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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2020
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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Delaware | 84-0622967 | ||||
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| 4350 South Monaco Street, Suite 500 | 80237 | |||||||||||
Denver, Colorado | (Zip code) | |||||||||||
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Common Stock, $.01 par value | 552676108 | New York Stock Exchange | |||||||||||||||
| 6% Senior Notes due January 2043 | 552676AQ1 | New York Stock Exchange | |||||||||||||||
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| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||||||||||||
| Emerging growth company | ☐ |
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M.D.C. HOLDINGS, INC.
2020
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September 30, December 31, 2017 2016 (Dollars in thousands, except per share amounts) ASSETS Homebuilding: Cash and cash equivalents Marketable securities Restricted cash Trade and other receivables Inventories: Housing completed or under construction Land and land under development Total inventories Property and equipment, net Deferred tax asset, net Metropolitan district bond securities (related party) Prepaid and other assets Total homebuilding assets Financial Services: Cash and cash equivalents Marketable securities Mortgage loans held-for-sale, net Other assets Total financial services assets Total Assets LIABILITIES AND EQUITY Homebuilding: Accounts payable Accrued liabilities Revolving credit facility Senior notes, net Total homebuilding liabilities Financial Services: Accounts payable and accrued liabilities Mortgage repurchase facility Total financial services liabilities Total Liabilities 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; 51,933,969 and 51,485,090 issued and outstanding at September 30, 2017 and December 31, 2016, respectively Additional paid-in-capital Retained earnings Accumulated other comprehensive income Total Stockholders' Equity Total Liabilities and Stockholders' Equity September 30,
2020December 31,
2019 (Unaudited) ASSETS Homebuilding: $ 351,399 $ 259,087 Cash and cash equivalents $ 432,277 $ 424,186 - 59,770 8,723 3,778 Restricted cash 19,732 14,279 42,904 42,492 Trade and other receivables 90,609 65,829 Inventories: 969,419 874,199 Housing completed or under construction 1,423,855 1,036,191 863,002 884,615 Land and land under development 1,221,854 1,330,384 1,832,421 1,758,814 Total inventories 2,645,709 2,366,575 26,304 28,041 Property and equipment, net 64,024 60,414 64,164 74,888 Deferred tax asset, net 13,297 21,768 - 30,162 72,808 60,463 Prepaid and other assets 78,421 78,358 2,398,723 2,317,495 Total homebuilding assets 3,344,069 3,031,409 Financial Services: 26,419 23,822 Cash and cash equivalents 70,435 35,747 40,221 36,436 Marketable securities 0 56,747 89,804 138,774 Mortgage loans held-for-sale, net 160,506 197,021 11,135 12,062 Other assets 37,764 17,432 167,579 211,094 Total financial services assets 268,705 306,947 $ 2,566,302 $ 2,528,589 Total Assets $ 3,612,774 $ 3,338,356 LIABILITIES AND EQUITY Homebuilding: $ 49,390 $ 42,088 Accounts payable $ 103,260 $ 87,364 151,661 144,566 Accrued and other liabilities Accrued and other liabilities 259,261 245,940 15,000 15,000 Revolving credit facility 10,000 15,000 842,532 841,646 Senior notes, net 1,037,225 989,422 1,058,583 1,043,300 Total homebuilding liabilities 1,409,746 1,337,726 Financial Services: 51,697 50,734 Accounts payable and accrued liabilities 84,168 68,529 65,103 114,485 Mortgage repurchase facility 130,861 149,616 116,800 165,219 Total financial services liabilities 215,029 218,145 1,175,383 1,208,519 Total Liabilities 1,624,775 1,555,871 Stockholders' Equity - - 519 515 Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding 0 0 Common stock, $0.01 par value; 250,000,000 shares authorized; 64,865,577 and 62,574,961 issued and outstanding at September 30, 2020 and December 31, 2019, respectively Common stock, $0.01 par value; 250,000,000 shares authorized; 64,865,577 and 62,574,961 issued and outstanding at September 30, 2020 and December 31, 2019, respectively 649 626 995,132 983,532 Additional paid-in-capital 1,397,220 1,348,733 392,442 313,952 Retained earnings 590,130 433,126 2,826 22,071 1,390,919 1,320,070 Total Stockholders' Equity 1,987,999 1,782,485 $ 2,566,302 $ 2,528,589 Total Liabilities and Stockholders' Equity $ 3,612,774 $ 3,338,356
M.D.C. HOLDINGS, INC.
Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands, except per share amounts) (Unaudited) Homebuilding: Home sale revenues Land sale revenues Total home and land sale revenues Home cost of sales Land cost of sales Inventory impairments Total cost of sales Gross margin Selling, general and administrative expenses Interest and other income Other expense Other-than-temporary impairment of marketable securities Homebuilding pretax income Financial Services: Revenues Expenses Interest and other income Other-than-temporary impairment of marketable securities Financial services pretax income Income before income taxes Provision for income taxes Net income Other comprehensive income (loss) related to available for sale securities, net of tax Comprehensive income Earnings per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Dividends declared per share Three Months Ended
September 30,Nine Months Ended
September 30, 2020 2019 2020 2019 (Dollars in thousands, except per share amounts) Homebuilding: $ 584,947 $ 575,722 $ 1,796,046 $ 1,541,337 Home sale revenues $ 1,000,549 $ 750,274 $ 2,584,392 $ 2,130,396 1,340 2,290 2,938 4,930 586,287 578,012 1,798,984 1,546,267 (485,147 ) (481,511 ) (1,493,166 ) (1,287,373 ) Home cost of sales (795,172) (609,316) (2,061,608) (1,724,040) (1,259 ) (2,318 ) (2,672 ) (4,197 ) (4,540 ) (4,700 ) (9,390 ) (6,300 ) Inventory impairments 0 0 0 (610) (490,946 ) (488,529 ) (1,505,228 ) (1,297,870 ) Total cost of sales (795,172) (609,316) (2,061,608) (1,724,650) 95,341 89,483 293,756 248,397 Gross profit Gross profit 205,377 140,958 522,784 405,746 (69,102 ) (61,904 ) (206,109 ) (182,621 ) Selling, general and administrative expenses (103,632) (92,716) (285,269) (257,689) 54,548 1,869 59,722 5,358 Interest and other income 756 2,336 3,365 7,491 (618 ) (1,558 ) (1,635 ) (2,463 ) Other expense (851) (1,887) (4,640) (4,188) - (215 ) (51 ) (934 ) 80,169 27,675 145,683 67,737 Homebuilding pretax income 101,650 48,691 236,240 151,360 Financial Services: 17,464 17,408 54,516 44,248 Revenues 36,803 22,388 91,653 58,389 (8,849 ) (7,955 ) (25,247 ) (21,739 ) Expenses (13,294) (10,352) (36,401) (28,883) 925 1,035 3,142 2,648 (29 ) (111 ) (160 ) (111 ) Other income (expense), net Other income (expense), net 859 2,079 (5,274) 11,877 9,511 10,377 32,251 25,046 Financial services pretax income 24,368 14,115 49,978 41,383 89,680 38,052 177,934 92,783 Income before income taxes 126,018 62,806 286,218 192,743 (28,517 ) (11,693 ) (60,651 ) (29,948 ) Provision for income taxes (27,080) (12,226) (66,124) (47,020) $ 61,163 $ 26,359 $ 117,283 $ 62,835 Net income $ 98,938 $ 50,580 $ 220,094 $ 145,723 (23,175 ) 1,028 (19,245 ) 3,871 $ 37,988 $ 27,387 $ 98,038 $ 66,706 Comprehensive income $ 98,938 $ 50,580 $ 220,094 $ 145,723 Earnings per share: $ 1.18 $ 0.51 $ 2.27 $ 1.22 Basic $ 1.54 $ 0.81 $ 3.46 $ 2.36 $ 1.16 $ 0.51 $ 2.23 $ 1.22 Diluted $ 1.49 $ 0.79 $ 3.37 $ 2.29 Weighted average common shares outstanding: 51,650,360 51,297,132 51,502,986 51,286,844 Basic 63,868,486 61,978,195 63,129,077 61,422,925 52,601,118 51,460,446 52,248,377 51,297,765 Diluted 65,824,910 63,968,215 64,969,855 63,360,535 $ 0.25 $ 0.24 $ 0.75 $ 0.72 Dividends declared per share $ 0.33 $ 0.30 $ 0.99 $ 0.90
M.D.C. HOLDINGS, INC.
Nine Months Ended September 30, 2017 2016 (Dollars in thousands) (Unaudited) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation expense Depreciation and amortization Inventory impairments Other-than-temporary impairment of marketable securities Gain on sale of marketable securities Gain on sale of metropolitan district bond securities (related party) Deferred income tax expense Net changes in assets and liabilities: Restricted cash Trade and other receivables Mortgage loans held-for-sale Housing completed or under construction Land and land under development Prepaid expenses and other assets Accounts payable and accrued liabilities Net cash provided by (used in) operating activities Investing Activities: Purchases of marketable securities Sales of marketable securities Proceeds from sale of metropolitan district bond securities (related party) Purchases of property and equipment Net cash provided by investing activities Financing Activities: Advances (payments) on mortgage repurchase facility, net Dividend payments Payments of deferred financing costs Proceeds from exercise of stock options Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents: Beginning of period End of period $ 117,283 $ 62,835 3,100 6,636 4,205 3,702 9,390 6,300 211 1,045 (18,122 ) (911 ) (35,847 ) - 22,795 11,357 (4,945 ) (871 ) 119 (21,679 ) 48,970 (2,319 ) (101,997 ) (229,739 ) 19,886 141,131 (11,229 ) (4,573 ) 15,345 18,183 69,164 (8,903 ) (17,604 ) (28,272 ) 83,315 56,873 44,253 - (1,917 ) (3,865 ) 108,047 24,736 (49,382 ) 3,400 (38,793 ) (36,763 ) (2,630 ) - 8,503 - (82,302 ) (33,363 ) 94,909 (17,530 ) 282,909 180,988 $ 377,818 $ 163,458
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 62,574,961 | $ | 626 | $ | 1,348,733 | $ | 433,126 | $ | 1,782,485 | ||||||||||||||||||||
| Cumulative effect of newly adopted accounting standards (Note 2) | — | — | — | (34) | (34) | ||||||||||||||||||||||||
| Balance at January 1, 2020 | 62,574,961 | 626 | 1,348,733 | 433,092 | 1,782,451 | ||||||||||||||||||||||||
| Net Income | — | — | — | 36,760 | 36,760 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 477,582 | 5 | 8,189 | 0 | 8,194 | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (20,768) | (20,768) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4,440 | — | 4,440 | ||||||||||||||||||||||||
| Forfeiture of restricted stock | (48) | — | — | — | — | ||||||||||||||||||||||||
| Balance at March 31, 2020 | 63,052,495 | $ | 631 | $ | 1,361,362 | $ | 449,084 | $ | 1,811,077 | ||||||||||||||||||||
| Net Income | — | 0 | 0 | 84,396 | 84,396 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 334,178 | 3 | (6,865) | 0 | (6,862) | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (20,914) | (20,914) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 5,488 | — | 5,488 | ||||||||||||||||||||||||
| Forfeiture of restricted stock | (1,807) | — | — | — | — | ||||||||||||||||||||||||
| Balance at June 30, 2020 | 63,384,866 | $ | 634 | $ | 1,359,985 | $ | 512,566 | $ | 1,873,185 | ||||||||||||||||||||
| Net Income | — | — | — | 98,938 | 98,938 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 1,480,711 | 15 | 28,627 | — | 28,642 | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (21,374) | (21,374) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 8,608 | — | 8,608 | ||||||||||||||||||||||||
| Balance at September 30, 2020 | 64,865,577 | $ | 649 | $ | 1,397,220 | $ | 590,130 | $ | 1,987,999 | ||||||||||||||||||||
M.D.C. HOLDINGS, INC.
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 56,615,352 | $ | 566 | $ | 1,168,442 | $ | 406,992 | $ | 1,576,000 | ||||||||||||||||||||
| Cumulative effect of newly adopted accounting standards | — | — | — | (67) | (67) | ||||||||||||||||||||||||
| Balance at January 1, 2019 | 56,615,352 | 566 | 1,168,442 | 406,925 | 1,575,933 | ||||||||||||||||||||||||
| Net Income | — | — | — | 40,550 | 40,550 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 372,344 | 4 | 7,083 | — | 7,087 | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (17,019) | (17,019) | ||||||||||||||||||||||||
| Stock dividend declared | 4,534,908 | 45 | 138,950 | (139,091) | (96) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4,251 | — | 4,251 | ||||||||||||||||||||||||
| Forfeiture of restricted stock | (1,714) | — | — | — | — | ||||||||||||||||||||||||
| Balance at March 31, 2019 | 61,520,890 | $ | 615 | $ | 1,318,726 | $ | 291,365 | $ | 1,610,706 | ||||||||||||||||||||
| Net Income | — | — | — | 54,593 | 54,593 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 405,094 | 4 | 10,237 | — | 10,241 | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (18,521) | (18,521) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4,132 | — | 4,132 | ||||||||||||||||||||||||
| Forfeiture of restricted stock | (3,578) | — | — | — | — | ||||||||||||||||||||||||
| Balance at June 30, 2019 | 61,922,406 | $ | 619 | $ | 1,333,095 | $ | 327,437 | $ | 1,661,151 | ||||||||||||||||||||
| Net Income | — | — | — | 50,580 | 50,580 | ||||||||||||||||||||||||
| Shares issued under stock-based compensation programs, net | 674,984 | 7 | (1,030) | — | (1,023) | ||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (18,700) | (18,700) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 9,793 | — | 9,793 | ||||||||||||||||||||||||
| Balance at September 30, 2019 | 62,597,390 | $ | 626 | $ | 1,341,858 | $ | 359,317 | $ | 1,701,801 | ||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Operating Activities: | |||||||||||
| Net income | $ | 220,094 | $ | 145,723 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Stock-based compensation expense | 18,536 | 18,178 | |||||||||
| Depreciation and amortization | 18,881 | 15,478 | |||||||||
| Inventory impairments | 0 | 610 | |||||||||
| Net (gain) loss on marketable equity securities | 8,285 | (7,934) | |||||||||
| Deferred income tax expense | 8,493 | 9,488 | |||||||||
| Net changes in assets and liabilities: | |||||||||||
| Trade and other receivables | (17,512) | (4,682) | |||||||||
| Mortgage loans held-for-sale, net | 36,515 | 32,191 | |||||||||
| Housing completed or under construction | (387,269) | (251,749) | |||||||||
| Land and land under development | 108,710 | (10,461) | |||||||||
| Prepaid and other assets | (20,314) | (3,889) | |||||||||
| Accounts payable and accrued and other liabilities | 35,023 | 23,929 | |||||||||
| Net cash provided by (used in) operating activities | 29,442 | (33,118) | |||||||||
| Investing Activities: | |||||||||||
| Purchases of marketable securities | (10,804) | (10,340) | |||||||||
| Sales of marketable securities | 59,266 | 6,277 | |||||||||
| Purchases of property and equipment | (20,885) | (20,128) | |||||||||
| Net cash provided by (used in) investing activities | 27,577 | (24,191) | |||||||||
| Financing Activities: | |||||||||||
| Payments on mortgage repurchase facility, net | (18,755) | (26,344) | |||||||||
| Payments on homebuilding line of credit, net | (5,000) | 0 | |||||||||
| Repayment of senior notes | (250,000) | 0 | |||||||||
| Proceeds from issuance of senior notes | 298,050 | 0 | |||||||||
| Dividend payments | (63,056) | (54,337) | |||||||||
| Issuance of shares under stock-based compensation programs, net | 29,974 | 16,304 | |||||||||
| Net cash used in financing activities | (8,787) | (64,377) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 48,232 | (121,686) | |||||||||
| Cash, cash equivalents and restricted cash: | |||||||||||
| Beginning of period | 474,212 | 470,139 | |||||||||
| End of period | $ | 522,444 | $ | 348,453 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Homebuilding: | |||||||||||
| Cash and cash equivalents | $ | 432,277 | $ | 285,338 | |||||||
| Restricted cash | 19,732 | 16,325 | |||||||||
| Financial Services: | |||||||||||
| Cash and cash equivalents | 70,435 | 46,790 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 522,444 | $ | 348,453 | |||||||
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On November 21, 2016, MDC’s board of directors declared a 5% stock dividend that was distributed on December 20, 2016 to shareholders of record on December 6, 2016. In accordance with Accounting Standards Codification (“ASC”) Topic 260,Earnings Per Share (“ASC 260”), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any periods or dates prior to the stock dividend record date.
2019.
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In May 2014, the Financial Accounting Standards Board (“FASB”) issued
Although we are still in the process of evaluating our contracts and updating our accounting policies, we do not believe the adoption of ASC 606 will have a material impact on the amount or timing of our recognition of revenues. There are certain markets where we are unable to complete certain performance obligations (generally landscaping) at the time of closing due to weather. Based on ASC 606, we have concluded that we will defer revenue and the related cost of sales specific to the unfulfilled performance obligations until it is delivered to the homeowner, which is different than our current accounting treatment. We anticipate that these adjustments to revenue and cost of sales will be immaterial each quarter. ASC 606 also will impact our accounting for land sales. Currently we include the proceeds from land sales in land sale revenues in the homebuilding section of our consolidated statements of operations and comprehensive income and include the associated costs in land cost of sales. Under ASC 606, we have concluded that the entities that we typically sell land to will likely not meet the definition of a customer.
In addition, ASU 2014-09eliminates the guidance in ASC Topic 970,Real Estate, that currently prescribes the accounting for costs incurred to sell real estate projects. We will apply the new guidance in ASC Topic 340-40,Other Assets and Deferred Costs — Contracts With Customers (“ASC 340-40), to these costs. Under ASC 340-40, incremental costs of obtaining a contract with a customer (i.e., costs that would not have been incurred if the contract had not been obtained) will be recognized as an asset only if we expect to recover them. We are still evaluating the accounting for marketing costs under ASC 340-40, but have concluded that marketing costs that were previously capitalized to a deferred marketing asset will now either be expensed as incurred or will be capitalized to fixed assets and amortized over the life of the community. As a result of this change, the timing of recognition and classification of certain marketing costs will change from the current accounting treatment. We are continuing to evaluate the exact dollar impact ASU 2014-09 will have on recording revenue and our marketing costs in our consolidated financial statements and related disclosures.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
In JanuaryJune 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 and is to be applied using a modified retrospective transition method. As discussed below, during the 2017third quarter, we sold a significant portion of our investments in equity securities, but there is a possibility we will purchase additional equity securities in the future. If we do have a material amount of investments in equity securities after the date of adoption, we expect that the impact to our consolidated statements of operations and comprehensive income from this update could be material. Furthermore, depending on trends in the stock market, we may see increased volatility in our consolidated statements of operations and comprehensive income.
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 the remaining 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. Upon adoption, we will be required to record a lease asset and lease liability related to our operating leases. ASU 2016-02 is effective for our interim and annual reporting periods beginning January 1, 2019 and is to be applied using a modified retrospective transition method. Early adoption is permitted. We do not plan to early adopt the guidance and we are currently evaluating the 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 became effective for us in the 2017first quarter. The primary impact from this guidance, on a prospective basis, will be to our provision for income taxes line item on our consolidated statements of operations and comprehensive income. Any excess tax benefits or deficiencies from (1) the exercise or expiration of options or (2) the vesting of stock awards will now be recognized through our income tax provision as opposed to additional paid-in capital (to the extent we had a sufficient pool of windfall tax benefits). As a result of exercises of stock options and vesting of stock awards during the three and nine months ended September 30, 2017, we recognized an excess tax deficiency of $0.0 million and an excess tax benefit of $0.1 million, respectively, in our tax provision for each period. Furthermore, as of September 30, 2017, we had options covering approximately 567,000 shares (1) with exercise prices above the MDC closing share price at September 30, 2017 and (2) that will have their ability to exercise expire at some point during the 2017fourth quarter. If the exercise price continues to be greater than the share price of MDC throughout 2017, these options will likely expire unexercised and as a result, we could recognize approximately $2.6 million in additional expense in our provision for income taxes line item on our consolidated statements of operations and comprehensive income in 2017. Another provision of ASU 2016-09 that is relevant to the Company is the classification of excess tax benefits on the statement of cash flows, which was adopted on a prospective basis. This provision did not have a material effect on the statement of cash flows and is not expected to have a material impact on the statement of cash flows in future quarterly or annual filings. Adoption of ASU 2016-09 was not material to our statement of cash flows for the periods presented and we do not anticipate it will be material for the year ending December 31, 2017.
In June 2016, the FASB issued ASU 2016-13,2016-13,
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensusinformation of the Emerging Issues Task Force) (“ASU 2016-15”), which amends ASC Topic 230, Statement of Cash Flows, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments in ASU 2016-15 are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effectiveObligor Group has not been included. See Note 20 for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-15 and do not believe the guidance will have a material impact on our statement of cash flows upon adoption.
In November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”), which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. ASU 2016-18 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-18 and do not believe the guidance will have a material impact on our statement of cash flows upon adoption.
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3. Segment Reporting
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follows
M.D.C. HOLDINGS, INC.
Notescentralized administrative functions. Applying the most recent cost allocation estimate to Unaudited Consolidated Financial Statements
the three and nine months ended September 30, 2019 would have resulted in decreased pretax income for our homebuilding segments of approximately $2.8 million and $8.2 million, respectively, and decreased pretax income for our financial services segments of approximately $0.4 million and $1.2 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three and nine months ended September 30, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.5 million and $9.5 million, respectively, with a corresponding increase in our Corporate segment pretax income.
Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
September 30, | September 30, | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||
Homebuilding | Homebuilding | ||||||||||||||||||||||||||||||||||||||
West | $ | 326,804 | $ | 284,589 | $ | 959,641 | $ | 745,995 | West | $ | 552,319 | $ | 410,414 | $ | 1,447,934 | $ | 1,164,502 | ||||||||||||||||||||||
Mountain | 167,066 | 192,876 | 564,558 | 521,034 | Mountain | 347,095 | 263,802 | 886,619 | 760,470 | ||||||||||||||||||||||||||||||
East | 92,417 | 100,547 | 274,785 | 279,238 | East | 101,135 | 76,058 | 249,839 | 205,424 | ||||||||||||||||||||||||||||||
Total homebuilding revenues | $ | 586,287 | $ | 578,012 | $ | 1,798,984 | $ | 1,546,267 | Total homebuilding revenues | $ | 1,000,549 | $ | 750,274 | $ | 2,584,392 | $ | 2,130,396 | ||||||||||||||||||||||
Financial Services | Financial Services | ||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 11,176 | $ | 11,294 | $ | 36,056 | $ | 28,866 | Mortgage operations | $ | 28,548 | $ | 14,395 | $ | 67,536 | $ | 36,258 | ||||||||||||||||||||||
Other | 6,288 | 6,114 | 18,460 | 15,382 | Other | 8,255 | 7,993 | 24,117 | 22,131 | ||||||||||||||||||||||||||||||
Total financial services revenues | $ | 17,464 | $ | 17,408 | $ | 54,516 | $ | 44,248 | Total financial services revenues | $ | 36,803 | $ | 22,388 | $ | 91,653 | $ | 58,389 | ||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
September 30, | September 30, | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||
Homebuilding | Homebuilding | ||||||||||||||||||||||||||||||||||||||
West | $ | 17,746 | $ | 18,392 | $ | 54,335 | $ | 43,830 | West | $ | 59,120 | $ | 34,898 | $ | 144,441 | $ | 103,448 | ||||||||||||||||||||||
Mountain | 18,326 | 18,856 | 61,097 | 49,688 | Mountain | 48,053 | 31,391 | 111,372 | 89,077 | ||||||||||||||||||||||||||||||
East | 2,613 | (2,267 | ) | 9,989 | 3,600 | East | 6,020 | 2,136 | 9,993 | 5,761 | |||||||||||||||||||||||||||||
Corporate | 41,484 | (7,306 | ) | 20,262 | (29,381 | ) | Corporate | (11,543) | (19,734) | (29,566) | (46,926) | ||||||||||||||||||||||||||||
Total homebuilding pretax income | $ | 80,169 | $ | 27,675 | $ | 145,683 | $ | 67,737 | Total homebuilding pretax income | $ | 101,650 | $ | 48,691 | $ | 236,240 | $ | 151,360 | ||||||||||||||||||||||
Financial Services | Financial Services | ||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 5,857 | $ | 6,723 | $ | 21,093 | $ | 16,491 | Mortgage operations | $ | 20,809 | $ | 8,468 | $ | 46,558 | $ | 19,700 | ||||||||||||||||||||||
Other | 3,654 | 3,654 | 11,158 | 8,555 | Other | 3,559 | 5,647 | 3,420 | 21,683 | ||||||||||||||||||||||||||||||
Total financial services pretax income | $ | 9,511 | $ | 10,377 | $ | 32,251 | $ | 25,046 | Total financial services pretax income | $ | 24,368 | $ | 14,115 | $ | 49,978 | $ | 41,383 | ||||||||||||||||||||||
Total pretax income | $ | 89,680 | $ | 38,052 | $ | 177,934 | $ | 92,783 | Total pretax income | $ | 126,018 | $ | 62,806 | $ | 286,218 | $ | 192,743 | ||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||
September 30, | December 31, | ||||||||||||||||||
2017 | 2016 | (Dollars in thousands) | |||||||||||||||||
Homebuilding assets | (Dollars in thousands) | Homebuilding assets | |||||||||||||||||
West | $ | 1,052,795 | $ | 1,035,033 | West | $ | 1,660,583 | $ | 1,461,645 | ||||||||||
Mountain | 677,721 | 571,139 | Mountain | 927,730 | 869,665 | ||||||||||||||
East | 217,238 | 256,816 | East | 248,028 | 194,592 | ||||||||||||||
Corporate | 450,969 | 454,507 | Corporate | 507,728 | 505,507 | ||||||||||||||
Total homebuilding assets | $ | 2,398,723 | $ | 2,317,495 | Total homebuilding assets | $ | 3,344,069 | $ | 3,031,409 | ||||||||||
Financial services assets | Financial services assets | ||||||||||||||||||
Mortgage operations | $ | 102,704 | $ | 153,182 | Mortgage operations | $ | 196,258 | $ | 209,946 | ||||||||||
Other | 64,875 | 57,912 | Other | 72,447 | 97,001 | ||||||||||||||
Total financial services assets | $ | 167,579 | $ | 211,094 | Total financial services assets | $ | 268,705 | $ | 306,947 | ||||||||||
Total assets | $ | 2,566,302 | $ | 2,528,589 | Total assets | $ | 3,612,774 | $ | 3,338,356 | ||||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
4. 4.Earnings Per Share
Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
September 30, | September 30, | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||
Numerator | Numerator | ||||||||||||||||||||||||||||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | Net income | $ | 98,938 | $ | 50,580 | $ | 220,094 | $ | 145,723 | ||||||||||||||||||||||
Less: distributed earnings allocated to participating securities | (68 | ) | (45 | ) | (196 | ) | (124 | ) | Less: distributed earnings allocated to participating securities | (148) | (122) | (404) | (343) | ||||||||||||||||||||||||||
Less: undistributed earnings allocated to participating securities | (244 | ) | (49 | ) | (375 | ) | (83 | ) | Less: undistributed earnings allocated to participating securities | (502) | (202) | (952) | (554) | ||||||||||||||||||||||||||
Net income attributable to common stockholders (numerator for basic earnings per share) | 60,851 | 26,265 | 116,712 | 62,628 | Net income attributable to common stockholders (numerator for basic earnings per share) | 98,288 | 50,256 | 218,738 | 144,826 | ||||||||||||||||||||||||||||||
Add back: undistributed earnings allocated to participating securities | 244 | 49 | 375 | 83 | Add back: undistributed earnings allocated to participating securities | 502 | 202 | 952 | 554 | ||||||||||||||||||||||||||||||
Less: undistributed earnings reallocated to participating securities | (240 | ) | (49 | ) | (369 | ) | (83 | ) | Less: undistributed earnings reallocated to participating securities | (488) | (195) | (929) | (540) | ||||||||||||||||||||||||||
Numerator for diluted earnings per share under two class method | $ | 60,855 | $ | 26,265 | $ | 116,718 | $ | 62,628 | Numerator for diluted earnings per share under two class method | $ | 98,302 | $ | 50,263 | $ | 218,761 | $ | 144,840 | ||||||||||||||||||||||
Denominator | Denominator | ||||||||||||||||||||||||||||||||||||||
Weighted-average common shares outstanding | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | Weighted-average common shares outstanding | 63,868,486 | 61,978,195 | 63,129,077 | 61,422,925 | ||||||||||||||||||||||||||||||
Add: dilutive effect of stock options | 950,758 | 163,314 | 745,391 | 10,921 | Add: dilutive effect of stock options | 1,810,624 | 1,990,020 | 1,599,722 | 1,570,194 | ||||||||||||||||||||||||||||||
| Add: dilutive effect of performance share units | Add: dilutive effect of performance share units | 145,800 | 0 | 241,056 | 367,416 | ||||||||||||||||||||||||||||||||||
Denominator for diluted earnings per share under two class method | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | Denominator for diluted earnings per share under two class method | 65,824,910 | 63,968,215 | 64,969,855 | 63,360,535 | ||||||||||||||||||||||||||||||
Basic Earnings Per Common Share | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | Basic Earnings Per Common Share | $ | 1.54 | $ | 0.81 | $ | 3.46 | $ | 2.36 | ||||||||||||||||||||||
Diluted Earnings Per Common Share | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | Diluted Earnings Per Common Share | $ | 1.49 | $ | 0.79 | $ | 3.37 | $ | 2.29 | ||||||||||||||||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
|
|
The following table sets forth our changes in accumulated other comprehensive income (“AOCI”):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Unrealized gains on available-for-sale marketable securities 1 : | ||||||||||||||||
Beginning balance | $ | 11,176 | $ | 5,344 | $ | 7,730 | $ | 3,657 | ||||||||
Other comprehensive income before reclassifications | 1,778 | 1,156 | 6,201 | 2,559 | ||||||||||||
Amounts reclassified from AOCI 2 | (10,128 | ) | (201 | ) | (11,105 | ) | 83 | |||||||||
Ending balance | $ | 2,826 | $ | 6,299 | $ | 2,826 | $ | 6,299 | ||||||||
Unrealized gains on available-for-sale metropolitan district bond securities 1 : | ||||||||||||||||
Beginning balance | $ | 14,825 | $ | 13,214 | $ | 14,341 | $ | 12,058 | ||||||||
Other comprehensive income before reclassifications | 7,400 | 73 | 7,884 | 1,229 | ||||||||||||
Amounts reclassified from AOCI | (22,225 | ) | - | (22,225 | ) | - | ||||||||||
Ending balance | $ | - | $ | 13,287 | $ | - | $ | 13,287 | ||||||||
Total ending AOCI | $ | 2,826 | $ | 19,586 | $ | 2,826 | $ | 19,586 | ||||||||
|
|
|
|
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 | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding: Interest and other income | $ | 52,211 | $ | 555 | $ | 53,622 | $ | 817 | ||||||||
Homebuilding: Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||
Financial services: Interest and other income | - | 94 | 347 | 94 | ||||||||||||
Financial services: Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||
Income before income taxes | 52,182 | 323 | 53,758 | (134 | ) | |||||||||||
Provision for income taxes | (19,829 | ) | (122 | ) | (20,428 | ) | 51 | |||||||||
Net income | $ | 32,353 | $ | 201 | $ | 33,330 | $ | (83 | ) | |||||||
|
|
ASC Topic 820,5. Fair Value Measurements
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:
Fair Value | Fair Value | |||||||||||||||||||||||||||||||
Financial Instrument | Hierarchy | September 30, 2017 | December 31, 2016 | Financial Instrument | Hierarchy | September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Marketable equity securities (available-for-sale) | Level 1 | $ | 40,221 | $ | 96,206 | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Marketable securities | Marketable securities | |||||||||||||||||||||||||||||||
| Equity securities | Equity securities | Level 1 | $ | 0 | $ | 56,747 | ||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | Level 2 | $ | 89,804 | $ | 138,774 | Mortgage loans held-for-sale, net | Level 2 | $ | 160,506 | $ | 197,021 | |||||||||||||||||||||
Metropolitan district bond securities (related party) (available-for-sale) | Level 3 | $ | - | $ | 30,162 | |||||||||||||||||||||||||||
2019.
Marketable securities
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 other-than-temporary impairment of marketable securitiesother income (expense), net in the homebuilding or financial services sections of our consolidated statements of operations and comprehensive income. During the three and nine months ended September 30, 2017, we recorded pretax OTTI’s of $0.0 million and $0.2 million, respectively, for certain of our equity securities that were in an unrealized loss position as of the end of each respective period. For the same periods in 2016, we recorded pretax OTTI’s of $0.3 million and $1.0 million, respectively.
The following tables set forth the cost and estimated fair value of our available-for-sale marketable securities:
September 30, 2017 | ||||||||||||||||
Cost Basis | OTTI | Net Cost Basis | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding equity securities | $ | - | $ | - | $ | - | $ | - | ||||||||
Financial services equity securities | 36,304 | (366 | ) | 35,938 | 40,221 | |||||||||||
Total marketable equity securities | $ | 36,304 | $ | (366 | ) | $ | 35,938 | $ | 40,221 | |||||||
December 31, 2016 | ||||||||||||||||
Cost Basis | OTTI | Net Cost Basis | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding equity securities | $ | 48,910 | $ | (685 | ) | $ | 48,225 | $ | 59,770 | |||||||
Financial services equity securities | 35,885 | (373 | ) | 35,512 | 36,436 | |||||||||||
Total marketable equity securities | $ | 84,795 | $ | (1,058 | ) | $ | 83,737 | $ | 96,206 | |||||||
As of September 30, 2017 and December 31, 2016, our marketable equity securities were in net unrealized gain positions totaling $4.3 million and $12.5 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 $0.6 million and $0.5 million as of September 30, 2017 and December 31, 2016, 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 September 30, 2017 is other-than-temporary.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
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) | ||||||||||||||||||||||||
Marketable equity securities | 1 | $ | (615 | ) | $ | 1,384 | 5 | $ | (457 | ) | $ | 6,045 | ||||||||||||
The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities. We record the net amount of these gains and losses to either other expense or interest and other income, dependent upon whether there is a net realized loss or gain, respectively, in the homebuilding section or financial services section of our consolidated statements of operations and comprehensive income.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross realized gains on sales of available-for-sale securities | $ | 16,577 | $ | 740 | $ | 18,365 | $ | 2,210 | ||||||||
Gross realized losses on sales of available-for-sale securities | (213 | ) | (91 | ) | (243 | ) | (1,299 | ) | ||||||||
Net realized gain on sales of available-for-sale securities | $ | 16,364 | $ | 649 | $ | 18,122 | $ | 911 | ||||||||
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 September 30, 2017 December 31, 2016 Carrying Fair Value Carrying Fair Value (Dollars in thousands) 5⅝% Senior Notes due February 2020, net 5½% Senior Notes due January 2024, net 6% Senior Notes due January 2043, net Total September 30, December 31, 2017 2016 (Dollars in thousands) Housing completed or under construction: West Mountain East Subtotal Land and land under development: West Mountain East Subtotal Total inventories •actual and trending •estimated future undiscounted cash flows and Operating Margin; •actual and trending net home orders; •homes available for sale; •market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes 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 Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands) West Mountain East Total inventory impairments Impairment Data Quantitative Data Three Months Ended Total Inventory Fair Value of After Impairments Number of Discount Rate (Dollars in thousands) March 31, 2017 June 30, 2017 September 30, 2017 March 31, 2016 June 30, 2016 September 30, 2016 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 during the period that related units or lots are delivered. 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. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized. Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands) Homebuilding interest incurred Less: Interest capitalized Homebuilding interest expensed Interest capitalized, beginning of period Plus: Interest capitalized during period Less: Previously capitalized interest included in home and land cost of sales Interest capitalized, end of period 2017 2016 (Dollars in thousands) Deferred marketing costs Land option deposits Goodwill Prepaid expenses Deferred debt issuance costs on revolving credit facility, net Other Total September 30, December 31, 2017 2016 (Dollars in thousands) Customer and escrow deposits Warranty accrual Accrued compensation and related expenses Accrued interest Construction defect claim reserves Land development and home construction accruals Other accrued liabilities Total accrued liabilities The following table sets forth information relating to financial services accounts payable and accrued liabilities: September 30, December 31, 2017 2016 (Dollars in thousands) Insurance reserves Accounts payable and other accrued liabilities Total accounts payable and accrued liabilities Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands) Balance at beginning of period Expense provisions Cash payments Adjustments Balance at end of period The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and nine months ended September 30, Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands) Balance at beginning of period Expense provisions Cash payments, net of recoveries Balance at end of period 14. Senior Notes September 30, December 31, 2017 2016 (Dollars in thousands) 5⅝% Senior Notes due February 2020, net 5½% Senior Notes due January 2024, net 6% Senior Notes due January 2043, net Total Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (Dollars in thousands) Stock option grants expense Restricted stock awards expense Performance share units expense Total stock based compensation Threshold Goal Target Goal Maximum Goal Maximum Potential Awardee Date of Award Performance Period Base Period Base Period Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues Fair Value per Share Expense to be Recognized CEO COO CFO CEO COO CFO The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change. 2020. 2020. based on a LIBOR rate or successor benchmark rate. 2020. The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section Name Chairman and CEO David D. Mandarich President and COO Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company: September 30, 2017 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) ASSETS Homebuilding: Cash and cash equivalents Marketable securities Restricted cash Trade and other receivables Inventories: Housing completed or under construction Land and land under development Total inventories Intercompany receivables Investment in subsidiaries Property and equipment, net Deferred tax asset, net Metropolitan district bond securities (related party) Prepaid and other assets Total homebuilding assets Financial Services: Cash and cash equivalents Marketable securities Intercompany receivables Mortgage loans held-for-sale, net Other assets Total financial services assets Total Assets LIABILITIES AND EQUITY Homebuilding: Accounts payable Accrued liabilities Advances and notes payable to parent and subsidiaries Revolving credit facility Senior notes, net Total homebuilding liabilities Financial Services: Accounts payable and other liabilities Advances and notes payable to parent and subsidiaries Mortgage repurchase facility Total financial services liabilities Total Liabilities Equity: Total Stockholders' Equity Total Liabilities and Stockholders' Equity December 31, 2016 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) ASSETS Homebuilding: Cash and cash equivalents Marketable securities Restricted cash Trade and other receivables Inventories: Housing completed or under construction Land and land under development Total inventories Intercompany receivables Investment in subsidiaries Property and equipment, net Deferred tax assets, net Metropolitan district bond securities (related party) Other assets Total Homebuilding Assets Financial Services: Cash and cash equivalents Marketable securities Intercompany receivables Mortgage loans held-for-sale, net Other assets Total Financial Services Assets Total Assets LIABILITIES AND EQUITY Homebuilding: Accounts payable Accrued liabilities Advances and notes payable to parent and subsidiaries Revolving credit facility Senior notes, net Total Homebuilding Liabilities Financial Services: Accounts payable and accrued liabilities Advances and notes payable to parent and subsidiaries Mortgage repurchase facility Total Financial Services Liabilities Total Liabilities Equity: Total Stockholders' Equity Total Liabilities and Stockholders' Equity Three Months Ended September 30, 2017 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) Homebuilding: Revenues Cost of sales Inventory impairments Gross margin Selling, general, and administrative expenses Equity income of subsidiaries Interest and other income Other expense Other-than-temporary impairment of marketable securities Homebuilding pretax income (loss) Financial Services: Financial services pretax income Income before income taxes (Provision) benefit for income taxes Net income Other comprehensive income related to available-for-sale securities, net of tax Comprehensive income Nine Months Ended September 30, 2017 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) Homebuilding: Revenues Home and land cost of sales Inventory impairments Gross margin Selling, general, and administrative expenses Equity income of subsidiaries Interest and other income Other expense Other-than-temporary impairment of marketable securities Homebuilding pretax income (loss) Financial Services: Financial services pretax income Income before income taxes (Provision) benefit for income taxes Net income Other comprehensive income related to available for sale securities, net of tax Comprehensive income Nine Months Ended September 30, 2016 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC Homebuilding: (Dollars in thousands) Revenues Home and land cost of sales Inventory impairments Gross margin Selling, general, and administrative expenses Equity income of subsidiaries Interest and other income Interest expense Other expense Other-than-temporary impairment of marketable securities Homebuilding pretax income (loss) Financial Services: Financial services pretax income Income before income taxes (Provision) benefit for income taxes Net income Other comprehensive income related to available for sale securities, net of tax Comprehensive income Nine Months Ended September 30, 2017 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Financing activities: Payments from (advances to) subsidiaries Mortgage repurchase facility Dividend payments Payments of deferred financing costs Proceeds from exercise of stock options Net cash provided by (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents: Beginning of period End of period Nine Months Ended September 30, 2016 Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC (Dollars in thousands) Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Financing activities: Payments from (advances to) subsidiaries Mortgage repurchase facility Dividend payments Payments of deferred financing costs Proceeds from the exercise of stock options Net cash provided by (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents: Beginning of period End of period ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 Homebuilding: (Dollars in thousands, except per share amounts) Home sale revenues Land sale revenues Total home and land sale revenues Home cost of sales Land cost of sales Inventory impairments Total cost of sales Gross margin Gross margin % Selling, general and administrative expenses Interest and other income Other expense Other-than-temporary impairment of marketable securities Homebuilding pretax income Financial Services: Revenues Expenses Interest and other income Other-than-temporary impairment of marketable securities Financial services pretax income Income before income taxes Provision for income taxes Net income Earnings per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Dividends declared per share Cash provided by (used in): Operating Activities Investing Activities Financing Activities 2020 quarter. geographical mix to some higher priced markets. 2020 Three Months Ended Nine Months Ended September 30, Change September 30, Change 2017 2016 Amount % 2017 2016 Amount % (Dollars in thousands) West Mountain East Corporate Total homebuilding pretax income our Corporate cost allocation. September 30, December 31, Change 2017 2016 Amount % (Dollars in thousands) West Mountain East Corporate Total homebuilding assets our Corporate segment pretax income. Three Months Ended Nine Months Ended September 30, Change September 30, Change 2017 2016 Amount % 2017 2016 Amount % (Dollars in thousands) West Mountain East Total home and land sale revenues Three Months Ended September 30, 2017 2016 % Change Homes Dollar Average Price Homes Dollar Average Price Homes Dollar Average Price (Dollars in thousands) Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Nine Months Ended September 30, 2017 2016 % Change Homes Dollar Average Price Homes Dollar Average Price Homes Dollar Average Price (Dollars in thousands) Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Home Sales: Our gross margin from home sales past twelve months. 2020. Impairments: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) West Mountain East Total inventory impairments below: Impairment Data Quantitative Data Three Months Ended Total Inventory Fair Value of Number of Discount Rate (Dollars in thousands) March 31, 2017 June 30, 2017 September 30, 2017 March 31, 2016 June 30, 2016 September 30, 2016 strong operating results. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 Change 2017 2016 Change (Dollars in thousands) General and administrative expenses General and administrative expenses as a percentage of home sale revenues 90 bps (50) bps Marketing expenses Marketing expenses as a percentage of home sale revenues 10 bps 0 bps Commissions expenses Commissions expenses as a percentage of home sale revenues 0 bps 0 bps Total selling, general and administrative expenses Total selling, general and administrative expenses as a percentage of home sale revenues 100 bps (30) bps For both the three and nine months ended September 30, respective periods. Three Months Ended September 30, 2017 2016 % Change Homes Dollar Average Price Monthly Absorption Rate * Homes Dollar Value Average Price Monthly Absorption Rate * Homes Dollar Value Average Price Monthly Absorption Rate (Dollars in thousands) Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Nine Months Ended September 30, 2017 2016 % Change Homes Dollar Average Price Monthly Absorption Rate * Homes Dollar Value Average Price Monthly Absorption Rate * Homes Dollar Value Average Price Monthly Absorption Rate (Dollars in thousands) Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Orders period. mid-Atlantic market. Average Active Subdivisions Average Active Subdivisions Active Subdivisions Three Months Ended Nine Months Ended September 30, % September 30, % September 30, % 2017 2016 Change 2017 2016 Change 2017 2016 Change Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Cancellation Rate: Cancellations As a Percentage of Homes in Beginning Backlog Cancellations As a Percentage of Gross Sales* Three Months Ended September 30, Change in Three Months Ended September 30, Change in Nine Months Ended September 30, Change in 2017 2016 Percentage 2017 2016 Percentage 2017 2016 Percentage Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total pandemic. At September 30, 2017 2016 % Change Homes Dollar Average Price Homes Dollar Average Price Homes Dollar Average Price (Dollars in thousands) Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total September 30, % 2017 2016 Change Unsold: Completed Under construction Total unsold started homes Sold homes under construction or completed Model homes under construction or completed Total homes completed or under construction increase in the number of homes in backlog year-over-year noted above. Total unsold started homes have decreased year-over-year due to the strong demand for new homes. September 30, 2017 September 30, 2016 Lots Owned Lots Optioned Total Lots Owned Lots Optioned Total Total % Change Arizona California Nevada Washington West Colorado Utah Mountain Maryland Virginia Florida East Total Three Months Ended Nine Months Ended September 30, Change September 30, Change 2017 2016 Amount % 2017 2016 Amount % (Dollars in thousands) Financial services revenues Mortgage operations Other Total financial services revenues Financial services pretax income Mortgage operations Other Total financial services pretax income Three Months Ended % or Nine Months Ended % or September 30, Percentage September 30, Percentage 2017 2016 Change 2017 2016 Change (Dollars in thousands) Total Originations (including transfer loans): Loans Principal Capture Rate Data: Capture rate as % of all homes delivered Capture rate as % of all homes delivered (excludes cash sales) Mortgage Loan Origination Product Mix: FHA loans Other government loans (VA & USDA) Total government loans Conventional loans Loan Type: Fixed rate ARM Credit Quality: Average FICO Score Other Data: Average Combined LTV ratio Full documentation loans Loans Sold to Third Parties: Loans Principal 2019. on January 9, 2020, $1.70 billion remains on our effective shelf registration statement. The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default. based on a LIBOR rate or successor benchmark rate. 2020. Consolidated Cash Flow income. During the nine months ended September 30, inventory increased significantly during both periods. senior notes of $48.1 million during the nine months ended September 30, 2020. IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS funds. 2020 and December 31, 2019, respectively. We utilize our Revolving Credit Facility, our Mortgage Repurchase Facility and senior notes in our financing strategy. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but do not affect our earnings or cash flows. We do not have an obligation to prepay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value do not have an impact on our financial position, results of operations or cash flows. For variable rate debt such as our Revolving Credit Facility and Mortgage Repurchase Facility, changes in interest rates generally do not affect the fair value of the outstanding borrowing on the debt facilities, but 10-Q reference. By:Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands) Net gain (loss) recognized during the period on equity securities $ 0 $ 767 $ (8,285) $ 7,934 Less: Net gain (loss) recognized during the period on equity securities sold during the period 0 299 (8,285) 536 Unrealized gain recognized during the reporting period on equity securities still held at the reporting date $ 0 $ 468 $ 0 $ 7,398 (1)(1) mortgage loans held-for-sale that are under commitments to sell and (2)(2) mortgage loans held-for-sale that are not under commitments to sell. At September 30, 2017 2020 and December 31, 2016, 2019, we had $75.3$105.5 million and $96.2$136.8 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At September 30, 2017 2020 and December 31, 2016, 2019, we had $14.5$55.0 million and $42.6$60.2 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.2017, 2020, we recorded net gains on the sales of mortgage loans of $9.8$26.8 million and $28.5$64.3 million, respectively, compared to $10.0$14.6 million and $22.5$38.9 million for the same periods in the prior year, respectively.Metropolitan district bond securities (related party). The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding sectionM.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statementswhichthat were provided by multiple sources.
Amount
Amount $ 247,613 $ 268,113 $ 246,915 $ 265,611 248,535 270,250 248,391 258,800 346,384 340,423 346,340 297,087 $ 842,532 $ 878,786 $ 841,646 $ 821,498 September 30, 2020 December 31, 2019 Carrying
AmountFair Value Carrying
AmountFair Value (Dollars in thousands) $250 million 5.625% Senior Notes due February 2020, net $ 0 $ 0 $ 249,909 $ 250,400 $250 million 5.500% Senior Notes due January 2024, net 249,174 270,388 249,005 272,083 $300 million 3.850% Senior Notes due January 2030, net 297,400 313,505 0 0 $500 million 6.000% Senior Notes due January 2043, net 490,651 605,125 490,508 528,542 Total $ 1,037,225 $ 1,189,018 $ 989,422 $ 1,051,025 7.Inventories September 30,
2020December 31,
2019 (Dollars in thousands) Housing completed or under construction: $ 489,753 $ 470,503 West $ 844,264 $ 589,040 343,394 277,922 Mountain 463,690 358,370 136,272 125,774 East 115,901 88,781 969,419 874,199 Subtotal 1,423,855 1,036,191 Land and land under development: 489,758 499,186 West 698,099 772,189 305,953 271,252 Mountain 412,299 468,718 67,291 114,177 East 111,456 89,477 863,002 884,615 Subtotal 1,221,854 1,330,384 $ 1,832,421 $ 1,758,814 Total inventories $ 2,645,709 $ 2,366,575 homes.homes. Costs capitalized to land and land under development primarily include: (1)(1) land costs; (2)(2) land development costs; (3)(3) entitlement costs; (4)(4) capitalized interest; (5)(5) engineering fees; and (6)(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)(1) land costs transferred from land and land under development; (2)(2) direct construction costs associated with a house; (3)(3) real property taxes, engineering fees, permits and other fees; (4)(4) capitalized interest; and (5)(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.“Operating“Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);currentlycurrently being offered for sale and lot size; and•known or probable events indicating that the carrying value may not be recoverable.- 12 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statementssubdivision’ssubdivision’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. 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.studies, which are considered Level 3 inputs. 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.2017 2020 and 20162019 are shown in the table below. Three Months Ended
September 30,Nine Months Ended
September 30, 2020 2019 2020 2019 (Dollars in thousands) $ 1,885 $ - $ 5,985 $ 1,400 West $ 0 $ 0 $ 0 $ 0 370 - 370 - Mountain 0 0 0 400 2,285 4,700 3,035 4,900 East 0 0 0 210 $ 4,540 $ 4,700 $ 9,390 $ 6,300 Total inventory impairments $ 0 $ 0 $ 0 $ 610
Subdivisions
Tested
Impairments
Inventory
Subdivisions
Impaired 33 $ 4,850 $ 19,952 2 12% to 18% 35 $ - $ - - N/A 33 $ 4,540 $ 52,190 9 10% to 15% 14 $ - $ - - N/A 17 $ 1,600 $ 6,415 2 12% to 15% 25 $ 4,700 $ 12,295 2 15% to 18% Impairment Data Quantitative Data Three Months Ended Number of
Subdivisions
ImpairedDiscount Rate (Dollars in thousands) March 31, 2019 2 $ 610 $ 10,476 N/A - 13 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements8.Capitalization of Interest $ 13,212 $ 13,187 $ 39,594 $ 39,511 (13,212 ) (13,187 ) (39,594 ) (39,511 ) $ - $ - $ - $ - $ 62,091 $ 77,150 $ 68,085 $ 77,541 13,212 13,187 39,594 39,511 (15,087 ) (15,922 ) (47,463 ) (42,637 ) $ 60,216 $ 74,415 $ 60,216 $ 74,415 Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands) Homebuilding interest incurred $ 14,799 $ 15,879 $ 46,427 $ 47,890 Less: Interest capitalized (14,799) (15,879) (46,427) (47,890) Homebuilding interest expensed $ 0 $ 0 $ 0 $ 0 Interest capitalized, beginning of period $ 56,929 $ 58,193 $ 55,310 $ 54,845 Plus: Interest capitalized during period 14,799 15,879 46,427 47,890 Less: Previously capitalized interest included in home cost of sales (16,511) (14,451) (46,520) (43,114) Interest capitalized, end of period $ 55,217 $ 59,621 $ 55,217 $ 59,621 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) $ 2,083 $ 1,841 $ 6,249 $ 5,811 Less: Sublease income (Note 19) (38) (37) (114) (112) Net lease cost $ 2,045 $ 1,804 $ 6,135 $ 5,699 Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,792 $ 1,834 $ 5,439 $ 5,397 Leased assets obtained in exchange for new operating lease liabilities $ 0 $ 646 $ 4,050 $ 2,676 9.Homebuilding Prepaid and Other AssetsSeptember 30, 2020 Weighted-average remaining lease term (in years) 5.6 Weighted-average discount rate 5.5 % Year Ended December 31, (Dollars in thousands) 2020 (excluding the nine months ended September 30, 2020) $ 1,343 2021 7,421 2022 7,115 2023 6,203 2024 5,607 Thereafter 10,096 Total operating lease payments $ 37,785 Less: Interest 5,290 $ 32,495 September 30, December 31, $ 37,178 $ 35,313 16,277 8,683 6,008 6,008 6,011 4,735 6,139 4,340 1,195 1,384 $ 72,808 $ 60,463 September 30,
2020December 31,
2019(Dollars in thousands) Operating lease right-of-use asset (Note 8) $ 30,653 $ 30,277 Land option deposits 25,925 27,361 Prepaid expenses 10,070 7,294 Goodwill 6,008 6,008 Deferred debt issuance costs on revolving credit facility, net 4,980 6,130 Other 785 1,288 Total prepaid and other assets $ 78,421 $ 78,358 10.Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities September 30,
2020December 31, 2019 (Dollars in thousands) $ 37,578 $ 27,183 Customer and escrow deposits $ 59,468 $ 39,001 20,725 20,678 Warranty accrual 32,097 31,386 27,624 27,830 Accrued compensation and related expenses 48,226 45,003 Lease liability (Note 8) Lease liability (Note 8) 31,637 30,830 11,031 23,234 Accrued interest 13,825 27,734 7,480 8,750 Construction defect claim reserves 8,479 8,196 6,212 8,695 Land development and home construction accruals 8,630 9,750 41,011 28,196 Other accrued liabilities 56,899 54,040 $ 151,661 $ 144,566 Total accrued and other liabilities Total accrued and other liabilities $ 259,261 $ 245,940 M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements $ 43,016 $ 42,204 8,681 8,530 $ 51,697 $ 50,734 September 30,
2020December 31, 2019 (Dollars in thousands) Insurance reserves $ 58,601 $ 52,219 Accounts payable and other accrued liabilities 25,567 16,310 Total accounts payable and accrued liabilities $ 84,168 $ 68,529 11.Warranty Accrualthird-partythird-party warranties and, under our agreement with the issuer of the third-partythird-party warranties, we are responsible for performing all of the work for the firsttwo years of the warranty coverage and paying for substantially all of the work required to be performed during years three through ten of the warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is 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.2017 2020 and 2016. For both2019. The warranty accrual increased due to the three and increase in the number of home closings, which was partially offset during the nine months ended September 30, 2017, we recorded2020 by adjustments to decrease our per home warranty accrual by $0.4 million. The decreases were driven by an adjustment to a specific warranty accrual where we determined that a portion of the previously accrued amount would be covered by insurance. For the three and nine months ended September 30, 2016, we increased our warranty reserve by $1.8 million and $5.1 million, respectively. The adjustments made during 2016 wererate due to higherlower than expected recentgeneral warranty related expenditures. $ 20,965 $ 17,217 $ 20,678 $ 15,328 2,448 2,390 7,691 6,147 (2,263 ) (2,723 ) (7,269 ) (7,828 ) (425 ) 1,825 (375 ) 5,062 $ 20,725 $ 18,709 $ 20,725 $ 18,709 Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands) Balance at beginning of period $ 30,458 $ 29,349 $ 31,386 $ 28,262 Expense provisions 4,493 3,557 11,595 10,642 Cash payments (2,683) (3,425) (8,713) (8,894) Adjustments (171) 389 (2,171) (140) Balance at end of period $ 32,097 $ 29,870 $ 32,097 $ 29,870 12.Insurance and Construction Defect Claim Reserveswith (1)with: (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2)(2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant, are based on actuarial studies that include known facts similar to those established for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements2017 2020 and 2016.2019. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in either the financial services orand homebuilding sections, respectively, of the consolidated balance sheets. Three Months Ended
September 30,Nine Months Ended
September 30, 2020 2019 2020 2019 (Dollars in thousands) $ 49,647 $ 46,900 $ 50,954 $ 45,811 Balance at beginning of period $ 63,881 $ 56,817 $ 60,415 $ 55,308 2,383 1,888 6,884 5,222 Expense provisions 4,058 3,102 10,562 8,312 (1,535 ) (635 ) (7,343 ) (2,880 ) Cash payments, net of recoveries (859) (2,614) (3,897) (6,315) $ 50,495 $ 48,153 $ 50,495 $ 48,153 Balance at end of period $ 67,080 $ 57,305 $ 67,080 $ 57,305 2017 2020 and 20162019 are not necessarily indicative of what future cash payments will be for subsequent periods.13.Income TaxesAt 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. 31.8%21.5% and 34.1%23.1% for the three and nine months ended September 30, 2017, respectively, compared to 30.7%2020 and 32.3%19.5% and 24.4% for the three and nine months ended September 30, 2016,2019, respectively. The rates for the three and nine months ended September 30, 20172020 resulted in income tax expense of $28.5$27.1 million and $60.7$66.1 million, respectively, compared to income tax expense of $11.7$12.2 million and $29.9$47.0 million for the same periods in 2016.three and nine months ended September 30, 2019, respectively. The year-over-year increase in our effective tax rate for the three months ended September 30, 20172020 was primarily due to changes in the resultestimated amount of energy tax credits to be received. The year-over-year decrease in our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rate2020 was primarily due to tax windfalls recognized upon the foregoing energy credits matter coupled with the establishmentvesting and exercise of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realization was more uncertain at the time. These items were somewhat offset by the releaseequity awards.14.Senior Notesvaluevalues of our senior notes as of September 30, 2017 2020 and December 31, 2016, 2019, net of any unamortized debt issuance costs or discount, were as follows: $ 247,613 $ 246,915 248,535 248,391 346,384 346,340 $ 842,532 $ 841,646 September 30,
2020December 31, 2019 (Dollars in thousands) 5.625% Senior Notes due February 2020, net $ 0 $ 249,909 5.500% Senior Notes due January 2024, net 249,174 249,005 3.850% Senior Notes due January 2030, net 297,400 0 6.000% Senior Notes due January 2043, net 490,651 490,508 Total $ 1,037,225 $ 989,422 M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSubsequent to September 30, 2017, we completed a public offering of an additional $150 million principal amount of our 6% senior notes due 2043. See Note 20 for additional information.15.Stock-Based Compensation2017 2020 and 2016: $ 391 $ 328 $ 747 $ 5,621 445 145 1,224 1,015 226 - 1,129 - $ 1,062 $ 473 $ 3,100 $ 6,636 On May 18, 2015, the Company granted2019, which is included as a non-qualified stock option to eachcomponent of the Chief Executive Officerselling general and the Chief Operating Officer for 1,050,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, onethird of the option shares will vest as of each of the third, fourth,administrative expenses and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediatelyexpenses in the event the closing pricehomebuilding and financial services sections of the Company’s stock, as reported by the New York Stock Exchange, in any 20 outour consolidated statements 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 $27.10operations and the expiration date of each option is comprehensive income, respectively:Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands) Stock option grants expense $ 814 $ 429 $ 2,026 $ 929 Restricted stock awards expense 2,271 1,391 4,841 2,979 Performance share units expense 5,523 7,975 11,669 14,270 Total stock-based compensation $ 8,608 $ 9,795 $ 18,536 $ 18,178 18, 2025. In accordance with ASC 718, the market-based awards were assigned a fair value of $5.35 per share (total value of $11.2 million) on the date of grant using a Monte Carlo simulation model23, 2018, June 20, 2017 and as calculated under that model, all expense was recorded on a straight-line basis through the end of the 2016second quarter. Included in the stock option grant expense for the nine months ended September 30, 2016, shown in the table above, was $5.0 million of stock option grant expense related to these market-based option grants. During the 2017second quarter, the market-based condition was achieved and, as a result, the shares fully vested and became exercisable.On July 25, 2016, and June 20, 2017, the Company granted long term performance stockshare unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs will beare earned based upon the Company’s performance over a period of three year period years (the “Performance Period”), measured by increasing home sale revenues over a “Base Period”.Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales percentage (excluding impairments) of at least fifteen percent (15%(15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10% (“Threshold Goals”), 50% of the Target Goals will be earned.earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%,200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017, 2018, 2019 and 2020, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for both grants haveeach grant has been provided in the table below.- 17 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements July 1, 2016 July 1, 2015 52,500 105,000 210,000 $ 4,815 July 25, 2016 to to $1.975 billion 52,500 $2.074 billion 105,000 $2.173 billion 210,000 $2.370 billion $ 22.93 4,815 June 30, 2019 June 30, 2016 13,125 26,250 52,500 1,204 $ 10,834 April 1, 2017 April 1, 2016 55,000 110,000 220,000 $ 6,802 June 20, 2017 to to $2.426 billion 55,000 $2.547 billion 110,000 $2.669 billion 220,000 $2.911 billion $ 30.92 6,802 March 31, 2020 March 31, 2017 13,750 27,500 55,000 1,701 $ 15,305 Threshold Goal Target Goal Maximum Goal Maximum Potential Expense to be Recognized * Maximum Remaining Expense to be Recognized * Date of Award Performance Period Base Period Base Period Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues Fair Value per Share Jul 25, 2016 July 1, 2016 - June 30, 2019 July 1, 2015 - June 30, 2016 $1.975 billion 137,781 $2.074 billion 275,562 $2.173 billion 551,124 $2.370 billion $ 19.66 $ 10,834 $ 0 Jun 20, 2017 April 1, 2017 - March 31, 2020 April 1, 2016 - March 31, 2017 $2.426 billion 144,342 $2.547 billion 288,684 $2.669 billion 577,368 $2.911 billion $ 27.83 $ 16,070 $ 0 May 23, 2018 April 1, 2018 - March 31, 2021 April 1, 2017 - March 31, 2018 $2.543 billion 145,800 $2.670 billion 291,600 $2.797 billion 583,200 $3.052 billion $ 25.57 $ 14,915 $ 2,615 Aug 5, 2019 January 1, 2019 - December 31, 2021 January 1, 2018 - December 31, 2018 $2.982 billion 135,000 $3.131 billion 270,000 $3.280 billion 540,000 $3.578 billion $ 32.60 $ 17,604 $ 13,391 Aug 20, 2020 January 1, 2020 - December 31, 2022 January 1, 2019 - December 31, 2019 $3.205 billion 135,000 $3.366 billion 270,000 $3.526 billion 540,000 $3.846 billion $ 41.89 $ 22,618 $ 22,618 performance basedperformance-based stock awards until achievement of the performance targets are probable of occurring.2017, 2020, the Company determined that achievement of the ThresholdMaximum Goals for these awards was probable for the PSUs granted in 2016and, as such, the Company recorded share-based award expense related to the awards of $0.2$1.3 million and $1.1$6.0 million, respectively, for the three and nine months ended September 30, 2017. For2020. As of September 30, 2019, the PSUs granted in 2017,Company determined that achievement between the Threshold and Target Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $2.5 million for both the three and nine months ended September 30, 2019.at that time and as such, no0 expense related to these awards had been recognized.grantPSUs granted in August of 2020, the Company concluded that achievement of any of the performance metrics has not met the level of probability required to record compensation expense and, as such, 0 expense related to these awards has been recognized as of September 30, 2017.16.Commitments and Contingencies2017, 2020, we had outstanding surety bonds and letters of credit totaling $184.9$256.3 million and $65.5$126.3 million, respectively, including $31.6$100.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $33.0$96.0 million and $25.3$82.5 million, respectively. All letters of credit as of September 30, 2017, 2020, excluding those issued by HomeAmerican, were issued 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.third-partythird-party obligations.Litigation Reserves.2017, 2020, we had cash deposits and letters of credit totaling $11.4$22.1 million and $3.6$7.6 million, respectively, at risk associated with the option to purchase 6,3067,757 lots.- 18 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements17.Derivative Financial Instruments2017, 2020, we had interest rate lock commitments with an aggregate principal balance of $101.2$254.7 million. Additionally, we had $14.0$53.0 million of mortgage loans held-for-sale at September 30, 2017 2020 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $85.0$201.0 million at September 30, 2017.2017, 2020, we recorded net lossesgains on derivatives of $0.5$1.6 million and $0.5$4.9 million, respectively, onin revenues in the financial services section of our derivatives,consolidated statements of operations and comprehensive income, compared to net gains of $0.1$0.5 million and $1.1$1.9 million for the same periods in 2016.18.Lines of CreditSeptember 29, 2017 November 1, 2018 to (1)(1) extend the Revolving Credit Facility maturity to December 16, 2022, (2)18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3)(3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) (1) 0.0%, (2) (2) a specified eurocurrencyprime rate, or (3)(3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.2017.2017 2020 and December 31, 2016, 2019, there were $34.0$25.4 million and $23.0$23.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both September 30, 2017 2020 and December 31, 2016, 2019, we had $15.0$10.0 million and $15.0 million, respectively, outstanding under the Revolving Credit Facility. As of September 30, 2017, 2020, availability under the Revolving Credit Facility was approximately $651.0$964.6 million.- 19 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsEffective August 10, 2017, the Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75$75 million (subject to increase by up to $75$75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility terminates on May 20, 2021. Effective September 24, 2020, the Mortgage Repurchase Facility was amended to adjust the commitments to purchase for specific time periods and increase the Adjusted Tangible Net Worth Ratio from 8.0 to 1.0 to 10.0 to 1.0. As part of the amendment, the commitments to purchase were increased to $100 million for the periods September 24, 2020 through October 23, 2020 and March 25, 2021 through April 23, 2021 and $200 million for the period December 22, 2020 through February 4, 2021.27, 2016 24, 2019 effective through January 22, 2020, which increased the maximum aggregate commitment from $75$75 million to $125$150 million. At September 30, 2020 and December 31, 2019 HomeAmerican had $130.9 million and was effective through January 25, 2017. At September 30, 2017 and December 31, 2016, HomeAmerican had $65.1 million and $114.5$149.6 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based.2017.19.Related Party Transactions$1.5 million and $1.0$1.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the nine months ended September 30, 2017 and 2016, respectively. The Foundation is a Delaware non-profit corporation that was incorporated on September 30,1999.501(c)(3) 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at September 30, 2017, 2020, all of whom serve without compensation:NameMDC TitleMDC Title Larry A. Mizel 20.Subsequent EventsOn October 16, 2017, we completedThe Company has a public offering of an additional $150 million principal amount of our 6% senior notes due 2043, which aresublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the same seriesCompany, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and havewill continue through October 31, 2021, with an option to extend to October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the same terms as our senior notes issued on January 10,2013initial term from $26.50 to $28.68 per rentable square foot per year, and May 13, 2013 (collectivelyincreasing over the “6% Notes”). extension term from $29.26 to $31.67 per rentable square foot per year. The 6% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $144.2 million, net of discount and underwriting fees. We plan to use the proceedssublease rent is an allocation of the offering for general corporate purposes, which may include repayment of debt.- 20 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial Statements21.Supplemental Guarantor InformationCompany.●M.D.C. Land Corporation●RAH of Florida, Inc.●Richmond American Construction, Inc.●Richmond American Homes of Arizona, Inc.●Richmond American Homes of Colorado, Inc.●Richmond American Homes of Florida, LP●Richmond American Homes of Illinois, Inc.●Richmond American Homes of Maryland, Inc.●Richmond American Homes of Nevada, Inc.●Richmond American Homes of New Jersey, Inc.●Richmond American Homes of Oregon, Inc. (formerly known as Richmond American Homes of Delaware, Inc.)●Richmond American Homes of Pennsylvania, Inc.●Richmond American Homes of Utah, Inc.●Richmond American Homes of Virginia, Inc.●Richmond American Homes of Washington, Inc.(1) (1) no default or event of default exists or would result from release of such guarantee, (2)(2) the Guarantor being released has consolidated net worth of less than 5% of the Company’sCompany’s consolidated net worth as of the end of the most recent fiscal quarter, (3)(3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4)(4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5)(5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.We have determined that separate, full financial statementswould (the “Obligor Group”) are not be material to investors materially different from those in the homebuilding section of our consolidated balance sheets and accordingly, supplementalconsolidated statements of operations and comprehensive income, separate summarized financial information forof the GuarantorObligor Group has not been included. As of September 30, 2020 and Non-Guarantor Subsidiaries is presented below.December 31, 2019, amounts due to non-guarantor subsidiaries from the Obligor Group totaled $65.9 million and $24.2 million, respectively.- 21 -M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSupplemental Condensed Combining Balance Sheet $ 347,217 $ 4,182 $ - $ - $ 351,399 - - - - - - 8,723 - - 8,723 5,517 39,577 - (2,190 ) 42,904 - 969,419 - - 969,419 - 863,002 - - 863,002 - 1,832,421 - - 1,832,421 1,603,012 2,803 5,254 (1,611,069 ) - 278,885 - - (278,885 ) - 24,408 1,896 - - 26,304 65,284 - - (1,120 ) 64,164 - - - - - 8,155 64,653 - - 72,808 2,332,478 1,954,255 5,254 (1,893,264 ) 2,398,723 - - 26,419 - 26,419 - - 40,221 - 40,221 - - 35,765 (35,765 ) - - - 89,804 - 89,804 - - 10,015 1,120 11,135 - - 202,224 (34,645 ) 167,579 $ 2,332,478 $ 1,954,255 $ 207,478 $ (1,927,909 ) $ 2,566,302 $ - $ 49,390 $ - $ - $ 49,390 40,205 112,986 98 (1,628 ) 151,661 43,822 1,572,098 26,802 (1,642,722 ) - 15,000 - - - 15,000 842,532 - - - 842,532 941,559 1,734,474 26,900 (1,644,350 ) 1,058,583 - - 52,259 (562 ) 51,697 - - 4,112 (4,112 ) - - - 65,103 - 65,103 - - 121,474 (4,674 ) 116,800 941,559 1,734,474 148,374 (1,649,024 ) 1,175,383 1,390,919 219,781 59,104 (278,885 ) 1,390,919 $ 2,332,478 $ 1,954,255 $ 207,478 $ (1,927,909 ) $ 2,566,302 M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSupplemental Condensed Combining Balance Sheet $ 255,679 $ 3,408 $ - $ - $ 259,087 59,770 - - - 59,770 - 3,778 - - 3,778 5,380 39,247 - (2,135 ) 42,492 - 874,199 - - 874,199 - 884,615 - - 884,615 - 1,758,814 - - 1,758,814 1,475,291 2,803 5,289 (1,483,383 ) - 295,214 - - (295,214 ) - 25,495 2,546 - - 28,041 74,119 - - 769 74,888 30,162 - - - 30,162 5,267 55,196 - - 60,463 2,226,377 1,865,792 5,289 (1,779,963 ) 2,317,495 - - 23,822 - 23,822 - - 36,436 - 36,436 - - 40,042 (40,042 ) - - - 138,774 - 138,774 - - 12,831 (769 ) 12,062 - - 251,905 (40,811 ) 211,094 $ 2,226,377 $ 1,865,792 $ 257,194 $ (1,820,774 ) $ 2,528,589 $ - $ 42,088 $ - $ - $ 42,088 1,527 136,615 143 6,281 144,566 48,134 1,445,276 26,266 (1,519,676 ) - 15,000 - - - 15,000 841,646 - - - 841,646 906,307 1,623,979 26,409 (1,513,395 ) 1,043,300 - - 59,150 (8,416 ) 50,734 - - 3,749 (3,749 ) - - - 114,485 - 114,485 - - 177,384 (12,165 ) 165,219 906,307 1,623,979 203,793 (1,525,560 ) 1,208,519 1,320,070 241,813 53,401 (295,214 ) 1,320,070 $ 2,226,377 $ 1,865,792 $ 257,194 $ (1,820,774 ) $ 2,528,589 M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSupplemental Condensed Combining Statement of Operations $ - $ 586,287 $ - $ - $ 586,287 - (486,406 ) - - (486,406 ) - (4,540 ) - - (4,540 ) - 95,341 - - 95,341 (11,911 ) (56,983 ) - (208 ) (69,102 ) 33,329 - - (33,329 ) - 53,740 941 1 (134 ) 54,548 7 (625 ) - - (618 ) - - - - - 75,165 38,674 1 (33,671 ) 80,169 - - 9,169 342 9,511 75,165 38,674 9,170 (33,329 ) 89,680 (14,002 ) (11,168 ) (3,347 ) - (28,517 ) $ 61,163 $ 27,506 $ 5,823 $ (33,329 ) $ 61,163 (23,175 ) - 927 (927 ) (23,175 ) $ 37,988 $ 27,506 $ 6,750 $ (34,256 ) $ 37,988 Three Months Ended September 30, 2016Non-GuarantorGuarantorEliminatingConsolidatedMDCSubsidiariesSubsidiariesEntriesMDC(Dollars in thousands)Homebuilding:Revenues$-$578,012$-$-$578,012Cost of sales-(483,829)--(483,829)Inventory impairments-(4,700)--(4,700)Gross margin-89,483--89,483Selling, general, and administrative expenses(8,268)(53,452)-(184)(61,904)Equity income of subsidiaries30,711--(30,711)-Interest and other income1,4785001(110)1,869Other expense1(1,559)--(1,558)Other-than-temporary impairment of marketable securities(215)---(215)Homebuilding pretax income (loss)23,70734,9721(31,005)27,675Financial Services:Financial services pretax income--10,08329410,377Income before income taxes23,70734,97210,084(30,711)38,052(Provision) benefit for income taxes2,652(10,616)(3,729)-(11,693)Net income$26,359$24,356$6,355$(30,711)$26,359Other comprehensive income related to available-for-sale securities, net of tax1,028-310(310)1,028Comprehensive income$27,387$24,356$6,665$(31,021)$27,387M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSupplemental Condensed Combining Statement of Operations $ - $ 1,798,984 $ - $ - $ 1,798,984 - (1,495,838 ) - - (1,495,838 ) - (9,390 ) - - (9,390 ) - 293,756 - - 293,756 (36,539 ) (168,988 ) - (582 ) (206,109 ) 102,469 - - (102,469 ) - 57,748 2,281 5 (312 ) 59,722 23 (1,658 ) - - (1,635 ) (51 ) - - - (51 ) 123,650 125,391 5 (103,363 ) 145,683 - - 31,357 894 32,251 123,650 125,391 31,362 (102,469 ) 177,934 (6,367 ) (42,742 ) (11,542 ) - (60,651 ) $ 117,283 $ 82,649 $ 19,820 $ (102,469 ) $ 117,283 (19,245 ) - 2,217 (2,217 ) (19,245 ) $ 98,038 $ 82,649 $ 22,037 $ (104,686 ) $ 98,038 $ - $ 1,546,267 $ - $ - $ 1,546,267 - (1,291,270 ) (300 ) - (1,291,570 ) - (6,300 ) - - (6,300 ) - 248,697 (300 ) - 248,397 (31,598 ) (150,492 ) - (531 ) (182,621 ) 80,990 - - (80,990 ) - 3,970 1,652 4 (268 ) 5,358 - - - - - (2 ) (2,461 ) - - (2,463 ) (934 ) - - - (934 ) 52,426 97,396 (296 ) (81,789 ) 67,737 - - 24,247 799 25,046 52,426 97,396 23,951 (80,990 ) 92,783 10,409 (31,438 ) (8,919 ) - (29,948 ) $ 62,835 $ 65,958 $ 15,032 $ (80,990 ) $ 62,835 3,871 - 680 (680 ) 3,871 $ 66,706 $ 65,958 $ 15,712 $ (81,670 ) $ 66,706 M.D.C. HOLDINGS, INC.Notes to Unaudited Consolidated Financial StatementsSupplemental Condensed Combining Statement of Cash Flows $ 26,918 $ (21,023 ) $ 63,269 $ - $ 69,164 97,540 (198 ) (254 ) 10,959 108,047 - 21,995 (11,036 ) (10,959 ) - - - (49,382 ) - (49,382 ) (38,793 ) - - - (38,793 ) (2,630 ) - - - (2,630 ) 8,503 - - - 8,503 (32,920 ) 21,995 (60,418 ) (10,959 ) (82,302 ) 91,538 774 2,597 - 94,909 255,679 3,408 23,822 - 282,909 $ 347,217 $ 4,182 $ 26,419 $ - $ 377,818 $ (5,918 ) $ (17,581 ) $ 14,596 $ - $ (8,903 ) 26,166 (1,252 ) (9,797 ) 9,619 24,736 - 20,284 (10,665 ) (9,619 ) - - - 3,400 - 3,400 (36,763 ) - - - (36,763 ) - - - - - - - - - - (36,763 ) 20,284 (7,265 ) (9,619 ) (33,363 ) (16,515 ) 1,451 (2,466 ) - (17,530 ) 141,245 3,097 36,646 - 180,988 $ 124,730 $ 4,548 $ 34,180 $ - $ 163,458 management’smanagement’s experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 20162019and this Quarterly Report on Form 10-Q. $ 584,947 $ 575,722 $ 1,796,046 $ 1,541,337 1,340 2,290 2,938 4,930 586,287 578,012 1,798,984 1,546,267 (485,147 ) (481,511 ) (1,493,166 ) (1,287,373 ) (1,259 ) (2,318 ) (2,672 ) (4,197 ) (4,540 ) (4,700 ) (9,390 ) (6,300 ) (490,946 ) (488,529 ) (1,505,228 ) (1,297,870 ) 95,341 89,483 293,756 248,397 16.3 % 15.5 % 16.3 % 16.1 % (69,102 ) (61,904 ) (206,109 ) (182,621 ) 54,548 1,869 59,722 5,358 (618 ) (1,558 ) (1,635 ) (2,463 ) - (215 ) (51 ) (934 ) 80,169 27,675 145,683 67,737 17,464 17,408 54,516 44,248 (8,849 ) (7,955 ) (25,247 ) (21,739 ) 925 1,035 3,142 2,648 (29 ) (111 ) (160 ) (111 ) 9,511 10,377 32,251 25,046 89,680 38,052 177,934 92,783 (28,517 ) (11,693 ) (60,651 ) (29,948 ) $ 61,163 $ 26,359 $ 117,283 $ 62,835 $ 1.18 $ 0.51 $ 2.27 $ 1.22 $ 1.16 $ 0.51 $ 2.23 $ 1.22 51,650,360 51,297,132 51,502,986 51,286,844 52,601,118 51,460,446 52,248,377 51,297,765 $ 0.25 $ 0.24 $ 0.75 $ 0.72 $ (51,723 ) $ 13,183 $ 69,164 $ (8,903 ) $ 110,004 $ (7,486 ) $ 108,047 $ 24,736 $ (18,439 ) $ (13,545 ) $ (82,302 ) $ (33,363 ) Three Months Ended
September 30,Nine Months Ended
September 30,2020 2019 2020 2019 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues $ 1,000,549 $ 750,274 $ 2,584,392 $ 2,130,396 Home cost of sales (795,172) (609,316) (2,061,608) (1,724,040) Inventory impairments — — — (610) Total cost of sales (795,172) (609,316) (2,061,608) (1,724,650) Gross profit 205,377 140,958 522,784 405,746 Gross margin 20.5 % 18.8 % 20.2 % 19.0 % Selling, general and administrative expenses (103,632) (92,716) (285,269) (257,689) Interest and other income 756 2,336 3,365 7,491 Other expense (851) (1,887) (4,640) (4,188) Homebuilding pretax income 101,650 48,691 236,240 151,360 Financial Services: Revenues 36,803 22,388 91,653 58,389 Expenses (13,294) (10,352) (36,401) (28,883) Other income (expense), net 859 2,079 (5,274) 11,877 Financial services pretax income 24,368 14,115 49,978 41,383 Income before income taxes 126,018 62,806 286,218 192,743 Provision for income taxes (27,080) (12,226) (66,124) (47,020) Net income $ 98,938 $ 50,580 $ 220,094 $ 145,723 Earnings per share: Basic $ 1.54 $ 0.81 $ 3.46 $ 2.36 Diluted $ 1.49 $ 0.79 $ 3.37 $ 2.29 Weighted average common shares outstanding: Basic 63,868,486 61,978,195 63,129,077 61,422,925 Diluted 65,824,910 63,968,215 64,969,855 63,360,535 Dividends declared per share $ 0.33 $ 0.30 $ 0.99 $ 0.90 Cash provided by (used in): Operating Activities $ (26,262) $ (88,783) $ 29,442 $ (33,118) Investing Activities $ (7,917) $ (10,272) $ 27,577 $ (24,191) Financing Activities $ (3,965) $ (12,293) $ (8,787) $ (64,377) - 27 -20172017,2020, our net income was $61.2$98.9 million, or $1.16$1.49 per diluted share, a 132%96% increase compared to net income of $26.4$50.6 million, or $0.51$0.79 per diluted share, for the same period in the prior year. Both our homebuilding and financial services businesses contributed to these year-over-year improvements, as pretax income from our homebuilding operations increased $53.0 million, or 109%, and our financial services pretax income increased $10.3 million, or 73%. The increase in homebuilding pretax income was primarily the result of a $52.5 million improvement in our pretax income from homebuilding operations, which benefited from a 2%33% increase in home sale revenues an 80 basis point improvement in our gross margin from home sale revenues percentage, and a $52.7 million increase in our interest and other income as a result of the sale of investments held by our Corporate segment. These items were slightly offset by a 100370 basis point increase in our selling, general and administrative (“SG&A”) expenses as a percentage of home sale revenues (“SG&A rate”).Home sale revenues were up from $575.7 millionoperating margin. The increase in the 2016 third quarter to $584.9 million in the 2017 third quarter. The $9.2 million improvement was primarilyoperating margin is the result of our improved pricing over the last twelve months as well as better operating leverage as we continue to grow our homebuilding operations. The increase in financial services pretax income was due to our mortgage business, which experienced a 2%higher interest rate lock volume, an increase in the number of mortgages we originated as a percentage of our total homes delivered as our backlog to start the quarter was up 2% year-over-year. Our number of homes delivered("Capture Rate"), and an increase in net interest income on loans originated during the 2017 third quarter was negatively impacted by the Weyerhaeuser joist issue (see below) and Hurricane Irma (see below). Because of these two issues, approximately 115 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods.6%89% from the prior year period, driven by an 8%due to a 73% increase in our the number of net new orders and a 10% increase in the average selling price of net new orders that was offset partially by a 2% declinethose orders. The increase in ourthe number of net new orders. Ourorders was due to an increase in the monthly sales absorption pace improvedrate driven by 2% year-over-year. However,strong demand during the quarter as noted above. The increase in the average selling price was the result of price increases implemented over the past twelve months as well as a 4% declineshift in average active communities for the 2017 third quarter drove the decrease in our number of net new orders.20172017,2020, our net income was $117.3$220.1 million, or $2.23$3.37 per diluted share, an 87%a 51% increase compared to net income of $62.8$145.7 million, or $1.22$2.29 per diluted share, for the same period in the prior year. TheSimilar to the third quarter commentary above, the increase was primarily the result of a $77.9 million improvement in our pretax income from homebuilding operations, which benefited from a 17% increase in home sale revenues and a $54.4driven by an $84.9 million increase in our interesthomebuilding pretax income and other incomea $26.9 million increase in mortgage operations pretax income. These increases were partially offset by a net loss on equity securities of $8.3 million during the nine months ended September 30, 2020, as compared to a resultnet gain of the sale of investments held by our Corporate Segment, as discussed above.Industry Conditions and Outlook$7.9 million for MDCThrough the first three quarters of 2017, solid economic fundamentals continued to support the homebuilding industry, driving robust demand for new homes, especially in the first-time homebuyer segment. To meet the growing demand, we have taken a number of steps to grow community count.First, we have substantially increased our approvals of future lots for purchase. During the 2017 third quarter, we approved the purchase of nearly 2,500 lots and year-to-date we have approved the purchase of over 7,800 lots, which is more than double the approvals from the same period a year ago. Increasingly, our lot approvals have focused on the first-time homebuyer segment, which has responded favorably to one of our newest product lines, the SeasonsTM collection.Second, in September 2017, we announced that we will commence operations in the greater Portland area, giving us additional exposure to the Pacific Northwest, where we have experienced solid results.Third, because our growth initiatives may require additional capital, we (1) expanded the capacity under our line of credit at the end of the third quarter to $700 million and extended its maturity by two years to December 2022, and (2) at the start of the fourth quarter, added $150 million to our senior notes due January 2043.We ended the 2017 third quarter with liquidity of $1.08 billion, an increase of 40% over the prior year. The higher liquidity provides us with additional resources to fund our increased lot approval activity, providing us the foundation for community count growth in 2018.year period.OtherDefective Weyerhaeuser JoistsDuring the 2017 third quarter, we were notified by Weyerhaeuser Company, a product vendor, of a manufacturing defect with certain of its floor I-joists used in certain homes built in our Colorado market (the “joist issue”). The joist issue impacted 216 homes, 23 of which had closed. Of the 193 homes that had not yet closed, approximately 90 were scheduled to close in the 2017 third quarter that did not close. The vendor has committed to us that it will absorb the costs associated with the removal and replacement of the defective joists. While this issue negatively impacted our number of homes delivered, absorption rate and cancellation rate in our Colorado market during the quarter, and may continue to impact these metrics in the next two quarters, we do not believe the resolution of this issue will be material to our results of operations, liquidity, or our financial condition.- 28 -Hurricane IrmaBoth sales and deliveries forThree Months Ended Nine Months Ended September 30, Change September 30, Change 2020 2019 Amount % 2020 2019 Amount % (Dollars in thousands) West $ 59,120 $ 34,898 $ 24,222 69 % $ 144,441 $ 103,448 $ 40,993 40 % Mountain 48,053 31,391 16,662 53 % 111,372 89,077 22,295 25 % East 6,020 2,136 3,884 182 % 9,993 5,761 4,232 73 % Corporate (11,543) (19,734) 8,191 42 % (29,566) (46,926) 17,360 37 % Total Homebuilding pretax income $ 101,650 $ 48,691 $ 52,959 109 % $ 236,240 $ 151,360 $ 84,880 56 % 2017 third quarter in our Florida market were negatively impacted by Hurricane Irma. Delivery of approximately 25 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods. In addition, sales were also disrupted as sales offices had to be closed for several days. There was no other material impact from this event.* See "Forward-Looking Statements"below.HomebuildingPretax Income $ 17,746 $ 18,392 $ (646 ) (4) % $ 54,335 $ 43,830 $ 10,505 24 % 18,326 18,856 (530 ) (3) % 61,097 49,688 11,409 23 % 2,613 (2,267 ) 4,880 (215) % 9,989 3,600 6,389 177 % 41,484 (7,306 ) 48,790 (668) % 20,262 (29,381 ) 49,643 (169) % $ 80,169 $ 27,675 $ 52,494 190 % $ 145,683 $ 67,737 $ 77,946 115 % Homebuildingthree months ended September 30, 2020, we recorded homebuilding pretax income for the 2017 third quarter was $80.2of $101.7 million, an increase of $52.5 million109% from $27.7$48.7 million for the same period in the prior year. The increase was primarily attributabledue to a 2%33% increase in home sale revenues, an 80a 170 basis point improvement in our gross margin from home sale revenues percentage, and a $52.7 million increase in our interest and other income as a result of the sale of investments held by our Corporate segment.For our West segment, the benefit of a 15% year-over-year improvement in home sale revenues was more than offset by higher G&A costs, due mostly to headcount growth, and a one-time legal charge taken during the 2017 third quarter. While our Mountain segment experienced a 13% year-over-year decline in home sale revenues, we were able to mostly offset the impact of the decrease with an improvement in our gross margin from home sales percentage.and a 200 basis point decrease in our selling, general and administrative expenses as a percentage of revenue.$4.9$3.9 million year-over-year improvementincrease in pretax income from the prior year, due primarily due to a $2.4 million reduction33% increase in inventory impairments coupled withhome sales revenue and an improved gross margin, which were slightly offset by a $0.8 million increase in general and administrative expenses resulting from home sales percentage. The pretax gain forthe change in our Corporate cost allocation. Our Corporate segment was driven by the higher interest and other income discussed above, partially offset byexperienced an $8.2 million increase in compensation-related expenses that was driven by an increasepretax income, due primarily to the impact of the change in headcount as we plan for future growth.2017,2020, we recorded homebuilding pretax income of $145.7$236.2 million compared to $67.7, an increase of $84.9 million from $151.4 million for the same period in the prior year, an increase of $77.9 million or 115%.year. The increase was primarily attributabledue to a 17%21% increase in home sale revenues, and a $54.4 million120 basis point increase in our interest and other income as a result of the sale of investments held by our Corporate segment, slightly offset by a $3.1 million increase in inventory impairments and higher compensation-related expenses due to increased headcount. The year-over-year increases in pretax income for our West and Mountain segments were driven primarily by higher home sale revenues of 29% and 9%, respectively. Our East segment had a $6.4 million improvement in pretax income as a result of a $1.9 million reduction in inventory impairments and a slightly improved gross margin from home sales percentage. Theand a 110 basis point decrease in our selling, general and administrative expenses as a percentage of revenue. Commentary on the drivers of the increase in pretax gainincome in our individual homebuilding segments is consistent with the 2020 third quarter discussion above.was driven bypretax income. Additionally, beginning January 1, 2020, we have reflected the higher interestexpense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and othermaking operating decisions. Had these bonuses been reflected in a similar manner during the three and nine months ended September 30, 2019, pretax income discussed above, partially offsetfor our homebuilding segments would have decreased by an additional $3.5 million and $9.5 million, respectively, with a corresponding increase in compensation-related expenses due to an increase in headcount.Assets $ 1,052,795 $ 1,035,033 $ 17,762 2 % 677,721 571,139 106,582 19 % 217,238 256,816 (39,578 ) (15) % 450,969 454,507 (3,538 ) (1) % $ 2,398,723 $ 2,317,495 $ 81,228 4 % September 30,
2020December 31,
2019Change Amount % (Dollars in thousands) West $ 1,660,583 $ 1,461,645 198,938 14 % Mountain 927,730 869,665 58,065 7 % East 248,028 194,592 53,436 27 % Corporate 507,728 505,507 2,221 0 % Total homebuilding assets $ 3,344,069 $ 3,031,409 $ 312,660 10 % 4%10% from December 31, 20162019 to September 30, 2017, mostly driven by2020. Homebuilding assets increased in each of our Mountain segment, which had (1) higher land and land under development balancesoperating segments largely due to strong land acquisition activity during the nine months ended September 30, 2017, and (2) a highergreater number of homes completed or under construction as of period-end. This increase was slightly offset by a result of an increasedecrease in backlogland and land under construction. The funds for the land acquisition activity came from our Corporate segment, driving a declinedevelopment in our Corporate segment’s assets that was mostly offset by our positive operating resultsWest and gains onMountain Segments, where the saletotal number of investments. Homebuilding assets in our East segment are downlots owned, excluding those currently under construction, has decreased slightly from December 31, 2017 due to reduced land acquisition activity as our returns2019.our Maryland and Virginia markets have been lower than the returns we expect to realize.Home and Land Sale Revenues $ 326,804 $ 284,589 $ 42,215 15 % $ 959,641 $ 745,995 $ 213,646 29 % 167,066 192,876 (25,810 ) (13) % 564,558 521,034 43,524 8 % 92,417 100,547 (8,130 ) (8) % 274,785 279,238 (4,453 ) (2) % $ 586,287 $ 578,012 $ 8,275 1 % $ 1,798,984 $ 1,546,267 $ 252,717 16 % For the 2017 third quarter, home and land sale revenues increased $8.3 million year-over-year to $586.3 million. For the nine months ended September 30, 2017 home and land sale revenues increased $252.7 million from the same periodare impacted by changes in the prior year to $1.80 billion. The increasesnumber of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below.Three Months Ended September 30, 2020 2019 % Change Homes Home Sale
RevenuesAverage
PriceHomes Home Sale
RevenuesAverage
PriceHomes Home
Sale
RevenuesAverage Price (Dollars in thousands) West 1,135 $ 552,319 $ 486.6 927 $ 410,414 $ 442.7 22 % 35 % 10 % Mountain 677 347,095 512.7 537 263,802 491.2 26 % 32 % 4 % East 335 101,135 301.9 249 76,058 305.5 35 % 33 % (1) % Total 2,147 $ 1,000,549 $ 466.0 1,713 $ 750,274 $ 438.0 25 % 33 % 6 % Nine Months Ended September 30, 2020 2019 % Change Homes Home Sale
RevenuesAverage
PriceHomes Home Sale
RevenuesAverage
PriceHomes Home
Sale
RevenuesAverage Price (Dollars in thousands) West 3,023 $ 1,447,934 $ 479.0 2,464 $ 1,164,502 $ 472.6 23 % 24 % 1 % Mountain 1,720 886,619 515.5 1,480 760,470 513.8 16 % 17 % 0 % East 851 249,839 293.6 641 205,424 320.5 33 % 22 % (8) % Total 5,594 $ 2,584,392 $ 462.0 4,585 $ 2,130,396 $ 464.6 22 % 21 % (1) % 2017 compared to2020, the same periods in the prior year were primarily driven by increasesincrease in new home deliveries was primarily the result of 2% and 15%, respectively.New Home Deliveries
Value
Value
Value 186 $ 58,640 $ 315.3 221 $ 64,314 $ 291.0 (16) % (9) % 8 % 223 135,745 608.7 195 125,602 644.1 14 % 8 % (5) % 240 81,483 339.5 177 59,601 336.7 36 % 37 % 1 % 98 50,936 519.8 75 35,072 467.6 31 % 45 % 11 % 747 326,804 437.5 668 284,589 426.0 12 % 15 % 3 % 314 146,883 467.8 343 169,858 495.2 (8) % (14) % (6) % 45 18,843 418.7 55 20,728 376.9 (18) % (9) % 11 % 359 165,726 461.6 398 190,586 478.9 (10) % (13) % (4) % 41 21,506 524.5 61 27,297 447.5 (33) % (21) % 17 % 68 33,537 493.2 78 39,795 510.2 (13) % (16) % (3) % 102 37,374 366.4 88 33,455 380.2 16 % 12 % (4) % 211 92,417 438.0 227 100,547 442.9 (7) % (8) % (1) % 1,317 $ 584,947 $ 444.2 1,293 $ 575,722 $ 445.3 2 % 2 % (0) %
Value
Value
Value 586 $ 183,258 $ 312.7 582 $ 170,352 $ 292.7 1 % 8 % 7 % 662 403,974 610.2 512 319,116 623.3 29 % 27 % (2) % 642 223,303 347.8 432 149,861 346.9 49 % 49 % 0 % 290 149,106 514.2 234 106,665 455.8 24 % 40 % 13 % 2,180 959,641 440.2 1,760 745,994 423.9 24 % 29 % 4 % 1,064 510,211 479.5 945 463,534 490.5 13 % 10 % (2) % 126 51,409 408.0 145 53,238 367.2 (13) % (3) % 11 % 1,190 561,620 471.9 1,090 516,772 474.1 9 % 9 % (0) % 140 65,870 470.5 178 84,742 476.1 (21) % (22) % (1) % 171 92,432 540.5 193 98,572 510.7 (11) % (6) % 6 % 304 116,483 383.2 251 95,257 379.5 21 % 22 % 1 % 615 274,785 446.8 622 278,571 447.9 (1) % (1) % (0) % 3,985 $ 1,796,046 $ 450.7 3,472 $ 1,541,337 $ 443.9 15 % 17 % 2 % For the three months ended September 30, 2017, we realized a 2% increase in the number of homes delivered, primarily due to a 2% year-over-yearan increase in the number of homes in backlog to startbegin the quarter. For all our markets, excluding California and Colorado, the year-over-year change in the numberrespective periods. The average selling price of homes delivered increased due to a shift in mix of homes from Nevada to more expensive Southern California markets. mostly the result of the changean increase in the number of homes in beginning backlog. In our California market, we started offbacklog to begin the quarter with backlog down 8% but were able to achieve a 14%respective periods. For the three months ended September 30, 2020, the increase in the number of homes delivered primarily due to a shiftnew home deliveries also benefited from an increase in the mix of homes delivered to communities that have shorter construction cycle times. While our beginning backlog conversion rates in our Colorado market was up 4% year-over-year,markets due to the numberconstruction status of homes delivered declined by 8%. This decrease is almost solely attributablein beginning backlog compared to the joist issue, which only impacted our Colorado market. Delivery of approximately 90 homes that were previously projected to close inprior year. For the 2017 third quarter was delayed to later quarters as a result of this issue. Furthermore, we anticipate that closings overthree months ended September 30, 2020, the next two quarters will continue to be impacted by this issue*. In our Florida market, despite beginning backlog being up 31% year-over-year, we only realized a 16% increase in the number of homes delivered as a result of Hurricane Irma. Delivery of approximately 25 homes that were previously scheduled to close in the 2017 third quarter was delayed to later quarters as a result of the hurricane.Our Washington, Utah and Maryland markets each experienced notable increases in the average selling price of homes delivered due towas the result of price increases implemented across the majority of our communities over the past year coupled withtwelve months.shiftdecrease in mixbacklog conversion rates in most of our markets within this segment due to higher priced communities. Our Colorado market had(1) a lower percentage of homes in backlog to start the largest decrease inperiod that were under construction at that time and (2) a lower percentage of homes both sold and delivered during the period. For the nine months ended September 30, 2020, the average selling price of homes delivered due todecreased as a significant increase in the shareresult of itsa greater percentage of closings coming from our more affordable plans designed for the first-time homebuyer. In our California market, price increases implemented in the past year were more than offset by a shift in the mix of deliveries to non-coastal communities, which have a lower average selling price. For most of our remaining markets, the average selling price benefited product offerings. price increases that have been implemented over the past twelve months. Any remaining differences were due to a shift in mix to differently priced communities.For the nine months ended September 30, 2017, the year-over-year changes in homes delivered in most of our markets was primarily the result of the year-over-year change in the number of units in backlog to begin the year. In our Maryland and Virginia markets, while we started the year with beginning backlog units up from the prior year, our number of homes delivered is down year-over-year primarily due to year-over-year declines in the number of net new orders in the first part of 2017 as a result of community count decreases. Commentary around average selling price for the nine-months ended September 30, 2017 is consistent with the commentary above for the three-months ended September 30, 2017.* See "Forward-Looking Statements" belowGross Margin percentage for the three months ended September 30, 20172020, increased 170 basis points year-over-year from 18.8% to 16.3%20.5%. Gross margin from 15.5% inhome sales increased across each of our segments on both build-to-order and speculative home deliveries driven by price increases implemented across nearly all of our communities over the three months ended September 30, 2016. During the 2017 and 2016 third quarters, we recorded inventory impairments of $4.5 million and $4.7 million, respectively. The impairments recorded for each period negatively impacted gross margin by 80 basis points. Additionally, during the 2016 third quarter we recorded adjustments of $1.8 million (a 30 basis point negative impact to gross margins) to increase our warranty accrual while for our 2017 third quarter, we recorded adjustments to decrease our warranty accrual by $0.4 million (a 10 basis point positive impact to gross margins). percentage for the nine months ended September 30, 20172020, increased by 20120 basis points year-over-year from 19.0% to 16.3%20.2%. The primary drivers of the improved gross margin from home sales for the nine months ended September 30, 2017 included $9.4 million (a 50 basis point negative impact to gross margins) of inventory impairments, while2020 are consistent with those noted above for the same period in 2016 included $6.3 million (a 40 basis point negative impact to gross margins) of inventory impairments and $5.1 million (athree months ended September 30, basis point negative impact to gross margins) of adjustments to increase our warranty accrual.Impairmentsmonths and nine months ended September 30, 20172020 and 20162019 are shown in the table below. $ 1,885 $ - $ 5,985 $ 1,400 370 - 370 - 2,285 4,700 3,035 4,900 $ 4,540 $ 4,700 $ 9,390 $ 6,300 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) West $ — $ — $ — $ — Mountain — — — 400 East — — — 210 Total inventory impairments — — — 610 Two communities combined Impairment Data Three Months Ended Number of
Subdivisions
ImpairedInventory
ImpairmentsFair Value of
Inventory After ImpairmentsDiscount Rate (Dollars in thousands) March 31, 2019 2 $ 610 $ 10,476 N/A Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (Dollars in thousands) General and administrative expenses $ 45,980 $ 46,951 $ (971) $ 131,488 $ 128,849 $ 2,639 4.6 % 6.3 % -170 bps 5.1 % 6.0 % -90 bps Marketing expenses $ 24,725 $ 20,457 $ 4,268 $ 68,828 $ 58,266 $ 10,562 2.5 % 2.7 % -20 bps 2.7 % 2.7 % 0 bps Commissions expenses $ 32,927 $ 25,308 $ 7,619 $ 84,953 $ 70,574 $ 14,379 3.3 % 3.4 % -10 bps 3.3 % 3.3 % 0 bps Total selling, general and administrative expenses $ 103,632 $ 92,716 $ 10,916 $ 285,269 $ 257,689 $ 27,580 10.4 % 12.4 % -200 bps 11.0 % 12.1 % -110 bps $3.0 million of our impairments recorded during the 2017 third quarter. The impairmentthree months ended September 30, 2020, primarily due to a decrease in one communitystock-based compensation expense that was largely offset by an increase in our West segmentsalaries and other compensation-related expenses due to higher average headcount and strong operating results.significant pricing pressures while the impairment in one community in our East segment wasincreased compensation-related expenses due to expected future negative cash flows fromincreased bonus expense as a limited numberresult of lots that drove total expected future cash flows for the community negative. The remaining impairments were relatively small on a community-by-community basis and were primarily related to close-out communities.
Subdivisions
Tested
Impairments
Inventory After Impairments
Subdivisions
Impaired 33 $ 4,850 $ 19,952 2 12% to 18% 35 $ - $ - - N/A 33 $ 4,540 $ 52,190 9 10% to 15% 14 $ - $ - - N/A 17 $ 1,600 $ 6,415 2 12% to 15% 25 $ 4,700 $ 12,295 2 15% to 18% Selling, General and Administrative Expenses $ 33,170 $ 27,758 $ 5,412 $ 97,831 $ 90,638 $ 7,193 5.7 % 4.8 % 5.4 % 5.9 % $ 16,445 $ 15,262 $ 1,183 $ 48,545 $ 41,728 $ 6,817 2.8 % 2.7 % 2.7 % 2.7 % $ 19,487 $ 18,884 $ 603 $ 59,733 $ 50,255 $ 9,478 3.3 % 3.3 % 3.3 % 3.3 % $ 69,102 $ 61,904 $ 7,198 $ 206,109 $ 182,621 $ 23,488 11.8 % 10.8 % 11.5 % 11.8 % 2017, as we continued to plan for2020, the future growth of our business, we increased headcount, resulting in higher compensation-related expenses, which increased our general and administrative expenses. For the nine months ended September 30, 2017, we were able to leverage our 17% year-over-year increase in home sale revenues, to produce a year-over-year improvement in our SG&A rate of 30 basis points. However, for our 2017 third quarter, we experienced a 100 basis point increase in our SG&A rate. As discussed in the New Home Deliveries section above, deliveriesmarketing expenses was driven by increased deferred selling amortization and home sale revenues in our Colorado and Florida marketsmaster marketing fees resulting from increased closings as well as increased compensation expense due to a higher average headcount during the 2017 quarter were negatively impacted by the joist issue and Hurricane Irma, respectively. Absent these issues, we estimate that our SG&A rate might have increased by only 40 basis points year-over-year.Our commissions expenses are variable with home sale revenues. As such, the year-over-year increases in home sale revenues drove the changes in commissions expenses year-over-year for both periods presented. The increases in marketing expenses were partially attributable to the growth in new home deliveries. In addition, increased model costs per home delivered and higher headcount drove the year-over-year increases in marketing costs.Interest and Other IncomeOur interest and other income for the three and nine months ended September 30, 2017 was $54.5 million and $59.7 million, respectively, compared to $1.9 million and $5.4 million, respectively, for the same periods in the prior year. The year-over-year increases in interest and other income were primarily driven by (1) the sale of our “Metro Bonds” and (2) the sale of marketable equity securities held by our Corporate segment. During the 2017 third quarter, we sold the Metro Bonds with a cost basis of $8.4 million for net proceeds of $44.2 million resulting in a realized gain of $35.8 million. The sale of our marketable equity securities held by our Corporate segment resulted in realized gains of $16.4 million and $17.8 million for the three and nine months ended September 30, 2017, respectively.- 34 -Orders:
Value 192 $ 64,765 $ 337.3 2.53 225 $ 67,424 $ 299.7 2.56 (15) % (4) % 13 % (1) % 250 164,265 657.1 4.17 260 152,901 588.1 4.08 (4) % 7 % 12 % 2 % 184 70,130 381.1 3.23 175 58,443 334.0 2.75 5 % 20 % 14 % 17 % 66 37,570 569.2 2.84 83 38,061 458.6 2.26 (20) % (1) % 24 % 26 % 692 336,730 486.6 3.20 743 316,829 426.4 2.95 (7) % 6 % 14 % 8 % 333 162,725 488.7 2.45 321 146,911 457.7 3.82 4 % 11 % 7 % (36) % 48 23,041 480.0 2.29 35 14,718 420.5 1.41 37 % 57 % 14 % 62 % 381 185,766 487.6 2.43 356 161,629 454.0 3.27 7 % 15 % 7 % (26) % 39 17,006 436.1 2.00 50 22,612 452.2 1.42 (22) % (25) % (4) % 41 % 44 20,984 476.9 3.45 52 26,869 516.7 2.04 (15) % (22) % (8) % 69 % 114 36,229 317.8 2.20 95 35,938 378.3 1.74 20 % 1 % (16) % 26 % 197 74,219 376.7 2.35 197 85,419 433.6 1.71 0 % (13) % (13) % 37 % 1,270 $ 596,715 $ 469.9 2.78 1,296 $ 563,877 $ 435.1 2.72 (2) % 6 % 8 % 2 %
Value 638 $ 209,547 $ 328.4 2.76 684 $ 207,456 $ 303.3 2.52 (7) % 1 % 8 % 10 % 727 465,164 639.8 4.21 797 476,341 597.7 4.36 (9) % (2) % 7 % (3) % 746 265,691 356.2 4.17 634 220,799 348.3 3.31 18 % 20 % 2 % 26 % 332 184,112 554.6 3.80 325 156,546 481.7 2.82 2 % 18 % 15 % 35 % 2,443 1,124,514 460.3 3.64 2,440 1,061,142 434.9 3.20 0 % 6 % 6 % 14 % 1,292 627,845 485.9 3.40 1,227 583,309 475.4 4.00 5 % 8 % 2 % (15) % 171 77,114 451.0 2.41 178 67,394 378.6 2.47 (4) % 14 % 19 % (2) % 1,463 704,959 481.9 3.24 1,405 650,703 463.1 3.71 4 % 8 % 4 % (13) % 122 54,468 446.5 1.65 208 96,590 464.4 1.89 (41) % (44) % (4) % (13) % 171 88,600 518.1 3.58 210 108,779 518.0 2.75 (19) % (19) % 0 % 30 % 365 128,091 350.9 2.22 325 133,533 410.9 2.19 12 % (4) % (15) % 1 % 658 271,159 412.1 2.30 743 338,902 456.1 2.22 (11) % (20) % (10) % 4 % 4,564 $ 2,100,632 $ 460.3 3.24 4,588 $ 2,050,747 $ 447.0 3.11 (1) % 2 % 3 % 4 % Three Months Ended September 30, 2020 2019 % Change Homes Dollar
ValueAverage
PriceMonthly
Absorption
Rate *Homes Dollar Value Average Price Monthly
Absorption Rate *Homes Dollar Value Average Price Monthly
Absorption
Rate(Dollars in thousands) West 1,955 $ 932,111 $ 476.8 6.58 1,168 $ 516,000 $ 441.8 4.09 67 % 81 % 8 % 61 % Mountain 1,051 542,375 516.1 5.70 565 271,800 481.1 2.86 86 % 100 % 7 % 99 % East 509 176,896 347.5 5.39 303 83,896 276.9 3.58 68 % 111 % 26 % 50 % Total 3,515 $ 1,651,382 $ 469.8 6.10 2,036 $ 871,696 $ 428.1 3.59 73 % 89 % 10 % 70 % Nine Months Ended September 30, 2020 2019 % Change Homes Dollar
ValueAverage
PriceMonthly
Absorption
Rate *Homes Dollar Value Average Price Monthly
Absorption
Rate *Homes Dollar Value Average Price Monthly
Absorption
Rate(Dollars in thousands) West 4,646 $ 2,265,557 $ 487.6 5.47 3,379 $ 1,543,584 $ 456.8 4.14 37 % 47 % 7 % 32 % Mountain 2,502 1,309,176 523.3 4.39 1,974 960,109 486.4 3.30 27 % 36 % 8 % 33 % East 1,156 393,913 340.8 4.23 912 268,578 294.5 4.02 27 % 47 % 16 % 5 % Total 8,304 $ 3,968,646 $ 477.9 4.91 6,265 $ 2,772,271 $ 442.5 3.82 33 % 43 % 8 % 28 % periodAverage Active Subdivisions Average Active Subdivisions Active Subdivisions Three Months Ended Nine Months Ended September 30, % September 30, % September 30, % 2020 2019 Change 2020 2019 Change 2020 2019 Change West 102 93 10 % 99 96 3 % 94 92 2 % Mountain 61 67 (9) % 62 66 (6) % 63 66 (5) % East 31 30 3 % 32 29 10 % 30 25 20 % Total 194 190 2 % 193 191 1 % 187 183 2 % 2017,2020, the dollar value ofincrease in net new orders was up year-over-year as increasesprimarily due to an increase in the average pricemonthly sales absorption rates in all of homes sold were partially offset by declinesour markets in the number of net new orders.During the 2017 third quarter, our Nevada, Colorado and Utah markets experienced the largest percentage increases in the dollar value of net new orders as a result of year-over-year improvements in both the number of net new orders and average selling price of net new orders. In our Nevada and Colorado markets, the increases in average selling price were the result of both price increases implemented in most existing communities and shifts in mix to higher priced communities (in Colorado, this occurred even with our more affordable Seasons™ product line becoming a more significant contributor to our net new orders).West segment. The increase in average selling price inwas due to price increases implemented over the past twelve months within nearly all of our Utah market was predominantly due tocommunities as well as a shift in mix of homes sold to higher priced communities. The increasesmore expensive Southern California markets.for our Nevada and Utah markets were driven by improvementswas primarily due to an increase in ourthe monthly sales absorption paces despite year-over-year declinesrates in each of our Colorado and Utah markets. The increase in average selling price was due to price increases implemented over the last twelve months within nearly all of our communities.subdivisions. The 2017 third quarter absorption pacesubdivisions in our Colorado market was negatively impacted by a number of factors including (1) a higher cancellation rate and lower sales pace as a result of the joist issue, (2) a higher number of sales coming from inactive communities in 2016 third quarter compared to the 2017 third quarter, and (3) close-out of certain communities prior to the start of the 2017 third quarter that had robust monthly sales absorption paces in the 2016 third quarter. Despite our monthly absorption pace in our Colorado market being driven down by the above factors, we were able to achieve growth in the number of net new orders as our average active community count was up 61% year-over-year. While sales activity in our Florida market was impacted negatively by Hurricane Irma, we were still able to achieve a 26% year-over-year increase in our monthly sales absorption pace as a result of strong demand. In our Maryland and Virginia markets, strong improvements in our monthly sales absorption pace, driven by improving demand for higher density products, were more than offset by the impact of substantial declines in average active subdivisions.2017,2020, the dollar value ofincrease in net new orders was up slightly when compared to the same period in 2016 as slight improvements in average selling price and our monthly sales absorption pace were modestly offsetdriven by a lower average active community count. Our Nevada, Washington, Utah and Colorado markets experienced the most meaningful year-over-year improvements in the dollar value of net new orders. The increase in Nevada’s dollar value of net new orders was primarily the result of a substantially improved monthly sales absorption pace due to higher demand in newly opened communities. In our Washington market, the primary driver of the increase in the dollar value of net new orders was an increase in the average selling price due to price increases implemented in existing communities that were prompted by high demand in this market. A 24% year-over-year increase in the number of average active subdivisions in each of our Colorado market was partially offset byFlorida and mid-Atlantic markets and to a lowerlesser extent an increase in the monthly sales absorption rate due mostly toin our mid-Atlantic market.joist issue discussed above. Thethree and nine months ended September 30, 2020, the increase in dollar value of net new orders for our Utah market was primarily the result of an increase in the average selling price of net new orders,was due to price increases implemented over the last twelve months within nearly all of our communities. Additionally, we experienced a shift in most existing communities. As discussed above,mix to our mid-Atlantic market resulting from an increase in our Maryland and Virginia markets, the year-over-year declines in the dollar value of net new orders were primarilythat was driven by decreasesincreases in both monthly sales absorption rates and average active subdivisions.Active Subdivisions: 27 30 (10) % 25 29 (14) % 26 30 (13) % 23 21 10 % 20 21 (5) % 19 20 (5) % 19 20 (5) % 19 21 (10) % 20 21 (5) % 7 14 (50) % 8 12 (33) % 10 13 (23) % �� 76 85 (11) % 72 83 (13) % 75 84 (11) % 48 28 71 % 45 28 61 % 42 34 24 % 7 9 (22) % 7 8 (13) % 8 8 0 % 55 37 49 % 52 36 44 % 50 42 19 % 5 11 (55) % 7 12 (42) % 8 12 (33) % 4 8 (50) % 4 9 (56) % 5 9 (44) % 14 18 (22) % 17 18 (6) % 18 17 6 % 23 37 (38) % 28 39 (28) % 31 38 (18) % 154 159 (3) % 152 158 (4) % 156 164 (5) % At September 30, 2017, we had 154 active subdivisions, up slightly from the end of our 2017 second quarter and down 3% from September 30, 2016. For Colorado, the increase was due to increased land acquisition activity over the last two years. In Virginia and Maryland, we have tempered our land acquisition activity over the past two years as our returns in these markets have been lower than returns we expect to realize. Active subdivisions in our Washington market were down 50% year-over-year as of September 30, 2017. While a large driver of that decline was the closeout of communities earlier than anticipated due to strong sales, our land acquisition activity was lower than anticipated due to increased competition for the acquisition of new communities. For all remaining markets, the year-over-year changes were primarily driven by the timing of opening new communities versus closing out older ones, with many communities closing earlier than anticipated due to higher monthly absorption paces during 2017 compared to 2016. Furthermore, through the nine months ended September 30, 2017, we approved the acquisition of over 7,800 lots, more than double the number during the same period a year ago. 18 % 19 % (1) % 26 % 26 % 0 % 18 % 24 % (6) % 9 % 14 % (5) % 16 % 23 % (7) % 20 % 21 % (1) % 9 % 15 % (6) % 19 % 26 % (7) % 11 % 18 % (7) % 8 % 6 % 2 % 27 % 17 % 10 % 17 % 17 % 0 % 11 % 14 % (3) % 21 % 24 % (3) % 16 % 20 % (4) % 13 % 9 % 4 % 32 % 24 % 8 % 17 % 19 % (2) % 13 % 10 % 3 % 28 % 31 % (3) % 22 % 22 % 0 % 13 % 9 % 4 % 32 % 24 % 8 % 18 % 20 % (2) % 9 % 18 % (9) % 15 % 32 % (17) % 31 % 25 % 6 % 7 % 15 % (8) % 17 % 30 % (13) % 21 % 20 % 1 % 11 % 19 % (8) % 24 % 32 % (8) % 21 % 28 % (7) % 10 % 17 % (7) % 21 % 31 % (10) % 23 % 25 % (2) % 12 % 13 % (1) % 24 % 25 % (1) % 18 % 21 % (3) % * Cancellations as a percentage of gross sales data has been provided for information only. No commentary is included below.Cancellations as a Percentage of Homes in Beginning Backlog 2020 2019 Three Months Ended September 30, June 30, March 31, September 30, June 30, March 31, West 11 % 14 % 15 % 12 % 13 % 14 % Mountain 12 % 20 % 22 % 16 % 13 % 14 % East 18 % 22 % 23 % 22 % 18 % 11 % Total 12 % 17 % 18 % 15 % 14 % 14 % improved from 13%decreased on both a sequential and year-over-year basis in the 2016 third quarter to 12% in the 2017 third quarter. Eacheach of our California, Nevada, Maryland, Virginiasegments. In general, we experienced a higher cancellation rate during the first and Florida markets had notable decreases in their cancellation ratessecond quarter of 2020 as a result of process improvements around accepting sales and managing backlog. The increased cancellation rate in our Colorado market isgeneral economic uncertainty surrounding the result of the joist issue previously discussed.
Value
Value
Value 374 $ 133,074 $ 355.8 423 $ 132,929 $ 314.3 (12) % 0 % 13 % 546 378,448 693.1 627 389,622 621.4 (13) % (3) % 12 % 411 151,726 369.2 397 139,731 352.0 4 % 9 % 5 % 279 156,974 562.6 270 133,367 494.0 3 % 18 % 14 % 1,610 820,222 509.5 1,717 795,649 463.4 (6) % 3 % 10 % 1,192 595,675 499.7 1,104 530,662 480.7 8 % 12 % 4 % 149 67,830 455.2 141 53,180 377.2 6 % 28 % 21 % 1,341 663,505 494.8 1,245 583,842 468.9 8 % 14 % 6 % 74 34,102 460.8 120 56,837 473.6 (38) % (40) % (3) % 111 58,225 524.5 118 64,228 544.3 (6) % (9) % (4) % 327 132,238 404.4 248 111,499 449.6 32 % 19 % (10) % 512 224,565 438.6 486 232,564 478.5 5 % (3) % (8) % 3,463 $ 1,708,292 $ 493.3 3,448 $ 1,612,055 $ 467.5 0 % 6 % 6 % September 30, 2020 2019 % Change Homes Dollar
ValueAverage
PriceHomes Dollar
ValueAverage
PriceHomes Dollar
ValueAverage
Price(Dollars in thousands) West 3,646 $ 1,743,547 $ 478.2 2,438 $ 1,146,912 $ 470.4 50 % 52 % 2 % Mountain 1,993 1,033,264 518.4 1,537 768,317 499.9 30 % 34 % 4 % East 872 298,965 342.9 641 183,856 286.8 36 % 63 % 20 % Total 6,511 $ 3,075,776 $ 472.4 4,616 $ 2,099,085 $ 454.7 41 % 47 % 4 % 2017,2020, we had 3,4636,511 homes in backlog with a total value of $1.71 billion, representing respective increases$3.1 billion. This represented a 41% increase in the number of 15 homes in backlog and $96.2 million from September 30, 2016. The majority of our markets experienced year-over-year growtha 47% increase in the dollar value of homes in backlog from September 30, 2019. The increase in the number of homes in backlog is primarily as a result of the year-over-year increase in net new orders during the nine months ended September 30, 2020. The increase in the average selling price of homes in backlog is due to price increases implemented over the lastpast twelve months. Backlogmonths in nearly all of our communities as well as a shift in our Marylandnet new order mix in our East and Virginia markets declined from September 30, 2016West segments as discussed above. These increases were slightly offset by a result of reduced sales activity over the last twelve months, mostly dueshift in mix to lower community count.priced communities, consistent with our ongoing strategy of offering more affordable home plans. Our ability to convert backlog into closings could be negatively impacted in future periods by the pandemic, the extent to which is highly uncertain and depends on future developments.- 37 - 78 81 (4) % 218 298 (27) % 296 379 (22) % 2,591 2,626 (1) % 319 293 9 % 3,206 3,298 (3) % Over the past couple of years, we have increased our focus on build-to-order homes and limited the number of unsold homes that we start without a sales contract, giving our customers the best opportunity to personalize their homes. As a result, our supply of unsold homes has declined by 22% year-over-year from September 30, 2016. September 30, % 2020 2019 Change Unsold: Completed 74 82 (10) % Under construction 129 255 (49) % Total unsold started homes 203 337 (40) % Sold homes under construction or completed 4,540 3,433 32 % Model homes under construction or completed 505 455 11 % Total homes completed or under construction 5,248 4,225 24 % decline in unsold homes was partially offset by an increase in model homes, while sold homes under construction was nearly unchanged fromor completed is due to the prior year. 1,971 761 2,732 1,515 269 1,784 53 % 1,454 679 2,133 1,753 75 1,828 17 % 2,150 401 2,551 2,051 200 2,251 13 % 655 64 719 853 - 853 (16) % 6,230 1,905 8,135 6,172 544 6,716 21 % 4,622 2,960 7,582 4,051 1,347 5,398 40 % 456 132 588 380 - 380 55 % 5,078 3,092 8,170 4,431 1,347 5,778 41 % 122 48 170 261 143 404 (58) % 282 30 312 429 15 444 (30) % 941 1,231 2,172 962 455 1,417 53 % 1,345 1,309 2,654 1,652 613 2,265 17 % 12,653 6,306 18,959 12,255 2,504 14,759 28 % September 30, 2020 September 30, 2019 Lots
OwnedLots
OptionedTotal Lots
OwnedLots
OptionedTotal Total
%
ChangeWest 10,140 3,280 13,420 9,128 2,203 11,331 18 % Mountain 6,217 2,708 8,925 6,456 3,139 9,595 (7) % East 2,716 1,769 4,485 2,014 2,003 4,017 12 % Total 19,073 7,757 26,830 17,598 7,345 24,943 8 % 20172020 were 18,959, up 28% from September 30, 2016, due to substantial growth in our optioned lots as26,830, which was a result of our significant land acquisition approval activity over the past nine months. The decline in lots controlled in our Maryland and Virginia markets is primarily due to reductions in land acquisition activity over the past two years as our recent returns in these markets have been lower than returns we expect to realize. Though our lots controlled count is down year-over-year in Washington, we remain committed to that market and continue to pursue all land acquisition opportunities as they arise.8% increase year-over-year. We believe that our total lot supply, of approximately 3.4 years (which is based on our last twelve months deliveries and is within our stated strategic range), coupled with our planned acquisition activity, can support growth in future periods. See "Forward-Looking Statements"below.- 38 - $ 11,176 $ 11,294 $ (118 ) (1) % $ 36,056 $ 28,866 $ 7,190 25 % 6,288 6,114 174 3 % 18,460 15,382 3,078 20 % $ 17,464 $ 17,408 $ 56 0 % $ 54,516 $ 44,248 $ 10,268 23 % $ 5,857 $ 6,723 $ (866 ) (13) % $ 21,093 $ 16,491 $ 4,602 28 % 3,654 3,654 - 0 % 11,158 8,555 2,603 30 % $ 9,511 $ 10,377 $ (866 ) (8) % $ 32,251 $ 25,046 $ 7,205 29 % Three Months Ended Nine Months Ended September 30, Change September 30, Change 2020 2019 Amount % 2020 2019 Amount % (Dollars in thousands) Financial services revenues Mortgage operations $ 28,548 $ 14,395 $ 14,153 98 % $ 67,536 $ 36,258 $ 31,278 86 % Other 8,255 7,993 262 3 % 24,117 22,131 1,986 9 % Total financial services revenues $ 36,803 $ 22,388 $ 14,415 64 % $ 91,653 $ 58,389 $ 33,264 57 % Financial services pretax income Mortgage operations $ 20,809 $ 8,468 $ 12,341 146 % $ 46,558 $ 19,700 $ 26,858 136 % Other 3,559 5,647 (2,088) (37) % 3,420 21,683 $ (18,263) (84) % Total financial services pretax income $ 24,368 $ 14,115 $ 10,253 73 % $ 49,978 $ 41,383 $ 8,595 21 % 2017,2020, our financial serviceservices pretax income decreased $0.9increased by $10.3 million, or 8%73%, from the same period in the prior year. The declineincrease was primarilydue to our mortgage operations, which saw an increase in pretax income of $12.3 million due to higher interest rate lock volume driven by the result ofyear-over-year increase in homes in backlog as well as an increased Capture Rate, and increased net interest income on loans originated during the period. This increase was partially offset by a decline in the dollar value of loans locked, originated and solddecrease in our mortgage operations. other financial services segment due to an increase in construction defect claim self-insurance expense driven by an increase in home closings as well as an increase in third-party insurance costs for excess construction defect claim coverage.2017,2020, our financial services pretax income was up $7.2increased $8.6 million, or 29%21%, from the same period in 2016.the prior year. The increase was due to our mortgage operations, which saw an increase in pretax income forof $26.9 million. Commentary on the drivers of the increase in pretax income in our mortgage operations segment are consistent with the 2020 third quarter discussion above. This increase was the result of (1) increases in the dollar value of loans locked, originated and sold; and (2) higher gains on loans locked and originated. The higher pretax incomepartially offset by a decrease in our other financial services segment, which had $8.3 million of net losses on equity securities during the period as compared to $7.9 million of net gains for the nine months ended September 30, 2017 was primarilysame period in the result of increased new home deliveries.prior year.- 39 - “Capture rate” is defined as the number of mortgage loans originated by our mortgage operations segment for our homebuyers as a percent of our total home closings. 824 862 (4) % 2,497 2,146 16 % $ 288,326 $ 296,456 (3) % $ 872,781 $ 747,941 17 % 62 % 66 % (4) % 62 % 61 % 1 % 66 % 69 % (3) % 66 % 64 % 2 % 20 % 21 % (1) % 19 % 20 % (1) % 20 % 22 % (2) % 21 % 24 % (3) % 40 % 43 % (3) % 40 % 44 % (4) % 60 % 57 % 3 % 60 % 56 % 4 % 100 % 100 % 0 % 100 % 100 % 0 % 97 % 97 % 0 % 97 % 98 % (1) % 3 % 3 % 0 % 3 % 2 % 1 % 735 735 0 % 735 736 (0) % 83 % 83 % 0 % 83 % 84 % (1) % 100 % 100 % 0 % 100 % 100 % 0 % 836 840 (0) % 2,645 2,144 23 % $ 293,375 $ 295,818 (1) % $ 921,431 $ 744,958 24 % Three Months Ended % or
PercentageNine Months Ended % or
PercentageSeptember 30, September 30, 2020 2019 Change 2020 2019 Change (Dollars in thousands) Total Originations (including transfer loans): Loans 1,476 1,095 35 % 3,841 2,809 37 % Principal $ 563,047 $ 386,613 46 % $ 1,439,918 $ 1,023,287 41 % Capture Rate Data: Capture rate as % of all homes delivered 68 % 64 % 4 % 68 % 61 % 7 % Capture rate as % of all homes delivered (excludes cash sales) 71 % 68 % 3 % 71 % 66 % 5 % Mortgage Loan Origination Product Mix: FHA loans 20 % 20 % — % 21 % 17 % 4 % Other government loans (VA & USDA) 22 % 20 % 2 % 22 % 20 % 2 % Total government loans 42 % 40 % 2 % 43 % 37 % 6 % Conventional loans 58 % 60 % (2) % 57 % 63 % (6) % 100 % 100 % — % 100 % 100 % — % Loan Type: Fixed rate 100 % 98 % 2 % 99 % 97 % 2 % ARM — % 2 % (2) % 1 % 3 % (2) % Credit Quality: Average FICO Score 736 738 — % 736 739 — % Other Data: ` ` Average Combined LTV ratio 85 % 84 % 1 % 85 % 82 % 3 % Full documentation loans 100 % 100 % — % 100 % 100 % — % Loans Sold to Third Parties: Loans 1,530 1,064 44 % 3,958 2,882 37 % Principal $ 574,239 $ 377,213 52 % $ 1,472,452 $ 1,047,637 41 % 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. 31.8%21.5% and 34.1%23.1% for the three and nine months ended September 30, 2017, respectively, compared to 30.7%2020 and 32.3%19.5% and 24.4% for the three and nine months ended September 30, 2016,2019, respectively. The rates for the three and nine months ended September 30, 20172020 resulted in income tax expense of $28.5$27.1 million and $60.7$66.1 million, respectively, compared to income tax expense of $11.7$12.2 million and $29.9$47.0 million for the same periods in 2016.three and nine months ended September 30, 2019, respectively. The year-over-year increase in our effective tax rate for the three months ended September 30, 20172020 was primarily due to changes in the resultestimated amount of energy tax credits to be received. The year-over-year decrease in our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rate2020 was primarily due to tax windfalls recognized upon the foregoing energy credits matter coupled with the establishmentvesting and exercise of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realization was more uncertain at the time. These items were somewhat offset by the release of the Metro Bonds valuation allowance discussed above.equity awards.- 40 -policiesprinciples generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. See "Forward-Looking Statements"below.Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.to:to: (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, revolving credit facilityRevolving Credit Facility and mortgage repurchase facility.Mortgage Repurchase Facility (both defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.5 billion ($1.35 billion after$2.0 billion. Following the public offeringissuance of an additional $150$300 million principal amount of our 6%3.850% senior notes due 2043). See Note 20 for additional information.We have marketable equity securities that consist primarily of holdings in corporate equities.ofof: (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½%5.500% senior notes due 2024, and our 6%3.850% senior notes due 2043 (see Note 20 for additional information on the public offering of an additional $150 million principal amount of these notes);2030 and our 6.000% senior notes due 2043; (3) our Revolving Credit Facility (defined below); and (4) our Mortgage Repurchase Facility (defined below). Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" below.seniorsenior notes through cash purchases, whether through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.September 29, 2017November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 16, 2022,18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a specified eurocurrencyprime rate, or (3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.2017.As2020.2017, we had $15.02020 and December 31, 2019, there were $25.4 million in borrowings and $34.0$23.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At September 30, 2020 and December 31, 2019, we had $10.0 million and $15.0 million, respectively, outstanding under the Revolving Credit Facility. As of September 30, 2020, availability under the Revolving Credit Facility leaving remaining borrowing capacity of $651.0was approximately $964.6 million. Effective August 10, 2017, the Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility terminates on May 20, 2021. Effective September 24, 2020, the Mortgage Repurchase Facility was amended to adjust the commitments to purchase for specific time periods and increase the Adjusted Tangible Net Worth Ratio from 8.0 to 1.0 to 10.0 to 1.0. As part of the amendment, the commitments to purchase were increased to $100 million for the periods September 24, 2020 through October 23, 2020 and March 25, 2021 through April 23, 2021 and $200 million for the period December 22, 2020 through February 4, 2021.27, 201624, 2019 effective through January 22, 2020, which increased the maximum aggregate commitment from $75 million to $125 million and was effective through January 25, 2017.$150 million. At September 30, 20172020 and December 31, 2016,2019, HomeAmerican had $65.1$130.9 million and $114.5$149.6 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based.2017. and nine months ended September 30, 2017,2020 and 2019, we paid dividends of $0.25$0.33 per share and $0.75$0.30 per share, respectively, compared to $0.24 per share and $0.72 per share for the same periods in the prior year, respectively.2017,2020, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months ended September 30, 2017.2020.2017,2020 and 2019, we generated $69.2$29.4 million and used $33.1 million of cash from operating activities, primarily due to (1)respectively. The most significant source of cash provided by operating activities in both periods was net income of $117.3 million, (2) a $49.0 million decrease in mortgage loans held-for-sale, (3) a $22.8 million decrease in our deferred tax asset, and (4) a $15.3 million increase in accounts payable and accrued liabilities. The increases were partially offset by a net increase in housing inventory of $82.1 million, an $11.2 million increase in prepaid and other assets, and net gains on the sale of investments, including our Metro Bonds of $54.0 million.2017, we generated $108.02020, cash provided by the decrease in land and land under development was $108.7 million, of cash for investing activities, primarily attributable to net proceedsas home starts outnumbered lot acquisitions during the period. Cash provided from the sale of mortgage loans for the nine months ended September 30, 2020 and purchase of marketable equity securities of $65.72019, was $36.5 million and proceeds$32.2 million, respectively, resulting from increased loan activity during the salemonth of December. Cash used to increase housing completed or under construction for the Metro Bonds of $44.3 million. These amounts were slightly offset by the purchase of $1.9nine months ended September 30, 2020 and 2019 was $387.3 million and $251.7 million, respectively, as homes in property and equipment.2017, we2020, net cash provided by investing activities was $27.6 million compared with net cash used $82.3by investing activities of $24.2 million in the prior year period. This primarily relates to $48.5 million in net cash forprovided by the sale of marketable securities during the nine months ended September 30, 2020. This was partially offset by cash used to purchase property and equipment, which remained consistent year-over-year.primarily relatedwas $8.8 million compared with $64.4 million in the prior year period. The primary driver of this decrease in cash used in financing activities was due to payments of $49.4 million on our mortgage repurchase facility and dividend payments totaling $38.8 million. These amounts were slightly offset bynet proceeds of $8.5 million from the exerciseissuance of stock options.2017,2020, we had deposits of $11.1$25.9 million in the form of cash and $3.6$8.2 million in the form of letters of credit that secured option contracts to purchase 6,3067,757 lots for a total estimated purchase price of $463.0$488.6 million.2017,2020, we had outstanding surety bonds and letters of credit totaling $184.9$256.3 million and $65.5$126.3 million, respectively, including $31.6$100.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $33.0$96.0 million and $25.3$82.5 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.mademade no material guarantees with respect to third-party obligations.- 43 -20162019 Annual Report on Form 10-K.20162019 and Item 1A of Part II of this Quarterly Report on Form 10-Q.ItemQuantitative Quantitative and Qualitative Disclosures About Market RiskOur Qualitative Disclosures About Market Riskand strategy isthat enables us to achieve an appropriate investment return while preserving principal and managing risk. OurUnder this policy, cash and cash equivalents may include immediately availableU.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, certificates of deposit and time deposits. Our marketabledeposits, with maturities of three months or less. Marketable securities consist of under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate equities, preferred stock and exchange traded funds. debt securities.our equity securities can be negatively impacted bymay go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of equity securities may also decline for a number of market risk factors, including changes in interest rates, general economic conditionsother reasons that directly relate to the issuer, such as management performance, financial leverage, the issuer’s historical and equity markets. prospective earnings, the value of its assets and reduced demand for its goods and services. Equity securities generally have greater price volatility than bonds and other debt securities.2017, we had marketable securities in unrealized loss positions totaling $0.6 million, against which we recorded impairments totaling $0.0 million during the current quarter. For the remaining marketable securities in unrealized loss positions totaling $0.6 million, there can be no assurances that the cost basis of these securities will be recovered in the future. If we elect to sell, or are otherwise were required to sell these securities, we could be required to record losses if the2020, our cash and cash equivalents included commercial bank deposits and money market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.HomeAmerican’sHomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at September 30, 20172020 had an aggregate principal balance of $101.2$254.7 million, all of which were under interest rate lock commitments at an average interest rate of 3.99%2.78%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $87.1$154.3 million at September 30, 2017,2020, of which $14.0$53.0 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.04%2.71%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale thatwhich had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $85.0$201.0 million and $108.5 million at September 30, 2017.1510 and 4035 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations and comprehensive income with an offset to either derivative assets or liabilities, depending on the nature of the change.doesdo affect our earnings and cash flows. See “Forward-Looking Statements” above.Item20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.- 45 -10-Qpreviously identified as being attendant to our businessthat appeared under Item 1A. Risk Factors in ourthe Company’s 2019 Annual Report on Form 10-K. There are no material changes from the risk factors included within the Company’s 2019 Annual Report on Form 10-K, other than the risk described below.year ended December 31, 2016. For a more complete discussionpandemic, many state and local governments instituted restrictions that substantially limited the operations of other risk factorsnon-essential businesses and the activities of individuals. While some of these restrictions have been eased, there is still significant uncertainty around the extent and duration of those still in place, the possibility for restrictions to be increased again in the future and the impact these restrictions will have on the U.S. economy and consumer confidence. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments that affectare highly uncertain, including new information that may emerge concerning the severity of the pandemic, whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus. If the pandemic continues to cause significant negative impacts to the U.S. economy and consumer confidence, our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2016, which include the following:●Changes in general economic, real estate and other business conditions may have an adverse effect on the homebuilding and mortgage industries, which could have a negative impact on our business.●Increased competition levels in the homebuilding and mortgage lending industries could have a negative impact on our homebuilding and mortgage operations.●If land is not available at reasonable prices or terms, we could be required to scale back our operations in a given market and/or we may operate at lower levels of profitability.●Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.●If mortgage interest rates rise, if down payment requirements are increased, if loan limits are decreased, or if mortgage financing otherwise becomes less available, it could adversely affect our business.●Expirations, amendments or changes to tax laws, incentives or credits currently available to our customers may negatively impact our business.●A decline in the market value of our homes or carrying value of our land would have a negative impact on our business.●Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our business.●Changes in energy prices may have an adverse effect on the economies in certain markets we operate in and our cost of building homes.●We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on the results of our business.●Our business is subject to numerous federal, state and local laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.●In the ordinary course of business, we are required to obtain surety bonds, the unavailability of which could adversely affect our business.●Decreases in the market value of our investments in marketable securities could have an adverse impact on our business.●Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.●Repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our business.●Because of the seasonal nature of our business, our quarterly operating results can fluctuate.●We are dependent on the services of key employees, and the loss of their services could hurt our business.- 46 -Table of Contentsoperations, financial condition and cash flows could be significantly and adversely impacted.●The interests of certain controlling shareholders may be adverse to investors●Information technology failures and data security breaches could harm our business.Company did notfollowing table provides information about our repurchase any sharesof common stock during the three or nine months ended September 30, 2017. Additionally, there2020:Period Average Price Paid Per Share July 1 to July 31, 2020 — N/A — 4,000,000 August 1 to August 31, 2020 — N/A — 4,000,000 September 1 to September 30, 2020 — N/A — 4,000,000 salesshares of unregistered equity securitiesMDC common stock repurchased under this repurchase program during the period.three month period ended September 30, 2020.- 47 -referenceDate: November 2, 2017Date: October 29, 2020 M.D.C. HOLDINGS, INC. (Registrant) /s/ /s/ Robert N. MartinPresident,President, Chief Financial Officer and Principal Accounting Officer (principal(principal financial officer andduly authorized officer)INDEX TO EXHIBITS____________________* Incorporated by reference- 49 -