Edgar Filing: MDC HOLDINGS INC

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

☐	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.

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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.

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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.

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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 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.

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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

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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:

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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.

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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.

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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”).

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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 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

122

Increase

Decrease

Average sales price

$350K

$1.2 million

$400K

Increase

Decrease

Discount rate

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