Edgar Filing: MDC HOLDINGS INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


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

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

(303) 773-1100

(Registrant’s telephone number, including area code)

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

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

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

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

As of June 30, 2011, 47,530,000 shares of M.D.C. Holdings, Inc. common stock were outstanding.

M.D.C. HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2011

INDEX


			Page No.
Part I.	Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2011 and December 31, 2010		1

		Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010		2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		3

		Notes to Unaudited Consolidated Financial Statements		4

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		51

	Item 4.	Controls and Procedures		51

Part II.	Other Information:

	Item 1.	Legal Proceedings		52

	Item 1A.	Risk Factors		53

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

	Item 3.	Defaults Upon Senior Securities		54

	Item 4.	(Removed and Reserved)		54

	Item 5.	Other Information		55

	Item 6.	Exhibits		55

	Signatures			56

ITEM 1.

Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	June 30, 2011			December 31, 2010
Assets
Cash and cash equivalents	$	755,835		$	572,225
Marketable securities		646,895			968,729
Restricted cash		604			420
Receivables
Home sales receivables		7,797			8,530
Income taxes receivable		-			2,048
Other receivables		8,661			9,432
Mortgage loans held-for-sale, net		39,200			65,114
Inventories, net
Housing completed or under construction		336,514			372,422
Land and land under development		524,234			415,237
Property and equipment, net		38,769			40,826
Deferred tax asset, net of valuation allowance of $252,209 and $231,379at June 30, 2011 and December 31, 2010, respectively		-			-
Related party assets		7,393			7,393
Prepaid expenses and other assets, net		54,402			85,393

Total Assets	$	2,420,304		$	2,547,769

Liabilities
Accounts payable	$	29,108		$	35,018
Accrued liabilities		204,890			260,729
Income taxes payable		734			-
Related party liabilities		117			90
Mortgage repurchase facility		8,988			25,434
Senior notes, net		1,243,273			1,242,815

Total Liabilities		1,487,110			1,564,086

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.01 par value; 250,000,000 shares authorized; 47,530,000 and 47,474,000 issued and outstanding, respectively, at June 30, 2011 and 47,198,000 and 47,142,000 issued and outstanding, respectively,at December 31, 2010		475			472
Additional paid-in-capital		839,964			820,237
Retained earnings		87,198			158,749
Accumulated other comprehensive income		6,216			4,884
Treasury stock, at cost; 56,000 shares at June 30, 2011 and December 31, 2010		(659	)		(659	)

Total Stockholders’ Equity		933,194			983,683

Total Liabilities and Stockholders’ Equity	$	2,420,304		$	2,547,769

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

- 1 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue

Home sales revenue	$	206,163		$	311,276		$	369,546		$	452,219
Land sales revenue		2,565			5,699			2,769			5,714
Other revenue		6,957			9,355			13,117			15,475

Total Revenue		215,685			326,330			385,432			473,408

Costs and expenses

Home cost of sales		179,097			255,062			320,078			364,452
Land cost of sales		1,741			4,974			1,758			5,165
Asset impairments		9,119			-			9,398			-
Marketing expenses		9,897			11,475			19,730			18,535
Commission expenses		7,456			11,611			13,223			16,740
General and administrative expenses		36,237			44,588			72,989			84,791
Other operating expenses		2,447			529			897			1,020
Related party expenses		28			-			32			9

Total operating costs and expenses		246,022			328,239			438,105			490,712

Loss from operations		(30,337	)		(1,909	)		(52,673	)		(17,304	)

Other income (expense)
Interest income		7,872			7,541			15,198			11,969
Interest expense		(7,394	)		(9,436	)		(16,124	)		(19,810	)
Other		56			105			92			204

Loss before income taxes		(29,803	)		(3,699	)		(53,507	)		(24,941	)

Benefit from income taxes, net		1,823			15			5,648			384

Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)

Loss per share

Basic	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Diluted	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

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

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

- 2 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2011			2010
Operating Activities
Net loss	$	(47,859	)	$	(24,557	)
Adjustments to reconcile net loss to net cash used in operating activities
Asset impairments		9,398			-
Stock-based compensation expense		6,680			8,202
Amortization of deferred marketing costs		4,850			5,528
Depreciation and amortization of long-lived assets		3,217			2,573
Write-offs of land option deposits and pre-acquisition costs		2,907			873
Other non-cash (income) expenses		359			322
Net changes in assets and liabilities:
Restricted cash		(184	)		(237	)
Home sales and other receivables		1,504			(35,608	)
Income taxes receivable		17,431			144,503
Mortgage loans held-for-sale		25,914			(49,750	)
Housing completed or under construction		51,411			(122,647	)
Land and land under development		(107,890	)		(105,669	)
Prepaid expenses and other assets		(6,226	)		(14,629	)
Accounts payable		(5,910	)		15,801
Accrued liabilities and related party liabilities		(24,859	)		(3,639	)

Net cash used in operating activities		(69,257	)		(178,934	)

Investing Activities
Purchase of marketable securities		(404,472	)		(722,159	)
Maturity of marketable securities		451,000			88,287
Sales of marketable securities		275,726			20,797
Purchase of property and equipment and other		(29,295	)		(5,072	)

Net cash provided by (used in) investing activities		292,959			(618,147	)

Financing Activities
Payment on mortgage repurchase facility		(47,115	)		(45,470	)
Advances on mortgage repurchase facility		30,669			81,660
Dividend payments		(23,692	)		(23,570	)
Proceeds from issuance of senior notes		-			242,288
Proceeds from exercise of stock options		46			53

Net cash (used in) provided by financing activities		(40,092	)		254,961

Net increase (decrease) in cash and cash equivalents		183,610			(542,120	)
Cash and cash equivalents
Beginning of period		572,225			1,234,252

End of period	$	755,835		$	692,132

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

- 3 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. (“MDC” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at June 30, 2011 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 11, 2011.

The Consolidated Statements of Operations for the three and six months ended June 30, 2011 and Consolidated Statements of Cash Flows for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year. Refer to the economic conditions described under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Risk Factors Relating to our Business” in Item 1A of the Company’s December 31, 2010 Annual Report on Form 10-K.

2.	Fair Value Measurements

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

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents. For cash and cash equivalents, the fair value approximates carrying value.

Marketable Securities. The Company’s marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of June 30, 2011 all of the Company’s marketable securities are treated as available-for-sale investments and, as such, the Company has recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income during the three and six months ended June 30, 2011. As of December 31, 2010, the Company classified certain marketable securities as held-to-maturity as it had the intent and ability to hold its held-to-maturity investments to maturity at the time of their purchase. In July 2011, the Company sold $100 million of held-to-maturity marketable securities prior to their maturity and, as a result, the Company has re-classified debt securities which were previously accounted for as held-to-maturity as available-for-sale as of June 30, 2011.

The following table sets forth the Company’s amortized cost and fair values of marketable securities, all of which were re-classified from held-to-maturity to available-for-sale (in thousands). The fair values of the Company’s marketable securities are based upon Level 1 and Level 2 fair value inputs.


	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debt securities - maturity less than 1 year	$	67,755	$	68,303	$	469,318	$	469,956
Debt securities - maturity 1 to 5 years		120,164		121,556		120,078		121,406

Total	$	187,919	$	189,859	$	589,396	$	591,362

The following table sets forth the amortized cost and estimated fair value of the Company’s other available-for-sale marketable securities (in thousands).

- 4 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Equity security	$	165,064	$	166,084	$	103,189	$	105,304
Debt securities		287,696		290,952		271,260		274,029

Total	$	452,760	$	457,036	$	374,449	$	379,333

Mortgage Loans Held-for-Sale, Net. As of June 30, 2011, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At June 30, 2011 and December 31, 2010, the Company had $30.3 million and $56.9 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 2 input being the quoted market prices for those mortgage loans. At June 30, 2011 and December 31, 2010, the Company had $8.9 million and $8.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

Inventories. The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when the undiscounted future cash flow of a subdivision is less than its carrying value. The Company determines the estimated fair value of each subdivision either by: (1) calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation; or (2) assessing what the market value of the land is in its current condition by considering the estimated price a willing buyer would pay for the land (other than in a forced liquidation), and recent land purchase transactions that the Company believes are indicators of fair value. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the level of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The estimated fair values of impaired subdivisions are based upon Level 3 inputs. The fair value of the Company’s inventory that was impaired at June 30, 2011 is as follows (in thousands).


	Land and Land Under Development (Held-for-		Housing Completed or Under Construction (Held-		Total Fair Value of
	Development)		for-Development)		Impaired Inventory
West	$	8,084	$	6,796		14,880
Mountain		1,202		3,702		4,904
East		-		-		-
Other Homebuilding		201		587		788

Consolidated	$	9,487	$	11,085	$	20,572

Related Party Assets. The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The estimated cash flows from the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. The estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

Mortgage Repurchase Facility. The Company’s Mortgage Repurchase Facility (as defined below) is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities. The fair value approximates carrying value.

- 5 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Senior Notes. The following table states the estimated fair values of the Company’s senior notes (in thousands).


	June 30, 2011				December 31, 2010
	Recorded Amount		Estimated Fair Value		Recorded Amount		Estimated Fair Value
7% Senior Notes due 2012	$	149,705	$	162,000	$	149,650	$	160,493
5¹/2% Senior Notes due 2013		349,810		374,500		349,748		362,198
5³/8% Medium Term Senior Notes due 2014		249,351		265,700		249,266		255,683
5³/8% Medium Term Senior Notes due 2015		249,839		259,050		249,821		251,450
5³/8% Senior Notes due 2020		244,568		244,525		244,330		244,400

Total	$	1,243,273	$	1,305,775	$	1,242,815	$	1,274,224

As further described in Note 16, in July 2011 the Company extinguished a combined $237.0 million of its senior notes due in 2012 and 2013. The estimated fair value of the 7% Senior Notes due 2012 and 5 ¹/2% Senior Notes due 2013 is based upon Level 1 fair value inputs determined using the price the Company paid to acquire the senior notes. The estimated fair value of the remaining senior notes is based on Level 2 fair value inputs, including market prices of bonds in the homebuilding sector.

3.	Inventory Impairments

The Company’s held-for-development inventory is included as a component of housing completed or under construction and land and land under development in the Consolidated Balance Sheets.

The Company evaluates its held-for-development inventory for impairment at each quarter end. The Company did not have any impairments of its homebuilding inventory during the three and six months ended June 20, 2010. The following table sets forth, by reportable segment, the asset impairments recorded during the three and six months ended June 30, 2011 (in thousands).


	Three Months Ended June 30,		Six Months Ended June 30,
	2011		2011
Land and Land Under Development (Held-for-Development)
West	$	5,919	$	5,919
Mountain		1,236		1,236
East		285		285
Other Homebuilding		-		-

Subtotal		7,440		7,440

Housing Completed or Under Construction (Held-for-Development)
West		954		954
Mountain		239		239
East		-		-
Other Homebuilding		-		-

Subtotal		1,193		1,193

Other Assets		486		765

Consolidated Asset Impairments	$	9,119	$	9,398

The Company recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

4.	Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At June 30, 2011, the Company had $130.0 million in interest rate lock commitments and $94.5 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three and six months ended June 30, 2011 and 2010.

5.	Balance Sheet Components

The following table sets for information relating to prepaid expenses and other assets, net (in thousands).


	June 30, 2011		December 31, 2010
Deferred marketing costs	$	23,135	$	22,736
Land option deposits		11,432		11,606
Goodwill		5,958		-
Deferred debt issue costs, net		4,552		5,021
Prepaid expenses		3,331		5,935
IRS deposit (See Note 13)		-		35,562
Other		5,994		4,533

Total	$	54,402	$	85,393

The following table sets forth information relating to accrued liabilities (in thousands).


	June 30,		December 31,
	2011		2010
Accrued liabilities
Insurance reserves (see Note 9)	$	52,310	$	52,901
Warranty reserves (see Note 8)		31,200		34,704
Accrued executive deferred compensation		22,467		20,956
Accrued interest payable		17,807		17,822
Accrued compensation and related expenses		15,609		22,659
Legal accruals (see Note 11)		13,213		14,230
Liability for unrecognized tax benefits (see Note 13)		11,808		55,850
Land development and home construction accruals		11,043		12,450
Customer and escrow deposits		6,631		4,523
Mortgage loan loss reserves (see Note 11)		4,100		6,881
Other accrued liabilities		18,702		17,753

Total accrued liabilities	$	204,890	$	260,729

- 7 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

6.	Loss Per Share

A company that has participating security holders (for example, unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method for purposes of calculating earnings (loss) per share (“EPS”). The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders, based on their respective rights to receive distributed earnings (i.e. dividends) and undistributed earnings (i.e. net income or loss). Currently, the Company has one class of security and has participating security holders consisting of shareholders of unvested restricted stock. The basic and diluted EPS calculations are shown below (in thousands, except per share amounts).


	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Basic and Diluted Loss Per Common Share
Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)
Less: distributed and undistributed earnings allocated to participating securities		(206	)		(135	)		(365	)		(259	)

Net loss attributable to common stockholders	$	(28,186	)	$	(3,819	)	$	(48,224	)	$	(24,816	)


Basic and diluted weighted-average shares outstanding		46,719			46,617			46,717			46,615
Basic Loss Per Common Share	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Dilutive Loss Per Common Share	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the three and six months ending June 30, 2011 and 2010 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.4 million shares during the three and six months ended June 30, 2011 and 2010.

7.	Interest Activity

The Company capitalizes interest on its senior notes associated with its qualifying assets, which includes land and land under development that is actively being developed and homes under construction through the completion of construction. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. The Company expensed $7.4 million and $9.4 million of interest primarily associated with interest incurred on its senior notes during the three months ended June 30, 2011 and 2010, respectively, and $16.1 million and $19.8 million during the six months ended June 30, 2011 and 2010, respectively, that could not be capitalized.

Interest activity is shown below (in thousands).

- 8 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Total Interest Incurred
Corporate	$	18,084		$	18,158		$	36,270		$	35,089
Financial Services and Other		60			127			123			206

Total interest incurred	$	18,144		$	18,285		$	36,393		$	35,295


Total Interest Capitalized
Interest capitalized, beginning of period	$	43,762		$	31,773		$	38,446		$	28,339
Interest capitalized		10,750			8,849			20,269			15,485
Previously capitalized interest included in home cost of sales		(5,454	)		(8,202	)		(9,657	)		(11,404	)

Interest capitalized, end of period	$	49,058		$	32,420		$	49,058		$	32,420

8.	Warranty Reserves

The Company records expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The establishment of warranty reserves is primarily based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, the Company’s trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded.

The following table summarizes the warranty reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	33,615		$	54,054		$	34,704		$	59,022
Expense provisions		1,034			2,220			1,875			3,210
Cash payments		(1,617	)		(2,611	)		(3,116	)		(4,640	)
Adjustments		(1,832	)		(1,677	)		(2,263	)		(5,606	)

Balance at end of period	$	31,200		$	51,986		$	31,200		$	51,986

The favorable warranty adjustments that were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations during the three and six months ended June 30, 2011 and 2010 were primarily the result of a continued favorable trend in the amount of warranty payments incurred on previously closed homes.

9.	Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by StarAmerican Insurance Ltd. (“StarAmerican”) and Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (2) self-insurance, including workers compensation; and (3) deductible amounts under the Company’s insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business conducted, and changing regulatory and legal environments.

- 9 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the insurance reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	52,031		$	51,390		$	52,901		$	51,606
Expense provisions		587			1,231			1,067			1,814
Cash payments		(656	)		(4,309	)		(2,006	)		(5,108	)
Adjustments		348			-			348			-

Balance at end of period	$	52,310		$	48,312		$	52,310		$	48,312

10.

Information on Business Segments

The Company’s operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-makers (“CODMs”) as two key executives—the Chief Executive Officer and the Chief Operating Officer.

The Company has identified each homebuilding subdivision as an operating segment as each homebuilding subdivision engages in business activities from which it earns revenue, primarily from the sale of single-family detached homes, generally to first-time and first-time move-up homebuyers. Subdivisions in the reportable segments noted below have been aggregated because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. The Company’s homebuilding reportable segments are as follows:

(1)

West (Arizona, California, Nevada and Washington)

(2)

Mountain (Colorado and Utah)

(3)

East (Delaware Valley, Maryland and Virginia)

(4)

Other Homebuilding (Florida and Illinois)

The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant; (3) StarAmerican; (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. These operating segments have been aggregated into one reportable segment because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets. The Company’s Corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment, earns interest income on its cash, cash equivalents and marketable securities, and incurs interest expense on its senior notes.

The following table summarizes revenue for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the revenue table below relate to mortgage loan origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.

- 10 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Homebuilding
West	$	69,401		$	123,193		$	111,884		$	180,330
Mountain		78,702			110,112			149,826			156,794
East		51,076			72,657			94,168			104,162
Other Homebuilding		10,949			16,757			20,808			25,793

Total Homebuilding		210,128			322,719			376,686			467,079
Financial Services and Other		6,731			9,143			12,434			14,764
Corporate		-			-			-			-
Intercompany adjustments		(1,174	)		(5,532	)		(3,688	)		(8,435	)

Consolidated	$	215,685		$	326,330		$	385,432		$	473,408

The following table summarizes (loss) income before income taxes for each of the Company’s six reportable segments (in thousands). Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes for each reportable segment in the table below, are charged by the Company’s Corporate segment to the homebuilding segments and the Financial Services and Other segment. Supervisory Fees represent costs incurred by the Company’s Corporate segment associated with certain resources that support the Company’s other reportable segments. Transfers, if any, between operating segments are recorded at cost.


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Homebuilding
West	$	(11,837	)	$	6,357		$	(16,397	)	$	8,711
Mountain		(1,204	)		4,962			(2,436	)		6,132
East		(2,345	)		1,455			(4,301	)		(64	)
Other Homebuilding		(916	)		295			(1,692	)		(224	)

Total Homebuilding		(16,302	)		13,069			(24,826	)		14,555
Financial Services and Other		3,089			4,089			4,869			5,935
Corporate		(16,590	)		(20,857	)		(33,550	)		(45,431	)

Consolidated	$	(29,803	)	$	(3,699	)	$	(53,507	)	$	(24,941	)

The following table summarizes total assets for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the table below relate to loans from the Company’s Financial Services and Other segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents and marketable securities.

- 11 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011			December 31, 2010
Homebuilding
West	$	360,939		$	300,652
Mountain		308,805			311,833
East		214,246			188,693
Other Homebuilding		37,146			40,554

Total Homebuilding		921,136			841,732
Financial Services and Other		112,113			135,286
Corporate		1,390,811			1,573,408
Intercompany adjustments		(3,756	)		(2,657	)

Consolidated	$	2,420,304		$	2,547,769

The following table summarizes depreciation and amortization of long-lived assets and amortization of deferred marketing costs for each of the Company’s six reportable segments (in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Homebuilding
West	$	1,241	$	2,211	$	2,121	$	3,285
Mountain		928		1,091		1,761		1,554
East		602		639		1,046		951
Other Homebuilding		189		237		399		398

Total Homebuilding		2,960		4,178		5,327		6,188
Financial Services and Other		157		170		330		339
Corporate		1,221		821		2,410		1,574

Consolidated	$	4,338	$	5,169	$	8,067	$	8,101

11.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At June 30, 2011 the Company had issued and outstanding performance bonds and letters of credit totaling $74.4 million and $22.9 million, respectively, including $9.1 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Mortgage Loan Loss Reserves. In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. During 2011, HomeAmerican reached settlements associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily as a result of these settlements, the Company increased its estimated mortgage loan loss reserve by $1.3 million during the six months ended June 30, 2011. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations.

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the mortgage loan loss reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	7,636		$	8,241		$	6,881		$	9,641
Expense provisions		-			-			-			-
Cash payments		(3,871	)		(172	)		(4,078	)		(1,572	)
Adjustments		335			-			1,297			-

Balance at end of period	$	4,100		$	8,069		$	4,100		$	8,069

Legal Accruals. Litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.

On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011 the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.

On March 31, 2011 the West Virginia Supreme Court of Appeals declined to enter a writ of prohibition with respect to the trial court’s re-entry of its judgment of default stating that the issues presented are more properly presented on appeal after full development of the record in the lower court.

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:

Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This litigation was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.

MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.

Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes.

The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $13.2 million and $14.2 million at June 30, 2011 and December 31, 2010, respectively.

12.

Line of Credit and Total Debt Obligations

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), which may include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at June 30, 2011 and December 31, 2010, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported as a liability in Mortgage Repurchase Facility in the Consolidated Balance Sheets. At June 30, 2011 and December 31, 2010, the Company had $9.0 million and $25.4 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.

The Company’s senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries.

The Company’s debt obligations at June 30, 2011 and December 31, 2010 are as follows (in thousands):


	June 30, 2011		December 31, 2010
7% Senior Notes due 2012	$	149,705	$	149,650
5¹/2% Senior Notes due 2013		349,810		349,748
5³/8% Medium-Term Senior Notes due 2014		249,351		249,266
5³/8% Medium-Term Senior Notes due 2015		249,839		249,821
5³/8% Senior Notes due 2020		244,568		244,330

Total Senior Notes, net		1,243,273		1,242,815
Mortgage repurchase facility		8,988		25,434

Total Debt	$	1,252,261	$	1,268,249

As further described in Note 16, in July 2011 the Company extinguished a combined $237.0 million of the senior notes due in 2012 and 2013.

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

13.

Income Taxes

The Company is required, at the end of each interim period, to estimate its annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The income tax benefits of $1.8 million and $5.6 million during the three and six months ended June 30, 2011, respectively, resulted primarily from the Company’s 2011 second quarter settlement of various state income tax matters and the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns. The Company’s income tax benefits during the three and six months ended June 30, 2010 were not material to the Company’s results of operations.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. The Company’s liability for unrecognized tax benefits was $11.8 million and $55.9 million at June 30, 2011 and December 31, 2010, respectively. This decrease resulted primarily from the Company’s settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns and settlement of various state income tax matters.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The increase in the Company’s total deferred tax asset at June 30, 2011 (per the table below) resulted primarily from an increase in the Company’s net operating loss carry forwards.

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. At June 30, 2011 and December 31, 2010, the Company had a full valuation allowance recorded against its net deferred tax assets. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows (in thousands).

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011			December 31, 2010
Deferred tax assets
Federal net operating loss carryforward	$	98,854		$	73,189
State net operating loss carryforward		49,485			47,041
Asset impairment charges		38,307			46,118
Warranty, litigation and other reserves		24,641			27,635
Stock-based compensation expense		25,124			22,777
Alternative minimum tax and other tax credit carryforwards		10,296			10,296
Accrued liabilities		10,529			9,789
Inventory, additional costs capitalized for tax purposes		5,368			5,368
Property, equipment and other assets, net		1,761			1,773
Charitable contribution on carryforward		946			938
Deferred revenue		293			326

Total deferred tax assets		265,604			245,250
Valuation allowance		(252,209	)		(231,379	)

Total deferred tax assets, net of valuation allowance		13,395			13,871

Deferred tax liabilities
Deferred revenue		5,731			6,401
Unrealized gain		2,393			1,880
Inventory, additional costs capitalized for financial statement purposes		580			604
Accrued liabilities		383			713
Other, net		4,308			4,273

Total deferred tax liabilities		13,395			13,871

Net deferred tax asset	$	-		$	-

14.

Variable Interest Entities

In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheets. The Company’s obligation with respect to Option Contracts generally is limited to forfeiture of the related cash deposits and/or letters of credit. At June 30, 2011, the Company had cash deposits and letters of credit of $10.5 million and $6.7 million, respectively, at risk associated with 2,957 lots under Option Contracts.

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

15.

Other Comprehensive Loss

Total other comprehensive loss includes net loss and unrealized holding gains or losses on the Company’s available-for-sale marketable securities. The following table sets forth the Company’s other comprehensive loss during the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)
Unrealized holding (loss) gain		(1,971	)		(2,448	)		1,332			(1,294	)

Total other comprehensive loss	$	(29,951	)	$	(6,132	)	$	(46,527	)	$	(25,851	)

16.

Subsequent Events

In July 2011, the Company completed a debt tender offer purchasing $63.7 million of its 7% Senior Notes due 2012 and $173.3 million of its 5¹/2% Senior Notes due 2013. The Company paid $256.7 million, including interest and fees, for the acquired notes and, as a result of the tender, the Company will record an $18.6 million charge associated with the extinguishment of debt during the 2011 third quarter.

In July 2011, the Company sold $100 million of marketable securities, which it previously accounted for as held-to-maturity securities, at a gain of $1.2 million.

17.

Supplemental Guarantor Information

The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the “Guarantor Subsidiaries”), which are 100%-owned subsidiaries of the Company.

•

M.D.C. Land Corporation

•

RAH of Florida, Inc.

•

Richmond American Construction, Inc.

•

Richmond American Homes of Arizona, Inc.

•

Richmond American Homes of Colorado, Inc.

•

Richmond American Homes of Delaware, Inc.

•

Richmond American Homes of Florida, LP

•

Richmond American Homes of Illinois, Inc.

•

Richmond American Homes of Maryland, Inc.

•

Richmond American Homes of Nevada, Inc.

•

Richmond American Homes of New Jersey, Inc.

•

Richmond American Homes of Pennsylvania, Inc.

•

Richmond American Homes of Utah, Inc.

•

Richmond American Homes of Virginia, Inc.

Subsidiaries that do not guarantee the Company’s senior notes (collectively, the “Non-Guarantor Subsidiaries”) primarily include:

•

American Home Insurance

•

American Home Title

•

HomeAmerican

•

StarAmerican

•

Allegiant

•

Richmond American Homes of West Virginia, Inc.

•

Richmond American Homes of Washington, Inc.

The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
Assets
Cash and cash equivalents	$	718,010		$	3,022	$	34,803	$	-		$	755,835
Marketable securities		615,892			-		31,003		-			646,895
Restricted cash		-			604		-		-			604
Receivables		8,572			5,666		4,877		(2,657	)		16,458
Mortgage loans held-for-sale, net		-			-		39,200		-			39,200
Inventories, net
Housing completed or under construction		-			319,951		16,563		-			336,514
Land and land underdevelopment		-			514,634		9,600		-			524,234
Investment in subsidiaries		122,483			-		-		(122,483	)		-
Other assets, net		48,334			42,106		11,223		(1,099	)		100,564

Total Assets	$	1,513,291		$	885,983	$	147,269	$	(126,239	)	$	2,420,304

Liabilities
Accounts payable and related party liabilities	$	2,768		$	26,106	$	3,008	$	(2,657	)	$	29,225
Accrued liabilities		85,099			56,992		64,632		(1,099	)		205,624
Advances and notes payable to parent and subsidiaries		(751,043	)		744,688		6,355		-			-
Mortgage repurchase facility		-			-		8,988		-			8,988
Senior notes, net		1,243,273			-		-		-			1,243,273

Total Liabilities		580,097			827,786		82,983		(3,756	)		1,487,110

Stockholders’ Equity		933,194			58,197		64,286		(122,483	)		933,194

Total Liabilities and Stockholders’ Equity	$	1,513,291		$	885,983	$	147,269	$	(126,239	)	$	2,420,304

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

December 31, 2010

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
Assets
Cash and cash equivalents	$	535,035		$	4,287	$	32,903	$	-		$	572,225
Marketable securities		938,471			-		30,258		-			968,729
Restricted cash		-			420		-		-			420
Receivables		14,402			8,071		194		(2,657	)		20,010
Mortgage loans held-for-sale, net		-			-		65,114		-			65,114
Inventories, net
Housing completed or under construction		-			372,422		-		-			372,422
Land and land underdevelopment		-			415,237		-		-			415,237
Investment in subsidiaries		110,065			-		-		(110,065	)		-
Other assets, net		88,267			42,288		3,057		-			133,612

Total Assets	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769


Liabilities
Accounts payable and related party liabilities	$	2,747		$	34,553	$	465	$	(2,657	)	$	35,108
Accrued liabilities		130,960			65,622		64,147		-			260,729
Advances and notes payable to parent and subsidiaries		(673,965	)		671,190		2,775		-			-
Mortgage repurchase facility		-			-		25,434		-			25,434
Senior notes, net		1,242,815			-		-		-			1,242,815

Total Liabilities		702,557			771,365		92,821		(2,657	)		1,564,086

Stockholders’ Equity		983,683			71,360		38,705		(110,065	)		983,683

Total Liabilities and Stockholders’ Equity	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769
Total Liabilities and Stockholders’ Equity	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Revenue

Home sales revenue	$	-		$	193,554		$	13,783		$	(1,174	)	$	206,163
Land sales and other revenue		-			2,730			6,792			-			9,522
Equity in (loss) income of subsidiaries		(13,221	)		-			-			13,221			-

Total revenue		(13,221	)		196,284			20,575			12,047			215,685

Costs and Expenses
Home cost of sales		-			168,000			12,271			(1,174	)		179,097
Asset impairments		-			9,119			-			-			9,119
Marketing and commission expenses		-			16,487			866			-			17,353
General and administrative and other expenses		16,251			18,672			5,530			-			40,453

Total operating costs and expenses		16,251			212,278			18,667			(1,174	)		246,022

(Loss) income from operations		(29,472	)		(15,994	)		1,908			13,221			(30,337	)
Other (expense) income		(337	)		41			830			-			534

(Loss) income before income taxes		(29,809	)		(15,953	)		2,738			13,221			(29,803	)
Benefit from (provision for) income taxes		1,829			1,208			(1,214	)		-			1,823

Net (loss) income	$	(27,980	)	$	(14,745	)	$	1,524		$	13,221		$	(27,980	)

- 20 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Revenue

Home sales revenue	$	-		$	316,809		$	-		$	(5,533	)	$	311,276
Land sales and other revenue		-			5,910			9,144			-			15,054
Equity in (loss) income of subsidiaries		15,307			-			-			(15,307	)		-

Total revenue		15,307			322,719			9,144			(20,840	)		326,330

Costs and Expenses
Home cost of sales		-			260,614			(19	)		(5,533	)		255,062
Asset impairments		-			-			-			-			-
Marketing and commission expenses		-			23,086			-			-			23,086
General and administrative and other expenses		18,607			25,828			5,656			-			50,091

Total operating costs and expenses		18,607			309,528			5,637			(5,533	)		328,239

(Loss) income from operations		(3,300	)		13,191			3,507			(15,307	)		(1,909	)
Other (expense) income		(2,422	)		28			604			-			(1,790	)

(Loss) income before income taxes		(5,722	)		13,219			4,111			(15,307	)		(3,699	)
Benefit from (provision for) income taxes		2,038			(245	)		(1,778	)		-			15

Net (loss) income	$	(3,684	)	$	12,974		$	2,333		$	(15,307	)	$	(3,684	)

- 21 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2011

(In thousands)


Revenue	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Home sales revenue	$	-		$	359,451		$	13,783		$	(3,688	)	$	369,546
Land sales and other revenue		-			3,391			12,495			-			15,886
Equity in (loss) income of subsidiaries		(19,273	)		-			-			19,273			-

Total revenue		(19,273	)		362,842			26,278			15,585			385,432

Costs and Expenses
Home cost of sales		-			311,495			12,271			(3,688	)		320,078
Asset impairments		-			9,398			-			-			9,398
Marketing and commission expenses		-			32,087			866			-			32,953
General and administrative and other expenses		31,019			34,429			10,228			-			75,676

Total operating costs and expenses		31,019			387,409			23,365			(3,688	)		438,105

(Loss) income from operations		(50,292	)		(24,567	)		2,913			19,273			(52,673	)
Other (expense) income		(2,528	)		83			1,611			-			(834	)

(Loss) income before income taxes		(52,820	)		(24,484	)		4,524			19,273			(53,507	)
Benefit from (provision for) income taxes		4,961			2,584			(1,897	)		-			5,648

Net (loss) income	$	(47,859	)	$	(21,900	)	$	2,627		$	19,273		$	(47,859	)

- 22 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Revenue
Home sales revenue	$	-		$	460,655		$	-		$	(8,436	)	$	452,219
Land sales and other revenue		-			6,424			14,765			-			21,189
Equity in (loss) income of subsidiaries		17,661			-			-			(17,661	)		-

Total revenue		17,661			467,079			14,765			(26,097	)		473,408

Costs and Expenses
Home cost of sales		-			372,925			(37	)		(8,436	)		364,452
Asset impairments		-			-			-			-			-
Marketing and commission expenses		-			35,275			-			-			35,275
General and administrative and other expenses		36,789			44,451			9,745			-			90,985

Total operating costs and expenses		36,789			452,651			9,708			(8,436	)		490,712

(Loss) income from operations		(19,128	)		14,428			5,057			(17,661	)		(17,304	)
Other (expense) income		(8,630	)		76			917			-			(7,637	)

(Loss) income before income taxes		(27,758	)		14,504			5,974			(17,661	)		(24,941	)
Benefit from (provision for) income taxes		3,201			(223	)		(2,594	)		-			384

Net (loss) income	$	(24,557	)	$	14,281		$	3,380		$	(17,661	)	$	(24,557	)

- 23 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash (used in) provided by operating activities	$	(25,813	)	$	(83,489	)	$	20,772		$	19,273		$	(69,257	)

Net cash provided by (used in) investing activities		321,930			(11	)		(28,960	)		-			292,959

Financing activities
(Advances to) payments from subsidiaries		(89,496	)		82,235			26,534			(19,273	)		-
Mortgage repurchase facility		-			-			(16,446	)		-			(16,446	)
Dividend payments		(23,692	)		-			-			-			(23,692	)
Proceeds from exercise of stock options		46			-			-			-			46

Net cash (used in) provided by financing activities		(113,142	)		82,235			10,088			(19,273	)		(40,092	)

Net increase (decrease) in cash and cash equivalents		182,975			(1,265	)		1,900			-			183,610
Cash and cash equivalents
Beginning of period		535,035			4,287			32,903			-			572,225

End of period	$	718,010		$	3,022		$	34,803		$	-		$	755,835

- 24 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash provided by (used in) operating activities	$	71,574		$	(225,398	)	$	(7,449	)	$	(17,661	)	$	(178,934	)

Net cash used in investing activities		(588,283	)		(454	)		(29,410	)		-			(618,147	)

Financing activities
(Advances to) payments from subsidiaries		(256,944	)		228,079			11,204			17,661			-
Proceeds from issuance of senior notes, net		242,288			-			-			-			242,288
Mortgage repurchase facility		-			-			36,190			-			36,190
Dividend payments		(23,570	)		-			-			-			(23,570	)
Proceeds from exercise of stock options		53			-			-			-			53

Net cash (used in) provided by financing activities		(38,173	)		228,079			47,394			17,661			254,961

Net (decrease) increase in cash and cash equivalents		(554,882	)		2,227			10,535			-			(542,120	)
Cash and cash equivalents
Beginning of period		1,210,123			3,258			20,871			-			1,234,252

End of period	$	655,241		$	5,485		$	31,406		$	-		$	692,132

- 25 -

ITEM 2.

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

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in “Item 1A: Risk Factors Relating to our Business” of our Annual Report on Form 10-K for the year ended December 31, 2010 and this Quarterly Report on Form 10-Q.

INTRODUCTION

M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this Quarterly Report on Form 10-Q, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California, Nevada and Washington); (2) Mountain (Colorado and Utah); (3) East (Maryland, which includes Maryland, Pennsylvania, Delaware and New Jersey, and Virginia, which includes Virginia and West Virginia); and (4) Other Homebuilding (Florida and Illinois).

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides insurance coverage primarily to our homebuilding subsidiaries and certain subcontractors for homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC which is a re-insurer of Allegiant claims.

EXECUTIVE SUMMARY

During the first six months of 2011, we continued to be faced with challenges in the homebuilding industry including: (1) high levels of existing home inventories; (2) significant competition for new home orders and acquisition of finished lots; (3) low consumer confidence; and (4) high unemployment levels. These conditions reflect a further extension of the housing market downturn and it is difficult to predict when and at what rate these negative conditions will improve, or when the homebuilding industry will experience a sustainable recovery. As a result of these difficult market conditions and without the benefit of a federal homebuyer tax credit (which required the sale of homes to be completed by April 30, 2010), we experienced a 9% reduction in net home orders during the six months ended June 30, 2011 compared with the same period during 2010. However, despite the challenging 2011 homebuilding environment, we did experience a 5% increase in sold homes during the three months ended June 30, 2011, compared with the same period in 2010, primarily attributable to increased subdivisions and results from a sales promotion that took place during the 2011 second quarter. The difficulties in the homebuilding market during the three and six months ended June 30, 2011 also contributed to a sharp reduction in our Home Gross Margins (as defined below) and $9.4 million of asset impairments during the first six months of 2011, which contributed to our reported loss before income taxes during the three and six months ended June 30, 2011 of $28.0 million and $47.9 million, respectively, compared with $3.7 million and $24.6 million during the same periods in 2010.

Our Home Gross Margins decreased to 13.1% and 13.4% during the three and six months ended June 30, 2011, respectively, from 18.1% and 19.4% during the three and six months ended June 30, 2010, respectively. Contributing to the declines in Home Gross Margins was the impact of very competitive pricing for new home orders designed to generate sales velocity. During the first six months of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined

- 26 -

below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. Therefore, during the first six months of 2011, we focused on selling and closing unsold homes under construction, which decreased to 496 units at June 30, 2011 from 944 units at December 31, 2010. Our Home Gross Margins were also negatively impacted by an increase in our land costs, as the market for acquiring finished residential lots remained very competitive despite the continuing overall weakness in the market for new homes.

On the expense side of our business, we incurred asset impairments of $9.4 million during the first six months of 2011, with $9.1 million coming during the 2011 second quarter. These asset impairments resulted from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets. We saw a decrease of $5.7 million and $2.3 million in marketing and commission expenses during the three and six months ended June 30, 2011, compared with the same periods in 2010, generally attributable to closing fewer homes during the 2011 periods. Additionally, we experienced an $8.4 million and $11.8 million decrease in our general and administrative expenses during the three and six months ended June 30, 2011, compared with the same periods in 2010, primarily due to lower costs associated with legal-related matters and employee compensation related costs. During the three months ended June 30, 2011, we had net interest income of $0.5 million compared to net interest expense of $1.9 million during the same period in 2010. We had net interest expense of $0.9 million during the six months ended June 30, 2011, compared to $7.8 million during the same period in 2010. The improvement during the 2011 periods primarily related to obtaining better returns on our marketable securities and capitalizing interest incurred to our inventory during the first six months of 2011 compared with the same period in 2010.

During the first six months of 2011 we focused on: (1) decreasing expenses, including general and administrative costs and interest costs; (2) market share expansion; and (3) new market entry. We added to our 2010 fourth quarter efforts to reduce general and administrative expenses by reducing our headcount by approximately 10% during the 2011 second quarter. On July 7, 2011, we completed a debt tender offer extinguishing $237.0 million of our senior notes. Also, we took steps designed to increase market share in existing markets through additional investments in our homebuilding operations. On April 28, 2011, we entered the Seattle/Tacoma market through the purchase of substantially all of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired included approximately 280 owned lots in various stages of construction, in 11 communities. Based on our acquisition activity in 2011 we increased our active subdivision (as defined below) count to 176 at June 30, 2011, a 19% increase from December 31, 2010. We also have an additional 45 subdivisions that we expect will be active in the near term, partially offset by 30 currently active subdivisions that we expect to be inactive in the near term.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. Additionally, using different estimates or assumptions in our critical accounting estimates and policies could have a material impact to our consolidated financial statements. See “Forward-Looking Statements” below.

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

The following discussion compares results for the three and six months ended June 30, 2011 with the three and six months ended June 30, 2010.

- 27 -

Home Sales Revenue. Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican) and interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of base sales price and any purchased options and upgrades, less any of the foregoing incentives, for each closed home constitutes the selling price of our closed homes.

Our home sales revenue can be impacted by changes in our home closing levels and changes in the average selling prices of closed homes. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing.

The table below summarizes home sales revenue by reportable segment (dollars in thousands).


	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
West	$	66,951		$	117,752		$	(50,801	)		-43	%
Mountain		78,415			110,072			(31,657	)		-29	%
East		51,049			72,622			(21,573	)		-30	%
Other Homebuilding		10,922			16,362			(5,440	)		-33	%

Total Homebuilding		207,337			316,808			(109,471	)		-35	%

Intercompany		(1,174	)		(5,532	)		4,358			79	%

Consolidated	$	206,163		$	311,276		$	(105,113	)		-34	%


	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
West	$	109,344		$	174,479		$	(65,135	)		-37	%
Mountain		149,163			156,671			(7,508	)		-5	%
East		93,959			104,108			(10,149	)		-10	%
Other Homebuilding		20,768			25,396			(4,628	)		-18	%

Total Homebuilding		373,234			460,654			(87,420	)		-19	%

Intercompany		(3,688	)		(8,435	)		4,747			56	%

Consolidated	$	369,546		$	452,219		$	(82,673	)		-18	%

The decline in home sales revenue during the three months ended June 30, 2011 for our West segment was primarily driven by closing 291 fewer homes in the Arizona, California and Nevada markets of this segment as this resulted in home sales revenue decreasing by $56.5 million and $8.1 million associated with the decrease in the average selling prices of homes in the markets of this segment, primarily California. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue during the 2011 second quarter. In our Mountain segment, the impact of closing 129 fewer homes resulted in a $36.8 million reduction in home sales revenue. This was partially offset by a $29,000 increase in the average selling price of closed homes in the Colorado market.

The decline in home sales revenue during the three months ended June 30, 2011 for our East segment was primarily driven by closing 38 fewer homes in the Maryland market of this segment as this resulted in home sales revenue decreasing by $17.6 million and $5.9 million associated with the decrease in the average selling prices of homes in the markets of this segment. In our Other Homebuilding segment, the impact of closing 23 fewer homes resulted in a $5.5 million reduction in home sales revenue.

- 28 -

The decline in home sales revenue during the six months ended June 30, 2011 for our West segment was primarily driven by closing 352 fewer homes in the Arizona, California and Nevada markets of this segment as this resulted in home sales revenue decreasing by $68.2 million and $10.7 million associated with the decrease in the average selling prices of homes, primarily from the California market. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue. In our Mountain segment, the impact of closing 69 fewer homes resulted in an $18.7 million reduction in home sales revenue. This was partially offset by a $32,300 increase in the average selling price of closed homes in the Colorado market.

The decline in home sales revenue during the six months ended June 30, 2011 for our East segment was primarily driven primarily by an $8.5 million decrease associated with the declines in the average selling prices of homes in the markets of this segment. In our Other Homebuilding segment, the impact of closing 21 fewer homes resulted in a $4.9 million reduction in home sales revenue.

Home Gross Margins. We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue.

The following table sets forth our Home Gross Margins by reportable segment.


	Three Months
	Ended June 30,
	2011			2010			Change
Homebuilding
West		15.5	%		20.0	%		-4.5	%
Mountain		12.9	%		15.6	%		-2.7	%
East		10.4	%		16.9	%		-6.5	%
Other Homebuilding		11.4	%		19.9	%		-8.5	%

Consolidated		13.1	%		18.1	%		-5.0	%


	Six Months
	Ended June 30,
	2011			2010			Change
Homebuilding
West		16.7	%		22.1	%		-5.4	%
Mountain		12.4	%		16.5	%		-4.1	%
East		10.6	%		17.2	%		-6.6	%
Other Homebuilding		13.5	%		21.4	%		-7.9	%

Consolidated		13.4	%		19.4	%		-6.0	%

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments to our warranty reserves. During the three and six months ended June 30, 2011 and 2010, we continued to experience lower warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we recorded adjustments to reduce our warranty reserve of $1.8 million and $2.3 million during the three and six months ended June 30, 2011, respectively, and $1.7 million and $5.6 million during the three and six months ended June 30, 2010, respectively.

The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in home cost of sales during the three and six months ended June 30, 2011 and 2010.

- 29 -


	Three Months
	Ended June 30,
	2011			2010			Change
West		16.7	%		21.8	%		-5.1	%
Mountain		14.2	%		17.9	%		-3.7	%
East		13.9	%		19.2	%		-5.3	%
Other		11.7	%		20.8	%		-9.1	%

Consolidated		14.9	%		20.2	%		-5.3	%


	Six Months
	Ended June 30,
	2011			2010			Change
West		18.3	%		22.6	%		-4.3	%
Mountain		14.2	%		18.4	%		-4.2	%
East		13.6	%		19.3	%		-5.7	%
Other		14.2	%		21.1	%		-6.9	%

Consolidated		15.4	%		20.7	%		-5.3	%

Home Gross Margins, excluding warranty and interest, decreased on a consolidated basis during the three and six months ended June 30, 2011 primarily due to: (1) accepting new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction; and (2) an increase in our land costs as the demand for finished residential lots has been very competitive despite the continuing overall weakness in the market for new homes. During the first quarter of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. As a result of our effort to reduce the number of unsold homes under construction, a higher percentage of our 2011 homes closed were homes under construction, compared with the same periods in 2010. Generally homes sold as a dirt start yield a higher Home Gross Margin than homes under construction.

Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) increases in the costs of finished lots; (3) continued and/or increases in home foreclosure levels; (4) on-going tightening of mortgage loan origination requirements; (5) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (6) deterioration in the demand for new homes in our markets; (7) fluctuating energy costs, including oil and gasoline; (8) increases in the costs of subcontracted labor, finished lots, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (9) increases in interest expense included in home cost of sales; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See “Forward-Looking Statements” above.

The following table sets forth by reportable segment a reconciliation of our home cost of sales, as reported, to home cost of sales excluding warranty adjustments and interest in home cost of sales, which is used in the calculation of Home Gross Margins, excluding warranty adjustments and interest in home cost of sales (dollars in thousands).

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Three Months Ended June 30, 2011	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales - Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest
West	$	66,951		$	56,592		$	(1,015	)	$	1,830	$	55,777			16.7	%
Mountain		78,415			68,276			(919	)		1,913		67,282			14.2	%
East		51,049			45,725			260			1,520		43,945			13.9	%
Other		10,922			9,678			(158	)		191		9,645			11.7	%
Intercompany		(1,174	)		(1,174	)		—			—		(1,174	)		N/A

Consolidated	$	206,163		$	179,097		$	(1,832	)	$	5,454	$	175,475			14.9	%


Three Months Ended June 30, 2010
West	$	117,752		$	94,218		$	(1,255	)	$	3,387	$	92,086			21.8	%
Mountain		110,072			92,926			119			2,492		90,315			17.9	%
East		72,622			60,339			(374	)		2,004		58,709			19.2	%
Other		16,362			13,111			(167	)		319		12,959			20.8	%
Intercompany		(5,532	)		(5,532	)		—			—		(5,532	)		N/A

Consolidated	$	311,276		$	255,062		$	(1,677	)	$	8,202	$	248,537			20.2	%


Six Months Ended June 30, 2011	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales -Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest
West	$	109,344		$	91,113		$	(1,218	)	$	3,000	$	89,331			18.3	%
Mountain		149,163			130,652			(1,099	)		3,726		128,025			14.2	%
East		93,959			84,036			243			2,590		81,203			13.6	%
Other		20,768			17,965			(189	)		341		17,813			14.2	%
Intercompany		(3,688	)		(3,688	)		—			—		(3,688	)		N/A

Consolidated	$	369,546		$	320,078		$	(2,263	)	$	9,657	$	312,684			15.4	%


Six Months Ended June 30, 2010
West	$	174,479		$	135,963		$	(3,827	)	$	4,715	$	135,075			22.6	%
Mountain		156,671			130,805			(681	)		3,566		127,920			18.4	%
East		104,108			86,156			(570	)		2,661		84,065			19.3	%
Other		25,396			19,963			(528	)		462		20,029			21.1	%
Intercompany		(8,435	)		(8,435	)		—			—		(8,435	)		N/A

Consolidated	$	452,219		$	364,452		$	(5,606	)	$	11,404	$	358,654			20.7	%

Home Gross Margins excluding the impact of warranty adjustments and interest in home cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustments and interest have on our Home Gross Margins.

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Land Sales Revenue. Land sales revenue was not material during the three and six months ended June 30, 2011. Land sales revenue during the three and six months ended June 30, 2010 was $5.7 million and related to the sale of 106 lots, primarily in our West segment.

Other Revenue. Gains on the sale of mortgage loans primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties. Insurance revenue primarily represents premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes. Title and other revenue primarily consist of forfeitures of homebuyer deposits on home sales contracts and revenue associated with our American Home Title operations.

The table below sets forth the components of other revenue (dollars in thousands).


	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Gains on sales of mortgage loans	$	4,292	$	6,593	$	(2,301	)		-35	%
Insurance revenue		1,992		1,888		104			6	%
Title and other revenue		673		874		(201	)		-23	%

Total other revenue	$	6,957	$	9,355	$	(2,398	)		-26	%


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Gains on sales of mortgage loans	$	8,615	$	10,603	$	(1,988	)		-19	%
Insurance revenue		2,980		3,177		(197	)		-6	%
Title and other revenue		1,522		1,695		(173	)		-10	%

Total other revenue	$	13,117	$	15,475	$	(2,358	)		-15	%

Gains on sales of mortgage loans decreased during the three and six months ended June 30, 2011 primarily due to closing 426 and 395 fewer homes, respectively.

Home Cost of Sales. Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), specific construction costs of each home, warranty costs and finance and closing costs, including Closing Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-party).

Our home cost of sales can be impacted primarily from changes in our home closing levels and changes in the cost of land acquisition, development, construction cost of homes and changes in our estimated costs for warranty repairs.

The table below sets forth the home cost of sales by reportable segment (dollars in thousands).

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	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	56,592		$	94,218		$	(37,626	)		-40	%
Mountain		68,276			92,926			(24,650	)		-27	%
East		45,725			60,339			(14,614	)		-24	%
Other Homebuilding		9,678			13,111			(3,433	)		-26	%

Total Homebuilding		180,271			260,594			(80,323	)		-31	%
Intercompany adjustments		(1,174	)		(5,532	)		4,358			79	%

Consolidated	$	179,097		$	255,062		$	(75,965	)		-30	%


	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	91,113		$	135,963		$	(44,850	)		-33	%
Mountain		130,652			130,805			(153	)		0	%
East		84,036			86,156			(2,120	)		-2	%
Other Homebuilding		17,965			19,963			(1,998	)		-10	%

Total Homebuilding		323,766			372,887			(49,121	)		-13	%
Intercompany adjustments		(3,688	)		(8,435	)		4,747			56	%

Consolidated	$	320,078		$	364,452		$	(44,374	)		-12	%

Home cost of sales in the West segment decreased during the three and six months ended June 30, 2011 primarily resulting from closing 240 and 301 fewer homes, respectively. The decrease associated with the decline in closings was partially offset by an increase to home cost of sales in our new Washington market of this segment.

In the Mountain segment home cost of sales decreased during the three months ended June 30, 2011 primarily due to closing 129 fewer homes. This was partially offset by an increase in the cost per closed home within this segment associated with a change in the mix of closed homes. Home cost of sales during the six months ended June 30, 2011 remained relatively flat as the decrease associated with closing 69 fewer homes during the first six months of 2011 was offset by increases in the cost per closed home.

In our East and Other Homebuilding segments, home cost of sales decreased during the three and six months ended June 30, 2011 primarily resulting from closing fewer homes during the 2011 periods.

Land Cost of Sales. Land cost of sales was not material during the three and six months ended June 30, 2011. Land cost of sales during the three and six months ended June 30, 2010 was $5.0 million and $5.2 million, respectively, and related to the sale of 106 lots, primarily in our West segment.

Asset Impairments. We recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.

Marketing Expenses. Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).

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	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	4,345	$	5,179	$	(834	)		-16	%
Mountain		3,094		3,467		(373	)		-11	%
East		1,859		2,030		(171	)		-8	%
Other Homebuilding		599		799		(200	)		-25	%

Consolidated	$	9,897	$	11,475	$	(1,578	)		-14	%


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%

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