costs, of $249.7 million and recorded a $9.4 million expense for loss on extinguishment of debt.

 

 
- 16 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our homebuilding segment subsidiaries.

 

15.

Stock Based Compensation

 

We account for share-based awards in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”), which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three and nine months ended September 30, 2015 and 2014:

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Stock option grant expense

  $ 3,544     $ 1,521     $ 5,043     $ 2,723  

Restricted stock awards expense

    454       683       1,546       2,031  

Total stock based compensation

  $ 3,998     $ 2,204     $ 6,589     $ 4,754  

 

On May 18, 2015, the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 1,000,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, one third of the option shares will vest as of each of the third, fourth, and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any 20 out of 30 consecutive trading days closes at a price equal to or greater than 120% of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was $28.45 and the expiration date of each option is May 18, 2025. In accordance with ASC 718, the market-based awards were assigned a fair value of $5.62 per share on the date of grant using a Monte Carlo simulation model. In accordance with the valuation model used, the total $11.2 million in expense will be recorded on a straight-line basis through the end of the 2016 second quarter. However, if at such time these options vest under the market-based condition prior to the end of the expected expense term, all remaining expense will be recognized immediately.

 

16.

Commitments and Contingencies

 

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At September 30, 2015, we had issued and outstanding surety bonds and letters of credit totaling $169.1 million and $49.6 million, respectively, including $27.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $60.0 million and $15.3 million, respectively. The letters of credit as of September 30, 2015, excluding those issued by HomeAmerican, were outstanding under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

We have made no material guarantees with respect to third-party obligations.

 

Mortgage Loan Loss Reserves. In the normal course of business, we establish reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of, but are not limited to, allegations of homebuyer fraud at the time of origination of the loan, missing documentation, loan processing defects or defective appraisals. These reserves are based upon, among other things: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. In addition to reserves established for mortgage loans previously sold to third-parties, we establish reserves for loans that we have been required to repurchase. Our mortgage loan reserves are reflected as a component of accrued liabilities in the financial services section of the accompanying consolidated balance sheets, and the associated expenses are included in expenses in the financial services section of the accompanying consolidated statements of operations and comprehensive income.

 

 
- 17 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the mortgage loan loss reserve activity for the three and nine months ended September 30, 2015 and 2014:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 1,058     $ 714     $ 810     $ 1,370  

Expense provisions

    39       42       764       42  

Cash payments

    (325 )     -       (325 )     (237 )

Adjustments

    (568 )     (160 )     (1,045 )     (579 )

Balance at end of period

  $ 204     $ 596     $ 204     $ 596  

 

Legal Reserves. Because of the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

 

Lot Option Contracts. In the normal course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments and minimizes the amount of our land inventories on our consolidated balance sheets. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At September 30, 2015, we had cash deposits and letters of credit totaling $14.1 million and $2.8 million, respectively, at risk associated with the option to purchase 2,699 lots.

 

17.

Derivative Financial Instruments

 

The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to prepaid expenses and other assets or accounts payable and accrued liabilities in the financial services section of our accompanying consolidated balance sheets, depending on the nature of the change.

 

At September 30, 2015, we had interest rate lock commitments with an aggregate principal balance of $107.1 million. Additionally, we had $21.3 million of mortgage loans held-for-sale that were not under commitments to sell at September 30, 2015. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $82.0 million at September 30, 2015.

 

For the three and nine months ended September 30, 2015, we recorded net gains (losses) on our derivatives of $0.9 million and $0.6 million, respectively, compared to $0 and $(0.4) million for the same periods in 2014.

 

18.

Lines of Credit

 

Revolving Credit Facility. On December 13, 2013, we entered into an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders, which may be used for general corporate purposes. This agreement was amended on December 17, 2014 to (1) increase the aggregate commitment amount by $100 million to $550 million (the “Commitment”) and (2) extend the maturity until December 13, 2019. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and the consent of the designated agent and the co-administrative agent. Interest rates on outstanding borrowings are determined by reference to a specified London Interbank Offered Rate (LIBOR), a specified federal funds effective rate or a specified prime rate, plus a margin that is determined based on our credit ratings and leverage ratio, as defined in the facility agreement. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

 
- 18 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the facility agreement. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) would result in an event of default.

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of September 30, 2015.

 

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At September 30, 2015 and December 31, 2014, there were $21.6 million and $10.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both September 30, 2015 and December 31, 2014, we had $15.0 million in borrowings outstanding under the Revolving Credit Facility. As of September 30, 2015, availability under the Revolving Credit Facility was approximately $513.4 million.

 

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). This agreement was amended on September 18, 2015 and extended until September 16, 2016. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, we may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility, which had a temporary increase in the maximum aggregate commitment from $50 million to $80 million from December 29, 2014 through January 28, 2015, had a maximum aggregate commitment of $50 million as of September 30, 2015. At September 30, 2015 and December 31, 2014, HomeAmerican had $43.8 million and $60.8 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of September 30, 2015.

 

 
- 19 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

19.

Supplemental Guarantor Information

 

Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company.

 

 

M.D.C. Land Corporation

 

RAH of Florida, Inc.

 

Richmond American Construction, Inc.

 

Richmond American Homes of Arizona, Inc.

 

Richmond American Homes of Colorado, Inc.

 

Richmond American Homes of Delaware, Inc.

 

Richmond American Homes of Florida, LP

 

Richmond American Homes of Illinois, Inc.

 

Richmond American Homes of Maryland, Inc.

 

Richmond American Homes of Nevada, Inc.

 

Richmond American Homes of New Jersey, Inc.

 

Richmond American Homes of Pennsylvania, Inc.

 

Richmond American Homes of Utah, Inc.

 

Richmond American Homes of Virginia, Inc.

 

Richmond American Homes of Washington, Inc.

 

The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.

 

 
- 20 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.

 

Supplemental Condensed Combining Balance Sheet

 

 

   

September 30, 2015

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 81,358     $ 3,716     $ -     $ -     $ 85,074  

Marketable securities

    89,479       -       -       -       89,479  

Restricted cash

    -       4,800       -       -       4,800  

Trade and other receivables

    5,335       25,568       -       (2,315 )     28,588  

Inventories:

                                       

Housing completed or under construction

    -       821,667       -       -       821,667  

Land and land under development

    -       957,695       -       -       957,695  

Total inventories

    -       1,779,362       -       -       1,779,362  
                                         

Intercompany receivables

    1,566,356       2,855       5,469       (1,574,680 )     -  

Investment in subsidiaries

    240,112       -       -       (240,112 )     -  

Property and equipment, net

    28,499       -       -       -       28,499  

Deferred tax asset, net

    112,756       -       -       2,389       115,145  

Metropolitan district bond securities (related party)

    24,074       -       -       -       24,074  

Prepaid and other assets

    10,829       61,619       -       -       72,448  

Total homebuilding assets

    2,158,798       1,877,920       5,469       (1,814,718 )     2,227,469  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       37,921       -       37,921  

Marketable securities

    -       -       10,939       -       10,939  

Intercompany receivables

    -       -       38,846       (38,846 )     -  

Mortgage loans held-for-sale, net

    -       -       68,633       -       68,633  

Other assets

    -       -       8,295       (2,389 )     5,906  

Total financial services assets

    -       -       164,634       (41,235 )     123,399  

Total Assets

  $ 2,158,798     $ 1,877,920     $ 170,103     $ (1,855,953 )   $ 2,350,868  
                                         

LIABILITIES AND EQUITY

                                       
                                         

Homebuilding:

                                       

Accounts payable

  $ -     $ 41,514     $ -     $ -     $ 41,514  

Accrued liabilities

    7,111       97,356       96       2,355       106,918  

Advances and notes payable to parent and subsidiaries

    47,170       1,538,222       25,443       (1,610,835 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    846,907       -       -       -       846,907  

Total homebuilding liabilities

    916,188       1,677,092       25,539       (1,608,480 )     1,010,339  
                                         

Financial Services:

                                       

Accounts payable and other liabilities

    -       -       58,834       (4,670 )     54,164  

Advances and notes payable to parent and subsidiaries

    -       -       2,691       (2,691 )     -  

Mortgage repurchase facility

    -       -       43,755       -       43,755  

Total financial services liabilities

    -       -       105,280       (7,361 )     97,919  

Total Liabilities

    916,188       1,677,092       130,819       (1,615,841 )     1,108,258  
                                         

Equity:

                                       

Total Stockholders' Equity

    1,242,610       200,828       39,284       (240,112 )     1,242,610  

Total Liabilities and Stockholders' Equity

  $ 2,158,798     $ 1,877,920     $ 170,103     $ (1,855,953 )   $ 2,350,868  

 

 
- 21 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Balance Sheet

 

   

December 31, 2014

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 119,951     $ 2,691     $ -     $ -     $ 122,642  

Marketable securities

    140,878       -       -       -       140,878  

Restricted cash

    -       2,816       -       -       2,816  

Trade and other receivables

    6,573       24,449       -       (2,467 )     28,555  

Inventories:

                                       

Housing completed or under construction

    -       732,692       -       -       732,692  

Land and land under development

    -       935,268       -       -       935,268  

Total inventories

    -       1,667,960       -       -       1,667,960  
                                         

Intercompany receivables

    1,418,705       2,854       5,295       (1,426,854 )     -  

Investment in subsidiaries

    260,874       -       -       (260,874 )     -  

Property and equipment, net

    30,491       -       -       -       30,491  

Deferred tax asset, net

    137,529       -       -       2,957       140,486  

Metropolitan district bond securities (related party)

    18,203       -       -       -       18,203  

Prepaid and other assets

    11,252       56,744       -       -       67,996  

Total homebuilding assets

    2,144,456       1,757,514       5,295       (1,687,238 )     2,220,027  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       31,183       -       31,183  

Marketable securities

    -       -       15,262       -       15,262  

Intercompany receivables

    -       -       39,513       (39,513 )     -  

Mortgage loans held-for-sale, net

    -       -       88,392       -       88,392  

Other assets

    -       -       6,531       (2,957 )     3,574  

Total financial services assets

    -       -       180,881       (42,470 )     138,411  

Total Assets

  $ 2,144,456     $ 1,757,514     $ 186,176     $ (1,729,708 )   $ 2,358,438  
                                         

LIABILITIES AND EQUITY

                                       
                                         

Homebuilding:

                                       

Accounts payable

  $ -     $ 35,445     $ -     $ -     $ 35,445  

Accrued liabilities

    7,007       105,529       67       2,514       115,117  

Advances and notes payable to parent and subsidiaries

    47,663       1,392,111       23,809       (1,463,583 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    846,450       -       -       -       846,450  

Total homebuilding liabilities

    916,120       1,533,085       23,876       (1,461,069 )     1,012,012  
                                         

Financial Services:

                                       

Accounts payable and accrued liabilities

    -       -       62,249       (4,981 )     57,268  

Advances and notes payable to parent and subsidiaries

    -       -       2,784       (2,784 )     -  

Mortgage repurchase facility

    -       -       60,822       -       60,822  

Total financial services liabilities

    -       -       125,855       (7,765 )     118,090  

Total Liabilities

    916,120       1,533,085       149,731       (1,468,834 )     1,130,102  
                                         

Equity:

                                       

Total Stockholders' Equity

    1,228,336       224,429       36,445       (260,874 )     1,228,336  

Total Liabilities and Stockholders' Equity

  $ 2,144,456     $ 1,757,514     $ 186,176     $ (1,729,708 )   $ 2,358,438  

 

 
- 22 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Operations

 

   

Three Months Ended September 30, 2015

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 

 

 

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 455,646     $ -     $ -     $ 455,646  

Home and land cost of sales

    -       (376,667 )     (100 )     -       (376,767 )

Inventory impairments

    -       (4,351 )     -       -       (4,351 )

Total cost of sales

    -       (381,018 )     (100 )     -       (381,118 )

Gross margin

    -       74,628       (100 )     -       74,528  

Selling, general, and administrative expenses

    (11,651 )     (45,620 )     -       (173 )     (57,444 )

Equity income of subsidiaries

    23,070       -       -       (23,070 )     -  

Interest and other income

    539       298       2       (1 )     838  

Interest expense

    155       -       -       (155 )     -  

Other expense

    (2 )     (348 )     -       -       (350 )

Other-than-temporary impairment of marketable securities

    (2,176 )     -       -       -       (2,176 )

Homebuilding pretax income (loss)

    9,935       28,958       (98 )     (23,399 )     15,396  

Financial Services:

                                       

Financial services pretax income

    -       -       7,933       329       8,262  

Income before income taxes

    9,935       28,958       7,835       (23,070 )     23,658  

(Provision) benefit for income taxes

    4,843       (10,874 )     (2,849 )     -       (8,880 )

Net income

  $ 14,778     $ 18,084     $ 4,986     $ (23,070 )   $ 14,778  

Other comprehensive income related to available for sale securities, net of tax

    (226 )     -       1,198       (1,198 )     (226 )

Comprehensive income

  $ 14,552     $ 18,084     $ 6,184     $ (24,268 )   $ 14,552  

 

 

   

Three Months Ended September 30, 2014

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 

 

 

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 407,704     $ -     $ -     $ 407,704  

Home and land cost of sales

    -       (340,022 )     -       -       (340,022 )

Inventory impairments

    -       -       -       -       -  

Total cost of sales

    -       (340,022 )     -       -       (340,022 )

Gross margin

    -       67,682       -       -       67,682  

Selling, general, and administrative expenses

    (7,813 )     (42,532 )     -       (167 )     (50,512 )

Equity income of subsidiaries

    19,538       -       -       (19,538 )     -  

Interest and other income

    5,680       254       3       (11 )     5,926  

Interest expense

    -       -       -       -       -  

Other expense

    (2 )     (839 )     -       -       (841 )

Other-than-temporary impairment of marketable securities

    (4,293 )     -       -       -       (4,293 )

Homebuilding pretax income (loss)

    13,110       24,565       3       (19,716 )     17,962  

Financial Services:

                                       

Financial services pretax income

    -       -       5,784       178       5,962  

Income before income taxes

    13,110       24,565       5,787       (19,538 )     23,924  

(Provision) benefit for income taxes

    2,348       (8,677 )     (2,137 )     -       (8,466 )

Net income

  $ 15,458     $ 15,888     $ 3,650     $ (19,538 )   $ 15,458  

Other comprehensive income related to available for sale securities, net of tax

    (2,484 )     -       (208 )     208       (2,484 )

Comprehensive income

  $ 12,974     $ 15,888     $ 3,442     $ (19,330 )   $ 12,974  

 

 
- 23 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Operations

 

   

Nine Months Ended September 30, 2015

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 

 

 

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 1,295,273     $ -     $ -     $ 1,295,273  

Home and land cost of sales

    -       (1,081,453 )     (100 )     -       (1,081,553 )

Inventory impairments

    -       (4,701 )     -       -       (4,701 )

Total cost of sales

    -       (1,086,154 )     (100 )     -       (1,086,254 )

Gross margin

    -       209,119       (100 )     -       209,019  

Selling, general, and administrative expenses

    (29,211 )     (133,125 )     -       (421 )     (162,757 )

Equity income of subsidiaries

    60,310       -       -       (60,310 )     -  

Interest and other income

    3,830       1,573       7       2       5,412  

Interest expense

    433       -       -       (433 )     -  

Other expense

    (5 )     (2,534 )     -       -       (2,539 )

Loss on early extinguishment of debt

    -       -       -       -       -  

Other-than-temporary impairment of marketable securities

    (2,176 )     -       -       -       (2,176 )

Homebuilding pretax income (loss)

    33,181       75,033       (93 )     (61,162 )     46,959  

Financial Services:

                                       

Financial services pretax income

    -       -       21,055       852       21,907  

Income before income taxes

    33,181       75,033       20,962       (60,310 )     68,866  

(Provision) benefit for income taxes

    10,015       (27,986 )     (7,699 )     -       (25,670 )

Net income

  $ 43,196     $ 47,047     $ 13,263     $ (60,310 )   $ 43,196  

Other comprehensive income related to available for sale securities, net of tax

    722       -       918       (918 )     722  

Comprehensive income

  $ 43,918     $ 47,047     $ 14,181     $ (61,228 )   $ 43,918  

 

   

Nine Months Ended September 30, 2014

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 

 

 

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 1,157,499     $ -     $ -     $ 1,157,499  

Home and land cost of sales

    -       (956,197 )     -       -       (956,197 )

Inventory impairments

    -       (850 )     -       -       (850 )

Total cost of sales

    -       (957,047 )     -       -       (957,047 )

Gross margin

    -       200,452       -       -       200,452  

Selling, general, and administrative expenses

    (30,534 )     (117,619 )     -       (499 )     (148,652 )

Equity income of subsidiaries

    62,290       -       -       (62,290 )     -  

Interest and other income

    23,021       1,089       12       (34 )     24,088  

Interest expense

    (685 )     -       -       -       (685 )

Other expense

    (6 )     (2,528 )     -       -       (2,534 )

Loss on early extinguishment of debt

    (9,412 )     -       -       -       (9,412 )

Other-than-temporary impairment of marketable securities

    (4,293 )     -       -       -       (4,293 )

Homebuilding pretax income (loss)

    40,381       81,394       12       (62,823 )     58,964  

Financial Services:

                                       

Financial services pretax income

    -       -       17,093       533       17,626  

Income before income taxes

    40,381       81,394       17,105       (62,290 )     76,590  

(Provision) benefit for income taxes

    8,123       (29,848 )     (6,361 )     -       (28,086 )

Net income

  $ 48,504     $ 51,546     $ 10,744     $ (62,290 )   $ 48,504  

Other comprehensive income related to available for sale securities, net of tax

    (4,203 )     -       (93 )     93       (4,203 )

Comprehensive income

  $ 44,301     $ 51,546     $ 10,651     $ (62,197 )   $ 44,301  

 

 
- 24 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Cash Flows

 

   

Nine Months Ended September 30, 2015

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

  $ 19,057     $ (73,657 )   $ 28,114     $ -     $ (26,486 )

Net cash provided by (used in) investing activities

    (21,669 )     (402 )     3,260       67,515       48,704  

Financing activities:

                                       

Payments from (advances to) subsidiaries

    -       75,084       (7,569 )     (67,515 )     -  

Mortgage repurchase facility

    -       -       (17,067 )     -       (17,067 )

Dividend payments

    (36,646 )     -       -       -       (36,646 )

Proceeds from the exercise of stock options

    665       -       -       -       665  

Net cash provided by (used in) financing activities

    (35,981 )     75,084       (24,636 )     (67,515 )     (53,048 )
                                         

Net increase in cash and cash equivalents

    (38,593 )     1,025       6,738       -       (30,830 )

Cash and cash equivalents:

                                       

Beginning of period

    119,951       2,691       31,183       -       153,825  

End of period

  $ 81,358     $ 3,716     $ 37,921     $ -     $ 122,995  

 

 

   

Nine Months Ended September 30, 2014

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

  $ (44,477 )   $ (174,980 )   $ 46,201     $ -     $ (173,256 )

Net cash provided by (used in) investing activities

    (9,675 )     (428 )     1,717       134,011       125,625  

Financing activities:

                                       

Payments from (advances to) subsidiaries

    -       174,725       (40,714 )     (134,011 )     -  

Mortgage repurchase facility

    -       -       (31,292 )     -       (31,292 )

Proceeds from issuance of senior notes

    248,375       -       -       -       248,375  

Repayment of senior notes

    (259,118 )     -       -       -       (259,118 )

Advances on revolving credit facility, net

    10,000       -       -       -       10,000  

Dividend payments

    (36,616 )     -       -       -       (36,616 )

Proceeds from the exercise of stock options

    63       -       -       -       63  

Net cash provided by (used in) financing activities

    (37,296 )     174,725       (72,006 )     (134,011 )     (68,588 )
                                         

Net increase in cash and cash equivalents

    (91,448 )     (683 )     (24,088 )     -       (116,219 )

Cash and cash equivalents:

                                       

Beginning of period

    145,180       3,454       50,704       -       199,338  

End of period

  $ 53,732     $ 2,771     $ 26,616     $ -     $ 83,119  

 

 
- 25 -

 

 

ITEM 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2014 and this Quarterly Report on Form 10-Q.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Homebuilding:

 

(Dollars in thousands, except per share amounts)

 

Home sale revenues

  $ 454,740     $ 405,051     $ 1,293,457     $ 1,154,328  

Land sale revenues

    906       2,653       1,816       3,171  

Total home and land sale revenues

    455,646       407,704       1,295,273       1,157,499  

Home cost of sales

    (375,948 )     (338,037 )     (1,079,609 )     (953,690 )

Land cost of sales

    (819 )     (1,985 )     (1,944 )     (2,507 )

Inventory impairments

    (4,351 )     -       (4,701 )     (850 )

Total cost of sales

    (381,118 )     (340,022 )     (1,086,254 )     (957,047 )

Gross margin

    74,528       67,682       209,019       200,452  

Gross margin %

    16.4 %     16.6 %     16.1 %     17.3 %

Selling, general and administrative expenses

    (57,444 )     (50,512 )     (162,757 )     (148,652 )

Interest and other income

    838       5,926       5,412       24,088  

Interest expense

    -       -       -       (685 )

Other expense

    (350 )     (841 )     (2,539 )     (2,534 )

Loss on early extinguishment of debt

    -       -       -       (9,412 )

Other-than-temporary impairment of marketable securities

    (2,176 )     (4,293 )     (2,176 )     (4,293 )

Homebuilding pretax income

    15,396       17,962       46,959       58,964  
                                 

Financial Services:

                               

Revenues

    12,841       10,699       34,852       31,413  

Expenses

    (5,464 )     (5,643 )     (15,830 )     (16,182 )

Interest and other income

    885       906       2,885       2,395  

Financial services pretax income

    8,262       5,962       21,907       17,626  
                                 

Income before income taxes

    23,658       23,924       68,866       76,590  

Provision for income taxes

    (8,880 )     (8,466 )     (25,670 )     (28,086 )

Net income

  $ 14,778     $ 15,458     $ 43,196     $ 48,504  
                                 

Earnings per share:

                               

Basic

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

Diluted

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  
                                 

Weighted average common shares outstanding:

                               

Basic

    48,785,973       48,625,685       48,756,265       48,607,425  

Diluted

    49,070,291       48,830,790       48,982,975       48,824,871  
                                 

Dividends declared per share

  $ 0.25     $ 0.25     $ 0.75     $ 0.75  
                                 

Cash provided by (used in):

                               

Operating Activities

  $ (70,995 )   $ (76,984 )   $ (26,486 )   $ (173,256 )

Investing Activities

  $ 32,115     $ 42,700     $ 48,704     $ 125,625  

Financing Activities

  $ (18,413 )   $ (12,628 )   $ (53,048 )   $ (68,588 )

 

 
- 26 -

 

 

Overview

 

Industry Conditions

 

The homebuilding industry continued a slow but steady recovery during the 2015 third quarter, with key macroeconomic drivers such as new homes sales, employment levels and consumer confidence showing modest improvements, while the supply of both new and existing single family home inventory and interest rates remained near historic lows. While global economic conditions could dampen the economic progress already realized by the domestic economy, we also believe that housing demand has the potential to strengthen based on accelerating wage growth, increasing household formation and rising birth rates. However, limited subcontractor availability and an increased focus on dirt sales have increased our average number of days from sale to delivery. These issues, coupled with a reduced number of spec homes available for sale, have hindered our ability to convert backlog into deliveries when compared to recent historical rates.

 

Three Months Ended September 30, 2015

 

Our net income for the 2015 third quarter was $14.8 million, or $0.30 per diluted share, down slightly from $15.5 million, or $0.32 per diluted share, for the same period in the prior year. The decrease was primarily attributable to a $5.4 million increase in general and administrative expenses and a $5.1 million decline in interest and other income. These items were mostly offset by a 12% year-over-year increase in home sale revenues, a $2.1 million decline in the impairment of marketable securities and a $2.3 million improvement in pretax income from financial services.

 

Home sale revenues were up 12% from $405.1 million in the 2014 third quarter to $454.7 million in the 2015 third quarter. This $49.7 million improvement was the result of a $50,500 increase in our average selling price to $421,100, mostly due to a mix shift to higher-priced communities and to a lesser extent price increases implemented earlier in the year. Our gross margin from home sales for the 2015 third quarter was 16.4%, down 10 basis points from the 2014 third quarter. However, the current quarter gross margin from home sales was negatively impacted by $4.4 million of inventory impairments. Excluding inventory impairments, our gross margin from home sales was 17.3%, up 80 basis points from the 2014 third quarter and up 70 basis points sequentially from the 2015 second quarter (see the Gross Margin section for a reconciliation of non-GAAP measures). The year-over-year increase in our gross margin from home sales before inventory impairments was primarily due to (1) a higher percentage of our total deliveries coming from dirt home starts, which typically have higher gross margins than spec home deliveries and (2) an increase in the gross margin for our spec home deliveries, due to decreased incentives offered on the sale of these units. Interest income was down as a result of a year-over-year decline in our average marketable securities balance while our G&A expenses were up mostly due to expenses related to executive compensation.

 

Net new home order activity increased slightly from the prior year period as an 8% increase in our monthly sales absorption pace was partially offset by a 5% decline in our number of average active communities. The improvement in our monthly sales absorption pace was achieved even though we have implemented price increases in many of our active communities throughout 2015. These price increases, coupled with a mix shift to higher priced communities, drove a 10% increase in our average price of net new home orders to $441,000. As a result of the increase in both units and average price, the dollar value of our net new orders was up 13% from the 2014 third quarter to $489.0 million.

 

Nine Months Ended September 30, 2015

 

Our net income for the nine months ended September 30, 2015 was $43.2 million, or $0.88 per diluted share, a decrease compared to net income of $48.5 million, or $0.99 per diluted share, for the prior year period. The decrease was primarily attributable to a 110 basis point reduction in our gross margin from homes sales, which included the impact of a $3.9 million increase in inventory impairments, and an $18.7 million decrease in interest and other income, due to year-over-year declines in both (1) our average marketable securities balance and (2) gains on sales of marketable securities as the volume of marketable securities sold decreased. These items were partially offset by a 12% improvement in home sale revenues and a $9.4 million reduction in charges related to the early extinguishment of debt.

 

Outlook

 

Our dollar value of homes in backlog reached a balance of $1.18 billion at September 30, 2015, up 49% year-over-year, leaving us well positioned for year-over-year revenue growth in future quarters. However, the magnitude of the backlog increase is tempered somewhat by a higher percent of dirt sales, which are generally in backlog for a longer period of time, and delayed closings as a result of limited subcontractor availability. With overall liquidity of over $735 million, and no senior note maturities until 2020, we believe that our financial position at the end of the 2015 third quarter provides the appropriate balance for us between supporting Company growth and providing protection from the volatile and cyclical nature of the housing market. See “Forward-Looking Statements” below.

 

 
- 27 -

 

 

Homebuilding

 

Pretax Income

 

   

Three Months Ended

                   

Nine Months Ended

                 
   

September 30,

   

Change

   

September 30,

   

Change

 
   

2015

   

2014

   

Amount

   

%

   

2015

   

2014

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 16,708     $ 12,402     $ 4,306       35  %   $ 40,808     $ 41,747     $ (939 )     (2 )%

Mountain

    12,849       11,031       1,818       16  %     35,239       30,572       4,667       15  %

East

    (691 )     1,138       (1,829 )     (161 )%     (1,093 )     9,095       (10,188 )     (112 )%

Corporate

    (13,470 )     (6,609 )     (6,861 )     104  %     (27,995 )     (22,450 )     (5,545 )     25  %

Total homebuilding pretax income

  $ 15,396     $ 17,962     $ (2,566 )     (14 )%   $ 46,959     $ 58,964     $ (12,005 )     (20 )%

 

For the 2015 third quarter, homebuilding pretax income was down slightly compared with the 2014 third quarter. Our income for the quarter benefitted from a 12% year-over-year increase in our home sale revenues as well as a $2.1 million decrease in the impairment of marketable securities. However, our results were also negatively impacted by a $5.4 million increase in general and administrative expenses and a $5.1 million decline in interest and other income. The $4.3 million increase in pretax income in our West segment was primarily driven by a 24% increase in home sale revenues while our Mountain segment’s $1.8 million increase was mostly the result of an improvement in their gross margin from home sales percentage. The $1.8 million decline in pretax income in our East segment was primarily the result of $3.0 million in inventory impairment charges that were partially offset by slightly lower selling, general and administrative expenses (“SG&A”) as a percent of home sale revenues (“SG&A rate”). The pretax loss in our Corporate segment grew by $6.9 million primarily due to a $4.1 million increase in expenses related to executive compensation and a $5.1 million decline in interest and other income. These items were partially offset by a $2.1 million decrease in the impairment of marketable securities.

 

For the nine months ended September 30, 2015, we recorded homebuilding pretax income of $47.0 million, compared to $59.0 million for the same period in the prior year, a decrease of $12.0 million. The decrease was primarily attributable to an $18.7 million decrease in interest and other income, due to year-over-year declines in both (1) our average marketable securities balance and (2) gains on sales of marketable securities as the volume of marketable securities sold decreased, and a 110 basis point reduction in our gross margin from homes sales, which included the impact of a $3.9 million increase in inventory impairments. These items were somewhat offset by a 12% improvement in home sale revenues, a $9.4 million reduction in charges related to the early extinguishment of debt and a $2.1 million reduction in charges related to the impairment of marketable securities. Our Mountain segment had a $4.7 million year-over-year improvement in pretax income for the nine months ended September 30, 2015, due primarily to a 9% increase in home sale revenues coupled with an improved gross margin from home sales percentage. In our West segment, a $0.9 million decrease in pretax income was caused by a decline in gross margin from home sales percentage that more than offset a 22% increase in home sale revenues and an improved SG&A rate. The $10.2 million decline in pretax income in our East segment was primarily the result of a 4% reduction in home sale revenues, a decline in our gross margin from home sales percentage and an increase in our SG&A rate due to mostly to higher net legal expenses as a result of non-recurring legal recoveries during the 2014 second quarter. The additional pretax loss in our Corporate segment was primarily due to a decrease in interest and other income of $19.2 million, which was partially offset by year-over-year reductions of $9.4 million in charges related to the early extinguishment of debt and a $2.1 million reduction in charges related to the impairment of marketable securities.

 

 
- 28 -

 

 

Assets

 

   

September 30,

   

December 31,

   

Change

 
   

2015

   

2014

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 977,257     $ 893,970     $ 83,287       9  %

Mountain

    548,454       516,971       31,483       6  %

East

    349,354       343,718       5,636       2  %

Corporate

    352,404       465,368       (112,964 )     (24 )%

Total homebuilding assets

  $ 2,227,469     $ 2,220,027     $ 7,442       0  %

 

Homebuilding assets increased slightly during the first nine months of 2015. Homebuilding assets in our West, Mountain and East segments increased from December 31, 2014 as incremental investments in both land and new construction drove an increase in our inventory balances. The funds for these investments came from our Corporate segment, driving the majority of the $113.0 million decline in Corporate segment assets.

 

Home and land sale revenues

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

Change

   

September 30,

   

Change

 
   

2015

   

2014

   

Amount

   

%

   

2015

   

2014

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 229,743     $ 184,627     $ 45,116       24 %   $ 624,261     $ 510,710     $ 113,551       22  %

Mountain

    147,166       144,442       2,724       2 %     428,080       392,052       36,028       9  %

East

    78,737       78,635       102       0 %     242,932       254,737       (11,805 )     (5 )%

Total home and land sale revenues

  $ 455,646     $ 407,704     $ 47,942       12 %   $ 1,295,273     $ 1,157,499     $ 137,774       12  %

 

Our home and land sale revenues increased $47.9 million and $137.8 million year-over-year for the three and nine months ended September 30, 2015, respectively. The increases for both periods, when compared to the same periods in the prior year, were driven by improvements in our average selling price of 14% and 12%, respectively. For both the three and nine months ended September 30, 2015, deliveries were nearly flat from the same periods in the prior year.

 

New Home Deliveries

 

   

Three Months Ended September 30,

 
   

2015

   

2014

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price 

 
   

(Dollars in thousands)

 

Arizona

    190     $ 54,434     $ 286.5       222     $ 58,816     $ 264.9       (14 )%     (7 )%     8 %

California

    161       84,877       527.2       136       62,217       457.5       18  %     36  %     15 %

Nevada

    159       60,258       379.0       131       40,297       307.6       21  %     50  %     23 %

Washington

    75       30,174       402.3       66       23,297       353.0       14  %     30  %     14 %

West

    585       229,743       392.7       555       184,627       332.7       5  %     24  %     18 %

Colorado

    281       132,916       473.0       309       129,056       417.7       (9 )%     3  %     13 %

Utah

    39       13,460       345.1       43       13,526       314.6       (9 )%     (0 )%     10 %

Mountain

    320       146,376       457.4       352       142,582       405.1       (9 )%     3  %     13 %

Maryland

    55       26,122       474.9       74       35,094       474.2       (26 )%     (26 )%     0 %

Virginia

    51       25,309       496.3       56       26,682       476.5       (9 )%     (5 )%     4 %

Florida

    69       27,190       394.1       56       16,066       286.9       23  %     69  %     37 %

East

    175       78,621       449.3       186       77,842       418.5       (6 )%     1  %     7 %

Total

    1,080     $ 454,740     $ 421.1       1,093     $ 405,051     $ 370.6       (1 )%     12  %     14 %

 

 
- 29 -

 

 

 

 

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price 

 
   

(Dollars in thousands)

 

Arizona

    543     $ 160,011     $ 294.7       531     $ 138,901     $ 261.6       2  %     15  %     13  %

California

    486       243,407       500.8       371       174,215       469.6       31  %     40  %     7  %

Nevada

    404       147,788       365.8       395       123,016       311.4       2  %     20  %     17  %

Washington

    190       73,055       384.5       208       74,578       358.5       (9 )%     (2 )%     7  %

West

    1,623       624,261       384.6       1,505       510,710       339.3       8  %     22  %     13  %

Colorado

    843       392,779       465.9       885       354,443       400.5       (5 )%     11  %     16  %

Utah

    95       33,600       353.7       111       35,231       317.4       (14 )%     (5 )%     11  %

Mountain

    938       426,379       454.6       996       389,674       391.2       (6 )%     9  %     16  %

Maryland

    168       78,980       470.1       232       108,350       467.0       (28 )%     (27 )%     1  %

Virginia

    170       82,755       486.8       180       88,972       494.3       (6 )%     (7 )%     (2 )%

Florida

    216       81,082       375.4       211       56,622       268.4       2  %     43  %     40  %

East

    554       242,817       438.3       623       253,944       407.6       (11 )%     (4 )%     8  %

Total

    3,115     $ 1,293,457     $ 415.2       3,124     $ 1,154,328     $ 369.5       (0 )%     12  %     12  %

 

For both the three and nine months ended September 30, 2015, almost all of our markets experienced year-over-year increases in the average selling price of homes delivered. Though price increases had a positive impact, the significant driver for the change in average selling price for our Florida, Nevada and California markets was a mix shift to higher priced communities. For Colorado, the increase in average selling price for both periods was largely the result of price increases previously implemented, due to strong demand, coupled with a mix shift to higher priced communities.

 

The number of home deliveries for both the three and nine months ended September 30, 2015 remained relatively flat with the same periods in 2014. The changes in homes delivered for our California, Maryland and Virginia markets in both periods and our Nevada and Washington markets in the 2015 third quarter were primarily driven by the changes in the number of homes in beginning backlog for those markets. For the remaining markets, any year-over-year declines in homes delivered for the three and nine months ended September 30, 2015 were primarily due to decreases in the number of homes both sold and delivered during the period, as expected with the decrease in spec inventory. Additionally, deliveries in many of our markets are being hampered by limited subcontractor availability.

 

 
- 30 -

 

 

Gross Margin

 

Gross margin from home sales for the 2015 third quarter was down 10 basis points from the same period in 2014, due primarily to $4.4 million in inventory impairments and higher land and construction costs, but partially offset by a 90 basis point improvement in our interest in cost of sales as a percent of home sale revenues, price increases implemented in various communities, and a higher percentage of our deliveries coming from dirt sales, which typically have higher gross margins. Excluding inventory impairments, our gross margin from home sales for the 2015 third quarter was 17.3% (see below for a reconciliation of non-GAAP measures), up 80 basis points year-over-year. Sequentially, from the 2015 second quarter, our gross margin from home sales excluding inventory impairments increased 70 basis points, due primarily to (1) a 30 basis point improvement in our interest in cost of sales as a percent of home sale revenues, (2) a higher percentage of our total deliveries coming from dirt starts and (3) an increase in the gross margin for our spec deliveries, due to decreased incentives offered on the sale of these units.

 

Our gross margin from home sales for the nine months ended September 30, 2015 decreased 110 basis points year-over-year. The decline was primarily due to lower margins from spec home deliveries in the first quarter of 2015 as a result of higher incentives utilized in our efforts to reduce our aged spec inventory. To a lesser extent, margins were adversely impacted by higher land and construction costs, a $3.9 million increase in inventory impairments, and a $2.4 million year-over-year decline in positive warranty adjustments.

 

The table set forth below is a reconciliation of our gross margin from home sales to gross margin from home sales excluding inventory impairments and interest in cost of sales, which is a non-GAAP measure.

 

   

Three Months Ended September 30,

 
   

September 30,

2015

   

Gross Margin %

   

June 30,

2015

   

Gross Margin %

     

September 30,
2014

   

Gross Margin %

 
   

(Dollars in thousands)

 

Gross Margin

  $ 74,528       16.4 %   $ 76,689       16.6 %   $ 67,682       16.6 %

Less: Land Sale Revenues

    (906 )             -               (2,653 )        

Add: Land Cost of Sales

    819               -               1,985          

Gross Margin from Home Sales

    74,441       16.4 %     76,689       16.6 %     67,014       16.5 %

Add: Inventory Impairments

    4,351               -               -          

Gross Margin from Home Sales Excluding Inventory Impairments (1)

    78,792       17.3 %     76,689       16.6 %     67,014       16.5 %

Add: Interest in Cost of Sales

    12,878               14,439               14,966          

Gross Margin from Home Sales Excluding Inventory Impairments and Interest in Cost of Sales (1)

  $ 91,670       20.2 %   $ 91,128       19.7 %   $ 81,980       20.2 %

 

                   

Nine Months Ended September 30,

 
                   

2015

   

Gross Margin %

   

2014

   

Gross Margin %

 

Gross Margin

                  $ 209,019       16.1 %   $ 200,452       17.3 %

Less: Land Sale Revenues

                    (1,816 )             (3,171 )        

Add: Land Cost of Sales

                    1,944               2,507          

Gross Margin from Home Sales

                    209,147       16.2 %     199,788       17.3 %

Add: Inventory Impairments

                    4,701               850          

Gross Margin from Home Sales Excluding Inventory Impairments (1)

                    213,848       16.5 %     200,638       17.4 %
                                                 

Add: Interest in Cost of Sales

                    39,808               43,212          

Gross Margin from Home Sales Excluding Inventory Impairments and Interest in Cost of Sales (1)

                  $ 253,656       19.6 %   $ 243,850       21.1 %

                                                                           
     
 

(1)

Gross margin from home sales excluding inventory impairments and gross margin from home sales excluding inventory impairments and interest in cost of sales are non-GAAP financial measures. We believe this information is meaningful as it isolates the impact that impairments and interest have on our Gross Margin from Home Sales and permits investors to make better comparisons with our competitors, who also break out and adjust gross margins in a similar fashion.

 

 
- 31 -

 

 

Inventory Impairments

 

Impairments of homebuilding inventory by segment for the three and nine months ended September 30, 2015 and 2014 are shown in the table below. In addition to the impairments shown below, we recorded $1.1 million of impairments on our land held for sale during the three and nine months ended September 30, 2015. No such impairments were recorded during the same periods in 2014.

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

West

  $ -     $ -     $ -     $ -  

Mountain

    250       -       250       -  

East

    2,975       -       3,325       850  

Total Inventory Impairments

  $ 3,225     $ -     $ 3,575     $ 850  

 

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

  

   

Impairment Data

   

Quantitative Data

 

Three Months Ended

 

Total

Subdivisions

Tested

   

Inventory

Impairments

   

Fair Value of

Inventory After Impairments

   

Number of

Subdivisions

Impaired

   

Discount Rate

 
   

(Dollars in thousands)

 

March 31, 2015

    22     $ 350     $ 3,701       1       8.7%  

June 30, 2015

    22       -       -       -       N/A  

September 30, 2015

    18       3,225       14,836       5       12.0 - 15.0%  

Total

    62     $ 3,575     $ 18,537       6          
                                         

March 31, 2014

    16     $ -     $ -       -       N/A  

June 30, 2014

    16       850       4,285       2       11.0 - 13.8%  

September 30, 2014

    23       -       -       -       N/A  

Total

    55     $ 850     $ 4,285       2          

 

Selling, General and Administrative Expenses

 

For the quarter ended September 30, 2015, our SG&A expenses were $57.4 million while our SG&A rate was 12.6%. For the same period in 2014, our SG&A expenses were $50.5 million while our SG&A rate was 12.5%. The 10 basis point increase in our SG&A rate was driven primarily by a $5.4 million increase in compensation-related expenses, which includes the expense related to our market performance based non-qualified stock options for certain of our executive officers, but was partially offset by lower marketing costs relative to home sale revenues.

 

For the nine months ended September 30, 2015, our SG&A expenses were $162.8 million while our SG&A rate was 12.6%. For the same period in 2014, our SG&A expenses were $148.7 million while our SG&A rate was 12.9%. The 30 basis point improvement in our SG&A rate was driven primarily by an increased ability to leverage our fixed overhead as a result of our 12% increase in home sale revenues, slightly offset by $2.1 million in higher net legal expenses.

 

Interest and Other Income

 

For the three months ended September 30, 2015, our interest and other income decreased $5.1 million from the 2014 third quarter, due primarily to a lower average marketable securities balance.

 

For the nine months ended September 30, 2015, our interest and other income decreased $18.7 million from the same period in the prior year due to year-over-year declines in both (1) our average marketable securities balance and (2) gains on sales of marketable securities as the volume of marketable securities sold decreased.

 

 
- 32 -

 

 

Early Extinguishment of Debt

 

During the 2014 first quarter, we redeemed $250 million of senior notes due December 2014, which resulted in an early extinguishment of debt charge of $9.4 million for the nine months ended September 30, 2014. We recorded no such charge during the three or nine months ended September 30, 2015.

 

Other-Than-Temporary Impairment of Marketable Securities

 

During the three and nine months ended September 30, 2015, we recorded an impairment of marketable securities totaling $2.2 million on certain equity securities based on our determination that the unrealized loss on certain of our equity securities no longer met the criteria to be considered temporary.

 

During the three and nine months ended September 30, 2014, we recorded an impairment of marketable securities totaling $4.3 million for certain equity securities we sold subsequent to quarter end to fund the early retirement of $250 million of our 5⅜% senior notes due July 2015.

 

 
- 33 -

 

 

Other Homebuilding Operating Data

 

Net New Orders:

 

   

Three Months Ended September 30,

 
   

2015

   

2014

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

 
   

(Dollars in thousands)

 

Arizona

    214     $ 60,274     $ 281.7       2.15       208     $ 63,685     $ 306.2       1.98       3  %     (5 )%     (8 )%     9  %

California

    184       118,943       646.4       3.07       164       78,245       477.1       2.80       12  %     52  %     35  %     10  %

Nevada

    110       40,196       365.4       2.99       155       55,766       359.8       2.91       (29 )%     (28 )%     2  %     3  %

Washington

    93       40,260       432.9       2.25       63       22,578       358.4       2.33       48  %     78  %     21  %     (3 )%

West

    601       259,673       432.1       2.53       590       220,274       373.3       2.42       2  %     18  %     16  %     5  %

Colorado

    273       129,221       473.3       2.39       262       114,707       437.8       2.25       4  %     13  %     8  %     6  %

Utah

    48       17,282       360.0       2.21       35       11,934       341.0       2.12       37  %     45  %     6  %     4  %

Mountain

    321       146,503       456.4       2.36       297       126,641       426.4       2.24       8  %     16  %     7  %     5  %

Maryland

    53       26,667       503.2       1.81       55       25,518       464.0       1.31       (4 )%     5  %     8  %     38  %

Virginia

    48       22,812       475.3       2.21       49       24,878       507.7       2.04       (2 )%     (8 )%     (6 )%     8  %

Florida

    86       33,393       388.3       1.98       90       34,274       380.8       1.88       (4 )%     (3 )%     2  %     5  %

East

    187       82,872       443.2       1.98       194       84,670       436.4       1.70       (4 )%     (2 )%     2  %     16  %

Total

    1,109     $ 489,048     $ 441.0       2.37       1,081     $ 431,585     $ 399.2       2.20       3  %     13  %     10  %     8  %

 

 

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

% Change

 
   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

 
   

(Dollars in thousands)

 

Arizona

    689     $ 195,546     $ 283.8       2.20       661     $ 193,516     $ 292.8       2.32       4  %     1  %     (3 )%     (5 )%

California

    696       402,701       578.6       3.79       531       257,163       484.3       3.64       31  %     57  %     19  %     4  %

Nevada

    487       185,313       380.5       4.19       485       158,804       327.4       3.27       0  %     17  %     16  %     28  %

Washington

    314       133,197       424.2       2.66       229       85,033       371.3       2.54       37  %     57  %     14  %     5  %

West

    2,186       916,757       419.4       2.99       1,906       694,516       364.4       2.85       15  %     32  %     15  %     5  %

Colorado

    1,173       557,372       475.2       3.19       1,068       453,163       424.3       3.12       10  %     23  %     12  %     2  %

Utah

    177       64,426       364.0       2.89       133       44,425       334.0       2.64       33  %     45  %     9  %     9  %

Mountain

    1,350       621,798       460.6       3.15       1,201       497,588       414.3       3.06       12  %     25  %     11  %     3  %

Maryland

    181       89,213       492.9       2.14       200       95,390       477.0       1.44       (10 )%     (6 )%     3  %     49  %

Virginia

    163       80,588       494.4       2.11       172       86,625       503.6       2.08       (5 )%     (7 )%     (2 )%     1  %

Florida

    303       112,895       372.6       2.34       257       87,047       338.7       1.96       18  %     30  %     10  %     19  %

East

    647       282,696       436.9       2.22       629       269,062       427.8       1.78       3  %     5  %     2  %     25  %

Total

    4,183     $ 1,821,251     $ 435.4       2.88       3,736     $ 1,461,166     $ 391.1       2.64       12  %     25  %     11  %     9  %

 

 

* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period

 

For the three and nine months ended September 30, 2015, the dollar value of net new orders increased 13% and 25%, respectively, compared to the same periods in the prior year as both units and average selling price increased from the prior year periods. Our units were up primarily due to an improved absorption rate. While the increases in average selling price for both periods are the result of price increases implemented in many of our active subdivisions across most of our markets during the first half of 2015, coupled with changes in the mix of net new orders to higher priced submarkets.

 

 
- 34 -

 

 

For the 2015 third quarter, our Washington and Utah markets both experienced substantial increases in net new orders, primarily due to improvements in their average active community counts. In addition to the increase in units, Washington’s average selling price increased as a result of a shift in mix to higher priced communities and price increases implemented in recent quarters. In California, a 10% expansion in monthly sales absorption pace, driven by the opening of new communities in high-demand submarkets, primarily drove the 12% increase in net new orders while a shift in mix to higher priced communities primarily caused the improved average selling price of net new orders. Our Nevada market had the most significant decrease in the number of net new orders as a result of their substantial year-over-year decline in average active community count, a direct effect of the strong demand and delays in opening new subdivisions. For our Maryland market, our absorption rate improved 38% year-over-year as we have continued throughout 2015 to reduce our exposure to certain underperforming submarkets.

 

For the first nine months of 2015, our California, Nevada, Washington, Colorado, Utah and Florida markets all had substantial increases in the dollar value of net new orders. The increase in each of these markets, with the exception of Nevada, was driven by increases in both the average selling price and number of net new homes sold. The increase in the number of net new homes sold in California, Washington, Colorado and Utah was primarily driven by higher average active community counts while Florida benefited from a higher monthly sales absorption pace. Despite a 28% increase in monthly sales absorption pace, the number of net new homes sold in Nevada was flat year-over-year as a result of a 24% decline in average active subdivisions for the period, a direct effect of the strong demand. However, a 16% increase in average sales price, due to price increases implemented and a change in the mix of homes sold, drove a 17% increase in the dollar value of net new orders in Nevada. Our Maryland market experienced a 49% year-over-year improvement in monthly absorption rate, due primarily to the change in our exposure to certain underperforming submarkets discussed above, coupled with severe winter weather conditions which negatively impacted our sales pace during the first quarter of 2014.

 

Active Subdivisions:

 

 

                           

Average Active Subdivisions

   

Average Active Subdivisions

 
   

Active Subdivisions

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

%

   

September 30,

   

%

   

September 30,

   

%

 
   

2015

   

2014

   

Change

   

2015

   

2014

   

Change

   

2015

   

2014

   

Change

 

Arizona

    31       36       (14 )%     33       35       (6 )%     35       32       9  %

California

    19       21       (10 )%     20       20       0  %     20       16       25  %

Nevada

    15       18       (17 )%     12       18       (33 )%     13       17       (24 )%

Washington

    14       10       40  %     14       9       56  %     13       10       30  %

West

    79       85       (7 )%     79       82       (4 )%     81       75       8  %

Colorado

    37       42       (12 )%     38       39       (3 )%     41       38       8  %

Utah

    8       5       60  %     7       6       17  %     7       6       17  %

Mountain

    45       47       (4 )%     45       45       0  %     48       44       9  %

Maryland

    10       14       (29 )%     10       14       (29 )%     9       15       (40 )%

Virginia

    8       8       0  %     7       8       (13 )%     9       9       0  %

Florida

    15       16       (6 )%     15       16       (6 )%     14       15       (7 )%

East

    33       38       (13 )%     32       38       (16 )%     32       39       (18 )%

Total

    157       170       (8 )%     156       165       (5 )%     161       158       2  %

 

At September 30, 2015, we had 157 active subdivisions, down 8% from 170 active subdivisions at September 30, 2014, but up slightly from 156 on a sequential basis from the 2015 second quarter. We experienced notable declines in active subdivision count in our Arizona, California, Nevada, Colorado and Maryland markets. These declines in each of these markets were primarily the result of delays in opening new subdivisions. Additionally, higher than expected demand in Nevada resulted in subdivisions closing out quicker than expected. Washington and Utah both had notable increases in the number of active subdivisions, in line with our objective to continue to grow our market share in these markets. See "Forward-Looking Statements" below.

 

 
- 35 -

 

 

Cancellation Rate:

 

   

Three Months Ended September 30,

   

Change in

   

Nine Months Ended September 30,

   

Change in

 
   

2015

   

2014

   

Percentage

   

2015

   

2014

   

Percentage

 

Arizona

    26 %     28 %     (2 )%     22 %     22 %     0  %

California

    20 %     29 %     (9 )%     19 %     23 %     (4 )%

Nevada

    28 %     22 %     6  %     17 %     19 %     (2 )%

Washington

    23 %     24 %     (1 )%     17 %     19 %     (2 )%

West

    24 %     26 %     (2 )%     19 %     21 %     (2 )%

Colorado

    26 %     28 %     (2 )%     20 %     19 %     1  %

Utah

    19 %     17 %     2  %     16 %     15 %     1  %

Mountain

    25 %     27 %     (2 )%     19 %     19 %     0  %

Maryland

    17 %     25 %     (8 )%     17 %     23 %     (6 )%

Virginia

    28 %     30 %     (2 )%     28 %     25 %     3  %

Florida

    30 %     24 %     6  %     25 %     23 %     2  %

East

    26 %     26 %     0  %     24 %     24 %     0  %

Total

    25 %     26 %     (1 )%     20 %     21 %     (1 )%

 

Our cancellation rate for the three and nine months ended September 30, 2015 was 25% and 20%, respectively, nearly unchanged from 26% and 21% for the three and nine months ended September 30, 2014, respectively. For the 2015 third quarter and to a lesser extent the nine months ended September 30, 2015, our cancellation rate in California declined due to a shift in mix to submarkets that have higher demand resulting in a lower cancellation rate. For both periods, Maryland experienced large declines in their cancellation rates as a result of various efforts to enhance the quality of our backlog, including reduced acceptance of contingencies and more emphasis on creditworthiness before the acceptance of sales contracts. For the 2015 third quarter, the number of cancellations increased in Florida, driven by the number of homes in beginning backlog, which was up 69% year-over-over and created a greater potential for cancellations. Because gross sales activity was similar year-over-year in Florida, these cancellations resulted in an increase in the cancellation rate for both markets. The increase in Nevada was driven by a decline in gross sales as a result of the decrease in community count.

 

Backlog:

 

   

September 30,

 
   

2015

   

2014

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

 
   

(Dollars in thousands)

 

Arizona

    377     $ 109,735     $ 291.1       290     $ 96,456     $ 332.6       30  %     14  %     (12 )%

California

    402       253,814       631.4       307       150,856       491.4       31  %     68  %     28  %

Nevada

    238       94,815       398.4       230       81,644       355.0       3  %     16  %     12  %

Washington

    179       79,175       442.3       67       25,302       377.6       167  %     213  %     17  %

West

    1,196       537,539       449.4       894       354,258       396.3       34  %     52  %     13  %

Colorado

    909       434,371       477.9       600       268,205       447.0       52  %     62  %     7  %

Utah

    122       43,551       357.0       48       17,135       357.0       154  %     154  %     0  %

Mountain

    1,031       477,922       463.6       648       285,340       440.3       59  %     67  %     5  %

Maryland

    81       42,999       530.9       97       48,831       503.4       (16 )%     (12 )%     5  %

Virginia

    83       42,494       512.0       95       47,663       501.7       (13 )%     (11 )%     2  %

Florida

    196       78,900       402.6       140       56,053       400.4       40  %     41  %     1  %

East

    360       164,393       456.6       332       152,547       459.5       8  %     8  %     (1 )%

Total

    2,587     $ 1,179,854     $ 456.1       1,874     $ 792,145     $ 422.7       38  %     49  %     8  %

 

 
- 36 -

 

 

At September 30, 2015, we had 2,587 homes in backlog with a total value of $1.18 billion, representing a year-over-year increase of 713 homes and $387.7 million from September 30, 2014. The increase in the number homes in backlog was driven mostly by (1) year-over-year increases in net new orders for each of the past four quarters, (2) a higher percent of those sales coming from dirt sales, which are generally in backlog for a longer period of time and (3) lower closings than expected year to date as a result of limited subcontractor availability. The changes in the average selling price in backlog for our markets were primarily driven by the year-over-year changes in the average price of net new orders.

 

Homes Completed or Under Construction (WIP lots):

 

   

September 30,

   

%

 
   

2015

   

2014

   

Change

 

Unsold:

                       

Completed

    221       456       (52 )%

Under construction

    403       881       (54 )%

Total unsold started homes

    624       1,337       (53 )%

Sold homes under construction or completed

    1,947       1,417       37  %

Model homes

    273       242       13  %

Total homes completed or under construction

    2,844       2,996       (5 )%

 

Throughout 2015, we have returned to focusing more on dirt sales, giving our customers the best opportunity to personalize their homes. As a result, our supply of spec homes has declined by 53% year-over-year from September 30, 2014. However, this decline was mostly offset by a 37% increase in sold homes under construction or completed as a result of our higher backlog, resulting in a 5% decline in our total homes completed or under construction.

 

Lots Owned and Optioned (including homes completed or under construction):

 

   

September 30, 2015

   

September 30, 2014

         
   

Lots Owned

   

Lots Optioned

   

Total

   

Lots Owned

   

Lots Optioned

   

Total

   

Total % Change

 

Arizona

    1,778       205       1,983       2,461       50       2,511       (21 )%

California

    1,726       222       1,948       1,711       191       1,902       2  %

Nevada

    1,938       439       2,377       1,703       209       1,912       24  %

Washington

    842       37       879       936       -       936       (6 )%

West

    6,284       903       7,187       6,811       450       7,261       (1 )%

Colorado

    4,208       1,036       5,244       4,240       1,160       5,400       (3 )%

Utah

    496       -       496       662       -       662       (25 )%

Mountain

    4,704       1,036       5,740       4,902       1,160       6,062       (5 )%

Maryland

    383       304       687       403       389       792       (13 )%

Virginia

    693       163       856       546       510       1,056       (19 )%

Florida

    1,014       293       1,307       917       254       1,171       12  %

East

    2,090       760       2,850       1,866       1,153       3,019       (6 )%

Total

    13,078       2,699       15,777       13,579       2,763       16,342       (3 )%

 

During the quarter, we purchased over 1,800 lots in 45 communities, representing a significant increase sequentially from the 2015 second quarter, when we purchased 718 lots in 28 communities. As a result of the pickup in land acquisition activity, we ended the 2015 third quarter with 15,777 lots under our control. Despite the slight decline in year-over-year lot supply, we increased our supply 8% from the prior quarter and believe that our current lot supply of approximately 3.6 years (which is based on our last-twelve months deliveries and is within our stated strategic range), coupled with our planned acquisition activity, will support growth in future periods. See "Forward-Looking Statements" below.

 
 
- 37 -

 

 

Financial Services

 

   

Three Months Ended

                   

Nine Months Ended

                 
   

September 30,

   

Change

   

September 30,

   

Change

 
   

2015

   

2014

   

Amount

   

%

   

2015

   

2014

   

Amount

   

%

 
   

(Dollars in thousands)

 
Financial services revenues                                                                

Mortgage operations

  $ 7,999     $ 6,416     $ 1,583       25 %   $ 21,752     $ 18,887     $ 2,865       15 %

Other

    4,842       4,283       559       13 %     13,100       12,526       574       5 %

Total financial services revenues

  $ 12,841     $ 10,699       2,142       20 %   $ 34,852     $ 31,413       3,439       11 %
                                                                 

Financial services pretax income

                                                               

Mortgage operations

  $ 5,354     $ 3,327       2,027       61 %   $ 12,243     $ 10,387       1,856       18 %

Other

    2,908       2,635       273       10 %     9,664       7,239       2,425       33 %

Total financial services pretax income

  $ 8,262     $ 5,962     $ 2,300       39 %   $ 21,907     $ 17,626     $ 4,281       24 %

 

 

 

For the three and nine months ended September 30, 2015, our financial services pretax income was up 39% and 24%, respectively, from the same periods in the prior year. The $2.3 million increase in pretax income for the 2015 third quarter was primarily due to an increase in the dollar value of loans locked, originated, and sold. Our pretax income for the nine months ended September 30, 2015 increased by $4.3 million primarily due to (1) a $1.5 million adjustment recorded in the 2015 second quarter in our other financial services segment to reduce insurance reserves as the result of a decline in insurance claim payment severity and frequency relative to prior period estimates, (2) an increase in the dollar value of loans locked, originated and sold and (3) higher per unit origination income.

 

 
- 38 -

 

 

The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. “Capture rate” is defined as the number of mortgage loans originated by our mortgage operations segment for our homebuyers as a percent of our total home closings.

  

   

Three Months Ended

   

% or

   

Nine Months Ended

   

% or

 
   

September 30,

   

Percentage

   

September 30,

   

Percentage

 
   

2015

   

2014

   

Change

   

2015

   

2014

   

Change

 

 

 

(Dollars in thousands)

 
Total Originations (including transfer loans):                                                

Loans

    606       619       (2 )%     1,759       1,772       (1 )%

Principal

  $ 203,091     $ 197,731       3 %   $ 589,810     $ 552,224       7 %

Capture Rate Data:

                                               

Capture rate as % of all homes delivered

    55 %     56 %     (1 )%     56 %     56 %     0 %

Capture rate as % of all homes delivered (excludes cash sales)

    59 %     61 %     (2 )%     59 %     61 %     (2 )%

Mortgage Loan Origination Product Mix:

                                               

FHA loans

    19 %     14 %     5 %     17 %     15 %     2 %

Other government loans (VA & USDA)

    23 %     32 %     (9 )%     26 %     30 %     (4 )%

Total government loans

    42 %     46 %     (4 )%     43 %     45 %     (2 )%

Conventional loans

    58 %     54 %     4 %     57 %     55 %     2 %
      100 %     100 %     0 %     100 %     100 %     0 %

Loan Type:

                                               

Fixed rate

    96 %     95 %     1 %     96 %     93 %     3 %

ARM

    4 %     5 %     (1 )%     4 %     7 %     (3 )%

Credit Quality:

                                               

Average FICO Score

    736       736       0 %     736       738       (0 )%

Other Data:

                                               

Average Combined LTV ratio

    85 %     87 %     (2 )%     85 %     86 %     (1 )%

Full documentation loans

    100 %     100 %     0 %     100 %     100 %     0 %

Loans Sold to Third Parties:

                                               

Loans

    640       624       3 %     1,819       1,886       (4 )%

Principal

  $ 215,023     $ 197,395       9 %   $ 608,156     $ 585,037       4 %

 

 

Income Taxes

 

For the three and nine months ended September 30, 2015, we had income tax expenses of $8.9 million and $25.7 million, respectively, both of which were based on effective income tax rates of 37.5% and 37.3%, respectively. For the three and nine months ended September 30, 2014, we had income tax expenses of $8.5 million and $28.1 million, respectively, which were based on effective income tax rates of 35.4% and 36.7%, respectively.

 

 
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an ongoing basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. See "Forward-Looking Statements" below.

 

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We use our liquidity and capital resources to (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, Revolving Credit Facility and Mortgage Repurchase Facility. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.25 billion.

 

We have marketable debt and equity securities. Our debt securities consist primarily of floating and fixed rate interest earning debt securities, which may include, among others, corporate debt, United States government and government agency debt. Our equity securities consist of holdings in corporate equities and holdings in mutual fund securities, which are invested mostly in debt securities.

 

Capital Resources

 

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½% senior notes due 2024 and our 6% senior notes due 2043; (3) our Revolving Credit Facility and (4) our Mortgage Repurchase Facility. Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See “Forward-Looking Statements” below.

 

We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility

 

Senior Notes.  Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries. We believe that we are in compliance with the representations, warranties and covenants in the senior note indentures.

 

On January 15, 2014, we issued $250 million of 5½% Senior Notes due 2024 (the “5½% Notes”). The 5½% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2014, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $248.4 million, net of underwriting fees of $1.6 million.

 

On March 26, 2014, we redeemed our 5% Senior Notes due December 2014.  As a result of this transaction, we paid $259.1 million to extinguish $250 million in debt principal with a carrying value, including unamortized deferred financing costs, of $249.7 million and recorded a $9.4 million expense for loss on extinguishment of debt.

 

 
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Revolving Credit Facility. On December 13, 2013, we entered into an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders, which may be used for general corporate purposes. This agreement was amended on December 17, 2014 to (1) increase the aggregate commitment amount by $100 million to $550 million (the “Commitment”) and (2) extend the maturity until December 13, 2019. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and the consent of the designated agent and the co-administrative agent. Interest rates on outstanding borrowings are determined by reference to a specified London Interbank Offered Rate (LIBOR), a specified federal funds effective rate or a specified prime rate, plus a margin that is determined based on our credit ratings and leverage ratio, as defined in the facility agreement. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the facility agreement. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) would result in an event of default.

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of September 30, 2015.

 

As of September 30, 2015, we had $15.0 million in borrowings and $21.6 million in letters of credit outstanding under the Revolving Credit Facility, leaving a remaining borrowing capacity of $513.4 million.

 

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). This agreement was amended on September 18, 2015 and extended until September 16, 2016. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, we may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility, which had a temporary increase in the maximum aggregate commitment from $50 million to $80 million from December 29, 2014 through January 28, 2015, had a maximum aggregate commitment of $50 million as of September 30, 2015. At September 30, 2015 and December 31, 2014, HomeAmerican had $43.8 million and $60.8 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of September 30, 2015.

 

Dividends

 

During the three and nine months ended September 30, 2015 and 2014, we paid dividends of $0.25 per share and $0.75 per share, respectively.

 

 
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MDC Common Stock Repurchase Program

 

At September 30, 2015, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the quarter ended September 30, 2015.

 

Consolidated Cash Flow

 

During the nine months ended September 30, 2015, we used $26.5 million of cash from operating activities, primarily resulting from increasing our inventory from December 31, 2014, which resulted in the use of $115.6 million in cash. This use of cash was partially offset by net income of $43.2 million, a $19.8 million decrease in mortgage loans held for sale, and the use of net operating loss carryforwards to reduce our current taxes payable.

 

During the nine months ended September 30, 2015, we generated $48.7 million of cash from investing activities, primarily attributable to the sale or maturity of $96.4 million in marketable securities, but partially offset by the purchase of $46.9 million in marketable securities.

 

During the nine months ended September 30, 2015, we used $53.0 million in cash from financing activities related to the net repayments totaling $17.1 million on our mortgage repurchase facility and dividend payments totaling $36.6 million.

 

Off-Balance Sheet Arrangements

 

Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At September 30, 2015, we had cash deposits and letters of credit totaling $14.1 million and $2.8 million, respectively, at risk associated with the option to purchase 2,699 lots for a total estimated purchase price of $314.9 million.

 

Surety Bonds and Letters of Credit. At September 30, 2015, we had issued and outstanding surety bonds and letters of credit totaling $169.1 million and $49.6 million, respectively, including $27.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $60.0 million and $15.3 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

We have made no material guarantees with respect to third-party obligations.

 

 
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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

 

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2014 Annual Report on Form 10-K.

 

OTHER

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Item 3.                 Quantitative and Qualitative Disclosures About Market Risk

 

Our cash and investment policy and strategy is to achieve an appropriate investment return while preserving principal and managing risk. Our cash and cash equivalents may include immediately available commercial bank deposits, commercial paper, money market funds, certificates of deposit and time deposits. Our marketable securities consist of holdings in mutual fund securities, which invest mostly in floating and fixed rate debt securities, and direct holdings in corporate equities. The market value and/or income derived from our equity securities can be negatively impacted by a number of market risk factors, including changes in interest rates, general economic conditions and equity markets. As of September 30, 2015, we had marketable securities in unrealized loss positions totaling $5.2 million, against which we have recorded impairments totaling $2.2 million. For the remaining marketable securities in unrealized loss positions totaling $3.0 million, there can be no assurances that the cost basis of these securities will be recovered in the future. If we elect to sell, or are otherwise were required to sell these securities, we could be required to record losses if the market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.

 

We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate locked commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at September 30, 2015 had an aggregate principal balance of approximately $107.1 million, all of which were under interest rate lock commitments at an average interest rate of 3.76%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $66.3 million at September 30, 2015, of which $20.7 million had not yet been committed to a mortgage purchaser and had an average interest rate of 3.9%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $82.0 million at September 30, 2015.

 

HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 15 and 40 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations with an offset to either derivative assets or liabilities, depending on the nature of the change.

 

 
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We utilize our Revolving Credit Facility, our Mortgage Repurchase Facility and senior notes in our financing strategy. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but does not affect our earnings or cash flows. We do not have an obligation to prepay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value do not have an impact on our financial position, results of operations or cash flows. For variable rate debt such as our Revolving Credit Facility and Mortgage Repurchase Facility, changes in interest rates generally do not affect the fair value of the outstanding borrowing on the debt facilities, but does affect our earnings and cash flows. See “Forward-Looking Statements” above.

 

Item 4.                  Controls and Procedures

 

(a)     Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer (principle executive officer) and the Chief Financial Officer (principal financial officer).  Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

(b) Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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M.D.C. HOLDINGS, INC.

FORM 10-Q

 

PART II

 

Item 1.                 Legal Proceedings

 

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

 

Item 1A.               Risk Factors

 

There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2014. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2014, which include the following:

 

 

 

Changes in general economic, real estate and other business conditions may have an adverse effect on the homebuilding and mortgage industries, which could have a negative impact on our business.

 

 

Increased competition levels in the homebuilding and mortgage lending industries could have a negative impact on our homebuilding and mortgage operations.

 

 

If land is not available at reasonable prices or terms, we could be required to scale back our operations in a given market and/or we may operate at lower levels of profitability.

 

 

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

 

 

If mortgage interest rates rise, if down payment requirements are increased, if loan limits are decreased, or if mortgage financing otherwise becomes less available, it could adversely affect our business.

 

 

Expirations, amendments or changes to tax laws, incentives or credits currently available to our customers may negatively impact our business.

 

 

Increases in our cancellations could have a negative impact on our business.

 

 

A decline in the market value of our homes or carrying value of our land would have a negative impact on our business.

 

 

Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our business.

 

 

Change in energy prices may have an adverse effect on the economies in certain markets we operate in and our cost of building homes.

 

 

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on the results of our business.

 

 

Our business is subject to numerous federal, local and state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.

 

 

In the ordinary course of business, we are required to obtain surety bonds, the unavailability of which could adversely affect our business.

 

 

Decreases in the market value of our investments in marketable securities could have an adverse impact on our business.

 

 

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.

 

 

Repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our business.

 

 

Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

 

 

We are dependent on the services of key employees, and the loss of their services could hurt our business.

 

 

The interests of certain controlling shareholders may be adverse to investors

 

 

Information technology failures and data security breaches could harm our business.

 

 
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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company did not repurchase any shares during the three and nine months ended September 30, 2015. Additionally, there were no sales of unregistered equity securities during the period.

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

Not applicable.

 

 
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Item 6.

Exhibits

   
10.1 Twelfth Amendment to Master Repurchase Agreement between HomeAmerican Mortgage Corporation, as Seller, and U.S. Bank National Association, as Agent and Buyer, dated as of September 18, 2015 (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed September 22, 2015). *
   
31.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

____________________

 

* Incorporated by reference.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date:     October 27, 2015

M.D.C. HOLDINGS, INC.

 

(Registrant)

 

 

 

 

 

 

 

By:

/s/ Robert N. Martin                                            

 

 

Robert N. Martin
Senior Vice President, Chief Financial Officer and Principal Accounting

Officer (principal financial officer and duly authorized officer)

     

 
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INDEX TO EXHIBITS

 

 

Exhibit

Number

 

Description

 
     
10.1   Twelfth Amendment to Master Repurchase Agreement between HomeAmerican Mortgage Corporation, as Seller, and U.S. Bank National Association, as Agent and Buyer, dated as of September 18, 2015 (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed September 22, 2015). *
     
31.1   Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

____________________

 

* Incorporated by reference. 

 

 

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