Edgar Filing: MDC HOLDINGS INC

Large Accelerated filer

Accelerated filer

Non-Accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting company

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 March 31, 2012

¨	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

(Address of principal executive offices)

(Zip code)

(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 March 31, 2012, 47,981,404 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 MARCH 31, 2012

INDEX


			Page No.
Part I. Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at March 31, 2012 and December 31, 2011		1

		Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011		2

		Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011		3

		Notes to Unaudited Consolidated Financial Statements		4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33

	Item 4.	Controls and Procedures		33

Part II. Other Information:

	Item 1.	Legal Proceedings		34

	Item 1A.	Risk Factors		35

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36

	Item 3.	Defaults Upon Senior Securities		36

	Item 4.	Mine Safety Disclosures		36

	Item 5.	Other Information		36

	Item 6.	Exhibits		37

	Signature			38

(i)

ITEM 1.

Unaudited Consolidated Financial Statement

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets


	March 31, 2012			December 31, 2011
	(Dollars in thousands, except per share amounts)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	263,303		$	316,418
Marketable securities		494,277			485,434
Restricted cash		1,080			667
Trade and other receivables		34,059			21,593
Inventories:
Housing completed or under construction		346,665			300,714
Land and land under development		488,442			505,338
Property and equipment, net		35,373			36,277
Deferred tax asset, net of valuation allowance of $277,185 and $281,178 at March 31, 2012 and December 31, 2011, respectively		—			—
Prepaid expenses and other assets		46,310			50,423

Total homebuilding assets		1,709,509			1,716,864
Financial Services:
Cash and cash equivalents		22,436			26,943
Marketable securities		35,955			34,509
Mortgage loans held-for-sale, net		54,990			78,335
Prepaid expenses and other assets		2,681			2,074

Total financial services assets		116,062			141,861

Total Assets	$	1,825,571		$	1,858,725

LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	33,416		$	25,645
Accrued liabilities		104,605			119,188
Senior notes, net		744,288			744,108

Total homebuilding liabilities		882,309			888,941
Financial Services:
Accounts payable and accrued liabilities		49,356			52,446
Mortgage repurchase facility		25,840			48,702

Total financial services liabilities		75,196			101,148

Total liabilities		957,505			990,089

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; 48,043,634 and 47,981,404 issued and outstanding, respectively, at March 31, 2012 and 48,017,108 and 47,957,196 issued and outstanding, respectively, at December 31, 2011		480			480
Additional paid-in-capital		865,739			863,128
Retained earnings		3,198			12,927
Accumulated other comprehensive income (loss)		(692	)		(7,240	)
Treasury stock, at cost; 62,230 shares at March 31, 2012 and 59,912, respectively, at December 31, 2011		(659	)		(659	)

Total Stockholders’ Equity		868,066			868,636

Total Liabilities and Stockholders’ Equity	$	1,825,571		$	1,858,725

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

- 1 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands, except per share amounts)
	(Unaudited)
Homebuilding:
Home sale revenues	$	184,678		$	163,383
Land sale revenues		1,590			204

Total home and land sale revenues		186,268			163,587

Home cost of sales		(158,654	)		(140,981	)
Land cost of sales		(1,490	)		(17	)
Inventory impairments		—			(279	)

Total cost of sales		(160,144	)		(141,277	)

Gross margin		26,124			22,310

Selling, general and administrative expenses		(34,124	)		(47,654	)
Interest income		5,913			6,488
Interest expense		(808	)		(8,667	)
Other income (expense)		158			2,039

Homebuilding pretax loss		(2,737	)		(25,484	)

Financial Services:
Revenues		7,720			5,703
Expenses		(2,858	)		(3,923	)

Financial services pretax income		4,862			1,780

Income (loss) before income taxes		2,125			(23,704	)
Benefit (provision) for income taxes		140			3,825

Net income (loss)	$	2,265		$	(19,879	)

Other Comprehensive income (loss):
Unrealized gain related to available-for-sale securities		6,548			3,303

Comprehensive income (loss)	$	8,813		$	(16,576	)

Earnings (loss) per share:
Basic	$	0.04		$	(0.43	)
Diluted	$	0.04		$	(0.43	)
Weighted Average Common Shares Outstanding:
Basic		47,311,840			46,716,562
Diluted		47,575,470			46,716,562
Dividends declared per share	$	0.25		$	0.25

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

- 2 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
	(Unaudited)
Operating Activities:
Net income (loss)	$	2,265		$	(19,879	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation expense		2,611			3,121
Depreciation and amortization		1,307			1,590
Inventory impairments and write-offs of land option deposits		82			1,061
Amortization of (premium) discount on marketable debt securities		(152	)		436
Net changes in assets and liabilities:
Restricted cash		(413	)		1
Trade and other receivables		(11,062	)		(782	)
Mortgage loans held-for-sale		23,345			27,417
Housing completed or under construction		(45,875	)		26,972
Land and land under development		17,000			(73,507	)
Prepaid expenses and other assets		3,394			844
Accounts payable		7,792			(11,845	)
Accrued liabilities		(19,107	)		(13,130	)

Net cash provided by (used in) operating activities		(18,813	)		(57,701	)

Investing Activities:
Purchase of marketable securities		(185,610	)		(75,426	)
Sale of marketable securities		182,021			74,950
Purchase of property and equipment		(364	)		(483	)
Purchases of held-to-maturity debt securities		—			(40,000	)
Maturities of held-to-maturity debt securities		—			146,000

Net cash provided by (used in) investing activities		(3,953	)		105,041

Financing Activities:
Payments on mortgage repurchase facility		(53,625	)		(25,434	)
Advances on mortgage repurchase facility		30,763			6,736
Dividend payments		(11,994	)		(11,824	)

Net cash provided by (used in) financing activities		(34,856	)		(30,522	)

Net increase (decrease) in cash and cash equivalents		(57,622	)		16,818
Cash and cash equivalents:
Beginning of period		343,361			572,225

End of period	$	285,739		$	589,043

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 U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2012 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, 2011.

Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2012 presentation.

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, 2011 Annual Report on Form 10-K.

2.	Recently Adopted Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs , (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements , (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for the Company’s interim and annual periods beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on the Company’s consolidated financial position or results of operations for the 2012 first quarter.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income , (“ASU 2011-05”), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-05 were effective for our interim and annual periods beginning January 1, 2012 and were applied retrospectively. The adoption of the provisions of ASU 2011-05 in the 2012 first quarter did not have a material impact on the Company’s consolidated financial position or results of operations.

In September 2011, the FASB issued an amendment to ASC 350, Intangibles—Goodwill and Other (“ASC 350”), which simplifies how entities test goodwill for impairment. Previous guidance under ASC 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under ASC 350. The amendments are effective for us for annual and interim goodwill impairment tests performed for fiscal years beginning January 1, 2012, and early adoption is permitted. We adopted this standard in the 2012 first quarter. The adoption of the provisions of ASC 350 did not have a material impact on the Company’s consolidated financial position or results of operations.

- 4 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

3.	Segment Reporting

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 (Virginia and Maryland, which includes Pennsylvania, Delaware and New Jersey)

(4)

Other (Florida and Illinois)

The Company’s Financial Services 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.

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


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Home and land sale revenues:
West	$	70,012		$	42,393
Mountain		61,042			70,952
East		45,228			42,910
Other		11,256			9,846
Intercompany adjustments		(1,270	)		(2,514	)

Total home and land sale revenues	$	186,268		$	163,587

Homebuilding pretax income (loss):
West	$	166		$	(4,560	)
Mountain		2,159			(1,232	)
East		1,820			(1,956	)
Other		280			(776	)
Corporate		(7,162	)		(16,960	)

Total homebuilding pretax income (loss)	$	(2,737	)	$	(25,484	)

- 5 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The following table summarizes total assets for the Company’s homebuilding operations. Intercompany adjustments noted in the table below relate to loans from the Company’s Financial Services segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents, marketable securities and property and equipment, net.


	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Homebuilding assets:
West	$	363,724	$	346,442
Mountain		273,619		262,787
East		238,168		223,606
Other		29,193		31,468
Corporate		804,783		852,657
Intercompany adjustments		22		(96	)

Total homebuilding assets	$	1,709,509	$	1,716,864

4.	Earnings (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.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands, except per share amounts)
Basic and Diluted Earnings (Loss) Per Common Share:
Net income (loss)	$	2,265		$	(19,879	)
Less: distributed and undistributed earnings allocated to participating securities		(160	)		(159	)

Earnings (loss) attributable to common stockholders	$	2,105		$	(20,038	)

Basic weighted-average shares outstanding		47,311,840			46,716,562
Dilutive effect of common stock equivalents		263,630			—

Diluted weighted-average common shares outstanding,assuming conversion of common stock equivalents		47,575,470			46,716,562

Basic Earnings (Loss) Per Common Share	$	0.04		$	(0.43	)

Diluted Earnings (Loss) Per Common Share	$	0.04		$	(0.43	)

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 most stock options and unvested restricted stock. Unvested performance-based stock options of 0.3 million were excluded from the calculation of diluted EPS as the performance-based conditions were not met at March 31, 2012. Diluted EPS for the three months ended March 31, 2012 and 2011 excluded approximately 5.0 million shares of 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 included in diluted EPS was 0.3 million shares during the three months ended March 31, 2012.

- 6 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

5.	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 March 31, 2012 and December 31, 2011, all of the Company’s marketable securities were 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.

The following tables set forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities. The fair values of the Company’s equity securities are based upon Level 1 inputs, and the fair values of the Company’s debt securities are based on Level 2 inputs.


	March 31, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
			(Dollars in thousands)
Homebuilding:
Equity security	$	171,752	$	167,454	$	169,565	$	160,021
Debt securities		323,627		326,823		323,454		325,413

Total available-for-sale securities	$	495,379	$	494,277	$	493,019	$	485,434

Financial Services:
Total available-for-sale debt securities	$	35,544	$	35,955	$	34,164	$	34,509

As of March 31, 2012 and December 31, 2011, the Company’s marketable securities (homebuilding and financial services in aggregate) were in an unrealized loss position of $0.7 million and $7.2 million, respectively. The equity securities, which consist of three mutual fund accounts and have a combined unrealized loss of $4.3 million as of March 31, 2012, have been in this position for less than 12 months. Management currently does not have the intent to sell any of its securities that are currently in an unrealized loss position, and it is not likely that the Company will be required to sell these marketable securities before the recovery of their cost basis. Additionally, due to the short period of time that the Company’s marketable securities have been in an unrealized loss position, and that the decline in market value occurred during a period of overall decline in market values, the decline is believed to be temporary.

Mortgage Loans Held-for-Sale, Net. As of March 31, 2012, 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 March 31, 2012 and December 31, 2011, the Company had $46.5 million and $77.5 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 March 31, 2012 and December 31, 2011, the Company had $8.5 million and $0.8 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell, and as such, the fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

- 7 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Inventories. The Company’s inventories consist of housing completed or under construction and land and land under development. The Company’s inventories are primarily associated with subdivisions where the Company intends to construct and sell homes on the land, including model and unsold started homes. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering fees and permits and fees; (4) capitalized interest; and (5) indirect construction costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that the Company begins construction of a home on an owned lot. Costs capitalized to land and land under development primarily include: (1) land costs; (2) development costs for the land; (3) entitlement costs; (4) capitalized interest; and (5) title insurance, taxes and closing costs directly related to the purchase of the land parcel.

Homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. The Company determines impairments on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, the Company reviews, among other things, the following for each subdivision:

•

actual and trending “Operating Profit” (which is defined as home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) for homes closed;

•

estimated future undiscounted cash flows and Operating Profit;

•

forecasted Operating Profit for homes in Backlog (as defined);

•

actual and trending net and gross home orders;

•

base sales price and home sales incentive information for homes closed and homes in Backlog;

•

market information for each sub-market; and

•

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

If events or circumstances indicate that the carrying value of the Company’s inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. The Company generally determines the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. For the three months ended March 31, 2011, the Company recognized inventory impairment charges of $0.3 million. The discount rates used in the Company’s estimated discounted cash flows ranged from 13% to 18% during the 2011 first quarter. The Company did not record any inventory impairments during the three months ended March 31, 2012.

Related Party Assets. Related party assets are included in prepaid expenses and other assets in the Company’s Consolidated Balance Sheets. 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 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.

- 8 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Senior Notes: The estimated values of the senior notes in the following table are based on Level 2 inputs, including market prices of bonds in the homebuilding sector.


	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
			(Dollars in thousands)
5.375% Senior Notes due 2014	$	249,483	$	262,500	$	249,438	$	254,667
5.375% Senior Notes due 2015		249,866		260,000		249,857		252,083
5.625% Senior Notes due 2020		244,939		247,031		244,813		227,467

Total	$	744,288	$	769,531	$	744,108	$	734,217

6.	Capitalization of Interest

The Company capitalizes interest on its senior notes associated with its qualified 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 qualified asset and interest is no longer capitalized on that home. The Company expensed $0.8 million and $8.7 million of interest primarily associated with interest incurred on its homebuilding debt during the three months ended March 31, 2012 and 2011, respectively. The table set forth below summarizes homebuilding interest activity.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Interest Incurred	$	10,563		$	18,186

Interest capitalized, beginning of period	$	58,742		$	38,446
Interest capitalized during period		9,785			9,519
Less: Previously capitalized interest included in home cost of sales		(4,894	)		(4,203	)

Interest capitalized, end of period	$	63,633		$	43,762

7.	Homebuilding Prepaid Expenses and Other Assets

The following table sets forth the information relating to prepaid expenses and other assets.


	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Deferred marketing costs	$	19,837	$	20,786
Land option deposits		4,762		6,952
Deferred debt issuance costs, net		3,090		3,235
Prepaid expenses		3,437		4,376
Related party assets		6,663		6,663
Goodwill and intangible assets, net		6,252		6,308
Other		2,269		2,103

Total	$	46,310	$	50,423

- 9 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

8.	Homebuilding Accrued Liabilities

The following table sets forth information relating to accrued liabilities.


	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Warranty reserves		25,076		25,525
Accrued interest payable		10,182		13,698
Accrued executive deferred compensation		24,971		24,136
Liability for unrecognized tax benefits		3,333		3,303
Legal accruals		1,750		9,360
Land development and home construction accruals		9,964		10,619
Accrued compensation and related expenses		8,209		11,350
Customer and escrow deposits		7,369		5,468
Other accrued liabilities		13,751		15,729

Total accrued liabilities	$	104,605	$	119,188

9.	Warranty Accrual

The Company records expenses and warranty accruals for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The Company’s management estimates the warranty reserves based on 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 accrual established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate. The table set forth below summarizes warranty accrual activity for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	25,525		$	34,704
Expense provisions		765			841
Cash payments		(1,214	)		(1,499	)
Adjustments		—			(431	)

Balance at end of period	$	25,076		$	33,615

Cash payments for the 2012 first quarter includes an offset comprised of $1.3 million of cash received from a third party vendor for amounts that were originally paid from the Company’s warranty reserves.

10.

Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies with Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”) and re-insurance agreements issued by StarAmerican Insurance Ltd. (“StarAmerican”); (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.

- 10 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The table set forth below summarizes the insurance reserve activity for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	50,459		$	52,901
Expense provisions		644			480
Cash payments		(6,181	)		(1,350	)

Balance at end of period	$	44,922		$	52,031

In the ordinary course of business, the Company makes payments from its insurance reserves to settle litigation claims arising primarily from its homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the $6.2 million in cash payments shown for the 2012 first quarter are not necessarily indicative of what future cash payments will be for any subsequent quarter.

11.

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 2012 and 2011 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax income or loss. The income tax benefit of $0.1 million during the three months ended March 31, 2012 was not material to our results of operations. The Company’s income tax benefit of $3.8 million during the three months ended March 31, 2011 resulted primarily from our 2011 first quarter settlement with the IRS on the audit of our 2004 and 2005 federal income tax returns.

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 decrease in the Company’s total deferred tax asset at March 31, 2012 (per the table below) resulted primarily from a decrease in the Company’s unrealized loss on marketable securities.

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 March 31, 2012 and December 31, 2011, 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.

- 11 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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


	March 31, 2012			December 31, 2011
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss carryforward	$	138,294		$	133,454
State net operating loss carryforward		53,890			53,350
Asset impairment charges		27,871			31,137
Accrued liabilities		26,298			29,600
Stock-based compensation expense		26,946			26,771
Alternative minimum tax and other tax credit carryforwards		10,296			10,296
Inventory, additional costs capitalized for tax		3,466			3,466
Unrealized loss on marketable securities		266			2,787
Other		1,541			1,522

Total deferred tax assets		288,868			292,383
Valuation allowance		(277,185	)		(281,178	)

Total deferred tax assets, net of valuation allowance		11,683			11,205

Deferred tax liabilities:
Deferred revenue		5,959			5,589
Property, equipment and other assets		804			706
Accrued liabilities		32			32
Inventory, additional costs capitalized for financial statement		538			542
Other, net		4,350			4,336

Total deferred tax liabilities		11,683			11,205

Net deferred tax asset	$	—		$	—

12.

Senior Notes

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 following table sets forth the carrying amount of the Company’s senior notes as of March 31, 2012 and December 31, 2011:


	March 31, 2012		December 31, 2011
	(Dollars in thousands)
5.375% Senior Notes due 2014	$	249,483	$	249,438
5.375% Senior Notes due 2015		249,866		249,857
5.625% Senior Notes due 2020		244,939		244,813

Total	$	744,288	$	744,108

13.

Stock Based Compensation

We account for share-based awards in accordance with Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation, which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at the fair value on the date of grant.

During the three months ended March 31, 2012 and 2011, the Company recognized $1.1 million and $2.0 million, respectively, for option awards. The Company recognized $1.5 million and $1.1 million for restricted stock grants during the three months ended March 31, 2012 and 2011, respectively.

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

On March 8, 2012, the Company granted a long term performance-based non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 500,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of the performance-based options provide that, over a three year period, one third of the option shares will vest as of March 1 following any fiscal year in which, in addition to the Company achieving a Home Gross Margin of at least 16.7% (as calculated in the Company’s 2011 Form 10-K, excluding warranty adjustments and interest), the Company achieves: (1) at least a 10% increase in total revenue over 2011 (166,667 option shares vest); (2) at least a 15% increase in total revenue over 2011 (166,667 option shares vest); or (3) at least a 20% increase in total revenue over 2011 (166,666 option shares vest). Any of the three tranches of option shares that are not performance vested by March 1, 2015 shall be forfeited. ASC 718 prohibits recognition of expense associated with performance based stock awards until achievement of the performance targets are probable of occurring. As of March 31, 2012, the Company had concluded that achievement of the performance targets had not met the level of probability required to record compensation expense at that time, and as such, no compensation expense was recognized related to the grant of these awards during the 2012 first quarter.

In accordance with ASC 718, the performance-based awards are valued at the fair value on the date of grant. The grant date fair value of these awards was $7.42 per share. The maximum potential expense that would be recognized by the Company if all of the performance targets were met would be approximately $7.4 million.

14.

Commitments and Contingencies

Surety Bonds and Letters of Credit. The Company is required to obtain surety bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2012, the Company had issued and outstanding surety bonds and letters of credit totaling $62.0 million and $19.1 million, respectively, including $6.2 million in letters of credit issued by HomeAmerican. In the event any such surety 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 things: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; and (2) a current assessment of the potential exposure associated with future claims of fraud in mortgage loans originated in prior periods. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Financial Services Segment of the Consolidated Balance Sheets, and the associated expenses are included in expenses in the Financial Services segment of the accompanying Consolidated Statements of Operations.

The following table summarizes the mortgage loan loss reserve activity for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	442		$	6,881
Expense provisions		294			—
Cash payments		(97	)		(207	)
Adjustments		—			962

Balance at end of period	$	639		$	7,636

During 2011, HomeAmerican reached settlements with third parties concerning claims and potential claims to repurchase certain previously sold mortgage loans, including a comprehensive settlement with Bank of America. The Company believes that the settlements substantially reduce its future exposure to liabilities associated with previously sold mortgage loans.

Legal Accruals. Litigation was 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 sought compensatory and

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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 was comprised of 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 66 plaintiffs from 15 households. The Company and RAH West Virginia 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 86 plaintiffs from 21 households. This action was 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 35 plaintiffs from nine households. This action was consolidated for discovery and pre-trial proceedings with the Joy action.

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 40 plaintiffs from 11 households in Jefferson and Berkeley Counties. This action was not consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case were substantially similar to the Joy, Bauer and Saliba cases.

These cases have been settled and Orders dismissing the cases with prejudice were entered by the Court on March 5, 2012. The March 5, 2012 Orders entered by the Court in the Joy, Bauer and Saliba cases also vacated default judgments that had been entered against MDC and RAH West Virginia. The settlement payments made by the Company did not exceed the amounts already recognized by the Company in prior periods.

On September 28, 2011, a shareholder derivative lawsuit was filed by Martha Woodford in the United States District Court for the District of Delaware, Civil Action No. 11-00879-RGA. In the lawsuit, the plaintiff made claims against our board of directors and certain executive officers for alleged breaches of fiduciary duty, violation of Section 14(a) of the Securities Exchange Act, corporate waste and unjust enrichment relating to the Company’s executive officer compensation practices. The plaintiff sought monetary damages and injunctive relief on behalf of the Company, and attorneys’ and other professional fees and costs.

The parties settled this lawsuit and the settlement was approved by the Court on March 8, 2012, thereby dismissing the lawsuit with prejudice. Under the terms of the settlement, the Company agreed to implement certain corporate governance procedures and paid legal fees of the plantiffs. The Company’s directors and executive officers admitted no liability. The legal fees paid by the Company to the plantiffs did not exceed the amounts already recognized by the Company in prior periods.

Lot Option Contracts. In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments 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 March 31, 2012 the Company had cash deposits and letters of credit of $4.8 million and $3.6 million, respectively, at risk associated with 1,464 lots under Option Contracts.

15.

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

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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 March 31, 2012, the Company had $35.8 million in interest rate lock commitments and $31.0 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 Financial Services revenues in the Consolidated Statements of Operations and Comprehensive Income with an offset to Financial Services prepaid expenses and other assets or accounts payable or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change.

16.

Mortgage Repurchase Facility

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement, (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”) which matures on September 27, 2012. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. As of March 31, 2012, the Mortgage Repurchase Facility has a maximum aggregate commitment of $50 million, reduced from $70 million through the fourth amendment in September 2011. At March 31, 2012 and December 31, 2011, we had $25.8 million and $48.7 million, respectively, of mortgage loans that we are obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that we are obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility on the Consolidated Balance Sheets. Advances under the Mortgage Repurchase Facility carry a Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.5%, or (ii) 3.75%. At HomeAmerican’s option the Balance Funded Rate (equal to 3.75%) may be applied to advances under the Mortgage Repurchase Facility provided the applicable Buyer is holding sufficient Qualifying Balances. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants customary for agreements of this type. The negative covenants include, among others, (i) an Adjusted Tangible Net Worth requirement, (ii) a minimum Adjusted Tangible Net Worth Ratio, (iii) an Adjusted Net Income requirement, (iv) a minimum Liquidity requirement; and (v) a requirement that HomeAmerican’s HUD Compare Ratio may be no more than 1.50 to 1.00. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we are in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility and we are not aware of any covenant violations.

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 wholly-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.

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

•

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.

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Balance Sheets


	March 31, 2012
	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(dollars in thousands)
ASSETS
Homebuilding:
Cash and cash equivalents	$	259,998		$	3,263	$	42		$	—		$	263,303
Marketable securities		494,277			—		—			—			494,277
Restricted cash		—			1,080		—			—			1,080
Trade and other receivables		7,231			26,591		237			—			34,059
Inventories
Housing completed or under construction		—			323,099		23,566			—			346,665
Land and land under development		—			468,806		19,636			—			488,442
Investment in subsidiaries		134,911			—		—			(134,911	)		—
Other assets, net		43,276			30,259		8,126			22			81,683

Total Homebuilding Assets		939,693			853,098		51,607			(134,889	)		1,709,509
Financial Services:
Cash and cash equivalents		—			—	$	22,436			—			22,436
Marketable securities		—			—		35,955			—			35,955
Mortgage loans held-for-sale, net		—			—		54,990			—			54,990
Prepaid expenses and other assets		—			—		4,381			(1,700	)		2,681

Total Financial Services Assets		—			—		117,762			(1,700	)		116,062

Total Asset	$	939,693		$	853,098	$	169,369		$	(136,589	)	$	1,825,571

LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	62		$	31,682	$	1,672			—		$	33,416
Accrued liabilities		52,562			46,650		5,371			22			104,605
Advances and notes payable to parent and subsidiaries		(725,285	)		708,320		25,734			(8,769	)		—
Senior notes, net		744,288			—		—			—			744,288

Total Homebuilding Liabilities		71,627			786,652		32,777			(8,747	)		882,309

Financial Services:
Accounts payable and other liabilities		—			—		49,356			—		$	49,356
Advances and notes payable to parent and subsidiaries		—			—		(7,069	)		7,069			—
Mortgage repurchase facility		—			—		25,840			—			25,840
Senior notes, net		—			—		—			—			—

Total Financial Services Liabilities		—			—		68,127			7,069			75,196

Total Liabilities		71,627			786,652		100,904			(1,678	)		957,505

Equity:
Total Stockholder’s Equity		868,066			66,446		68,465			(134,911	)		868,066

Total Liabilities and Stockholders’ Equity	$	939,693		$	853,098	$	169,369		$	(136,589	)	$	1,825,571

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Balance Sheets


	December 31, 2011
	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(dollars in thousands)
ASSETS
Homebuilding:
Cash and cash equivalents		313,566		$	2,771	$	81		$	—		$	316,418
Marketable securities		485,434			—		—			—			485,434
Restricted cash		—			667		—			—			667
Trade and other receivables		8,368			12,740		485			—			21,593
Inventories
Housing completed or under construction		—			280,932		19,782			—			300,714
Land and land under development		—			489,305		16,033			—			505,338
Investment in subsidiaries		126,768			—		—			(126,768	)		—
Other assets, net		45,287			33,074		8,435			(96	)		86,700

Total Homebuilding Assets		979,423			819,489		44,816			(126,864	)		1,716,864
Financial Services:
Cash and cash equivalents		—			—		26,943			—			26,943
Marketable securities		—			—		34,509			—			34,509
Mortgage loans held-for-sale, net		—			—		78,335			—			78,335
Prepaid expenses and other assets		—			—		3,774			(1,700	)		2,074

Total Financial Services Assets		—			—		143,561			(1,700	)		141,861

Total Asset	$	979,423		$	819,489	$	188,377		$	(128,564	)	$	1,858,725

LIABILITIES AND EQUITY
Homebuilding:
Accounts payable		—			23,409		2,236			—		$	25,645
Accrued liabilities		67,199			50,271		1,814			(96	)		119,188
Advances and notes payable to parent and subsidiaries		(700,520	)		682,088		21,998			(3,566	)		0
Senior notes, net		744,108			—		—			—			744,108

Total Homebuilding Liabilities		110,787			755,768		26,048			(3,662	)		888,941

Financial Services:
Accounts payable and other liabilities		—			—		52,446			—		$	52,446
Advances and notes payable to parent and subsidiaries		—			—		(1,866	)		1,866			0
Mortgage repurchase facility		—			—		48,702			—			48,702
Senior notes, net		—			—		—			—			—

Total Financial Services Liabilities		—			—		99,282			1,866			101,148

Total Liabilities	$	110,787		$	755,768	$	125,330		$	(1,796	)	$	990,089

Equity:
Total Stockholder’s Equity		868,636			63,721		63,047			(126,768	)		868,636

Total Liabilities and Stockholders’ Equity	$	979,423		$	819,489	$	188,377		$	(128,564	)	$	1,858,725

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statements of Operations


	Three Months Ended March 31, 2012
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
				(Dollars in thousands)
Homebuilding:
Revenues	$	—		$	175,532		$	12,006		$	(1,270	)	$	186,268
Cost of Sales		—			(151,074	)		(10,340	)		1,270			(160,144	)
Asset impairments		—			—			—			—			—

Gross Margin		—			24,458			1,666			—			26,124

Selling, general, and administrative expenses		(12,308	)		(21,993	)		177			—			(34,124	)
Equity income (loss) of subsidiaries		7,705			—			—			(7,705	)		—
Interest expense		(778	)		(30	)		—			—			(808	)
Interest income		5,910			3			—			—			5,913
Other income (expense)		18			117			23			—			158

Homebuilding pretax income (loss)		547			2,555			1,866			(7,705	)		(2,737	)

Financial Services:
Financial Services pretax income (loss)		—			—			4,862			—			4,862

Income (loss) before income taxes		547			2,555			6,728			(7,705	)		2,125
(Provision) benefit for income taxes		1,718			168			(1,746	)		—			140

Net income (loss)	$	2,265		$	2,723		$	4,982		$	(7,705	)	$	2,265


	Three Months Ended March 31, 2011
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
				(Dollars in thousands)
Homebuilding:
Revenues	$	—		$	166,101		$	—		$	(2,514	)	$	163,587
Cost of Sales		—			(143,512	)		—			2,514			(140,998	)
Asset impairments		—			(279	)		—			—			(279	)

Gross Margin		—			22,310			—			—			22,310

Selling, general, and administrative expenses		(17,082	)		(30,572	)		—			—			(47,654	)
Equity income (loss) of subsidiaries		(6,052	)		—			—			6,052			—
Interest expense		(8,667	)		—			—			—			(8,667	)
Interest income		6,476			12			—			—			6,488
Other income (expense)		2,314			(281	)		6			—			2,039

Homebuilding pretax income (loss)		(23,011	)		(8,531	)		6			6,052			(25,484	)

Financial Services:
Financial Services pretax income (loss)		—			—			1,780			—			1,780

Income (loss) before income taxes		(23,011	)		(8,531	)		1,786			6,052			(23,704	)
(Provision) benefit for income taxes		3,132			1,376			(683	)		—			3,825

Net income (loss)	$	(19,879	)	$	(7,155	)	$	1,103		$	6,052		$	(19,879	)

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statements of Cash Flows


	Three Months Ended March 31, 2012
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
				(Dollars in thousands)
Net cash provided by (used in) operating activities	$	(6,281	)	$	(25,595	)	$	20,768		$	(7,705	)	$	(18,813	)

Net cash used in investing activities		(2,385	)		(147	)		(1,421	)		—			(3,953	)

Financing activities:
Payments from (advances to) subsidiaries		(32,908	)		26,234			(1,031	)		7,705			—
Proceeds from issuance of senior notes, net		—			—			—			—			—
Mortgage repurchase facility		—			—			(22,862	)		—			(22,862	)
Dividend payments		(11,994	)		—			—			—			(11,994	)

Net cash provided by (used in) financing activities		(44,902	)		26,234			(23,893	)		7,705			(34,856	)

Net (decrease) increase in cash and cash equivalents		(53,568	)		492			(4,546	)		—			(57,622	)
Cash and cash equivalents
Beginning of period		313,566			2,771			27,024			—			343,361

End of period	$	259,998		$	3,263		$	22,478		$	—		$	285,739


	Three Months Ended March 31, 2011
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
				(Dollars in thousands)
Net cash provided by (used in) operating activities	$	(19,469	)	$	(71,781	)	$	24,840		$	8,709		$	(57,701	)

Net cash provided by (used in) investing activities		104,104			(11	)		948			—			105,041

Financing activities:
Payments from (advances to) subsidiaries		(58,100	)		70,446			(3,637	)		(8,709	)		—
Proceeds from issuance of senior notes, net		—			—			—			—			—
Mortgage repurchase facility		—			—			(18,698	)		—			(18,698	)
Dividend payments		(11,824	)		—			—			—			(11,824	)

Net cash provided by (used in) financing activities		(69,924	)		70,446			(22,335	)		(8,709	)		(30,522	)

Net increase (decrease) in cash and cash equivalents		14,711			(1,346	)		3,453			—			16,818
Cash and cash equivalents
Beginning of period		535,035			4,287			32,903			—			572,225

End of period	$	549,746		$	2,941		$	36,356		$	—		$	589,043

- 20 -

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, 2011 and this Quarterly Report on Form 10-Q.

Selected Financial Information (unaudited)


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	184,678		$	163,383
Land sale revenues		1,590			204

Total home sale and land revenues		186,268			163,587

Home cost of sales		(158,654	)		(140,981	)

Land cost of sales		(1,490	)		(17	)
Inventory impairments		—			(279	)

Total cost of sales		(160,144	)		(141,277	)

Gross margin		26,124			22,310

Gross margin %		14.0	%		13.6	%

Selling, general and administrative expenses		(34,124	)		(47,654	)
Interest expense		(808	)		(8,667	)
Interest income		5,913			6,488
Other revenue		243			493
Other expense		(85	)		1,546

Homebuilding pretax loss		(2,737	)		(25,484	)

Financial Services:
Revenues		7,720			5,703
Expenses		(2,858	)		(3,923	)

Financial services pretax income		4,862			1,780

Income (loss) before income taxes		2,125			(23,704	)
Benefit from income taxes		140			3,825

Net income (loss)	$	2,265		$	(19,879	)

Earnings (loss) per share:
Basic	$	0.04		$	(0.43	)
Diluted	$	0.04		$	(0.43	)
Dividends declared per share	$	0.25		$	0.25
Weighted Average Common Shares Outstanding:
Basic		47,311,840			46,716,562
Diluted		47,575,470			46,716,562
Cash (Used in) Provided by:
Operating Activities	$	(18,813	)	$	(57,701	)
Investing Activities	$	(3,953	)	$	105,041
Financing Activities	$	(34,856	)	$	(30,522	)

- 21 -

Overview

Our goal for 2012 is to return to profitability for the full year, even if overall market conditions do not improve. We have implemented or are in the process of implementing four strategic initiatives to achieve this goal: (1) increasing our active subdivision count, (2) reducing our general and administrative expenses, (3) reducing our capital costs, and (4) improving our sales process and sales organization. Further detail on these strategies can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2011.

During the 2012 first quarter, as a part of our strategy to improve our sales process and organization, we adjusted the way we sell home upgrades to our customers by including a higher level of upgrades in our base home price in communities across the country. We also implemented stricter standards that must be met before we recognize a home sales contract as a new order. Our goal in making these adjustments to our sales process is to better demonstrate the value proposition of our product offering to prospective homebuyers, which we believe will result in an increase in our pace of new home orders, reduce our cancellation rate and improve our gross margins.

We believe the four strategies outlined above had a significant impact on the improvement in our operating results for the first quarter of 2012, as we reported net income of $2.3 million, or $0.04 per diluted share, compared to a net loss of $19.9 million, or $0.43 per diluted share for the first quarter of 2011. The $22.1 million increase in net income was driven primarily by a 13% increase in home sale revenues, a $13.5 million decrease in our homebuilding selling, general and administrative expenses, and a $7.9 million decrease in interest expense.

Additionally, a combination of the strategic changes to our operations and an improvement in overall market conditions for the homebuilding industry drove a 51% increase in net new orders for the 2012 first quarter, as well as a decrease in our cancellation rate from 32% in the 2011 first quarter to 21% in the 2012 first quarter. As a result of these strong orders, our quarter-end backlog increased by 50% year-over-year to 1,487 homes.

Our financial position remained strong at the end of the quarter, as evidenced by our total cash and marketable securities of $816.0 million, which exceeded our senior notes by $72 million. We believe that our strong financial position gives us a competitive advantage as we pursue attractive land acquisition opportunities, which can help us further grow our operations in the future.

- 22 -

Homebuilding


	Three Months Ended March 31,						Change
	2012			2011			Amount		%
				(Dollars in thousands)
Homebuilding pretax income (loss):
West	$	166		$	(4,560	)		4,726		104	%
Mountain		2,159			(1,232	)		3,391		275	%
East		1,820			(1,956	)		3,776		193	%
Other		280			(776	)		1,056		136	%
Corporate		(7,162	)		(16,960	)		9,798		58	%

Total homebuilding pretax income (loss)	$	(2,737	)	$	(25,484	)	$	22,747		89	%


	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Homebuilding assets:
West	$	363,724	$	346,442
Mountain		273,619		262,787
East		238,168		223,606
Other		29,193		31,468
Corporate		804,783		852,657
Intercompany adjustments		22		(96	)

Total homebuilding assets	$	1,709,509	$	1,716,864

For the first quarter of 2012, we reported a homebuilding pretax loss of $2.7 million, compared to a pretax loss of $25.5 million for the first quarter of 2011. The $22.7 million improvement in our homebuilding financial performance was driven primarily by a $21.3 million increase in home sale revenues, a $13.5 million decrease in our homebuilding selling, general and administrative expenses, and a $7.9 million decrease in interest expense.

The pretax results for our West segment improved $4.7 million due to an increase in homebuilding revenues, including the addition of the Washington market to our operations, and a reduction of selling, general and administrative (“SG&A”) expenses, partially offset by a decrease in our gross margin percentage. For our Mountain segment, pretax results improved $3.4 million due to an increase in our gross margin percentage and a reduction of SG&A expenses, partially offset by a decrease in homebuilding revenues. Pretax results for our East segment improved $3.8 million, almost entirely related to a decrease in our SG&A expenses, which included a benefit from a sizable legal recovery during the 2012 first quarter. For our Other homebuilding segment, pretax results increased $1.1 million due to a reduction of SG&A expenses. The pretax results for our non-operating Corporate segment improved $9.8 million due to a reduction of both interest and SG&A expenses.

Revenues


	Three Months Ended March 31,						Change
	2012			2011			Amount			%
				(Dollars in thousands)
Home and land sale revenues:
West	$	70,012		$	42,393		$	27,619			65	%
Mountain		61,042			70,952			(9,910	)		-14	%
East		45,228			42,910			2,318			5	%
Other		11,256			9,846			1,410			14	%
Intercompany adjustments		(1,270	)		(2,514	)		1,244			50	%

Total home and land sale revenues	$	186,268		$	163,587		$	22,681			14	%

Total home and land sale revenues for the 2012 first quarter increased 14% to $186.3 million compared to $163.6 million for the prior year period. The increase in revenues was driven primarily by a 12% increase in new home deliveries to 619 homes as compared to 554 in the prior year. The Company’s consolidated average selling price for homes closed was essentially flat at $298,300 for the 2012 first quarter compared to $294,900 for the 2011 first quarter.

- 23 -


	Three Months Ended March 31,				Change
	2012		2011		Amount			%
Homes closed:
Arizona		88		77		11			14	%
California		55		48		7			15	%
Nevada		106		66		40			61	%
Washington		44		—		44			N/A

West		293		191		102			53	%

Colorado		125		166		(41	)		-25	%
Utah		52		54		(2	)		-4	%

Mountain		177		220		(43	)		-20	%

Maryland		44		57		(13	)		-23	%
Virginia		59		43		16			37	%

East		103		100		3			3	%

Florida		46		43		3			7	%
Illinois		—		—		—			N/A

Other Homebuilding		46		43		3			7	%

Total		619		554		65			12	%


	Three Months Ended March 31,				Change
	2012		2011		Amount			%
			(in thousands)
Average selling price:
Arizona	$	205.7	$	180.0	$	25.7			14	%
California		328.9		317.3		11.6			4	%
Nevada		205.7		201.5		4.2			2	%
Washington		272.9		N/A		N/A			N/A
Colorado		362.5		336.8		25.7			8	%
Utah		273.2		274.9		(1.7	)		-1	%
Maryland		429.6		428.4		1.2			0	%
Virginia		446.2		430.0		16.2			4	%
Florida		243.4		229.0		14.4			6	%
Illinois		N/A		N/A		N/A			N/A

Company Average	$	298.3	$	294.9	$	3.4			1	%

New home deliveries increased 12% during the three months ended March 31, 2012 compared to the same period in the prior year. The increase is primarily attributable to a 24% increase in the number of homes in backlog to start the 2012 first quarter as compared to the prior year period. This increase was partially offset by a decrease in the percentage of backlog that was under construction at the beginning of the quarter.

Average selling price increased year-over-year in most of our markets, primarily due to a shift of closings to more desirable communities within each market. However, our overall average selling price remained flat due to a shift in the mix of closings between markets. In particular, Colorado and Maryland, where our average selling prices are among our highest, experienced year-over-year closings decreases of 25% and 23%, respectively, while Nevada, where our average selling price was our lowest, increased closings year-over-year by 61%. In addition, we closed 44 homes, or 7% of our 2012 first quarter total closings, from our newly acquired Washington operation, where the average selling price is less than our consolidated average selling price, versus closings no homes in the Washington market in the prior year period. These shifts in the mix of our homes closed were partially offset by a 37% increase in homes closed in Virginia, where the average selling price is our highest.

- 24 -

Gross Margin

Gross margin from home sales for the 2012 first quarter was 14.1% versus 13.5% for the year earlier period and 14.6% for the 2011 fourth quarter. The 2011 first quarter included $0.3 million in inventory impairments and a $0.4 million benefit related to a warranty accrual reduction, while the 2012 first quarter did not include any inventory impairments or warranty accrual adjustments and the 2011 fourth quarter included $0.8 million in inventory impairments and a $2.3 million benefit related to a warranty accrual reduction.

Excluding inventory impairments, warranty accrual adjustments and previously capitalized interest in cost of sales, adjusted gross margin from home sales was 16.7% for the 2012 first quarter, higher than the 16.0% for the 2011 first quarter and relatively flat compared to 16.8% for the 2011 fourth quarter (please see table set forth below reconciling this non-GAAP measure to our gross margin from home sales). The 70 basis point year-over-year improvement in our adjusted gross margin from home sales was driven by delivering a significantly higher percentage of homes started with a buyer under contract, which historically have been more profitable than homes that are started without a buyer under contract.

The table set forth below is a reconciliation of our gross margin, as reported, to gross margin from home sales and gross margins from home sales excluding inventory impairments, warranty adjustments and interest in home cost of sales.


	March 31, 2012			Gross Margin %			December 31, 2011			Gross Margin %			March 31, 2011			Gross Margin %
							(Dollars in millions)
Gross Margin	$	26,124			14.0	%	$	33,827			14.1	%	$	22,310			13.6	%
Less: Land Sales Revenue		(1,590	)					(8,360	)					(204	)
Add: Land Cost of Sales		1,490						8,314						17

Gross Margin from Home Sales	$	26,024			14.1	%	$	33,781			14.6	%	$	22,123			13.5	%
Add: Inventory Impairments		—						811						279
Add: Interest in Cost of Sales		4,895						6,355						4,203
Less: Warranty Adjustments		—						(2,251	)					(431	)

Adjusted Gross Margin from Home Sales (1)	$	30,919			16.7	%	$	38,696			16.8	%	$	26,174			16.0	%

(1)

Adjusted gross margin from home sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that inventory impairments, warranty adjustments and interest have on our Gross Margin from Home Sales and permits investors to make better comparisons with our competitiors, who also break out and adjust gross margins in a similar fashion.

Selling, General and Administrative Expense

Our 2012 first quarter homebuilding selling, general and administrative (“SG&A”) expenses (includes Corporate general and administrative expense) decreased 28% to $34.1 million, compared to $47.7 million for 2011 first quarter. The primary driver of the decrease in SG&A expenses related to a $7.0 million reduction in compensation-related expenses resulting largely from a 32% decrease in our headcount made to adjust our business to the overall level of homebuilding activity and $3.8 million in legal recoveries. SG&A expenses included $0.9 million in restructuring charges related to employee severance costs incurred in connection with adjusting the size of our workforce.

Interest Income

Our 2012 first quarter interest income was $5.9 million, compared to $6.5 million for the 2011 first quarter. The decrease was attributable to a year-over-year decline in our cash and cash equivalents and marketable securities balance resulting from the repayment of $500 million of senior notes during the second half of 2011, which was partially offset by an increase in the overall rate of return earned by us on those balances.

- 25 -

Interest Expense

We expensed $0.8 million and $8.6 million of interest expense for the three months ended 2012 and 2011, respectively, related to the portion of our homebuilding debt that exceeded our qualified assets. The 91% year-over-year decrease in interest expense related primarily to our repayment of $500 million of senior debt during the last half of 2011, which significantly reduced the amount by which our homebuilding debt exceeds our qualified assets.

Other Income (Expense)


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Other revenues	$	243		$	493
Other expenses		(85	)		1,546

Other income (expense)	$	158		$	2,039

For the three month ended March 31, 2012, we had other income of $0.2 million, compared to other income of $2.0 million during the three months ended March 31, 2011. The other income in the 2011 first quarter related primarily to the release of a $2.7 million employment tax contingency reserve as a result of the finalization of an IRS examination. This item was partially offset by $1.1 million in other expenses, primarily write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise and due diligence costs associated with our acquisition of homebuilding assets in Washington.

Operating Data


	Three Months Ended March 31,				Change
	2012		2011		Amount			%
			(Dollars in thousands)
Net new orders:
Arizona		187		122		65			53	%
California		121		77		44			57	%
Nevada		166		88		78			89	%
Washington		76		—		76			N/A

West		550		287		263			92	%

Colorado		235		181		54			30	%
Utah		68		67		1			1	%

Mountain		303		248		55			22	%

Maryland		83		46		37			80	%
Virginia		90		68		22			32	%

East		173		114		59			52	%

Florida		36		51		(15	)		-29	%
Illinois		1		5		(4	)		-- -80	%

Other		37		56		(19	)		-34	%

Total		1,063		705		358			51	%

Estimated Value of Orders for Homes, net	$	322,000	$	205,000	$	117,000			57	%
Estimated Average Selling Price of Orders for Homes, net	$	302.9	$	290.8	$	12.1			4	%

- 26 -


	March 31,				Change
	2012		2011		Amount			%
Active Subdivisions:
Arizona		22		29		(7	)		-24	%
California		18		16		2			13	%
Nevada		20		19		1			5	%
Washington		11		—		11			N/A

West		71		64		7			11	%

Colorado		48		42		6			14	%
Utah		17		18		(1	)		-6	%

Mountain		65		60		5			8	%

Maryland		18		14		4			29	%
Virginia		16		10		6			60	%

East		34		24		10			42	%

Florida		16		13		3			23	%
Illinois		—		1		(1	)		-100	%

Other Homebuilding		16		14		2			14	%

Total		186		162		24			15	%

Average for quarter ended		187		155		32			21	%

Net new orders for the 2012 first quarter increased 51% to 1,063 homes, compared with 705 homes during the same period in 2011. Our monthly sales absorption rate for the 2012 first quarter was 1.9 per community, compared to 1.5 per community for the 2011 first quarter and 0.9 per community for the 2011 fourth quarter. We experienced substantial order growth in most of our markets due to a combination of increased year-over-year community count, a change in our sales processes and procedures, and the overall improvement in housing market conditions. However, Utah net new orders increased by only 1% year-over-year and Florida net new orders decreased by 29% year-over-year, in part due to recent management changes in these markets.


	Three Months Ended March 31,						Change in Percentage
	2012			2011			Change in Percentage
Cancellation rate:
Arizona		19.4	%		28.2	%		-8.8	%
California		19.3	%		33.6	%		-14.3	%
Nevada		18.6	%		25.4	%		-6.8	%
Washington		13.6	%		N/A			N/A

West		18.0	%		29.0	%		-11.0	%

Colorado		21.4	%		37.8	%		-16.4	%
Utah		20.9	%		36.2	%		-15.3	%

Mountain		21.3	%		37.3	%		-16.0	%

Maryland		26.5	%		42.5	%		-16.0	%
Virginia		27.4	%		18.1	%		9.3	%

East		27.0	%		30.1	%		-3.1	%

Florida		26.5	%		29.2	%		-2.7	%
Illinois		N/A			N/A			N/A

Other		26.1	%		29.1	%		-3.0	%

Total		21.0	%		32.3	%		-11.3	%

Our cancellation rate for the 2012 first quarter was 21% versus 32% in the prior year first quarter and 43% in the 2011 fourth quarter. The improvement in our cancellation rate reflects overall improvement in housing market conditions and the implementation of more strict underwriting standards for recognizing new home orders as a part of our efforts to improve our sales processes. Cancellation rates improved in almost every market, with the exception of Virginia.

- 27 -


	March 31,
	2012				2011				% Change
	Homes		Dollar Value		Homes		Dollar Value		Homes			Dollar Value
	(Dollars in thousands)
Backlog:
Arizona		227	$	49,000		129	$	25,100		76	%		95	%
California		184		61,700		108		33,400		70	%		85	%
Nevada		216		42,500		98		19,900		120	%		114	%
Washington		86		25,900		—		—		N/A			N/A

West		713		179,100		335		78,400		113	%		128	%

Colorado		343		127,100		288		99,500		19	%		28	%
Utah		84		23,700		82		22,600		2	%		5	%

Mountain		427		150,800		370		122,100		15	%		24	%

Maryland		152		64,100		115		51,200		32	%		25	%
Virginia		134		67,100		95		41,100		41	%		63	%

East		286		131,200		210		92,300		36	%		42	%

Florida		60		15,700		72		17,500		-17	%		-10	%
Illinois		1		200		6		1,700		-83	%		-88	%

Other Homebuilding		61		15,900		78		19,200		-22	%		-17	%

Total		1,487	$	477,000		993	$	312,000		50	%		53	%

Estimated Average Selling Price of Homes in Backlog			$	320.8			$	314.2					2	%

We ended the 2012 first quarter with 1,487 homes in backlog, with an estimated sales value of $477 million, compared with a backlog of 993 homes with an estimated sales value of $312 million at March 31, 2011. The 50% increase in the number of homes in our backlog was primarily the result of a 51% increase in net orders during the 2012 first quarter and a shift to more presold homes versus speculative home sales.


	March 31,				Change
	2012		2011		Amount			%
Homes started:
Unsold Started Homes—Completed		147		67		80			119	%
Unsold Started Homes—Frame		222		570		(348	)		-61	%
Unsold Started Homes—Foundation		158		37		121			327	%

Total Unsold Started Homes		527		674		(147	)		-22	%
Sold Homes Started		872		641		231			36	%
Model Homes		236		246		(10	)		-4	%

Total homes started		1,635		1,561		74			5	%

Our total homes started increased to 1,635 at March 31, 2012 from 1,561 at March 31, 2011, primarily relating to a higher number of sold homes started in light of our year-over-year increase in backlog. Our focus on reducing our spec inventory partially offset the increase in sold homes started.

- 28 -


	March 31, 2012						March 31, 2011
	Lots Owned		Lots Optioned		Total		Lots Owned		Lots Optioned		Total
Lots owned and optioned:
Arizona		684		118		802		1,219		241		1,460
California		1,065		—		1,065		1,499		17		1,516
Nevada		778		75		853		1,087		724		1,811
Washington		305		97		402		—		—		—

West		2,832		290		3,122		3,805		982		4,787

Colorado		2,768		363		3,131		2,985		845		3,830
Utah		451		—		451		619		369		988

Mountain		3,219		363		3,582		3,604		1,214		4,818

Maryland		520		400		920		339		822		1,161
Virginia		516		156		672		599		128		727

East		1,036		556		1,592		938		950		1,888

Florida		197		255		452		232		606		838
Illinois		123		—		123		128		—		128

Other		320		255		575		360		606		966

Total		7,407		1,464		8,871		8,707		3,752		12,459

Our land acquisition activities in 2010 and the first half of 2011 provided us with enough land to execute our strategic initiative regarding active subdivision count, which increased by 15% year-over-year as of March 31, 2012. However, consistent with our strategy to maintain a two to three year supply of land, we reduced our land acquisition activities starting in the last half of 2011, as we determined we had a sufficient lot supply to satisfy existing demand. As a result, our supply of lots owned and optioned at March 31, 2012 decreased 29% year-over-year. In nearly every market, we experienced a year-over-year decline in lots owned and under option, with the most significant percentage decreases occurring in Utah, Nevada, Florida and Arizona. The decreases in these markets were partially offset by our entry into the Washington market in April 2011. As a result of electing not to exercise option rights with respect to certain lot option agreements, we recorded $0.1 million of expenses related to project write-off costs during the three months ended March 31, 2012, compared to $0.1 million in the same quarter a year ago.

The table set forth below shows the amount of at risk option deposits.