M.D.C. 10Q 2016 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-Q

(Mark One)

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

For the quarterly period endedJune 30, 2016

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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware		84-0622967
(State or other jurisdiction		(I.R.S. employer
of incorporation or organization)		identification no.)

4350 South Monaco Street, Suite 500		80237
Denver, Colorado		(Zip code)
(Address of principal executive offices)

(303) 773-1100

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer		☒		Accelerated Filer		☐
Non-Accelerated Filer		☐ (Do not check if a smaller reporting company)		Smaller Reporting Company		☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

AsofAugust 1, 2016, 49,033,981shares of M.D.C. Holdings, Inc. common stock were outstanding.

Table Of Contents

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

INDEX


			Page No.
Part I. Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2016 and December 31, 2015	1

		Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2016 and 2015	2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	3

		Notes to Unaudited Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	41

Part II. Other Information:

	Item 1.	Legal Proceedings	42

	Item 1A.	Risk Factors	42

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 3.	Defaults Upon Senior Securities	43

	Item 4.	Mine Safety Disclosures	43

	Item 5.	Other Information	43

	Item 6.	Exhibits	44

	Signature		44

(i)

Table Of Contents

PART I

ITEM 1. UnauditedConsolidated Financial Statements

M.D.C. HOLDINGS, INC.

ConsolidatedBalance Sheets.

	June 30,		December 31,
	2016		2015
	(Dollars in thousands, except
	per share amounts)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	132,006	$	144,342
Marketable securities		55,798		92,387
Restricted cash		3,946		3,750
Trade and other receivables		47,803		23,314
Inventories:
Housing completed or under construction		933,922		747,036
Land and land under development		893,096		1,016,926
Total inventories		1,827,018		1,763,962
Property and equipment, net		29,143		28,226
Deferred tax asset, net		89,242		99,107
Metropolitan district bond securities (related party)		28,604		25,911
Prepaid and other assets		65,254		65,394
Total homebuilding assets		2,278,814		2,246,393
Financial Services:
Cash and cash equivalents		39,300		36,646
Marketable securities		14,821		11,307
Mortgage loans held-for-sale, net		118,699		115,670
Other assets		9,766		5,883
Total financial services assets		182,586		169,506
Total Assets	$	2,461,400	$	2,415,899
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	48,294	$	40,472
Accrued liabilities		130,651		122,886
Revolving credit facility		15,000		15,000
Senior notes, net		841,076		840,524
Total homebuilding liabilities		1,035,021		1,018,882
Financial Services:
Accounts payable and accrued liabilities		56,060		52,114
Mortgage repurchase facility		93,297		88,611
Total financial services liabilities		149,357		140,725
Total Liabilities		1,184,378		1,159,607
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-		-
Common stock, $0.01 par value; 250,000,000 shares authorized; 49,008,835 and 48,888,424issued and outstanding at June 30, 2016 and December 31, 2015, respectively		490		489
Additional paid-in-capital		921,660		915,746
Retained earnings		336,314		324,342
Accumulated other comprehensive income		18,558		15,715
Total Stockholders' Equity		1,277,022		1,256,292
Total Liabilities and Stockholders' Equity	$	2,461,400	$	2,415,899

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

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M.D.C. HOLDINGS, INC.

ConsolidatedStatements of Operations and Comprehensive Income

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands, except per share amounts)
	(Unaudited)
Homebuilding:
Home sale revenues	$	571,195		$	461,708		$	965,615		$	838,717
Land sale revenues		316			-			2,640			910
Total home and land sale revenues		571,511			461,708			968,255			839,627
Home cost of sales		(475,836	)		(385,019	)		(805,862	)		(703,661	)
Land cost of sales		(216	)		-			(1,879	)		(1,125	)
Inventory impairments		(1,600	)		-			(1,600	)		(350	)
Total cost of sales		(477,652	)		(385,019	)		(809,341	)		(705,136	)
Gross margin		93,859			76,689			158,914			134,491
Selling, general and administrative expenses		(64,440	)		(54,781	)		(120,717	)		(105,313	)
Interest and other income		2,553			2,720			3,489			4,574
Other expense		(278	)		(1,055	)		(905	)		(2,189	)
Other-than-temporary impairment of marketable securities		(288	)		-			(719	)		-
Homebuilding pretax income		31,406			23,573			40,062			31,563

Financial Services:
Revenues		15,823			11,420			26,840			22,011
Expenses		(7,543	)		(4,207	)		(13,784	)		(10,366	)
Interest and other income		772			1,096			1,613			2,000
Financial services pretax income		9,052			8,309			14,669			13,645

Income before income taxes		40,458			31,882			54,731		��	45,208
Provision for income taxes		(13,545	)		(11,884	)		(18,255	)		(16,790	)
Net income	$	26,913		$	19,998		$	36,476		$	28,418

Other comprehensive income (loss) related toavailable for sale securities, net of tax		895			(360	)		2,843			948
Comprehensive income	$	27,808		$	19,638		$	39,319		$	29,366

Earnings per share:
Basic	$	0.55		$	0.41		$	0.74		$	0.58
Diluted	$	0.55		$	0.41		$	0.74		$	0.58

Weighted average common shares outstanding
Basic		48,851,350			48,768,021			48,839,660			48,741,476
Diluted		48,861,742			49,005,037			48,848,914			48,954,059

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

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

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M.D.C. HOLDINGS, INC.

ConsolidatedStatements of Cash Flows

	Six Months Ended
	June 30,
	2016			2015
	(Dollars in thousands)
	(Unaudited)
Operating Activities:
Net income	$	36,476		$	28,418
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation expense		6,163			2,591
Depreciation and amortization		2,367			2,092
Inventory impairments		1,600			350
Other-than-temporary impairment of marketable securities		719			-
Gain on sale of marketable securities		(262	)		(462	)
Amortization of discount / premiums on marketable debt securities, net		-			100
Deferred income tax expense		7,873			16,267
Net changes in assets and liabilities:
Restricted cash		(196	)		(2,128	)
Trade and other receivables		(26,235	)		(292	)
Mortgage loans held-for-sale		(3,029	)		8,664
Housing completed or under construction		(186,805	)		(41,474	)
Land and land under development		122,701			36,919
Prepaid expenses and other assets		(2,975	)		(3,118	)
Accounts payable and accrued liabilities		19,517			(3,418	)
Net cash provided by (used in) operating activities		(22,086	)		44,509

Investing Activities:
Purchases of marketable securities		(15,426	)		(34,679	)
Maturities of marketable securities		-			1,510
Sales of marketable securities		50,765			50,179
Purchases of property and equipment		(3,117	)		(421	)
Net cash provided by investing activities		32,222			16,589

Financing Activities:
Advances (payments) on mortgage repurchase facility, net		4,686			(10,822	)
Dividend payments		(24,504	)		(24,425	)
Proceeds from exercise of stock options		-			612
Net cash used in financing activities		(19,818	)		(34,635	)

Net increase (decrease) in cash and cash equivalents		(9,682	)		26,463
Cash and cash equivalents:
Beginning of period		180,988			153,825
End of period	$	171,306		$	180,288

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

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M.D.C. HOLDINGS, INC.

Notesto Unaudited Consolidated Financial Statements

1. Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at June 30, 2016 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2015.

2. Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers ("ASU 2014-09"), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We do not plan to early adopt the guidance and are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

In February 2015, the FASB issued ASU 2015-02,Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends the consolidation requirements in Accounting Standards Codification (“ASC”) Topic 810,Consolidation (“ASC 810”), primarily related to limited partnerships and variable interest entities. ASU 2015-02 was effective for our interim and annual reporting periods beginning January 1, 2016 and did not have a material impact on our consolidated financial statements.

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

In February 2016, the FASB issued ASU 2016-02,Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a corresponding lease liability for virtually all leases. The liability will be equal to the present value of lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees. ASU 2016-02 is effective for our interim and annual reporting periods beginning January 1, 2019 and is to be applied using a modified retrospective adoption method. 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 is effective for our interim and annual reporting periods beginning January 1, 2017. Early adoption is permitted.We are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning January 1, 2021. Earlier adoption is permitted. We are currently evaluating the method of adoption and impact the update will have on our consolidated financial statements and related disclosures.

3. Segment Reporting

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Chief Executive Officer and the Chief Operating Officer.

We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

●

West (Arizona, California, Nevada and Washington)

●

Mountain (Colorado and Utah)

●

East (Virginia, Florida and Maryland, which includes Pennsylvania and New Jersey)

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in our homebuilding operations.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Homebuilding
West	$	270,031	$	217,701	$	461,406	$	394,518
Mountain		190,334		156,893		328,158		280,914
East		111,146		87,114		178,691		164,195
Total home and land sale revenues	$	571,511	$	461,708	$	968,255	$	839,627

Financial Services
Mortgage operations	$	10,702	$	7,104	$	17,572	$	13,753
Other		5,121		4,316		9,268		8,258
Total financial services revenues	$	15,823	$	11,420	$	26,840	$	22,011

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Homebuilding
West	$	15,740		$	15,597		$	25,438		$	24,100
Mountain		20,748			14,970			30,832			22,390
East		4,500			19			5,867			(402	)
Corporate		(9,582	)		(7,013	)		(22,075	)		(14,525	)
Total homebuilding pretax income	$	31,406		$	23,573		$	40,062		$	31,563

Financial Services
Mortgage operations	$	6,445		$	4,097		$	9,768		$	6,889
Other		2,607			4,212			4,901			6,756
Total financial services pretax income	$	9,052		$	8,309		$	14,669		$	13,645

Total pretax income	$	40,458		$	31,882		$	54,731		$	45,208

The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include our cash and cash equivalents, marketable securities and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
Homebuilding assets
West	$	1,066,722	$	991,393
Mountain		559,287		536,831
East		317,013		324,457
Corporate		335,792		393,712
Total homebuilding assets	$	2,278,814	$	2,246,393

Financial services assets
Mortgage operations	$	131,572	$	123,176
Other		51,014		46,330
Total financial services assets	$	182,586	$	169,506

Total assets	$	2,461,400	$	2,415,899

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

4. Earnings Per Share

ASC Topic 260,Earnings Per Share(“ASC 260”), requires acompany that has participating security holders (for example, holders of unvested restricted stock that has nonforfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and participating security holders consisting of shareholders of unvested restricted stock. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260.To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding.The table below shows basic and diluted EPS calculations:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands, except per share amounts)
Numerator
Net income	$	26,913		$	19,998		$	36,476		$	28,418
Less: distributed earnings allocated to participatingsecurities		(39	)		(23	)		(79	)		(48	)
Less: undistributed earnings allocated to participatingsecurities		(47	)		(15	)		(36	)		(9	)
Net income attributable to common stockholders (numeratorfor basic earnings per share)		26,827			19,960			36,361			28,361
Add back: undistributed earnings allocated toparticipating securities		47			15			36			9
Less: undistributed earnings reallocated toparticipating securities		(47	)		(15	)		(36	)		(9	)
Numerator for diluted earnings per share under two classmethod	$	26,827		$	19,960		$	36,361		$	28,361

Denominator
Weighted-average common shares outstanding		48,851,350			48,768,021			48,839,660			48,741,476
Add: dilutive effect of stock options		10,392			237,016			9,254			212,583
Denominator for diluted earnings per shareunder two class method		48,861,742			49,005,037			48,848,914			48,954,059

Basic Earnings Per Common Share	$	0.55		$	0.41		$	0.74		$	0.58
Diluted Earnings Per Common Share	$	0.55		$	0.41		$	0.74		$	0.58

Diluted EPS for the three and six months ended June 30, 2016 excluded options to purchase approximately 6.4 million and 6.5 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same periods in 2015, diluted EPS excluded options to purchase approximately 3.6 million and 3.6 million shares, respectively.

5. AccumulatedOther Comprehensive Income

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016		2015
	(Dollars in thousands)
Unrealized gains (losses) on available-for-sale marketable securities¹ :
Beginning balance	$	5,016		$	3,142		$	3,657	$	2,775
Other comprehensive income (loss) before reclassifications		880			(1,260	)		1,404		(900	)
Amounts reclassified from AOCI²		(552	)		(293	)		283		(286	)
Ending balance	$	5,344		$	1,589		$	5,344	$	1,589

Unrealized gains on available-for-sale metropolitan district bond securities¹ :
Beginning balance	$	12,647		$	8,621		$	12,058	$	7,680
Other comprehensive income before reclassifications		567			1,193			1,156		2,134
Amounts reclassified from AOCI		-			-			-		-
Ending balance	$	13,214		$	9,814		$	13,214	$	9,814

Total ending AOCI	$	18,558		$	11,403		$	18,558	$	11,403

	⁽¹⁾	All amounts net-of-tax.
	⁽²⁾	See separate table below for details about these reclassifications

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The following table sets forth the activity related to reclassifications out of accumulated other comprehensive income related to available for sale securities:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Affected Line Item in the Statements of Operations	2016			2015			2016			2015
	(Dollars in thousands)
Homebuilding interest and other income	$	1,177		$	137		$	262		$	125
Other-than-temporary impairment of marketable securities		(288	)		-			(719	)		-
Financial services interest and other income		-			336			-			337
Income before income taxes		889			473			(457	)		462
Provision for income taxes		(337	)		(180	)		174			(176	)
Net income	$	552		$	293		$	(283	)	$	286

6. Fair Value Measurements

ASC Topic 820,Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

		Fair Value
Financial Instrument	Hierarchy	June 30, 2016		December 31, 2015
		(Dollars in thousands)
Marketable equity securities (available-for-sale)	Level 1	$	70,619	$	103,694
Mortgage loans held-for-sale, net	Level 2	$	118,699	$	115,670
Metropolitan district bond securities (related party) (available-for-sale)	Level 3	$	28,604	$	25,911

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of June 30, 2016 and December 31, 2015.

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

Marketable securities. As of June 30, 2016 and December 31, 2015, we only held marketable equity securities. However, during 2015, we also held marketable debt securities. Our equity securities consist of holdings in corporate equities and holdings in mutual fund securities, which are primarily invested in debt securities. Our debt securities consisted primarily of fixed and floating rate interest earning debt securities, which may have included, among others, United States government and government agency debt and corporate debt. As of June 30, 2016 and December 31, 2015, all of our equity securities were treated as available-for-sale investments and as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if an unrealized loss, if applicable, is other-than-temporary.

Each quarter we assess all of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”). If the unrealized loss is determined to be other-than-temporary, an OTTI is recorded in the consolidated statements of operations and comprehensive income. During the three months and six months ended June 30, 2016, we recorded pretax OTTIs of $0.3 million and $0.7 million, respectively, for certain of our equity securities that were in an unrealized loss position as of the end of each respective period. The OTTIs are included in other-than-temporary impairment of marketable securities in the homebuilding section of our consolidated statements of operations and comprehensive income. No such impairments were recorded during the three and six months ended June 30, 2015.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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

	June 30, 2016
	Amortized Cost		OTTI			Net Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding equity securities	$	47,923	$	(904	)	$	47,019	$	55,798
Financial services equity securities		14,979		-			14,979		14,821
Total marketable equity securities	$	62,902	$	(904	)	$	61,998	$	70,619

	December 31, 2015
	Amortized Cost		OTTI			Net Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding equity securities	$	89,738	$	(3,969	)	$	85,769	$	92,387
Financial services equity securities		12,026		-			12,026		11,307
Total marketable equity securities	$	101,764	$	(3,969	)	$	97,795	$	103,694

As of June 30, 2016 and December 31, 2015, our marketable equity securities were in net unrealized gain positions totaling $8.6 million and $5.9 million, respectively.Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.6 million and $0.9 million as of June 30, 2016 and December 31, 2015, respectively.The table below sets forth the aggregated unrealized losses for individual equity securities that were in unrealized loss positions but did not have OTTIs recognized.We do not believe the decline in the value of these marketable securities as of June 30, 2016 is other-than-temporary.

	June 30, 2016							December 31, 2015
	Number of Securities in an Unrealized Loss Position		Aggregate Unrealized Loss Position			Aggregate Fair Value of Securities in an Unrealized Loss Position		Number of Securities in an Unrealized Loss Position		Aggregate Unrealized Loss Position			Aggregate Fair Value of Securities in an Unrealized Loss Position
	(Dollars in thousands)
Marketable equity securities		2	$	(604	)	$	2,394		4	$	(882	)	$	6,116

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The table below sets forth gross realized gains and losses from the sale of available-for-sale marketable securities, which were included in other expense in the homebuilding section, or interest and other income in the financial services section, of our consolidated statements of operations and comprehensive income.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Gross realized gains on sales of available-for-sale securities
Equity securities	$	1,379		$	638		$	1,470		$	875
Debt securities		-			205			-			371
Total	$	1,379		$	843		$	1,470		$	1,246

Gross realized losses on sales of available-for-sale securities
Equity securities	$	(202	)	$	(232	)	$	(1,208	)	$	(557	)
Debt securities		-			(138	)		-			(227	)
Total	$	(202	)	$	(370	)	$	(1,208	)	$	(784	)

Net realized gain on sales of available-for-sale securities	$	1,177		$	473		$	262		$	462

Mortgageloansheld-for-sale,net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At June 30, 2016 and December 31, 2015, we had $94.9 million and $92.6 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 June 30, 2016 and December 31, 2015, we had $23.8 million and $23.1 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2016, we recorded net gains on the sales of mortgage loans of $6.9 million and $12.5 million, respectively, compared to $4.4 million and $8.8 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 section of our consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District, which are generally received in the fourth quarter, and are supported by an annual levy on the taxable assessed value of real estate and personal property within the Metro District’s boundaries. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments in perpetuity until the unpaid principal and accrued interest is paid in full.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

In accordance with ASC Topic 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), we adjust the bond principal balance using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we update its fair value on a quarterly basis, with the adjustment being recorded through AOCI. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as they drive increases to the tax paying base for the Metro District, (2) the forecasted assessed value of those closed homes and (3) the discount rate. Cash receipts, which are typically only received in the fourth quarter, reduce the carrying value of the Metro Bonds. The increases in the value of the Metro Bonds during the past two years are based on a larger percentage of future cash flows coming from homes that have closed, which utilize a lower discount rate as those cash flows have a reduced amount of risk. The table below provides quantitative data, as of June 30, 2016, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

Quantitative Data

Sensitivity Analysis

Unobservable Input

Range

Weighted

Average

Movement in
Fair Value from
Increase in Input

Movement in
Fair Value from
Decrease in Input

Number of homes closed per year

130

Increase

Decrease

Average sales price

$419,000

$1,200,000

486,000

Increase

Decrease

Discount rate

12%

7.4%

Decrease

Increase

��

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Balance at beginning of period	$	27,277	$	19,978	$	25,911	$	18,203
Increase in fair value (recorded in other comprehensive income)		915		1,925		1,865		3,343
Change due to accretion of principal		412		356		828		713
Cash receipts		-		-		-		-
Balance at end of period	$	28,604	$	22,259	$	28,604	$	22,259

Mortgage Repurchase Facility.The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes and were obtained from multiple pricing sources.

	June 30, 2016				December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5⅝% Senior Notes due February 2020, net	$	246,466	$	261,767	$	246,032	$	257,813
5½% Senior Notes due January 2024		248,299		249,892		248,209		252,188
6% Senior Notes due January 2043		346,311		275,228		346,283		276,938
Total	$	841,076	$	786,887	$	840,524	$	786,939

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

7. Inventories

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
Housing Completed or Under Construction:
West	$	498,341	$	365,867
Mountain		295,775		253,578
East		139,806		127,591
Subtotal		933,922		747,036
Land and Land Under Development:
West		511,643		580,682
Mountain		232,414		259,484
East		149,039		176,760
Subtotal		893,096		1,016,926
Total Inventories	$	1,827,018	$	1,763,962

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes (defined as homes under construction without a sales contract). Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

In accordance with ASC Topic 360,Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

•

actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all direct incremental costs associated with the home closing, including sales commissions) for homes closed;

•

estimated future undiscounted cash flows and Operating Margin;

•

forecasted Operating Margin for homes in backlog;

•

actual and trending net and gross home orders;

•

base sales price and home sales incentive information for homes closed, homes in backlog and homes available for sale;

•

market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

•

known or probable events indicating that the carrying value may not be recoverable.

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

If land is classified as held for sale, in accordance with ASC 360, we measure it at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

Impairments of homebuilding inventory by segment for the three and six months ended June 30, 2016 and 2015 are shown in the table below.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(Dollars in thousands)
West	$	1,400	$	-	$	1,400	$	-
Mountain		-		-		-		-
East		200		-		200		350
Total Inventory Impairments	$	1,600	$	-	$	1,600	$	350

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

	Impairment Data								Quantitative Data
Three Months Ended	Total Subdivisions Tested		Inventory Impairments		Fair Value of Inventory After Impairments		Number of Subdivisions Impaired		Discount Rate
	(Dollars in thousands)
March 31, 2016		14	$	-	$	-		-		N/A
June 30, 2016		17	$	1,600	$	6,415		2	12%	to	15%

March 31, 2015		22	$	350	$	3,701		1		8.7%
June 30, 2015		22	$	-	$	-		-		N/A

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

8. Capitalization of Interest

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835,Interest(“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales as related units or lots are 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.

The homebuilding interest expensed in the table below relates to the portion of interest incurred where our homebuilding debt exceeded our qualified inventory for such periods in accordance with ASC 835.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Homebuilding interest incurred	$	13,106		$	13,305		$	26,324		$	26,556
Less: Interest capitalized		(13,106	)		(13,305	)		(26,324	)		(26,556	)
Homebuilding interest expensed	$	-		$	-		$	-		$	-

Interest capitalized, beginning of period	$	79,783		$	79,991		$	77,541		$	79,231
Plus: Interest capitalized during period		13,106			13,305			26,324			26,556
Less: Previously capitalized interest included in home and land cost of sales		(15,739	)		(14,439	)		(26,715	)		(26,930	)
Interest capitalized, end of period	$	77,150		$	78,857		$	77,150		$	78,857

9. HomebuildingPrepaid Expenses andOther Assets

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

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
Land option deposits	$	8,841	$	11,997
Deferred marketing costs		33,735		31,152
Prepaid expenses		6,119		6,500
Goodwill		6,008		6,008
Deferred debt issuance costs, net		5,004		5,570
Other		5,547		4,167
Total	$	65,254	$	65,394

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

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

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
Customer and escrow deposits	$	30,067	$	20,717
Warranty accrual		17,217		15,328
Accrued compensation and related expenses		21,072		25,492
Accrued interest		23,234		23,234
Land development and home construction accruals		10,904		11,465
Other accrued liabilities		28,157		26,650
Total accrued liabilities	$	130,651	$	122,886

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
Insurance reserves	$	46,900	$	45,811
Accounts payable and other accrued liabilities		9,160		6,303
Total accounts payable and accrued liabilities	$	56,060	$	52,114

11. Warranty Accrual

Our homes are sold with limited third-party warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accruals are recorded based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

Our warranty accrual is included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three and six months ended June 30, 2016 and 2015. For the three and six months ended June 30, 2016 we recorded adjustments of $0.3 million and $3.2 million, respectively, to increase our warranty accrual primarily due to higher than expected recent warranty related expenditures. For the same periods in the prior year, we reduced our warranty reserve by $0.2 million.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	16,852		$	17,761		$	15,328		$	18,346
Expense provisions		2,305			1,329			3,757			2,444
Cash payments		(2,190	)		(1,624	)		(5,105	)		(3,324	)
Adjustments		250			(213	)		3,237			(213	)
Balance at end of period	$	17,217		$	17,253		$	17,217		$	17,253

12. Insurance Reserves

The establishment of reserves for estimated losses associated with (1) insurance policies issued by Allegiant, (2) re-insurance agreements issued by StarAmerican, and (3) self-insured retentions for our homebuilding subsidiaries are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. It is possible that future changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The table set forth below summarizes the insurance reserve activity for the three and six months ended June 30, 2016 and 2015. The insurance reserve is included as a component of accrued liabilities in the financial services section of the consolidated balance sheets.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	46,379		$	50,015		$	45,811		$	50,470
Expense provisions		1,946			1,576			3,334			2,849
Cash payments, net of recoveries		(1,425	)		(2,702	)		(2,245	)		(4,430	)
Adjustments		-			(1,500	)		-			(1,500	)
Balance at end of period	$	46,900		$	47,389		$	46,900		$	47,389

The adjustments to decrease our insurance reserve during the three and six months ended June 30, 2015 primarily resulted from a decrease in insurance claim payment severity and frequency relative to prior period estimates.

In the ordinary course of business, we make payments from our insurance reserves to settle litigation claims arising primarily from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three and six months ended June 30, 2016 and 2015 are not necessarily indicative of what future cash payments will be for subsequent periods.

13. Income Taxes

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 33.5% and 33.4% for the three and six months ended June 30, 2016, respectively, compared to 37.3% and 37.1% for the three and six months ended June 30, 2015, respectively. The rates for the three and six months ended June 30, 2016 resulted in income tax expense of $13.5 million and $18.3 million, respectively, compared to income tax expense of $11.9 million and $16.8 million for the three and six months ended June 30, 2015. The year-over-year improvements in our effective tax rates are primarily the result of our estimated 2016 full year effective tax rate including (1) an estimate for energy credits versus no such estimate as of June 30, 2015 as the credit for both 2015 and 2016 was not approved by the U.S. Congress until December of 2015 and (2) a domestic manufacturing deduction whereas we were not eligible for this deduction in the prior year due to our net operating loss carryforwards.

At June 30, 2016 and December 31, 2015 we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $89.2 million and $99.1 million, respectively. The valuation allowances were related to (1) various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods that exist in certain states and (2) the portion of the amount by which the carrying value of our Metro Bonds for tax purposes exceeds our carrying value for book purposes, as we believe realization of that portion is more uncertain at this time.

14. Senior Notes

The carrying value of our senior notes as of June 30, 2016 and December 31, 2015, net of any unamortized debt issuance costs or discount, were as follows:

	June 30,		December 31,
	2016		2015
	(Dollars in thousands)
5⅝% Senior Notes due February 2020, net	$	246,466	$	246,032
5½% Senior Notes due January 2024		248,299		248,209
6% Senior Notes due January 2043		346,311		346,283
Total	$	841,076	$	840,524

Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our homebuilding segment subsidiaries.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

15. Stock Based Compensation

We account for share-based awards in accordance with ASC 718, which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Stock option grant expense	$	2,643	$	1,123	$	5,293	$	1,499
Restricted stock awards expense		533		593		870		1,092
Total stock based compensation	$	3,176	$	1,716	$	6,163	$	2,591

On May 18, 2015, the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 1,000,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, one third of the option shares will vest as of each of the third, fourth, and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any 20 out of 30 consecutive trading days closes at a price equal to or greater than 120% of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was $28.45 and the expiration date of each option is May 18, 2025. In accordance with ASC 718, the market-based awards were assigned a fair value of $5.62 per share (total value of $11.2 million) on the date of grant using a Monte Carlo simulation model and, as calculated under that model, all expense was to be recorded on a straight-line basis through the end of the 2016 second quarter. Included in the stock based compensation expense for the three and six months ended June 30, 2016, shownin the table above, was$2.5 million and $5.0 million, respectively, of stock option grant expense related to these market-based option grants.For the same periods in the prior year, $1.2 million of stock option grant compensation expense was related to these market-based option grants.

16. Commitments and Contingencies

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At June 30, 2016, we had outstanding surety bonds and letters of credit totaling $162.1 million and $70.9 million, respectively, including $43.4 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $44.0 million and $47.8 million, respectively. All letters of credit as of June 30, 2016, excluding those issued by HomeAmerican, were issued underour unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

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

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

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The following table summarizes the mortgage loan loss reserve activity for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016		2015			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	160	$	1,225		$	201		$	810
Expense provisions		-		-			-			725
Cash payments		-		-			-			-
Adjustments		-		(167	)		(41	)		(477	)
Balance at end of period	$	160	$	1,058		$	160		$	1,058

Legal Reserves. Because of the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

Lot Option Contracts. In the normal course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At June 30, 2016, we had cash deposits and letters of credit totaling $8.1 million and $2.7 million, respectively, at risk associated with the option to purchase 2,650 lots.

17. Derivative Financial Instruments

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.

At June 30, 2016, we had interest rate lock commitments with an aggregate principal balance of$122.8million. Additionally, we had$23.8 million of mortgage loans held-for-sale at June 30, 2016 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 million at June 30, 2016.

For the three and six months ended June 30, 2016, we recorded net gains on our derivatives of $0.4 million and $1.0 million, respectively, compared to $0 and $0.6 million for the same periods in 2015.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

18. Lines of Credit

Revolving Credit Facility.We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders, which may be used for general corporate purposes.This agreement has anaggregate commitment of $550 million (the “Commitment”)and was amended on December 18, 2015 to extend the maturity to December 18, 2020.Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and the consent of the designated agent and the co-administrative agent. As defined in the Revolving Credit Facility agreement, interest rates on outstanding borrowings are equal to the highest of (1) 0.0% or (2) a specified eurocurrency rate, federal funds effective rate or prime 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.

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 facility agreement. 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.

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as ofJune 30, 2016.

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At June 30, 2016 and December 31, 2015, there were $27.5 million and $22.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both June 30, 2016 and December 31, 2015, we had $15.0 million in outstanding borrowings under the Revolving Credit Facility. As of June 30, 2016, availability under the Revolving Credit Facility was approximately $507.5 million.

Mortgage Repurchase Facility.HomeAmerican has a master repurchase agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”) that will expire on September 16, 2016. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale 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 maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on June 24, 2016 from $50 million to $100 million and was effective through July 28, 2016. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $50 million to $90 million from December 23, 2015 through January 31, 2016. At June 30, 2016 and December 31, 2015, there were $93.3 million and $88.6 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. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of June 30, 2016.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

19. Supplemental Guarantor Information

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.

●

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 Delaware, 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 Pennsylvania, Inc.

●

Richmond American Homes of Utah, Inc.

●

Richmond American Homes of Virginia, Inc.

●

Richmond American Homes of Washington, Inc.

The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (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) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (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 statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Balance Sheet

	June 30, 2016
					Non-
			Guarantor		Guarantor		Eliminating			Consolidated
	MDC		Subsidiaries		Subsidiaries		Entries			MDC
	(Dollars in thousands)
ASSETS
Homebuilding:
Cash and cash equivalents	$	127,973	$	4,033	$	-	$	-		$	132,006
Marketable securities		55,798		-		-		-			55,798
Restricted cash		-		3,946		-		-			3,946
Trade and other receivables		5,915		44,232		-		(2,344	)		47,803
Inventories:
Housing completed or under construction		-		933,922		-		-			933,922
Land and land under development		-		893,096		-		-			893,096
Total inventories		-		1,827,018		-		-			1,827,018

Intercompany receivables		1,637,706		2,805		5,643		(1,646,154	)		-
Investment in subsidiaries		232,695		-		-		(232,695	)		-
Property and equipment, net		26,366		2,777		-		-			29,143
Deferred tax asset, net		87,827		-		-		1,415			89,242
Metropolitan district bond securities (related party)		28,604		-		-		-			28,604
Prepaid and other assets		4,238		61,016		-		-			65,254
Total homebuilding assets		2,207,122		1,945,827		5,643		(1,879,778	)		2,278,814

Financial Services:
Cash and cash equivalents		-		-		39,300		-			39,300
Marketable securities		-		-		14,821		-			14,821
Intercompany receivables		-		-		38,651		(38,651	)		-
Mortgage loans held-for-sale, net		-		-		118,699		-			118,699
Other assets		-		-		11,181		(1,415	)		9,766
Total financial services assets		-		-		222,652		(40,066	)		182,586
Total Assets	$	2,207,122	$	1,945,827	$	228,295	$	(1,919,844	)	$	2,461,400

LIABILITIES AND EQUITY

Homebuilding:
Accounts payable	$	-	$	48,294	$	-	$	-		$	48,294
Accrued liabilities		26,925		101,341		139		2,246			130,651
Advances and notes payable to parent and subsidiaries		47,099		1,607,331		26,268		(1,680,698	)		-
Revolving credit facility		15,000		-		-		-			15,000
Senior notes, net		841,076		-		-		-			841,076
Total homebuilding liabilities		930,100		1,756,966		26,407		(1,678,452	)		1,035,021

Financial Services:
Accounts payable and other liabilities		-		-		60,650		(4,590	)		56,060
Advances and notes payable to parent and subsidiaries		-		-		4,107		(4,107	)		-
Mortgage repurchase facility		-		-		93,297		-			93,297
Total financial services liabilities		-		-		158,054		(8,697	)		149,357
Total Liabilities		930,100		1,756,966		184,461		(1,687,149	)		1,184,378

Equity:
Total Stockholders' Equity		1,277,022		188,861		43,834		(232,695	)		1,277,022
Total Liabilities and Stockholders' Equity	$	2,207,122	$	1,945,827	$	228,295	$	(1,919,844	)	$	2,461,400

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Balance Sheet

	December 31, 2015
					Non-
			Guarantor		Guarantor			Eliminating			Consolidated
	MDC		Subsidiaries		Subsidiaries			Entries			MDC
	(Dollars in thousands)
ASSETS
Homebuilding:
Cash and cash equivalents	$	141,245	$	3,097	$	-		$	-		$	144,342
Marketable securities		92,387		-		-			-			92,387
Restricted cash		-		3,750		-			-			3,750
Trade and other receivables		5,304		20,297		-			(2,287	)		23,314
Inventories:
Housing completed or under construction		-		747,036		-			-			747,036
Land and land under development		-		1,016,926		-			-			1,016,926
Total inventories		-		1,763,962		-			-			1,763,962

Intercompany receivables		1,509,551		2,850		5,291			(1,517,692	)		-
Investment in subsidiaries		267,191		-		-			(267,191	)		-
Property and equipment, net		26,073		2,153		-			-			28,226
Deferred tax asset, net		97,083		-		-			2,024			99,107
Metropolitan district bond securities (related party)		25,911		-		-			-			25,911
Prepaid and other assets		5,973		59,421		-			-			65,394
Total homebuilding assets		2,170,718		1,855,530		5,291			(1,785,146	)		2,246,393

Financial Services:
Cash and cash equivalents		-		-		36,646			-			36,646
Marketable securities		-		-		11,307			-			11,307
Intercompany receivables		-		-		39,234			(39,234	)		-
Mortgage loans held-for-sale, net		-		-		115,670			-			115,670
Other assets		-		-		7,907			(2,024	)		5,883
Total financial services assets		-		-		210,764			(41,258	)		169,506
Total Assets	$	2,170,718	$	1,855,530	$	216,055		$	(1,826,404	)	$	2,415,899

LIABILITIES AND EQUITY

Homebuilding:
Accounts payable	$	-	$	40,472	$	-		$	-		$	40,472
Accrued liabilities		11,527		108,445		(33	)		2,947			122,886
Advances and notes payable to parent and subsidiaries		47,375		1,480,589		25,536			(1,553,500	)		-
Revolving credit facility		15,000		-		-			-			15,000
Senior notes, net		840,524		-		-			-			840,524
Total homebuilding liabilities		914,426		1,629,506		25,503			(1,550,553	)		1,018,882

Financial Services:
Accounts payable and accrued liabilities		-		-		57,348			(5,234	)		52,114
Advances and notes payable to parent and subsidiaries		-		-		3,426			(3,426	)		-
Mortgage repurchase facility		-		-		88,611			-			88,611
Total financial services liabilities		-		-		149,385			(8,660	)		140,725
Total Liabilities		914,426		1,629,506		174,888			(1,559,213	)		1,159,607

Equity:
Total Stockholders' Equity		1,256,292		226,024		41,167			(267,191	)		1,256,292
Total Liabilities and Stockholders' Equity	$	2,170,718	$	1,855,530	$	216,055		$	(1,826,404	)	$	2,415,899

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Operations

	Three Months Ended June 30, 2016
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	571,511		$	-		$	-		$	571,511
Home and land cost of sales		-			(476,052	)		-			-			(476,052	)
Inventory impairments		-			(1,600	)		-			-			(1,600	)
Total cost of sales		-			(477,652	)		-			-			(477,652	)
Gross margin		-			93,859			-			-			93,859
Selling, general, and administrative expenses		(11,228	)		(53,024	)		-			(188	)		(64,440	)
Equity income of subsidiaries		32,909			-			-			(32,909	)		-
Interest and other income		2,020			423			2			108			2,553
Other expense		(1	)		(277	)		-			-			(278	)
Other-than-temporary impairment of marketable securities		(288	)		-			-			-			(288	)
Homebuilding pretax income (loss)		23,412			40,981			2			(32,989	)		31,406
Financial Services:
Financial services pretax income		-			-			8,972			80			9,052
Income before income taxes		23,412			40,981			8,974			(32,909	)		40,458
(Provision) benefit for income taxes		3,501			(13,746	)		(3,300	)		-			(13,545	)
Net income	$	26,913		$	27,235		$	5,674		$	(32,909	)	$	26,913
Other comprehensive income related to availablefor sale securities, net of tax		895			-			371			(371	)		895
Comprehensive income	$	27,808		$	27,235		$	6,045		$	(33,280	)	$	27,808

	Three Months Ended June 30, 2015
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	461,708		$	-		$	-		$	461,708
Home and land cost of sales		-			(385,019	)		-			-			(385,019	)
Inventory impairments		-			-			-			-			-
Total cost of sales		-			(385,019	)		-			-			(385,019	)
Gross margin		-			76,689			-			-			76,689
Selling, general, and administrative expenses		(8,638	)		(46,048	)		-			(95	)		(54,781	)
Equity income of subsidiaries		24,248			-			-			(24,248	)		-
Interest and other income		1,728			994			-			(2	)		2,720
Interest expense		192			-			-			(192	)		-
Other expense		(1	)		(1,054	)		-			-			(1,055	)
Other-than-temporary impairment of marketable securities		-			-			-			-			-
Homebuilding pretax income (loss)		17,529			30,581			-			(24,537	)		23,573
Financial Services:
Financial services pretax income		-			-			8,020			289			8,309
Income before income taxes		17,529			30,581			8,020			(24,248	)		31,882
(Provision) benefit for income taxes		2,469			(11,408	)		(2,945	)		-			(11,884	)
Net income	$	19,998		$	19,173		$	5,075		$	(24,248	)	$	19,998
Other comprehensive income related to availablefor sale securities, net of tax		(360	)		-			(539	)		539			(360	)
Comprehensive income	$	19,638		$	19,173		$	4,536		$	(23,709	)	$	19,638

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Operations

	Six Months Ended June 30, 2016
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	968,255		$	-		$	-		$	968,255
Home and land cost of sales		-			(807,441	)		(300	)		-			(807,741	)
Inventory impairments		-			(1,600	)		-			-			(1,600	)
Total cost of sales		-			(809,041	)		(300	)		-			(809,341	)
Gross margin		-			159,214			(300	)		-			158,914
Selling, general, and administrative expenses		(23,330	)		(97,040	)		-			(347	)		(120,717	)
Equity income of subsidiaries		50,279			-			-			(50,279	)		-
Interest and other income		2,492			1,152			3			(158	)		3,489
Other expense		(3	)		(902	)		-			-			(905	)
Other-than-temporary impairment of marketable securities		(719	)		-			-			-			(719	)
Homebuilding pretax income (loss)		28,719			62,424			(297	)		(50,784	)		40,062
Financial Services:
Financial services pretax income		-			-			14,164			505			14,669
Income before income taxes		28,719			62,424			13,867			(50,279	)		54,731
(Provision) benefit for income taxes		7,757			(20,822	)		(5,190	)		-			(18,255	)
Net income	$	36,476		$	41,602		$	8,677		$	(50,279	)	$	36,476
Other comprehensive income related to availablefor sale securities, net of tax		2,843			-			370			(370	)		2,843
Comprehensive income	$	39,319		$	41,602		$	9,047		$	(50,649	)	$	39,319

	Six Months Ended June 30, 2015
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	839,627		$	-		$	-		$	839,627
Home and land cost of sales		-			(704,786	)		-			-			(704,786	)
Inventory impairments		-			(350	)		-			-			(350	)
Total cost of sales		-			(705,136	)		-			-			(705,136	)
Gross margin		-			134,491			-			-			134,491
Selling, general, and administrative expenses		(17,560	)		(87,505	)		-			(248	)		(105,313	)
Equity income of subsidiaries		37,240			-			-			(37,240	)		-
Interest and other income		3,291			1,275			5			3			4,574
Interest expense		278			-			-			(278	)		-
Other expense		(3	)		(2,186	)		-			-			(2,189	)
Other-than-temporary impairment of marketable securities		-			-			-			-			-
Homebuilding pretax income (loss)		23,246			46,075			5			(37,763	)		31,563
Financial Services:
Financial services pretax income		-			-			13,122			523			13,645
Income before income taxes		23,246			46,075			13,127			(37,240	)		45,208
(Provision) benefit for income taxes		5,172			(17,112	)		(4,850	)		-			(16,790	)
Net income	$	28,418		$	28,963		$	8,277		$	(37,240	)	$	28,418
Other comprehensive income related to availablefor sale securities, net of tax		948			-			(280	)		280			948
Comprehensive income	$	29,366		$	28,963		$	7,997		$	(36,960	)	$	29,366

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Cash Flows

	Six Months Ended June 30, 2016
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Net cash provided by (used in) operating activities	$	17,988		$	(45,748	)	$	5,674		$	-		$	(22,086	)
Net cash provided by (used in) investing activities		(6,756	)		(1,132	)		(2,967	)		43,077			32,222
Financing activities:
Payments from (advances to) subsidiaries		-			47,816			(4,739	)		(43,077	)		-
Mortgage repurchase facility		-			-			4,686			-			4,686
Dividend payments		(24,504	)		-			-			-			(24,504	)
Proceeds from the exercise of stock options		-			-			-			-			-
Net cash provided by (used in) financing activities		(24,504	)		47,816			(53	)		(43,077	)		(19,818	)

Net increase in cash and cash equivalents		(13,272	)		936			2,654			-			(9,682	)
Cash and cash equivalents:
Beginning of period		141,245			3,097			36,646			-			180,988
End of period	$	127,973		$	4,033		$	39,300		$	-		$	171,306

	Six Months Ended June 30, 2015
							Non-
				Guarantor			Guarantor			Eliminating			Consolidated
	MDC			Subsidiaries			Subsidiaries			Entries			MDC
	(Dollars in thousands)
Net cash provided by (used in) operating activities	$	35,266		$	(895	)	$	10,138		$	-		$	44,509
Net cash provided by (used in) investing activities		13,810			(265	)		698			2,346			16,589
Financing activities:
Payments from (advances to) subsidiaries		-			1,481			865			(2,346	)		-
Mortgage repurchase facility		-			-			(10,822	)		-			(10,822	)
Dividend payments		(24,425	)		-			-			-			(24,425	)
Proceeds from the exercise of stock options		612			-			-			-			612
Net cash provided by (used in) financing activities		(23,813	)		1,481			(9,957	)		(2,346	)		(34,635	)

Net increase in cash and cash equivalents		25,263			321			879			-			26,463
Cash and cash equivalents:
Beginning of period		119,951			2,691			31,183			-			153,825
End of period	$	145,214		$	3,012		$	32,062		$	-		$	180,288

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ITEM 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties.The forward-looking statements are based upon management’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 ended December 31,2015 and this Quarterly Report on Form 10-Q.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	571,195		$	461,708		$	965,615		$	838,717
Land sale revenues		316			-			2,640			910
Total home and land sale revenues		571,511			461,708			968,255			839,627
Home cost of sales		(475,836	)		(385,019	)		(805,862	)		(703,661	)
Land cost of sales		(216	)		-			(1,879	)		(1,125	)
Inventory impairments		(1,600	)		-			(1,600	)		(350	)
Total cost of sales		(477,652	)		(385,019	)		(809,341	)		(705,136	)
Gross margin		93,859			76,689			158,914			134,491
Gross margin %		16.4	%		16.6	%		16.4	%		16.0	%
Selling, general and administrative expenses		(64,440	)		(54,781	)		(120,717	)		(105,313	)
Interest and other income		2,553			2,720			3,489			4,574
Other expense		(278	)		(1,055	)		(905	)		(2,189	)
Other-than-temporary impairment of marketable securities		(288	)		-			(719	)		-
Homebuilding pretax income		31,406			23,573			40,062			31,563

Financial Services:
Revenues		15,823			11,420			26,840			22,011
Expenses		(7,543	)		(4,207	)		(13,784	)		(10,366	)
Interest and other income		772			1,096			1,613			2,000
Financial services pretax income		9,052			8,309			14,669			13,645

Income before income taxes		40,458			31,882			54,731			45,208
Provision for income taxes		(13,545	)		(11,884	)		(18,255	)		(16,790	)
Net income	$	26,913		$	19,998		$	36,476		$	28,418

Earnings per share:
Basic	$	0.55		$	0.41		$	0.74		$	0.58
Diluted	$	0.55		$	0.41		$	0.74		$	0.58

Weighted average common shares outstanding:
Basic		48,851,350			48,768,021			48,839,660			48,741,476
Diluted		48,861,742			49,005,037			48,848,914			48,954,059

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

Cash provided by (used in):
Operating Activities	$	(7,101	)	$	29,083		$	(22,086	)	$	44,509
Investing Activities	$	19,048		$	22,927		$	32,222		$	16,589
Financing Activities	$	20,824		$	(1,637	)	$	(19,818	)	$	(34,635	)

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Overview

Industry Conditions

The 2016 spring selling season showed improvement over 2015. The stability of the housing industry continues to be driven by solid levels of employment, consumer confidence and personal income. Despite the Brexit-related uncertainties that unfolded at the end of the 2016 second quarter and ongoing concerns associated with the upcoming presidential election, we are optimistic that the industry will continue down a steady path as we continue to see strong household formation, a moderate supply of both new and existing homes, and mortgages rates at or near record lows. Furthermore, we believe that a reemergence of the first-time buyer into the market for new homes has the potential to increase the overall level of national new home sales.

Three Months EndedJune 30, 2016

Our net income for the 2016 second quarter was $26.9 million, or $0.55 per diluted share, a significant increase from $20.0 million, or $0.41 per diluted share, for the same period in the prior year. The increase was primarily driven by an improvement in home sale revenues of 24% coupled with a 60 basis point improvement in our selling, general and administrative (“SG&A”) expenses as a percentage of home sale revenues rate (“SG&A rate”) and a 380 basis point improvement in our effective tax rate.

Home sale revenues were up 24% from $461.7 million in the 2015 second quarter to $571.2 million in the 2016 second quarter. The $109.5 million improvement was the result of both a 10% increase in our average selling price and a 13% increase in the number of homes delivered. The increase in our average selling price was mostly due to a mix shift to higher-priced communities and, to a lesser extent, price increases implemented over the past twelve months. Our improvement in the number of homes delivered was the result of a 39% year-over-year increase in our beginning homes in backlog.

Net new home order activity increased 11% from the prior year period primarily driven by a 10% increase in our monthly sales absorption pace to 3.3, our highest second quarter absorption pace since 2005. Our average selling price of net new home orders increased 3% primarily driven by a shift in mix to higher priced communities. The year-over-year increase was smaller than in recent quarters, due in part to increasing our offering of a more affordable product in certain of our markets. As a result of the increase in both units and average price, the dollar value of our net new orders was up 15% from the 2015 second quarter to $723.0 million.

Six months endedJune 30, 2016

Our net income for the six months ended June 30, 2016 was $36.5 million, or $0.74 per diluted share, an increase compared to net income of $28.4 million, or $0.58 per diluted share, for the prior year period. Our net income was up primarily due to a 15% improvement in home sale revenues and a 30 basis point increase in our gross margin from home sale revenues.

Outlook

Our dollar value of homes in backlog reached $1.61 billion at June 30, 2016, up 42% year-over-year and the highest since our 2006 third quarter. However, expectations from our significant increase in backlog in regard to future home deliveries should continue to be tempered as a result of our backlog consisting of a much higher percentage of build-to-order sales, which are generally in backlog for a longer period of time, and subcontractor availability issues, which have continued to negatively impact our cycle times. As a result, we expect to experience a lower number of homes delivered as a percentage of beginning backlog (“backlog conversion rate”) for the remainder of the year than we have historically experienced. As we enter the second half of 2016, our key focus will remain on driving year-over-year growth in revenues by accelerating the delivery of homes from our significant beginning backlog.We are also increasing the availability of our recently developed series of more affordable home plans in many of our markets, because we believe that the first-time homebuyer segment will become an increasingly important part of the housing market.With overall liquidity of $756.1 millionand no senior note maturities until 2020, we believe that our financial position at June 30, 2016 provides us with the ability to grow operations as opportunities arise while still providing adequate protection from the volatile and cyclical nature of the housing market and the domestic and global economies. See"Forward-Looking Statements"below.

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Homebuilding

Pretax Income

	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2016			2015			Amount			%			2016			2015			Amount			%
	(Dollars in thousands)
West	$	15,740		$	15,597		$	143			1	%	$	25,438		$	24,100		$	1,338			6	%
Mountain		20,748			14,970			5,778			39	%		30,832			22,390			8,442			38	%
East		4,500			19			4,481			N/M			5,867			(402	)		6,269			N/M
Corporate		(9,582	)		(7,013	)		(2,569	)		37	%		(22,075	)		(14,525	)		(7,550	)		52	%
Total homebuildingpretax income	$	31,406		$	23,573		$	7,833			33	%	$	40,062		$	31,563		$	8,499			27	%

N/M – Not meaningful

For the three months ended June 30, 2016, we recorded homebuilding pretax income of $31.4 million, compared to $23.6 million for the same period in the prior year, an increase of $7.8 million. The improvement in pretax income for the quarter was primarily driven by a 24% year-over-year increase in our home sale revenues and a 60 basis point improvement in our SG&A rate. The year-over-year increases in pretax income for each of our West, Mountain and East segments were driven primarily by higher home sale revenues of 24%, 21% and 28%, respectively. Our Mountain and East segments also benefited from an improved gross margin from home sales percentage driven primarily by a higher percentage of build-to-order deliveries. The pretax loss in our Corporate segment grew by $2.6 million primarily due to higher compensation-related expenses.

For the six months ended June 30, 2016, we recorded homebuilding pretax income of $40.1 million, compared to $31.6 million for the same period in the prior year, an increase of $8.5 million. The increase was primarily attributable to a 15% increase in home sale revenues, coupled with a 30 basis point increase in gross margin from home sale revenues. The increases in pretax income for each of our West, Mountain and East segments were driven primarily by increases in home sale revenues of 17%, 16% and 8%, respectively. Furthermore, our East and Mountain segments benefited from improvements in their gross margin from home sales percentage.The additional $7.6 million of pretax loss in our Corporate segment was primarily due to higher compensation-related expenses.

Assets

	June 30,		December 31,		Change
	2016		2015		Amount			%
	(Dollars in thousands)
West	$	1,066,722	$	991,393	$	75,329			8	%
Mountain		559,287		536,831		22,456			4	%
East		317,013		324,457		(7,444	)		(2	)%
Corporate		335,792		393,712		(57,920	)		(15	)%
Total homebuilding assets	$	2,278,814	$	2,246,393	$	32,421			1	%

Total homebuilding assets were nearly unchanged at June 30, 2016 compared to December 31, 2015. Homebuilding assets in our West and Mountain segments increased modestly from December 31, 2015 as a result of incremental investments in our work-in-process inventories. The funds for these investments came from our Corporate segment, driving the majority of the $57.9 million decline in our Corporate segment’s assets.

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Home and land sale revenues

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2016		2015		Amount		%			2016		2015		Amount		%
	(Dollars in thousands)
West	$	270,031	$	217,701	$	52,330		24	%	$	461,406	$	394,518	$	66,888		17	%
Mountain		190,334		156,893		33,441		21	%		328,158		280,914		47,244		17	%
East		111,146		87,114		24,032		28	%		178,691		164,195		14,496		9	%
Total home and landsale revenues	$	571,511	$	461,708	$	109,803		24	%	$	968,255	$	839,627	$	128,628		15	%

For the 2016 second quarter, home and land sale revenues increased $109.8 million year-over-year to $571.5 million. For the six months ended June 30, 2016, home and land sale revenues increased $128.6 million from the same period in the prior year to $968.3 million. The increases for both the three and six months ended June 30, 2016 compared to the same periods in the prior year were driven by increases in our average selling price of 10% and 8%, respectively, and increases in new home deliveries of 13% and 7%, respectively.

New Home Deliveries

	Three Months Ended June 30,
	2016						2015						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		201	$	60,976	$	303.4		203	$	58,691	$	289.1		(1	)%		4	%		5	%
California		192		117,985		614.5		185		89,544		484.0		4	%		32	%		27	%
Nevada		148		51,834		350.2		134		46,616		347.9		10	%		11	%		1	%
Washington		85		39,236		461.6		59		22,850		387.3		44	%		72	%		19	%
West		626		270,031		431.4		581		217,701		374.7		8	%		24	%		15	%
Colorado		353		172,100		487.5		317		147,925		466.6		11	%		16	%		4	%
Utah		51		17,935		351.7		25		8,968		358.7		104	%		100	%		(2	)%
Mountain		404		190,035		470.4		342		156,893		458.8		18	%		21	%		3	%
Maryland		83		41,639		501.7		57		25,702		450.9		46	%		62	%		11	%
Virginia		75		38,623		515.0		60		28,326		472.1		25	%		36	%		9	%
Florida		84		30,867		367.5		86		33,086		384.7		(2	)%		(7	)%		(4	)%
East		242		111,129		459.2		203		87,114		429.1		19	%		28	%		7	%
Total		1,272	$	571,195	$	449.1		1,126	$	461,708	$	410.0		13	%		24	%		10	%

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	Six Months Ended June 30,
	2016						2015						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		361	$	106,038	$	293.7		353	$	105,577	$	299.1		2	%		0	%		(2	)%
California		317		193,515		610.5		325		158,530		487.8		(2	)%		22	%		25	%
Nevada		255		90,260		354.0		245		87,530		357.3		4	%		3	%		(1	)%
Washington		159		71,593		450.3		115		42,881		372.9		38	%		67	%		21	%
West		1,092		461,406		422.5		1,038		394,518		380.1		5	%		17	%		11	%
Colorado		602		293,675		487.8		562		259,863		462.4		7	%		13	%		6	%
Utah		90		32,510		361.2		56		20,140		359.6		61	%		61	%		0	%
Mountain		692		326,185		471.4		618		280,003		453.1		12	%		16	%		4	%
Maryland		117		57,445		491.0		113		52,858		467.8		4	%		9	%		5	%
Virginia		115		58,777		511.1		119		57,446		482.7		(3	)%		2	%		6	%
Florida		163		61,802		379.2		147		53,892		366.6		11	%		15	%		3	%
East		395		178,024		450.7		379		164,196		433.2		4	%		8	%		4	%
Total		2,179	$	965,615	$	443.1		2,035	$	838,717	$	412.1		7	%		15	%		8	%

For both the three and six months ended June 30, 2016, most of our markets experienced year-over-year increases in the average selling price of homes delivered. California and Washington each experienced the most significant increases in average selling price in both periods as both markets benefited from (1) a shift in mix to higher priced communities and (2) price increases implemented over the past twelve months.

The number of homes delivered for both the three and six months ended June 30, 2016 increased compared to the same periods in 2015 as our beginning backlog for each period was up 39% and 54% year-over-year, respectively. However, the benefit to deliveries from the improved beginning backlog was somewhat offset by a lower backlog conversion rate mostly due to (1) a higher percentage of our homes in beginning backlog being in the early phases of construction due to our renewed focus on build-to-order homes and (2) issues with subcontractor availability, which have negatively impacted our cycle times. During the 2016 second quarter, we were able to sequentially improve our backlog conversion rate to 41% from 39% in the 2016 first quarter and expect to maintain or improve upon the current quarter conversion rate for the two remaining quarters of 2016.See "Forward-Looking Statements"below.

Gross Margin

For the 2016 second quarter, our gross margin from home sales decreased 20 basis points from the same period in 2015. Our gross margin from home sales for the quarter was negatively impacted by inventory impairments of $1.6 million, but wasmostly offset by less interest included in cost of sales as a percentage of home sale revenues.

Our gross margin from home sales for the six months ended June 30, 2016 increased 30 basis points year-over-year due primarily to (1) a higher percentage of our deliveries coming from build-to-order sales, which typically have higher gross margins when compared to deliveries of homes that were started without a sales contract, and (2) less interest included in cost of sales as a percentage of home sale revenues primarily due to a higher inventory balance to allocate the interest incurred. The increase in our gross margin from home sales was tempered somewhat by $3.2 million, or 30 basis points, in negative adjustments to our warranty accrual, primarily due to higher than expected recent warranty related expenditures, and $1.6 million of inventory impairments.

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Inventory Impairments

Impairments of homebuilding inventory by segment for the three and six months ended June 30, 2016 and 2015 are shown in the table below.

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(Dollars in thousands)				(Dollars in thousands)
West	$	1,400	$	-	$	1,400	$	-
Mountain		-		-		-		-
East		200		-		200		350
Total Inventory Impairments	$	1,600	$	-	$	1,600	$	350

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

	Impairment Data								Quantitative Data
Three Months Ended	Total Subdivisions Tested		Inventory Impairments		Fair Value of Inventory After Impairments		Number of Subdivisions Impaired		Discount Rate
	(Dollars in thousands)
March 31, 2016		14	$	-	$	-		-			N/A
June 30, 2016		17	$	1,600	$	6,415		2		12%	to	15%

March 31, 2015		22	$	350	$	3,701		1			8.7%
June 30, 2015		22	$	-	$	-		-			N/A

Selling, General and Administrative Expenses

	Three Months Ended June 30,								Six Months Ended June 30,
	2016			2015			Change		2016			2015			Change
	(Dollars in thousands)
General and administrative expenses	$	31,414		$	26,377		$	5,037	$	62,880		$	52,290		$	10,590
General and administrative expensesas a percentage of home sale revenues		5.5	%		5.7	%		(20) bps		6.5	%		6.2	%		30 bps
Marketing expenses	$	14,433		$	13,191		$	1,242	$	26,466		$	25,318		$	1,148
Marketing expenses as a percentage ofhome sale revenues		2.5	%		2.9	%		(40) bps		2.7	%		3.0	%		(30) bps
Commissions expenses	$	18,593		$	15,213		$	3,380	$	31,371		$	27,705		$	3,666
Commissions expenses as a percentage ofhome sale revenues		3.3	%		3.3	%		0 bps		3.2	%		3.3	%		(10) bps
Total selling, general and administrativeexpenses	$	64,440		$	54,781		$	9,659	$	120,717		$	105,313		$	15,404
Total selling, general and administrativeexpenses as a percentage of homesale revenues		11.3	%		11.9	%		(60) bps		12.5	%		12.6	%		(10) bps

For the three and six months ended June 30, 2016, the increases in our general and administrative expenses were primarily due to increased compensation-related expenses driven by higher average headcount and additional stock-based compensation expense related to a non-qualified stock option grant made in the middle of the 2015 second quarter to each of our Chief Executive Officer and Chief Operating Officer. Despite the higher general and administrative expenses, we experienced year-over-year decreases in our SG&A rates for both periods as the result of year-over-year increases in home sale revenues of 24% and 15%, respectively, for the three and six months ended June 30, 2016.

Other-Than-Temporary Impairment of Marketable Securities

During the three and six months ended June 30, 2016, we recorded an impairment of marketable securities totaling $0.3 million and $0.7 million, respectively. The impairments recorded on certain equity securities were based on our determination that the unrealized loss on certain of our equity securities no longer met the criteria to be considered temporary. No such impairments were recorded during the same periods in 2015.

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Other Homebuilding Operating Data

Net New Orders:

	Three Months Ended June 30,
	2016								2015								% Change
	Homes		Dollar Value		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		236	$	69,393	$	294.0		2.62		250	$	70,350	$	281.4		2.35		(6	)%		(1	)%		4	%		11	%
California		308		178,438		579.3		5.33		283		158,462		559.9		4.44		9	%		13	%		3	%		20	%
Nevada		230		81,610		354.8		3.48		150		56,254		375.0		4.55		53	%		45	%		(5	)%		(24	)%
Washington		118		56,463		478.5		3.42		109		45,769		419.9		2.79		8	%		23	%		14	%		23	%
West		892		385,904		432.6		3.59		792		330,835		417.7		3.27		13	%		17	%		4	%		10	%
Colorado		413		191,329		463.3		4.02		410		187,483		457.3		3.23		1	%		2	%		1	%		24	%
Utah		77		28,070		364.5		3.21		63		22,458		356.5		3.11		22	%		25	%		2	%		3	%
Mountain		490		219,399		447.8		3.87		473		209,941		443.8		3.22		4	%		5	%		1	%		20	%
Maryland		69		31,750		460.1		1.67		61		28,660		469.8		2.14		13	%		11	%		(2	)%		(22	)%
Virginia		73		37,362		511.8		2.95		43		22,318		519.0		1.74		70	%		67	%		(1	)%		70	%
Florida		122		48,565		398.1		2.32		112		37,938		338.7		2.45		9	%		28	%		18	%		(5	)%
East		264		117,677		445.7		2.23		216		88,916		411.6		2.18		22	%		32	%		8	%		2	%
Total		1,646	$	722,980	$	439.2		3.34		1,481	$	629,692	$	425.2		3.03		11	%		15	%		3	%		10	%

	Six Months Ended June 30,
	2016								2015								% Change
	Homes		Dollar Value		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		459	$	138,015	$	300.7		2.49		475	$	132,673	$	279.3		2.22		(3	)%		4	%		8	%		12	%
California		537		322,374		600.3		4.54		512		280,992		548.8		4.15		5	%		15	%		9	%		9	%
Nevada		459		163,041		355.2		3.57		377		143,669		381.1		4.83		22	%		13	%		(7	)%		(26	)%
Washington		242		116,336		480.7		3.17		221		91,814		415.4		2.90		10	%		27	%		16	%		9	%
West		1,697		739,766		435.9		3.34		1,585		649,148		409.6		3.22		7	%		14	%		6	%		4	%
Colorado		906		427,248		471.6		4.11		900		418,453		464.9		3.56		1	%		2	%		1	%		15	%
Utah		143		52,783		369.1		3.03		129		46,747		362.4		3.27		11	%		13	%		2	%		(7	)%
Mountain		1,049		480,031		457.6		3.92		1,029		465,200		452.1		3.52		2	%		3	%		1	%		11	%
Maryland		158		74,810		473.5		2.09		128		62,276		486.5		2.33		23	%		20	%		(3	)%		(10	)%
Virginia		158		82,055		519.3		3.07		115		57,497		500.0		2.10		37	%		43	%		4	%		46	%
Florida		230		97,657		424.6		2.42		217		77,374		356.6		2.51		6	%		26	%		19	%		(4	)%
East		546		254,522		466.2		2.46		460		197,147		428.6		2.34		19	%		29	%		9	%		5	%
Total		3,292	$	1,474,319	$	447.8		3.30		3,074	$	1,311,495	$	426.6		3.13		7	%		12	%		5	%		5	%

* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period

For the three and six months ended June 30, 2016, the dollar value of net new orders increased 15% and 12%, respectively, compared to the same periods in the prior year, as both net new orders and average selling price increased from the prior year periods. Our net new orders in both periods were up primarily due to improved absorption rates.

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For both periods in 2016, our California, Nevada, Washington, Virginia and Florida markets primarily drove the $93.3 million and $162.8 million year-over-year increases, respectively, in the dollar value of net new orders. In California, we continued to see improving demand and a shift in mix to higher priced communities, driving $20.0 million and $41.4 million, respectively, in year-over-year increases in the dollar value of net new orders for the three and six months ended June 30, 2016. The $25.4 million and $19.4 million, respectively, of increases in our Nevada market’s dollar value of net new orders were driven by higher net new orders, which were the result of a significant increases in our average active community count, but partially offset by a decline in our monthly sales absorption rate. Our monthly sales absorption pace in Nevada during 2015 benefited from higher sales coming from certain active communities that were in high demand whereas those communities were no longer active in 2016. Our Washington market has been very strong in 2016 and, as a result, we have been able to drive price increases while continuing to see strong monthly sales absorption paces. In 2015, demand in our Virginia market was particularly tepid. During 2016, we have seen demand improve, which has helped drive the $15.0 million and $24.6 million improvements, respectively, in the dollar value of net new orders. Our Florida market has benefited from an increase in average active communities and a higher average selling price, primarily due to a higher portion of sales coming from our communities in South Florida, which have the highest selling price in the state.

Active Subdivisions:

								Average Active Subdivisions							Average Active Subdivisions
	Active Subdivisions							Three Months Ended							Six Months Ended
	June 30,				%			June 30,				%			June 30,				%
	2016		2015		Change			2016		2015		Change			2016		2015		Change
Arizona		30		35		(14	)%		30		36		(17	)%		31		36		(14	)%
California		20		20		0	%		19		21		(10	)%		20		21		(5	)%
Nevada		22		11		100	%		22		11		100	%		21		13		62	%
Washington		10		13		(23	)%		12		13		(8	)%		13		13		0	%
West		82		79		4	%		83		81		2	%		85		83		2	%
Colorado		28		39		(28	)%		34		42		(19	)%		37		42		(12	)%
Utah		8		7		14	%		8		7		14	%		8		7		14	%
Mountain		36		46		(22	)%		42		49		(14	)%		45		49		(8	)%
Maryland		13		9		44	%		14		10		40	%		13		9		44	%
Virginia		9		7		29	%		8		8		0	%		9		9		0	%
Florida		19		15		27	%		18		15		20	%		16		14		14	%
East		41		31		32	%		40		33		21	%		38		32		19	%
Total		159		156		2	%		165		163		1	%		168		164		2	%

At June 30, 2016, we had 159 active subdivisions, a 2% increase from June 30, 2015. With regard to our Colorado market, although we experienced a 28% year-over-year decrease in our number of active communities, our lots owned and optioned at June 30, 2016, as discussed in the “Lots Owned and Optioned” section below, are up 14% year-over-year and we expect this to drive future increases in active community count. For our remaining markets, the year-over-year change is primarily driven by the timing of opening new communities versus closing out older communities. See"Forward-Looking Statements" below.

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Cancellation Rate:

	Three Months Ended June 30,						Change in			Six Months Ended June 30,						Change in
	2016			2015			Percentage			2016			2015			Percentage
Arizona		25	%		17	%		8	%		23	%		20	%		3	%
California		19	%		19	%		0	%		19	%		19	%		0	%
Nevada		15	%		15	%		0	%		14	%		13	%		1	%
Washington		16	%		17	%		(1	)%		17	%		15	%		2	%
West		19	%		17	%		2	%		19	%		17	%		2	%
Colorado		22	%		20	%		2	%		18	%		17	%		1	%
Utah		18	%		18	%		0	%		19	%		15	%		4	%
Mountain		22	%		20	%		2	%		18	%		17	%		1	%
Maryland		27	%		20	%		7	%		23	%		16	%		7	%
Virginia		18	%		34	%		(16	)%		16	%		27	%		(11	)%
Florida		26	%		24	%		2	%		26	%		23	%		3	%
East		24	%		25	%		(1	)%		22	%		23	%		(1	)%
Total		21	%		19	%		2	%		19	%		18	%		1	%

Our cancellation rate for the three and six months ended June 30, 2016 was up slightly from the same periods in 2015. For both periods in 2016, our Virginia market had the most significant year-over-year changes. The improvement in our Virginia market for both periods was the result of 2015 having a higher number of cancellations from homes with contingencies in beginning backlog.

Backlog:

	June 30,
	2016						2015						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		419	$	129,591	$	309.3		353	$	102,062	$	289.1		19	%		27	%		7	%
California		562		360,450		641.4		379		217,806		574.7		48	%		65	%		12	%
Nevada		399		138,604		347.4		287		114,305		398.3		39	%		21	%		(13	)%
Washington		262		127,968		488.4		161		68,564		425.9		63	%		87	%		15	%
West		1,642		756,613		460.8		1,180		502,737		426.0		39	%		50	%		8	%
Colorado		1,126		546,356		485.2		917		428,450		467.2		23	%		28	%		4	%
Utah		161		59,133		367.3		113		39,681		351.2		42	%		49	%		5	%
Mountain		1,287		605,489		470.5		1,030		468,131		454.5		25	%		29	%		4	%
Maryland		131		61,623		470.4		83		42,326		510.0		58	%		46	%		(8	)%
Virginia		144		76,278		529.7		86		44,964		522.8		67	%		70	%		1	%
Florida		241		107,679		446.8		179		71,180		397.7		35	%		51	%		12	%
East		516		245,580		475.9		348		158,470		455.4		48	%		55	%		5	%
Total		3,445	$	1,607,682	$	466.7		2,558	$	1,129,338	$	441.5		35	%		42	%		6	%

At June 30, 2016, we had 3,445 homes in backlog with a total value of $1.61 billion, representing a year-over-year increase of 887 homes and $478.3 million from June 30, 2015. The increase in the number homes in backlog for each of our markets was driven by a combination of the following factors: (1) an increase in net new order activity over the last twelve months, (2) a higher percentage of our backlog coming from build-to-order sales, which are generally in backlog for a longer period of time and, (3) limited subcontractor availability, which has extended our cycle times.

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Homes Completed or Under Construction (WIP lots):

	June 30,				%
	2016		2015		Change
Unsold:
Completed		100		229		(56	)%
Under construction		263		459		(43	)%
Total unsold started homes		363		688		(47	)%
Sold homes under construction or completed		2,535		1,787		42	%
Model homes		289		281		3	%
Total homes completed or under construction		3,187		2,756		16	%

At the beginning of 2015, we increased our focus on build-to-order sales and started fewer unsold homes, giving our customers the best opportunity to personalize their homes. As a result, our supply of unsold homes has declined by 47% year-over-year from June 30, 2015. However, this decline was more than offset by a 42% increase in sold homes under construction or completed as a result of our higher backlog, resulting in a 16% increase in our total homes completed or under construction.

Lots Owned and Optioned (including homes completed or under construction):

	June 30, 2016						June 30, 2015
	Lots Owned		Lots Optioned		Total		Lots Owned		Lots Optioned		Total		Total % Change
Arizona		1,565		259		1,824		1,972		40		2,012		(9	)%
California		1,834		79		1,913		1,625		55		1,680		14	%
Nevada		2,087		67		2,154		1,683		420		2,103		2	%
Washington		816		35		851		825		129		954		(11	)%
West		6,302		440		6,742		6,105		644		6,749		(10	)%
Colorado		3,937		1,423		5,360		3,878		821		4,699		14	%
Utah		424		-		424		535		-		535		(21	)%
Mountain		4,361		1,423		5,784		4,413		821		5,234		11	%
Maryland		297		168		465		385		325		710		(35	)%
Virginia		498		107		605		588		319		907		(33	)%
Florida		1,038		512		1,550		910		160		1,070		45	%
East		1,833		787		2,620		1,883		804		2,687		(2	)%
Total		12,496		2,650		15,146		12,401		2,269		14,670		3	%

Our total owned and optioned lots at June 30, 2016 were 15,146, up 3% from June 30, 2015. Our current lot supply of approximately 3.3 years (which is based on our last-twelve months deliveries and is within our stated strategic range), coupled with our planned acquisition activity, will support growth in future periods. See "Forward-Looking Statements" below.

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Financial Services

	Three Months Ended										Six Months Ended
	June 30,				Change						June 30,				Change
	2016		2015		Amount			%			2016		2015		Amount			%
	(Dollars in thousands)
Financial services revenues
Mortgage operations	$	10,702	$	7,104	$	3,598			51	%	$	17,572	$	13,753	$	3,819			28	%
Other		5,121		4,316		805			19	%		9,268		8,258		1,010			12	%
Total financial services revenues	$	15,823	$	11,420	$	4,403			39	%	$	26,840	$	22,011	$	4,829			22	%

Financial services pretax income
Mortgage operations	$	6,445	$	4,097	$	2,348			57	%	$	9,768	$	6,889	$	2,879			42	%
Other		2,607		4,212		(1,605	)		(38	)%		4,901		6,756		(1,855	)		(27	)%
Total financial services pretaxincome	$	9,052	$	8,309	$	743			9	%	$	14,669	$	13,645	$	1,024			8	%

For the three and six months ended June 30, 2016, our financial services pretax income was up $0.7 million, or 9%, and $1.0 million, or 8%, respectively, from the same periods in the prior year. The year-over-year increases in pretax income for both periods were primarily due to our mortgage operations segment having (1) increases in the dollar value of loans locked, originated, and sold, and (2) higher gains on loans locked and sold. The improvements in our mortgage operations segment were mostly offset by year-over-year reductions in pretax income in our other financial services as segment for both periods. The declines in both periods were the result of a $1.5 million adjustment recorded during our 2015 second quarter to reduce insurance reserves as the result of a decline in insurance claim payment severity and frequency relative to prior period estimates. No such positive adjustment was recorded during 2016.

Thefollowing table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. “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.

	Three Months Ended						% or			Six Months Ended						% or
	June 30,						Percentage			June 30,						Percentage
	2016			2015			Change			2016			2015			Change
	(Dollars in thousands)
Total Originations (including transfer loans):
Loans		758			660			15	%		1,284			1,153			11	%
Principal	$	270,523		$	219,807			23	%	$	451,485		$	386,719			17	%
Capture Rate Data:
Capture rate as % of all homes delivered		59	%		58	%		1	%		58	%		56	%		2	%
Capture rate as % of all homesdelivered (excludes cash sales)		63	%		62	%		1	%		61	%		60	%		1	%
Mortgage Loan Origination Product Mix:
FHA loans		18	%		17	%		1	%		19	%		16	%		3	%
Other government loans (VA & USDA)		26	%		28	%		(2	)%		25	%		28	%		(3	)%
Total government loans		44	%		45	%		(1	)%		44	%		44	%		0	%
Conventional loans		56	%		55	%		1	%		56	%		56	%		0	%
		100	%		100	%		0	%		100	%		100	%		0	%
Loan Type:
Fixed rate		98	%		95	%		3	%		98	%		96	%		2	%
ARM		2	%		5	%		(3	)%		2	%		4	%		(2	)%
Credit Quality:
Average FICO Score		737			736			0	%		736			736			0	%
Other Data:
Average Combined LTV ratio		84	%		85	%		(1	)%		84	%		85	%		(1	)%
Full documentation loans		100	%		100	%		0	%		100	%		100	%		0	%
Loans Sold to Third Parties:
Loans		679			613			11	%		1,304			1,179			11	%
Principal	$	235,713		$	203,722			16	%	$	449,140		$	393,133			14	%

Income Taxes

For the three and six months ended June 30, 2016, we had income tax expenses of $13.5 million and $18.3 million, respectively, both of which were based on effective income tax rates of 33.5% and 33.4%, respectively. For the three and six months ended June 30, 2015, we had income tax expenses of $11.9 million and $16.8 million, respectively, which were based on effective income tax rates of 37.3% and 37.1%, respectively. The year-over-year improvements in our effective tax rates are primarily the result of our estimated 2016 full year effective tax rate including (1) an estimate for energy credits versus no such estimate as of June 30, 2015 as the credit for both 2015 and 2016 was not approved by the U.S. Congress until December 2015, and (2) a domestic manufacturing deduction, whereas we were not eligible for this deduction in the prior year due to our net operating loss carryforwards.

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting policies 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.

Our critical accounting estimates and policies have not changed from those reported in Management’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, 2015.

LIQUIDITY AND CAPITAL RESOURCES

We use our liquidity and capital resources 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 facility and mortgage repurchase facility. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.50 billion.

We have marketable equity securities that consist primarily of holdings in corporate equities and holdings in mutual fund securities, which are invested mostly in debt securities.

Capital Resources

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½% senior notes due 2024 and our 6% senior notes due 2043; (3) our Revolving Credit Facility and (4) our Mortgage Repurchase Facility. 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.

We may from time to time seek to retire or purchase our outstanding senior 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.

Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility

Senior Notes.Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries. We believe that we are in compliance with the representations, warranties and covenants in the senior note indentures.

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As of June 30, 2016, we had $15.0 million in borrowings and $27.5 million in letters of credit outstanding under the Revolving Credit Facility, leaving a remaining borrowing capacity of $507.5 million.

Mortgage Repurchase Facility.HomeAmerican has a master repurchase agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”) that will expire on September 16, 2016. We anticipate extending the maturity date of the facility before its scheduled expiration date (See “Forward-Looking Statements” below). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale 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 maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on June 24, 2016 from $50 million to $100 million and was effective through July 28, 2016. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $50 million to $90 million from December 23, 2015 through January 31, 2016. At June 30, 2016 and December 31, 2015, there were $93.3 million and $88.6 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. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of June 30, 2016.

Dividends

During the three and six months ended June 30, 2016 and 2015, we paid dividends of $0.25 per share and $0.50 per share, respectively.

MDC Common Stock Repurchase Program

At June 30, 2016, 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 or six months ended June 30, 2016.

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Consolidated Cash Flow

During the six months ended June 30, 2016, we used $22.1 million of cash from operating activities, primarily due to (1) the use of $64.1 million to increase our inventory from December 31, 2015, and (2) a $26.2 million increase to our trade and other receivables. These uses of cash were partially offset by net income of $36.5 million, a $19.5 million increase in accounts payable and accrued liabilities, and the use of net operating loss carryforwards and energy credits to reduce our current taxes payable.

During the six months ended June 30, 2016, we generated $32.2 million of cash from investing activities, primarily attributable to the sale of $50.8 million in marketable securities, partially offset by the purchases of $15.4 million in marketable securities and $3.1 million in property and equipment.

During the six months ended June 30, 2016, we used $19.8 million in cash for financing activities, primarily related to dividend payments totaling $24.5 million. This was partially offset by net advances totaling $4.7 million on our mortgage repurchase facility.

Off-Balance Sheet Arrangements

Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At June 30, 2016, we had deposits of $8.1 million in the form of cash and $2.7 million in the form of letters of credit that secured option contracts to purchase 2,650 lots for a total estimated purchase price of $215.9 million.

Surety Bonds and Letters of Credit.At June 30, 2016, we had issued and outstanding surety bonds and letters of credit totaling$162.1 million and $70.9 million, respectively, including $43.4 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately$44.0 million and $47.8 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.

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

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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2015 Annual Report on Form 10-K.

OTHER

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

Item 3. Quantitativeand Qualitative Disclosures About Market Risk

Our cash and investment policy and strategy is to achieve an appropriate investment return while preserving principal and managing risk. Our cash and cash equivalents may include immediately available commercial bank deposits, commercial paper, money market funds, certificates of deposit and time deposits. Our marketable securities consist primarily of holdings in mutual fund securities, which invest mostly in floating and fixed rate debt securities, and direct holdings in corporate equities. The market value and/or income derived from our equity securities can be negatively impacted by a number of market risk factors, including changes in interest rates, general economic conditions and equity markets. As of June 30, 2016, we had marketable securities in unrealized loss positions totaling $0.9 million, against which we recorded impairments totaling $0.3 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 the market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.

We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate lock commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at June 30, 2016 had an aggregate principal balance of $122.8 million, all of which were under interest rate lock commitments at an average interest rate of 3.57%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $114.2 million at June 30, 2016, of which $23.1 million had not yet been committed to a mortgage purchaser and had an average interest rate of 3.66 %. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $85.0 million at June 30, 2016.

HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 15 and 40 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.

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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 does affect our earnings and cash flows. See “Forward-Looking Statements” above.

Item 4. Controlsand Procedures

(a) Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer (principle executive officer) and the Chief Financial Officer (principal financial officer). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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M.D.C. HOLDINGS, INC.

FORM 10-Q

PART II

Item 1. LegalProceedings

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

Item 1A. RiskFactors

There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2015. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2015, 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.

●

Increases in our cancellations could have a negative impact on 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.

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●

We are dependent on the services of key employees, and the loss of their services could hurt our business.

●

The interests of certain controlling shareholders may be adverse to investors

●

Information technology failures and data security breaches could harm our business.

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds

The Company did not repurchase any shares during the three and six months ended June 30, 2016. Additionally, there were no sales of unregistered equity securities during the period.

Item 3. DefaultsUpon Senior Securities

Not applicable.

Item 4. MineSafety Disclosures

Not applicable.

Item 5. OtherInformation

Not applicable.

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Item 6. Exhibits

10.1

Second Amendment to the M.D.C. Holdings, Inc. 2011 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed April 1, 2016). *

10.2

Form of Restricted Stock Award Agreement (2011 Stock Option Plan for Non-Employee Directors).

31.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

____________________

* Incorporated by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 3, 2016	M.D.C. HOLDINGS, INC.
	(Registrant)


	By:	/s/ Robert N. Martin
		Robert N. Martin
		Senior Vice President, Chief Financial Officer and Principal Accounting Officer (principal financial officer and duly authorized officer)

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INDEX TO EXHIBITS

ExhibitNumber

Description


	10.1	Second Amendment to the M.D.C. Holdings, Inc. 2011 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed April 1, 2016). *

10.2

Form of Restricted Stock Award Agreement (2011 Stock Option Plan for Non-Employee Directors).

31.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

____________________

* Incorporated by reference.

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Positive
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Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

M.D.C. (MDC) 10-Q2016 Q2 Quarterly report

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