Edgar Filing: MDC HOLDINGS INC

mdc20140630_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 June 30, 2014

☐	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 July 25, 2014, 48,816,639 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 JUNE 30, 2014

INDEX

			Page No.
PartI. Financial Information:

	Item1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2014 and December 31,2013	1

		Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013	2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	3

		Notes to Unaudited Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	41

Part II. Other Information:

	Item 1.	Legal Proceedings	42

	Item1A.	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		44

(i)

ITEM 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

	June 30, 2014		December 31, 2013
	(Dollars in thousands, except per share amounts)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	100,150	$	148,634
Marketable securities		492,498		569,021
Restricted cash		2,188		2,195
Trade and other receivables		27,250		23,407
Inventories:
Housing completed or under construction		758,392		636,700
Land and land under development		837,889		774,961
Total inventories		1,596,281		1,411,661
Property and equipment, net		30,765		31,248
Deferred tax asset, net		160,872		176,262
Metropolitan district bond securities (related party)		14,291		12,729
Prepaid and other assets		65,374		53,525
Total homebuilding assets		2,489,669		2,428,682
Financial Services:
Cash and cash equivalents		29,881		50,704
Marketable securities		13,390		19,046
Mortgage loans held-for-sale, net		58,377		92,578
Other assets		5,244		4,439
Total financial services assets		106,892		166,767
Total Assets	$	2,596,561	$	2,595,449
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	34,266	$	15,046
Accrued liabilities		145,290		152,821
Revolving credit facility		10,000		-
Senior notes, net		1,096,112		1,095,620
Total homebuilding liabilities		1,285,668		1,263,487
Financial Services:
Accounts payable and accrued liabilities		56,086		55,639
Mortgage repurchase facility		32,198		63,074
Total financial services liabilities		88,284		118,713
Total Liabilities		1,373,952		1,382,200
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; 48,816,639 and 48,788,887 issued and outstanding at June 30, 2014 and December 31, 2013, respectively		488		488
Additional paid-in-capital		910,535		908,090
Retained earnings		301,730		293,096
Accumulated other comprehensive income		9,856		11,575
Total Stockholders' Equity		1,222,609		1,213,249
Total Liabilities and Stockholders' Equity	$	2,596,561	$	2,595,449

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands, except per share amounts)
	(Unaudited)
Homebuilding:
Home sale revenues	$	430,743		$	400,327		$	749,277		$	732,075
Land sale revenues		518			1,807			518			1,807
Total home and land sale revenues		431,261			402,134			749,795			733,882
Home cost of sales		(356,175	)		(327,927	)		(615,653	)		(602,003	)
Land cost of sales		(522	)		(1,435	)		(522	)		(1,435	)
Inventory impairments		(850	)		-			(850	)		-
Total cost of sales		(357,547	)		(329,362	)		(617,025	)		(603,438	)
Gross margin		73,714			72,772			132,770			130,444
Selling, general and administrative expenses		(49,798	)		(51,908	)		(98,140	)		(100,109	)
Interest and other income		4,613			10,200			18,162			16,749
Interest expense		-			(909	)		(685	)		(1,726	)
Other expense		(1,080	)		(366	)		(1,693	)		(722	)
Loss on early extinguishment of debt		-			-			(9,412	)		-
Homebuilding pretax income		27,449			29,789			41,002			44,636

Financial Services:
Revenues		11,491			13,884			20,714			26,390
Expenses		(5,615	)		(6,581	)		(10,539	)		(12,223	)
Interest and other income		701			920			1,489			1,795
Financial services pretax income		6,577			8,223			11,664			15,962

Income before income taxes		34,026			38,012			52,666			60,598
Benefit from (provision for) income taxes		(12,484	)		186,897			(19,620	)		186,827
Net income	$	21,542		$	224,909		$	33,046		$	247,425

Other comprehensive income (loss) related to available for sale securities, net of tax		2,327			(1,995	)		(1,719	)		540
Comprehensive income	$	23,869		$	222,914		$	31,327		$	247,965

Earnings per share:
Basic	$	0.44		$	4.60		$	0.68		$	5.06
Diluted	$	0.44		$	4.55		$	0.67		$	5.01

Weighted average common shares outstanding
Basic		48,640,979			48,478,076			48,613,521			48,410,486
Diluted		48,852,696			48,946,055			48,842,527			48,916,988

Dividends declared per share	$	0.25		$	-		$	0.50		$	-

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2014			2013
	(Dollars in thousands)
	(Unaudited)
Operating Activities:
Net income	$	33,046		$	247,425
Adjustments to reconcile net income to net cash used in operating activities:
Loss on early extinguishment of debt		9,412			-
Stock-based compensation expense		2,550			5,214
Depreciation and amortization		1,933			2,072
Loss (gain) on sale of marketable securities		(6,356	)		-
Amortization of discount / premiums on marketable debt securities		422			1,423
Deferred income tax expense (benefit)		19,554			(187,643	)
Net changes in assets and liabilities:
Restricted cash		7			(820	)
Trade and other receivables		(8,409	)		(8,566	)
Mortgage loans held-for-sale		34,201			27,490
Housing completed or under construction		(122,368	)		(56,087	)
Land and land under development		(62,746	)		(138,509	)
Prepaid expenses and other assets		(9,615	)		(7,884	)
Accounts payable and accrued liabilities		12,097			(30,358	)
Net cash used in operating activities		(96,272	)		(146,243	)

Investing Activities:
Purchases of marketable securities		(382,279	)		(312,095	)
Maturities of marketable securities		159,789			87,015
Sales of marketable securities		306,769			137,067
Purchases of property and equipment		(1,354	)		(998	)
Net cash provided by (used in) investing activities		82,925			(89,011	)

Financing Activities:
Payments on mortgage repurchase facility, net		(30,876	)		(27,479	)
Proceeds from issuance of senior notes		248,375			346,938
Repayment of senior notes		(259,118	)		-
Advances on revolving credit facility, net		10,000			-
Dividend payments		(24,412	)		-
Proceeds from exercise of stock options		71			5,118
Net cash provided by (used in) financing activities		(55,960	)		324,577

Net increase (decrease) in cash and cash equivalents		(69,307	)		89,323
Cash and cash equivalents:
Beginning of period		199,338			160,095
End of period	$	130,031		$	249,418

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

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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 June 30, 2014 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, 2013. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

2.	Recently Adopted Accounting Standards

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). This update will require companies to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless certain conditions exist. ASU 2013-11 was effective for our interim and annual periods beginning January 1, 2014. The adoption of ASU 2013-11 did not have a material impact 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-maker as two key executives— our Chief Executive Officer and 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:

●

West (Arizona, California, Nevada and Washington)

●

Mountain (Colorado and Utah)

●

East (Virginia, Florida 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 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 the homebuilding segment.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The table set forth below summarizes home sale revenues for our homebuilding operations and revenues for our financial services operations.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
	(Dollars in thousands)
Homebuilding
West	$	189,661	$	164,514	$	326,083	$	299,493
Mountain		146,665		133,768		247,610		267,145
East		94,935		103,852		176,102		167,244
Total home and land sale revenues	$	431,261	$	402,134	$	749,795	$	733,882

Financial Services
Mortgage operations	$	7,352	$	10,494	$	12,471	$	19,538
Other		4,139		3,390		8,243		6,852
Total financial services revenues	$	11,491	$	13,884	$	20,714	$	26,390

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Homebuilding
West	$	16,695		$	16,779		$	29,345		$	27,390
Mountain		12,182			14,142			19,541			27,138
East		5,296			4,523			7,957			6,051
Corporate		(6,724	)		(5,655	)		(15,841	)		(15,943	)
Total homebuilding pretax income	$	27,449		$	29,789		$	41,002		$	44,636

Financial Services
Mortgage operations	$	4,501		$	6,855		$	7,060		$	12,854
Other		2,076			1,368			4,604			3,108
Total financial services pretax income	$	6,577		$	8,223		$	11,664		$	15,962

Total pretax income	$	34,026		$	38,012		$	52,666		$	60,598

The table set forth below 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 consist primarily of cash and cash equivalents, marketable securities and our deferred tax asset. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	June 30,		December 31,
	2014		2013
Homebuilding assets	(Dollars in thousands)
West	$	846,832	$	760,450
Mountain		500,365		418,796
East		333,174		297,627
Corporate		809,298		951,809
Total homebuilding assets	$	2,489,669	$	2,428,682

Financial services assets
Mortgage operations	$	66,206	$	99,065
Other		40,686		67,702
Total financial services assets	$	106,892	$	166,767

Total assets	$	2,596,561	$	2,595,449

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/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) 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/(loss)). 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:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands, except per share amounts)
Numerator
Net income	$	21,542		$	224,909		$	33,046		$	247,425
Less: distributed earnings allocated to participating securities		(49	)		-			(101	)		-
Less: undistributed earnings allocated to participating securities		(37	)		(2,069	)		(39	)		(2,310	)
Net income attributable to common stockholders (numerator for basic earnings per share)		21,456			222,840			32,906			245,115
Add back: undistributed earnings allocated to participating securities		37			2,069			39			2,310
Less: undistributed earnings reallocated to participating securities		(37	)		(2,049	)		(38	)		(2,286	)
Numerator for diluted earnings per share under two class method	$	21,456		$	222,860		$	32,907		$	245,139

Denominator
Weighted-average common shares outstanding		48,640,979			48,478,076			48,613,521			48,410,486
Add: dilutive effect of stock options		211,717			467,979			229,006			506,502
Denominator for diluted earnings per share under two class method		48,852,696			48,946,055			48,842,527			48,916,988

Basic Earnings Per Common Share	$	0.44		$	4.60		$	0.68		$	5.06
Diluted Earnings Per Common Share	$	0.44		$	4.55		$	0.67		$	5.01

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Diluted EPS for the three and six months ended June 30, 2014 excluded options to purchase approximately 4.2 million and 4.0 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same periods in 2013, diluted EPS excluded options to purchase approximately 3.2 million and 3.1 million shares, respectively.

5.	Accumulated Other Comprehensive Income

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014			2013
	(Dollars in thousands)
Unrealized gains (losses) on available-for-sale marketable securities ¹ :
Beginning balance	$	3,609	$	7,373		$	7,655		$	4,838
Other comprehensive income before reclassifications		1,633		(5,274	)		1,600			(3,053	)
Amounts reclassified from accumulated other comprehensive income ²		104		(1,215	)		(3,909	)		(901	)
Ending balance	$	5,346	$	884		$	5,346		$	884

Unrealized gains on available-for-sale metropolitan district bond securities ¹ :
Beginning balance	$	3,920	$	-		$	3,920		$	-
Other comprehensive income before reclassifications		590		4,494			590			4,494
Amounts reclassified from accumulated other comprehensive income		-		-			-			-
Ending balance	$	4,510	$	4,494		$	4,510		$	4,494

Total ending accumulated other comprehensive income	$	9,856	$	5,378		$	9,856		$	5,378

^1.

All amounts net-of-tax.

^2.

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 (loss) related to available for sale securities:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
Affected Line Item in the Statements of Operations	2014			2013		2014			2013
	(Dollars in thousands)
Homebuilding interest and other income	$	(176	)	$	1,166	$	6,361		$	871
Financial services interest and other income		7			49		(5	)		30
Income before income taxes		(169	)		1,215		6,356			901
Benefit from (provision for) income taxes		65			-		(2,447	)		-
Net income	$	(104	)	$	1,215	$	3,909		$	901

6.	Fair Value Measurements

Accounting Standards Codification (“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.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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	June 30, 2014		December 31, 2013
		(Dollars in thousands)
Marketable securities (available-for-sale)
Equity securities	Level 1	$	465,115	$	389,323
Debt securities - maturity less than 1 year	Level 2		2,079		72,577
Debt securities - maturity 1 to 5 years	Level 2		21,723		106,566
Debt securities - maturity greater than 5 years	Level 2		16,971		19,601
Total available-for-sale securities		$	505,888	$	588,067

Mortgage loans held-for-sale, net	Level 2	$	58,377	$	92,578

Metropolitan district bond securities (related party) (available-for-sale)	Level 3	$	14,291	$	12,729

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

The fair value of our cash and cash equivalents, restricted cash, trade and other receivables, inventories, prepaid and other assets, accounts payable, and accrued liabilities approximate their carrying value.

Marketable Securities. We have marketable debt and equity securities. Our equity securities consist primarily of holdings in mutual fund securities, which invest mostly in debt securities. The remaining equity securities in our investment portfolio are holdings in corporate equities. 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 market prices in active markets for identical or similar securities, which are level 1 inputs, or uses observable inputs for their pricing, which are level 2 inputs. As of June 30, 2014 and December 31, 2013, 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.

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

	June 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding:
Equity securities	$	453,152	$	460,925	$	375,142	$	385,303
Debt securities		31,051		31,573		181,635		183,718
Total homebuilding available-for-sale securities	$	484,203	$	492,498	$	556,777	$	569,021

Financial Services:
Equity securities	$	4,000	$	4,190	$	4,000	$	4,020
Debt securities		8,950		9,200		14,721		15,026
Total financial services available-for-sale debt securities	$	12,950	$	13,390	$	18,721	$	19,046

Total available-for-sale marketable securities	$	497,153	$	505,888	$	575,498	$	588,067

As of June 30, 2014 and December 31, 2013, our marketable securities were in net unrealized gain positions totaling $8.7 million and $12.6 million, respectively. Our marketable securities that were in unrealized loss positions aggregated to unrealized losses of $0.7 million and $1.1 million as of June 30, 2014 and December 31, 2013, respectively. The table below sets forth the debt and equity securities that were in an aggregate loss position. We do not believe that the aggregate unrealized loss related to our debt or equity securities as of June 30, 2014 is material to our operations.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	June 30, 2014							December 31, 2013
	Number of Securities in Loss Position		Aggregate Loss Position			Aggregate Fair Value of Securities in a Loss Position		Number of Securities in Loss Position		Aggregate Loss Position			Aggregate Fair Value of Securities in a Loss Position
Type of Investment	(Dollars in thousands)
Debt		40	$	(221	)	$	12,509		72	$	(430	)	$	46,440
Equity		3		(480	)		108,403		7		(713	)		14,174
Total		43	$	(701	)	$	120,912		79	$	(1,143	)	$	60,614

The following tables set 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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Gross realized gains on sales of available-for-sale securities
Equity securities	$	-		$	216		$	5,518		$	216
Debt securities		100			128			1,920			260
Total	$	100		$	344		$	7,438		$	476

Gross realized losses on sales of available-for-sale securities
Equity securities	$	(467	)	$	-		$	(709	)	$	-
Debt securities		(182	)		(1,006	)		(373	)		(1,225	)
Total	$	(649	)	$	(1,006	)	$	(1,082	)	$	(1,225	)

Net realized gain (loss) on sales of available-for-sale securities	$	(549	)	$	(662	)	$	6,356		$	(749	)

Mortgage Loans Held-for-Sale, Net. As of June 30, 2014, 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 June 30, 2014 and December 31, 2013, we had $48.9 million and $66.1 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 June 30, 2014 and December 31, 2013, we had $9.5 million and $26.5 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 that are supported by an annual levy on the taxable value of real estate and personal property within the Metro District’s boundaries and a one-time fee assessed on permits obtained by MDC in the Metro District. 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”).

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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 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 Metro District, and the discount rate. The table below provides quantitative data, as of June 30, 2014, 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 120

Increase

Decrease

Discount rate

6% to 16%

11.9%

Decrease

Increase

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
	(Dollars in thousands)
Balance at beginning of period	$	13,027	$	5,818	$	12,729	$	5,818
Increase in fair value (recorded in other comprehensive income)		959		7,354		959		7,354
Change due to accretion of principal		305		663		603		663
Cash receipts		-		-		-		-
Balance at end of period	$	14,291	$	13,835	$	14,291	$	13,835

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

	June 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5⅜% Senior Notes due December 2014, net	$	-	$	-	$	249,814	$	258,750
5⅜% Senior Notes due July 2015, net		249,956		259,850		249,935		262,562
5⅝% Senior Notes due February 2020, net		246,156		270,938		245,871		259,688
5½% Senior Notes due January 2024, net		250,000		258,250		-		-
6% Senior Notes due January 2043		350,000		329,613		350,000		305,083
Total	$	1,096,112	$	1,118,651	$	1,095,620	$	1,086,083

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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:

	June 30,		December 31,
	2014		2013
	(Dollars in thousands)
Housing Completed or Under Construction:
West	$	349,850	$	270,778
Mountain		236,784		194,101
East		171,758		171,821
Subtotal		758,392		636,700
Land and Land Under Development:
West		458,490		459,512
Mountain		244,853		211,526
East		134,546		103,923
Subtotal		837,889		774,961
Total Inventories	$	1,596,281	$	1,411,661

Our inventories are primarily associated with communities where we intend to construct and sell homes on the land, including models and unsold started 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.

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories 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 such 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 then estimated fair value. 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. For the three and six months ended June 30, 2014, we recorded $0.9 million of inventory impairment charges related to two projects in our East segment. No such charges were recorded during the three and six months ended June 30, 2013.

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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						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Homebuilding interest incurred	$	16,530		$	15,345		$	35,712		$	29,684
Less: Interest capitalized		(16,530	)		(14,436	)		(35,027	)		(27,958	)
Homebuilding interest expensed	$	-		$	909		$	685		$	1,726

Interest capitalized, beginning of period	$	80,928		$	72,791		$	74,155		$	69,143
Interest capitalized during period		16,530			14,436			35,027			27,958
Less: Previously capitalized interest included in home cost of sales		(16,522	)		(12,680	)		(28,246	)		(22,554	)
Interest capitalized, end of period	$	80,936		$	74,547		$	80,936		$	74,547

9.	Homebuilding Prepaid Expenses and Other Assets

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

	June 30,		December 31,
	2014		2013
	(Dollars in thousands)
Land option deposits	$	18,907	$	15,221
Deferred marketing costs		23,818		15,830
Prepaid expenses		3,648		4,349
Goodwill		6,008		6,008
Deferred debt issuance costs, net		12,601		11,527
Other		392		590
Total	$	65,374	$	53,525

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

10.	Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

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

	June 30,		December 31,
	2014		2013
	(Dollars in thousands)
Accrued compensation and related expenses	$	20,677	$	35,990
Accrued executive deferred compensation		30,796		30,796
Accrued interest		29,953		24,198
Warranty reserves		20,178		22,238
Customer and escrow deposits		14,685		10,759
Land development and home construction accruals		7,875		9,592
Other accrued liabilities		21,126		19,248
Total accrued liabilities	$	145,290	$	152,821

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

	June 30,		December 31,
	2014		2013
	(Dollars in thousands)
Insurance reserves	$	49,363	$	49,637
Accounts payable and other accrued liabilities		6,723		6,002
Total accounts payable and accrued liabilities	$	56,086	$	55,639

11.	Warranty Reserves

Our homes are sold with limited third-party warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Warranty accruals are recorded 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 determination of the warranty accrual rate for closed homes and the evaluation of our warranty reserve balance at period end are 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 reserves are included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty reserves are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations.

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty reserve for the three and six months ended June 30, 2014 and 2013. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we reduced our warranty reserve by $1.3 million and $2.1 million for the three and six months ended June 30, 2014, respectively, compared to no adjustments during the three months ended June 30, 2013 and $0.3 million in adjustments for the six months ended June 30, 2013.

The impact of the change in our warranty accrual rates from the three months ended June 30, 2014, as compared to three months ended June 30, 2013, and the six months ended June 30, 2014, as compared to six months ended June 30, 2014, did not materially affect our warranty expense or gross margin from home sales for the three and six months ended June 30, 2014.

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	21,447		$	23,098		$	22,238		$	23,151
Expense provisions		1,243			1,154			2,157			2,276
Cash payments		(1,237	)		(1,527	)		(2,142	)		(3,002	)
Adjustments		(1,275	)		-			(2,075	)		300
Balance at end of period	$	20,178		$	22,725		$	20,178		$	22,725

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 actuarially developed 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.

The table set forth below summarizes the insurance reserve activity for the three and six months ended June 30, 2014 and 2013. 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						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	49,076		$	48,949		$	49,637		$	47,852
Expense provisions		1,737			1,775			3,047			3,302
Cash payments, net of recoveries		(1,450	)		(2,890	)		(3,321	)		(3,320	)
Balance at end of period	$	49,363		$	47,834		$	49,363		$	47,834

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 six months ended June 30, 2014 and 2013 are not necessarily indicative of what future cash payments will be for subsequent periods.

13.

Deferred Compensation Retirement Plans

Effective August 1, 2008, the Company entered into amended and restated employment agreements (as amended on March 8, 2012, the “Employment Agreements”) with Larry A. Mizel, Chairman of the Board and Chief Executive Officer, and David D. Mandarich, President and Chief Operating Officer (collectively, the “Executive Officers”), which provided certain annual post-retirement pension benefits (the “Retirement Benefits”) depending on the year of retirement. In response to concerns expressed by significant institutional investors, and in accordance with the recommendation of an independent compensation consultant to the Company’s Compensation Committee, the Company announced that it had reached agreements (collectively, the “Second Amendments”) with the Executive Officers for the early termination, effective on October 18, 2013, of the Retirement Benefits contained in their respective Employment Agreements. Pursuant to the Second Amendments, the Company will pay each of Mr. Mizel and Mr. Mandarich a deferred lump sum in the amount of $14.8 million and $16.0 million, respectively, in full satisfaction of their past, present and future Retirement Benefits. The Company’s termination of the Retirement Benefits is irrevocable. These payments, which equal the amounts accrued on the books of the Company as of June 30, 2013 with respect to the Company’s estimated liability to pay Retirement Benefits, will be made to the Executive Officers on October 20, 2014. As a result of the termination of the Retirement Benefits, the Company no longer accrues additional expenses relating to Retirement Benefits.

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

14.	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. As a result, we recorded income tax expense of $12.5 million and $19.6 million for the three and six months ended June 30, 2014, respectively, compared to a benefit of $186.9 million and $186.8 million for the same respective periods in 2013. Our overall effective income tax rates were 36.7% and 37.3% for the three and six months ended June 30, 2014, respectively, while our effective tax rates for the same periods in 2013 were not meaningful as the income tax benefit was not directly correlated to the amount of pretax income in such periods due to a $187.6 million benefit from the reversal of our deferred tax asset valuation allowance in the 2013 second quarter.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to our net deferred tax asset are as follows:

	June 30,			December 31,
	2014			2013
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	60,887		$	70,770
State net operating loss carryforwards		41,625			40,012
Alternative minimum tax and other tax credit carryforwards		24,772			24,196
Stock-based compensation expense		25,923			26,651
Warranty, litigation and other reserves		14,186			15,543
Receivables from related party		12,081			12,132
Deferred compensation retirement plans and accrued compensation		4,313			11,136
Asset impairment charges		4,099			5,496
Inventory, additional costs capitalized for tax purposes		1,914			1,700
Other, net		4,070			3,446
Total deferred tax assets		193,870			211,082
Valuation allowance		(14,988	)		(14,669	)
Total deferred tax assets, net of valuation allowance		178,882			196,413

Deferred tax liabilities:
Property, equipment and other assets		5,242			5,512
Discount on notes receivable		4,204			4,204
Deferred revenue		3,715			3,985
Unrealized gain on marketable securities		3,388			4,915
Other, net		1,461			1,535
Total deferred tax liabilities		18,010			20,151
Net deferred tax asset	$	160,872		$	176,262

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

15.	Senior Notes

The following table sets forth the carrying amount of our senior notes as of June 30, 2014 and December 31, 2013, net of applicable discounts:

	June 30,		December 31,
	2014		2013
	(Dollars in thousands)
5⅜% Senior Notes due December 2014, net	$	-	$	249,814
5⅜% Senior Notes due July 2015, net		249,956		249,935
5⅝% Senior Notes due February 2020, net		246,156		245,871
5½% Senior Notes due January 2024, net		250,000		-
6% Senior Notes due January 2043		350,000		350,000
Total	$	1,096,112	$	1,095,620

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, with payments 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.

During the first quarter 2014, we redeemed our 5⅜% 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.

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.

16.	Stock Based Compensation

We account for share-based awards in accordance with ASC 718, Compensation-Stock Compensation, 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.

During the three and six months ended June 30, 2014, we expensed $0.6 million and $1.2 million, respectively, for stock option grants, compared to $0.8 million and $2.8 million, respectively, during the same periods in 2013. We expensed $0.6 million and $1.3 million for restricted stock awards during the three and six months ended June 30, 2014, respectively, compared to $1.0 million and $2.4 million, respectively, during the same periods in 2013.

17.	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 June 30, 2014, we had issued and outstanding surety bonds and letters of credit totaling $116.5 million and $37.2 million, respectively, including $21.2 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $47.1 million and $7.1 million, respectively. The letters of credit as of June 30, 2014, excluding those issued by HomeAmerican, were outstanding under our unsecured revolving credit facility (see Note 19 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.

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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 allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (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 repurchased if we believe the loss is likely and estimable. 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.

The following table summarizes the mortgage loan loss reserve activity.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	873		$	1,140		$	1,370		$	976
Expense provisions		-			378			-			628
Cash payments		-			(70	)		-			(156	)
Adjustments		(159	)		(98	)		(656	)		(98	)
Balance at end of period	$	714		$	1,350		$	714		$	1,350

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