City

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, ~~2020~~2021


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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


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

4350 South Monaco Street, Suite 500

80237

Denver, Colorado

(Zip code)

(Address of principal executive offices)

(303) 773-1100

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

552676108

New York Stock Exchange

6% Senior Notes due January 2043

552676AQ1

New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July ~~24, 2020, 63,401,388~~27, 2021, 70,620,251 shares of M.D.C. Holdings, Inc. common stock were outstanding.

Table o fof Contents

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE~~June 30, ~~2020~~2021

INDEX

Page

No.

Part I. Financial Information:

Item 1.

Unaudited Consolidated Financial Statements:

Consolidated Balance Sheets at June 30, 3 ~~0, 20~~20 2021 and December 31, ~~2019~~2020

Consolidated Statements of Operations and Comprehensive Income for the three and six ~~six~~months ended June 30 , 20 20 2021 and ~~2019~~2020

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 3 0 20 20 , 2021 and ~~2019~~2020

Consolidated Statements of Cash Flows for the six months ended June 3 ~~30, 20~~0 20 , 2021 and 20 192020

Notes to Unaudited Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2422

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3836

Item 4.

Controls and Procedures

3936

Part II. Other Information:

Unregistered Sales of Equity Securities and Use of Proceeds

(i)

PART I

~~ITEM~~Item 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

June 30,
2020 December 31,
2019
(Dollars in thousands, except
per share amounts)
ASSETS
Homebuilding:
Cash and cash equivalents $ 482,702 $ 424,186
Restricted cash 15,668 14,279
Trade and other receivables 88,279 65,829
Inventories:
Housing completed or under construction 1,270,300 1,036,191
Land and land under development 1,235,598 1,330,384
Total inventories 2,505,898 2,366,575
Property and equipment, net 62,516 60,414
Deferred tax asset, net 19,828 21,768
Prepaid and other assets 69,484 78,358
Total homebuilding assets 3,244,375 3,031,409
Financial Services:
Cash and cash equivalents 62,218 35,747
Marketable securities — 56,747
Mortgage loans held-for-sale, net 173,567 197,021
Other assets 25,775 17,432
Total financial services assets 261,560 306,947
Total Assets $ 3,505,935 $ 3,338,356
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable $ 95,018 $ 87,364
Accrued and other liabilities 278,543 245,940
Revolving credit facility 10,000 15,000
Senior notes, net 1,037,062 989,422
Total homebuilding liabilities 1,420,623 1,337,726
Financial Services:
Accounts payable and accrued liabilities 70,033 68,529
Mortgage repurchase facility 142,094 149,616
Total financial services liabilities 212,127 218,145
Total Liabilities 1,632,750 1,555,871
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding — —
Common stock, $0.01 par value; 250,000,000 shares authorized; 63,384,866 and 62,574,961 issued and outstanding at June 30, 2020 and December 31, 2019, respectively 634 626
Additional paid-in-capital 1,359,985 1,348,733
Retained earnings 512,566 433,126
Total Stockholders' Equity 1,873,185 1,782,485
Total Liabilities and Stockholders' Equity $ 3,505,935 $ 3,338,356


	June 30, 2021		December 31, 2020

	(Dollars in thousands, except per share amounts)
ASSETS
Homebuilding:
Cash and cash equivalents	$	638,547	$	411,362
Restricted cash	14,158		15,343
Trade and other receivables	133,146		72,466
Inventories:
Housing completed or under construction	1,872,666		1,486,587
Land and land under development	1,309,360		1,345,643
Total inventories	3,182,026		2,832,230
Property and equipment, net	59,664		61,880
Deferred tax asset, net	14,793		11,454
Prepaids and other assets	98,066		101,685
Total homebuilding assets	4,140,400		3,506,420
Financial Services:
Cash and cash equivalents	88,654		77,267

Mortgage loans held-for-sale, net	186,086		232,556
Other assets	43,054		48,677
Total financial services assets	317,794		358,500
Total Assets	$	4,458,194	$	3,864,920
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	135,712	$	98,862
Accrued and other liabilities	330,929		300,735
Revolving credit facility	10,000		10,000
Senior notes, net	1,384,714		1,037,391
Total homebuilding liabilities	1,861,355		1,446,988
Financial Services:
Accounts payable and accrued liabilities	99,599		95,630
Mortgage repurchase facility	164,681		202,390
Total financial services liabilities	264,280		298,020
Total Liabilities	2,125,635		1,745,008
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding	0		0
Common stock, $0.01 par value; 250,000,000 shares authorized; 70,619,638 and 64,851,126 issued and outstanding at June 30, 2021 and December 31, 2020, respectively	706		649
Additional paid-in-capital	1,689,689		1,407,597
Retained earnings	642,164		711,666
Total Stockholders' Equity	2,332,559		2,119,912
Total Liabilities and Stockholders' Equity	$	4,458,194	$	3,864,920

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues $ 886,758 $ 732,844 $ 1,583,843 $ 1,380,122
Home cost of sales (707,789) (590,172) (1,266,436) (1,114,724)
Inventory impairments — — — (610)
Total cost of sales (707,789) (590,172) (1,266,436) (1,115,334)
Gross profit 178,969 142,672 317,407 264,788
Selling, general and administrative expenses (92,316) (82,712) (181,637) (164,973)
Interest and other income 720 2,764 2,609 5,155
Other expense (2,452) (1,110) (3,789) (2,301)
Homebuilding pretax income 84,921 61,614 134,590 102,669
Financial Services:
Revenues 32,964 18,597 54,850 36,001
Expenses (12,178) (9,574) (23,107) (18,531)
Other income (expense), net 5,931 3,694 (6,133) 9,798
Financial services pretax income 26,717 12,717 25,610 27,268
Income before income taxes 111,638 74,331 160,200 129,937
Provision for income taxes (27,242) (19,738) (39,044) (34,794)
Net income $ 84,396 $ 54,593 $ 121,156 $ 95,143
Comprehensive income $ 84,396 $ 54,593 $ 121,156 $ 95,143
Earnings per share:
Basic $ 1.33 $ 0.88 $ 1.92 $ 1.55
Diluted $ 1.31 $ 0.86 $ 1.87 $ 1.50
Weighted average common shares outstanding:
Basic 63,015,827 61,336,404 62,755,310 61,138,982
Diluted 64,080,940 63,323,267 64,538,835 63,023,149
Dividends declared per share $ 0.33 $ 0.30 $ 0.66 $ 0.60


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	1,367,773	$	886,758	$	2,409,631	$	1,583,843
Home cost of sales	(1,051,181)		(707,789)		(1,865,069)		(1,266,436)


Gross profit	316,592		178,969		544,562		317,407
Selling, general and administrative expenses	(128,861)		(92,316)		(243,854)		(181,637)
Interest and other income	868		720		1,835		2,609
Other expense	(1,090)		(2,452)		(1,527)		(3,789)
Homebuilding pretax income	187,509		84,921		301,016		134,590

Financial Services:
Revenues	33,318		32,964		78,341		54,850
Expenses	(16,440)		(12,178)		(31,545)		(23,107)
Other income (expense), net	1,155		5,931		2,042		(6,133)
Financial services pretax income	18,033		26,717		48,838		25,610

Income before income taxes	205,542		111,638		349,854		160,200
Provision for income taxes	(51,190)		(27,242)		(84,812)		(39,044)
Net income	$	154,352	$	84,396	$	265,042	$	121,156

Comprehensive income	$	154,352	$	84,396	$	265,042	$	121,156

Earnings per share:
Basic	$	2.19	$	1.23	$	3.76	$	1.78
Diluted	$	2.11	$	1.21	$	3.62	$	1.73

Weighted average common shares outstanding:
Basic	70,291,057		68,057,093		70,044,326		67,775,735
Diluted	72,715,273		69,207,415		72,754,141		69,701,942

Dividends declared per share	$	0.40	$	0.31	$	0.77	$	0.61

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)


	Six Months Ended June 30, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2020	64,851,126	$	649	$	1,407,597	$	711,666	$	2,119,912
Net Income	—	—		—		110,690		110,690
Shares issued under stock-based compensation programs, net	221,303	2		1,007		—		1,009
Cash dividends declared	—	—		—		(25,978)		(25,978)
Stock dividend declared	5,192,776	52		279,579		(280,318)		(687)
Stock-based compensation expense	—	—		9,926		—		9,926

Balance at March 31, 2021	70,265,205	$	703	$	1,698,109	$	516,060	$	2,214,872
Net Income	—	—		—		154,352		154,352
Shares issued under stock-based compensation programs, net	358,993	3		(16,546)		—		(16,543)
Cash dividends declared	—	—		—		(28,248)		(28,248)
Stock-based compensation expense	—	—		8,126		—		8,126
Forfeiture of restricted stock	(4,560)	—		—		—		—
Balance at June 30, 2021	70,619,638	$	706	$	1,689,689	$	642,164	$	2,332,559


		Six Months Ended June 30, 2020																					Six Months Ended June 30, 2020
		Common Stock					Additional Paid-in Capital		Retained Earnings				Total	Common Stock						Additional Paid-in Capital			Retained Earnings			Total
		Shares	Amount													Shares			Amount			Additional Paid-in Capital			Retained Earnings		Total
Balance at December 31, 2019	Balance at December 31, 2019	62,574,961	$	626	$	1,348,733	$	433,126	$	1,782,485	Balance at December 31, 2019	62,574,961		$	626		$	1,348,733		$	433,126		$	1,782,485
Cumulative effect of newly adopted accounting standards (Note 2)		—	—		—		(34)		(34)
Cumulative effect of newly adopted accounting standards											Cumulative effect of newly adopted accounting standards	—		—			—			(34)			(34)
Balance at January 1, 2020	Balance at January 1, 2020	62,574,961	626		1,348,733		433,092		1,782,451		Balance at January 1, 2020	62,574,961		626			1,348,733			433,092			1,782,451
Net Income	Net Income	—	—		—		36,760		36,760		Net Income	—		—			—			36,760			36,760
Shares issued under stock-based compensation programs, net	Shares issued under stock-based compensation programs, net	477,582	5		8,189		—		8,194		Shares issued under stock-based compensation programs, net	477,582		5			8,189			—			8,194
Cash dividends declared	Cash dividends declared	—	—		—		(20,768)		(20,768)		Cash dividends declared	—		—			—			(20,768)			(20,768)
Stock-based compensation expense	Stock-based compensation expense	—	—		4,440		—		4,440		Stock-based compensation expense	—		—			4,440			—			4,440
Forfeiture of restricted stock	Forfeiture of restricted stock	(48)	—		—		—		—		Forfeiture of restricted stock	(48)		—			—			—			—
Balance at March 31, 2020	Balance at March 31, 2020	63,052,495	$	631	$	1,361,362	$	449,084	$	1,811,077	Balance at March 31, 2020	63,052,495		$	631		$	1,361,362		$	449,084		$	1,811,077
Net Income	Net Income	—	—		—		84,396		84,396		Net Income	—		—			—			84,396			84,396
Shares issued under stock-based compensation programs, net	Shares issued under stock-based compensation programs, net	334,178	3		(6,865)		—		(6,862)		Shares issued under stock-based compensation programs, net	334,178		3			(6,865)			—			(6,862)
Cash dividends declared	Cash dividends declared	—	—		—		(20,914)		(20,914)		Cash dividends declared	—		—			—			(20,914)			(20,914)
Stock-based compensation expense	Stock-based compensation expense	—	—		5,488		—		5,488		Stock-based compensation expense	—		—			5,488			—			5,488
Forfeiture of restricted stock	Forfeiture of restricted stock	(1,807)	—		—		—		—		Forfeiture of restricted stock	(1,807)		—			—			—			—
Balance at June 30, 2020	Balance at June 30, 2020	63,384,866	$	634	$	1,359,985	$	512,566	$	1,873,185	Balance at June 30, 2020	63,384,866		$	634		$	1,359,985		$	512,566		$	1,873,185

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows~~Changes in Stockholders’ Equity~~

~~(Dollars in thousands, except share amounts)~~

Six Months Ended June 30, 2019
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shares Amount
Balance at December 31, 2018 56,615,352 $ 566 $ 1,168,442 $ 406,992 $ 1,576,000
Cumulative effect of newly adopted accounting standards — — — (67) (67)
Balance at January 1, 2019 56,615,352 566 1,168,442 406,925 1,575,933
Net Income — — — 40,550 40,550
Shares issued under stock-based compensation programs, net 372,344 4 7,083 — 7,087
Cash dividends declared — — — (17,019) (17,019)
Stock dividend declared 4,534,908 45 138,950 (139,091) (96)
Stock-based compensation expense — — 4,251 — 4,251
Forfeiture of restricted stock (1,714) — — — —
Balance at March 31, 2019 61,520,890 $ 615 $ 1,318,726 $ 291,365 $ 1,610,706
Net Income — — — 54,593 54,593
Shares issued under stock-based compensation programs, net 405,094 4 10,237 — 10,241
Cash dividends declared — — — (18,521) (18,521)
Stock-based compensation expense — — 4,132 — 4,132
Forfeiture of restricted stock (3,578) — — — —
Balance at June 30, 2019 61,922,406 $ 619 $ 1,333,095 $ 327,437 $ 1,661,151


	Six Months Ended June 30,
	2021		2020

	(Dollars in thousands)
Operating Activities:
Net income	$	265,042	$	121,156
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	18,867		9,928
Depreciation and amortization	16,178		11,527

Net loss on marketable equity securities	0		8,285
Deferred income tax expense	(3,339)		1,962
Net changes in assets and liabilities:
Trade and other receivables	(57,105)		(23,445)
Mortgage loans held-for-sale, net	46,470		23,454
Housing completed or under construction	(385,698)		(233,829)
Land and land under development	36,379		94,918
Prepaids and other assets	4,695		1,209
Accounts payable and accrued and other liabilities	70,595		40,539
Net cash provided by operating activities	12,084		55,704

Investing Activities:
Purchases of marketable securities	0		(10,804)
Sales of marketable securities	0		59,266
Purchases of property and equipment	(13,447)		(12,968)
Net cash provided by (used in) investing activities	(13,447)		35,494

Financing Activities:
Payments on mortgage repurchase facility, net	(37,709)		(7,522)
Payments on homebuilding line of credit, net	0		(5,000)
Repayment of senior notes	0		(250,000)
Proceeds from issuance of senior notes	347,725		298,050
Dividend payments	(54,913)		(41,682)
Payments of deferred financing costs	(819)		0
Issuance of shares under stock-based compensation programs, net	(15,534)		1,332
Net cash provided by (used in) financing activities	238,750		(4,822)

Net increase (decrease) in cash, cash equivalents and restricted cash	237,387		86,376
Cash, cash equivalents and restricted cash:
Beginning of period	503,972		474,212
End of period	$	741,359	$	560,588

Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents	$	638,547	$	482,702
Restricted cash	14,158		15,668
Financial Services:
Cash and cash equivalents	88,654		62,218
Total cash, cash equivalents and restricted cash	$	741,359	$	560,588

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

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~~M.D.C. HOLDINGS, INC.~~

~~Consolidated Statements~~ of ~~Cash Flows~~

Six Months Ended
June 30,
2020 2019
(Dollars in thousands)
Operating Activities:
Net income $ 121,156 $ 95,143
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense 9,928 8,383
Depreciation and amortization 11,527 9,941
Inventory impairments — 610
Net (gain) loss on marketable equity securities 8,285 (7,167)
Deferred income tax expense 1,962 7,759
Net changes in assets and liabilities:
Trade and other receivables (23,445) (36)
Mortgage loans held-for-sale, net 23,454 39,874
Housing completed or under construction (233,829) (118,528)
Land and land under development 94,918 24,438
Prepaid and other assets 1,209 (4,206)
Accounts payable and accrued and other liabilities 40,539 (546)
Net cash provided by operating activities 55,704 55,665
Investing Activities:
Purchases of marketable securities (10,804) (5,116)
Sales of marketable securities 59,266 5,057
Purchases of property and equipment (12,968) (13,860)
Net cash provided by (used in) investing activities 35,494 (13,919)
Financing Activities:
Payments on mortgage repurchase facility, net (7,522) (33,776)
Payments on homebuilding line of credit, net (5,000) —
Repayment of senior notes (250,000) —
Proceeds from issuance of senior notes 298,050 —
Dividend payments (41,682) (35,636)
Issuance of shares under stock-based compensation programs, net 1,332 17,328
Net cash used in financing activities (4,822) (52,084)
Net increase (decrease) in cash, cash equivalents and restricted cash 86,376 (10,338)
Cash, cash equivalents and restricted cash:
Beginning of period 474,212 470,139
End of period $ 560,588 $ 459,801
Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents $ 482,702 $ 390,061
Restricted cash 15,668 12,911
Financial Services:
Cash and cash equivalents 62,218 56,829
Total cash, cash equivalents and restricted cash $ 560,588 $ 459,801

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

~~-5-~~

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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, ~~2020~~2021 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, ~~2019.~~2020.

On January 25, 2021, MDC's board of directors declared an 8% stock dividend that was distributed on March 17, 2021 to shareholders of record on March 3, 2021. In accordance with Accounting Standards Codification ("ASC") Topic 260, Earnings Per Share ("ASC 260"), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any period or dates prior to the stock dividend record date.

Included in these footnotes are certain statements that 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 section 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.

Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

2. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In June 2016, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("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. On January 1, 2020, we adopted ASU 2016-13 using the modified retrospective transition method, resulting in a cumulative effect adjustment that decreased the opening balance of retained earnings by less than $0.1 million. The standard did not materially impact our consolidated statements of operations and comprehensive income or consolidated cash flows.

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In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X. The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements. The rule is effective January 4, 2021 but earlier compliance is permitted. The Company adopted these amendments on June 30, 2020. As the combined assets, liabilities and results of operations of M.D.C. Holdings, Inc. and the Guarantor Subsidiaries (the “Obligor Group”) are not materially different from those in the homebuilding section of our consolidated balance sheets and consolidated statements of operations and comprehensive income, separate summarized financial information of the Obligor Group has not been included. See Note 20 for further information regarding subsidiary guarantees.

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 Executive Chairman and the Chief Executive Officer (“CEO”) ~~and the Chief Operating Officer (“COO”)~~.

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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, Oregon and Washington)

•Mountain (Colorado, Idaho and Utah)

•East (mid-Atlantic, which includes Maryland and Virginia, Florida and ~~Florida)~~Tennessee)

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 1 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, treasury, information technology, insurance, risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in the homebuilding operations section of our consolidated statements of operations and comprehensive income.

On a periodic basis, we assess our Corporate cost allocation estimates. Our most recent assessment resulted in increases in Corporate cost allocations to both our homebuilding and financial services segments beginning January 1, 2020, to reflect the use of centralized administrative functions. Applying the most recent cost allocation estimate to the three and six months ended June 30, 2019 would have resulted in decreased pretax income for our homebuilding segments of approximately $2.7 million and $5.4 million, respectively, and decreased pretax income for our financial services segments of approximately $0.4 million and $0.8 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three and six months ended June 30, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.0 million and $6.0 million, respectively, with a corresponding increase in our Corporate segment pretax income.

The following table summarizes revenues for our homebuilding and financial services ~~operations~~operations:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Homebuilding	Homebuilding									Homebuilding
West	West	$	490,117	$	384,530	$	895,615	$	754,088	West	$	847,683	$	490,117	$	1,464,294	$	895,615
Mountain	Mountain	316,666		287,476		539,524		496,668		Mountain	400,633		316,666		725,350		539,524
East	East	79,975		60,838		148,704		129,366		East	119,457		79,975		219,987		148,704
Total homebuilding revenues	Total homebuilding revenues	$	886,758	$	732,844	$	1,583,843	$	1,380,122	Total homebuilding revenues	$	1,367,773	$	886,758	$	2,409,631	$	1,583,843

Financial Services	Financial Services									Financial Services
Mortgage operations	Mortgage operations	$	24,363	$	11,689	$	38,988	$	21,863	Mortgage operations	$	23,321	$	24,363	$	58,486	$	38,988
Other	Other	8,601		6,908		15,862		14,138		Other	9,997		8,601		19,855		15,862
Total financial services revenues	Total financial services revenues	$	32,964	$	18,597	$	54,850	$	36,001	Total financial services revenues	$	33,318	$	32,964	$	78,341	$	54,850

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Homebuilding	Homebuilding									Homebuilding
West	West	$	48,745	$	35,350	$	85,321	$	68,550	West	$	132,919	$	48,745	$	210,106	$	85,321
Mountain	Mountain	41,807		35,972		63,319		57,686		Mountain	64,052		41,807		109,910		63,319
East	East	3,073		2,152		3,973		3,625		East	10,846		3,073		18,681		3,973
Corporate	Corporate	(8,704)		(11,860)		(18,023)		(27,192)		Corporate	(20,308)		(8,704)		(37,681)		(18,023)
Total homebuilding pretax income	Total homebuilding pretax income	$	84,921	$	61,614	$	134,590	$	102,669	Total homebuilding pretax income	$	187,509	$	84,921	$	301,016	$	134,590
Financial Services	Financial Services									Financial Services
Mortgage operations	Mortgage operations	$	17,506	$	6,239	$	25,749	$	11,232	Mortgage operations	$	14,088	$	17,506	$	40,127	$	25,749
Other	Other	9,211		6,478		(139)		16,036		Other	3,945		9,211		8,711		(139)
Total financial services pretax income	Total financial services pretax income	$	26,717	$	12,717	$	25,610	$	27,268	Total financial services pretax income	$	18,033	$	26,717	$	48,838	$	25,610

Total pretax income	Total pretax income	$	111,638	$	74,331	$	160,200	$	129,937	Total pretax income	$	205,542	$	111,638	$	349,854	$	160,200

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 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, 2020		December 31, 2019			June 30, 2021		December 31, 2020

		(Dollars in thousands)							(Dollars in thousands)
Homebuilding assets	Homebuilding assets					Homebuilding assets
West	West	$	1,575,620	$	1,461,645	West	$	2,083,436	$	1,855,567
Mountain	Mountain	893,282		869,665		Mountain	994,226		905,007
East	East	220,235		194,592		East	372,166		274,937
Corporate	Corporate	555,238		505,507		Corporate	690,572		470,909
Total homebuilding assets	Total homebuilding assets	$	3,244,375	$	3,031,409	Total homebuilding assets	$	4,140,400	$	3,506,420
Financial services assets	Financial services assets					Financial services assets
Mortgage operations	Mortgage operations	$	194,213	$	209,946	Mortgage operations	$	225,971	$	279,649
Other	Other	67,347		97,001		Other	91,823		78,851
Total financial services assets	Total financial services assets	$	261,560	$	306,947	Total financial services assets	$	317,794	$	358,500

Total assets	Total assets	$	3,505,935	$	3,338,356	Total assets	$	4,458,194	$	3,864,920

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4. Earnings Per Share

Accounting Standards Codification ("ASC") Topic 260, Earnings per Share ("ASC 260") requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable 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 shares of unvested restricted stock held by participating security holders. 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 adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations.


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands, except per share amounts)															(Dollars in thousands, except per share amounts)
Numerator	Numerator									Numerator
Net income	Net income	$	84,396	$	54,593	$	121,156	$	95,143	Net income	$	154,352	$	84,396	$	265,042	$	121,156
Less: distributed earnings allocated to participating securities	Less: distributed earnings allocated to participating securities	(121)		(110)		(256)		(221)		Less: distributed earnings allocated to participating securities	(133)		(121)		(291)		(256)
Less: undistributed earnings allocated to participating securities	Less: undistributed earnings allocated to participating securities	(363)		(213)		(465)		(352)		Less: undistributed earnings allocated to participating securities	(589)		(363)		(1,067)		(465)
Net income attributable to common stockholders (numerator for basic earnings per share)	Net income attributable to common stockholders (numerator for basic earnings per share)	83,912		54,270		120,435		94,570		Net income attributable to common stockholders (numerator for basic earnings per share)	153,630		83,912		263,684		120,435
Add back: undistributed earnings allocated to participating securities	Add back: undistributed earnings allocated to participating securities	363		213		465		352		Add back: undistributed earnings allocated to participating securities	589		363		1,067		465
Less: undistributed earnings reallocated to participating securities	Less: undistributed earnings reallocated to participating securities	(357)		(209)		(455)		(345)		Less: undistributed earnings reallocated to participating securities	(569)		(357)		(1,032)		(455)
Numerator for diluted earnings per share under two class method	Numerator for diluted earnings per share under two class method	$	83,918	$	54,274	$	120,445	$	94,577	Numerator for diluted earnings per share under two class method	$	153,650	$	83,918	$	263,719	$	120,445

Denominator	Denominator									Denominator
Weighted-average common shares outstanding	Weighted-average common shares outstanding	63,015,827		61,336,404		62,755,310		61,138,982		Weighted-average common shares outstanding	70,291,057		68,057,093		70,044,326		67,775,735
Add: dilutive effect of stock options	Add: dilutive effect of stock options	1,065,113		1,435,739		1,494,841		1,333,043		Add: dilutive effect of stock options	2,424,216		1,150,322		2,394,887		1,614,428
Add: dilutive effect of performance share units	Add: dilutive effect of performance share units	—		551,124		288,684		551,124		Add: dilutive effect of performance share units	0		0		314,928		311,779
Denominator for diluted earnings per share under two class method	Denominator for diluted earnings per share under two class method	64,080,940		63,323,267		64,538,835		63,023,149		Denominator for diluted earnings per share under two class method	72,715,273		69,207,415		72,754,141		69,701,942

Basic Earnings Per Common Share	Basic Earnings Per Common Share	$	1.33	$	0.88	$	1.92	$	1.55	Basic Earnings Per Common Share	$	2.19	$	1.23	$	3.76	$	1.78
Diluted Earnings Per Common Share	Diluted Earnings Per Common Share	$	1.31	$	0.86	$	1.87	$	1.50	Diluted Earnings Per Common Share	$	2.11	$	1.21	$	3.62	$	1.73

Diluted EPS for the three and six months ended June 30, 2020 excluded options to purchase ~~approximately~~ 1.3 million and 0.8 million shares, ~~of common stock,~~ respectively, because the effect of their inclusion would be anti-dilutive. ~~For~~Their were 0 anti-dilutive options for both the ~~same periods in 2019, diluted EPS excluded options to purchase approximately 0.5~~three and ~~0.5 million shares, respectively.~~six months ended June 30, 2021.

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5. 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,
2020 December 31,
2019
(Dollars in thousands)
Marketable securities
Equity securities Level 1 $ — $ 56,747
Mortgage loans held-for-sale, net Level 2 $ 173,567 $ 197,021

Fair Value

Financial Instrument

Hierarchy

June 30,
2021

December 31,
2020

(Dollars in thousands)

Mortgage loans held-for-sale, net

Level 2

186,086

232,556

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, ~~prepaid~~prepaids and other assets, accounts payable, accrued and other liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

Equity securities. Our equity securities consisted of holdings in common stock and exchange traded funds ~~as of December 31, 2019. Our equity securities~~and were recorded at fair value with all changes in fair value recorded to other income (expense), net in the financial services section of our consolidated statements of operations and comprehensive income.

The following table reconciles the net gain (loss) recognized during the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 on equity securities to the unrealized gain recognized during the periods on equity securities still held at the reporting date.


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Net gain (loss) recognized during the period on equity securities	Net gain (loss) recognized during the period on equity securities	$	4,983	$	2,327	$	(8,285)	$	7,167	Net gain (loss) recognized during the period on equity securities	$	0	$	4,983	$	0	$	(8,285)
Less: Net gain (loss) recognized during the period on equity securities sold during the period	Less: Net gain (loss) recognized during the period on equity securities sold during the period	4,983		—		(8,285)		237		Less: Net gain (loss) recognized during the period on equity securities sold during the period	0		4,983		0		(8,285)
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date		$	—	$	2,327	$	—	$	6,930
Unrealized gain (loss) loss recognized during the reporting period on equity securities still held at the reporting date										Unrealized gain (loss) loss recognized during the reporting period on equity securities still held at the reporting date	$	0	$	0	$	0	$	0

Mortgage loans held-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, ~~2020~~2021 and December 31, ~~2019,~~2020, we had ~~$84.0~~$118.9 million and ~~$136.8~~$137.3 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, ~~2020~~2021 and December 31, ~~2019,~~2020, we had ~~$89.6~~$67.2 million and ~~$60.2~~$95.3 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, ~~2020,~~2021, we recorded net gains on the sales of mortgage loans of ~~$20.8~~$26.4 million and ~~$37.5~~$49.9 million, respectively, compared to ~~$12.6~~$20.8 million and ~~$24.3~~$37.5 million for the same periods in the prior year, respectively.

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Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating 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 that were provided by multiple sources.


		June 30, 2020						December 31, 2019							June 30, 2021				December 31, 2020
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value

		(Dollars in thousands)															(Dollars in thousands)
$250 million 5.625% Senior Notes due February 2020, net		$	—	$	—	$	249,909	$	250,400
$250 million 5.500% Senior Notes due January 2024, net	$250 million 5.500% Senior Notes due January 2024, net	249,117		266,983		249,005		272,083		$250 million 5.500% Senior Notes due January 2024, net	$	249,352	$	274,650	$	249,233	$	275,463
$300 million 3.850% Senior Notes due January 2030, net	$300 million 3.850% Senior Notes due January 2030, net	297,342		289,725		—		—		$300 million 3.850% Senior Notes due January 2030, net	297,577		322,725		297,458		331,384
$350 million 2.500% Senior Notes due January 2031, net										$350 million 2.500% Senior Notes due January 2031, net	346,985		326,522		0		0
$500 million 6.000% Senior Notes due January 2043, net	$500 million 6.000% Senior Notes due January 2043, net	490,603		527,662		490,508		528,542		$500 million 6.000% Senior Notes due January 2043, net	490,800		639,003		490,700		667,288
Total	Total	$	1,037,062	$	1,084,370	$	989,422	$	1,051,025	Total	$	1,384,714	$	1,562,900	$	1,037,391	$	1,274,135

6. Inventories

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


		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020

		(Dollars in thousands)							(Dollars in thousands)
Housing completed or under construction:	Housing completed or under construction:					Housing completed or under construction:
West	West	$	741,109	$	589,040	West	$	1,064,028	$	902,842
Mountain	Mountain	418,798		358,370		Mountain	608,629		464,501
East	East	110,393		88,781		East	200,009		119,244
Subtotal	Subtotal	1,270,300		1,036,191		Subtotal	1,872,666		1,486,587
Land and land under development:	Land and land under development:					Land and land under development:
West	West	719,517		772,189		West	838,482		822,504
Mountain	Mountain	425,503		468,718		Mountain	325,277		391,054
East	East	90,578		89,477		East	145,601		132,085
Subtotal	Subtotal	1,235,598		1,330,384		Subtotal	1,309,360		1,345,643
Total inventories	Total inventories	$	2,505,898	$	2,366,575	Total inventories	$	3,182,026	$	2,832,230

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

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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~~“Homebuilding Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

•~~estimated future undiscounted cash flows and Operating Margin;~~

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•forecasted ~~Operating~~Homebuilding Margin for homes in backlog;

•actual and trending net home orders;

•homes available for sale;

•market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes 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.

If land is classified as held for sale, we measure it in accordance with ASC 360 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, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

~~Impairments of homebuilding inventory by segment for the three and six months ended June 30, 2020 and 2019 are shown in the table below.~~

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(Dollars in thousands)
West $ — $ — $ — $ —
Mountain — — — 400
East — — — 210
Total inventory impairments $ — $ — $ — $ 610

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

Impairment Data Quantitative Data
Three Months Ended Number of
Subdivisions
Impaired
Inventory
Impairments
Fair Value of
Inventory After Impairments
Discount Rate
(Dollars in thousands)
March 31, 2019 2 $ 610 $ 10,476 N/A

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7. 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 during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Homebuilding interest incurred	Homebuilding interest incurred	$	15,094	$	15,980	$	31,628	$	32,011	Homebuilding interest incurred	$	17,409	$	15,094	$	34,741	$	31,628
Less: Interest capitalized	Less: Interest capitalized	(15,094)		(15,980)		(31,628)		(32,011)		Less: Interest capitalized	(17,409)		(15,094)		(34,741)		(31,628)
Homebuilding interest expensed	Homebuilding interest expensed	$	—	$	—	$	—	$	—	Homebuilding interest expensed	$	0	$	0	$	0	$	0

Interest capitalized, beginning of period	Interest capitalized, beginning of period	$	59,077	$	56,947	$	55,310	$	54,845	Interest capitalized, beginning of period	$	55,268	$	59,077	$	52,777	$	55,310
Plus: Interest capitalized during period	Plus: Interest capitalized during period	15,094		15,980		31,628		32,011		Plus: Interest capitalized during period	17,409		15,094		34,741		31,628
Less: Previously capitalized interest included in home cost of sales	Less: Previously capitalized interest included in home cost of sales	(17,242)		(14,734)		(30,009)		(28,663)		Less: Previously capitalized interest included in home cost of sales	(18,326)		(17,242)		(33,167)		(30,009)
Interest capitalized, end of period	Interest capitalized, end of period	$	56,929	$	58,193	$	56,929	$	58,193	Interest capitalized, end of period	$	54,351	$	56,929	$	54,351	$	56,929

8. Leases

We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s ~~headquarters, and~~headquarters. All of our property related leases are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and do not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.

The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.

Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Operating lease cost ¹	Operating lease cost ¹	$	2,120	$	1,990	$	4,166	$	3,970	Operating lease cost 1	$	1,995	$	2,120	$	3,972	$	4,166
Less: Sublease income (Note 19)	Less: Sublease income (Note 19)	(38)		(38)		(76)		(75)		Less: Sublease income (Note 19)	(39)		(38)		(78)		(76)
Net lease cost	Net lease cost	$	2,082	$	1,952	$	4,090	$	3,895	Net lease cost	$	1,956	$	2,082	$	3,894	$	4,090

¹Includes variable lease costs, which are immaterial.

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Supplemental cash flow information related to leases was as follows:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:															Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	1,741	$	1,792	$	3,647	$	3,563	Operating cash flows from operating leases	$	1,887	$	1,741	$	3,745	$	3,647
Leased assets obtained in exchange for new operating lease liabilities	Leased assets obtained in exchange for new operating lease liabilities	$	1,405	$	553	$	4,050	$	2,030	Leased assets obtained in exchange for new operating lease liabilities	$	0	$	1,405	$	830	$	4,050

Weighted-average remaining lease term and discount rate for operating leases were as follows:


	June 30, ~~2020~~2021
Weighted-average remaining lease term (in years)	~~5.7~~4.9
Weighted-average discount rate	5.5	%

Maturities of operating lease liabilities were as follows:


		Year Ended December 31,			Year Ended December 31,
		(Dollars in thousands)			(Dollars in thousands)
2020 (excluding the six months ended June 30, 2020)		$	3,152
2021		7,361
2021 (excluding the six months ended June 30, 2021)				2021 (excluding the six months ended June 30, 2021)	$	3,165
2022	2022	7,054		2022	7,387
2023	2023	6,141		2023	6,416
2024	2024	5,543		2024	5,717
2025				2025	5,493
Thereafter	Thereafter	9,914		Thereafter	4,869
Total operating lease payments	Total operating lease payments	$	39,165	Total operating lease payments	$	33,047

Less: Interest	Less: Interest	5,772		Less: Interest	4,150
Present value of operating lease liabilities ¹	Present value of operating lease liabilities ¹	$	33,393	Present value of operating lease liabilities 1	$	28,897

¹Homebuilding and financial services operating lease liabilities of ~~$32.4~~$28.5 million and ~~$1.0~~$0.4 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services section of our consolidated balance sheet at June 30, ~~2020.~~2021.

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9. Homebuilding ~~Prepaid~~Prepaids and Other Assets

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


		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020

		(Dollars in thousands)							(Dollars in thousands)
Operating lease right-of-use asset (Note 8)		$	31,584	$	30,277
Land option deposits	Land option deposits	19,669		27,361		Land option deposits	$	37,487	$	29,987
Prepaid expenses		6,084		7,294
Operating lease right-of-use asset						Operating lease right-of-use asset	27,448		29,226
Prepaids						Prepaids	18,916		26,929
Deferred debt issuance costs on revolving credit facility, net						Deferred debt issuance costs on revolving credit facility, net	8,074		9,043
Goodwill	Goodwill	6,008		6,008		Goodwill	6,008		6,008
Deferred debt issuance costs on revolving credit facility, net		5,363		6,130
Other	Other	776		1,288		Other	133		492
Total		$	69,484	$	78,358
Total prepaids and other assets						Total prepaids and other assets	$	98,066	$	101,685

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1010. Homebuilding Accrued and Other Liabilities and Financial Services Accounts Payable and Accrued Liabilities

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


		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020

		(Dollars in thousands)							(Dollars in thousands)
Customer and escrow deposits	Customer and escrow deposits	$	43,632	$	39,001	Customer and escrow deposits	$	84,780	$	67,022
Warranty accrual		30,458		31,386
Accrued compensation and related expenses	Accrued compensation and related expenses	34,076		45,003		Accrued compensation and related expenses	54,578		56,682
Warranty accrual (Note 11)						Warranty accrual (Note 11)	35,017		33,664
Accrued interest						Accrued interest	32,122		27,650
Lease liability (Note 8)	Lease liability (Note 8)	32,441		30,830		Lease liability (Note 8)	28,454		30,221
Accrued interest		27,843		27,734
Construction defect claim reserves		8,393		8,196
Land development and home construction accruals	Land development and home construction accruals	8,125		9,750		Land development and home construction accruals	15,620		10,824
Construction defect claim reserves (Note 12)						Construction defect claim reserves (Note 12)	8,353		8,479
Income taxes payable						Income taxes payable	6,468		8,285
Other accrued liabilities	Other accrued liabilities	93,575		54,040		Other accrued liabilities	65,537		57,908
Total accrued and other liabilities	Total accrued and other liabilities	$	278,543	$	245,940	Total accrued and other liabilities	$	330,929	$	300,735

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

June 30,
2020 December 31, 2019
(Dollars in thousands)
Insurance reserves $ 55,488 $ 52,219
Accounts payable and other accrued liabilities 14,545 16,310
Total accounts payable and accrued liabilities $ 70,033 $ 68,529


	June 30, 2021		December 31, 2020

	(Dollars in thousands)
Insurance reserves (Note 12)	$	67,933	$	61,575
Accounts payable and other accrued liabilities	31,666		34,055
Total accounts payable and accrued liabilities	$	99,599	$	95,630

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11. Warranty Accrual

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

Our warranty accrual is included in accrued and other 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, ~~2020~~2021 and ~~2019. For the three and six months ended June 30, 2020 and 2019, we recorded adjustments to decrease our~~2020. The warranty accrual increased due to ~~lower than expected general warranty related expenditures~~the increase in ~~certain close~~the number of ~~escrow years.~~

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(Dollars in thousands)
Balance at beginning of period $ 30,887 $ 29,992 $ 31,386 $ 28,262
Expense provisions 3,937 3,737 7,102 7,085
Cash payments (2,366) (2,976) (6,030) (5,469)
Adjustments (2,000) (1,404) (2,000) (529)
Balance at end of period $ 30,458 $ 29,349 $ 30,458 $ 29,349
home closings.


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Balance at beginning of period	$	33,873	$	30,887	$	33,664	$	31,386
Expense provisions	5,703		3,937		10,088		7,102
Cash payments	(4,559)		(2,366)		(8,735)		(6,030)
Adjustments	0		(2,000)		0		(2,000)
Balance at end of period	$	35,017	$	30,458	$	35,017	$	30,458

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12. Insurance and Construction Defect Claim Reserves

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

The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with: (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant, are based on actuarial studies that include known facts similar to those for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.

The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in the financial services and homebuilding sections, respectively, of the consolidated balance sheets.

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(Dollars in thousands)
Balance at beginning of period $ 61,450 $ 56,219 $ 60,415 $ 55,308
Expense provisions 3,586 2,745 6,504 5,210
Cash payments, net of recoveries (1,155) (2,147) (3,038) (3,701)
Balance at end of period $ 63,881 $ 56,817 $ 63,881 $ 56,817


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Balance at beginning of period	$	74,003	$	61,450	$	70,054	$	60,415
Expense provisions	5,388		3,586		9,671		6,504
Cash payments, net of recoveries	(3,105)		(1,155)		(3,439)		(3,038)
Balance at end of period	$	76,286	$	63,881	$	76,286	$	63,881

In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising 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, ~~2020~~2021 and ~~2019~~2020 are not necessarily indicative of what future cash payments will be for subsequent periods.

13. Income Taxes

Our overall effective income tax rates were 24.9% and 24.2% for the three and six months ended June 30, 2021 and 24.4% for both the three and six months ended June 30, ~~2020 and 26.6% and 26.8% for the three and six months ended June 30, 2019, respectively.~~2020. The rates for the three and six months ended June 30, ~~2020~~2021 resulted in income tax expense of $51.2 million and $84.8 million, respectively, compared to income tax expense of $27.2 million and $39.0 ~~million, respectively, compared to income tax expense of $19.7 million and $34.8~~ million for the three and six months ended June 30, ~~2019,~~2020, respectively. The year-over-year ~~decrease~~increase in ~~our~~the effective tax rate for the three ~~and six~~ months ended June 30, ~~2020~~2021, was primarily due to ~~windfalls on our equity awards as well as energy tax credits~~an increase in pretax income, in addition to a decrease in the amount of executive compensation that ~~expired on December 31, 2017 and were retroactively extended by the Further Consolidated Appropriations Act, 2020~~ ~~(H.R. 1865, PL 116-94) signed by the President on December 20, 2019.~~is deductible under Internal Revenue Code Section 162(m).

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14. Senior Notes

The carrying values of our senior notes as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, net of any unamortized debt issuance costs or discount, were as follows:


		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020

		(Dollars in thousands)							(Dollars in thousands)
5.625% Senior Notes due February 2020, net		$	—	$	249,909
5.500% Senior Notes due January 2024, net	5.500% Senior Notes due January 2024, net	249,117		249,005		5.500% Senior Notes due January 2024, net	$	249,352	$	249,233
3.850% Senior Notes due January 2030, net	3.850% Senior Notes due January 2030, net	297,342		—		3.850% Senior Notes due January 2030, net	297,577		297,458
2.500% Senior Notes due January 2031, net						2.500% Senior Notes due January 2031, net	346,985		0
6.000% Senior Notes due January 2043, net	6.000% Senior Notes due January 2043, net	490,603		490,508		6.000% Senior Notes due January 2043, net	490,800		490,700
Total	Total	$	1,037,062	$	989,422	Total	$	1,384,714	$	1,037,391

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.

15. Stock-Based Compensation

~~We account for share-based awards in accordance with ASC Topic 718~~ ~~Compensation–Stock Compensation~~ (“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, ~~2020~~2021 and ~~2019,~~2020, which is included as a component of selling, general and administrative expenses and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

		(Dollars in thousands)															(Dollars in thousands)
Stock option grants expense	Stock option grants expense	$	717	$	245	$	1,212	$	500	Stock option grants expense	$	725	$	717	$	1,589	$	1,212
Restricted stock awards expense	Restricted stock awards expense	1,053		677		2,570		1,588		Restricted stock awards expense	1,452		1,053		3,921		2,570
Performance share units expense	Performance share units expense	3,718		3,210		6,146		6,295		Performance share units expense	6,842		3,718		13,435		6,146
Total stock-based compensation	Total stock-based compensation	$	5,488	$	4,132	$	9,928	$	8,383	Total stock-based compensation	$	9,019	$	5,488	$	18,945	$	9,928

~~On August 5, 2019, May 23, 2018, June 20, 2017 and July 25, 2016,~~Additional detail on the ~~Company granted long term~~ performance share ~~unit awards (“PSUs”~~units ("PSUs") to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs are earned based upon the Company’s performance over a period of three years (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each awardexpense is conditioned upon the Company achieving an average gross margin from home sales (excluding impairments) of at least fifteen percent (15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10%, 50% of the Target Goals will be earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%, 200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017, 2018 and 2019, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for each grant has been provided in the table below.

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Threshold Goal Target Goal Maximum Goal Maximum Potential Expense to be Recognized * Maximum Remaining Expense to be Recognized *
Date of Award Performance Period Base Period Base Period Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues PSUs Home Sale Revenues Fair Value per Share
July 25, 2016 July 1, 2016 - June 30, 2019 July 1, 2015 - June 30, 2016 $1.975 billion 137,781 $2.074 billion 275,562 $2.173 billion 551,124 $2.370 billion $ 19.66 $ 10,834 $ —
June 20, 2017 April 1, 2017 - March 31, 2020 April 1, 2016 - March 31, 2017 $2.426 billion 144,342 $2.547 billion 288,684 $2.669 billion 577,368 $2.911 billion $ 27.83 $ 16,070 $ —
May 23, 2018 April 1, 2018 - March 31, 2021 April 1, 2017 - March 31, 2018 $2.543 billion 145,800 $2.670 billion 291,600 $2.797 billion 583,200 $3.052 billion $ 25.57 $ 14,915 $ 3,922
August 5, 2019 January 1, 2019 - December 31, 2021 January 1, 2018 - December 31, 2018 $2.982 billion 135,000 $3.131 billion 270,000 $3.280 billion 540,000 $3.578 billion $ 32.60 $ 17,604 $ 17,604

~~_______________________~~

* Dollars in thousands

In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance-based stock awards until achievement of the performance targets are probable of occurring.included below:

~~2016~~2018 PSU ~~Grants.~~Grants. The ~~2016~~2018 PSU awards vested on ~~August 7, 2019 at the Maximum Goal following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved.~~April 29, 2021. For the ~~three and~~ six months ended June 30, ~~2019,~~2021, the Company recorded share-based award expense of ~~$0.9 million and $1.8~~$1.3 million related to these awards.

~~2017~~ ~~PSU Grant~~s. The 2017 PSU awards vested on May 5, 2020 at the Maximum Goal following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved. For ~~both~~ the three and six months ended June 30, 2020, the Company recorded share-based award expense of ~~$1.4 million related to these awards. For the three and six months ended June 30, 2019, the Company recorded share-based award expense of $2.3~~$3.7 million and ~~$4.5~~$4.7 million, respectively, related to these awards.

~~2018~~ 2019 PSU Grants. As of June 30, ~~2020,~~2021, the Company ~~determined that achievement of~~recorded the ~~Maximum Goals for these awards was probable and, as such, the Company recorded~~required share-based award expense related to the awards of ~~$3.7~~$1.8 million and ~~$4.7~~$3.7 million ~~respectively,~~ for the three and six months ended June 30, ~~2020.~~2021, based on its assessment of the probability for achievement of the performance targets. As of June 30, ~~2019,~~2020, the Company concluded that achievement of ~~any of~~ the performance ~~metrics~~targets had ~~not met the level of probability required to record compensation expense and as such, 0 expense related to the grant of these awards had been recognized as of June 30, 2019.~~

~~2019~~ ~~PSU Grants. For the PSUs granted in August of 2019, the Company concluded that achievement of any of the performance metrics has~~ not met the level of probability required to record compensation expense and as such, 0 expense related to these awards ~~has been recognized as of June 30, 2020.~~was recognized.

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2020 PSU Grants. As of June 30, 2021, the Company recorded the required share-based award expense related to the awards of $5.0 million and $8.5 million for the three and six months ended June 30, 2021, based on its assessment of the probability for achievement of the performance targets.

2021 PSU Grants. The 2021 PSUs were granted on July 14, 2021 and included a target number of share units of 397,500. The grant date fair value was $44.35 per share unit. As the PSU's were granted subsequent to June 30, 2021, the achievement of the performance targets were not assessed for the three and six months ended June 30, 2021 and as such, 0 expense related to these awards was recognized for these periods.

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, ~~2020,~~2021, we had outstanding surety bonds and letters of credit totaling ~~$264.4~~$295.5 million and ~~$87.9~~$151.7 million, respectively, including ~~$62.0~~$114.0 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately ~~$89.7~~$140.2 million and ~~$47.4~~$107.5 million, respectively. All letters of credit as of June 30, ~~2020,~~2021, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

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

Litigation. Due to 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 ordinary 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. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At June 30, ~~2020,~~2021, we had cash deposits and letters of credit totaling ~~$17.8~~$33.3 million and ~~$7.4~~$10.9 million, respectively, at risk associated with the option to purchase ~~7,327~~10,900 lots.

Coronavirus/COVID-19 Pandemic. ~~While the~~In response to the pandemic, ~~continues to evolve,~~ many state and local governments ~~began easing~~instituted restrictions ~~during~~that substantially limited the ~~second quarter that were put~~operations of non-essential businesses and the activities of individuals. While many of these restrictions have been or are in ~~place earlier this year. Some areas are now experiencing an increase in cases leading~~the process of being eased, there is still significant uncertainty as a result of the pandemic and its potential to ~~restrictions being re-instated in certain areas.~~continue to negatively impact the U.S. economy and consumer confidence. We continue to construct, market and sell homes in all markets in which we operate, but increased restrictions could have a negative impact on traffic at our sales centers and model homes, cancellation rates and our ability to physically construct homes. While the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, including whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus, the pandemic and its associated impact on the U.S. economy and consumer confidence could have a material impact to the Company’s future results of operations, financial condition and cash flows.

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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, ~~2020,~~2021, we had interest rate lock commitments with an aggregate principal balance of ~~$233.0~~$306.0 million. Additionally, we had ~~$85.9~~$64.9 million of mortgage loans held-for-sale at June 30, ~~2020~~2021 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 ~~$205.5~~$189.5 million at June 30, ~~2020.~~2021.

For the three and six months ended June 30, ~~2020,~~2021, we recorded net ~~gains~~gain (loss) on derivatives of ~~$2.3~~$(8.1) million and ~~$3.3~~$1.0 million, respectively, in revenues in the financial services section of our consolidated statements of operations and comprehensive income, compared to a net ~~loss~~gains of ~~$0.5~~$2.3 million and ~~a net gain of $1.4~~$3.3 million for the same periods in ~~2019.~~2020.

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 was amended on ~~November 1, 2018~~December 28, 2020 to (1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the “Commitment”), (2) extend the Revolving Credit Facility maturity of $1.125 billion of the Commitments to December 18, ~~2023, (2) increase~~2025 with the ~~aggregate commitment from $700 million~~remaining Commitment continuing to ~~$1.0 billion (the “Commitment”)~~terminate on December 18, 2023 and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed ~~$1.5~~$1.7 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency 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 Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.

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 of June 30, ~~2020.~~2021.

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were ~~$25.9~~$37.7 million and ~~$23.5~~$25.1 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had $10.0 million and ~~$15.0~~$10.0 million, respectively, outstanding under the Revolving Credit Facility. As of June 30, ~~2020,~~2021, availability under the Revolving Credit Facility was approximately ~~$964.1 million.~~$1.15 billion.

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Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). ~~Effective May 21, 2020, the Mortgage Repurchase Facility was amended to extend its termination date to May 20, 2021.~~ The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended on September 24, 2020, March 25, 2021 and May 20, 2021 to adjust the commitments to purchase for specific time periods. As part of the amendments, the commitments to purchase (subject to increase by up to $75 million under certain conditions) were increased as follows: (1) $200 million for the periods December 22, 2020 through February 4, 2021 and December 21, 2021 through February 3, 2022, (2) $175 million for the periods March 25, 2021 through April 22, 2021, June 23, 2021 through July 22, 2021 and September 22, 2021 through October 21, 2021 and (3) $150 million for the period March 23, 2022 through April 21, 2022. The Mortgage Repurchase Facility terminates on May 19, 2022.

The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased by $25 million on June ~~25, 2020 from $75 million to $150 million~~28, 2021 effective through July ~~23, 2020.~~22, 2021. The maximum aggregate commitment of the Mortgage Repurchase Facility ~~also had a temporary increase in the maximum aggregate commitment from $75 million to $150~~was temporarily increased by $50 million on December ~~24, 2019~~28, 2020 effective through January ~~22, 2020.~~27, 2021. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020 HomeAmerican had ~~$142.1~~$164.7 million and ~~$149.6~~$202.4 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 based on a LIBOR rate or successor benchmark rate.

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 capitalized 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, ~~2020.~~2021.

19. Related Party Transactions

We contributed $1.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the six months ended June 30, 2020. The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at June 30, 2020, all of whom serve without compensation:


~~Name~~						~~MDC Title~~
~~Larry A. Mizel~~						~~Chairman and CEO~~
~~David D. Mandarich~~						~~President and COO~~

~~Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.~~

The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the ~~Chief~~ Executive ~~Officer~~Chairman of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and will continue through October 31, ~~2021, with an option to extend to October 31,~~ 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the ~~initial~~ term from $26.50 ~~to $28.68 per rentable square foot per year, and increasing over the extension term from $29.26~~ to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.

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20. 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 Construction NM, Inc. (formerly known as Richmond American Homes Five, Inc.)

•Richmond American Homes of Arizona, Inc.

•Richmond American Homes of Colorado, Inc.

•Richmond American Homes of Florida, LP

•Richmond American Homes of Idaho, Inc. (formerly known as Richmond American Homes of Illinois, Inc.)

•Richmond American Homes of Maryland, Inc.

•Richmond American Homes of Nevada, Inc.

•Richmond American Homes of New ~~Jersey,~~Mexico, Inc. (formerly known as Richmond American Homes Three, Inc.)

•Richmond American Homes of Oregon, Inc.

•Richmond American Homes of Pennsylvania, Inc.

•Richmond American Homes of Tennessee, Inc. (formerly known as Richmond American Homes of New Jersey, Inc.)

•Richmond American Homes of Texas, Inc. (formerly known as Richmond American Homes Four, 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.

As the combined assets, liabilities and results of operations of M.D.C. Holdings, Inc. and the Guarantor Subsidiaries (the “Obligor Group”) are not materially different from those in the homebuilding section of our consolidated balance sheets and consolidated statements of operations and comprehensive income, separate summarized financial information of the Obligor Group has not been included. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, amounts due to non-guarantor subsidiaries from the Obligor Group totaled ~~$65.5~~$65.0 million and ~~$24.2~~$65.8 million, respectively.

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~~ITEM~~Item 2. Management's Discussion 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:~~1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and this Quarterly Report on Form 10-Q.

Specifically, as a result of the Coronavirus/COVID-19 pandemic, we experienced adverse business conditions, especially in the latter portion of March and into April 2020, which negatively impacted our operating results. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments that are highly uncertain.


		Three Months Ended June 30,									Six Months Ended June 30,										Three Months Ended June 30,						Six Months Ended June 30,
		2020			2019			2020			2019				2021			2020			2021			2020

		(Dollars in thousands, except per share amounts)																						(Dollars in thousands, except per share amounts)
Homebuilding:	Homebuilding:													Homebuilding:
Home sale revenues	Home sale revenues	$	886,758		$	732,844		$	1,583,843		$	1,380,122		Home sale revenues	$	1,367,773		$	886,758		$	2,409,631		$	1,583,843
Home cost of sales	Home cost of sales	(707,789)			(590,172)			(1,266,436)			(1,114,724)			Home cost of sales	(1,051,181)			(707,789)			(1,865,069)			(1,266,436)
Inventory impairments		—			—			—			(610)
Total cost of sales		(707,789)			(590,172)			(1,266,436)			(1,115,334)

Gross profit	Gross profit	178,969			142,672			317,407			264,788			Gross profit	316,592			178,969			544,562			317,407
Gross margin	Gross margin	20.2		%	19.5		%	20.0		%	19.2		%	Gross margin	23.1		%	20.2		%	22.6		%	20.0		%
Selling, general and administrative expenses	Selling, general and administrative expenses	(92,316)			(82,712)			(181,637)			(164,973)			Selling, general and administrative expenses	(128,861)			(92,316)			(243,854)			(181,637)
Interest and other income	Interest and other income	720			2,764			2,609			5,155			Interest and other income	868			720			1,835			2,609
Other expense	Other expense	(2,452)			(1,110)			(3,789)			(2,301)			Other expense	(1,090)			(2,452)			(1,527)			(3,789)
Homebuilding pretax income	Homebuilding pretax income	84,921			61,614			134,590			102,669			Homebuilding pretax income	187,509			84,921			301,016			134,590

Financial Services:	Financial Services:													Financial Services:
Revenues	Revenues	32,964			18,597			54,850			36,001			Revenues	33,318			32,964			78,341			54,850
Expenses	Expenses	(12,178)			(9,574)			(23,107)			(18,531)			Expenses	(16,440)			(12,178)			(31,545)			(23,107)
Other income (expense), net	Other income (expense), net	5,931			3,694			(6,133)			9,798			Other income (expense), net	1,155			5,931			2,042			(6,133)
Financial services pretax income	Financial services pretax income	26,717			12,717			25,610			27,268			Financial services pretax income	18,033			26,717			48,838			25,610

Income before income taxes	Income before income taxes	111,638			74,331			160,200			129,937			Income before income taxes	205,542			111,638			349,854			160,200
Provision for income taxes	Provision for income taxes	(27,242)			(19,738)			(39,044)			(34,794)			Provision for income taxes	(51,190)			(27,242)			(84,812)			(39,044)
Net income	Net income	$	84,396		$	54,593		$	121,156		$	95,143		Net income	$	154,352		$	84,396		$	265,042		$	121,156

Earnings per share:	Earnings per share:													Earnings per share:
Basic	Basic	$	1.33		$	0.88		$	1.92		$	1.55		Basic	$	2.19		$	1.23		$	3.76		$	1.78
Diluted	Diluted	$	1.31		$	0.86		$	1.87		$	1.50		Diluted	$	2.11		$	1.21		$	3.62		$	1.73

Weighted average common shares outstanding:	Weighted average common shares outstanding:													Weighted average common shares outstanding:
Basic	Basic	63,015,827			61,336,404			62,755,310			61,138,982			Basic	70,291,057			68,057,093			70,044,326			67,775,735
Diluted	Diluted	64,080,940			63,323,267			64,538,835			63,023,149			Diluted	72,715,273			69,207,415			72,754,141			69,701,942

Dividends declared per share	Dividends declared per share	$	0.33		$	0.30		$	0.66		$	0.60		Dividends declared per share	$	0.40		$	0.31		$	0.77		$	0.61

Cash provided by (used in):	Cash provided by (used in):													Cash provided by (used in):
Operating Activities	Operating Activities	$	92,877		$	1,317		$	55,704		$	55,665		Operating Activities	$	70,041		$	92,877		$	12,084		$	55,704
Investing Activities	Investing Activities	$	42,512		$	(7,485)		$	35,494		$	(13,919)		Investing Activities	$	(7,698)		$	42,512		$	(13,447)		$	35,494
Financing Activities	Financing Activities	$	574		$	(10,097)		$	(4,822)		$	(52,084)		Financing Activities	$	(97,592)		$	574		$	238,750		$	(4,822)

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Overview

Industry Conditions and Outlook for MDC*

The Coronavirus/COVID-19 pandemic devastated the US economy during the early portion of the second quarter, adversely impacting consumer demand, financial markets and employment levels. Industries relying on in-person interaction, such as leisure and hospitality and retail, have been disproportionately impacted by the pandemic. The homebuilding industry was not immune to the impact of the pandemic as we experienced an industry wide decrease in traffic and order activity as well as increased cancellation levels during the months of March and April.

The demand for our homes remained very strong during the second quarter of 2021, driven by low interest rates, an improving economy and a continued focus on suburban homeownership. In contrast, the supply of new and existing homes remained constrained, due in large part to the underproduction of new homes has steadily improved subsequent to April across nearly all markets in which we operate. This increase in demand is due to a number of factors, including: favorable interest rates, pent-up demand from stay-at-home and shelter-in-place orders during March and April, low existing home inventory and increased city-to-suburban migration asover the past decade. As a result of this supply-demand imbalance, we continued to raise sales prices in the ~~pandemic. The degree~~majority of our communities during the second quarter in order to (1) offset cost increases, which have been significant due to labor and material shortages; (2) reduce our sales absorption rate to keep our backlog at a level that is manageable for our construction personnel and trade partners, and; (3) improve the ~~pandemic will~~profitability per home closed given the limits on construction capacity.

While our construction cycle times have been negatively impacted by an increased demand for labor and materials, our management team remains focused on minimizing the impact of any such disruptions on our home construction process. To that end, we delivered 2,722 homes during the second quarter, representing a 43% increase from the prior year quarter and an 80% increase from the second quarter of 2019.

We ended the quarter in a strong financial position, with total liquidity of $1.91 billion and a debt-to-capital ratio of 37.3%. We continue to strategically deploy capital to grow our lot count and replenish our land pipeline. During the second quarter we acquired 3,686 lots across 66 communities and approved over 5,700 lots for purchase. We control 34,400 lots as of June 30, 2021, which represents a 37% increase year-over-year and provides a strong platform for the future growth of our Company. While we remain confident in the long term growth prospects for the industry, we continue to closely monitor developments related to COVID-19, which are highly uncertain and could adversely impact our operations and financial results in ~~the coming periods depends on~~ future ~~developments that are highly uncertain.~~

Our first priority with regard to the pandemic continues to be the health and safety of our employees, customers, subcontractors and suppliers, as well as the communities in which we operate. We continue to encourage employees to work remotely where practical, and we have increased sanitization procedures, implemented temperature checks and posted signage requiring the use of masks and promoting social distancing measures across all of our offices and subdivisions. We have successfully implemented and continue to rely on virtual processes for key operational activities that have traditionally been done in-person, such as model home tours, Home Gallery appointments, and pre-closing walk-throughs.periods.

Three Months Ended June 30, ~~2020~~2021

For the three months ended June 30, ~~2020,~~2021, our net income was ~~$84.4~~$154.4 million, or ~~$1.31~~$2.11 per diluted share, a ~~55%~~83% increase compared to net income of ~~$54.6~~$84.4 million, or ~~$0.86~~$1.21 per diluted share, for the same period in the prior year. The increase was driven by our homebuilding operations, which generated pretax income of $187.5 million. This represented an increase of $102.6 million, or 121% from the second quarter of 2020. The increase in homebuilding pretax income was the result of a 54% increase in home sale revenues and a 390 basis point increase in our operating margin. The increase in operating margin was the result of our improved pricing over the last twelve months as well as better operating leverage as we continue to see strong results in our more traditional markets and the results of better scale within some of our smaller markets. Our financial services pretax income decreased $8.7 million or 33% from the prior year period to $18.0 million. The decrease in financial services pretax income was primarily due to $5.0 million of gains on equity securities recognized during the prior year quarter. No such gains or losses were recognized in the current year to date. Our mortgage business experienced a small decrease in pretax income year-over-year due to increased competition in the primary mortgage market, increased compensation related costs and a temporary decrease in the number of mortgages we originated as a percentage of our total home delivered ("Capture Rate").

The dollar value of our net new home orders increased 40% from the prior year period, due to a 14% increase in the number of net new orders and a 24% increase in the average selling price of those orders. The increase in the number of net new orders was due to an increase in the monthly sales absorption rate driven by strong demand during the quarter as noted above. The increase in the average selling price was the result of price increases implemented over the past twelve months.

Six Months Ended June 30, 2021

For the six months ended June 30, 2021, our net income was $265.0 million, or $3.62 per diluted share, a 119% increase compared to net income of $121.2 million, or $1.73 per diluted share, for the same period in the prior year. Both our homebuilding and financial services businesses contributed to ~~these year-over-year improvements,~~the increase, as pretax income from our homebuilding operations increased ~~$23.3~~$166.4 million, or ~~38%~~124%, and our financial services pretax income increased ~~$14.0~~$23.2 million, or ~~110%~~91%. The main drivers of the increase in homebuilding pretax income ~~was~~are consistent with the result of a 21% increase in home sale revenues, a 70 basis point increase in our gross margin from home sales and a 90 basis point decrease in our selling, general and administrative expenses as a percentage of revenue.second quarter discussed above. The increase in financial services pretax income was primarily due to our mortgage business, which experienced ~~a higher interest rate lock~~an increase in loan origination and sales activity driven by the overall increase in volume ~~driven by~~of our homebuilding operations. Additionally, $8.3 million of net losses on equity securities were recognized in the prior year period, further impacting the year-over-year increase in homes in backlog as well as an increase in the number of mortgages we originated as a percentage of our total homes delivered ("Capture Rate"), and increased net interest income on loans originated during the quarter.

The dollar value of our net new home orders increased 8% from the prior year period, due to a 5% increase in the number of net new orders and a 3% increase in the average selling price. The increase in net new orders was driven by increases in both the monthly sales absorption rate and the number of average active communities during the period, while the increase in the average selling price was the result of price increases implemented over the past twelve months offset slightly by a shift in mix to lower priced communities.

~~Six Months Ended June 30, 2020~~

For the six months ended June 30, 2020, our net income was $121.2 million, or $1.87 per diluted share, a 27% increase compared to net income of $95.1 million, or $1.50 per diluted share, for the same period in the prior year. Similar to the second quarter commentary above, the increase was driven by a $31.9 million increase in homebuildingfinancial services pretax ~~income and a $14.5 million increase in mortgage operations pretax~~ income. ~~These increases were partially offset by a net loss on equity securities of $8.3 million during the six months ended June 30, 2020, as compared to a net gain of $7.2 million for the prior year period.~~

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Outlook for MDC*

The steps taken during the six months ended June 30, 2020 to improve cash flow and reduce costs have reinforced our strong financial position as we deal with the continued uncertainties brought about by the pandemic. We ended the 2020 second quarter with cash and cash equivalents of nearly $550 million and available borrowing capacity on our Revolving Credit Facility exceeding $950 million, resulting in total liquidity of more than $1.5 billion. The dollar value of our homes in backlog was $2.4 billion as of June 30, 2020, which was 23% higher than the prior year period. The higher backlog puts us in a strong position to drive continued year-over-year improvement to our operating results during the back half of 2020. However, our financial position and ability to convert backlog into closings could be negatively impacted in future periods by the pandemic, the extent to which is highly uncertain and depends on future developments, including new information that may emerge concerning the severity of the pandemic, whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus (see discussion in Industry Conditions above and in Risk Factors below).

* See "Forward-Looking Statements" below.

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Homebuilding

Pretax Income:


		Three Months Ended										Six Months Ended											Three Months Ended								Six Months Ended
		June 30,						Change						June 30,								Change					June 30,				Change				June 30,	Change
		2020		2019		Amount		%		2020		2019		Amount		%			2021		2020		Amount		%		2021		2020		Amount		%

		(Dollars in thousands)																															(Dollars in thousands)
West	West	$	48,745	$	35,350	$	13,395	38	%	$	85,321	$	68,550	$	16,771	24	%	West	$	132,919	$	48,745	$	84,174	173	%	$	210,106	$	85,321	$	124,785	146	%
Mountain	Mountain	41,807		35,972		5,835		16	%	63,319		57,686		5,633		10	%	Mountain	64,052		41,807		22,245		53	%	109,910		63,319		46,591		74	%
East	East	3,073		2,152		921		43	%	3,973		3,625		348		10	%	East	10,846		3,073		7,773		253	%	18,681		3,973		14,708		370	%
Corporate	Corporate	(8,704)		(11,860)		3,156		27	%	(18,023)		(27,192)		9,169		34	%	Corporate	(20,308)		(8,704)		(11,604)		(133)	%	(37,681)		(18,023)		(19,658)		(109)	%
Total Homebuilding pretax income	Total Homebuilding pretax income	$	84,921	$	61,614	$	23,307	38	%	$	134,590	$	102,669	$	31,921	31	%	Total Homebuilding pretax income	$	187,509	$	84,921	$	102,588	121	%	$	301,016	$	134,590	$	166,426	124	%

For the three months ended June 30, ~~2020,~~2021, we recorded homebuilding pretax income of ~~$84.9~~$187.5 million, an increase of ~~$23.3 million~~121% from ~~$61.6~~$84.9 million for the same period in the prior year. The increase was due to a ~~21%~~54% increase in home sale revenues, a 70290 basis point increase in our gross margin from home sales and a 90100 basis point decrease in our selling, general and administrative expenses as a percentage of revenue.

Our West segment experienced a ~~$13.4~~$84.2 million year-over-year increase in pretax income, due to a ~~27%~~73% increase in home sales revenue and an improved gross ~~margin, which were slightly offset by a $3.3 million increase in general and administrative expenses resulting from the change in our Corporate cost allocation discussed below.~~margin. Our Mountain segment experienced a ~~$5.8~~$22.2 million increase in pretax income from the prior year, as a result of a ~~10%~~27% increase in home sales revenue and an improved gross ~~margin, which were slightly offset by a $1.7 million increase in general and administrative expenses due to the change in our Corporate cost allocation.~~margin. Our East segment experienced a ~~$0.9~~$7.8 million increase in pretax income from the prior year, due ~~primarily~~ to an improved gross margin as well as a ~~31%~~49% increase in home sales ~~revenue, which was slightly offset by a $0.7 million increase in~~revenue. Each of our homebuilding segments also benefited from decreased selling, general and administrative expenses ~~resulting from the change in our Corporate cost allocation.~~as a percentage of revenue driven by improved operating leverage. Our Corporate segment experienced ~~a $3.1~~an $11.6 million increase in pretax ~~income,~~loss, due primarily to ~~the impact of the change~~increases in ~~our Corporate cost allocation, which was partially offset by a $2.0 million decrease in interest income due to lower interest rates during the current period.~~stock-based and deferred compensation expenses as well as increased bonus expense.

For the six months ended June 30, ~~2020,~~2021, we recorded homebuilding pretax income of ~~$134.6~~$301.0 million, an increase of ~~$31.9 million~~124% from ~~$102.7~~$134.6 million for the same period in the prior year. The increase was due to a ~~15%~~52% increase in home sale revenues, ~~an 80~~a 260 basis point increase in our gross margin from home sales and a 50140 basis point decrease in our selling, general and administrative expenses as a percentage of revenue. Commentary on the drivers of the increase in pretax income in our individual homebuilding segments is consistent with the ~~2020~~2021 second quarter discussion above.

~~-26-~~

~~Table of Contents~~Assets:

~~Assets:~~


		June 30, 2020		December 31, 2019		Change							June 30, 2021				December 31, 2020			Change
								Amount				%							Amount			%

		(Dollars in thousands)																		(Dollars in thousands)
West	West	$	1,575,620	$	1,461,645	113,975		8	%	West	$	2,083,436			$	1,855,567			227,869			12	%
Mountain	Mountain	893,282		869,665		23,617		3	%	Mountain	994,226		905,007				89,219			10	%
East	East	220,235		194,592		25,643		13	%	East	372,166		274,937				97,229			35	%
Corporate	Corporate	555,238		505,507		49,731		10	%	Corporate	690,572		470,909				219,663			47	%
Total homebuilding assets	Total homebuilding assets	$	3,244,375	$	3,031,409	$	212,966	7	%	Total homebuilding assets	$	4,140,400	$	3,506,420			$	633,980		18	%

Total homebuilding assets increased 7%18% from December 31, ~~2019~~2020 to June 30, ~~2020.~~2021. Homebuilding assets increased in each of our operating segments largely due to a greater number of homes completed or under construction as of period-end. ~~Our~~ Corporate assets ~~also~~ increased ~~primarily due to an increase~~as a result of the issuance of $350 million of 2.500% senior notes in ~~funds lent from our financial services segment. These increases were slightly offset by a decrease in land and land under development in our West and Mountain Segments, where the total number~~January of ~~lots owned has decreased slightly from December 31, 2019.~~this year.

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Table of Contents

New Home Deliveries & Home Sale Revenues:

Changes in home sale revenues are impacted by changes in the number of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below.


	Three Months Ended June 30,
	2021					2020					% Change
	Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price

	(Dollars in thousands)
West	1,672	$	847,683	$	507.0	1,017	$	490,117	$	481.9	64	%	73	%	5	%
Mountain	711	400,633		563.5		608	316,666		520.8		17	%	27	%	8	%
East	339	119,457		352.4		275	79,975		290.8		23	%	49	%	21	%
Total	2,722	$	1,367,773	$	502.5	1,900	$	886,758	$	466.7	43	%	54	%	8	%


		Three Months Ended June 30,																															Six Months Ended June 30,
		2020								2019											% Change								2021						2020	% Change
		Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price			Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price

		(Dollars in thousands)																															(Dollars in thousands)
West	West	1,017	$	490,117	$	481.9	785	$	384,530	$	489.8	30	%	27	%	(2)	%	West	2,948	$	1,464,294	$	496.7	1,888	$	895,615	$	474.4	56	%	63	%	5	%
Mountain	Mountain	608	316,666		520.8		534	287,476		538.3		14	%	10	%	(3)	%	Mountain	1,323	725,350		548.3		1,043	539,524		517.3		27	%	34	%	6	%
East	East	275	79,975		290.8		195	60,838		312.0		41	%	31	%	(7)	%	East	629	219,987		349.7		516	148,704		288.2		22	%	48	%	21	%
Total	Total	1,900	$	886,758	$	466.7	1,514	$	732,844	$	484.0	25	%	21	%	(4)	%	Total	4,900	$	2,409,631	$	491.8	3,447	$	1,583,843	$	459.5	42	%	52	%	7	%

Six Months Ended June 30,
2020 2019 % Change
Homes Home Sale
Revenues Average
Price Homes Home Sale
Revenues Average
Price Homes Home
Sale
Revenues Average Price
(Dollars in thousands)
West 1,888 $ 895,615 $ 474.4 1,537 $ 754,088 $ 490.6 23 % 19 % (3) %
Mountain 1,043 539,524 517.3 943 496,668 526.7 11 % 9 % (2) %
East 516 148,704 288.2 392 129,366 330.0 32 % 15 % (13) %
Total 3,447 $ 1,583,843 $ 459.5 2,872 $ 1,380,122 $ 480.5 20 % 15 % (4) %

~~-27-~~

~~Table of Contents~~

West Segment Commentary

For ~~both~~ the three and six months ended June 30, ~~2020,~~2021, the increase in new home deliveries was ~~primarily~~the result of an increase in the number of homes in backlog to begin the respective periods. This increase was partially offset for the six months ended June 30, 2021 by a decrease in backlog conversion rates in most of our markets within this segment. This decrease was due to (1) the construction status of homes in beginning backlog, which on average were at a more preliminary stage of construction as compared to the prior year periods and (2) increased cycle times resulting from extended permitting times and minor supply chain disruptions. The average selling price of homes delivered increased as a result of price increases implemented over the last twelve months as well as a shift in geographic mix of homes delivered from Arizona to Southern California. These increases were partially offset by a shift in mix to lower priced communities.

Mountain Segment Commentary

For the three and six months ended June 30, 2021, the increase in new home deliveries was the result of an increase in the number of homes in backlog to begin the respective periods. This increase was partially offset by a decrease in backlog conversion rates ~~in our Arizona, California and Washington markets due to construction delays~~ as a result of (1) ~~certain state and local governments not identifying residential~~the construction status of homes in beginning backlog, which on average were at a more preliminary stage of construction as ~~an essential business, which impacted our ability~~compared to ~~physically construct homes~~the prior year periods and (2) ~~more general construction related delays resulting from~~a lower percentage of homes both sold and delivered in the ~~pandemic coupled with an~~respective periods as compared to the prior year periods. The increase in the ~~number of homes under construction . The~~ average selling price of homes delivered ~~decreased as a~~was the result of ~~a greater percentage of closings from our more affordable product offerings during~~price increases implemented over the ~~current periods.~~past twelve months.

~~Mountain~~East Segment Commentary

For the three and six months ended June 30, ~~2020,~~2021, the increase in new home deliveries was the result of an increase in the number of homes in backlog to begin the respective periods. ~~The decrease in the average selling price of homes delivered in our Mountain segment was due to a higher percentage of deliveries from communities that offer more affordable home plans.~~

~~East Segment Commentary~~

For both the three and six months ended June 30, 2020, the increase in new home deliveries was the result of an increase in the number of homes in backlog to begin the respective periods. For the six months ended June 30, 2020, thisThis increase was partially offset by a decrease in backlog conversion rates ~~in most of our markets within this segment~~ due to a (1) ~~a lower percentage~~the construction status of homes in beginning backlog, which on average were at a more preliminary stage of construction as compared to ~~start~~ the ~~period that were under construction at that time~~prior year periods, (2) increased cycle times resulting from extended permitting times and ~~(2)~~minor supply chain disruptions and (3) a lower percentage of homes both sold and delivered ~~during~~in the ~~period.~~respective periods as compared to the prior year periods. The average selling price of homes delivered ~~decreased~~increased as a result of price increases implemented over the last twelve months as well as a ~~greater percentage~~shift in geographic mix of ~~closings from~~homes delivered to our ~~more affordable product offerings.~~mid-Atlantic market.

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Gross Margin from Home Sales:

Our gross margin from home sales for the three months ended June 30, ~~2020,~~2021, increased 70290 basis points year-over-year from ~~19.5%~~20.2% to ~~20.2%~~23.1%. ~~During the three months ended June 30, 2020 and 2019 we recorded decreases to~~Gross margin from home sales increased across each of our ~~warranty accrual of $2.0 million and $1.4 million, respectively. These adjustments positively impacted gross margin by 20 basis points in both periods. Gross margins increased~~segments on both build-to-order and speculative home deliveries driven by price increases implemented across ~~the majority~~nearly all of our communities over the past twelve months. Our gross margin from home sales in the 2021 second quarter was also positively impacted by a 60 basis point improvement in our capitalized interest in cost of sales as a percentage of home sale revenues. These increases were partially offset by an increase in building costs year-over-year.

Our gross margin from home sales for the six months ended June 30, ~~2020,~~2021, increased 80260 basis points year-over-year from ~~19.2%~~20.0% to ~~20.0%~~22.6%. The primary drivers of the improved gross margin from home sales for the six months ended June 30, ~~2020~~2021 are consistent with those noted above for the three months ended June 30, 2020. Gross margins were also positively impacted as a result of a lower percentage of speculative home deliveries in the six months ended June 30, 2020, which typically have a lower gross margin than our build-to-order deliveries.2021.

~~Inventory~~Selling, General and Administrative Expenses:~~Impairments:~~


	Three Months Ended June 30,								Six Months Ended June 30,
	2021			2020			Change		2021			2020			Change

	(Dollars in thousands)
General and administrative expenses	$	61,958		$	40,419		$	21,539	$	119,121		$	85,508		$	33,613
General and administrative expenses as a percentage of home sale revenues	4.5		%	4.6		%	-10 bps		4.9		%	5.4		%	-50 bps
Marketing expenses	$	26,832		$	22,657		$	4,175	$	52,535		$	44,103		$	8,432
Marketing expenses as a percentage of home sale revenues	2.0		%	2.6		%	-60 bps		2.2		%	2.8		%	-60 bps
Commissions expenses	$	40,071		$	29,240		$	10,831	$	72,198		$	52,026		$	20,172
Commissions expenses as a percentage of home sale revenues	2.9		%	3.3		%	-40 bps		3.0		%	3.3		%	-30 bps
Total selling, general and administrative expenses	$	128,861		$	92,316		$	36,545	$	243,854		$	181,637		$	62,217
Total selling, general and administrative expenses as a percentage of home sale revenues	9.4		%	10.4		%	-100 bps		10.1		%	11.5		%	-140 bps

~~Impairments of homebuilding inventory by segment~~General and administrative expenses increased for the three and six months ended June 30, ~~2020~~2021 due to (1) increased stock-based and ~~2019 are shown in~~deferred compensation expenses, (2) increased bonus expense and (3) increased salary related expenses due to higher average headcount during the ~~table below:~~respective periods.

~~The table below provides quantitative data,~~Marketing expenses increased for ~~the periods presented, where applicable, used in determining the fair value of the impaired inventory.~~

Impairment Data
Three Months Ended Number of
Subdivisions
Impaired Inventory
Impairments Fair Value of
Inventory After Impairments Discount Rate
(Dollars in thousands)
March 31, 2019 2 $ 610 $ 10,476 N/A

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~~Table of Contents~~

~~Selling, General and Administrative Expenses:~~

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
(Dollars in thousands)
General and administrative expenses $ 40,419 $ 39,326 $ 1,093 $ 85,508 $ 81,898 $ 3,610
General and administrative expenses as a percentage of home sale revenues
4.6 % 5.4 % -80 bps 5.4 % 5.9 % -50 bps
Marketing expenses $ 22,657 $ 19,513 $ 3,144 $ 44,103 $ 37,809 $ 6,294
Marketing expenses as a percentage of home sale revenues
2.6 % 2.7 % -10 bps 2.8 % 2.7 % 10 bps
Commissions expenses $ 29,240 $ 23,873 $ 5,367 $ 52,026 $ 45,266 $ 6,760
Commissions expenses as a percentage of home sale revenues
3.3 % 3.3 % 0 bps 3.3 % 3.3 % 0 bps
Total selling, general and administrative expenses $ 92,316 $ 82,712 $ 9,604 $ 181,637 $ 164,973 $ 16,664
Total selling, general and administrative expenses as a percentage of home sale revenues
10.4 % 11.3 % -90 bps 11.5 % 12.0 % -50 bps

~~For both~~ the three and six months ended June 30, ~~2020, the increase in our marketing expenses was driven by (1) increased sales office expense resulting from an increased number~~2021 as a result of ~~average active subdivisions, (2)~~ increased deferred selling amortization and master marketing fees resulting from increased ~~closings and (3) increased compensation expense due to a higher average headcount during the periods.~~closings.

~~General and administrative~~Commissions expenses increased for ~~both~~ the three and six months ended June 30, ~~2020 as a result of increased compensation-related expenses~~2021 due to ~~increased stock based compensation and bonus expense, driven~~the increase in ~~part by strong operating results during the periods.~~homes sale revenues year-over-year.

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Table o fof Contents

Other Homebuilding Operating Data

Net New Orders and Active Subdivisions:

Changes in the dollar value of net new orders are impacted by changes in the number of net new orders and the average selling price of those homes. Commentary for each of our segments on significant changes in these two metrics is provided below.


	Three Months Ended June 30,
	2021						2020						% 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)
West	1,602	$	850,742	$	531.0	5.67	1,309	$	574,996	$	439.3	4.62	22	%	48	%	21	%	23	%
Mountain	706	433,793		614.4		4.18	758	362,228		477.9		3.99	(7)	%	20	%	29	%	5	%
East	406	180,205		443.9		3.56	323	106,436		329.5		3.53	26	%	69	%	35	%	1	%
Total	2,714	$	1,464,740	$	539.7	4.80	2,390	$	1,043,660	$	436.7	4.23	14	%	40	%	24	%	13	%


		Three Months Ended June 30,																																					Six Months Ended June 30,
		2020											2019														% Change										2021							2020	% 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			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)																																					(Dollars in thousands)
West	West	1,309	$	574,996	$	439.3	4.62	1,246	$	550,742	$	442.0	4.46	5	%	4	%	(1)	%	4	%	West	3,377	$	1,791,809	$	530.6	5.73	2,691	$	1,262,330	$	469.1	4.88	25	%	42	%		13	%	17	%
Mountain	Mountain	758	362,228		477.9		3.99	690	318,275		461.3		3.56	10	%	14	%	4	%	12	%	Mountain	1,717	1,017,585		592.7		5.03	1,451	722,197		497.7		3.76	18	%	41	%		19	%	34	%
East	East	323	106,436		329.5		3.53	337	98,843		293.3		4.36	(4)	%	8	%	12	%	(19)	%	East	829	354,950		428.2		4.03	647	206,911		319.8		3.58	28	%	72	%		34	%	13	%
Total	Total	2,390	$	1,043,660	$	436.7	4.23	2,273	$	967,860	$	425.8	4.13	5	%	8	%	3	%	2	%	Total	5,923	$	3,164,344	$	534.2	5.21	4,789	$	2,191,438	$	457.6	4.28	24	%	44	%		17	%	22	%

Six Months Ended June 30,
2020 2019 % 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)
West 2,691 $ 1,262,330 $ 469.1 4.88 2,211 $ 1,003,236 $ 453.7 4.15 22 % 26 % 3 % 18 %
Mountain 1,451 722,197 497.7 3.76 1,409 669,523 475.2 3.53 3 % 8 % 5 % 7 %
East 647 206,911 319.8 3.58 609 182,141 299.1 4.33 6 % 14 % 7 % (17) %
Total 4,789 $ 2,191,438 $ 457.6 4.28 4,229 $ 1,854,900 $ 438.6 3.94 13 % 18 % 4 % 9 %

*Calculated as total net new orders (gross orders less cancellations) in period ÷ average active communities during period ÷ number of months in period.


						Average Active Subdivisions						Average Active Subdivisions														Average Active Subdivisions				Average Active Subdivisions
		Active Subdivisions						Three Months Ended									Six Months Ended								Active Subdivisions				Three Months Ended			Six Months Ended
		June 30,				%	June 30,				%	June 30,							%		June 30,		%		June 30,		%		June 30,		%
		2020	2019	Change		2020	2019	Change		2020	2019	Change			2021	2020		Change			2021	2020	Change		2021	2020	Change
West	West	96	97	(1)	%	95	94	1	%	92	89	3	%	West	91	96		(5)		%	94	95	(1)	%	98	92	7	%
Mountain	Mountain	63	65	(3)	%	63	65	(3)	%	64	66	(3)	%	Mountain	55	63		(13)		%	56	63	(11)	%	57	64	(11)	%
East	East	33	25	32	%	31	26	19	%	30	23	30	%	East	41	33		24		%	38	31	23	%	34	30	13	%
Total	Total	192	187	3	%	189	185	2	%	186	178	4	%	Total	187	192		(3)		%	188	189	(1)	%	189	186	2	%

West Segment Commentary

For ~~both~~ the three and six months ended June 30, ~~2020,~~2021, the increase in net new orders was ~~primarily~~ due to an increase in the monthly sales absorption ~~rates, driven by~~rate, most notably in our ~~Phoenix~~California, Oregon and ~~California~~Washington markets. For the six months ended June 30, ~~2020~~2021, the increase in net new orders also benefited from an increase in average active subdivisions year-over-year. The increase in average selling price was due to price increases implemented over the past twelve months within ~~the majority~~nearly all of our ~~communities as well as~~communities. This increase was slightly offset by a shift in mix ~~of homes sold from Nevada~~ to more expensive Southern California markets. For the three months ended June 30, 2020 these increases were offset by a higher percentage of our net new orders coming from an expanded offering of more affordable home plans, most notably in our Southern California markets.lower priced communities.

Mountain Segment Commentary

For the three ~~and~~months ended June 30, 2021, the decrease in net new orders was due to a decrease in average active subdivisions within our Colorado markets. This decrease was partially offset by an increase in the monthly sales absorption rate in our Colorado markets.

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Table of Contents

For the the six months ended June 30, ~~2020,~~2021, the increase in net new orders was ~~primarily~~ due to an increase in the monthly sales absorption rates in ~~both~~ our Colorado ~~and Utah markets. The increase in average selling price was due to price increases implemented over the last twelve months.~~

~~-30-~~

~~Table of Contents~~

~~East Segment Commentary~~

For the three months ended June 30, 2020, the decrease in net new orders was driven by a decrease in the monthly sales absorption rates in our Florida markets due to (1) a decrease in gross sales due to the impact of the pandemic on Florida's large hospitality-based economy and (2) an increased cancellation rate (see further discussion below). This decrease in the monthly sales absorption rates was largely offset by a 19% year-over-year increase in average active subdivisions.

~~For the six months ended June 30, 2020, the increase in net new orders was driven by an increase in the number of average active subdivisions in each of our Florida and mid-Atlantic~~ markets. This increase was partially offset by a decrease in ~~the monthly sales absorption rate due to (1) a decrease in close-out communities in~~average active subdivisions within our ~~mid-Atlantic market and (2) an increased cancellation rate (see further discussion below).~~Colorado markets.

For ~~both~~ the three and six months ended June 30, ~~2020,~~2021, the increase in average selling price was due to price increases implemented over the last twelve months ~~as well as a shift in mix resulting from (1) a decrease in net new orders in~~within nearly all of our ~~Florida markets as noted above and (2) an~~communities.

East Segment Commentary

For the three months ended June 30, 2021, the increase in net new orders ~~in our mid-Atlantic market~~was primarily driven by an ~~increased~~increase in average active subdivisions within each of our Florida and mid-Atlantic markets.

For the six months ended June 30, 2021, the increase in net new orders was driven by both an increase in the monthly sales absorption ~~rate and increased~~rates as well as an increase in average active ~~subdivisions.~~subdivisions within each of our Florida and mid-Atlantic markets.

For the three and six months ended June 30, 2021, the increase in average selling price was due to price increases implemented over the last twelve months within nearly all of our communities. Additionally, we experienced a shift in mix within several markets to higher priced communities.

Cancellation Rate:

Cancellations as a Percentage of Homes in Beginning Backlog
2020 2019
Three Months Ended
June 30, March 31, June 30, March 31,
West 14 % 15 % 13 % 14 %
Mountain 20 % 22 % 13 % 14 %
East 22 % 23 % 18 % 11 %
Total 17 % 18 % 14 % 14 %


	Cancellations as a Percentage of Homes in Beginning Backlog
	2021				2020
	Three Months Ended
	March 31,		June 30,		March 31,		June 30,
West	7	%	5	%	15	%	14	%
Mountain	8	%	5	%	22	%	20	%
East	13	%	9	%	23	%	22	%
Total	8	%	6	%	18	%	17	%

Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) ~~increased~~decreased year-over-year in each of our segments. ~~In general, we experienced a higher~~The cancellation rate ~~during~~in the ~~month~~first and second quarter of April due to the pandemic as a result of general economic uncertainty and changes in our homebuyers' employment status. Cancellation rates in June were more consistent with our historical rates. Our Florida markets experienced some of the highest cancellation rates as a result of economic, and more specifically employment, uncertainty brought about2020 was negatively impacted by the pandemic.

Backlog:

June 30,
2020 2019 % Change
Homes Dollar
Value Average
Price Homes Dollar
Value Average
Price Homes Dollar
Value Average
Price
(Dollars in thousands)
West 2,826 $ 1,336,251 $ 472.8 2,197 $ 1,016,327 $ 462.6 29 % 31 % 2 %
Mountain 1,619 $ 816,559 $ 504.4 1,509 $ 739,921 $ 490.3 7 % 10 % 3 %
East 698 $ 220,362 $ 315.7 587 $ 173,436 $ 295.5 19 % 27 % 7 %
Total 5,143 $ 2,373,172 $ 461.4 4,293 $ 1,929,684 $ 449.5 20 % 23 % 3 %


	June 30,
	2021					2020					% Change
	Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price

	(Dollars in thousands)
West	4,139	$	2,204,500	$	532.6	2,826	$	1,336,251	$	472.8	46	%	65	%	13	%
Mountain	2,412	1,426,496		591.4		1,619	816,559		504.4		49	%	75	%	17	%
East	1,127	482,736		428.3		698	220,362		315.7		61	%	119	%	36	%
Total	7,678	$	4,113,732	$	535.8	5,143	$	2,373,172	$	461.4	49	%	73	%	16	%

At June 30, ~~2020,~~2021, we had ~~5,143~~7,678 homes in backlog with a total value of ~~$2.4~~$4.1 billion. This represented a ~~20%~~49% increase in the number of homes in backlog and a ~~23%~~73% increase in the dollar value of homes in backlog from June 30, ~~2019.~~2020. The increase in the number of homes in backlog is primarily a result of the year-over-year increase in net new orders ~~during~~over the ~~six months ended June 30, 2020.~~past nine months. The increase in the average selling price of homes in backlog is due to price increases implemented over the past twelve months in nearly all of our communities as well as ~~decreased incentives, which is slightly offset by~~ a shift in our net new order mix ~~to lower priced communities, consistent with~~in our ~~ongoing strategy of offering more affordable home plans.~~East segment as discussed above. Our ability to convert backlog into closings could be negatively impacted in future periods by the pandemic, the extent to which is highly uncertain and depends on future developments.

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Homes Completed or Under Construction (WIP lots):

June 30, %
2020 2019 Change
Unsold:
Completed 109 96 14 %
Under construction 191 236 (19) %
Total unsold started homes 300 332 (10) %
Sold homes under construction or completed 3,573 3,023 18 %
Model homes under construction or completed 502 457 10 %
Total homes completed or under construction 4,375 3,812 15 %


	June 30,		%
	2021	2020	Change
Unsold:
Completed	19	109	(83)	%
Under construction	214	191	12	%
Total unsold started homes	233	300	(22)	%
Sold homes under construction or completed	6,655	3,573	86	%
Model homes under construction or completed	502	502	—	%
Total homes completed or under construction	7,390	4,375	69	%

The increase in sold homes under construction or completed is due to the increase in the number of homes in backlog year-over-year noted above. Total unsold started homes have decreased year-over-year ~~despite~~due to the ~~increased cancellation rates as we have been successful in selling our speculative inventory in the current~~strong demand ~~environment. Speculative inventory comprised less than 10% of our total housing completed or under construction inventory balance at June 30, 2020.~~for new homes.

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


		June 30, 2020					June 30, 2019								June 30, 2021				June 30, 2020
		Lots Owned	Lots Optioned	Total	Lots Owned	Lots Optioned	Total	Total % Change			Lots Owned	Lots Optioned	Total	Lots Owned	Lots Optioned	Total	Total % Change
West	West	9,364	2,619	11,983	8,611	2,446	11,057	8	%	West	13,265	4,729	17,994	9,364	2,619	11,983	50	%
Mountain	Mountain	6,076	2,667	8,743	6,457	2,741	9,198	(5)	%	Mountain	6,599	4,174	10,773	6,076	2,667	8,743	23	%
East	East	2,260	2,041	4,301	2,085	1,267	3,352	28	%	East	3,636	1,997	5,633	2,260	2,041	4,301	31	%
Total	Total	17,700	7,327	25,027	17,153	6,454	23,607	6	%	Total	23,500	10,900	34,400	17,700	7,327	25,027	37	%

Our total owned and optioned lots at June 30, ~~2020~~2021 were ~~25,027,~~34,400, which was ~~a 6% year-over-year~~an 37% increase but a decrease of 8% from March 31, 2020. The sequential decrease was the result of a planned slowdown in our rate of approval of new lot acquisitions during the quarter and the cancellation of some previously approved lot acquisitions due to the uncertainty caused by the pandemic.year-over-year. We believe that our total lot supply, coupled with our planned acquisition activity, can 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
2020 2019 Amount % 2020 2019 Amount %
(Dollars in thousands)
Financial services revenues
Mortgage operations $ 24,363 $ 11,689 $ 12,674 108 % $ 38,988 $ 21,863 $ 17,125 78 %
Other 8,601 6,908 1,693 25 % 15,862 14,138 1,724 12 %
Total financial services revenues $ 32,964 $ 18,597 $ 14,367 77 % $ 54,850 $ 36,001 $ 18,849 52 %
Financial services pretax income

Mortgage operations $ 17,506 $ 6,239 $ 11,267 181 % $ 25,749 $ 11,232 $ 14,517 129 %
Other 9,211 6,478 2,733 42 % (139) 16,036 (16,175) (101) %
Total financial services pretax income $ 26,717 $ 12,717 $ 14,000 110 % $ 25,610 $ 27,268 $ (1,658) (6) %


	Three Months Ended								Six Months Ended
	June 30,				Change				June 30,				Change
	2021		2020		Amount		%		2021		2020		Amount		%

	(Dollars in thousands)
Financial services revenues
Mortgage operations	$	23,321	$	24,363	$	(1,042)	(4)	%	$	58,486	$	38,988	$	19,498	50	%
Other	9,997		8,601		1,395		16	%	19,855		15,862		3,993		25	%
Total financial services revenues	$	33,318	$	32,964	$	354	1	%	$	78,341	$	54,850	$	23,491	43	%
Financial services pretax income
Mortgage operations	$	14,088	$	17,506	(3,418)		(20)	%	$	40,127	$	25,749	$	14,379	56	%
Other	3,945		9,211		(5,266)		(57)	%	8,711		(139)		$	8,850	N/M
Total financial services pretax income (loss)	$	18,033	$	26,717	(8,684)		(33)	%	$	48,838	$	25,610	$	23,228	91	%

For the three months ended June 30, 2020, our financial services pretax income increased by $14.0 million, or 110%, from the same period in the prior year. The increase was primarily due to our mortgage operations, which saw an increase in pretax income of $11.3 million due to higher interest rate lock volume driven by the year-over-year increase in homes in backlog as well as an increased Capture Rate, and increased net interest income on loans originated during the period. The increase in our other financial services segment was due to gains on equity securities during the quarter of $5.0 million compared to $2.3 million in the prior year quarter. During the three months ended June 30, 2020, we sold our portfolio of equity securities in light of recent market volatility. These proceeds remain invested in money market funds as of June 30, 2020.

~~For the six months ended June 30, 2020,~~2021, our financial services pretax income decreased ~~$1.7~~by $8.7 million, or ~~6%,~~33% from the same period in the prior year. The decrease was due to both our mortgage operations as well as other financial services. The decrease in our mortgage operations was due to increased competition in the primary mortgage market, increased compensation related costs and a temporary decrease in our Capture Rate. The decrease in other financial services ~~segment, which had~~was primarily the result of $5.0 million of gains on equity securities recognized during the prior year quarter.

For the six months ended June 30, 2021, our financial services pretax income increased $23.2 million, or 91% from the same period in the prior year. The increase was due to both our mortgage operations as well as other financial services. The increase in our mortgage operations was due to an increase in loan origination and sales activity driven by the overall increase in volume of our homebuilding operations. The increase in other financial services was primarily the result of $8.3 million of net losses on equity securities recognized during the ~~period as compared to $7.2 million of net gains for the same period in the~~ prior year. This was largely offset by an increase in our mortgage operations pretax income of $14.5 million. Commentary on the drivers of the increase in pretax income in our mortgage operations segment is consistent with the 2020 second quarter discussion above.year period.

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

Three Months Ended % or
Percentage Six Months Ended % or
Percentage
June 30, June 30,
2020 2019 Change 2020 2019 Change
(Dollars in thousands)
Total Originations (including transfer loans):
Loans 1,336 931 44 % 2,365 1,714 38 %
Principal $ 497,566 $ 351,148 42 % $ 876,872 $ 636,674 38 %
Capture Rate Data:
Capture rate as % of all homes delivered 69 % 61 % 8 % 68 % 60 % 8 %
Capture rate as % of all homes delivered (excludes cash sales) 72 % 66 % 6 % 71 % 64 % 7 %
Mortgage Loan Origination Product Mix:
FHA loans 21 % 15 % 6 % 21 % 16 % 5 %
Other government loans (VA & USDA) 21 % 19 % 2 % 22 % 19 % 3 %
Total government loans 42 % 34 % 8 % 43 % 35 % 8 %
Conventional loans 58 % 66 % (8) % 57 % 65 % (8) %
100 % 100 % — % 100 % 100 % — %
Loan Type:
Fixed rate 100 % 97 % 3 % 99 % 97 % 2 %
ARM — % 3 % (3) % 1 % 3 % (67) %
Credit Quality:
Average FICO Score 737 742 (1) % 736 740 (1) %
Other Data: ` `
Average Combined LTV ratio 84 % 82 % (2) % 84 % 81 % 4 %
Full documentation loans 100 % 100 % — % 100 % 100 % — %
Loans Sold to Third Parties:
Loans 1,229 929 32 % 2,428 1,818 34 %
Principal $ 460,111 $ 350,010 31 % $ 898,213 $ 670,424 34 %


	Three Months Ended						% or Percentage		Six Months Ended						% or Percentage Change
	June 30,								June 30,
	2021			2020			Change		2021			2020

	(Dollars in thousands)
Total Originations (including transfer loans):
Loans	1,564			1,336			17	%	3,132			2,365			32	%
Principal	$	643,129		$	497,566		29	%	$	1,259,134		$	876,872		44	%
Capture Rate Data:
Capture rate as % of all homes delivered	57		%	69		%	(12)	%	64		%	68		%	(4)	%
Capture rate as % of all homes delivered (excludes cash sales)	60		%	72		%	(12)	%	66		%	71		%	(5)	%
Mortgage Loan Origination Product Mix:
FHA loans	18		%	21		%	(3)	%	19		%	21		%	(2)	%
Other government loans (VA & USDA)	18		%	21		%	(3)	%	18		%	22		%	(4)	%
Total government loans	36		%	42		%	(6)	%	37		%	43		%	(6)	%
Conventional loans	64		%	58		%	6	%	63		%	57		%	6	%
	100		%	100		%	—	%	100		%	100		%	—	%
Loan Type:
Fixed rate	100		%	100		%	—	%	100		%	99		%	1	%
ARM	—		%	—		%	—	%	—		%	1		%	(1)	%
Credit Quality:
Average FICO Score	740			737			—	%	739			736			—	%
Other Data:	`			`
Average Combined LTV ratio	84		%	84		%	—	%	85		%	84		%	1	%
Full documentation loans	100		%	100		%	—	%	100		%	100		%	—	%
Loans Sold to Third Parties:
Loans	1,701			1,229			38	%	3,287			2,428			35	%
Principal	$	689,530		$	460,111		50	%	$	1,300,428		$	898,213		45	%

Income Taxes

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting ~~policies~~principles 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, ~~2019.~~2020.

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 (both defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $2.0 billion. Following the issuance of ~~$300~~$350 million of ~~3.850%~~2.500% senior notes on January ~~9, 2020, $1.70~~11, 2021, $1.35 billion remains on our effective shelf registration statement.

Capital Resources

Our capital structure is primarily a combination of: (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5.500% senior notes due 2024, 3.850% senior notes due 2030, 2.500% senior notes due 2031 and our 6.000% senior notes due 2043; (3) our Revolving Credit Facility (defined below); and (4) our Mortgage Repurchase Facility (defined below). Because of our current balance of cash, cash equivalents, 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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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 was amended on ~~November 1, 2018~~December 28, 2020 to (1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the “Commitment”), (2) extend the Revolving Credit Facility maturity of $1.125 billion of the Commitments to December 18, ~~2023, (2) increase~~2025 with the ~~aggregate commitment from $700 million~~remaining Commitment continuing to ~~$1.0 billion (the “Commitment”)~~termination on December 18, 2023 and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed ~~$1.5~~$1.7 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency 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 maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased by $25 million on June ~~25, 2020 from $75 million to $150 million~~28, 2021 effective through July ~~23, 2020.~~22, 2021. The maximum aggregate commitment of the Mortgage Repurchase Facility ~~also had a temporary increase in the maximum aggregate commitment from $75 million to $150~~was temporarily increased by $50 million on December ~~24, 2019~~28, 2020 effective through January ~~22, 2020.~~27, 2021. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, HomeAmerican had ~~$142.1~~$164.7 million and ~~$149.6~~$202.4 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 based on a LIBOR rate or successor benchmark rate.

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2021.

Dividends

During the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, we paid cash dividends of ~~$0.33~~$0.40 per share and ~~$0.30~~$0.31 per share, respectively.

MDC Common Stock Repurchase Program

At June 30, ~~2020,~~2021, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months ended June 30, ~~2020.~~2021.

Consolidated Cash Flow

During ~~both~~ the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, we generated $12.1 million and $55.7 million of cash from operating ~~activities.~~activities, respectively. The most significant source of cash provided by operating activities in both periods was net income. Cash provided by the ~~decrease~~change in ~~land~~accounts payable and ~~land under development~~accrued liabilities for the six months ended June 30, 2021 and 2020 ~~and 2019,~~ was ~~$94.9~~$70.6 million and ~~$24.4~~$40.5 million, respectively, due to the increased construction spend during both periods as a result of the year-over-year increases in home ~~starts following~~deliveries as well as the ~~spring selling season outnumbered lot acquisitions during the period. The level of lot acquisitions during the six months ended June 30, 2020 was further impacted by the pandemic.~~increase in homes in inventory at both period ends. Cash provided from the sale of mortgage loans for the six months ended June 30, 2021 and 2020 ~~and 2019,~~ was ~~$23.5~~$46.5 million and ~~$39.9~~$23.5 million, respectively, resulting from ~~increased~~the seasonal nature of our business and the above average level of loan ~~activity~~originations that occur during the month of December. Cash provided by the decrease in land and land under development for the six months ended June 30, 2021 and 2020, was $36.4 million and $94.9 million, respectively. The level of lot acquisitions during the six months ended June 30, 2020 was negatively impacted by the pandemic. Cash used to increase housing completed or under construction for the six months ended June 30, 2021 and 2020 ~~and 2019~~ was ~~$233.8~~$385.7 million and ~~$118.5~~$233.8 million, respectively, as homes in inventory increased ~~by nearly 750~~significantly during both periods. ~~The amount of cash~~Cash used to increase ~~housing completed or under construction~~trade and other receivables for the six months ended June 30, 2021 and 2020 was $57.1 million and $23.5 million, respectively, due to the year-over-year increases in home deliveries during both ~~periods was also impacted by the construction status of those homes in inventory at both the beginning and end of the respective~~ periods.

During the six months ended June 30, ~~2020,~~2021, net cash used in investing activities was $13.4 million compared with net cash provided by investing activities ~~was~~of $35.5 ~~million compared with net cash used by investing activities of $13.9~~ million in the prior year period. This difference primarily relates to $48.5 million in net cash provided by the sale of marketable securities during the six months ended June 30, 2020. ~~This was partially offset by cash~~Cash used to purchase property and equipment ~~which~~ remained consistent year-over-year.

During the six months ended June 30, ~~2020,~~2021, net cash ~~used in~~provided by financing activities was ~~$4.8~~$238.8 million compared with ~~$52.1~~cash use of $4.8 million in the prior year period. The primary driver of this ~~decrease~~increase in cash ~~used in~~provided by financing activities was ~~due to net~~the proceeds from the issuance of senior notes of ~~$48.1~~$347.7 million during the six months ended June 30, ~~2020.~~2021.

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, ~~2020,~~2021, we had deposits of ~~$19.7~~$37.5 million in the form of cash and ~~$8.4~~$12.2 million in the form of letters of credit that secured option contracts to purchase ~~7,327~~10,900 lots for a total estimated purchase price of ~~$514.5~~$812.6 million.

Surety Bonds and Letters of Credit. At June 30, ~~2020,~~2021, we had outstanding surety bonds and letters of credit totaling ~~$264.4~~$295.5 million and ~~$87.9~~$151.7 million, respectively, including ~~$62.0~~$114.0 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately ~~$89.7~~$140.2 million and ~~$47.4~~$107.5 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

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

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, ~~2019~~2020 Annual Report on Form 10-K.

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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, ~~2019~~2020 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have a cash and investment policy that enables us to achieve an appropriate investment return while preserving principal and managing risk. Under this policy, cash and cash equivalents may include U.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, and time deposits, with maturities of three months or less. Marketable securities under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate debt securities.

The market value and/or income derived from equity securities may go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of equity securities may also decline for a number of other reasons that directly relate to the issuer, such as management performance, financial leverage, the issuer’s historical and prospective earnings, the value of its assets and reduced demand for its goods and services. Equity securities generally have greater price volatility than bonds and other debt securities.

As of June 30, ~~2020,~~2021, our cash and cash equivalents included commercial bank deposits and money market funds.

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, ~~2020~~2021 had an aggregate principal balance of ~~$233.0~~$306.0 million, all of which were under interest rate lock commitments at an average interest rate of ~~3.03%~~3.26%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of ~~$166.4~~$179.6 million at June 30, ~~2020,~~2021, of which ~~$85.9~~$64.9 million had not yet been committed to a mortgage purchaser and had an average interest rate of ~~2.95%~~3.07%. 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 ~~$205.5~~$189.5 million and ~~$108.5~~$203.0 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 105 and 35 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.

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

Item 4. Controls and 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~~Chairman (principal executive officer) and the Chief Financial Officer (principal financial officer). Based on that evaluation, our management, including the ~~Chief~~ Executive ~~Officer~~Chairman and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

~~(a)~~(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, ~~2020~~2021 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. Legal Proceedings

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. Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A. Risk Factors in the Company’s ~~2019~~2020 Annual Report on Form 10-K. There are no material changes from the risk factors included within the Company’s ~~2019~~2020 Annual Report on Form 10-K, other than the risk described below.

The recent global Coronavirus/COVID-19 pandemic could harm business and results of operations of the Company.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, availability of financing for homebuyers, interest rates, consumer confidence, wage growth, household formations, levels of new and existing homes for sale, cost of land, labor and construction materials, demographic trends and housing demand. These factors, in particular consumer confidence, can be significantly and adversely affected by a variety of factors beyond our control. In response to the pandemic, many state and local governments instituted restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. While ~~some~~many of these restrictions have been or are in the process of being eased, there is still significant uncertainty ~~around~~as a result of the ~~extent~~pandemic and ~~duration of those still in place, the possibility for restrictions~~its potential to ~~be increased again in the future and the~~continue to negatively impact ~~these restrictions will have on~~ the U.S. economy and consumer confidence. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments that are highly uncertain, including new information that may emerge concerning the severity of the pandemic, whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus. If the pandemic continues to cause significant negative impacts to the U.S. economy and consumer confidence, our results of operations, financial condition and cash flows could be significantly and adversely impacted.

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

The following table provides information about our repurchase of common stock during the three months ended June 30, ~~2020:~~2021:


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (2)	Maximum Number of Shares that may yet be Purchased under the Plan or Program (2)
April 1 to April 30, 2021	—	N/A	—	4,000,000
May 1 to May 31, 2021	—	N/A	—	4,000,000
June 1 to June 30, 2021	—	N/A	—	4,000,000

Period
Total Number of Shares Purchased ⁽¹⁾
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program ⁽²⁾
Maximum Number of Shares that may yet be Purchased under the Plan or Program ⁽²⁾
April 1 to April 30, 2020 — N/A — 4,000,000
May 1 to May 31, 2020 256,623 $ 27.66 — 4,000,000
June 1 to June 30, 2020 — N/A — 4,000,000

⁽¹⁾Represents shares of common stock withheld by us to cover withholding taxes due upon the vesting of restricted stock award shares, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.

⁽²⁾ We are authorized to repurchase up to 4,000,000 shares of our common stock. There were no shares of MDC common stock repurchased under this repurchase program during the three month period ended June 30, ~~2020.~~2021.

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Item6. Exhibits


~~10.1~~3.1			~~M.D.C. Holdings, Inc. 2020 Equity Plan for Non-Employee Directors (as amended and restated)~~Amendment to the Bylaws of MDC, as of June 28, 2021 (incorporated by reference to Exhibit ~~10.1~~3.1 of the Company's Current Report on Form 8-K filed June 30, 2021). *
10.1			M.D.C. Holdings, Inc. 2021 Equity Incentive Plan, effective April ~~22, 2020)~~26, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 28, 2021). *
10.2			Form of Restricted Stock ~~Option~~ Agreement ~~(2020~~(2021 Equity ~~Plan for Non-Employee Directors)~~Incentive Plan).
10.3			Form of ~~Restricted~~ Stock ~~Award~~Option Agreement ~~(2020~~(2021 Equity ~~Plan for Non-Employee Directors)~~Incentive Plan).
10.4			~~Fourth~~Form of Executive Officer Restricted Stock Agreement (2021 Equity Incentive Plan).
10.5			Form of Executive Officer Stock Option Agreement (2021 Equity Incentive Plan).
10.6			Form of Senior Executive Officer Restricted Stock Agreement (2021 Equity Incentive Plan).
10.7			Form of Senior Executive Officer Stock Option Agreement (2021 Equity Incentive Plan).
10.8			Seventh Amendment to Amended and Restated Master Repurchase Agreement between HomeAmerican Mortgage Corporation, as Seller, and U.S. Bank National Association, as Agent and Buyer, dated as of May ~~21, 2020 (incorporated~~20, 2021 (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed May ~~22,~~20, 2021). *
10.9			Amendment to Employment Agreement, between Larry A. Mizel and the Company, dated as of June 28, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 30, 2021). *
10.10			Amendment to Employment Agreement, between David D. Mandarich, and the Company, dated as of June 28, 2021, (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed June 30, 2020). *
22			Subsidiary ~~Guarantors~~Guarantors.
31.1			Certification of ~~Chief Executive Officer~~principal 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~~principal 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~~principal 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~~principal 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 Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, (ii) Consolidated Statements of Operations for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, ~~2020~~2021 and ~~2019;~~2020; and (v) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

____________________

*Incorporated by reference.

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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: July ~~28, 2020~~29, 2021			M.D.C. HOLDINGS, INC.
			(Registrant)

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

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	Six Months Ended June 30, 2019
	Common Stock					Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2018	56,615,352	$	566	$	1,168,442	$	406,992	$	1,576,000
Cumulative effect of newly adopted accounting standards	—	—		—		(67)		(67)
Balance at January 1, 2019	56,615,352	566		1,168,442		406,925		1,575,933
Net Income	—	—		—		40,550		40,550
Shares issued under stock-based compensation programs, net	372,344	4		7,083		—		7,087
Cash dividends declared	—	—		—		(17,019)		(17,019)
Stock dividend declared	4,534,908	45		138,950		(139,091)		(96)
Stock-based compensation expense	—	—		4,251		—		4,251
Forfeiture of restricted stock	(1,714)	—		—		—		—
Balance at March 31, 2019	61,520,890	$	615	$	1,318,726	$	291,365	$	1,610,706
Net Income	—	—		—		54,593		54,593
Shares issued under stock-based compensation programs, net	405,094	4		10,237		—		10,241
Cash dividends declared	—	—		—		(18,521)		(18,521)
Stock-based compensation expense	—	—		4,132		—		4,132
Forfeiture of restricted stock	(3,578)	—		—		—		—
Balance at June 30, 2019	61,922,406	$	619	$	1,333,095	$	327,437	$	1,661,151


				Threshold Goal			Target Goal			Maximum Goal						Maximum Potential Expense to be Recognized *	Maximum Remaining Expense to be Recognized *
Date of Award	Performance Period	Base Period	Base Period Revenues	PSUs	Home Sale Revenues	PSUs	Home Sale Revenues	PSUs	Home Sale Revenues	Fair Value per Share
July 25, 2016	July 1, 2016 - June 30, 2019	July 1, 2015 - June 30, 2016	$1.975 billion	137,781	$2.074 billion	275,562	$2.173 billion	551,124	$2.370 billion	$	19.66	$	10,834	$	—

June 20, 2017	April 1, 2017 - March 31, 2020	April 1, 2016 - March 31, 2017	$2.426 billion	144,342	$2.547 billion	288,684	$2.669 billion	577,368	$2.911 billion	$	27.83	$	16,070	$	—

May 23, 2018	April 1, 2018 - March 31, 2021	April 1, 2017 - March 31, 2018	$2.543 billion	145,800	$2.670 billion	291,600	$2.797 billion	583,200	$3.052 billion	$	25.57	$	14,915	$	3,922

August 5, 2019	January 1, 2019 - December 31, 2021	January 1, 2018 - December 31, 2018	$2.982 billion	135,000	$3.131 billion	270,000	$3.280 billion	540,000	$3.578 billion	$	32.60	$	17,604	$	17,604


Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program ⁽²⁾	Maximum Number of Shares that may yet be Purchased under the Plan or Program ⁽²⁾
April 1 to April 30, 2020	—	N/A		—	4,000,000
May 1 to May 31, 2020	256,623	$	27.66	—	4,000,000
June 1 to June 30, 2020	—	N/A		—	4,000,000