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Table Of Contents

 

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 March 31, 2016

 

OR

 

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

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

84-0622967

(State or other jurisdiction

of incorporation or organization)

(I.R.S. employer

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 May 2, 2016, 49,008,835 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

 

INDEX

  

 

 

 

Page
No.
 

Part I. Financial Information:

 

       

 

Item 1.

Unaudited Consolidated Financial Statements:

 

       

 

 

Consolidated Balance Sheets at March 31, 2016 and December 31, 2015

1

       

 

 

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2016 and 2015

2

       

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

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

39

       

 

Item 4.

Controls and Procedures

40

   

Part II. Other Information:

 

       

 

Item 1.

Legal Proceedings

41

       

 

Item 1A.

Risk Factors

41

       

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

       
 

Item 3.

Defaults Upon Senior Securities

42

       
 

Item 4.

Mine Safety Disclosures

42

       

 

Item 5.

Other Information

42

       

 

Item 6.

Exhibits

43

     

 

Signature

43

 

 

ITEM 1.

Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands, except

per share amounts)

 
    (Unaudited)          
ASSETS                 
Homebuilding:                

Cash and cash equivalents

  $ 99,031     $ 144,342  

Marketable securities

    77,154       92,387  

Restricted cash

    3,349       3,750  

Trade and other receivables

    38,096       23,314  

Inventories:

               

Housing completed or under construction

    862,515       747,036  

Land and land under development

    948,767       1,016,926  

Total inventories

    1,811,282       1,763,962  

Property and equipment, net

    29,374       28,226  

Deferred tax asset, net

    95,880       99,107  

Metropolitan district bond securities (related party)

    27,277       25,911  

Prepaid and other assets

    62,932       65,394  

Total homebuilding assets

    2,244,375       2,246,393  

Financial Services:

               

Cash and cash equivalents

    39,504       36,646  

Marketable securities

    12,268       11,307  

Mortgage loans held-for-sale, net

    82,193       115,670  

Other assets

    7,466       5,883  

Total financial services assets

    141,431       169,506  

Total Assets

  $ 2,385,806     $ 2,415,899  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 46,669     $ 40,472  

Accrued liabilities

    110,791       122,886  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    840,798       840,524  

Total homebuilding liabilities

    1,013,258       1,018,882  

Financial Services:

               

Accounts payable and accrued liabilities

    54,033       52,114  

Mortgage repurchase facility

    60,221       88,611  

Total financial services liabilities

    114,254       140,725  

Total Liabilities

    1,127,512       1,159,607  

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; 49,006,835 and 48,888,424 issued and outstanding at March 31, 2016 and December 31, 2015, respectively

    490       489  

Additional paid-in-capital

    918,488       915,746  

Retained earnings

    321,653       324,342  

Accumulated other comprehensive income

    17,663       15,715  

Total Stockholders' Equity

    1,258,294       1,256,292  

Total Liabilities and Stockholders' Equity

  $ 2,385,806     $ 2,415,899  

 

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

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands, except per share amounts)

 
   

(Unaudited)

 

Homebuilding:

               

Home sale revenues

  $ 394,420     $ 377,009  

Land sale revenues

    2,324       910  

Total home and land sale revenues

    396,744       377,919  

Home cost of sales

    (330,026 )     (318,642 )

Land cost of sales

    (1,663 )     (1,125 )

Inventory impairments

    -       (350 )

Total cost of sales

    (331,689 )     (320,117 )

Gross margin

    65,055       57,802  

Selling, general and administrative expenses

    (56,277 )     (50,532 )

Interest and other income

    1,850       1,865  

Other expense

    (1,541 )     (1,145 )

Other-than-temporary impairment of marketable securities

    (431 )     -  

Homebuilding pretax income

    8,656       7,990  
                 

Financial Services:

               

Revenues

    11,017       10,591  

Expenses

    (6,241 )     (6,159 )

Interest and other income

    841       904  

Financial services pretax income

    5,617       5,336  
                 

Income before income taxes

    14,273       13,326  

Provision for income taxes

    (4,710 )     (4,906 )

Net income

  $ 9,563     $ 8,420  
                 

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

    1,948       1,308  

Comprehensive income

  $ 11,511     $ 9,728  
                 

Earnings per share:

               

Basic

  $ 0.20     $ 0.17  

Diluted

  $ 0.20     $ 0.17  
                 

Weighted average common shares outstanding

               

Basic

    48,827,971       48,714,637  

Diluted

    48,833,444       48,891,514  
                 

Dividends declared per share

  $ 0.25     $ 0.25  

  

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

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 
   

(Unaudited)

 

Operating Activities:

               

Net income

  $ 9,563     $ 8,420  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Stock-based compensation expense

    2,987       875  

Depreciation and amortization

    1,073       1,083  

Inventory impairments

    -       350  

Other-than-temporary impairment of marketable securities

    431       -  

Loss on sale of marketable securities

    915       11  

Amortization of discount / premiums on marketable debt securities, net

    -       59  

Deferred income tax expense

    1,788       4,713  

Net changes in assets and liabilities:

               

Restricted cash

    401       (1,444 )

Trade and other receivables

    (15,251 )     (6,141 )

Mortgage loans held-for-sale

    33,477       23,684  

Housing completed or under construction

    (115,357 )     4,282  

Land and land under development

    68,311       (1,274 )

Prepaid expenses and other assets

    911       489  

Accounts payable and accrued liabilities

    (4,234 )     (19,681 )

Net cash provided by (used in) operating activities

    (14,985 )     15,426  
                 

Investing Activities:

               

Purchases of marketable securities

    (5,482 )     (20,484 )

Maturities of marketable securities

    -       1,510  

Sales of marketable securities

    20,600       12,976  

Purchases of property and equipment

    (1,944 )     (340 )

Net cash provided by (used in) investing activities

    13,174       (6,338 )
                 

Financing Activities:

               

Payments on mortgage repurchase facility, net

    (28,390 )     (20,785 )

Dividend payments

    (12,252 )     (12,213 )

Net cash used in financing activities

    (40,642 )     (32,998 )
                 

Net decrease in cash and cash equivalents

    (42,453 )     (23,910 )

Cash and cash equivalents:

               

Beginning of period

    180,988       153,825  

End of period

  $ 138,535     $ 129,915  

  

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

 

 
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Table Of Contents
 

 

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 March 31, 2016 and for all periods presented. Certain prior year balances have been reclassified to conform to the current year’s presentation. 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, 2015.

 

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 update will have on our consolidated financial statements and related disclosures.

 

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 Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”), primarily related to limited partnerships and variable interest entities. ASU 2015-02 was effective for our interim and annual reporting periods beginning January 1, 2016 and did not have a material impact on our consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which makes a number of changes to the current GAAP model, including changes to the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under ASU 2016-01, we will primarily be impacted by the changes to accounting for equity instruments with readily determinable fair values as they will no longer be permitted to be classified as available-for-sale (changes in fair value reported through other comprehensive income) and instead, all changes in fair value will be reported in earnings. ASU 2016-01 is effective for our interim and annual reporting periods beginning January 1, 2018. Early adoption of this particular guidance from ASU 2016-01 is not permitted. We are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a corresponding lease liability for virtually all leases. The liability will be equal to the present value of lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees. ASU 2016-02 is effective for our interim and annual reporting periods beginning January 1, 2019. We are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for our interim and annual reporting periods beginning January 1, 2017. Early adoption is permitted. We are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

 

 
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Table Of Contents
 

  

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

3.

Segment Reporting

 

An operating segment is 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 our 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

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 
Homebuilding                

West

  $ 191,375     $ 176,817  

Mountain

    137,824       124,021  

East

    67,545       77,081  

Total homebuilding revenues

  $ 396,744     $ 377,919  
                 

Financial Services

               

Mortgage operations

  $ 6,870     $ 6,649  

Other

    4,147       3,942  

Total financial services revenues

  $ 11,017     $ 10,591  

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 
Homebuilding                

West

  $ 9,698     $ 8,503  

Mountain

    10,084       7,420  

East

    1,367       (421 )

Corporate

    (12,493 )     (7,512 )

Total homebuilding pretax income

  $ 8,656     $ 7,990  
                 

Financial Services

               

Mortgage operations

  $ 3,323     $ 2,792  

Other

    2,294       2,544  

Total financial services pretax income

  $ 5,617     $ 5,336  
                 

Total pretax income

  $ 14,273     $ 13,326  

 

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 our 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.

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 
Homebuilding assets                

West

  $ 1,041,898     $ 991,393  

Mountain

    539,308       536,831  

East

    331,421       324,457  

Corporate

    331,748       393,712  

Total homebuilding assets

  $ 2,244,375     $ 2,246,393  
                 

Financial services assets

               

Mortgage operations

  $ 92,941     $ 123,176  

Other

    48,490       46,330  

Total financial services assets

  $ 141,431     $ 169,506  
                 

Total assets

  $ 2,385,806     $ 2,415,899  

 

4.

Earnings Per Share     

 

ASC Topic 260, Earnings Per Share (“ASC 260”), requires a company that has participating security holders (for example, holders of unvested restricted stock that has nonforfeitable dividend rights) to utilize the two-class method for calculating 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)). Our common shares outstanding are comprised of shareholder owned common stock and 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, excluding participating shares in accordance with ASC 260. 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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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands, except per share amounts)

 

Numerator

               

Net income

  $ 9,563     $ 8,420  

Less: distributed earnings allocated to participating securities

    (40 )     (25 )

Less: undistributed earnings allocated to participating securities

    -       -  

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

    9,523       8,395  

Add back: undistributed earnings allocated to participating securities

    -       -  

Less: undistributed earnings reallocated to participating securities

    -       -  

Numerator for diluted earnings per share under two class method

  $ 9,523     $ 8,395  
                 

Denominator

               

Weighted-average common shares outstanding

    48,827,971       48,714,637  

Add: dilutive effect of stock options

    5,473       176,877  

Denominator for diluted earnings per share under two class method

    48,833,444       48,891,514  
                 

Basic Earnings Per Common Share

  $ 0.20     $ 0.17  

Diluted Earnings Per Common Share

  $ 0.20     $ 0.17  

 

Diluted EPS for the three months ended March 31, 2016 excluded options to purchase approximately 6.6 million shares of common stock because the effect of their inclusion would be anti-dilutive. For the same period in 2015, diluted EPS excluded options to purchase approximately 3.7 million shares.

 

5.

Accumulated Other Comprehensive Income

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Unrealized gains on available-for-sale marketable securities 1 :

               

Beginning balance

  $ 3,657     $ 2,775  

Other comprehensive income (loss) before reclassifications

    524       360  

Amounts reclassified from AOCI 2

    835       7  

Ending balance

  $ 5,016     $ 3,142  
                 

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

               

Beginning balance

  $ 12,058     $ 7,680  

Other comprehensive income before reclassifications

    589       941  

Amounts reclassified from AOCI

    -       -  

Ending balance

  $ 12,647     $ 8,621  
                 

Total ending AOCI

  $ 17,663     $ 11,763  

 _______________________

 

 

(1)

All amounts net-of-tax.

 

(2)

See separate table below for details about these reclassifications

 

 
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Table Of Contents
 

 

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

 
   

March 31,

 

Affected Line Item in the Statements of Operations

 

2016

   

2015

 
   

(Dollars in thousands)

 

Homebuilding other expense

  $ (915 )   $ (12 )

Other-than-temporary impairment of marketable securities

    (431 )     -  

Financial services interest and other income

    -       1  

Income before income taxes

    (1,346 )     (11 )

Provision for income taxes

    511       4  

Net income

  $ (835 )   $ (7 )

 

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

 

March 31,

2016

   

December 31,

2015

 
       

(Dollars in thousands)

 

Marketable equity securities (available-for-sale)

 

Level 1

  $ 89,422     $ 103,694  

Mortgage loans held-for-sale, net

 

Level 2

  $ 82,193     $ 115,670  

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

 

Level 3

  $ 27,277     $ 25,911  

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2016 and December 31, 2015.

 

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

 

Marketable Securities.  As of March 31, 2016 and December 31, 2015, we only held marketable equity securities. However, during 2015, we also held marketable debt 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 consisted primarily of fixed and floating rate interest earning debt securities, which may have included, among others, United States government and government agency debt and corporate debt. As of March 31, 2016 and December 31, 2015, all of our equity securities were treated as available-for-sale investments and as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if an unrealized loss, if applicable, is other-than-temporary.

 

Each quarter we assess all of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”). If the unrealized loss is determined to be other-than-temporary, an OTTI is recorded in the consolidated statements of operations and comprehensive income. During the three months ended March 31, 2016, we recorded a pretax OTTI of $0.4 million for certain of our equity securities that were in an unrealized loss position as of the end of the quarter. The OTTI is included in other-than-temporary impairment of marketable securities in the homebuilding section of our consolidated statements of operations and comprehensive income. No such impairments were recorded during the three months ended March 31, 2015.

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following tables set forth the cost and fair value of our marketable equity securities:

 

   

March 31, 2016

 
   

Original Cost

Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 70,666     $ (2,324 )   $ 68,342     $ 77,154  

Financial services equity securities

    12,988       -       12,988       12,268  

Total marketable equity securities

  $ 83,654     $ (2,324 )   $ 81,330     $ 89,422  

 

   

December 31, 2015

 
   

Original Cost

Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 89,738     $ (3,969 )   $ 85,769     $ 92,387  

Financial services equity securities

    12,026       -       12,026       11,307  

Total marketable equity securities

  $ 101,764     $ (3,969 )   $ 97,795     $ 103,694  

 

As of March 31, 2016 and December 31, 2015, our marketable equity securities were in a net unrealized gain position totaling $8.1 million and $5.9 million, respectively. Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.9 million as of both March 31, 2016 and December 31, 2015, respectively. The table below sets forth the aggregated unrealized losses for individual 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 March 31, 2016 is other-than-temporary.

 

   

March 31, 2016

   

December 31, 2015

 
   

Number of

Securities in an Unrealized Loss Position

   

Aggregate

Unrealized

Loss

Position

   

Aggregate

Fair Value of

Securities in

an

Unrealized

Loss Position

   

Number of

Securities in an Unrealized Loss Position

   

Aggregate

Unrealized

Loss

Position

   

Aggregate

Fair Value

of Securities in

an

Unrealized

Loss Position

 
   

(Dollars in thousands)

 

Marketable equity securities

    5     $ (925 )   $ 7,102       4     $ (882 )   $ 6,116  

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The table below sets forth gross realized gains and losses from the sale of available-for-sale marketable securities, which were included in other expense in the homebuilding section, or interest and other income in the financial services section, of our consolidated statements of operations and comprehensive income. Some of the losses realized in the current year may have been recognized in prior years through an OTTI.

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

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

               

Equity securities

  $ 91     $ 237  

Debt securities

    -       166  

Total

  $ 91     $ 403  
                 

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

               

Equity securities

  $ (1,006 )   $ (325 )

Debt securities

    -       (89 )

Total

  $ (1,006 )   $ (414 )
                 

Net realized loss on sales of available-for-sale securities

  $ (915 )   $ (11 )

 

Mortgage Loans Held-for-Sale, Net.  As of March 31, 2016, 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 March 31, 2016 and December 31, 2015, we had $62.2 million and $92.6 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 March 31, 2016 and December 31, 2015, we had $20.0 million and $23.1 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.

 

Gains on sales of mortgage loans, net, were $5.6 million and $4.4 million for the three months ended March 31, 2016 and 2015, respectively, and are included as a component of revenues in the financial services section of the consolidated statements of operations and comprehensive income.

 

Metropolitan District Bond Securities (Related Party).  The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our 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.

 

In accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“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 increases in the value of the Metro Bonds during the past two years are based on a larger percentage of future cash flows coming from homes that have closed, which utilize a lower discount rate as those cash flows have a reduced amount of risk. The table below provides quantitative data, as of March 31, 2016, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

    Quantitative Data   Sensitivity Analysis
Unobservable Input   Range    

Weighted

 Average

  Movement in
Fair Value from
Increase in Input
  Movement in
Fair Value from
Decrease in Input

Number of homes closed per year

  0 to 113       91  

Increase

 

Decrease

Average sales price

  $418,000 to $1,200,000       $486,000  

Increase

 

Decrease

Discount rates

  5% to 12%       7.4%  

Decrease

 

Increase

 

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

 

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 25,911     $ 18,203  

Increase in fair value (recorded in other comprehensive income)

    950       1,418  

Change due to accretion of principal

    416       357  

Cash receipts

    -       -  

Balance at end of period

  $ 27,277     $ 19,978  

 

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, which primarily reflect estimated prices for our senior notes and were obtained from multiple pricing sources.

 

   

March 31, 2016

   

December 31, 2015

 
   

Carrying
Amount

   

Fair Value

   

Carrying
Amount

   

Fair Value

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 246,247     $ 252,592     $ 246,032     $ 257,813  

5½% Senior Notes due January 2024, net

    248,254       239,833       248,209       252,188  

6% Senior Notes due January 2043, net

    346,297       268,753       346,283       276,938  

Total

  $ 840,798     $ 761,178     $ 840,524     $ 786,939  

 

 

 

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:

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Housing Completed or Under Construction:

               

West

  $ 440,914     $ 365,867  

Mountain

    277,542       253,578  

East

    144,059       127,591  

Subtotal

    862,515       747,036  

Land and Land Under Development:

               

West

    549,559       580,682  

Mountain

    236,702       259,484  

East

    162,506       176,760  

Subtotal

    948,767       1,016,926  

Total Inventories

  $ 1,811,282     $ 1,763,962  

 

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes (defined as homes under construction without a sales contract). 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 Topic 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 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 (including capitalized interest) 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, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

If land is classified as held for sale, in accordance with ASC 360, we measure it at the lower of the carrying value or fair value less estimated costs to sell. 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 months ended March 31, 2016 and 2015 are shown in the table below.

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

West

  $ -     $ -  

Mountain

    -       -  

East

    -       350  

Total Inventory Impairments

  $ -     $ 350  

 

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, 2016

    14     $ -     $ -       -       N/A  

March 31, 2015

    22     $ 350     $ 3,701       1       8.7%  

 

 
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Table Of Contents
 

 

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 the 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

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Homebuilding interest incurred

  $ 13,218     $ 13,251  

Less: Interest capitalized

    (13,218 )     (13,251 )

Homebuilding interest expensed

  $ -     $ -  
                 

Interest capitalized, beginning of period

  $ 77,541     $ 79,231  

Plus: Interest capitalized during period

    13,218       13,251  

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

    (10,976 )     (12,491 )

Interest capitalized, end of period

  $ 79,783     $ 79,991  

 

9.

Homebuilding Prepaid Expenses and Other Assets

 

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

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Land option deposits

  $ 9,254     $ 11,997  

Deferred marketing costs

    32,803       31,152  

Prepaid expenses

    5,978       6,500  

Goodwill

    6,008       6,008  

Deferred debt issuance costs, net

    5,287       5,570  

Other

    3,602       4,167  

Total

  $ 62,932     $ 65,394  

 

10.

Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

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

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Customer and escrow deposits

  $ 26,570     $ 20,717  

Warranty accrual

    16,852       15,328  

Accrued compensation and related expenses

    13,926       25,492  

Accrued interest

    11,031       23,234  

Land development and home construction accruals

    11,164       11,465  

Other accrued liabilities

    31,248       26,650  

Total accrued liabilities

  $ 110,791     $ 122,886  

 

 

 
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Table Of Contents
 

 

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:

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Insurance reserves

  $ 46,379     $ 45,811  

Accounts payable and other accrued liabilities

    7,654       6,303  

Total accounts payable and accrued liabilities

  $ 54,033     $ 52,114  

 

11.

Warranty Accrual

 

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. Our 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 accrual 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 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 accrual, adjustment and payment activity related to our warranty accrual for the three months ended March 31, 2016 and 2015. During the 2016 first quarter, we recorded a $3.0 million adjustment to increase our warranty accrual primarily due to higher than expected recent warranty related expenditures. There was no such adjustment for the three months ended March 31, 2015. Additionally, from time to time, we change our warranty accrual rates based on payment trends. Any changes made to those rates did not materially affect our warranty expense or gross margin from home sales for the three months ended March 31, 2016.

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 15,328     $ 18,346  

Expense provisions

    1,452       1,115  

Cash payments

    (2,915 )     (1,700 )

Adjustments

    2,987       -  

Balance at end of period

  $ 16,852     $ 17,761  

 

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. It is possible that future changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The table set forth below summarizes the insurance reserve activity for the three months ended March 31, 2016 and 2015. The insurance reserve is included as a component of accrued liabilities in the financial services section of the consolidated balance sheets.

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 45,811     $ 50,470  

Expense provisions

    1,388       1,273  

Cash payments, net of recoveries

    (820 )     (1,728 )

Balance at end of period

  $ 46,379     $ 50,015  

 

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 months ended March 31, 2016 and 2015 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

13.

Income Taxes

 

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 33.0% and 36.8% for the three months ended March 31, 2016 and 2015, respectively, resulting in income tax expense of $4.7 million and $4.9 million for the same periods, respectively. The year-over-year improvement in our effective tax rate is primarily the result of our estimated 2016 full year effective tax rate (1) including estimated energy credits versus no such estimate as of March 31, 2015 as the credit for both 2015 and 2016 was not approved by the U.S. Congress until December of 2015 and (2) including a domestic manufacturing deduction whereas we were not eligible for this deduction in the prior year due to net operating loss carryforwards.

 

At March 31, 2016 and December 31, 2015 we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $95.9 million and $99.1 million, respectively. The valuation allowances were related to (1) various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods that exist in certain states and (2) the portion of the amount by which the carrying value of our Metro Bonds for tax purposes exceeds our carrying value for book purposes, as we believe realization of that portion is more uncertain at this time.

 

 

14.

Senior Notes

 

The carrying value of our senior notes as of March 31, 2016 and December 31, 2015, net of any unamortized debt issuance costs or discount, were as follows:

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 246,247     $ 246,032  

5½% Senior Notes due January 2024, net

    248,254       248,209  

6% Senior Notes due January 2043, net

    346,297       346,283  

Total

  $ 840,798     $ 840,524  

 

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.

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

15.

Stock Based Compensation

 

We account for share-based awards in accordance with ASC 718, which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three months ended March 31, 2016 and 2015:

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Stock option grant expense

  $ 2,650     $ 376  

Restricted stock awards expense

    337       499  

Total stock based compensation

  $ 2,987     $ 875  

 

On May 18, 2015, the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 1,000,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, one third of the option shares will vest as of each of the third, fourth, and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any 20 out of 30 consecutive trading days closes at a price equal to or greater than 120% of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was $28.45 and the expiration date of each option is May 18, 2025. In accordance with ASC 718, the market-based awards were assigned a fair value of $5.62 per share on the date of grant using a Monte Carlo simulation model, which resulted in $11.2 million in future expense being recorded on a straight-line basis through the end of the 2016 second quarter. For the 2016 first quarter, $3.0 million of total stock-based compensation expense was recognized, $2.5 million of which was related to the market-based option grants discussed above.

 

16.

Commitments and Contingencies

 

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2016, we had issued and outstanding surety bonds and letters of credit totaling $164.7 million and $58.4 million, respectively, including $35.3 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $51.9 million and $43.3 million, respectively. The letters of credit as of March 31, 2016, excluding those issued by HomeAmerican, were outstanding under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

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

 

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

 

 
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Table Of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the mortgage loan loss reserve activity for the three months ended March 31, 2016 and 2015:

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 201     $ 810  

Expense provisions

    -       725  

Cash payments

    -       -  

Adjustments

    (41 )     (310 )

Balance at end of period

  $ 160     $ 1,225  

 

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.