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TABLE OF CONTENTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Table of Contents

United States
Securities and Exchange Commission
Washington, DC 20549

FORM 10-K

ý Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")

For the fiscal year ended December 31, 2014

or

o Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act

For the transition period from              to             
Commission File Number 001-08029

THE RYLAND GROUP, INC.
(Exact name of registrant as specified in its charter)

Maryland   52-0849948
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. employer identification no.)

3011 Townsgate Road, Suite 200, Westlake Village, California 91361
(Address of principal executive offices)

Registrant's telephone number, including area code: (805) 367-3800

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

Title of each class
 
Name of each exchange on which registered
Common stock, par value $1.00 per share   New York Stock Exchange
Preferred stock purchase rights   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý    No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o    No ý

The aggregate market value of the common stock of The Ryland Group, Inc. held by nonaffiliates of the registrant (45,712,911 shares) at June 30, 2014, was $1,802,917,210. The number of shares of common stock of The Ryland Group, Inc. outstanding on February 23, 2015, was 46,681,044.


Table of Contents

DOCUMENT INCORPORATED BY REFERENCE

Name of Document
 
Location in Report

Proxy Statement for the 2015 Annual Meeting of Stockholders

  Part III    

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THE RYLAND GROUP, INC.
FORM 10-K
INDEX

ITEM NO.
       

PART I

 

 

 

 

Item 1.

 

Business

 

4
Item 1A.   Risk Factors   10
Item 1B.   Unresolved Staff Comments   14
Item 2.   Properties   14
Item 3.   Legal Proceedings   14
Item 4.   Mine Safety Disclosures   14

PART II

 

 

 

 

Item 5.

 

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

15
Item 6.   Selected Financial Data   17
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   18
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   39
Item 8.   Financial Statements and Supplementary Data   40
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   81
Item 9A.   Controls and Procedures   81
Item 9B.   Other Information   81

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

82
Item 11.   Executive Compensation   83
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   83
Item 13.   Certain Relationships and Related Transactions, and Director Independence   83
Item 14.   Principal Accountant Fees and Services   83

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

83

SIGNATURES

 

89

INDEX OF EXHIBITS

 

90

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PART I

Item 1.    Business

With headquarters in Southern California, The Ryland Group, Inc., a Maryland corporation (the "Company"), is one of the nation's largest homebuilders and a mortgage-finance company. The Company is traded on the New York Stock Exchange ("NYSE") under the symbol "RYL." Founded in 1967, the Company has built more than 315,000 homes. In addition, RMC Mortgage Corporation and its subsidiaries ("RMCMC") and Ryland Mortgage Company (collectively referred to as "RMC") have provided mortgage financing and related services for more than 255,000 homebuyers.

The Company consists of six reportable segments: four geographically determined homebuilding regions; financial services; and corporate. All of the Company's business is conducted and located in the United States, and its operations span all significant aspects of the homebuying process—from design, construction and sale to mortgage origination, title and escrow services. The homebuilding operations are, by far, the most substantial part of its business, comprising approximately 98 percent of consolidated revenues in 2014. The homebuilding segments generate nearly all of their revenues from sales of completed homes, with a lesser amount from sales of land and lots. In addition to building single-family detached homes, the homebuilding segments also build attached homes, such as townhomes and condominiums that share common walls and roofs. The Company generally builds homes for entry-level buyers and first- and second-time move-up buyers. Its prices generally range from $160,000 to more than $650,000, with the average price of a home closed during 2014 being $333,000. The financial services segment provides mortgage-related products and services, as well as title and escrow services, to its homebuyers.

The Company has traditionally concentrated on expanding its operations by investing its available capital in both existing and new markets. New and existing communities are evaluated based on returns, profitability and cash flow, and both senior and local management are incentivized based on the achievement of such returns. Management monitors the land acquisition process, sales revenues, margins and returns achieved in each of the Company's markets as part of its capital allocation process. (See "Part I, Item 1A, Risk Factors.")

The Company, which is diversified throughout the United States, believes diversification not only reduces its exposure to economic and market fluctuations, but also enhances its growth potential. Capital is strategically allocated to avoid concentration in any given geographic area and to reduce the risk associated with excessive dependence on local market anomalies. Subject to macroeconomic and local market conditions, the Company generally tries to either manage its exposure or expand its presence in its existing markets in an effort to be among the largest builders in each of those markets. In managing its exposure, the Company may decide to reduce its inventory position in a market because of current factors or conditions, or it may exit a market that is no longer viable for the achievement of its strategic goals. It may seek diversification by expanding within existing divisions or by selectively entering new markets, primarily through establishing start-up or satellite operations, or by acquiring local builders.

The Company's national scale has provided opportunities for the negotiation of volume discounts and rebates from material suppliers. Its scale, as well as the strength and transparency of its balance sheet and its relationship with the banking industry, has provided the Company with a lower cost of capital, compared to smaller and more localized competitors. The Company believes that economies of scale and diversification may contribute to improvements in its operating margins during periods of growth and mitigate its overall risk.

Committed to product innovation, the Company conducts ongoing research into consumer preferences and trends. It is constantly adapting and improving its floor plans, design features and customized options. The Company strives to offer value, quality, location and selection to all of its homebuyers.

The Company is dedicated to building quality homes and customer relationships. With customer satisfaction as a major priority, it continues to make innovative enhancements designed to attract homebuyers. The Company continually improves its methods of collecting customer feedback by using

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systems for tracking requests, processing issues and promoting customer interaction. In addition, it uses a third party to analyze customer feedback in order to better serve its homebuyers' needs.

The Company enters into land development joint ventures, from time to time, for the purpose of building lot positions, reducing its risk profile and enhancing its return on capital. It periodically partners with developers, other homebuilders or financial investors to develop finished lots for sale to the joint ventures' members or to other third parties.

Recent Trends

As a result of its strategic initiatives, strong balance sheet, liquidity, broad geographic presence and experienced personnel, the Company was able to capitalize on attractive land acquisition opportunities in markets with improving affordability statistics, demographics and household creation trends from 2012 to 2014. The Company began to expand more aggressively through accelerated land acquisitions in most markets, as well as through its acquisitions of homebuilders with operations in the Charlotte, Phoenix and Raleigh markets during 2012 and, during 2013, in the Dallas market and in the Delaware, New Jersey and Pennsylvania tri-state area. As a result, the Company was able to increase community count, improve operating leverage and return to higher profitability. The Company believes that continued revenue growth and improved financial performance will most likely come from a greater presence in its established markets, should economic progress continue, and that it is well positioned to take advantage of such opportunities, especially in markets that are showing employment growth and a healthy demographic outlook.

Homebuilding

General

The Company's homes are built on-site and marketed in four major geographic regions, or segments: North, Southeast, Texas and West. Within each of those segments, the Company operated in the following metropolitan areas at December 31, 2014:

North   Baltimore, Chicago, Delaware, Indianapolis, Metro Washington, D.C., Minneapolis/St. Paul, New Jersey, Northern Virginia and Philadelphia
Southeast   Atlanta, Charleston, Charlotte, Myrtle Beach, Orlando, Raleigh/Durham and Tampa
Texas   Austin, Dallas/Fort Worth, Houston and San Antonio
West   Denver, Las Vegas, Phoenix and Southern California

The Company has decentralized operations to capitalize on the expertise of its local division presidents and management teams. Each of its homebuilding divisions across the country generally consists of a division president; a controller; management personnel focused on land acquisition, entitlement and development, sales, construction, product development, customer service and purchasing; and accounting and administrative personnel. The Company's operations in each of its homebuilding markets may differ due to a number of market-specific factors, including regional economic conditions and job growth; land availability and development requirements; consumer preferences; competition from other homebuilders; and resale home activity. The Company not only considers each of these factors upon entering into new markets, but also in determining the extent of its operations and the allocation of its capital in existing markets. Market experience of local management teams is critical to the decision-making process regarding the Company's operations.

The Company markets attached and detached single-family homes, which are generally targeted to entry-level and first- and second-time move-up buyers. Its diverse product lines are tailored to the local styles and preferences found in each of its geographic markets. The product line offered in a particular community is determined in conjunction with the land acquisition process and is dependent upon a number of factors, including consumer preferences, competitive product offerings, and construction and development costs.

The Company generally offers several different floor plans within its communities, each with unique architectural styles. Exteriors may be further distinguished by the use of stone, stucco, brick or siding. Some home designs may be used in multiple communities across several divisions within the Company,

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with modifications to suit local trends. Additionally, new designs are continuously being developed to replace or augment existing ones in order to ensure that homes reflect current consumer preferences. The Company relies on its own architectural staff and also engages unaffiliated architectural firms to develop new designs.

Homebuyers are able to customize certain features of their homes by selecting from numerous options and upgrades displayed in the Company's model homes and design centers. These design centers, which are conveniently located in most of the Company's markets, feature state-of-the-art technology and showcase upgrades that represent sources of additional revenue and profit for the Company. The Company typically offers a variety of potential options and upgrades for an additional charge, such as different choices of flooring, countertops and appliances. It designs its base house and option packages to meet the needs of its customers. Options and upgrades contributed 14.0 percent of homebuilding revenues in 2014 and resulted in significantly higher margins in comparison to base homes.

Land Acquisition and Development

The Company's long-term objective is to control a portfolio of building lots sufficient to meet its anticipated homebuilding requirements for a period of approximately four to five years. The Company acquires land only after completing due diligence and feasibility studies. The land acquisition process is controlled by a corporate land approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both direct acquisition and lot option purchase contracts to acquire and control lot inventory for use in the sale and construction of homes. The Company's land acquisition activities include the purchase of finished lots from developers and the purchase of undeveloped entitled land from third parties. The Company generally does not purchase unentitled or unzoned land.

Although control of lot inventory through the use of option contracts minimizes the Company's investment, such a strategy is not viable in certain markets due to the absence of third-party land developers. In other markets, competitive conditions may prevent the Company from controlling quality lots solely through the use of option contracts. In such situations, the Company may acquire undeveloped entitled land and/or finished lots on a bulk basis. The Company utilizes the selective development of land to gain access to prime locations, increase margins and position itself as a leader in the area through its influence over a community's character, layout and amenities. After determining the size, style, price range, density, layout and overall design of a community, the Company obtains governmental and other approvals necessary to begin the development process. Land is then graded; roads, utilities and other infrastructure are installed; and individual homesites are created.

Materials Costs

Substantially all materials used in construction are available from a number of sources, and prices may fluctuate due to various factors. To increase purchasing efficiencies, the Company not only standardizes certain building materials and products, but also acquires such products through national and regional supply contracts. The Company has, on occasion, experienced shortages of certain materials. If shortages were to occur in the future, it could result in longer construction times and higher costs than those experienced in the past.

Construction

Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a competitive-bid basis. The Company generally obtains a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company's production team, which coordinates subcontractor work; monitors quality; and ensures compliance with local zoning and building codes. The construction time for homes depends on the weather, availability of labor or subcontractors, materials, home size, geological conditions, as well as on other factors. The duration of the home construction process is generally between three and six months. The Company has an integrated financial and homebuilding management system that assists in scheduling production and controlling costs. Through this system, the Company monitors construction status and job costs incurred for each home during each phase of construction. The system provides for detailed budgeting and allows the Company to track and control actual costs, versus construction bids, for each community and subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If shortages were to

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occur in the future, it could result in longer construction times and higher costs than those experienced in the past.

The Company, its subcontractors and its suppliers maintain insurance, subject to deductibles and self-insured amounts, to protect against various risks associated with homebuilding activities, including, among others, general liability, "all-risk" property, workers' compensation, automobile and employee fidelity. The Company accrues for expected costs associated with deductibles and self-insured amounts, when appropriate.

Sales and Marketing

The Company generally markets its homes to entry-level and first- and second-time move-up buyers through targeted product offerings in each of the communities in which it operates. The Company's marketing strategy is determined during the land acquisition and feasibility stages of a community and may be updated based on observed trends after the community opens. Employees and independent real estate brokers sell the Company's homes generally by showing furnished models. A new order is reported when a sales contract has been signed by the homebuyer, approved by the Company and secured by a deposit, subject to cancellation. The Company normally starts construction of a home when a customer has selected a lot, chosen a floor plan and received preliminary mortgage approval. Construction may begin prior to this, however, in order to satisfy market demand for completed homes and to facilitate construction scheduling and/or cost savings. Homebuilding revenues are recognized when home sales are closed, title and possession are transferred to the buyer, and there is no significant continuing involvement from the homebuilder.

The Company advertises directly to potential homebuyers through the Internet and in newspapers and trade publications, as well as with marketing brochures and newsletters. It also uses billboards; radio and television advertising; and its Website to market the location, price range and availability of its homes. The Company attempts to operate in conspicuously located communities that permit it to take advantage of local traffic patterns. Model homes play a significant role in the Company's marketing efforts by creating an attractive atmosphere, in which to showcase its floor plans, options and upgrades.

The Company's sales contracts require an earnest money deposit. The amount of earnest money received varies between markets and communities. Buyers are generally required to pay additional deposits when they select options or upgrades for their homes. Most of the Company's sales contracts stipulate that when homebuyers cancel their contracts with the Company, it has the right to retain their earnest money and option deposits. Its operating divisions may, however, refund a portion of such deposits. The Company's sales contracts may also include contingencies that permit homebuyers to cancel and receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified time period, or if they cannot sell an existing home. The length of time between the signing of a sales contract for a home and delivery of the home to the buyer may vary, depending on customer preferences, lot availability, permit approval and construction cycles.

Customer Service and Warranties

The Company's operating divisions are responsible for conducting pre-closing quality control inspections and responding to homebuyers' post-closing needs. The Company believes that prompt and courteous acknowledgment of its homebuyers' needs during and after construction reduces post-closing repair costs; enhances its reputation for quality and service; and ultimately leads to repeat and referral business.

The Company provides each homeowner with product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years from the time of closing. The Company believes its warranty program meets or exceeds terms customarily offered in the homebuilding industry. The subcontractors who perform the construction services also provide warranties on workmanship.

Seasonality

The Company experiences seasonal variations in its quarterly operating results and capital requirements. Historically, new order activity is higher during the spring and summer months. As a result, in the third and fourth quarters of its fiscal year, the Company typically has more homes under construction, closes

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more homes, and has greater revenues, which may contribute to additional selling, general and administrative and gross profit leverage resulting in greater operating income. In addition to the overall volume of homes the Company sells and delivers, its results in a given period are significantly affected by the geographic mix of markets in which it operates; the number and characteristics of the communities the Company has open for sales in those markets; and the products it sells from those communities during the period. Historical results are not necessarily indicative of current or future homebuilding activities.

Inflation

The Company may be adversely affected during periods of inflation because of higher land, construction and personnel costs. Additionally, inflation may cause an increase in interest rates resulting not only in higher costs to finance the Company's operations but also in higher mortgage interest rates, affecting the affordability of its products to prospective buyers. While the Company generally attempts to pass on increases in its costs to its customers through increased sales prices, market conditions may limit the Company's ability to do so. During periods when we are unable to raise sales prices at rates to compensate for these higher costs, or if mortgage rates increase significantly, the Company's revenues, gross profit margins and net income could be adversely affected.

Financial Services

The Company's financial services segment provides mortgage-related products and services, as well as title and escrow services, to its homebuyers. The Company's financial services segment includes RMC, RH Insurance Company, Inc. ("RHIC"), Columbia National Risk Retention Group, Inc. ("CNRRG") and Ryland Insurance Services ("RIS"). By aligning its operations with the Company's homebuilding segments, the financial services segment leverages this relationship to offer its lending services to homebuyers. Providing mortgage financing and other services to its customers helps the Company monitor its backlog and closing process. The mortgage capture rate represents the percentage of homes closed and available to capture by the Company that were financed with mortgage loans obtained from RMC. Substantially all of the loans the Company originates are sold to third party investors within a short period of time in the secondary mortgage market on a servicing-released basis. The third-party investor then services and manages the loans.

Loan Origination

In 2014, RMC's mortgage operations consisted primarily of loans originated in connection with sales of the Company's homes. During the year, RMC originated 3,914 loans totaling $1.1 billion. The vast majority of that amount was used for purchasing homes built by the Company, while the remainder was used for purchasing homes built by others, purchasing existing homes or refinancing existing mortgage loans.

RMC arranges various types of mortgage financing, including conventional, Federal Housing Administration ("FHA") and Veterans Administration ("VA") mortgages, with various fixed- and adjustable-rate features. RMC is approved to originate loans that conform to guidelines established by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

Title and Escrow Services

Cornerstone Title Company, doing business as Ryland Title Company, is a 100 percent-owned subsidiary of RMCMC that provides escrow and title services and acts as a title insurance agent primarily for the Company's homebuyers. At December 31, 2014, it provided title services in Arizona, Colorado, Delaware, Florida, Illinois, Indiana, Maryland, Minnesota, Nevada, New Jersey, Pennsylvania, Texas and Virginia. Additionally, the Company provides title services through joint ventures in Georgia and South Carolina.

Insurance Services

RIS, a 100 percent-owned subsidiary of RMCMC, previously provided insurance services to the Company's homebuyers. Effective December 2013, RIS ceased writing new policies. During 2013, RIS provided insurance services to 38.1 percent of the Company's homebuyers.

RHIC, a 100 percent-owned subsidiary of the Company, provided insurance services to the homebuilding segments' subcontractors in certain markets. Effective June 1, 2008, RHIC ceased writing new policies. Registered and licensed under Section 431, Article 19 of the Hawaii Revised Statutes, RHIC is required to

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meet certain minimum capital and surplus requirements. Additionally, no dividends may be paid without prior approval of the Hawaii Insurance Commissioner.

CNRRG, a 100 percent-owned subsidiary of the Company and some of its affiliates, was established to directly offer structural warranty coverage to protect homeowners against liability risks arising in connection with the homebuilding business of the Company and its affiliates.

Corporate

Corporate is a non-operating reportable segment with the sole purpose of supporting operations. Corporate implements strategic initiatives; monitors and allocates capital; establishes operational policies and internal control standards; and provides financial, human resource, information technology, insurance, legal and tax compliance services. In addition, it performs administrative functions associated with a publicly traded entity.

Real Estate and Economic Conditions

The Company is significantly affected by fluctuations in national and local economic conditions such as unemployment rates, interest rates and levels of consumer confidence. The effects of these fluctuations can differ among the various geographic markets in which the Company operates. During 2014, mortgage availability headwinds and slow household formation growth impacted the Company's ability to attract homebuyers.

Inventory risk can be substantial for homebuilders. The market value of land, lots and housing inventories fluctuates as a result of changing market and economic conditions. The Company must continuously locate and acquire land not only for expansion into new markets, but also for replacement and expansion of land inventory within current markets. The Company employs various measures designed to control inventory risk, including a corporate land approval process and a continuous review of operational metrics by senior management. It cannot, however, assure that these measures will avoid or eliminate this risk. The Company has experienced substantial losses from inventory and other valuation adjustments and write-offs in prior years.

Competition

The Company competes for homebuyers, properties, raw materials, skilled labor, employees and management talent with a large number of national, regional and local homebuilding companies in each of its markets. The strong presence of national homebuilders, plus the viability of regional and local homebuilders, impacts the level of competition in many markets. The Company also competes with other housing alternatives, including existing homes and rental properties. Principal competitive factors in the homebuilding industry include price; design; quality; reputation; relationships with developers; accessibility of subcontractors; availability and location of lots; and availability of customer financing. The Company's financial services segment competes with other mortgage companies to arrange financing for homebuyers. Principal competitive factors include interest rates, fees and other mortgage loan product features available to the consumer.

Employees

At December 31, 2014, the Company had 1,502 employees. The Company considers its employee relations to be good. No employees are represented by a collective bargaining agreement.

Website Access to Reports

The Company files annual, quarterly and special reports; proxy statements; and other information with the U.S. Securities and Exchange Commission ("SEC") under the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"). The Company files information electronically with the SEC, and its filings are available on the SEC's Website at www.sec.gov. The Company's Website address is www.ryland.com. Information on the Company's Website is not part of this report. The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, XBRL filings, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available on its Website as soon as possible after it electronically files such material with or furnishes it to the SEC. To retrieve any of this information, visit www.ryland.com, select "Investor Relations," scroll down the page to "Financial Information" and select "SEC Filings." Through its Website, the Company shares information about itself with the securities marketplace.

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Item 1A.    Risk Factors

The homebuilding industry is cyclical in nature and has experienced downturns, which have in the past and may in the future cause the Company to incur losses in financial and operating results.

The Company is affected by the cyclical nature of the homebuilding industry, which is sensitive to many factors, including fluctuations in general and local economic conditions; interest rates; housing demand; employment levels; levels of new and existing homes for sale; demographic trends; availability of homeowner financing; and consumer confidence. In recent years, the markets served by the Company, and the U.S. homebuilding industry as a whole, experienced a prolonged decrease in demand for new homes, as well as an oversupply of new and existing homes available-for-sale. In addition, an oversupply of alternatives to new homes, such as rental properties and existing homes, can depress prices and reduce margins.

Demand for new homes is sensitive to economic conditions over which the Company has no control, such as the availability of mortgage financing and the level of employment.

Demand for new homes is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. During the last few years, the mortgage lending industry has experienced significant instability. As a result of increased default rates, particularly (but not entirely) with regard to subprime and other nonconforming loans, many lenders have reduced their willingness to make residential mortgage loans and have tightened their credit requirements with regard to them. Fewer loan products, stricter loan qualification standards and higher down payments have made it more difficult for some borrowers to finance home purchases. Although the Company's financial services segment offers mortgage loans to potential buyers, the Company may no longer be able to offer financing terms that are attractive to those buyers. Lack of available mortgage financing at acceptable rates reduces demand for the homes the Company builds and, in some instances, causes potential buyers to cancel contracts they have signed.

Because most of the Company's homebuyers finance the purchase of their homes, the terms and availability of mortgage financing can affect the demand for and the ability to complete the purchase of a home, as well as the Company's future operating and financial results.

The Company's business and earnings depend on the ability of its homebuyers to obtain financing for the purchase of their homes. Many of the Company's homebuyers must sell their existing homes in order to buy a home from the Company. In recent years, the mortgage lending industry as a whole experienced significant instability due to, among other things, defaults on subprime and other loans, resulting in the declining market value of such loans. In light of these developments, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to tightened credit requirements and an increase in indemnity claims for mortgages that were originated and sold by the Company. Deterioration in credit quality among subprime and other nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not conform to Fannie Mae, Freddie Mac, FHA or VA standards. Fewer loan products and tighter loan qualifications, in turn, make it more difficult for a borrower to finance the purchase of a new home or the purchase of an existing home from a potential move-up buyer who wishes to purchase one of the Company's homes. If the Company's potential homebuyers or the buyers of the homebuyers' existing homes cannot obtain suitable financing, or if increased indemnity claims are made for mortgages that are originated and sold, the result will have an adverse effect on the Company's operating and financial results and performance.

Rising interest rates; decreased availability of mortgage financing or of certain mortgage programs; higher down payment requirements; or increased monthly mortgage costs, as discussed above, may lead to reduced demand for the Company's homes and mortgage loan services. Increased interest rates can also hinder the Company's ability to realize its backlog because its home purchase contracts provide customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannot arrange for adequate financing. As a result, rising interest rates can decrease the Company's home sales and mortgage originations. Any of these factors could have an adverse impact on the Company's financial condition and results of operations.

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As a result of turbulence in the credit markets and mortgage finance industry in 2008 and 2009, the federal government has taken on a significant role in supporting mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, both of which purchase home mortgages and mortgage-backed securities originated by mortgage lenders, and its insurance of mortgages originated by lenders through the FHA and VA. FHA backing of mortgages has recently been particularly important to the mortgage finance industry and to the Company's business. In 2014, 31.3 percent of the Company's homebuyers who chose to finance with RMC purchased a home using an FHA- or VA-backed loan. In addition, the Federal Reserve has purchased a sizable amount of mortgage-backed securities in an effort to stabilize mortgage interest rates and to support the market for mortgage-backed securities. The availability and affordability of mortgage loans, including consumer interest rates for such loans, could be adversely affected by a curtailment or ceasing of the federal government's mortgage-related programs or policies. The FHA may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, and/or limit the number of mortgages it insures. Due to growing federal budget deficits, the U.S. Treasury may not be able to continue supporting the mortgage-related activities of Fannie Mae, Freddie Mac, the FHA and the VA at present levels, or it may significantly revise the federal government's participation in and support of the residential mortgage market. In this regard, the Federal Reserve has announced reductions in its monthly bond purchase stimulus program.

Since the availability of Fannie Mae, Freddie Mac, FHA- and VA-backed mortgage financing is an important factor in marketing and selling many of the Company's homes, any limitations, restrictions or changes in the availability of such government-backed financing could reduce its home sales and adversely affect the Company's results of operations, including its income from RMC.

The Company may be subject to indemnification claims on mortgages sold to third parties.

Substantially all of the loans the Company originates are sold within a short period of time in the secondary mortgage market on a servicing-released basis. The mortgage industry has experienced substantial increases in delinquencies, foreclosures and foreclosures-in-process. All mortgages are generally sold, and under certain limited circumstances RMC is required to indemnify loan investors for losses incurred on sold loans. Reserves are created to address repurchase and indemnity claims made by these third-party investors or purchasers. These reserves are based on pending claims received that are associated with previously sold mortgage loans, industry foreclosure data, the Company's portfolio delinquency and foreclosure rates on sold loans made available by investors, as well as on historical loss payment patterns used to develop ultimate loss projections. Estimating loss has been made more difficult by the recent processing delays related to foreclosure losses affecting agencies and financial institutions. Because of the uncertainties inherent in estimating these matters, the Company cannot provide assurance that the amounts reserved will be adequate or that any potential inadequacies will not have an adverse effect on its results of operations.

Tax law changes could make home ownership more expensive or less attractive.

Significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally are deductible expenses for the purpose of calculating an individual's federal and, in some cases, state taxable income, subject to various limitations under current tax law and policy. If federal or state governments change income tax laws by eliminating or substantially reducing these income tax benefits, as some policymakers have discussed, the after-tax cost of owning a new home will increase significantly. This could adversely impact both demand for and/or sales prices of new homes.

The Company is subject to inventory risk for its land, options for land, building lots and housing inventory.

The market value of the Company's land, building lots and housing inventories fluctuates as a result of changing market and economic conditions. In addition, inventory carrying costs can result in losses in poorly performing projects or markets. Changes in economic and market conditions have caused the Company to dispose of land and options for land and housing inventories on a basis that has resulted in loss and required it to write down or reduce the carrying value of its inventory. During the year ended December 31, 2014, the Company decided not to pursue development and construction in certain areas where it held land or made option deposits, which resulted in $2.5 million in recorded write-offs of option deposits and preacquisition feasibility costs. The Company can provide no assurance that it will not need to record additional write-offs in the future.

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In the course of its business, the Company makes land acquisitions. Although it employs various measures, including its land approval process and continued review by senior management, designed to manage inventory risk, the Company cannot assure that these measures will enable it to avoid or eliminate its inventory risk.

Construction costs can fluctuate and impact the Company's margins.

The homebuilding industry has, from time to time, experienced significant difficulties, including shortages of qualified tradespeople; reliance on local subcontractors who may be inadequately capitalized; shortages of materials; and volatile increases in the cost of materials, particularly increases in the prices of lumber, drywall and cement, which are significant components of home construction costs. The Company may not be able to recapture increased costs by raising prices because of either market conditions or because it fixes its prices at the time home sales contracts are signed.

Supply shortages and other risks related to demand for building materials and/or skilled labor could increase costs and delay deliveries.

There is a high level of competition in the homebuilding industry for skilled labor and building materials. Rising costs or shortages in building materials or skilled labor could cause increases in construction costs and construction delays. The Company is generally unable to pass on increases in construction costs to homebuyers who have already entered into purchase contracts. A purchase contract generally fixes the price of the home at the time the contract is signed, and this may occur well in advance of when construction commences. Further, the Company may not be able to pass on rising construction costs because of market conditions. Sustained increases in construction costs due to competition for materials and skilled labor, as well as higher commodity prices (including prices for lumber, metals and other building material inputs), among other things, may decrease the Company's margins over time.

Shortages in the availability of subcontract labor may delay construction schedules and increase the Company's costs.

The Company conducts its construction operations as a general contractor with construction and development work performed by unaffiliated third-party subcontractors. As a consequence, the Company depends on the continued availability of and satisfactory performance by these subcontractors for the design and construction of its homes. The Company cannot make assurances that there will be sufficient availability of and satisfactory performance by these unaffiliated third-party subcontractors. In addition, inadequate subcontractor resources could delay the Company's construction schedules and have a material adverse effect on its business.

Because the homebuilding industry is competitive, the business practices of other homebuilders can have an impact on the Company's financial results and cause these results to decline.

The residential homebuilding industry is highly competitive. The Company competes with a large number of national, regional and local homebuilding companies in each of its markets. This competition could cause the Company to adjust selling prices in response to competitive conditions in the markets in which it operates and could require it to increase the use of sales incentives. The Company cannot predict whether these measures will be successful or if additional incentives will be made in the future. It also competes with other housing alternatives, including existing homes and rental housing. The homebuilding industry's principal competitive factors are home price, availability of customer financing, design, quality, reputation, relationships with developers, accessibility of subcontractors, and availability and location of homesites. Any of the foregoing factors could have an adverse impact on the Company's financial performance and results of operations.

The Company's financial services segment competes with other mortgage bankers to arrange financing for homebuyers. The principal competitive factors for the financial services segment include interest rates, fees and other features of mortgage loan products available to the consumer.

Homebuilding is subject to warranty claims in the ordinary course of business that can be subject to uncertainty.

As a homebuilder, the Company is subject to warranty claims arising in the ordinary course of business. The Company records warranty and other reserves for the homes it sells to cover expected costs of materials and outside labor during warranty periods based on historical experience in the Company's

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markets and on the judgment of the qualitative risks associated with the types of homes built by the Company, including analyses of historical claims. Because of the uncertainties inherent to these matters, the Company cannot provide assurance that the amounts reserved for warranty claims will be adequate or that any potential inadequacies will not have an adverse effect on its results of operations.

Because the Company's business is subject to various regulatory and environmental limitations, it may not be able to conduct its business as planned.

The Company's homebuilding segments are subject to various local, state and federal laws, statutes, ordinances, rules and regulations concerning zoning, building design, construction, stormwater permitting and discharge, and similar matters, as well as open spaces, wetlands and environmentally protected areas. These include local regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area, as well as other municipal or city land planning restrictions, requirements or limitations. The Company may also experience periodic delays in homebuilding projects due to regulatory compliance, municipal appeals and other governmental planning processes in any of the markets in which it operates. These factors could result in delays or increased operational costs.

With respect to originating, processing, selling and servicing mortgage loans, the Company's financial services segment is subject to the rules and regulations of FHA, Freddie Mac, Fannie Mae, VA and the U.S. Department of Housing and Urban Development ("HUD"). Mortgage origination activities are further subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act, and their associated regulations. These and other federal and state statutes and regulations prohibit discrimination and establish underwriting guidelines that include provisions for audits, inspections and appraisals; require credit reports on prospective borrowers; fix maximum loan amounts; and require the disclosure of certain information concerning credit and settlement costs. The Company is required to submit audited financial statements annually, and each agency or other entity has its own financial requirements. The Company's affairs are also subject to examination by these entities at all times to assure compliance with applicable regulations, policies and procedures.

The Company's ability to grow its business and operations depends, to a significant degree, upon its ability to access capital on favorable terms.

The ability to access capital on favorable terms is an important factor in growing the Company's business and operations in a profitable manner. In 2007, Moody's lowered the Company's debt rating to non-investment grade, and Standard & Poor's ("S&P") also reduced the Company's investment-grade rating to non-investment grade in 2008. The Company received additional downgrades in 2008 and 2011. At December 31, 2014, Moody's reported the Company's rating outlook as stable and S&P reported its rating outlook as positive. The loss of an investment-grade rating affects the cost, availability and terms of credit available to the Company, making it more difficult and costly to access the debt capital markets for funds that may be required to implement its business plans.

Natural disasters may have a significant impact on the Company's business.

The climates and geology of many of the states in which the Company operates present increased risks of natural disasters. To the extent that hurricanes, severe storms, tornadoes, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, its business and financial condition may be adversely affected.

Information technology failures and data security breaches could harm the Company's business.

The Company's information technology systems are dependent upon global communications providers, Web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant systems failures and electrical outages in the past. While it takes measures to ensure its major systems have redundant capabilities, the Company's systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins, cyber attacks and similar events. Despite the Company's implementation of network security measures, its servers are vulnerable to computer viruses, break-ins and similar disruptions resulting from unauthorized tampering with its computer systems. The occurrence of any of these events could disrupt or damage the Company's information technology systems and hamper its internal operations, its ability to provide services to its customers and the ability of its customers to access the Company's information technology systems. In addition, the Company's business

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requires the collection and retention of large volumes of internal and customer data. The Company also maintains personally identifiable information about its employees. The integrity and protection of customer, employee and company data is critical to the Company. A material network breach in the security of the Company's information technology systems could include the theft of customer or employee data or its intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in the inappropriate disclosure of confidential information, it could cause significant damage to its reputation, affect relationships with its customers, reduce demand for the Company's services, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

The Company's short-term investments and marketable securities are subject to certain risks which could materially and adversely affect its overall financial condition.

The Company invests a portion of its available cash and cash equivalent balances by purchasing marketable securities with maturities in excess of three months in a managed portfolio. The primary objectives of these investments are the preservation of capital and the maintenance of a high degree of liquidity, with a secondary objective being the attainment of yields higher than those earned on the Company's cash and cash equivalent balances. Should any of the Company's short-term investments or marketable securities lose value or have their liquidity impaired, it could materially and adversely affect the Company's overall financial condition by limiting its ability to fund operations.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

The Company leases office space for its corporate headquarters in Westlake Village, California, and for its IT Department and RMC's operations center in Scottsdale, Arizona. In addition, the Company leases office space in the various markets in which it operates. The Company believes that its existing facilities are adequate for the Company's current and planned levels of operation. Because of the nature of the Company's homebuilding operations, significant amounts of property are held as inventory in the ordinary course of its homebuilding business. See Item 1. "Business" for a discussion of the Company's homebuilding operations.

Item 3.    Legal Proceedings

Contingent liabilities may arise from obligations incurred in the ordinary course of business or from the usual obligations of on-site housing producers for the completion of contracts.

On December 23, 2011, Countrywide Home Loans, Inc. ("Countrywide") filed a lawsuit against Ryland Mortgage Company alleging breach of contract related to repurchase and indemnity obligations arising out of the sale of mortgage loans associated with loan purchase agreements between Countrywide and Ryland Mortgage Company. In the third quarter of 2014, Ryland Mortgage Company settled the lawsuit and any other potential claims related to repurchase and indemnity obligations arising out of the sale of mortgage loans associated with loan purchase agreements between Countrywide and Ryland Mortgage Company. (See Note L, "Commitments and Contingencies.")

The Company is party to various other legal proceedings generally incidental to its businesses. Based on evaluation of these matters and discussions with counsel, management believes that it is not probable that liabilities arising from these matters will have a material adverse effect on the financial condition, results of operations and cash flows of the Company.

Item 4.    Mine Safety Disclosures

Not applicable.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Equity, Common Stock Prices and Dividends

The Company lists its common shares on the NYSE, trading under the symbol "RYL." The latest reported sale price of the Company's common stock on February 10, 2015, was $44.42, and there were 1,435 common stockholders of record on that date.

The following table presents high and low market prices, as well as dividend information, for the Company:



2014
   

HIGH
   

LOW
    DIVIDENDS
DECLARED
PER SHARE
 

2013
   

HIGH
   

LOW
    DIVIDENDS
DECLARED
PER SHARE
     
First quarter   $ 46.67   $ 38.07   $ 0.03   First quarter   $ 43.00   $ 33.50   $ 0.03
Second quarter     42.70     35.96     0.03   Second quarter     50.42     35.65     0.03
Third quarter     40.35     31.22     0.03   Third quarter     43.70     33.04     0.03
Fourth quarter     39.54     30.33     0.03   Fourth quarter     44.63     35.70     0.03
 

 

Issuer Purchases of Equity Securities

The following table summarizes the Company's purchases of its own equity securities during the year ended December 31, 2014:






PERIOD

   

TOTAL
NUMBER OF
SHARES
PURCHASED
   


AVERAGE
PRICE PAID
PER SHARE
    TOTAL NUMBER
OF SHARES
PURCHASED AS
PART OF PUBLICLY
ANNOUNCED PLANS
OR PROGRAMS
    APPROXIMATE
DOLLAR VALUE OF
SHARES THAT MAY
YET BE PURCHASED
UNDER THE PLANS
OR PROGRAMS
 
   
(in thousands, except share data)  

August 1–31

    560,000   $     34.12     560,000   $     123,198  

September 1–30

    300,000     35.26     300,000     112,619  

Total

    860,000   $     34.52     860,000        
   

On December 6, 2006, the Company announced that it had received authorization from its Board of Directors to purchase shares totaling $175.0 million. The Company repurchased 860,000 shares in accordance with this authorization during the year ended December 31, 2014. There were approximately 2.9 million shares available for purchase in accordance with this authorization, based on the Company's stock price at December 31, 2014. This authorization does not have an expiration date. The Company did not purchase any of its own equity securities during the years ended December 31, 2013 or 2012.

Performance Graph

The following performance graph and related information shall not be deemed "soliciting material" or be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

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The following graph compares the Company's cumulative total stockholder return since December 31, 2009, to the S&P 500 and the Dow Jones U.S. Home Construction indices for the calendar years ended December 31:


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN1
Among The Ryland Group, Inc., The S&P 500 Index
And The Dow Jones U.S. Home Construction Index

GRAPHIC

      1 $100 invested on 12/31/09 in stock or index, including reinvestment of dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company's equity compensation plan information as of December 31, 2014, is summarized as follows:

 
  NUMBER OF SECURITIES TO
BE ISSUED UPON EXERCISE
OF OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS

  WEIGHTED-AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS

  NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
EQUITY COMPENSATION
PLANS (EXCLUDING
SECURITIES REFLECTED
IN COLUMN (a))

PLAN CATEGORY
  (a)
  (b)
  (c)
 

Equity compensation plans approved by stockholders

  1,753,581   $     23.30   3,633,175

Equity compensation plans not approved by stockholders1

 
 
 
 
1
The Company does not have any equity compensation plans that have not been approved by stockholders.

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Item 6.   Selected Financial Data

  YEAR ENDED DECEMBER 31,   

(in millions, except per share data)

    2014     2013     2012     2011     2010  
   

ANNUAL RESULTS

                               

REVENUES

                               

Homebuilding

  $ 2,570   $ 2,089   $ 1,271   $ 863   $ 970  

Financial services

    45     52     37     27     31  
       

TOTAL REVENUES

    2,615     2,141     1,308     890     1,001  
       

Cost of sales

    2,008     1,654     1,027     727     844  

Operating expenses

    327     294     231     199     225  
       

TOTAL EXPENSES

    2,335     1,948     1,258     926     1,069  
       

Other income (loss)

    4     3     (6 )   3     (13 )
       

Income (loss) from continuing operations before taxes

    284     196     44     (33 )   (81 )

Tax expense (benefit)

    108     (183 )   2     (3 )    
       

Net income (loss) from continuing operations

    176     379     42     (30 )   (81 )

Loss from discontinued operations, net of taxes

            (2 )   (21 )   (4 )
       

NET INCOME (LOSS)

  $ 176   $ 379   $ 40   $ (51 ) $ (85 )
       

YEAR-END POSITION

                               

ASSETS

                               

Cash, cash equivalents and marketable securities

  $ 580   $ 631   $ 615   $ 563   $ 739  

Housing inventories

    2,046     1,650     1,077     795     752  

Other assets

    426     499     240     186     111  

Assets of discontinued operations

            2     35     51  
       

TOTAL ASSETS

    3,052     2,780     1,934     1,579     1,653  
       

LIABILITIES

                               

Debt and financial services credit facilities

    1,532     1,470     1,134     874     880  

Other liabilities

    421     385     272     215     207  

Liabilities of discontinued operations

        1     2     6     4  
       

TOTAL LIABILITIES

    1,953     1,856     1,408     1,095     1,091  
       

NONCONTROLLING INTEREST

    14     16     22     34     62  

STOCKHOLDERS' EQUITY

    1,085     908     504     450     500  
       

TOTAL EQUITY

  $ 1,099   $ 924   $ 526   $ 484   $ 562  
       

PER COMMON SHARE DATA

                               

NET INCOME (LOSS)

                               

Basic

                               

Continuing operations

  $ 3.77   $ 8.22   $ 0.93   $ (0.67 ) $ (1.83 )

Discontinued operations

    0.00     0.00     (0.04 )   (0.47 )   (0.10 )
       

Total

    3.77     8.22     0.89     (1.14 )   (1.93 )
       

Diluted

                               

Continuing operations

    3.09     6.79     0.88     (0.67 )   (1.83 )

Discontinued operations

    0.00     0.00     (0.04 )   (0.47 )   (0.10 )
       

Total

  $ 3.09   $ 6.79   $ 0.84   $ (1.14 ) $ (1.93 )
       

DIVIDENDS DECLARED

  $ 0.12   $ 0.12   $ 0.12   $ 0.12   $ 0.12  

STOCKHOLDERS' EQUITY

  $ 23.43   $ 19.64   $ 11.16   $ 10.12   $ 11.31  
   

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is intended to assist the reader in understanding the Company's business and is provided as a supplement to, and should be read in conjunction with, the Company's consolidated financial statements and accompanying notes. The Company's results of operations discussed below are presented in conformity with U.S. generally accepted accounting principles ("GAAP").

Forward-Looking Statements

Certain statements in this Annual Report may be regarded as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section 21E of the Exchange Act. These forward-looking statements represent the Company's expectations and beliefs concerning future events, and no assurance can be given that the results described in this Annual Report will be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as "anticipate," "believe," "could," "estimate," "expect," "foresee," "goal," "intend," "likely," "may," "plan," "project," "should," "target," "will" or other similar words or phrases. All forward-looking statements contained herein are based upon information available to the Company on the date of this Annual Report. Except as may be required under applicable law, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company's control that could cause actual results to differ materially from the results discussed in the forward-looking statements. The factors and assumptions upon which any forward-looking statements herein are based are subject to risks and uncertainties which include, among others:

economic changes nationally or in the Company's local markets, including volatility and increases in interest rates, the impact of, and changes in, governmental stimulus, tax and deficit reduction programs, inflation, changes in consumer demand and confidence levels and the state of the market for homes in general;
changes and developments in the mortgage lending market, including revisions to underwriting standards for borrowers and lender requirements for originating and holding mortgages, changes in government support of and participation in such market, and delays or changes in terms and conditions for the sale of mortgages originated by the Company;
the availability and cost of land and the future value of land held or under development;
increased land development costs on projects under development;
shortages of skilled labor or raw materials used in the production of homes;
increased prices for labor, land and materials used in the production of homes;
increased competition;
failure to anticipate or react to changing consumer preferences in home design;
increased costs and delays in land development or home construction resulting from adverse weather conditions or other factors;
potential delays or increased costs in obtaining necessary permits as a result of changes to laws, regulations or governmental policies (including those that affect zoning, density, building standards, the environment and the residential mortgage industry);
delays in obtaining approvals from applicable regulatory agencies and others in connection with the Company's communities and land activities;
changes in the Company's effective tax rate and assumptions and valuations related to its tax accounts;
the risk factors set forth in this Annual Report on Form 10-K; and
other factors over which the Company has little or no control.

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Results of Operations
Overview

During 2014, the Company saw continued improvement in most of the economic indicators salient to the homebuilding industry: employment rates continued to rise, consumer confidence improved and interest rates remained at historically low levels. Sales pace, however, continued to be a challenge amidst slower household formation growth and a restrictive mortgage underwriting environment. The Company believes that the housing market as a whole is likely to move forward in its recovery as affordability remains attractive and homeownership remains near historically low levels. It believes that continued improvement in employment levels; low interest rates; slow relaxation of the mortgage underwriting environment; historically low production of single-family homes; and a steady increase of potential buyers due, in part, to an expected rise in the number of household formations should eventually drive more attractive sales absorption rates that will facilitate a healthier, sustainable long-term recovery. The Company remains structurally lean and, as a result of community count growth over the last several years, expects to achieve greater leverage with comparable volume levels than in past years.

Throughout 2014, the Company's strategic homebuilding initiatives continued to generate year-over-year improvements in volume, operational efficiencies and profitability while, at the same time, maintaining a strong balance sheet. The Company made significant progress in achieving its operational goals in 2014 with a 22.2 percent increase in consolidated revenues; a 1.0 percent rise in housing gross profit margin; and a 1.0 percent decrease in the selling, general and administrative expense ratio, all of which led to an improvement in homebuilding operations profitability, compared to the same period in the prior year. The Company reported increases of 9.3 percent in closings and 5.6 percent in sales for the year ended December 31, 2014, compared to 2013. The Company believes that continued revenue growth and improved financial performance will most likely come from a greater presence in its established markets, improvements in operational leverage and a return to more traditional sales absorption rates should economic progress continue.

The Company continues to maintain a geographically diverse footprint in order to manage risk and believes that it is well positioned to take advantage of favorable trends and opportunities in all of its markets. The number of active communities rose 21.0 percent to 351 active communities at December 31, 2014, from 290 active communities at December 31, 2013. Significant ongoing land acquisitions in its existing markets should enhance the Company's ability to establish additional market penetration and create a platform for future growth. Investments in new communities increased consolidated inventory owned by $397.5 million, or 24.3 percent, at December 31, 2014, compared to December 31, 2013.

The Company's net income from continuing operations totaled $175.8 million, or $3.09 per diluted share, for the year ended December 31, 2014, compared to $379.1 million, or $6.79 per diluted share, for 2013 and $42.4 million, or $0.88 per diluted share, for 2012. The decrease in net income for 2014, compared to 2013, was primarily due to a $258.9 million tax benefit related to the reversal of the Company's deferred tax valuation allowance in 2013, which also restored income tax expense in 2014. The increase in net income for 2013, compared to 2012, was primarily due to a reversal of the Company's deferred tax asset valuation allowance; a rise in closing volume; higher housing gross profit margin, including lower inventory valuation adjustments and write-offs; a reduced selling, general and administrative expense ratio; pretax charges related to early retirement of debt in 2012; and a decline in interest expense. Pretax charges related to inventory and other valuation adjustments and write-offs totaled $2.4 million, $2.0 million and $6.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The Company's consolidated revenues rose 22.2 percent to $2.6 billion for the year ended December 31, 2014, from $2.1 billion for 2013. This increase was primarily attributable to a 9.3 percent rise in closings and to a 12.5 percent higher average closing price. The increase in average closing price was due to a change in the product and geographic mix of homes delivered, as well as to a more accommodating price environment during 2014, versus 2013. The Company's consolidated revenues rose 63.6 percent to $2.1 billion for the year ended December 31, 2013, from $1.3 billion for the same period in the prior year. This increase was primarily attributable to a 46.1 percent rise in closings and to a 12.5 percent higher average closing price. The increase in average closing price was due to price increases in existing communities, as well as to a change in the product and geographic mix of homes delivered during 2013,

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versus 2012. Revenues for the homebuilding and financial services segments totaled $2.6 billion and $45.2 million in 2014, compared to $2.1 billion and $51.4 million in 2013 and $1.3 billion and $37.6 million in 2012, respectively.

The Company reported a rise in closing volume for the year ended December 31, 2014, compared to 2013, primarily due to higher backlog at the beginning of the year, as well as to an increase in sales. New orders rose 5.6 percent to 7,668 units for the year ended December 31, 2014, from 7,262 units for 2013 primarily due to an increase in the number of active communities, partially offset by lower sales absorption rates. New order dollars increased 15.2 percent for the year ended December 31, 2014, compared to 2013. The Company's average monthly sales absorption rate was 2.0 homes per community for the year ended December 31, 2014, versus 2.3 homes per community for 2013. The Company's average monthly sales absorption rate is calculated as the net new orders in the period divided by the average number of active communities during the period divided by the number of months in that period.

Selling, general and administrative expense totaled 11.2 percent of homebuilding revenues for the year ended December 31, 2014, compared to 12.2 percent and 15.0 percent for the same periods in 2013 and 2012, respectively. The year-over-year decreases were primarily attributable to higher leverage that resulted from increased revenues.

The financial services segment reported pretax earnings of $7.4 million, $20.1 million and $13.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in pretax earnings for 2014, compared to 2013, was primarily attributable to a decrease in locked loan pipeline volume, which was due, in part, to the reversal of the accelerated timing of loan locks during 2013; an increase in litigation expense; and higher expense related to a change in estimate of ultimate insurance loss liability. The rise in pretax earnings for 2013, compared to 2012, was primarily due to increases in locked loan pipeline and origination volumes, as well as to a rise in title income, partially offset by increased personnel costs and by higher expense related to estimates of ultimate insurance loss liability.

The Company maintained a strong balance sheet, ending the year with $580.0 million in cash, cash equivalents and marketable securities. After the maturity of the $126.5 million of 5.4 percent senior notes in January 2015, which were paid after year end with existing cash, the Company's earliest senior debt maturity is in 2017. Its net debt-to-capital ratio, including marketable securities, was 43.1 percent at December 31, 2014, compared to 45.8 percent at December 31, 2013. Stockholders' equity per share rose 19.3 percent to $23.43 at December 31, 2014, compared to $19.64 at December 31, 2013.

The net debt-to-capital ratio, including marketable securities, is a non-GAAP financial measure that is calculated as debt, net of cash, cash equivalents and marketable securities, divided by the sum of debt and total stockholders' equity, net of cash, cash equivalents and marketable securities. The Company believes that the net debt-to-capital ratio, including marketable securities, is useful in understanding the leverage employed in its operations and in comparing it with other homebuilders.

Homebuilding Overview

The combined homebuilding operations reported pretax earnings from continuing operations of $303.5 million, $201.8 million and $62.6 million for 2014, 2013 and 2012, respectively. Homebuilding results in 2014 improved from those in 2013 primarily due to a rise in revenues; higher housing gross profit margin; a reduced selling, general and administrative expense ratio; and a decline in interest expense. Homebuilding results in 2013 improved from those in 2012 primarily due to a rise in closing volume; higher housing gross profit margin, including lower inventory and other valuation adjustments and write-offs; a decline in interest expense; and a reduced selling, general and administrative expense ratio.

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STATEMENTS OF EARNINGS

  YEAR ENDED DECEMBER 31,   

(in thousands, except units)

    2014     2013     2012  
   

REVENUES

                   

Housing

  $ 2,555,967   $ 2,082,838   $ 1,263,120  

Land and other

    13,934     6,537     7,727  
       

TOTAL REVENUES

    2,569,901     2,089,375     1,270,847  

EXPENSES

                   

Housing cost of sales

                   

Cost of sales

    1,998,379     1,649,223     1,017,124  

Valuation adjustments and write-offs

    (77 )   146     5,166  
       

Total housing cost of sales

    1,998,302     1,649,369     1,022,290  

Land and other cost of sales

    9,342     4,827     5,182  
       

Total cost of sales

    2,007,644     1,654,196     1,027,472  

Selling, general and administrative

    258,781     224,995     164,688  

Interest

        8,358     16,118  
       

TOTAL EXPENSES

    2,266,425     1,887,549     1,208,278  
       

PRETAX EARNINGS

  $ 303,476   $ 201,826   $ 62,569  
   

Closings (units)

    7,677     7,027     4,809  

Housing gross profit margin

    21.8 %   20.8 %   19.1 %

Selling, general and administrative ratio

    10.1 %   10.8 %   13.0 %
   

Homebuilding revenues increased 23.0 percent to $2.6 billion for 2014 from $2.1 billion for 2013 primarily due to a 9.3 percent rise in closings and to a 12.5 percent increase in average closing price. The increase in closings was due to a higher backlog at the beginning of the year and to a 5.6 percent rise in new orders during 2014, versus 2013. The increase in average closing price was due to a change in the product and geographic mix of homes delivered during 2014, versus 2013, as well as to a more accommodating price environment. Homebuilding revenues increased 64.4 percent to $2.1 billion for 2013 from $1.3 billion for 2012 primarily due to a 46.1 percent rise in closings and to a 12.5 percent increase in average closing price. The increase in closings was due to a 27.0 percent rise in new orders during 2013, versus 2012. The increase in average closing price was due to price increases in existing communities, as well as to a change in the product and geographic mix of homes delivered during 2013, versus 2012.

In order to manage its risk and return of land investments and monetize certain land positions, the Company executed several land and lot sales during the year. Homebuilding revenues included $13.9 million from land and lot sales for the year ended December 31, 2014, compared to $6.5 million for 2013 and $7.7 million for 2012, which resulted in pretax earnings of $4.6 million, $1.7 million and $2.5 million for 2014, 2013 and 2012, respectively. Gross profit margin from land and lot sales was 33.0 percent, 26.2 percent and 32.9 percent for the years ended December 31, 2014, 2013 and 2012, respectively. Fluctuations in revenues and gross profit percentages from land and lot sales are a product of local market conditions and changing land portfolios. The Company generally purchases land and lots with the intent to build homes on those lots and sell them; it will, however, occasionally sell a portion of its land to other homebuilders or third parties.

Housing gross profit margin was 21.8 percent for the year ended December 31, 2014, compared to 20.8 percent for 2013. This improvement in housing gross profit margin was attributable to a relative decline in direct construction costs of 1.0 percent. Housing gross profit margin was 20.8 percent for the year ended December 31, 2013, compared to 19.1 percent for the year ended December 31, 2012. This improvement was primarily attributable to a relative reduction in direct construction costs of 1.7 percent and to lower inventory valuation adjustments and write-offs of 0.4 percent, partially offset by increased land costs of 0.5 percent. Inventory and other valuation adjustments and write-offs affecting housing gross profit margin decreased to $146,000 for the year ended December 31, 2013, from $5.2 million for 2012.

The homebuilding segments' selling, general and administrative expense ratio totaled 10.1 percent of homebuilding revenues for 2014, 10.8 percent for 2013 and 13.0 percent for 2012. The year-over-year decreases in the selling, general and administrative expense ratio was primarily attributable to higher leverage resulting from increased revenues.

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In 2014, the homebuilding segment capitalized all interest incurred, resulting in no interest expense for the year ended December 31, 2014, compared to $8.4 million and $16.1 million of interest expense for the years ended December 31, 2013 and 2012, respectively. The year-over-year decreases in interest expense were primarily due to an increase in the amount of interest capitalized resulting from higher levels of inventory under development. Interest incurred, principally to finance land acquisitions, land development and home construction, totaled $68.8 million, $67.6 million and $58.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. (See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies.")

New orders represent sales contracts that have been signed by the homebuyer and approved by the Company, subject to cancellations. The dollar value of new orders increased $345.9 million, or 15.2 percent, to $2.6 billion for 2014 from $2.3 billion for 2013. The dollar value of new orders increased due to a rise in new order units and to a higher average closing price. Unit orders increased 5.6 percent to 7,668 new orders in 2014, compared to 7,262 new orders in 2013. This increase in new orders was primarily attributable to a 21.0 percent increase in the number of active communities, partially offset by a 13.0 percent decline in sales absorption rates. The dollar value of new orders increased $729.5 million, or 47.2 percent, to $2.3 billion for the year ended December 31, 2013, from $1.5 billion for the year ended December 31, 2012. Unit orders increased 27.0 percent to 7,262 new orders in 2013, compared to 5,719 new orders in 2012. This increase in new orders was primarily attributable to a 21.8 percent increase in the number of active communities and to a 4.5 percent rise in sales absorption rates. For the years ended December 31, 2014, 2013 and 2012, cancellation rates totaled 18.9 percent, 17.7 percent and 19.0 percent, respectively.

Consolidated inventory owned by the Company, which includes homes under construction; land under development and improved lots; and cash deposits related to consolidated inventory not owned, rose 24.3 percent to $2.0 billion at December 31, 2014, from $1.6 billion at December 31, 2013. Homes under construction increased 18.9 percent to $764.9 million at December 31, 2014, from $643.4 million at December 31, 2013. Land under development and improved lots increased 28.5 percent to $1.3 billion at December 31, 2014, compared to $973.3 million at December 31, 2013, as the Company opened more communities during 2014. The Company had 449 model homes with inventory values totaling $132.3 million at December 31, 2014, compared to 370 model homes with inventory values totaling $99.3 million at December 31, 2013. In addition, it had 1,024 started and unsold homes with inventory values totaling $252.4 million at December 31, 2014, compared to 977 started and unsold homes with inventory values totaling $196.2 million at December 31, 2013.

The following table provides certain information with respect to the Company's number of residential communities and lots under development at December 31, 2014:

  COMMUNITIES         

  ACTIVE   NEW AND
NOT YET OPEN
  INACTIVE   HELD-
FOR-SALE
  TOTAL   TOTAL LOTS
CONTROLLED1
   
         
                             

North

  104   61   11   1   177   13,886      

Southeast

  104   58   8   6   176   12,181      

Texas

  92   40     2   134   7,263      

West

  51   46       97   6,266      
             

Total

  351   205   19   9   584   39,596      
     
1
Includes lots controlled through the Company's investments in joint ventures.

Inactive communities consist of projects either under development or on hold for future home sales. At December 31, 2014, of the 9 communities that were held-for-sale, 6 communities had fewer than 20 lots remaining.

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Favorable affordability levels and slowly improving economic conditions in most housing submarkets have allowed the Company to focus on growing its number of active communities and increasing profitability, all while balancing those two objectives with cash preservation. During the year ended December 31, 2014, it secured 14,573 owned or optioned lots, opened 162 communities and closed 101 communities. The Company operated from 21.0 percent more active communities at December 31, 2014, than it did at December 31, 2013. The number of lots controlled was 38,973 lots at December 31, 2014, compared to 38,142 lots at December 31, 2013. Optioned lots, as a percentage of total lots controlled, were 35.1 percent and 38.3 percent at December 31, 2014 and December 31, 2013, respectively. In addition, the Company controlled 623 lots and 628 lots under joint venture agreements at December 31, 2014 and 2013, respectively.

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Homebuilding Segment Information

The Company's homebuilding operations consist of four geographically determined regions, or reporting segments: North, Southeast, Texas and West.

STATEMENTS OF EARNINGS

The following table provides a summary of the results for the homebuilding segments for the years ended December 31, 2014, 2013 and 2012:

(in thousands)

    2014     2013     2012  
   

NORTH

                   

Revenues

  $ 703,094   $ 617,550   $ 393,238  

Expenses

                   

Cost of sales

    554,634     498,084     324,572  

Selling, general and administrative

    72,106     63,990     51,120  

Interest

        3,414     6,101  
       

Total expenses

    626,740     565,488     381,793  
       

Pretax earnings

  $ 76,354   $ 52,062   $ 11,445  

Housing gross profit margin

    21.1 %   19.3 %   17.5 %
       

SOUTHEAST

                   

Revenues

  $ 691,141   $ 597,933   $ 355,621  

Expenses

                   

Cost of sales

    525,311     467,494     286,450  

Selling, general and administrative

    70,393     64,451     46,774  

Interest

        970     4,206  
       

Total expenses

    595,704     532,915     337,430  
       

Pretax earnings

  $ 95,437   $ 65,018   $ 18,191  

Housing gross profit margin

    24.1 %   21.8 %   19.5 %
       

TEXAS

                   

Revenues

  $ 550,916   $ 448,828   $ 323,162  

Expenses

                   

Cost of sales

    439,702     356,768     257,402  

Selling, general and administrative

    60,616     51,956     40,075  

Interest

        1,277     2,876  
       

Total expenses

    500,318     410,001     300,353  
       

Pretax earnings

  $ 50,598   $ 38,827   $ 22,809  

Housing gross profit margin

    20.2 %   20.5 %   20.4 %
       

WEST

                   

Revenues

  $ 624,750   $ 425,064   $ 198,826  

Expenses

                   

Cost of sales

    487,997     331,850     159,048  

Selling, general and administrative

    55,666     44,598     26,719  

Interest

        2,697     2,935  
       

Total expenses

    543,663     379,145     188,702  
       

Pretax earnings

  $ 81,087   $ 45,919   $ 10,124  

Housing gross profit margin

    21.6 %   21.8 %   19.4 %
       

TOTAL

                   

Revenues

  $ 2,569,901   $ 2,089,375   $ 1,270,847  

Expenses

                   

Cost of sales

    2,007,644     1,654,196     1,027,472  

Selling, general and administrative

    258,781     224,995     164,688  

Interest

        8,358     16,118  
       

Total expenses

    2,266,425     1,887,549     1,208,278  
       

Pretax earnings

  $ 303,476   $ 201,826   $ 62,569  

Housing gross profit margin

    21.8 %   20.8 %   19.1 %
   

Homebuilding Segments 2014 versus 2013

North—Homebuilding revenues increased 13.9 percent to $703.1 million in 2014 from $617.6 million in 2013 primarily due to a 9.3 percent increase in the number of homes delivered and to a 4.3 percent rise in

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average closing price. The increase in the number of homes delivered was most impacted by the Company's entry into the Philadelphia market during July 2013. The rise in average closing price was primarily attributable to an increase in the Indianapolis and Baltimore markets, partially offset by a lower average closing price in the Philadelphia and Washington, D.C., markets due to a change in product mix. Gross profit margin on home sales was 21.1 percent in 2014, compared to 19.3 percent in 2013. This improvement in housing gross profit margin was primarily due to a relative decline in land costs of 2.1 percent and to a reduction in the fair value of acquisition-related contingent liabilities resulting in a 0.5 percent benefit to gross profit margin, partially offset by a relative increase in direct construction costs of 0.7 percent and by lower leverage of direct overhead expense of 0.3 percent. As a result, the North region generated pretax earnings of $76.4 million in 2014, compared to pretax earnings of $52.1 million in 2013.

Southeast—Homebuilding revenues increased 15.6 percent to $691.1 million in 2014 from $597.9 million in 2013 primarily due to a 17.1 percent rise in average closing price, partially offset by a 1.3 percent decline in the number of homes delivered. All markets reported an increase in average closing price, except for Charlotte, which was relatively flat. The largest contributors to the increase in average closing price were the Atlanta, Charleston and Orlando markets. The increase in average closing price was due to the introduction of newer, higher-priced communities during 2014, as well as to a favorable pricing environment. Home deliveries declined in the Tampa, Orlando and Charleston markets due to a reduction in sales absorption rates. Gross profit margin on home sales was 24.1 percent in 2014, compared to 21.8 percent in 2013. This improvement in housing gross profit margin was primarily due to a relative decline in direct construction costs of 2.2 percent. As a result, the Southeast region generated pretax earnings of $95.4 million in 2014, compared to pretax earnings of $65.0 million in 2013.

Texas—Homebuilding revenues increased 22.7 percent to $550.9 million in 2014 from $448.8 million in 2013 primarily due to an 11.7 percent rise in the number of homes delivered and to a 10.2 percent increase in average closing price. The rise in the number of homes delivered was primarily attributable to the Company's re-entry into the Dallas market in June 2013. The increase in average closing price was broad-based across all markets. Gross profit margin on home sales was 20.2 percent in 2014, compared to 20.5 percent in 2013. This decline in housing gross profit margin was primarily due to a relative increase in direct construction costs of 0.9 percent, partially offset by a relative decrease in land costs of 0.7 percent. As a result, the Texas region generated pretax earnings of $50.6 million in 2014, compared to pretax earnings of $38.8 million in 2013.

West—Homebuilding revenues increased 47.0 percent to $624.8 million in 2014 from $425.1 million in 2013 primarily due to a 27.1 percent increase in the number of homes delivered and to a 14.3 percent rise in average closing price. The increase in the number of homes delivered was most impacted by significantly higher closings in the Southern California, Denver and Phoenix markets. The increase in average closing price was primarily attributable to a change in geographic and product mix, with the largest contribution coming from the Southern California market. Gross profit margin on home sales was 21.6 percent in 2014, compared to 21.8 percent in 2013. Gross profit margins decreased slightly due to higher relative land costs of 2.9 percent primarily in Southern California, partially offset by a relative decline in direct construction costs of 2.1 percent primarily due to leverage associated with increased base prices and to higher leverage of direct overhead expense of 0.2 percent. As a result, the West region generated pretax earnings of $81.1 million in 2014, compared to pretax earnings of $45.9 million in 2013.

Homebuilding Segments 2013 versus 2012

North—Homebuilding revenues increased 57.0 percent to $617.6 million in 2013 from $393.2 million in 2012 primarily due to a 48.1 percent rise in the number of homes delivered and to a 5.9 percent increase in average closing price. The increase in the number of homes delivered was broad-based across all markets, with the largest contributions coming from the Chicago, Washington, D.C., and Indianapolis markets. The rise in average closing price was primarily attributable to modest price increases and to the mix of homes delivered in the Baltimore market. Gross profit margin on home sales was 19.3 percent in 2013, compared to 17.5 percent in 2012. This improvement was primarily due to reduced relative direct construction costs of 1.5 percent and to lower option deposit write-offs of 0.8 percent, partially offset by higher land costs of 0.5 percent. As a result, the North region generated pretax earnings of $52.1 million in 2013, compared to pretax earnings of $11.4 million in 2012.

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Southeast—Homebuilding revenues increased 68.1 percent to $597.9 million in 2013 from $355.6 million in 2012 primarily due to a 46.9 percent rise in the number of homes delivered and to a 14.7 percent increase in average closing price. The increases in the number of homes delivered and average closing price were broad-based across all markets, as general market conditions improved in the region. Gross profit margin on home sales was 21.8 percent in 2013, compared to 19.5 percent in 2012. This improvement was primarily due to reduced relative direct construction costs of 1.3 percent; lower land costs of 0.6 percent; and higher leverage of direct overhead expense of 0.4 percent, which was due to an increase in the number of homes delivered and to a higher average closing price. As a result, the Southeast region generated pretax earnings of $65.0 million in 2013, compared to pretax earnings of $18.2 million in 2012.

Texas—Homebuilding revenues increased 38.9 percent to $448.8 million in 2013 from $323.2 million in 2012 primarily due to a 21.9 percent rise in the number of homes delivered and to a 13.9 percent increase in average closing price. The rise in the number of homes delivered was impacted by the Company's re-entry into the Dallas market in the second quarter of 2013 and to increases in demand and the number of communities in the Houston market. The increase in average closing price was broad-based across all markets. Gross profit margin on home sales was 20.5 percent in 2013, compared to 20.4 percent in 2012. This improvement was primarily due to reduced relative direct construction costs of 0.1 percent; lower land costs of 0.1 percent; and a decrease in warranty costs of 0.1 percent, partially offset by higher mortgage and closing costs of 0.2 percent. As a result, the Texas region generated pretax earnings of $38.8 million in 2013, compared to pretax earnings of $22.8 million in 2012.

West—Homebuilding revenues increased 113.8 percent to $425.1 million in 2013 from $198.8 million in 2012 primarily due to an 88.4 percent rise in the number of homes delivered and to a 15.6 percent increase in average closing price. The increase in the number of homes delivered was broad-based across all markets, with the largest contributions coming from the Las Vegas and Southern California markets and from the Company's re-entry into the Phoenix market in the fourth quarter of 2012. The increase in average closing price was most dramatic in the Southern California and Las Vegas markets, partially offset by a slightly lower price mix of homes in the Denver market. Gross profit margin on home sales was 21.8 percent in 2013, compared to 19.4 percent in 2012. This improvement was primarily due to reduced relative direct construction costs of 2.0 percent and to lower inventory valuation adjustments of 1.0 percent, partially offset by increased land costs of 0.8 percent. As a result, the West region generated pretax earnings of $45.9 million in 2013, compared to pretax earnings of $10.1 million in 2012.

New Orders

Historically, new order activity is higher in the spring and summer months. As a result, the Company typically has more homes under construction, closes more homes, and has greater revenues and operating income in the third and fourth quarters of its fiscal year. Historical results, however, are not necessarily indicative of current or future homebuilding activities.

The following table provides the Company's new orders (units and aggregate sales values) for the years ended December 31, 2014, 2013 and 2012:

    2014   % CHG     2013   % CHG     2012   % CHG  
   

UNITS

                               

North

    2,185   (2.7 )%   2,245   42.9 %   1,571   32.0 %

Southeast

    2,265   1.3     2,236   15.5     1,936   65.2  

Texas

    1,629   (1.3 )   1,651   28.4     1,286   19.4  

West

    1,589   40.6     1,130   22.0     926   182.3  

Total

    7,668   5.6 %   7,262   27.0 %   5,719   51.8 %

DOLLARS (in millions)

                               

North

  $ 692   (0.4 )% $ 695   50.9 % $ 461   41.5 %

Southeast

    722   16.7     618   36.2     454   79.3  

Texas

    545   7.1     510   47.7     345   26.7  

West

    661   46.5     451   58.2     285   177.1  

Total

  $ 2,620   15.2 % $ 2,274   47.2 % $ 1,545   61.9 %
   

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New orders increased 5.6 percent to 7,668 units for the year ended December 31, 2014, from 7,262 units for 2013, and new order dollars rose 15.2 percent for 2014, compared to 2013. The overall increase in new orders was primarily due to a 21.0 percent rise in active communities, partially offset by a decrease in sales absorption rates. The Company's Phoenix, Raleigh, Southern California, Denver and Philadelphia markets had the largest year-over-year increases in new orders. Additionally, the Company's entry into Philadelphia and re-entry into Dallas in the latter half of 2013 contributed to its overall increase in new orders for 2014. The Company's average monthly sales absorption rate was 2.0 homes per community for 2014, versus 2.3 and 2.2 homes per community for the same periods in 2013 and 2012, respectively. New orders for 2014 declined 2.7 percent in the North, compared to the same period in 2013, primarily due to a decrease in the sales absorption rate, partially offset by an increase in the number of active communities. New orders for 2014 rose 1.3 percent in the Southeast, compared to the same period in 2013, primarily due an increase in the number of active communities. New orders for 2014 declined 1.3 percent in Texas, compared to 2013, primarily due to a decrease in the sales absorption rate, partially offset by an increase in the number of active communities. New orders for 2014 rose 40.6 percent in the West, compared to the same period in 2013, primarily due to an increase in the number of active communities and to a rise in the sales absorption rate.

New orders for 2013 rose 42.9 percent in the North, compared to 2012, primarily due to an increase in the number of active communities and to higher sales absorption rates. New orders for 2013 rose 15.5 percent in the Southeast, compared to 2012, primarily due to an increase in the number of active communities, partially offset by lower sales absorption rates. New orders for 2013 rose 28.4 percent in Texas, compared to 2012, primarily due to an increase in the number of active communities and to higher sales absorption rates. New orders for 2013 rose 22.0 percent in the West, compared to 2012, primarily due to an increase in the number of active communities, partially offset by lower sales absorption rates.

The following table provides the number of the Company's active communities:

  DECEMBER 31,   

    2014     % CHG     2013     % CHG     2012     % CHG  
   

North

    104     23.8 %   84     25.4 %   67     8.1 %

Southeast

    104     16.9     89     4.7     85     39.3  

Texas

    92     10.8     83     45.6     57     (14.9 )

West

    51     50.0     34     17.2     29     38.1  

Total

    351     21.0 %   290     21.8 %   238     12.8 %
   

The following table provides the Company's cancellation rates for the years ended December 31, 2014, 2013 and 2012:

                  2014     2013   2012  
   

North

                  18.4 %   15.8 % 19.4 %

Southeast

                  17.9     18.0   18.3  

Texas

                  21.2     20.4   22.2  

West

                  18.4     16.7   14.9  
                       

Total

                  18.9 %   17.7 % 19.0 %
   

The Company reported an overall slight increase in cancellation rates during 2014, compared to the same period in 2013. Cancellation rates increased the most in the Baltimore, Philadelphia, Chicago, Orlando and Dallas markets. Cancellations were primarily due to continued challenges in the availability of homeowner financing and in the ability to qualify homebuyers.

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The following table provides the Company's sales incentives and price concessions (average dollar value per unit closed and percentage of revenues) for the years ended December 31, 2014, 2013 and 2012:

    2014     2013     2012  
       

(in thousands)

    AVG $
PER UNIT
    % OF
REVENUES
    AVG $
PER UNIT
    % OF
REVENUES
    AVG $
PER UNIT
    % OF
REVENUES
 

North

  $ 21     6.2 % $ 17     5.4 % $ 25     8.0 %

Southeast

    22     6.9     20     7.2     23     9.3  

Texas

    34     9.4     36     10.9     40     13.5  

West

    19     4.4     14     3.8     21     6.3  

Total

  $ 24     6.7 % $ 22     6.8 % $ 28     9.6 %
   

Closings

The following table provides the Company's closings and average closing prices for the years ended December 31, 2014, 2013 and 2012:

    2014   % CHG     2013   % CHG     2012   % CHG  
   

UNITS

                               

North

    2,220   9.3 %   2,032   48.1 %   1,372   23.9 %

Southeast

    2,284   (1.3 )   2,315   46.9     1,576   59.5  

Texas

    1,691   11.7     1,514   21.9     1,242   19.0  

West

    1,482   27.1     1,166   88.4     619   125.9  

Total

    7,677   9.3 %   7,027   46.1 %   4,809   40.9 %

AVERAGE PRICE (in thousands)

                               

North

  $ 316   4.3 % $ 303   5.9 % $ 286   5.5 %

Southeast

    302   17.1     258   14.7     225   3.2  

Texas

    325   10.2     295   13.9     259   3.2  

West

    415   14.3     363   15.6     314   7.2  

Total

  $ 333   12.5 % $ 296   12.5 % $ 263   4.8 %
   

Outstanding Contracts

Outstanding contracts denote the Company's backlog of homes sold, but not closed, which are generally built and closed, subject to cancellations, over the subsequent two quarters. At December 31, 2014, the Company's outstanding contracts were flat at 2,617 units, compared to 2,626 units at December 31, 2013. The $919.0 million value of outstanding contracts at December 31, 2014, represented a 7.5 percent increase from $854.8 million at December 31, 2013, primarily due to a 7.7 percent rise in average sales price.

The following table provides the Company's outstanding contracts (units, aggregate dollar values and average prices) at December 31, 2014, 2013 and 2012:

  2014    2013    2012   

    UNITS     DOLLARS
(in millions)
    AVERAGE
PRICE
(in thousands)
    UNITS     DOLLARS
(in millions)
    AVERAGE
PRICE
(in thousands)
    UNITS     DOLLARS
(in millions)
    AVERAGE
PRICE
(in thousands)
 
   

North

    797   $ 257   $ 322     832   $ 267   $ 321     619   $ 188   $ 305  

Southeast

    783     265     339     802     233     290     881     211     239  

Texas

    552     193     350     614     198     322     477     135     283  

West

    485     204     420     378     157     416     414     129     311  

Total

    2,617   $ 919   $ 351     2,626   $ 855   $ 326     2,391   $ 663   $ 277  
   

At December 31, 2014, the Company anticipates that approximately 49 percent of its outstanding contracts will close during the first quarter of 2015, subject to cancellations.

Impairments

As required by the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") No. 360 ("ASC 360"), "Property, Plant and Equipment," inventory is reviewed for potential impairments on an ongoing basis. ASC 360 requires that, in the event that impairment indicators are present and undiscounted cash flows signify that the carrying amount of an asset is not recoverable, impairment charges must be recorded if the fair value of the asset is less than its carrying amount. (See

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"Housing Inventories" within Note A, "Summary of Significant Accounting Policies.") There were no inventory valuation adjustments for the years ended December 31, 2014 or 2013, compared to $1.9 million in inventory valuation adjustments in 2012 that were due to declining prices resulting from the competitive pressures of new, resale and distressed properties. The Company periodically writes off earnest money deposits and preacquisition feasibility costs related to land and lot option purchase contracts that it no longer plans to pursue. The Company wrote off $2.5 million, $1.9 million, and $996,000 in preacquisition feasibility costs during the years ended 2014, 2013 and 2012, respectively. Additionally, the Company wrote off $3.2 million of earnest money deposits during 2012. Should homebuilding market conditions weaken or the Company be unsuccessful in renegotiating certain land option purchase contracts, it may write off additional earnest money deposits and preacquisition feasibility costs in future periods.

During 2014 and 2013, no communities were impaired. During 2012, one community in the West where the Company expects to build homes was impaired for a total of $1.9 million. Should market conditions deteriorate or costs increase, it is possible that the Company's estimates of undiscounted cash flows from its communities could decline, resulting in additional future impairment charges. Additionally, the Company recorded $1.9 million of inventory and other valuation adjustments and write-offs associated with its discontinued operations in 2012.

Investments in Joint Ventures

As of December 31, 2014, the Company participated in six active homebuilding joint ventures in the Austin, Chicago, Denver, San Antonio and Washington, D.C., markets. These joint ventures exist for the purpose of acquisition and co-development of land parcels and lots, which are then sold to the Company, its joint venture partners or others at market prices. The Company's investments in its unconsolidated joint ventures totaled $12.6 million at December 31, 2014, compared to $13.6 million at December 31, 2013, which included $837,000 and $987,000 of capitalized interest, respectively. The Company's equity in earnings from its unconsolidated joint ventures totaled $1.4 million for the year ended December 31, 2014, and $1.2 million for the years ended December 31, 2013 and 2012. (See "Investments in Joint Ventures" within Note A, "Summary of Significant Accounting Policies.")

Financial Services

The Company's financial services segment provides mortgage-related products and services, as well as title and escrow services, to its homebuyers. By aligning its operations with the Company's homebuilding segments, the financial services segment leverages this relationship to offer its lending services to homebuyers, which, in turn, helps the Company monitor its backlog and closing process. RMC's mortgage origination operations consisted primarily of mortgage loans originated in connection with sales of the Company's homes. The mortgage capture rate represents the percentage of homes closed and available to capture by the Company that were financed with mortgage loans obtained by RMC. Substantially all of the loans the Company originates are sold to third party investors within a short period of time in the secondary mortgage market on a servicing-released basis. The third-party investor then services and manages the loans. The fair values of the Company's mortgage loans held-for-sale totaled $153.4 million and $139.6 million at December 31, 2014 and 2013, respectively.

STATEMENTS OF EARNINGS

  YEAR ENDED DECEMBER 31,   

(in thousands, except units)

    2014     2013     2012  
   

REVENUES

                   

Income from origination and sale of mortgage loans, net

  $ 32,529   $ 39,158   $ 28,634  

Title, escrow and insurance

    10,406     9,990     7,199  

Interest and other

    2,233     2,232     1,786  
       

TOTAL REVENUES

    45,168     51,380     37,619  

EXPENSES

    37,860     31,312     24,477  

OTHER INCOME

    139          
       

PRETAX EARNINGS

  $ 7,447   $ 20,068   $ 13,142  
   

Originations (units)

    3,914     4,007     3,039  

Ryland Homes origination capture rate

    61.0 %   66.3 %   68.1 %
   

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Mortgage originations totaled 3,914 in 2014, compared to 4,007 in 2013 and 3,039 in 2012. During 2014 and 2013, origination volume totaled $1.1 billion and $1.0 billion, respectively. The capture rate of mortgages originated for customers of the Company's homebuilding operations was 61.0 percent in 2014, compared to 66.3 percent in 2013 and 68.1 percent in 2012. These declines in capture rates were primarily due to increased competition in the mortgage marketplace, as well as to the gradual introduction of mortgage-related products and services into new markets. Approximately nine percent of the Company's homebuyers did not finance their home purchase with a mortgage.

The financial services segment reported pretax earnings of $7.4 million, $20.1 million and $13.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in pretax earnings for 2014, compared to 2013, was primarily attributable to a decrease in locked loan pipeline volume, which was due, in part, to the reversal of the accelerated timing of loan locks during 2013; an increase in litigation expense; and higher expense related to a change in estimate of ultimate insurance loss liability. The rise in pretax earnings for 2013, compared to 2012, was primarily due to increases in locked loan pipeline and origination volumes, as well as to a rise in title income, partially offset by increased personnel costs and higher expense related to estimates of ultimate insurance loss liability. The increase in the locked loan pipeline was due, in part, to an acceleration in the timing of loan locks during the second and third quarters of 2013, which resulted from a rapid increase in mortgage interest rates during that period. Reversion of the unusually high level of the Company's locked loan pipeline to more typical levels began in the fourth quarter of 2013 and continued in 2014.

Revenues for the financial services segment totaled $45.2 million in 2014, compared to $51.4 million in 2013 and $37.6 million in 2012. The 12.1 percent decrease in revenues for 2014, compared to 2013, was primarily attributable to the decrease in new lock volume and to a 5.3 percent reduction in capture rate, partially offset by a 5.0 percent increase in origination volume and higher title income. The 36.6 percent increase in revenues for 2013, compared to 2012, was primarily due to increases in locked loan pipeline and origination volumes, as well as to a rise in title income. Interest income is earned from the date a mortgage loan is originated until the loan is sold.

During 2014, financial services expense totaled $37.9 million and included $16.0 million related to direct expenses of RMC's mortgage operations; $8.7 million in title and insurance expenses; $7.6 million in corporate and other general and administrative expenses; and $5.6 million in loan indemnification and related litigation expense. The increase in financial services expense for 2014, compared to 2013, was primarily due to an increase in litigation expense resulting from the Countrywide settlement, as well as to $1.8 million higher expense related to a change in estimate of ultimate insurance loss liability. Financial services expense totaled $31.3 million and $24.5 million for 2013 and 2012, respectively. The rise in financial services expense for 2013 from 2012 was primarily attributable to increased personnel costs and higher expense related to estimates of ultimate insurance loss liability. (See Note L, "Commitments and Contingencies.")

In 2014, 96.0 percent of the loans originated by RMC had fixed interest rates. Of the mortgage loans it originated, 67.6 percent were prime loans and 32.4 percent were government loans. Prime mortgage loans are generally defined as agency-eligible loans (Fannie Mae/Freddie Mac) and any nonconforming loans that would otherwise meet agency criteria. In 2014, the Company's borrowers had Fair Isaac Corporation ("FICO") credit scores that averaged 732. During 2014, RMC did not originate mortgage loans classified as subprime, reduced documentation or pay-option adjustable-rate. During 2014, the mortgage loans originated by RMC were sold to third-party investors. The Company has two repurchase credit facilities to fund, and are secured by, mortgages that were originated by RMCMC and are pending sale. Generally, the Company is required to indemnify its investors to which mortgage loans are sold if it is shown that there has been undiscovered fraud on the part of the borrower; if there are losses due to origination deficiencies attributable to RMC; or if the borrower does not make a first payment. RMC is typically not required to repurchase mortgage loans.

Income Taxes

Deferred tax assets are recognized for estimated tax effects that are attributable to deductible temporary differences and tax carryforwards related to tax credits and NOLs. They are realized when existing temporary differences are carried back to a profitable year(s) and/or carried forward to a future year(s)

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having taxable income. Deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of these assets will not be realized. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses; actual earnings; forecasts of future earnings; the duration of statutory carryforward periods; the Company's experience with NOL carryforwards not expiring unused; and tax planning alternatives.

In 2013, the Company determined that it was more likely than not that its deferred tax assets would be realized, which resulted in a $258.9 million reversal of the valuation allowance against its deferred tax assets. At December 31, 2014, the Company had no federal NOL carryforwards remaining and no valuation allowance against its deferred tax assets. (See Note I, "Income Taxes.")

Financial Condition and Liquidity

The Company has historically funded its homebuilding and financial services operations with cash flows from operating activities; the issuance of new debt securities; borrowings from revolving credit facilities; and borrowings under financial services credit facilities. Under current market conditions, the Company is focused on maintaining a strong balance sheet by generating cash from existing communities and by extending debt maturities when market conditions are favorable, as well as by investing in new communities to facilitate continued growth and profitability. As a result of this strategy, the Company opened 162 new communities during 2014; has senior debt and convertible senior debt with various maturities until 2022 (See Note H, "Debt and Credit Facilities."); and ended the year with $580.0 million in cash, cash equivalents and marketable securities. Additionally, the Company had $232.3 million available under an unsecured revolving credit facility at December 31, 2014.

  DECEMBER 31,   

(in millions)

    2014     2013  
   

Cash, cash equivalents and marketable securities

  $ 580   $ 631  

Housing inventories1

    2,031     1,634  

Debt

    1,403     1,397  

Stockholders' equity

  $ 1,085   $ 908  

Net debt-to-capital ratio, including marketable securities

    43.1 %   45.8 %
   
1
Excludes consolidated inventory not owned, net of cash deposits.

Consolidated inventory owned by the Company increased 24.3 percent to $2.0 billion at December 31, 2014, compared to $1.6 billion at December 31, 2013. The Company continues to grow at a healthy rate and strives to maintain a projected four- to five-year supply of land. At December 31, 2014, it controlled 38,973 lots, with 25,303 lots owned and 13,670 lots, or 35.1 percent, under option. Lots controlled increased 2.2 percent at December 31, 2014, from 38,142 lots controlled at December 31, 2013. The Company also controlled 623 lots and 628 lots under joint venture agreements at December 31, 2014 and December 31, 2013, respectively. (See "Housing Inventories" and "Investments in Joint Ventures" within Note A, "Summary of Significant Accounting Policies.")

At December 31, 2014, the Company's net debt-to-capital ratio, including marketable securities, decreased to 43.1 percent from 45.8 percent at December 31, 2013. The Company remains focused on maintaining its liquidity so that it can be flexible in reacting to changing market conditions. The Company had $580.0 million and $631.2 million in cash, cash equivalents and marketable securities at December 31, 2014 and 2013, respectively.

During 2014, the Company used $95.3 million of cash for operating activities, which included cash outflows related to a $406.8 million increase in inventories and a $13.8 million increase in mortgage loans held-for-sale, partially offset by cash inflows of $219.8 million from current period net income from continuing operations; $94.1 million from a decline in deferred income taxes; and a net cash inflow of $11.4 million from changes in other assets, liabilities, excess tax benefits and other operating activities. Investing activities provided $277.6 million, which included cash inflows of $298.2 million related to net reductions in investments in marketable securities and $2.6 million related to a net return of investments in unconsolidated joint ventures, partially offset by cash outflows of $23.1 million related to an increase in

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property, plant and equipment. Financing activities provided $110.9 million, which included cash inflows of $56.3 million from borrowings against the Company's financial services revolving credit facilities; $54.3 million related to a decrease in restricted cash; $33.9 million from the issuance of common stock under stock-based compensation; and $5.1 million from an increase in short-term borrowings, partially offset by cash outflows of $29.7 million for common stock repurchases; payments of $5.6 million for dividends; and $3.3 million of other financing activities. Net cash provided by continuing operations during 2014 totaled $293.2 million.

During 2013, the Company used $260.0 million of cash for operating activities from continuing operations, which included cash outflows related to a $542.0 million increase in inventories and a $31.6 million increase in mortgage loans held-for-sale, partially offset by net cash inflows of $162.3 million from current year net income from continuing operations, which included a $258.9 million decrease in the deferred tax valuation allowance; $78.3 million from net changes in assets and liabilities, and other operating activities; and $73.0 million from a decline in deferred income taxes. Investing activities from continuing operations used $907,000, which included cash outflows of $50.9 million related to business acquisitions; $19.9 million related to property, plant and equipment; and $3.2 million related to net contributions to unconsolidated joint ventures, partially offset by cash inflows of $73.1 million related to net reductions in investments in marketable securities. Financing activities from continuing operations provided $330.8 million, which included cash inflows of a $262.2 million related to a net increase in senior debt and short-term borrowings; $73.1 million in borrowings against the Company's financial services credit facility; and $28.2 million from the issuance of common stock under stock-based compensation, partially offset by cash outflows related to an increase of $19.1 million in restricted cash; $8.0 million in other financing activities; and payments of $5.5 million for dividends. Net cash provided by continuing operations during 2013 totaled $69.9 million.

During 2012, the Company used $111.1 million of cash for operating activities from continuing operations, which included cash outflows related to a $236.5 million increase in inventories and a $25.6 million increase in mortgage loans held-for-sale, partially offset by net cash inflows of $79.4 million from current year net income from continuing operations, which included an $11.6 million decrease in the deferred tax valuation allowance, and $71.6 million from changes in assets and liabilities, and other operating activities. Investing activities from continuing operations used $125.1 million, which included cash outflows of $80.2 million related to business acquisitions; $35.1 million related to net investments in marketable securities; and $12.2 million related to property, plant and equipment, partially offset by cash inflows of $2.3 million related to a net return of investment in unconsolidated joint ventures and to $109,000 of other investing activities. Financing activities from continuing operations provided $235.0 million, which included cash inflows related to a $299.9 million net increase in senior debt and short-term borrowings and to $14.4 million from the issuance of common stock under stock-based compensation, partially offset by cash outflows related to a $49.9 million decrease in borrowings against the Company's financial services credit facility; an increase of $13.8 million in restricted cash; $10.1 million in other financing activities; and payments of $5.4 million for dividends. Net cash used for continuing operations during 2012 totaled $1.2 million.

Dividends declared totaled $0.12 per share for the annual periods ended December 31, 2014, 2013 and 2012.

For the year ended December 31, 2014, borrowing arrangements for the Company included senior notes, convertible senior notes, a revolving credit facility, financial services credit facilities and nonrecourse secured notes payable.

Senior Notes and Convertible Senior Notes

Senior notes outstanding, net of discount, totaled $1.4 billion at December 31, 2014 and 2013.

In January 2015, the Company used existing cash of $126.5 million to settle its 5.4 percent senior notes that matured. (See Note P, "Subsequent Event.")

During 2013, the Company issued $267.5 million of 0.25 percent convertible senior notes due June 2019. The Company will pay interest on the notes on June 1 and December 1 of each year, which commenced

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on December 1, 2013. The notes, which mature on June 1, 2019, are initially convertible into shares of the Company's common stock at a conversion rate of 13.3307 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $75.01 per share. The conversion rate of the notes is subject to adjustment for a notice of redemption or for certain events. The Company received net proceeds of $260.1 million from this offering prior to offering expenses. The Company used these proceeds for general corporate purposes. (See Note H, "Debt and Credit Facilities.")

During 2012, the Company issued $250.0 million of 5.4 percent senior notes due October 2022. The Company will pay interest on the notes on April 1 and October 1 of each year, which commenced on April 1, 2013. The notes will mature on October 1, 2022, and may be redeemed at the stated redemption price, in whole or in part, at the option of the Company at any time. (See Note H, "Debt and Credit Facilities.")

Additionally during 2012, the Company issued $225.0 million of 1.6 percent convertible senior notes due May 2018. The Company will pay interest on the notes on May 15 and November 15 of each year, which commenced on November 15, 2012. At any time prior to the close of business on the business day immediately preceding the stated maturity date, holders may convert all or any portion of their convertible senior notes. These notes will mature on May 15, 2018, unless converted earlier by the holder, at its option, or purchased by the Company upon the occurrence of a fundamental change. These notes are initially convertible into shares of the Company's common stock at a conversion rate of 31.2168 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $32.03 per share. The conversion rate of the notes is subject to adjustment for a notice of redemption or for certain events. (See Note H, "Debt and Credit Facilities.")

Senior notes and indenture agreements are subject to certain covenants that include, among other things, restrictions on additional secured debt and the sale of assets. The Company was in compliance with these covenants at December 31, 2014.

The Company's obligations to pay principal, premium and interest under its senior notes and convertible senior notes are guaranteed on a joint and several basis by substantially all of its 100 percent-owned homebuilding subsidiaries ("the Guarantor Subsidiaries"). Such guarantees are full and unconditional. (See Note M, "Supplemental Guarantor Information.")

Unsecured Revolving Credit Facility

During 2014, the Company entered into a $300.0 million unsecured four-year revolving credit facility agreement (the "Credit Facility"). The Credit Facility provides for a $300.0 million revolving credit facility (the "Revolving Credit Facility"), which includes a $150.0 million letter of credit subfacility (the "Letter of Credit Subfacility") and a $25.0 million swing line facility. In addition, the Credit Facility includes an accordion feature pursuant to which the commitments under the Revolving Credit Facility may be increased, from time to time, up to a principal amount not to exceed $450.0 million, subject to the terms and conditions set forth in the agreement. The commitments for the Letter of Credit Subfacility are not to exceed half of the amount of the commitments for the Revolving Credit Facility. The Credit Facility, which matures on November 21, 2018, provides for the commitments to be extended for up to two additional one-year periods, subject to satisfaction of the terms and conditions set forth therein.

The obligation of the lenders to make advances or issue letters of credit under the Credit Facility is subject to the satisfaction of certain conditions set forth in the credit agreement. If the leverage ratio of the Company and its homebuilding segment subsidiaries exceeds certain thresholds as set forth in the Credit Facility, availability under the Revolving Credit Facility will be subject to a borrowing base as set forth in the agreement.

The Credit Facility contains various representations and warranties, as well as affirmative, negative and financial covenants that the Company considers customary for financings of this type. The financial covenants in the Credit Facility include a maximum leverage ratio covenant; a minimum net worth test; and a minimum interest coverage test or a minimum liquidity test. The financial services segment subsidiaries of the Company are unrestricted subsidiaries under the Credit Facility and certain covenants of the agreement do not apply to the unrestricted subsidiaries. The Credit Facility includes event of default

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provisions that the Company considers customary for financings of this type. If an event of default under the Credit Facility occurs and is continuing, the commitments under the agreement may be terminated; the amounts outstanding, including all accrued interest and unpaid fees, may be declared payable immediately; and the Company may be required to cash collateralize the outstanding letters of credit issued under this facility. The Credit Facility will be used for general corporate purposes. Certain letters of credit issued and outstanding prior to the Company's entry into the Credit Facility have been deemed letters of credit under the facility and made subject to its terms. Amounts borrowed under the Credit Facility are guaranteed on a joint and several basis by substantially all of the Company's 100 percent-owned homebuilding subsidiaries. Such guarantees are full and unconditional. (See Note M, "Supplemental Guarantor Information.")

Outstanding borrowings under the Credit Facility will bear interest at a fluctuating rate per annum that is equal to the base rate or the reserve adjusted LIBOR rate in each case, plus an applicable margin determined based on changes in the leverage ratio of the Company and its homebuilding segment subsidiaries. The Company did not have any outstanding borrowings against the Revolving Credit Facility at December 31, 2014. Under the Letter of Credit Subfacility, however, the Company had unsecured letters of credit outstanding that totaled $67.7 million at December 31, 2014. The unused borrowing capacity of the Credit Facility at December 31, 2014, totaled $232.3 million.

Financial Services Credit Facilities

During 2014, RMCMC entered into a $50.0 million warehouse line of credit with Comerica Bank, which will expire in April 2015. This facility is used to fund, and is secured by, mortgages that were originated by RMCMC and are pending sale. Under the terms of this facility, RMCMC is required to maintain various financial and other covenants and to satisfy certain requirements relating to the mortgages securing the facility. At December 31, 2014, RMCMC was in compliance with these covenants and had outstanding borrowings against this facility that totaled $48.5 million. The weighted-average effective interest rate on the outstanding borrowings against this facility was 3.0 percent at December 31, 2014.

During 2011, RMCMC entered into a $50.0 million repurchase credit facility with JPMorgan Chase Bank, N.A. ("JPM"), which was subsequently increased to $75.0 million during 2012 and to $100.0 million during 2014, and will expire in November 2015. This facility is used to fund, and is secured by, mortgages that were originated by RMCMC and are pending sale. Under the terms of the facility, RMCMC is required to maintain various financial and other covenants and to satisfy certain requirements relating to the mortgages securing the facility. At December 31, 2014, RMCMC was in compliance with these covenants and had outstanding borrowings against this facility that totaled $80.9 million and $73.1 million at December 31, 2014 and 2013, respectively. The weighted-average effective interest rates on the outstanding borrowings against this facility were 3.2 percent and 3.4 percent at December 31, 2014 and 2013, respectively.

Letter of Credit Agreements

To provide letters of credit required in the ordinary course of its business, the Company has various secured letter of credit agreements requiring it to maintain restricted cash deposits for outstanding letters of credit. Outstanding letters of credit totaled $33.3 million and $93.6 million under these agreements at December 31, 2014 and 2013, respectively. Additionally, the Company had unsecured letters of credit outstanding that totaled $67.7 million at December 31, 2014, under its revolving credit facility.

Nonrecourse Secured Notes Payable

To finance its land purchases, the Company may also use nonrecourse secured notes payable. At December 31, 2014 and 2013, outstanding seller-financed nonrecourse secured notes payable totaled $5.8 million and $689,000, respectively.

Financial Services Subsidiaries

The financial services segment uses funds made available under the repurchase credit facilities, cash generated internally and existing equity to finance its operations.

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Other

In January 2015, the Company filed a shelf registration with the SEC. The registration statement provides that securities may be offered, from time to time, in one or more series and in the form of senior, subordinated or convertible debt; preferred stock; preferred stock represented by depository shares; common stock; stock purchase contracts; stock purchase units; and warrants to purchase both debt and equity securities. The Company filed this registration statement to replace the prior registration statement that expired January 27, 2015. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. The timing and amount of future offerings, if any, will depend on market and general business conditions.

The Company repurchased 860,000 shares of its outstanding common stock during 2014. The Company had existing authorization of $112.6 million from its Board of Directors to purchase 2.9 million additional shares, based on its stock price at December 31, 2014. This authorization does not have an expiration date. During 2013, the Company did not repurchase any shares of its outstanding common stock. Outstanding shares of common stock totaled 46,296,045 and 46,234,809 at December 31, 2014 and 2013, respectively.

The following table provides a summary of the Company's contractual cash obligations and commercial commitments at December 31, 2014, and the effect such obligations are expected to have on its future liquidity and cash flow:

(in thousands)

    TOTAL     2015     2016–2017     2018–2019     AFTER 2019  
   

Debt, principal maturities

  $ 1,534,141   $ 257,854   $ 233,787   $ 492,500   $ 550,000  

Interest on debt

    284,318     60,357     104,255     69,456     50,250  

Operating leases

    16,747     5,224     7,306     3,325     892  

Land option contracts1

    1,283     1,283              
       

Total at December 31, 2014

  $ 1,836,489   $ 324,718   $ 345,348   $ 565,281   $ 601,142  
   
1
Represents obligations under option contracts with specific performance provisions, net of cash deposits.

The Company is focused on managing overhead expense, land acquisition, development and homebuilding construction activity in conjunction with opportunistic debt offerings in order to maintain liquidity and appropriate debt levels commensurate with its existing business and growth expectations. The Company believes that it will be able to continue to fund its homebuilding and financial services operations through its existing cash resources, cash generation capabilities, amounts available under its credit facilities, and issuances of replacement and new debt.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company enters into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Land and lot option purchase contracts enable the Company to control significant lot positions with a minimal capital investment, thereby reducing the risks associated with land ownership and development. At December 31, 2014, the Company had $72.8 million in cash deposits and letters of credit outstanding pertaining to land and lot option purchase contracts with an aggregate purchase price of $847.1 million, of which option contracts totaling $1.4 million contained specific performance provisions. At December 31, 2013, the Company had $73.0 million in cash deposits and letters of credit outstanding pertaining to land and lot option purchase contracts with an aggregate purchase price of $869.1 million, of which option contracts totaling $2.5 million contained specific performance provisions. Additionally, the Company's liability is generally limited to forfeiture of nonrefundable deposits, letters of credit and other nonrefundable amounts incurred.

Pursuant to ASC No. 810 ("ASC 810"), "Consolidation," the Company consolidated $30.8 million and $33.2 million of inventory not owned related to land and lot option purchase contracts at December 31, 2014 and 2013, respectively. (See "Variable Interest Entities" within Note A, "Summary of Significant Accounting Policies.")

At December 31, 2014 and 2013, the Company had outstanding letters of credit under secured letter of credit agreements that totaled $33.3 million and $93.6 million, respectively. Additionally, the Company had

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$67.7 million of unsecured letters of credit under its Credit Facility at December 31, 2014. The Company had development or performance bonds that totaled $189.4 million, issued by third parties, to secure performance under various contracts and obligations related to land or municipal improvements at December 31, 2014, compared to $138.9 million at December 31, 2013. The Company expects that the obligations secured by these letters of credit and performance bonds will generally be satisfied in the ordinary course of business and in accordance with applicable contractual terms. To the extent that the obligations are fulfilled, the related letters of credit and performance bonds will be released, and the Company will not have any continuing obligations.

The Company has no material third-party guarantees other than those associated with its senior notes. (See Note M, "Supplemental Guarantor Information.")

Critical Accounting Policies

Preparation of the Company's consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of inherently uncertain matters. Listed below are those policies that management believes are critical and require the use of complex judgment in their application. There are items within the financial statements that require estimation, but they are not considered critical. Management has discussed the critical accounting policies with the Audit Committee of its Board of Directors, and the Audit Committee has reviewed the disclosure.

Use of Estimates

In budgeting land acquisitions, development and homebuilding construction costs associated with real estate projects, the Company evaluates market conditions; material and labor costs; buyer preferences; construction timing; and provisions for insurance, mortgage loan reserves and warranty obligations. The Company accrues its best estimate of probable cost for the resolution of legal claims. Estimates, which are based on historical experience and other assumptions, are reviewed continually, updated when necessary and believed to be reasonable under the circumstances. Management believes that the timing and scope of its evaluation procedures are proper and adequate. Changes in assumptions relating to such factors, however, could have a material effect on the Company's results of operations for a particular quarterly or annual period.

Income Recognition

As required by ASC No. 976 ("ASC 976"), "Real Estate—Retail Land," revenues and cost of sales are recorded at the time each home or lot is closed; title and possession are transferred to the buyer; and there is no significant continuing involvement from the homebuilder. In order to match revenues with related expenses, land, land development, interest, taxes and other related costs (both incurred and estimated to be incurred in the future) are allocated to the cost of homes closed, in accordance with ASC No. 970 ("ASC 970"), "Real Estate—General." Changes to estimated costs, subsequent to the commencement of the delivery of homes, are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific-identification method.

Marketable Securities

The Company invests a portion of its available cash and cash equivalent balances in marketable securities having maturities in excess of three months in a managed portfolio. These investments are primarily held in the custody of a single financial institution. To be considered for investment, securities must meet certain minimum requirements as to their credit ratings, maturity terms and other risk-related criteria as defined by the Company's investment policies. The primary objectives of these investments are the preservation of capital and the maintenance of a high degree of liquidity, with a secondary objective being the attainment of yields higher than those earned on the Company's cash and cash equivalent balances.

The Company considers its investment portfolio to be available-for-sale. Accordingly, these investments are recorded at their fair values, with unrealized gains and losses included in "Accumulated other comprehensive loss" within the Consolidated Balance Sheets.

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The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost basis, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This evaluation is based on factors such as the length of time and extent to which the fair value has been less than the security's cost basis and the adverse conditions specifically related to the security, including any changes to the rating of the security by a rating agency. A temporary impairment results in an unrealized loss being recorded in "Accumulated other comprehensive loss" within the Consolidated Balance Sheets. An other-than-temporary impairment charge is recorded as a realized loss within the Consolidated Statements of Earnings. At December 31, 2014, none of these securities were in a gross unrealized loss position. The Company believes that the cost bases for its marketable securities, available-for-sale, were recoverable in all material respects at December 31, 2014 and 2013. (See Note G, "Fair Values of Financial and Nonfinancial Instruments.")

Inventory Valuation

Housing inventory includes land and development costs; direct construction costs; capitalized indirect construction costs; capitalized interest; and real estate taxes. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. Inventories to be held and used are stated at cost unless a community is determined to be impaired, in which case the impaired inventories are written down to their fair values.

As required by ASC 360, inventory is reviewed for potential write-downs on an ongoing basis. Once a community is considered to be impaired, the Company's determinations of fair value and new cost basis are primarily based on discounting estimated cash flows at rates commensurate with inherent risks associated with the assets. Due to the fact that estimates and assumptions included in cash flow models are based on historical results and projected trends, unexpected changes in market conditions that may lead to additional impairment charges in the future cannot be anticipated. Management believes its processes are designed to properly assess the market and the carrying values of assets. (See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies.")

Warranty Reserves

The Company's homes are sold with limited third-party warranties. As homes close warranty reserves are established for an amount estimated to adequately cover the expected costs of materials and outside labor during warranty periods. Certain factors are considered in determining the reserves, including the historical range of amounts paid per house; experience with respect to similar home designs and geographic areas; the historical amount paid as a percentage of home construction costs; any warranty expenditures not considered to be normal and recurring; and conditions that may affect certain subdivisions. Improvements in quality control and construction techniques expected to impact future warranty expenditures are also considered. Accordingly, the process of determining the Company's warranty reserves balance requires estimates associated with various assumptions, each of which can positively or negatively impact this balance.

Generally, warranty reserves are reviewed monthly to determine the reasonableness and adequacy of both the aggregate reserve amount and the per unit reserve amount originally included in housing cost of sales, as well as to note the timing of any reversals of the original reserve. General warranty reserves not utilized for a particular house are evaluated for reasonableness in the aggregate on both a market-by-market basis and a consolidated basis. Warranty payments for an individual house may exceed the related reserve. Payments in excess of the related reserve are evaluated in the aggregate to determine if an adjustment to the warranty reserve should be recorded, which could result in a corresponding adjustment to housing cost of sales.

The Company continues to evaluate the adequacy of its warranty reserves and believes that its existing estimation process is materially accurate. Since the Company's warranty reserves can be impacted by a significant number of factors, it is possible that changes to the Company's assumptions could have a material impact on its warranty reserve balance. (See Note L, "Commitments and Contingencies.")

Income Taxes

The Company calculates a provision for its income taxes by using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying temporary differences arising from

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the diverse treatment of items for tax and general accounting purposes. The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with ASC No. 740 ("ASC 740"), "Income Taxes," the Company assesses whether a valuation allowance should be established based on available evidence indicating whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under U.S. tax laws. This assessment considers, among other matters, current and cumulative income and loss; future profitability; the duration of statutory carryback or carryforward periods; asset turns; and tax planning alternatives. The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, it also bases this estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect the Company's actual tax results, and future business results may affect the amount of its deferred tax liabilities or the valuation of its deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as to the residential homebuilding industry's cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in the Company's historical analyses. These differences could have a material impact on the Company's consolidated results of operations or financial position.

Changes in positive and negative evidence, including differences between the Company's future operating results and estimates, could result in the establishment of a valuation allowance against its deferred tax assets. Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company's consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company's deferred tax assets. (See Note I, "Income Taxes.")

Mortgage Loan Loss Reserves

Reserves are created to address repurchase and indemnity claims by third-party investors that arise primarily if the borrower obtained the loan through fraudulent information or omissions; if there are origination deficiencies attributable to RMC; or if the borrower does not make a first payment. Reserves are determined based on pending claims received that are associated with previously sold mortgage loans and discussions with investors and analysis of mortgages originated. Estimating loss is difficult due to the inherent uncertainty in predicting loss activity, as well as to delays in processing and requests for payment related to the loan loss by agencies and financial institutions. Recorded reserves represent the Company's best estimates of current and future unpaid losses as of December 31, 2014, based on existing conditions and available information. The Company continues to evaluate the adequacy of its mortgage loan loss reserves and believes that its existing estimation process provides a reasonable estimate of probable loss. Since the Company's mortgage loan loss reserves can be impacted by a significant number of factors, it is possible that subsequent changes in conditions or available information may change assumptions and estimates, which could have a material impact on its mortgage loan loss reserve balance. (See Note L, "Commitments and Contingencies.")

Share-Based Payments

The Company follows the provisions of ASC No. 718 ("ASC 718"), "Compensation—Stock Compensation," which requires that compensation expense be measured and recognized at an amount equal to the fair value of share-based payments granted under compensation arrangements. The Company calculates the fair value of stock options by using the Black-Scholes-Merton option-pricing model. Determination of the fair value of share-based awards at the grant date requires judgment in developing assumptions and involves a number of variables. These variables include, but are not limited to, expected price volatility of the stock over the term of the awards, expected dividend yield and expected stock option exercise behavior. Additionally, judgment is required in estimating the number of share-based awards that are expected to forfeit. Since accounting for stock-based compensation requires the use of complex judgment in its application, if actual results differ significantly from these estimates, stock-based compensation expense and the Company's consolidated results of operations could be materially impacted. (See Note K, "Stock-Based Compensation.")

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Outlook

Although rates of improvement in housing markets can vary, the Company believes that the housing market as a whole may continue to progress due to overall improvement in the economy; rising employment levels; accessible financing; attractive housing affordability levels; and positive demographic trends. Absent unexpected changes in economic conditions and other unforeseeable circumstances, these developments, combined with additional leverage of overhead expenditures from higher volumes, should allow the Company to improve its performance. While any future steps taken by the Federal Reserve to increase interest rates may have a tempering effect on overall home sales and prices, the Company believes it is well positioned to capture potential increases in demand stemming from a stronger macroeconomic environment that would be expected to accompany any interest rate increases. Although the recent significant decline in oil prices may negatively impact certain localized markets, lower gas prices should result in more disposable income for households and could prove to be positive for the national economy and the Company as a whole. The Company anticipates steady growth in its community count during 2015 and will remain focused on maintaining strong operating profit margins. At December 31, 2014, the Company's backlog of orders for new homes totaled 2,617 units, with a projected dollar value of $919.0 million, reflecting a 7.5 percent increase in projected dollar value from $854.8 million at December 31, 2013. The pace at which the Company acquires new land and opens additional communities will depend on market and economic conditions, timing of governmental approval processes and future sales absorption rates. Although the Company's outlook remains cautiously optimistic, the strength of its balance sheet, liquidity and improved operating leverage have positioned it to successfully take advantage of any continued advancements in economic trends and in the demand for new homes.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market Risk Summary

The following table provides information about the Company's significant financial instruments that are sensitive to changes in interest rates at December 31, 2014. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For other financial instruments, weighted-average rates are based on implied forward rates as of the reporting date.

Interest Rate Sensitivity
Principal Amount by Expected Maturity

(in thousands)

    2015     2016–2017     2018–2019     THERE-
AFTER
    TOTAL     FAIR VALUE  
   

Senior notes and convertible senior

                                     

notes (fixed rate)

  $ 126,481   $ 230,000   $ 492,500   $ 550,000   $ 1,398,981   $ 1,498,450  

Average interest rate

    5.4 %   8.4 %   0.9 %   6.1 %   4.6 %      

Other financial instruments

                                     

Mortgage interest rate lock commitments:

                                     

Notional amount

  $ 147,969   $   $   $   $ 147,969   $ 4,229  

Average interest rate

    4.1 %   %   %   %   4.1 %      

Forward-delivery contracts:

                                     

Notional amount

  $ 79,000   $   $   $   $ 79,000   $ (2,141 )

Average interest rate

    3.5 %   %   %   %   3.5 %      
   

Interest rate risk is a primary market risk facing the Company. Interest rate risk arises principally in the Company's financial services segment. The Company enters into forward-delivery contracts and may, at times, use other hedging contracts to mitigate its exposure to movement in interest rates on mortgage interest rate lock commitments ("IRLCs"). In managing interest rate risk, the Company does not speculate on the direction of interest rates. (See "Derivative Instruments" within Note A, "Summary of Significant Accounting Policies," and Note E, "Derivative Instruments.")

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Item 8.    Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF EARNINGS

                   
 
  YEAR ENDED DECEMBER 31,  

(in thousands, except share data)

    2014     2013     2012  
   

REVENUES

                   

Homebuilding

  $ 2,569,901   $ 2,089,375   $ 1,270,847  

Financial services

    45,168     51,380     37,619  
       

TOTAL REVENUES

    2,615,069     2,140,755     1,308,466  
       

EXPENSES

                   

Cost of sales

    2,007,644     1,654,196     1,027,472  

Selling, general and administrative

    289,029     254,747     190,815  

Financial services

    37,860     31,312     24,477  

Interest

        8,358     16,118  
       

TOTAL EXPENSES

    2,334,533     1,948,613     1,258,882  
       

OTHER INCOME (LOSS)

                   

Gain from marketable securities, net

    1,526     1,849     2,214  

Loss related to early retirement of debt, net

            (9,146 )

Other income

    2,402     1,700     1,315  
       

TOTAL OTHER INCOME (LOSS)

    3,928     3,549     (5,617 )
       

Income from continuing operations before taxes

    284,464     195,691     43,967  

Tax expense (benefit)

    108,665     (183,408 )   1,585  
       

NET INCOME FROM CONTINUING OPERATIONS

    175,799     379,099     42,382  
       

Income (loss) from discontinued operations, net of taxes

        106     (2,000 )
       

NET INCOME

  $ 175,799   $ 379,205   $ 40,382  
   

NET INCOME (LOSS) PER COMMON SHARE

                   

Basic

                   

Continuing operations

  $ 3.77   $ 8.22   $ 0.93  

Discontinued operations

    0.00     0.00     (0.04 )
       

Total

    3.77     8.22     0.89  
       

Diluted

                   

Continuing operations

    3.09     6.79     0.88  

Discontinued operations

    0.00     0.00     (0.04 )
       

Total

  $ 3.09   $ 6.79   $ 0.84  
       

AVERAGE COMMON SHARES OUTSTANDING

                   

Basic

    46,579,641     45,966,307     44,761,178  

Diluted

    58,218,165     56,219,939     49,655,321  

DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.12   $ 0.12   $ 0.12  
   

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                   
 
  YEAR ENDED DECEMBER 31,  

(in thousands)

    2014     2013     2012  
   

Net income

  $ 175,799   $ 379,205   $ 40,382  

Other comprehensive income (loss), net:

                   

Actuarial loss on defined benefit pension plan, net

        (1,034 )    

Amortization of actuarial loss on defined benefit pension plan, net

    17          

Reduction of unrealized gain related to cash flow hedging instruments, net

            (1,056 )

Unrealized gain (loss) on marketable securities, available-for-sale, net

    341     (215 )   984  
       

Other comprehensive income (loss), net

    358     (1,249 )   (72 )
       

Comprehensive income

  $ 176,157   $ 377,956   $ 40,310  
   

See Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

             
 
  DECEMBER 31,  

(in thousands, except share data)

    2014     2013  
   

ASSETS

             

Cash, cash equivalents and marketable securities

             

Cash and cash equivalents

  $ 521,195   $ 227,986  

Restricted cash

    35,720     90,034  

Marketable securities, available-for-sale

    23,044     313,155  
       

Total cash, cash equivalents and marketable securities

    579,959     631,175  

Housing inventories

             

Homes under construction

    764,853     643,357  

Land under development and improved lots

    1,250,159     973,250  

Consolidated inventory not owned

    30,811     33,176  
       

Total housing inventories

    2,045,823     1,649,783  

Property, plant and equipment

    30,566     25,437  

Mortgage loans held-for-sale

    153,366     139,576  

Net deferred taxes

    91,766     185,904  

Other

    150,609     148,437  

Assets of discontinued operations

        30  
       

TOTAL ASSETS

    3,052,089     2,780,342  
       

LIABILITIES

             

Accounts payable

    205,397     172,841  

Accrued and other liabilities

    215,221     212,680  

Financial services credit facilities

    129,389     73,084  

Debt

    1,403,079     1,397,308  

Liabilities of discontinued operations

        504  
       

TOTAL LIABILITIES

    1,953,086     1,856,417  
       

EQUITY

             

STOCKHOLDERS' EQUITY

             

Preferred stock, $1.00 par value:

             

Authorized—10,000 shares Series A Junior

             

Participating Preferred, none outstanding

         

Common stock, $1.00 par value:

             

Authorized—199,990,000 shares

             

Issued—46,296,045 shares at December 31, 2014

             

(46,234,809 shares at December 31, 2013)

    46,296     46,235  

Retained earnings

    1,039,076     862,968  

Accumulated other comprehensive loss

    (799 )   (1,157 )
       

TOTAL STOCKHOLDERS' EQUITY

             

FOR THE RYLAND GROUP, INC.

    1,084,573     908,046  
       

NONCONTROLLING INTEREST

    14,430     15,879  
       

TOTAL EQUITY

    1,099,003     923,925  
       

TOTAL LIABILITIES AND EQUITY

  $ 3,052,089   $ 2,780,342  
   

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY




(in thousands, except per share data)

   

COMMON
STOCK
   

RETAINED
EARNINGS
    ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) INCOME



1
 
TOTAL
STOCKHOLDERS'
EQUITY
 
   

STOCKHOLDERS' EQUITY BALANCE AT JANUARY 1, 2012

  $ 44,414   $ 405,109   $ 164   $ 449,687  

Net income

        40,382         40,382  

Other comprehensive loss, net of tax

            (72 )   (72 )

Common stock dividends (per share $0.12)

        (5,479 )       (5,479 )

Stock-based compensation

    761     18,657         19,418  
       

STOCKHOLDERS' EQUITY
BALANCE AT DECEMBER 31, 2012

  $ 45,175   $ 458,669   $ 92   $ 503,936  

NONCONTROLLING INTEREST

                      21,824  
                         

TOTAL EQUITY BALANCE AT DECEMBER 31, 2012

                    $ 525,760  
   

STOCKHOLDERS' EQUITY BALANCE AT JANUARY 1, 2013

  $ 45,175   $ 458,669   $ 92   $ 503,936  

Net income

        379,205         379,205  

Other comprehensive loss, net of tax

            (1,249 )   (1,249 )

Common stock dividends (per share $0.12)

        (5,590 )       (5,590 )

Stock-based compensation

    1,060     30,684         31,744  
       

STOCKHOLDERS' EQUITY
BALANCE AT DECEMBER 31, 2013

  $ 46,235   $ 862,968   $ (1,157 ) $ 908,046  

NONCONTROLLING INTEREST

                      15,879  
                         

TOTAL EQUITY BALANCE AT DECEMBER 31, 2013

                    $ 923,925  
   

STOCKHOLDERS' EQUITY BALANCE AT JANUARY 1, 2014

  $ 46,235   $ 862,968   $ (1,157 ) $ 908,046  

Net income

        175,799         175,799  

Other comprehensive income, net of tax

            358     358  

Common stock dividends (per share $0.12)

        (5,630 )       (5,630 )

Stock-based compensation

    921     34,767         35,688  

Repurchase of common stock

    (860 )   (28,828 )       (29,688 )
       

STOCKHOLDERS' EQUITY
BALANCE AT DECEMBER 31, 2014

  $ 46,296   $ 1,039,076   $ (799 ) $ 1,084,573  

NONCONTROLLING INTEREST

                      14,430  
                         

TOTAL EQUITY BALANCE AT DECEMBER 31, 2014

                    $ 1,099,003  
   
1
At December 31, 2014, the balance in accumulated other comprehensive loss was comprised of an unrealized actuarial loss on the defined benefit pension plan of $1.0 million, net of taxes of $630,000, and an unrealized gain on marketable securities, available-for-sale of $218,000. At December 31, 2013, the balance in accumulated other comprehensive loss was comprised of an unrealized actuarial loss on the defined benefit pension plan of $1.0 million, net of taxes of $640,000, and an unrealized loss on marketable securities, available-for-sale of $123,000. See Note B, "Accumulated Other Comprehensive Income (Loss)."

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

  YEAR ENDED DECEMBER 31,   

(in thousands)

    2014     2013     2012  
   

CASH FLOWS FROM OPERATING ACTIVITIES

                   

Net income from continuing operations

  $ 175,799   $ 379,099   $ 42,382  

Adjustments to reconcile net income from continuing operations to
net cash used for operating activities:

                   

Depreciation and amortization

    22,916     20,517     15,399  

Inventory and other asset impairments and write-offs

    2,402     2,022     6,262  

Loss on early extinguishment of debt, net

            9,146  

Decrease in deferred tax valuation allowance

        (258,867 )   (11,584 )

Stock-based compensation expense

    18,638     19,503     17,841  

Changes in assets and liabilities:

                   

Increase in inventories

    (406,835 )   (541,973 )   (236,512 )

Increase in mortgage loans held-for-sale

    (13,790 )   (31,626 )   (25,599 )

Decrease in deferred income taxes

    94,138     72,963      

Net change in other assets, payables and other liabilities

    19,761     80,210     72,926  

Excess tax benefits from stock-based compensation

    (5,940 )        

Other operating activities

    (2,407 )   (1,887 )   (1,319 )
       

Net cash used for operating activities from continuing operations

    (95,318 )   (260,039 )   (111,058 )
       

CASH FLOWS FROM INVESTING ACTIVITIES

                   

Contributions to unconsolidated joint ventures

    (137 )   (5,812 )   (559 )

Return of investment in unconsolidated joint ventures

    2,697     2,585     2,869  

Additions to property, plant and equipment

    (23,106 )   (19,908 )   (12,224 )

Purchases of marketable securities, available-for-sale

    (641,669 )   (756,217 )   (1,176,108 )

Proceeds from sales and maturities of marketable securities, available-for-sale

    939,827     829,332     1,140,968  

Cash paid for business acquisitions

        (50,887 )   (80,182 )

Other investing activities

            109  
       

Net cash provided by (used for) investing activities from continuing operations

    277,612     (907 )   (125,127 )
       

CASH FLOWS FROM FINANCING ACTIVITIES

                   

Cash proceeds of long-term debt

        267,500     475,000  

Retirement of long-term debt

            (177,219 )

Increase (decrease) in borrowings against revolving credit facilities, net

    56,305     73,084     (49,933 )

Increase (decrease) in short-term borrowings

    5,082     (5,298 )   2,154  

Common stock dividends

    (5,628 )   (5,533 )   (5,411 )

Common stock repurchases

    (29,688 )        

Issuance of common stock under stock-based compensation

    27,920     28,205     14,366  

Excess tax benefits from stock-based compensation

    5,940          

Decrease (increase) in restricted cash

    54,314     (19,141 )   (13,844 )

Other financing activities

    (3,330 )   (7,972 )   (10,121 )
       

Net cash provided by financing activities from continuing operations

    110,915     330,845     234,992  
       

Net increase (decrease) in cash and cash equivalents from continuing operations

    293,209     69,899     (1,193 )

Cash flows from operating activities—discontinued operations

    (27 )   (25 )   (104 )

Cash flows from investing activities—discontinued operations

        25     75  

Cash and cash equivalents at beginning of year1

    228,013     158,114     159,336  
       

CASH AND CASH EQUIVALENTS AT END OF YEAR2

  $ 521,195   $ 228,013   $ 158,114  
   

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                   

Cash paid for interest, net of capitalized interest

  $ (843 ) $ (5,165 ) $ (12,777 )

Cash paid for income taxes, net

    (6,084 )   (3,704 )   (404 )
   

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
FROM CONTINUING OPERATIONS

                   

Decrease in consolidated inventory not owned related to land options

  $ 1,449   $ 5,945   $ 12,399  
   
1
Includes cash and cash equivalents associated with discontinued operations of $27,000 and $56,000 at December 31, 2013 and 2012, respectively.

2
Includes cash and cash equivalents associated with discontinued operations of $27,000 at December 31, 2013 and 2012.

See Notes to Consolidated Financial Statements.

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Note A: Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its 100 percent-owned subsidiaries. Noncontrolling interest represents the selling entities' ownership interests in land and lot option purchase contracts. (See "Variable Interest Entities" within this footnote.) Intercompany transactions have been eliminated in consolidation. Information is presented on a continuing operations basis unless otherwise noted. The results from continuing and discontinued operations are presented separately in the consolidated financial statements. (See Note N, "Discontinued Operations.") All prior period amounts have been reclassified to conform to the 2014 presentation. (See "Critical Accounting Policies" within Management's Discussion and Analysis of Financial Condition and Results of Operations.)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents totaled $521.2 million and $228.0 million at December 31, 2014 and 2013, respectively. The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less and cash held in escrow accounts to be cash equivalents.

Restricted Cash

At December 31, 2014 and 2013, the Company had restricted cash of $35.7 million and $90.0 million, respectively. The Company has various secured letter of credit agreements that require it to maintain cash deposits as collateral for outstanding letters of credit. Cash restricted under these agreements totaled $33.8 million and $89.5 million at December 31, 2014 and 2013, respectively. In addition, RMC had restricted cash related to funds held in trust for third parties that totaled $1.9 million and $487,000 at December 31, 2014 and 2013, respectively.

Marketable Securities, Available-for-sale

The Company considers its investment portfolio to be available-for-sale. Accordingly, these investments are recorded at their fair values, with unrealized gains or losses recorded in other comprehensive income. (See Note F, "Marketable Securities, Available-for-sale.")

Homebuilding Revenues

In accordance with ASC 976, homebuilding revenues are recognized when home and lot sales are closed; title and possession are transferred to the buyer; and there is no significant continuing involvement from the homebuilder. Sales incentives offset revenues and are recognized when homes are closed.

Housing Inventories

Housing inventory includes land and development costs; direct construction costs; certain capitalized indirect construction costs; capitalized interest; and real estate taxes. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. Inventories to be held and used are stated at cost unless a community is determined to be impaired, in which case the impaired inventories are written down to their fair values.

As required by ASC 360, inventory is reviewed for potential write-downs on an ongoing basis. ASC 360 requires that, in the event that impairment indicators are present and undiscounted cash flows signify that the carrying amount of an asset is not recoverable, impairment charges must be recorded if the fair value of the asset is less than its carrying amount. The Company reviews all communities on a quarterly basis for changes in events or circumstances indicating signs of impairment. Examples of events or changes in circumstances include, but are not limited to, price declines resulting from sustained competitive pressures; a change in the manner in which the asset is being used; a change in assessments by a regulator or municipality; cost increases; the expectation that, more likely than not, an asset will be sold or disposed of significantly before the end of its previously estimated useful life; or the impact of local economic or macroeconomic conditions, such as employment or housing supply, on the market for a

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given product. Signs of impairment may include, but are not limited to, very low or negative profit margins, the absence of sales activity in an open community and/or significant price differences for comparable parcels of land held-for-sale.

If it is determined that indicators of impairment exist in a community, undiscounted cash flows are prepared and analyzed at a community level based on expected pricing; sales absorption rates; construction costs; local municipality fees; warranty, closing, carrying, selling, overhead and other related costs; or on market studies that are performed for comparable parcels of land held-for-sale to determine if the realizable values of the assets held are less than their respective carrying amounts. In order to determine assumed sales prices included in cash flow models, the Company analyzes historical sales prices on homes delivered in the community and in other communities located within the same geographic area, as well as sales prices included in its current backlog for such communities. In addition, it analyzes market studies and trends, which generally include statistics on sales prices of similar products in neighboring communities and sales prices of similar products in non-neighboring communities located within the same geographic area. In order to estimate the costs of building and delivering homes, the Company generally assumes cost structures reflecting contracts currently in place with vendors, adjusted for any anticipated cost-reduction initiatives or increases. The Company's analysis of each community generally assumes current pricing equal to current sales orders for a particular or comparable community. For a minority of communities that the Company does not intend to operate for an extended period of time or where the operating life extends several years, slight increases over current sales prices may be assumed in later years. Once a community is considered to be impaired, the Company's determinations of fair value and new cost basis are primarily based on discounting estimated cash flows at rates commensurate with inherent risks associated with the continuing assets. Due to the fact that estimates and assumptions included in cash flow models are based on historical results and projected trends, unexpected changes in market conditions that may lead to additional impairment charges in the future cannot be anticipated.

Valuation adjustments are recorded against homes completed, homes under construction, land under development or improved lots. Write-downs of impaired inventories to their fair values are recorded as adjustments to the cost basis of the respective inventory. At December 31, 2014 and 2013, valuation reserves related to impaired inventories totaled $122.0 million and $154.8 million, respectively. The net carrying values of the related inventories totaled $137.7 million and $155.9 million at December 31, 2014 and 2013, respectively. The Company periodically writes off earnest money deposits and preacquisition feasibility costs related to land and lot option purchase contracts that it no longer plans to pursue. The Company wrote off $2.5 million, $1.9 million, and $996,000 in preacquisition feasibility costs during the years ended 2014, 2013 and 2012, respectively. Additionally, the Company wrote off $3.2 million of earnest money deposits and $1.9 million of inventory valuation adjustments during 2012. Should homebuilding market conditions weaken or the Company be unsuccessful in renegotiating certain land option purchase contracts, it may write off additional earnest money deposits and preacquisition feasibility costs in future periods.

Interest and taxes are capitalized during active development and construction stages. Capitalized interest is amortized and included in land costs within cost of sales when the related inventory is delivered to homebuyers. The following table summarizes the activity that relates to capitalized interest:

(in thousands)

    2014     2013     2012  
   

Capitalized interest at January 1

  $ 89,619   $ 82,773   $ 81,058  

Interest capitalized

    68,788     59,208     42,327  

Interest amortized to cost of sales

    (50,597 )   (52,362 )   (40,612 )
       

Capitalized interest at December 31

  $ 107,810   $ 89,619   $ 82,773  

Interest incurred

  $ 69,802   $ 68,184   $ 59,503  
   

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The following table summarizes each reporting segment's total number of lots owned and lots controlled under option agreements (unaudited):

  DECEMBER 31, 2014    DECEMBER 31, 2013   

    LOTS
OWNED
    LOTS
OPTIONED
   
TOTAL
    LOTS
OWNED
    LOTS
OPTIONED
   
TOTAL
 
   

North

    7,396     6,335     13,731     6,382     7,455     13,837  

Southeast

    8,646     3,535     12,181     8,114     2,439     10,553  

Texas

    3,938     3,083     7,021     3,886     3,147     7,033  

West

    5,323     717     6,040     5,158     1,561     6,719  
           

Total

    25,303     13,670     38,973     23,540     14,602     38,142  
   

Additionally, at December 31, 2014 and 2013, the Company controlled five lots associated with discontinued operations, all of which were owned.

Goodwill

The Company records goodwill associated with its business acquisitions when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired. Goodwill was included in "Other" assets within the Consolidated Balance Sheets.

The following table provides the Company's goodwill balance by segment at December 31, 2014 and 2013:

(in thousands)

    2014     2013  
   

North

  $ 13,555   $ 13,749  

Southeast

    8,125     8,125  

Texas

    6,550     6,550  

West

    8,661     8,661  
       

Total

  $ 36,891   $ 37,085  
   

ASC No. 350 ("ASC 350"), "Intangibles—Goodwill and Other," requires that goodwill and certain intangible assets be reviewed for impairment at least annually. The Company performs impairment tests of its goodwill annually as of November 30, or whenever significant events or changes occur that indicate impairment of goodwill may exist. ASC 350 allows an entity to qualitatively assess whether it is necessary to perform step one of the prescribed two-step goodwill impairment test. In testing for a potential impairment of goodwill, the Company qualitatively evaluates, based on the weight of available evidence, the significance of all identified events and circumstances in their totality, including both positive and negative events, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of events or changes in circumstances that may indicate that an asset is impaired include, but are not limited to, price declines resulting from sustained competitive pressures; a change in the manner in which the asset is being used; a change in assessments by a regulator or municipality; cost increases; the expectation that, more likely than not, an asset will be sold or disposed of significantly before the end of its previously estimated useful life; or the impact of local economic or macroeconomic conditions, such as employment or housing supply, on the market for a given product. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the two-step goodwill impairment test is not required. The Company performed a qualitative assessment of its goodwill at November 30, 2014 and 2013, and determined that the two-step process was not necessary. The Company recorded no goodwill impairments during the years ended December 31, 2014, 2013 and 2012.

Variable Interest Entities ("VIE")

As required by ASC No. 810 ("ASC 810"), "Consolidation of Variable Interest Entities," a VIE is to be consolidated by a company if that company has a controlling financial interest in the VIE, defined as both the power to direct the VIE's activities that most significantly impact the VIE's economic performance, as well as the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. ASC 810 also requires disclosures about VIEs that a company is not obligated to consolidate, but in which it has a significant, though not primary, variable interest.

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The Company enters into joint ventures, from time to time, for the purpose of acquisition and co-development of land parcels and lots. Its investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. At December 31, 2014 and 2013, all of the Company's joint ventures were unconsolidated and accounted for under the equity method as the Company did not have a financial controlling interest in the joint ventures. (See "Investments in Joint Ventures" within this footnote.) Additionally, in the ordinary course of business, the Company enters into lot option purchase contracts in order to procure land for the construction of homes. Under such lot option purchase contracts, the Company funds stated deposits in consideration for the right to purchase lots at a future point in time at predetermined prices. The Company's liability is generally limited to forfeiture of nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. In accordance with the requirements of ASC 810, certain of the Company's lot option purchase contracts may result in the creation of a variable interest in a VIE.

In compliance with the provisions of ASC 810, the Company consolidated $30.8 million and $33.2 million of inventory not owned related to land and lot option purchase contracts at December 31, 2014 and 2013, respectively. Although the Company may not have had legal title to the optioned land, under ASC 810 it had the primary variable interest and was required to consolidate the particular VIE's assets under option at fair value. To reflect the fair value of the inventory consolidated under ASC 810, the Company included $16.4 million and $17.3 million of its related cash deposits for lot option purchase contracts at December 31, 2014 and 2013, respectively, in "Consolidated inventory not owned" within the Consolidated Balance Sheets. Noncontrolling interest totaled $14.4 million and $15.9 million with respect to the consolidation of these contracts at December 31, 2014 and 2013, respectively, representing the selling entities' ownership interests in the VIE. Additionally, the Company had cash deposits and/or letters of credit totaling $25.0 million and $36.6 million at December 31, 2014 and 2013, respectively, that were associated with lot option purchase contracts having aggregate purchase prices of $368.7 million and $482.8 million, respectively. As the Company did not have the primary variable interest in these contracts, it was not required to consolidate them.

Investments in Joint Ventures

The Company enters into joint ventures, from time to time, for the purpose of acquisition and co-development of land parcels and lots, which are then sold to the Company, its joint venture partners or others at market prices. It participates in a number of joint ventures in which it has less than a controlling interest. As of December 31, 2014, the Company participated in six active homebuilding joint ventures in the Austin, Chicago, Denver, San Antonio and Washington, D.C., markets. The Company recognizes its share of the respective joint ventures' earnings or losses from the sale of lots to other homebuilders. It does not, however, recognize earnings from lots that it purchases from the joint ventures. Instead, the Company reduces its cost basis in each lot by its share of the earnings from the lot.

The following table summarizes each reporting segment's total estimated share of lots owned by the Company under its joint ventures (unaudited) at December 31, 2014 and 2013:

    2014     2013  
   

North

    155     150  

Texas

    242     252  

West

    226     226  
       

Total

    623     628  
   

At December 31, 2014 and 2013, the Company's investments in its unconsolidated joint ventures totaled $12.6 million and $13.6 million, respectively, which included $837,000 and $987,000, respectively, of homebuilding interest capitalized to investments in unconsolidated joint ventures. Its investments in unconsolidated joint ventures were included in "Other" assets within the Consolidated Balance Sheets. The Company's equity in earnings from its unconsolidated joint ventures totaled $1.4 million for the year ended December 31, 2014, and $1.2 million for the years ended December 31, 2013 and 2012 and were included in "Cost of sales" within the Consolidated Statement of Earnings.

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Property, Plant and Equipment

Property, plant and equipment totaled $30.6 million and $25.4 million at December 31, 2014 and 2013, respectively. These amounts are carried at cost less accumulated depreciation and amortization. Depreciation is provided for, principally, by the straight-line method over the estimated useful lives of the assets. Property, plant and equipment included model home furnishings of $28.8 million and $24.1 million at December 31, 2014 and 2013, respectively, which is net of accumulated depreciation of $44.3 million and $37.8 million at December 31, 2014 and 2013, respectively. Model home furnishings are amortized over the life of the community as homes are closed. Amortization expense was included in "Selling, general and administrative" expense within the Consolidated Statements of Earnings.

Warranty Reserves

Warranty reserves are estimated and accrued at the time a home closes and are updated as experience requires. The Company provides product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years. It estimates and records warranty liabilities based upon historical experience and known risks at the time a home closes as a component of cost of sales, as well as upon identification and quantification of its obligations in cases of unexpected claims. Actual future warranty costs could differ from current estimates. (See Note L, "Commitments and Contingencies.")

Legal Reserves

The Company is party to various legal proceedings generally incidental to its businesses. Litigation reserves have been established based on discussions with counsel and on the Company's analysis of historical claims. The Company has, and requires its subcontractors to have, general liability insurance to protect it against a portion of its risk of loss and to cover it against construction-related claims. The Company establishes reserves to cover its self-insured retentions and deductible amounts under those policies. Key assumptions used in these estimates include claim frequencies, severities and settlement patterns, which can occur over an extended period of time. Due to the degree of judgment required and the potential for variability in these underlying assumptions, the Company's actual future costs could differ from those estimated. (See Note L, "Commitments and Contingencies.")

Advertising Costs

The Company expenses advertising costs as they are incurred. Advertising costs totaled $6.0 million, $5.4 million and $4.6 million in 2014, 2013 and 2012, respectively, and were included in "Selling, general and administrative" expense within the Consolidated Statements of Earnings.

Loan Origination Fees, Mortgage Discount Points and Loan Sales

Mortgage loans are recorded at fair value at the time of origination in accordance with ASC No. 825 ("ASC 825"), "Financial Instruments," and are classified as held-for-sale. Fair value measurements of mortgage loans held-for-sale improve the consistency of loan valuation between the date of borrower lock and the date of close. Loan origination fees, net of mortgage discount points, are recognized in current earnings upon origination of the related mortgage loan. Sales of mortgages and the related servicing rights are accounted for in accordance with ASC No. 860 ("ASC 860"), "Transfers and Servicing." Generally, in order for a transfer of financial assets to be recognized as a sale, ASC 860 requires that control of the loans be passed to the investor and that consideration other than beneficial interests be received in return. Interest income is earned from the date a mortgage loan is originated until the loan is sold.

Derivative Instruments

In the normal course of business and pursuant to its risk-management policy, the Company enters, as an end user, into derivative instruments, including forward-delivery contracts for loans; options on forward-delivery contracts; and options on futures contracts, to minimize the impact of movement in market interest rates on IRLCs. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with IRLCs. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. It manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits. The Company elected not to

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use hedge accounting treatment with respect to its economic hedging activities. Accordingly, all derivative instruments used as economic hedges were carried at their fair value in "Other" assets or "Accrued and other liabilities" within the Consolidated Balance Sheets, with changes in values recorded in current earnings. The Company's mortgage pipeline includes IRLCs, which represent commitments that have been extended by the Company to those borrowers who have applied for loan funding and have met certain defined credit and underwriting criteria. (See Note E, "Derivative Instruments.")

Other Income

Other income primarily consists of cancellation income from forfeited sales contract deposits, insurance-related income, interest income and various other types of ancillary income. The Company's other income totaled $2.4 million, $1.7 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Income Taxes

The Company files a consolidated federal income tax return. Certain items of income and expense are included in one period for financial reporting purposes and in another for income tax purposes. Deferred income taxes are provided in recognition of these differences. Deferred tax assets and liabilities are determined based on enacted tax rates and are subsequently adjusted for changes in these rates. A valuation allowance against the Company's deferred tax assets may be established if it is more likely than not that all or some portion of the deferred tax assets will not be realized. A change in deferred tax assets or liabilities results in a charge or credit to deferred tax expense. (See "Critical Accounting Policies" within Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note I, "Income Taxes.")

Per Share Data

The Company computes earnings per share in accordance with ASC No. 260 ("ASC 260"), "Earnings per Share," which requires the presentation of both basic and diluted earnings per common share to be calculated using the two-class method. Basic net earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding. The Company's nonvested outstanding shares of restricted stock with non-forfeitable dividends are classified as participating securities in accordance with ASC 260. As such, earnings or loss for the reporting period are allocated between common shareholders and these participating restricted stockholders, based upon their respective participating rights in dividends and undistributed earnings. For purposes of determining diluted earnings per common share, basic earnings per common share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options and warrants using the treasury stock method and convertible debt using the if-converted method. (See Note D, "Earnings Per Share Reconciliation.")

Stock-Based Compensation

In accordance with the terms of its shareholder-approved equity incentive plans, the Company issues various types of stock awards that include, but are not limited to, grants of stock options and restricted stock units to its employees. The Company records expense associated with these grants in accordance with the provisions of ASC 718, which requires that stock-based payments to employees be recognized, based on their estimated fair values, in the Consolidated Statements of Earnings as compensation expense over the vesting period of the awards.

Additionally, the Company grants stock awards to the non-employee members of its Board of Directors pursuant to its shareholder-approved director stock plan. Stock-based compensation is recognized over the service period for such awards. (See "Critical Accounting Policies" within Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note K, "Stock-Based Compensation.")

New Accounting Pronouncements

ASU 2014-08

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08 ("ASU 2014-08"), "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The amendments in ASU 2014-08 are intended to change the criteria for reporting discontinued

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operations and enhance convergence between U.S. GAAP and International Financial Reporting Standards. Under the new guidance, only disposals representing a strategic shift in operations that has a major effect on the organization's operations and financial results should be presented as a discontinued operation. Additionally, expanded disclosures about discontinued operations are required, as well as disclosure of the pretax income attributable to the disposal of a significant part of an organization that does not qualify as a discontinued operation. A public entity is required to apply the amendments prospectively for annual reporting periods beginning after December 15, 2014, and for interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held-for-sale) that have not been reported in financial statements previously issued or available for issuance. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

ASU 2014-09

In May 2014, the FASB issued ASU No. 2014-09 ("ASU 2014-09"), "Revenue from Contracts with Customers (Topic 606)." The amendments in ASU 2014-09 provide guidance on revenue recognition and supersede the revenue recognition requirements in Topic 605, "Revenue Recognition," most industry-specific guidance and some cost guidance included in Subtopic 605-35, "Revenue Recognition—Construction-Type and Production-Type Contracts." The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than is currently required. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to be included in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning after December 15, 2016. At that time, the Company may adopt the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method of adoption of this guidance and does not anticipate that it will have a material impact on its consolidated financial statements.

Note B: Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the actuarial loss on the defined benefit pension plan and the amortization of this loss, as well as unrealized gains or losses on available-for-sale marketable securities, as reported within the Consolidated Statement of Stockholders' Equity. Changes in accumulated other comprehensive income (loss) are reported as "Other comprehensive income or loss" within the Consolidated Statements of Comprehensive Income. Reclassification adjustments, which represent realized gains or losses on the sales of available-for-sale marketable securities, netted a gain of $329,000 for the year ended December 31, 2014, compared to a net loss of $64,000 and a net gain of $233,000 for the same periods in 2013 and 2012, respectively. Realized gains or losses were included in "Gain from marketable securities, net" within the Consolidated Statements of Earnings.

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The following table summarizes the components of other comprehensive income (loss) for the years ended December 31, 2014, 2013 and 2012:

  YEAR ENDED DECEMBER 31, 2014   

(in thousands)

    GROSS OTHER
COMPREHENSIVE
INCOME (LOSS)
    TAX
(EXPENSE)
BENEFIT
    NET OTHER
COMPREHENSIVE
INCOME (LOSS)
 
   

Amortization of actuarial loss on defined benefit pension plan

  $ 28   $ (11 ) $ 17  

Unrealized gain on marketable securities, available-for-sale:

                   

Unrealized gain on marketable securities, available-for-sale

    670         670  

Less: reclassification adjustments for gains included in net income

    (329 )       (329 )
       

Total unrealized gain on marketable securities, available-for-sale

    341         341  
       

Other comprehensive income

  $ 369   $ (11 ) $ 358  
   



 

YEAR ENDED DECEMBER 31, 2013 

 

Actuarial loss on defined benefit pension plan

  $ (1,674 ) $ 640   $ (1,034 )

Unrealized loss on marketable securities, available-for-sale:

                   

Unrealized loss on marketable securities, available-for-sale            

    (279 )       (279 )

Less: reclassification adjustments for losses included in net income

    64         64  
       

Total unrealized loss on marketable securities, available-for-sale

    (215 )       (215 )
       

Other comprehensive loss

  $ (1,889 ) $ 640   $ (1,249 )
   



 

YEAR ENDED DECEMBER 31, 2012 

 

Reduction of unrealized gain related to cash flow hedging instruments

  $ (1,709 ) $ 653   $ (1,056 )

Unrealized gain on marketable securities, available-for-sale:

                   

Unrealized gain on marketable securities, available-for-sale

    1,217         1,217  

Less: reclassification adjustments for gains included in net income

    (233 )       (233 )
       

Total unrealized gain on marketable securities, available-for-sale

    984         984  
       

Other comprehensive loss

  $ (725 ) $ 653   $ (72 )
   

Note C: Segment Information

The Company is a leading national homebuilder and provider of mortgage-related financial services. As one of the largest single-family on-site homebuilders in the United States, it operates in 17 states across the country. In accordance with ASC No. 280 ("ASC 280"), "Segment Reporting," the Company has identified six reportable segments: four geographically determined homebuilding regions (North, Southeast, Texas and West); financial services; and corporate. The homebuilding segments specialize in the sale and construction of single-family attached and detached housing. The Company's financial services segment, which includes RMC, RHIC and CNRRG, provides mortgage-related products and services, as well as title and escrow services, to its homebuyers. Corporate is a nonoperating business segment with the sole purpose of supporting operations. In order to best reflect the Company's financial condition and results of operations, certain corporate expenses, along with certain assets and liabilities relating to employee benefit plans, are allocated to the homebuilding and financial services segments.

The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings and risk. The accounting policies of the segments are the same as those described in Note A, "Summary of Significant Accounting Policies."

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Selected Segment Information

  YEAR ENDED DECEMBER 31,   

(in thousands)

    2014     2013     2012  
   

REVENUES

                   

Homebuilding

                   

North

  $ 703,094   $ 617,550   $ 393,238  

Southeast

    691,141     597,933     355,621  

Texas

    550,916     448,828     323,162  

West

    624,750     425,064     198,826  

Financial services

    45,168     51,380     37,619  
       

Total

  $ 2,615,069   $ 2,140,755   $ 1,308,466  
   

EARNINGS BEFORE TAXES

                   

Homebuilding

                   

North

  $ 76,354   $ 52,062   $ 11,445  

Southeast

    95,437     65,018     18,191  

Texas

    50,598     38,827     22,809  

West

    81,087     45,919     10,124  

Financial services

    7,447     20,068     13,142  

Corporate and unallocated

    (26,459 )   (26,203 )   (31,744 )
       

Total

  $ 284,464   $ 195,691   $ 43,967  
   

DEPRECIATION AND AMORTIZATION

                   

Homebuilding

                   

North

  $ 5,894   $ 5,819   $ 4,710  

Southeast

    5,186     5,629     4,308  

Texas

    4,587     3,960     2,834  

West

    6,638     4,569     2,984  

Financial services

    289     175     78  

Corporate and unallocated

    322     365     485  
       

Total

  $ 22,916   $ 20,517   $ 15,399  
   

  DECEMBER 31, 2014   

(in thousands)

    HOUSING
INVENTORIES
    OTHER
ASSETS
    TOTAL
ASSETS
 
   

Homebuilding

                   

North

  $ 589,427   $ 47,742   $ 637,169  

Southeast

    518,691     36,994     555,685  

Texas

    347,178     43,042     390,220  

West

    590,527     41,198     631,725  

Financial services

        194,258     194,258  

Corporate and unallocated

        643,032     643,032  
       

Total

  $ 2,045,823   $ 1,006,266   $ 3,052,089  
   

 

  DECEMBER 31, 2013   

Homebuilding

                   

North

  $ 464,777   $ 48,314   $ 513,091  

Southeast

    397,237     24,143     421,380  

Texas

    290,018     37,310     327,328  

West

    497,751     30,248     527,999  

Financial services

        193,652     193,652  

Corporate and unallocated

        796,862     796,862  
       

Total

  $ 1,649,783   $ 1,130,529   $ 2,780,312  
   

Note D: Earnings Per Share Reconciliation

The Company computes earnings per share in accordance with ASC 260, which requires earnings per share for each class of stock to be calculated using the two-class method. The two-class method is the method by which a company allocates earnings or loss between the holders of its common stock and its participating security holders. Under the two-class method, the allocation of earnings or loss between common shareholders and other security holders is based on their respective participation rights in dividends and undistributed earnings for the reporting period. All outstanding nonvested shares of

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restricted stock that contain non-forfeitable rights to dividends are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Company's nonvested shares of restricted stock with non-forfeitable rights to dividends are considered participating securities in accordance with ASC 260. As all of the nonvested shares of restricted stock with non-forfeitable rights to dividends vested as of March 31, 2014, the Company had no outstanding participating securities as of December 31, 2014. For purposes of determining diluted earnings per common share, basic earnings per common share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options and warrants using the treasury stock method and convertible debt using the if-converted method.

The following table displays the computation of basic and diluted earnings per share:

  YEAR ENDED DECEMBER 31,   

(in thousands, except share data)

    2014     2013     2012  
   

NUMERATOR

                   

Net income from continuing operations

  $ 175,799   $ 379,099   $ 42,382  

Net income (loss) from discontinued operations

        106     (2,000 )

Less: distributed earnings allocated to nonvested restricted stock

        (13 )   (42 )

Less: undistributed earnings allocated to nonvested restricted stock

    (56 )   (1,135 )   (313 )
       

Numerator for basic earnings per share

    175,743     378,057     40,027  
       

Plus: interest on 1.6 percent convertible senior notes due 2018

    2,916     2,916     1,829  

Plus: interest on 0.25 percent convertible senior notes due 2019

    1,197     710      

Plus: undistributed earnings allocated to nonvested restricted stock

    56     1,135     313  

Less: undistributed earnings reallocated to nonvested restricted stock

    (45 )   (931 )   (284 )
       

Numerator for diluted earnings per share

  $ 179,867   $ 381,887   $ 41,885  
       

DENOMINATOR

                   

Basic earnings per share—weighted-average shares

    46,579,641     45,966,307     44,761,178  

Effect of dilutive securities:

                   

Share-based payments

    1,048,782     1,031,656     487,443  

1.6 percent convertible senior notes due 2018

    7,023,780     7,023,780     4,406,700  

0.25 percent convertible senior notes due 2019

    3,565,962     2,198,196      

Diluted earnings per share—adjusted

                   
       

weighted-average shares and assumed conversions

    58,218,165     56,219,939     49,655,321  
       

NET INCOME (LOSS) PER COMMON SHARE

                   

Basic

                   

Continuing operations

  $ 3.77   $ 8.22   $ 0.93  

Discontinued operations

    0.00     0.00     (0.04 )
       

Total

    3.77     8.22     0.89  

Diluted

                   

Continuing operations

    3.09     6.79     0.88  

Discontinued operations

    0.00     0.00     (0.04 )
       

Total

  $ 3.09   $ 6.79   $ 0.84  
   

Note E: Derivative Instruments

The Company, which uses derivative financial instruments in its normal course of operations, has no derivative financial instruments that are held for trading purposes.

The following table presents the contract or notional amounts of the Company's derivative financial instruments:

  DECEMBER 31,   

(in thousands)

    2014     2013  
   

Mortgage interest rate lock commitments

  $ 147,969   $ 269,210  

Hedging contracts:

             

Forward-delivery contracts

  $ 79,000   $ 118,000  
   

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IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement. During 2013, the increasing interest rate environment resulted in loan commitments being extended up to 270 days. IRLCs expose the Company to market risk if mortgage rates increase. IRLCs had interest rates generally ranging from 3.5 percent to 5.3 percent at December 31, 2014 and 2013.

Hedging contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movement in interest rates on IRLCs. The selection of hedging contracts is based upon the Company's secondary marketing strategy, which establishes a risk-tolerance level. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with IRLCs. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. The Company manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits. The Company records its IRLCs and forward delivery contracts at fair value. (See Note G, "Fair Values of Financial and Nonfinancial Instruments.")

Note F: Marketable Securities, Available-for-sale

The Company's investment portfolio includes U.S. Treasury securities; obligations of U.S. government agencies; municipal debt securities; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. These investments are primarily held in the custody of a single financial institution. The Company considers its investment portfolio to be available-for-sale as defined in ASC No. 320 ("ASC 320"), "Investments—Debt and Equity Securities." Accordingly, these investments are recorded at their fair values. The cost of securities sold is based on an average-cost basis. Unrealized gains and losses on these investments were included in "Accumulated other comprehensive loss" within the Consolidated Balance Sheets.

The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost bases, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Gross unrealized losses related to the Company's available-for-sale securities have been in continuous unrealized loss positions for less than 12 months. At December 31, 2014 and 2013, the Company believed that the cost bases for these securities were recoverable in all material respects.

For the years ended December 31, 2014, 2013 and 2012, net realized earnings associated with the Company's investment portfolio, which includes interest, dividends and net realized gains on sales of marketable securities, totaled $1.5 million, $1.8 million and $2.2 million, respectively. These earnings were included in "Gain from marketable securities, net" within the Consolidated Statements of Earnings. Realized gains or losses on the sales of marketable securities were included as reclassification adjustments, which are a component of other comprehensive income. (See Note B, "Accumulated Other Comprehensive Income (Loss).")

The primary objectives of the Company's investment portfolio are safety of principal and liquidity. Investments are made with the purpose of achieving the highest rate of return consistent with these two objectives. The Company's investment policy limits investments to debt rated investment grade or better, as well as to bank and money market instruments and to issues by the U.S. government, U.S. government agencies and municipal or other institutions primarily with investment-grade credit ratings. Policy restrictions are placed on maturities, as well as on concentration by type and issuer.

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The following table displays the fair values of marketable securities, available-for-sale, by type of security:

  DECEMBER 31, 2014   

(in thousands)

    AMORTIZED
COST
    GROSS
UNREALIZED
GAINS
    GROSS
UNREALIZED
LOSSES
    ESTIMATED
FAIR VALUE
 
   

Type of security:

                         

U.S. Treasury securities

  $ 350   $   $   $ 350  

Municipal debt securities

    13,529     1,715     (61 )   15,183  
       

Total debt securities

    13,879     1,715     (61 )   15,533  

Time deposits

    7,511             7,511  
       

Total marketable securities, available-for-sale            

  $ 21,390   $ 1,715   $ (61 ) $ 23,044  
   

  DECEMBER 31, 2013   

Type of security:

                         

U.S. Treasury securities

  $ 76,355   $ 149   $   $ 76,504  

Obligations of U.S. government agencies

    17,074     2     (8 )   17,068  

Municipal debt securities

    33,492     492     (1,008 )   32,976  

Corporate debt securities

    157,798     102     (21 )   157,879  

Asset-backed securities

    20,433     76     (20 )   20,489  
       

Total debt securities

    305,152     821     (1,057 )   304,916  

Time deposits

    1,606             1,606  

Short-term pooled investments

    6,633             6,633  
       

Total marketable securities, available-for-sale            

  $ 313,391   $ 821   $ (1,057 ) $ 313,155  
   

The following table displays the fair values of marketable securities, available-for-sale, by contractual maturity:

  DECEMBER 31,   

(in thousands)

    2014     2013  
   

Contractual maturity:

             

Maturing in one year or less

  $ 350   $ 129,384  

Maturing after one year through three years

        154,169  

Maturing after three years

    15,183     21,363  
       

Total debt securities

    15,533     304,916  

Time deposits and short-term pooled investments

    7,511     8,239  
       

Total marketable securities, available-for-sale

  $ 23,044   $ 313,155  
   

Note G: Fair Values of Financial and Nonfinancial Instruments

Financial Instruments

The Company's financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by the assumptions used. As required by ASC No. 820 ("ASC 820"), "Fair Value Measurements and Disclosures," fair value measurements of financial instruments are categorized as Level 1, Level 2 or Level 3, based on the types of inputs used in estimating fair values.

Level 1 fair values are those determined using quoted market prices in active markets for identical assets or liabilities. Level 2 fair values are those determined using directly or indirectly observable inputs in the marketplace that are other than Level 1 inputs. Level 3 fair values are those determined using unobservable inputs, including the use of internal assumptions, estimates or models. Valuations, therefore, are sensitive to the assumptions used for these items. Fair values represent the Company's best estimates as of the balance sheet date and are based on existing conditions and available information at the issuance date of these financial statements. Subsequent changes in conditions or available information may change assumptions and estimates.

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The carrying values of cash, cash equivalents, restricted cash and secured notes payable are reported in the Consolidated Balance Sheets and approximate their fair values due to their short-term natures and liquidity. The aggregate carrying value of the senior notes, net of discount, reported at December 31, 2014 and 2013, was $1.4 billion. The aggregate fair values of the senior notes and convertible senior notes were $1.5 billion and $1.6 billion at December 31, 2014 and 2013, respectively. The fair values of the Company's senior notes and convertible senior notes have been determined using quoted market prices (Level 2).

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

  FAIR VALUE AT DECEMBER 31,   

(in thousands)

  HIERARCHY     2014     2013  
   

Marketable securities, available-for-sale:

                 

U.S. Treasury securities

  Level 1   $ 350   $ 76,504  

Obligations of U.S. government agencies

  Level 1         17,068  

Municipal debt securities

  Level 2     15,183     32,976  

Corporate debt securities

  Level 2         157,879  

Asset-backed securities

  Level 2         20,489  

Time deposits

  Level 2     7,511     1,606  

Short-term pooled investments

  Level 1         6,633  

Mortgage loans held-for-sale

  Level 2     153,366     139,576  

Mortgage interest rate lock commitments

  Level 2     4,229     5,218  

Forward-delivery contracts

  Level 2     (2,141 )   2,261  
   

Marketable Securities, Available-for-sale

At December 31, 2014 and 2013, the Company had $23.0 million and $313.2 million, respectively, of marketable securities that were available-for-sale and comprised of U.S. Treasury securities; obligations of U.S. government agencies; municipal debt securities; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. The Company's marketable securities, available-for-sale that were identified as Level 2 were valued based on quoted market prices of similar instruments. (See Note F, "Marketable Securities, Available-for-sale.")

Other Financial Instruments

Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). IRLCs are valued at their aggregate market price premium or deficit, plus a servicing premium, multiplied by the projected close ratio (Level 2). The market price premium or deficit is based on quoted market prices of similar instruments; the servicing premium is based on contractual investor guidelines for each product; and the projected close ratio is determined utilizing an external modeling system, widely used within the industry, to estimate customer behavior at an individual loan level.

At December 31, 2014 and 2013, contractual principal amounts of mortgage loans held-for-sale totaled $147.9 million and $137.5 million, respectively. The excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value totaled $5.4 million and $2.1 million at December 31, 2014 and 2013, respectively. These amounts were included in "Financial services" revenues within the Consolidated Statements of Earnings. At December 31, 2014, the Company held one repurchased loan with payments 90 days or more past due that had an aggregate carrying value of $219,000 and an aggregate unpaid principal balance of $340,000. At December 31, 2013, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $467,000 and an aggregate unpaid principal balance of $738,000.

In accordance with ASC No. 825 ("ASC 825"), "Financial Instruments," the Company elected the fair value option for its IRLCs and its forward delivery contracts. The fair values of IRLCs were included in "Other" assets within the Consolidated Balance Sheets, and the fair values of forward-delivery contracts were included in "Other" assets and "Accrued and other liabilities" within the Consolidated Balance Sheets. Losses realized on the IRLC pipeline, including activity and changes in fair value, totaled $988,000 for the year ended December 31, 2014, compared to gains of $480,000 and $1.4 million for the years ended December 31, 2013 and 2012, respectively. Losses on forward-delivery contracts used to hedge IRLCs totaled $12.6 million, compared to gains on forward-delivery contracts used to hedge IRLCs that totaled

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$8.8 million for the year ended December 31, 2013, and losses on forward-delivery contracts that totaled $8.1 million for the year ended December 31, 2012. Gains on loan sales totaled $32.3 million, $17.0 million and $26.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Net gains and losses related to IRLCs, forward-delivery contracts and loan sales were included in "Financial services" revenues within the Consolidated Statements of Earnings.

While recorded fair values represent management's best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, IRLCs and forward-delivery contracts, among other factors, could materially impact these fair values.

Nonfinancial Instruments

In accordance with ASC 820, the Company measures certain nonfinancial homebuilding assets at their fair values on a nonrecurring basis. See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies," for further discussion of the valuation of the Company's nonfinancial assets. There were no housing inventory impairments during the years ended December 31, 2014 and 2013. In accordance with ASC No. 330, ("ASC 330"), "Inventory," the fair value of housing inventory that was impaired during 2012 totaled $2.9 million. Impairment charges related to these assets totaled $1.9 million for the year ended December 31, 2012.

There were no impairments recorded on other assets held-for-sale during the year ended December 31, 2014. The fair values of other assets held-for-sale that were impaired during 2013 totaled $596,000 at December 31, 2013. Impairment charges related to these assets totaled $154,000 for the year ended December 31, 2013. The fair values of other assets held-for-sale that were impaired during 2012 totaled $263,000 at December 31, 2012. Impairment charges related to these assets totaled $41,000 for the year ended December 31, 2012.

There were no impairments recorded on investments in joint ventures for the years ended 2014 and 2013. The fair values of investments in joint ventures that were impaired during 2012 totaled $1.3 million at December 31, 2012. Impairment charges related to these assets totaled $40,000 for the year ended December 31, 2012.

Note H: Debt and Credit Facilities

The following table presents the composition of the Company's debt and financial services credit facilities at December 31, 2014 and 2013:

(in thousands)

    2014     2013  
   

Senior notes

             

5.4 percent senior notes due January 2015

  $ 126,481   $ 126,481  

8.4 percent senior notes due May 2017

    230,000     230,000  

6.6 percent senior notes due May 2020

    300,000     300,000  

5.4 percent senior notes due October 2022

    250,000     250,000  

Convertible senior notes

             

1.6 percent convertible senior notes due May 2018

    225,000     225,000  

0.25 percent convertible senior notes due June 2019

    267,500     267,500  
       

Total senior notes and convertible senior notes

    1,398,981     1,398,981  

Debt discount

    (1,673 )   (2,362 )
       

Senior notes and convertible senior notes, net

    1,397,308     1,396,619  

Secured notes payable

    5,771     689  
       

Total debt

  $ 1,403,079   $ 1,397,308  

Financial services credit facilities

  $ 129,389   $ 73,084  
   

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At December 31, 2014, maturities of the Company's debt and financial services credit facilities were scheduled as follows:

(in thousands)

       
   

2015

  $ 257,854  

2016

    3,787  

2017

    230,000  

2018

    225,000  

2019

    267,500  

After 2019

    550,000  
       

Total

  $ 1,534,141  
   

Each of the senior notes pays interest semiannually and all, except for the convertible senior notes due May 2018 and June 2019, may be redeemed at a stated redemption price, in whole or in part, at the option of the Company at any time.

During 2013, the Company issued $267.5 million of 0.25 percent convertible senior notes due June 2019. The Company will pay interest on the notes on June 1 and December 1 of each year, which commenced on December 1, 2013. The notes, which mature on June 1, 2019, are initially convertible into shares of the Company's common stock at a conversion rate of 13.3307 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $75.01 per share and represents a conversion premium of approximately 50.0 percent, based on the closing price of the Company's common stock on May 14, 2013, which was $50.01 per share. The conversion rate of the notes is subject to adjustment upon the following events: the Company issues a dividend or distribution in shares of common stock on all or substantially all of its shares of common stock; the Company subdivides or combines common stock; the Company offers its stockholders the option to purchase additional shares at a price that is less than the average closing price of its common stock from the ten previous trading days; the Company distributes shares of common stock or offers its holders of common stock the option to purchase capital stock or other securities; a corporate spin-off event occurs; the Company pays dividends or distributions to a stockholder, other than a dividend or distribution due to liquidation or a regular cash dividend that does not exceed $0.03 per share per quarter; the Company makes a payment in respect of a tender offer for its common stock that exceeds the average closing price of its common stock from the ten previous trading days; a make-whole adjustment event occurs; or a redemption notice occurs, which includes a change in control or termination of trading. These events may not be considered standard anti-dilution provisions under a conventional convertible debt security scenario. An event that adversely affects the value of the notes may occur, and that event may not result in an adjustment to the conversion rate. All of the conversion rate adjustment events are intended to make the investor whole for the direct effect that the occurrence of such above mentioned dilutive events should have on the price of the underlying shares; they do not adjust for the actual change in the market value of the underlying shares. Therefore, the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. At any time prior to the close of business on the business day immediately preceding the stated maturity date, holders may convert all or any portion of their notes. The notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's Guarantor Subsidiaries. The Company may not redeem the notes prior to June 6, 2017. On or after that date, it may redeem for cash any or all of the notes, at its option, if the closing sale price of its common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending within 5 trading days immediately preceding the date on which it provides notice of redemption, including the last trading day of such 30 day trading period, exceeds 130 percent of the applicable conversion price on each applicable trading day. The redemption price will equal 100 percent of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. The Company received net proceeds of $260.1 million from this offering prior to offering expenses.

During 2012, the Company issued $250.0 million of 5.4 percent senior notes due October 2022. The Company will pay interest on the notes on April 1 and October 1 of each year, which commenced on April 1, 2013. It received net proceeds of $246.6 million from this offering prior to offering expenses. The

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notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's Guarantor Subsidiaries.

Additionally during 2012, the Company issued $225.0 million of 1.6 percent convertible senior notes due May 2018. The Company will pay interest on the notes on May 15 and November 15 of each year, which commenced on November 15, 2012. At any time prior to the close of business on the business day immediately preceding the stated maturity date, holders may convert all or any portion of their convertible senior notes. These notes will mature on May 15, 2018, unless converted earlier by the holder, at its option, or purchased by the Company upon the occurrence of a fundamental change. These notes are initially convertible into shares of the Company's common stock at a conversion rate of 31.2168 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $32.03 per share and represents a conversion premium of approximately 42.5 percent, based on the closing price of the Company's common stock on May 10, 2012, which was $22.48 per share. The conversion rate of the notes is subject to adjustment upon the following events: the Company issues a dividend or distribution in shares of common stock on all or substantially all of its shares of common stock; the Company subdivides or combines common stock; the Company offers its stockholders the option to purchase additional shares at a price that is less than the average closing price of its common stock from the ten previous trading days; the Company distributes shares of common stock or offers its holders of common stock the option to purchase capital stock or other securities; a corporate spin-off event occurs; the Company pays dividends or distributions to a stockholder, other than a dividend or distribution due to liquidation or a regular cash dividend that does not exceed $0.03 per share per quarter; the Company makes a payment in respect of a tender offer for its common stock that exceeds the average closing price of its common stock from the ten previous trading days; or a make-whole adjustment event occurs, which includes a change in control or termination of trading. These events may not be considered standard anti-dilution provisions under a conventional convertible debt security scenario. An event that adversely affects the value of the notes may occur, and that event may not result in an adjustment to the conversion rate. All of the conversion rate adjustment events are intended to make the investor whole for the direct effect that the occurrence of such above-mentioned dilutive events should have on the price of the underlying shares; they do not adjust for the actual change in the market value of the underlying shares. Therefore, the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. The notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's Guarantor Subsidiaries. The Company may not redeem the notes prior to the stated maturity date. No sinking fund is provided for the notes. The Company received net proceeds of $218.8 million from this offering prior to offering expenses.

The Company did not redeem or repurchase any debt during the years ended December 31, 2014 and 2013. For the year ended December 31, 2012, the Company paid $177.2 million to redeem and repurchase $167.2 million of its 6.9 percent senior notes due June 2013, resulting in a loss of $9.1 million. The loss resulting from this debt repurchase was included in "Loss related to early retirement of debt, net" within the Consolidated Statements of Earnings.

In January 2015, the Company used existing cash of $126.5 million to settle its 5.4 percent senior notes that matured. (See Note P, "Subsequent Event.")

To provide letters of credit required in the ordinary course of its business, the Company has various secured letter of credit agreements that require it to maintain restricted cash deposits for outstanding letters of credit. Outstanding letters of credit totaled $33.3 million and $93.6 million under these agreements at December 31, 2014 and 2013, respectively.

To finance its land purchases, the Company may also use nonrecourse secured notes payable. Outstanding seller-financed nonrecourse secured notes payable totaled $5.8 million and $689,000 at December 31, 2014 and 2013, respectively.

Senior notes; convertible senior notes; credit facilities; and indenture agreements are subject to certain covenants that include, among other things, restrictions on additional secured debt and the sale of assets. The Company was in compliance with these covenants at December 31, 2014.

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During 2014, the Company entered into a $300.0 million unsecured four-year revolving Credit Facility agreement. The Credit Facility provides for a $300.0 million Revolving Credit Facility, which includes a $150.0 million Letter of Credit Subfacility and a $25.0 million swing line facility. In addition, the Credit Facility includes an accordion feature pursuant to which the commitments under the Revolving Credit Facility may be increased, from time to time, up to a principal amount not to exceed $450.0 million, subject to the terms and conditions set forth in the agreement. The commitments for the Letter of Credit Subfacility are not to exceed half of the amount of the commitments for the Revolving Credit Facility. The Credit Facility, which matures on November 21, 2018, provides for the commitments to be extended for up to two additional one-year periods, subject to satisfaction of the terms and conditions set forth therein.

The obligation of the lenders to make advances or issue letters of credit under the Credit Facility is subject to the satisfaction of certain conditions set forth in the credit agreement. If the leverage ratio of the Company and its homebuilding segment subsidiaries exceeds certain thresholds as set forth in the Credit Facility, availability under the Revolving Credit Facility will be subject to a borrowing base as set forth in the agreement.

The Credit Facility contains various representations and warranties, as well as affirmative, negative and financial covenants that the Company considers customary for financings of this type. The financial covenants in the Credit Facility include a maximum leverage ratio covenant; a minimum net worth test; and a minimum interest coverage test or a minimum liquidity test. The financial services segment subsidiaries of the Company are unrestricted subsidiaries under the Credit Facility and certain covenants of the agreement do not apply to the unrestricted subsidiaries. The Credit Facility includes event of default provisions that the Company considers customary for financings of this type. If an event of default under the Credit Facility occurs and is continuing, the commitments under the agreement may be terminated; the amounts outstanding, including all accrued interest and unpaid fees, may be declared payable immediately; and the Company may be required to cash collateralize the outstanding letters of credit issued under this facility. The Credit Facility will be used for general corporate purposes. Certain letters of credit issued and outstanding prior to the Company's entry into the Credit Facility have been deemed letters of credit under the facility and made subject to its terms. Amounts borrowed under the Credit Facility are guaranteed on a joint and several basis by substantially all of the Company's 100 percent-owned homebuilding subsidiaries. Such guarantees are full and unconditional. (See Note M, "Supplemental Guarantor Information.")

Outstanding borrowings under the Credit Facility will bear interest at a fluctuating rate per annum that is equal to the base rate or the reserve adjusted LIBOR rate in each case, plus an applicable margin determined based on changes in the leverage ratio of the Company and its homebuilding segment subsidiaries. The Company did not have any outstanding borrowings against the Revolving Credit Facility at December 31, 2014. Under the Letter of Credit Subfacility, however, the Company had unsecured letters of credit outstanding that totaled $67.7 million at December 31, 2014. The unused borrowing capacity of the Credit Facility at December 31, 2014, totaled $232.3 million.

During 2014, RMCMC entered into a $50.0 million warehouse line of credit with Comerica Bank, which will expire in April 2015. This facility is used to fund, and is secured by, mortgages that were originated by RMCMC and are pending sale. Under the terms of this facility, RMCMC is required to maintain various financial and other covenants and to satisfy certain requirements relating to the mortgages securing the facility. At December 31, 2014, RMCMC was in compliance with these covenants. RMCMC had outstanding borrowings against this facility that totaled $48.5 million at December 31, 2014. The weighted-average effective interest rate on the outstanding borrowings against this credit facility was 3.0 percent at December 31, 2014.

During 2011, RMCMC entered into a $50.0 million repurchase credit facility with JPM, which was subsequently increased to $75.0 million during 2012 and to $100.0 million during 2014, and will expire in November 2015. This facility is used to fund, and is secured by, mortgages that were originated by RMCMC and are pending sale. Under the terms of the facility, RMCMC is required to maintain various financial and other covenants and to satisfy certain requirements relating to the mortgages securing the facility. At December 31, 2014, RMCMC was in compliance with these covenants. RMCMC had outstanding borrowings against this facility that totaled $80.9 million and $73.1 million at December 31, 2014 and 2013,

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respectively. The weighted-average effective interest rates on the outstanding borrowings against this credit facility were 3.2 and 3.4 percent at December 31, 2014 and 2013, respectively.

Note I: Income Taxes

Deferred tax assets are recognized for estimated tax effects that are attributable to deductible temporary differences and tax carryforwards related to tax credits and NOLs. They are realized when existing temporary differences are carried back to a profitable year(s) and/or carried forward to a future year(s) having taxable income. Deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of these assets will not be realized. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses; actual earnings; forecasts of future earnings; the duration of statutory carryforward periods; the Company's experience with NOL carryforwards not expiring unused; and tax planning alternatives.

Based on an evaluation of positive and negative evidence regarding the Company's ability to realize its deferred tax assets and in accordance with ASC No. 740 ("ASC 740"), "Income Taxes," at June 30, 2013, it concluded that the positive evidence outweighed the negative evidence and that it was more likely than not that all of its deferred tax assets would be realized. As a result, the Company reversed its $258.9 million deferred tax valuation allowance against its deferred tax assets during 2013. At December 31, 2014 and 2013, the Company had net deferred tax assets of $91.8 million and $185.9 million, respectively. There was no valuation allowance as of December 31, 2014 or 2013.

Changes in positive and negative evidence, including differences between the Company's future operating results and estimates, could result in the establishment of a valuation allowance against its deferred tax assets. Given that the accounting for deferred taxes is based upon estimates of future results, differences between the anticipated and actual outcomes of these future results could have a material impact on the Company's consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company's deferred tax assets.

For federal purposes, NOLs can be carried forward 20 years; for state purposes, they can generally be carried forward 10 to 20 years, depending on the taxing jurisdiction. As of December 31, 2014, the Company does not have any federal NOL carryforwards. The Company has other carryforwards primarily composed of federal tax credits that can be carried forward 20 years with expiration dates beginning in 2029. The Company anticipates full utilization of these tax credits.

The Company's provision for income tax presented an overall effective income tax expense rate of 38.2 percent for the year ended December 31, 2014, compared to an overall effective tax benefit rate of 93.7 percent for 2013 and an overall effective income tax expense rate of 3.8 percent for 2012. The changes in overall effective income tax rates for 2014, 2013 and 2012 were primarily due to the reversal of the Company's deferred tax asset valuation allowance during the respective years.

The following table reconciles the federal income tax statutory rate to the Company's effective income tax rate for the years ended December 31, 2014, 2013 and 2012:

    2014     2013     2012  
   

Federal income tax statutory rate

    35.0 %   35.0 %   35.0 %

State income taxes, net of federal tax

    3.2     3.2     3.5  

Deferred tax valuation allowance

        (132.2 )   (39.3 )

Compensation expense

    0.1     0.1     2.7  

Other

    (0.1 )   0.2     1.9  
       

Effective income tax rate

    38.2 %   (93.7 )%   3.8 %
   

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The Company's income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012, is summarized as follows:

(in thousands)

    2014     2013     2012  
   

CURRENT TAX EXPENSE (BENEFIT)

                   

Federal

  $ 1,891   $ (75 ) $ 568  

State

    1,731     471     1,017  
       

Total current tax expense

    3,622     396     1,585  

DEFERRED TAX EXPENSE (BENEFIT)

                   

Federal

    97,210  <