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, 2013

 

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, 2013, 48,874,476 shares of M.D.C. Holdings, Inc. common stock were outstanding.

  

 

 

---

 

 

M.D.C. HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

 

INDEX

 

 

			Page No.
Part I. Financial Information:
	Item 1.	Unaudited Consolidated Financial Statements:
		Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	1
		Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012	2
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	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	41
	Item 4.	Controls and Procedures	41
Part II. Other Information:
	Item 1.	Legal Proceedings	42
	Item 1A.	Risk Factors	42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 3.	Defaults Upon Senior Securities	43
	Item 4.	Mine Safety Disclosures	43
	Item 5.	Other Information	43
	Item 6.	Exhibits	44
Signature			45

 

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets 

		September 30, 2013				December 31, 2012
		(Dollars in thousands, except
		per share amounts)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	149,580			$	129,535
Marketable securities			578,441				519,465
Restricted cash			2,186				1,859
Trade and other receivables			29,488				28,163
Inventories:
Housing completed or under construction			634,159				512,949
Land and land under development			699,974				489,572
Total inventories			1,334,133				1,002,521
Property and equipment, net			31,608				33,125
Deferred tax asset, net of valuation allowance of $25,046 and $248,306 at September 30, 2013 and December 31, 2012, respectively			184,986				-
Metropolitan district bond securities (related party)			14,167				5,818
Other assets			50,937				38,959
Total homebuilding assets			2,375,526				1,759,445
Financial Services:
Cash and cash equivalents			47,706				30,560
Marketable securities			21,816				32,473
Mortgage loans held-for-sale, net			74,340				119,953
Other assets			8,693				3,010
Total financial services assets			152,555				185,996
Total Assets		$	2,528,081			$	1,945,441
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable		$	20,030			$	73,055
Accrued liabilities			135,434				118,456
Senior notes, net			1,095,421				744,842
Total homebuilding liabilities			1,250,885				936,353
Financial Services:
Accounts payable and accrued liabilities			57,852				51,864
Mortgage repurchase facility			38,912				76,327
Total financial services liabilities			96,764				128,191
Total Liabilities			1,347,649				1,064,544
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; 48,874,476 and 48,698,757 issued and outstanding at September 30, 2013 and December 31, 2012, respectively.			489				487
Additional paid-in-capital			910,218				896,861
Retained earnings (accumulated deficit)			262,387				(21,289	)
Accumulated other comprehensive income			7,338				4,838
Total Stockholders' Equity			1,180,432				880,897
Total Liabilities and Stockholders' Equity		$	2,528,081			$	1,945,441

 

 

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

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands, except per share amounts)
		(Unaudited)
Homebuilding:
Home sale revenues		$	433,693			$	320,647			$	1,165,768			$	761,857
Land sale revenues			25				15				1,832				3,420
Total home and land sale revenues			433,718				320,662				1,167,600				765,277
Home cost of sales			(354,889	)			(271,067	)			(956,892	)			(649,941	)
Land cost of sales			(35	)			(2	)			(1,470	)			(3,210	)
Inventory impairments			(350	)			-				(350	)			-
Total cost of sales			(355,274	)			(271,069	)			(958,712	)			(653,151	)
Gross margin			78,444				49,593				208,888				112,126
Selling, general and administrative expenses			(57,753	)			(44,788	)			(157,862	)			(118,135	)
Interest income			6,460				5,365				21,146				16,651
Interest expense			-				-				(1,726	)			(808	)
Other income (expense)			(488	)			16				853				592
Homebuilding pretax income			26,663				10,186				71,299				10,426
Financial Services:
Revenues			14,282				13,668				40,672				31,974
Expenses			(6,921	)			(5,155	)			(19,144	)			(13,459	)
Interest and other income			885				785				2,680				2,323
Financial services pretax income			8,246				9,298				24,208				20,838
Income before income taxes			34,909				19,484				95,507				31,264
Benefit from income taxes			1,342				642				188,169				1,765
Net income		$	36,251			$	20,126			$	283,676			$	33,029
Other comprehensive income related to available for sale securities, net of tax			1,960				5,095				2,500				10,945
Comprehensive income		$	38,211			$	25,221			$	286,176			$	43,974
Earnings per share:
Basic		$	0.73			$	0.41			$	5.76			$	0.69
Diluted		$	0.73			$	0.41			$	5.71			$	0.68
Weighted average common shares outstanding
Basic			48,492,588				47,761,307				48,438,154				47,499,429
Diluted			48,767,834				47,940,038				48,867,055				47,610,195
Dividends declared per share		$	-			$	0.25			$	-			$	0.75

 

 

 

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

 

 

 M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

 

		Nine Months Ended September 30, 2013
		2013				2012
		(Dollars in thousands)
		(Unaudited)
Operating Activities:
Net income		$	283,676			$	33,029
Adjustments to reconcile net income to net cash used in operating activities:
Stock-based compensation expense			8,240				12,628
Depreciation and amortization			2,960				3,708
Inventory impairments and write-offs of land option deposits			1,624				414
Amortization of discount (premiums) on marketable debt securities			816				279
Deferred income tax benefit			(189,657	)			-
Net changes in assets and liabilities:
Restricted cash			(327	)			(1,417	)
Trade and other receivables			(1,599	)			(13,685	)
Mortgage loans held-for-sale			45,613				(8,313	)
Housing completed or under construction			(121,165	)			(202,994	)
Land and land under development			(210,218	)			112,406
Other assets			(15,307	)			(553	)
Accounts payable and accrued liabilities			(30,516	)			14,043
Net cash used in operating activities			(225,860	)			(50,455	)
Investing Activities:
Purchases of marketable securities			(369,887	)			(397,167	)
Maturities of marketable securities			132,492				106,000
Sales of marketable securities			187,083				285,056
Purchases of property and equipment			(1,278	)			(958	)
Net cash used in investing activities			(51,590	)			(7,069	)
Financing Activities:
Payments on mortgage repurchase facility			(195,760	)			(137,529	)
Advances on mortgage repurchase facility			158,345				135,715
Dividend payments			-				(36,046	)
Proceeds from issuance of senior notes			346,938				-
Proceeds from exercise of stock options			5,118				15,820
Net cash provided by (used in) financing activities			314,641				(22,040	)
Net increase (decrease) in cash and cash equivalents			37,191				(79,564	)
Cash and cash equivalents:
Beginning of period			160,095				343,361
End of period		$	197,286			$	263,797

 

 

 

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

 

 

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, 2013 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, 2012. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

 

Refer to the economic conditions described under the caption "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and "Risk Factors Relating to our Business" in Item 1A of our December 31, 2012 Annual Report on Form 10-K.

 

2.            Recently Adopted Accounting Standards

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, (“ASU 2013-02”). ASU 2013-02 amends Accounting Standards Codification (“ASC”) 220, Comprehensive Income (“ASC 220”), and requires entities to present the changes in the components of accumulated other comprehensive income for the current period. Entities are required to present separately the amount of the change that is due to reclassifications, and the amount that is due to current period other comprehensive income. These changes are permitted to be shown either before or net-of-tax and can be displayed either on the face of the financial statements or in the footnotes. ASU 2013-02 was effective for our interim and annual periods beginning January 1, 2013. The adoption of ASU 2013-02 did not have a material effect on our consolidated financial position or results of operations.

 

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, or decision-making group, to evaluate performance and make operating decisions. We have identified our chief operating decision-makers (“CODMs”) as two key executives—the Chief Executive Officer and the Chief Operating Officer.

 

We have identified each homebuilding division as an operating segment. Our 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:

 

(1)

West (Arizona, California, Nevada and Washington)

(2)

Mountain (Colorado and Utah)

(3)

East (Virginia, Florida, Illinois and Maryland, which includes Pennsylvania, Delaware 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 HomeAmerican’s 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 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.

 

 

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

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, legal 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 the homebuilding segment.

 

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

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands)
Homebuilding
West		$	188,456			$	148,037			$	487,949			$	335,002
Mountain			134,992				96,335				402,137				236,625
East			110,270				76,290				277,514				193,650
Total home and land sale revenues		$	433,718			$	320,662			$	1,167,600			$	765,277
Financial Services
Mortgage operations		$	9,694			$	10,479			$	29,232			$	24,368
Other			4,588				3,189				11,440				7,606
Total financial services revenues		$	14,282			$	13,668			$	40,672			$	31,974

 

 

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

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands)
Homebuilding
West		$	19,539			$	8,334			$	46,929			$	11,178
Mountain			12,203				6,951				39,341				13,746
East			6,657				4,907				12,708				7,143
Corporate			(11,736	)			(10,006	)			(27,679	)			(21,641	)
Total homebuilding pretax income		$	26,663			$	10,186			$	71,299			$	10,426
Financial Services
Mortgage operations		$	5,936			$	7,430			$	18,790				16,518
Other			2,310				1,868				5,418				4,320
Total financial services pretax income		$	8,246			$	9,298			$	24,208			$	20,838
Total pretax income		$	34,909			$	19,484			$	95,507			$	31,264

 

 

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

 

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 our net deferred tax asset.

 

 

		September 30, 2013				December 31, 2012
		(Dollars in thousands)
Homebuilding assets
West		$	694,591			$	459,807
Mountain			403,711				332,939
East			309,678				274,199
Corporate			967,546				692,500
Total homebuilding assets		$	2,375,526			$	1,759,445
Financial services assets
Mortgage operations		$	85,494			$	122,941
Other			67,061				63,055
Total financial services assets		$	152,555			$	185,996
Total assets		$	2,528,081			$	1,945,441

 

 

4.            Earnings Per Share     

 

A company that has participating security holders (for example, unvested restricted stock that has non-forfeitable dividend rights) is required to utilize the two-class method for purposes of calculating 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 or loss). Currently, we have one class of security and we have participating security holders consisting of shareholders of unvested restricted stock. The following table shows basic and diluted EPS calculations:

 

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands, except per share amounts)
Numerator
Net income		$	36,251			$	20,126			$	283,676			$	33,029
Less: distributed earnings allocated to participating securities			-				(280	)			-				(450	)
Less: undistributed earnings allocated to participating securities			(647	)			(137	)			(4,471	)			-
Net income attributable to common stockholders (numerator for basic earnings per share)			35,604				19,709				279,205				32,579
Add back: undistributed earnings allocated to participating securities			647				137				4,471				-
Less: undistributed earnings reallocated to participating securities			(643	)			(136	)			(4,433	)			-
Numerator for diluted earnings per share under two class method		$	35,608			$	19,710			$	279,243			$	32,579
Denominator
Weighted-average common shares outstanding			48,492,588				47,761,307				48,438,154				47,499,429
Add: dilutive effect of stock options			275,246				178,731				428,901				110,766
Denominator for diluted earnings per share under two class method			48,767,834				47,940,038				48,867,055				47,610,195
Basic Earnings Per Common Share		$	0.73			$	0.41			$	5.76			$	0.69
Diluted Earnings Per Common Share		$	0.73			$	0.41			$	5.71			$	0.68

 

 

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

 

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options. Diluted EPS for the three and nine months ended September 30, 2013 excluded options to purchase approximately 4.2 million shares and 3.4 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same periods in 2012, diluted EPS excluded options to purchase approximately 3.7 million shares and 4.8 million shares, respectively.

 

 

5.            Accumulated Other Comprehensive Income

 

The following table sets forth our changes in accumulated other comprehensive income:

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands)
Unrealized gains (losses) on available-for-sale marketable securities a :
Beginning balance		$	884			$	(1,390	)		$	4,838			$	(7,240	)
Other comprehensive income before reclassifications			1,766				5,377				(1,195	)			12,027
Amounts reclassified from accumulated other comprehensive income b			194				(282	)			(799	)			(1,082	)
Ending balance		$	2,844			$	3,705			$	2,844			$	3,705
Unrealized gains on available-for-sale metropolitan district bond securities a :
Beginning balance		$	4,494			$	-			$	-			$	-
Other comprehensive income before reclassifications			-				-				4,494				-
Amounts reclassified from accumulated other comprehensive income			-				-				-				-
Ending balance		$	4,494			$	-			$	4,494			$	-
Total ending accumulated other comprehensive income		$	7,338			$	3,705			$	7,338			$	3,705

 

(a)   All amounts net-of-tax. 

(b)   See separate table below for details about these reclassifications. 

 

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 September 30,								Nine Months Ended September 30,
Affected Line Item in the Statements of Operations		2013				2012				2013				2012
		(Dollars in thousands)
Homebuilding interest income		$	(311	)		$	317			$	560			$	1,235
Financial services interest and other income			(4	)			(35	)			118				(153	)
Income before income taxes			(315	)			282				678				1,082
Benefit from income taxes			121				-				121				-
Net income		$	(194	)		$	282			$	799			$	1,082

 

 

  

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

 

6.             Fair Value Measurements

 

ASC 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, 2013				December 31, 2012
				(Dollars in thousands)
Marketable securities (available-for-sale)
Equity securities		Level 1		$	377,970			$	208,818
Debt securities - maturity less than 1 year		Level 2			84,791				54,388
Debt securities - maturity 1 to 5 years		Level 2			120,170				277,514
Debt securities - maturity greater than 5 years		Level 2			17,326				11,218
Total available-for-sale securities				$	600,257			$	551,938
Mortgage loans held-for-sale, net		Level 2		$	74,340			$	119,953
Metropolitan district bond securities (available-for-sale)*		Level 3		$	14,167			$	12,920

 

* These securities were recorded at their cost-basis at December 31, 2012 as they were still under the cost recovery method of accounting. As such, the fair value presented for December 31, 2012 does not equal the amount we have recorded in our accompanying consolidated balance sheets.

 

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

 

Cash and Cash Equivalents.  Fair value approximates carrying value.

 

Marketable Securities.  Our marketable securities consist primarily of: (1) fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities which consist of debt and equity securities; (3) holdings in corporate equities; and (4) deposit securities, which may include, among others, certificates of deposit and time deposits. As of September 30, 2013 and December 31, 2012, 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 accumulated other comprehensive income.

  

  

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

 

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

 

 

		September 30, 2013								December 31, 2012
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
Homebuilding:
Equity security		$	371,253			$	373,990			$	208,279			$	208,818
Debt securities			202,771				204,451				306,793				310,647
Total homebuilding available-for-sale securities		$	574,024			$	578,441			$	515,072			$	519,465
Financial Services:
Equity security		$	4,000			$	3,980			$	-			$	-
Debt securities			17,577				17,836				32,028				32,473
Total financial services available-for-sale debt securities		$	21,577			$	21,816			$	32,028			$	32,473
Total available-for-sale marketable securities		$	595,601			$	600,257			$	547,100			$	551,938

 

As of September 30, 2013 and December 31, 2012, our marketable securities (homebuilding and financial services in aggregate) were in a net unrealized gain position of $4.7 million and $4.8 million, respectively.

 

Mortgage Loans Held-for-Sale, Net.  As of September 30, 2013, 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, 2013 and December 31, 2012, we had $53.6 million and $108.3 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, 2013 and December 31, 2012, we had $17.9 million and $11.7 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).  Our Metropolitan District Bond Securities (“Metro Bonds”) are included in other assets 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 owned and operated by our Company. The Board of Directors of the Metro District currently is comprised of employees of the Company and therefore is a related party. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District that are supported by an annual levy on the taxable value of real estate and personal property within the Metropolitan District’s boundaries and a one-time fee assessed on new homes closed in the Metro District. The stated maturity date of the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off at that date, the Company will continue to receive principal and interest payments into perpetuity until the unpaid principal and accrued interest is paid in full. 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 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30).

 

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 closed in the community coupled with the stabilization of property values within the Metro District. In accordance with ASC 310-30, we will adjust the bond principal balance on a prospective basis 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 will update its fair value on a quarterly basis, with the adjustment being recorded through other comprehensive income. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The two primary unobservable inputs used in our discounted cash flow model are the forecasted number of homes to be closed, as they drive any increases to the tax base for the Metropolitan District, and the discount rate. The table on the following page provides quantitative data regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

 

  

M.D.C. HOLDINGS, INC.

 Notes to Unaudited Consolidated Financial Statements

 

 

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

Discount rate

6%

to

15%

11.1%

Decrease

Increase

Number of homes closed per year

0

to

118

38

Increase

Decrease

 

The table set forth below summarizes the activity for the three and nine months ended September 30, 2013 and 2012 for our Metro Bonds.

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
		(Dollars in thousands)
Balance at beginning of period		$	13,835			$	6,663			$	5,818			$	6,663
Increase in fair value (recorded in other comprehensive income)			-				-				7,354				-
Change due to accretion of principal			332				-				995				-
Cash receipts			-				-				-				-
Balance at end of period		$	14,167			$	6,663			$	14,167			$	6,663

 

Mortgage Repurchase Facility.  The debt associated with our Mortgage Repurchase Facility 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 our senior notes in the following table are based on Level 2 inputs, including market prices of other homebuilder bonds.

 

 

		September 30, 2013								December 31, 2012
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Dollars in thousands)
5.375% Senior Notes due December 2014, net		$	249,765			$	262,350			$	249,621			$	267,208
5.375% Senior Notes due July 2015, net			249,925				264,313				249,895				268,867
5.625% Senior Notes due February 2020, net			245,731				257,031				245,326				273,125
6.000% Senior Notes due January 2043			350,000				304,719				-				-
Total		$	1,095,421			$	1,088,413			$	744,842