Edgar Filing: MDC HOLDINGS INC

FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

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

For the Transition period from to

Commission file number 1-08951

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)

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


Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		New York Stock Exchange
5³/₈% Senior Notes due December 2014		New York Stock Exchange
5³/₈% Senior Notes due July 2015		New York Stock Exchange
5⁵/₈% Senior Notes due January 2020		New York Stock Exchange
6% Senior Notes due January 2043		New York Stock Exchange

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

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

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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

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


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

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

As of June 30, 2012, the aggregate market value of the Registrants’ common stock held by non-affiliates of the Registrants was $1.2 billion based on the closing sales price of $32.67 per share as reported on the New York Stock Exchange on June 29, 2012.

As of December 31, 2012, the number of shares outstanding of Registrant’s common stock was 48,698,757.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of part III of this Form 10-K are incorporated by reference from the Registrant’s 2012 definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year.

M.D.C. HOLDINGS, INC.

FORM 10-K

For the Year Ended December 31, 2012

Table of Contents


			Page No.
PART I

	ITEM 1.	Business		1

		(a) General Development of Business		1

		(b) Available Information		1

		(c) Financial Information About Industry Segments		2

		(d) Narrative Description of Business		2

	ITEM 1A.	Risk Factors		7

	ITEM 1B.	Unresolved Staff Comments		14

	ITEM 2.	Properties		15

	ITEM 3.	Legal Proceedings		15

	ITEM 4.	Mine Safety Disclosures		15

PART II

	ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16

	ITEM 6.	Selected Financial Data		18

	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		44

	ITEM 8.	Consolidated Financial Statements		F-1

	ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		46

	ITEM 9A.	Controls and Procedures		46

	ITEM 9B.	Other Information		48

PART III

	ITEM 10.	Directors, Executive Officers and Corporate Governance		48

	ITEM 11.	Executive Compensation		48

	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		48

	ITEM 13.	Certain Relationships and Related Transactions, and Director Independence		48

	ITEM 14.	Principal Accountant Fees and Services		48

PART IV

	ITEM 15.	Exhibits and Financial Statement Schedules		49

SIGNATURES				55

(i)

M.D.C. HOLDINGS, INC.

FORM 10-K

PART I

Forward-Looking Statements

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

Item 1.

Business

(a)

General Development of Business

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 Annual Report on Form 10-K, 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 or develop lots to the extent necessary for the construction and sale of primarily 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 homebuilding divisions that we consider to be our operating segments. Operating segments are aggregated into reportable segments as follows: (1) West (Arizona, California, Nevada and Washington); (2) Mountain (Colorado and Utah); and (3) East (Virginia, Florida, Illinois and Maryland, which includes Pennsylvania, Delaware and New Jersey).

Our financial services operating segments are as follows: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers; (2) 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; (3) StarAmerican Insurance Ltd. (“StarAmerican”), a wholly owned subsidiary of MDC which is a re-insurer of Allegiant claims; (4) American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers; and (5) American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Maryland, Nevada and Virginia.

(b)

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Anyone seeking information about our business can receive copies of our 2012

Annual Report on Form 10-K, Annual Report to Shareholders, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other documents filed with the SEC at the public reference section of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. These documents also may be obtained, free of charge, by: contacting our Investor Relations office at (303) 773-1100; writing to M.D.C. Holdings, Inc., Investor Relations, 4350 South Monaco Street, Suite 500, Denver, Colorado 80237; or accessing our website at http://ir.richmondamerican.com. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available on our website as soon as reasonably practicable after we file or furnish the materials electronically with the SEC. To obtain any of this information, go to http://ir.richmondamerican.com and select “SEC Filings.” Our website also includes our: (1) Corporate Governance Guidelines; (2) Corporate Code of Conduct; (3) Rules for Senior Financial Officers; (4) Audit Committee Procedures for Handling Confidential Complaints; and (5) charters for the Audit, Compensation and Corporate Governance/Nominating Committees. These materials may be obtained, free of charge, at our website, http://ir.richmondamerican.com (select “Corporate Governance”).

(c)

Financial Information About Industry Segments

Note 3 to the Consolidated Financial Statements contains information regarding our reportable segments for each of the years ended December 31, 2012, 2011 and 2010.

(d)

Narrative Description of Business

Our business consists of two primary operations, homebuilding and financial services. We build and sell primarily single-family detached homes that are designed and built to meet local customer preferences. We are the general contractor for our projects and retain subcontractors for land development and home construction. We build a variety of home styles in each of our markets, targeting primarily first-time and first-time move-up homebuyers.

For 2012, the percentage of our home deliveries and home sale and land sale revenues by state were as follows:


	Percentage of Deliveries		Percentage of Home and Land Sale Revenues
Arizona		16%		11%
California		15%		16%
Nevada		16%		11%
Washington		7%		6%

West		54%		44%

Colorado		22%		25%
Utah		6%		6%

Mountain		28%		31%

Maryland		6%		9%
Virginia		7%		12%
Florida		5%		4%

East		18%		25%

Total.		100%		100%

Our financial services include subsidiary businesses that provide mortgage financing, place title insurance and homeowner insurance for our homebuyers and provide products and completed operations coverage for our subsidiaries and most of our subcontractors.

Homebuilding Operations

Operating Divisions. The primary functions of our homebuilding segments include land acquisition and development, home construction, sales and marketing, and customer service. Operating decisions are made by our local management teams under the oversight of our Chief Operating Decision Makers (“CODMs”), defined as our Chief Executive Officer and Chief Operating Officer. Our organizational structure (i.e., the grouping and reporting of divisions) changes based upon the current needs of the Company. At December 31, 2012, 2011 and 2010, we had 10, 10 and 9 active homebuilding operating divisions, respectively.

Corporate Management. We manage our homebuilding business primarily through members of senior management in our Corporate segment and our Asset Management Committees (“AMCs”). Each AMC is comprised of the Chief Operating Officer and three of our corporate officers. Two of the AMCs review and approve all real estate acquisition transactions in accordance with land strategies set forth by the CODMs. Land acquisition transactions may not proceed without approval by the AMC. Generally, the role of our senior management team and/or AMC includes:

•

review and approval of division business plans and budgets;

•

oversight of land and home inventory levels;

•

review of major personnel decisions; and

•

review of capital allocation decisions.

Additionally, our corporate executives and corporate departments generally are responsible for establishing and monitoring compliance with our policies and procedures. Among other things, the corporate office has primary responsibility for:

•

asset management and capital allocation;

•

treasury;

•

risk management;

•

merchandising and marketing;

•

national purchasing contracts;

•

accounting, tax and internal audit functions;

•

legal matters;

•

human resources and payroll;

•

information technology; and

•

training and development.

During 2011 and 2012, we reorganized our finance and accounting operations, focusing on the centralization of certain back office functions. In addition, we reorganized our sales and marketing activities to (1) better communicate the value of our homes to our prospective homebuyers, thereby giving us the opportunity to reduce incentives and increase sales absorptions, (2) better align the compensation structure for our sales organization with Company goals, and (3) simplify our processes to reduce overhead expenses.

Housing. Generally, we build single-family detached homes in a number of standardized series, designed to provide variety in the size and style of homes for our potential homebuyers. In certain markets we build and sell attached townhome product. Within each series for our single-family detached homes, we build several different floor plans offering standard and optional features (such as upgraded appliances, cabinetry, flooring, etc.). Differences in sales prices of similar models from market-to-market depend primarily upon homebuyer demand, home prices offered by our competitors, market conditions (such as home inventory supply levels), location, optional features and design specifications. The series of homes offered at a particular location is based on perceived customer preferences, lot

size, area demographics and, in certain cases, the requirements of major land sellers and local municipalities. We seek to maintain limited levels of inventories of unsold started homes in our markets. Unsold started homes in various stages of completion allow us to meet the immediate and near-term demands of prospective homebuyers. In our efforts to mitigate the risk of carrying excess inventory, we have developed procedures through which we attempt to control the number of our unsold started homes.

Land Acquisition and Development. We acquire our lots with the intention of constructing and selling homes on the acquired land. Generally, we prefer to purchase finished lots using option contracts, in phases or in bulk for cash. However, under certain circumstances, we may acquire entitled land for development into finished lots when we believe that the risk is justified. In making land purchases, we consider a number of factors, including projected rates of return, estimated gross margins from home sales, sales prices of the homes to be built, population and employment growth patterns, proximity to developed areas, estimated cost and complexity of development including environmental and geological factors, quality of schools, estimated levels of competition and demographic trends. We attempt to maintain a supply of finished lots sufficient to enable us to start homes promptly after a contract for a home sale is executed. See “Forward-Looking Statements” above.

In our option contracts, we generally obtain the right to purchase lots in consideration for an option deposit in the form of cash or letters of credit. In the event we elect not to purchase the lots within a specified period of time, we may be required to forfeit the option deposit. Our option contracts generally do not contain provisions requiring our specific performance.

From time to time, we may own or have the right under option contracts to acquire undeveloped parcels of real estate that we intend to develop into finished lots. We generally develop our land in phases in order to limit our risk in a particular subdivision and to efficiently employ available resources. Generally, building permits and utilities are available and zoning is suitable for the current intended use of substantially all of our undeveloped land. When developed, these lots generally will be used in our homebuilding activities. See “Forward-Looking Statements” above.

Labor and Raw Materials. For the most part, materials used in our homebuilding operations are standard items carried by major suppliers. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Increases in the cost of building materials and subcontracted labor may reduce gross margins from home sales to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. From time to time and to varying degrees, we may experience shortages in the availability of building materials and/or labor in each of our markets. These shortages and delays may result in delays in the delivery of homes under construction, reduced gross margins from home sales, or both. See “Forward-Looking Statements” above.

Warranty. Our homes are sold with limited third-party warranties that generally provide for ten years of structural coverage, two years of coverage for plumbing, electrical, heating, ventilation and air conditioning systems, and one year of coverage for workmanship and materials. Under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage, and paying for substantially all of the work required to be performed during years three through ten of the warranties.

Seasonal Nature of Business. The homebuilding industry can experience noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels. The seasonal nature of our business is described in more detail in our description of Risk Factors under the heading “Because of the seasonal nature of our business, our quarterly operating results can fluctuate.”

Backlog. At December 31, 2012 and 2011, homes under contract but not yet delivered (“backlog”) totaled 1,645 and 1,043, respectively, with an estimated sales value of $579 million and $330 million, respectively. We anticipate that homes in backlog at December 31, 2012 will close during 2013 under their existing home order contracts or through the replacement of an existing contract with a new home order contract. The estimated backlog sales value at December 31, 2012 may be impacted by, among other things, subsequent home order cancellations and incentives provided, and options and upgrades selected after contract but prior to closing. See “Forward-Looking Statements” above.

Customer Service and Quality Control. Our homebuilding divisions are responsible for pre-closing quality control inspections and responding to customers’ post-closing needs. We have a product service and quality control program, focused on improving and/or maintaining the quality of our customers’ complete home buying and homeownership experience.

Sales and Marketing. Our sales and marketing programs are designed to attract homebuyers in a cost effective manner. We have a centralized in-house advertising and marketing department that oversees our efforts to communicate the inherent value of our homes to our prospective homebuyers and distinguish our Richmond American Homes brand from our competitors or other home buying opportunities. The main objective of this team is to generate homebuyer leads, which are actively pursued by our community sales associates. Our in-house merchandising team furnishes our model homes and sales offices.

Another important part of our marketing presentation takes place in our design centers (also known as Home Galleries). Here, homebuyers are able to personalize their homes with a variety of options and upgrades. These locations also serve as an information center for prospective home buyers and real estate agents who may opt to receive personalized attention from one of our new home specialists, resulting in a more focused and efficient home search across all of our Richmond American communities in a given market place. We believe that the services provided by our Home Galleries represent a key competitive advantage in dealing with prospective homebuyers.

Competition. The homebuilding industry is fragmented and highly competitive. The competitive nature of our business is described in more detail in our description of Risk Factors.

Regulation. Our homebuilding operations are subject to compliance with applicable laws and regulations, which are described in more detail in our description of Risk Factors.

Financial Services Operations

Mortgage Lending Operations

General. HomeAmerican is a full-service mortgage lender and the principal originator of mortgage loans for our homebuyers. HomeAmerican has a centralized loan processing center where it originates mortgage loans, primarily for our homebuyers.

HomeAmerican is authorized to originate Federal Housing Administration-insured (“FHA”), Veterans Administration-guaranteed (“VA”), Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) (together “the government sponsored entities”) and private investor mortgage loans. HomeAmerican also is an authorized loan servicer for Fannie Mae and Freddie Mac and, as such, is subject to the rules and regulations of these entities.

HomeAmerican uses a mortgage repurchase facility, in addition to internally generated funds, to finance the origination of mortgage loans until they are sold. HomeAmerican sells originated mortgage loans to third-party

purchasers on either a bulk or flow basis. Mortgage loans sold on a bulk basis include the sale of a package of substantially similar originated mortgage loans, while sales of mortgage loans on a flow basis are completed as HomeAmerican originates each loan. Mortgage loans sold to third-party purchasers include HomeAmerican’s representations and warranties with respect to certain borrower payment defaults, credit quality issues and/or misrepresentations made by us or our homebuyers. Substantially all of the mortgage loans originated by HomeAmerican are sold to third-party purchasers generally between 15 to 40 days of origination.

Pipeline. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed (the “Locked Pipeline”) at December 31, 2012 and 2011 had an aggregate principal balance of approximately $50.8 and $24.4 million, respectively, and were under interest rate lock commitments at an average interest rate of 3.26% and 3.93%, respectively.

Forward Sales Commitments. HomeAmerican is exposed to market risks related to fluctuations in interest rates. HomeAmerican creates certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or Locked Pipeline). HomeAmerican uses forward sales of mortgage-backed securities and commitments to hedge the interest rate risk inherent in the interest rate lock commitment and its loan inventory held-for-sale.

Competition. The mortgage industry is consolidating with a handful of entities responsible for an increasing proportion of loans originated and serviced. Increasingly, HomeAmerican finds itself directly competing with the end purchasers of the loans it originates who are aggressively pursuing the Richmond American homebuyer at the time of sale. This trend has become more pronounced as the number of third party loan purchasers has decreased over time. These competitors may offer product or pricing benefits that are unavailable to HomeAmerican or may have the ability to offer mortgages with borrower credit characteristics that are less stringent than those offered by HomeAmerican. The competitive nature of our business is described in more detail in our description of Risk Factors.

Regulation. Our mortgage lending operations are subject to compliance with applicable laws and regulations, which are described in more detail in our description of Risk Factors.

Insurance Operations

General. Our insurance operations consist of three business divisions: (1) Allegiant; (2) StarAmerican; and (3) American Home Insurance.

Allegiant and StarAmerican were formed to provide insurance coverage of homebuilding risks for our homebuilding subsidiaries and certain of our homebuilding subcontractors. Allegiant was organized as a risk retention group under the Federal Liability Risk Retention Act of 1981. Allegiant, which began operations in June of 2004, is licensed as a Class 3 Stock Insurance Company by the Division of Insurance of the State of Hawaii and is subject primarily to the regulations of its state of incorporation. StarAmerican is a single parent captive insurance company licensed by the Division of Insurance of the State of Hawaii and is a wholly owned subsidiary of MDC. Pursuant to agreements beginning in June 2004, StarAmerican re-insures Allegiant for all claims in excess of $50,000 per occurrence up to $3.0 million per occurrence, subject to various aggregate limits.

Allegiant generates premium revenue generally by providing to its customers, comprised of the Company’s hombuilding subsidiaries and certain subcontractors of the Company’s homebuilding subsidiaries, products and completed operations coverage on homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions. Allegiant seeks to provide to its customers coverage and insurance rates that are competitive with other insurers. StarAmerican generates premium revenue by providing re-insurance coverage to Allegiant. Allegiant and StarAmerican incur expenses for actual losses and loss adjustment expenses and for reserves established based on

actuarial studies including known facts, such as our experience with similar insurance cases and historical trends involving insurance claim payment patterns, pending levels of unpaid insurance claims, claim severity, claim frequency patterns and interpretations of circumstances including changing regulatory and legal environments.

Regulation. Allegiant and StarAmerican are licensed in the State of Hawaii and, therefore, are subject to regulation by the Hawaii Insurance Division. This regulation includes restrictions and oversight regarding: types of insurance provided; investment options; required capital and surplus; financial and information reporting; use of auditors, actuaries and other service providers; periodic examinations; and other operational items. Additionally, as a risk retention group, Allegiant also is registered in other states where certain MDC homebuilding subsidiaries do business.

American Home Insurance is an insurance agency that sells primarily personal property and casualty insurance products in the same markets as our homebuilding subsidiaries and primarily to our homebuyers.

Title Operations

American Home Title provides title agency services to the Company and its homebuyers in Colorado, Florida, Maryland, Nevada and Virginia.

Employees.

The table below summarizes the approximate number of employees for our combined Homebuilding, combined Financial Services and Corporate segments at December 31, 2012 and 2011.


	December 31,
	2012		2011
Homebuilding		665		585
Financial Services		84		82
Corporate		171		187

Total		920		854

Item 1A.

Risk Factors.

The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business conditions that could adversely affect our business or financial results.

The homebuilding industry is cyclical and is significantly affected by changes in industry conditions, as well as in general and local economic conditions, such as:

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employment levels;

•

availability of financing for homebuyers;

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interest rates;

•

consumer confidence;

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levels of new and existing homes for sale;

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demographic trends; and

•

housing demand.

These conditions may exist on a national level, like the recent downturn, or may affect some of the regions or markets in which we operate more than others. When adverse conditions affect any of our larger markets, they could have a proportionately greater impact on us than on some other homebuilding companies.

An oversupply of alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes, and rental properties, can also reduce our ability to sell new homes and depress new home prices and reduce our margins on the sale of new homes. High levels of foreclosures and short-sales not only contribute to additional inventory available for sale, but also can reduce appraisal valuations for new homes, potentially resulting in lower sales prices.

Continued military deployments, terrorist attacks, other acts of violence or threats to national security, and any corresponding response by the United States or others, or related domestic or international instability, may adversely affect general economic conditions or cause a slowdown of the economy.

As a result of the foregoing matters, potential customers may be less willing or able to buy our homes. In the future, our pricing strategies may continue to be limited by market conditions. We may be unable to change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable homes to maintain our gross margins or satisfactorily address changing market conditions in other ways. In addition, cancellations of home sales contracts in backlog may increase as homebuyers choose to not honor their contracts.

Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally to purchasers of the homes we build. A decrease in the demand for our homes because of the foregoing matters may also adversely affect the financial results of this segment of our business. An increase in the default rate on the mortgages we originate may adversely affect our ability to sell the mortgages or the pricing we receive upon the sale of mortgages or may increase our potential exposure regarding those mortgage loan sales.

Because of the uncertainties inherent in these matters, actual future obligations could differ significantly from our current estimates.

The homebuilding industry has recently experienced a significant downturn, and its ultimate effects are uncertain. A renewed deterioration in industry conditions or in the broader economic conditions, whether resulting from a “fiscal cliff” or otherwise, could have adverse effects on our business and financial results.

The homebuilding industry experienced a sustained downturn from 2006 through 2011, and it has been one of the most severe housing downturns in U.S. history.

Our recovery from the downturn in the housing market has been negatively impacted by its continuing effects, including difficulty in customers’ ability to qualify for mortgage loans, significant drops in home prices and land values, elevated levels of foreclosures and short-sales, all of which severely constrained demand for new homes, and resulted in significant inventory impairments and operating losses.

In the event of another downturn in the homebuilding and mortgage lending industries, or if the national economy weakens as a result of the “fiscal cliff” or other causes, we could experience declines in the market value of our inventory and demand for our homes, which could have a significant negative impact on our gross margins from home sales and financial and operating results.

Additionally, as a result of recent economic circumstances, we may be subject to increased counterparty risks, which may include, among others, banks under our letter of credit facilities and mortgage purchasers who may not be willing or able to perform on obligations to us. To the extent a third-party is unable to meet its obligations to us, our financial position, results of operations and/or cash flows could be negatively impacted.

These challenging conditions are complex and interrelated. We cannot predict their occurrence or severity, nor can we provide assurance that our responses would be successful.

Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, deliveries and decreases in the average selling prices of sold and delivered homes, which would have a negative impact on our home sales revenue and results of operations.

The homebuilding industry is fragmented and highly competitive. Our homebuilding subsidiaries compete with numerous public and private homebuilders, including a number that are substantially larger than us and may have greater financial resources than we do. Our homebuilding subsidiaries also compete with subdivision developers and land development companies, some of which are themselves homebuilders or affiliates of homebuilders. Homebuilders compete for customers, land, building materials, subcontractor labor and desirable financing. Competition for home orders primarily is based upon home sales price, location of property, home style, financing available to prospective homebuyers, quality of homes built, customer service and general reputation in the community, and may vary market-by-market and/or submarket-by-submarket. Additionally, competition within the homebuilding industry can be impacted through an excess supply of new and existing homes available for sale resulting from a number of factors including, among other things, increases in unsold started homes available for sale and increases in home foreclosures. Increased competition can cause us to decrease our home sales prices and/or increase home sales incentives in an effort to generate new home sales and maintain homes in backlog until they close. These competitive pressures may negatively impact our future financial and operating results.

Through our mortgage lending subsidiary, HomeAmerican, we also compete with numerous banks and other mortgage bankers and brokers, many of which are larger than us and may have greater financial resources than we do. Competitive factors include pricing, mortgage loan terms, underwriting criteria and customer service. To the extent that we are unable to adequately compete with other companies that originate mortgage loans, total revenue and the results of operations from our mortgage operations may be negatively impacted.

If land is not available at reasonable prices or terms, our homes sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

Our operations depend on our homebuilding subsidiaries’ ability to obtain land for the development of our residential communities at reasonable prices and with terms that meet our underwriting criteria. Our ability to obtain land for new residential communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land, and especially finished lots, appropriate for development of residential communities continues to be limited because of these factors, or for any other reason, the number of homes that our homebuilding subsidiaries build and sell may decline. To the extent that we are unable to timely purchase land or enter into new contracts for the purchase of land at reasonable prices, due to the lag time between the time we acquire land and the time we begin selling homes, our home sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

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

The residential construction industry experiences labor and material shortages from time to time, including: work stoppages; labor disputes; shortages in qualified trades people; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and delays in availability, or fluctuations in prices, of building materials. These labor and material shortages can be more severe during periods of strong demand for housing or during periods in which the markets where we operate experience natural disasters that have a significant impact on existing residential and commercial structures. Additionally, we

could experience labor shortages as a result of subcontractors going out of business or leaving the residential construction market due to low levels of housing production and volumes. Any of these circumstances could give rise to delays in the start or completion of our residential communities, increase the cost of developing one or more of our residential communities and increase the construction cost of our homes. To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, finished lots, building materials, and other resources, through higher selling prices, our gross margins from home sales and results of operations could be adversely affected.

Increased costs of lumber, framing, concrete, steel and other building materials could cause increases in construction costs. We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may be in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our gross margins from home sales, particularly if pricing competition restricts our ability to pass on any additional costs of materials or labor, thereby decreasing our gross margins from home sales.

If mortgage interest rates rise, if mortgage financing otherwise becomes less available or if down payment requirements are increased, it could adversely affect our business, and the duration and ultimate severity of the effects are uncertain.

The mortgage lending industry continues to experience significant instability. Lenders, regulators and others have questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in prior years. Credit requirements tightened in the immediate aftermath of the financial crisis of 2007 and 2008, and investor demand for mortgage loans and mortgage-backed securities declined. The deterioration in credit quality has caused almost all lenders to eliminate subprime mortgages and most other loan products that are not eligible for sale to Fannie Mae or Freddie Mac or loans that do not meet FHA and VA requirements. Fewer loan products and tighter loan qualifications have made it more difficult for many homebuyers to finance the purchase of our homes. These factors have served to reduce the pool of qualified homebuyers and made it more difficult to sell to first-time and move-up buyers who have historically been our customers. These reductions in demand have adversely affected our business and financial results, and the duration and severity of the effects remain uncertain.

We believe that the liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. The future of these entities is in question. Any reduction in the availability of the financing provided by these institutions could adversely affect interest rates, mortgage availability and our sales of new homes and mortgage loans.

Because of the decline in the availability of other mortgage products, FHA and VA mortgage financing support has become a more important factor in marketing our homes. Increased demands on the FHA have resulted in a reduction of its cash reserves and additional regulations and requirements. This factor or any increases in down payment requirements or limitations or restrictions on the availability of FHA and VA financing support could adversely affect interest rates, mortgage availability and our sales of new homes and mortgage loans.

Even if potential customers do not need financing, changes in the availability of mortgage products may make it harder for them to sell their current homes to potential buyers who need financing.

If interest rates increase, the costs of owning a home will be affected and could result in further reductions in the demand for our homes. Similarly, potential changes to the tax code with respect to deduction of home mortgage interest payments or other changes may decrease affordability of and demand for homeownership.

Expirations, amendments or changes to tax laws, incentives or credits currently available to our customers may negatively impact our business.

Many homeowners receive substantial tax benefits in the form of tax deductions against their personal taxable income for mortgage interest and property tax payments and the loss or reduction of these deductions would affect most homeowners’ net cost of owning a home. Also, federal or state governments have in the past provided for substantial benefits in the form of tax credits for buyers of new or used homes. Significant changes to existing tax laws that currently benefit homebuyers, such as the ability to deduct mortgage interest and real property taxes, may result in an increase in the total cost of home ownership and may make the purchase of a home less attractive to buyers. This could adversely impact demand for and/or sales prices of new homes, which would have a negative impact on our business.

Increases in our cancellations could have a negative impact on our gross margins from home sales and home sales revenue.

Home order cancellations can result from a number of factors, including declines in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions.

Increased levels of home order cancellations would have a negative impact on our home sales revenue and financial and operating results in future reporting periods.

A decline in the market value of our homes or carrying value of our land would have a negative impact on our results of operations and financial position.

Our homebuilding subsidiaries acquire land for the replacement of land inventory and/or expansion within our current markets and may, from time to time, purchase land for expansion into new markets. The fair value of our land and land under development and housing completed or under construction inventory depends on market conditions. Factors that can impact our determination of the fair value of our inventory primarily include home sales prices, levels of home sales incentives and home construction and land costs. Our home sales prices and/or levels of home sales incentives can be impacted by, among other things, decreased demand for new homes, decreased home prices offered by our competitors, home foreclosure and short-sale levels, decreased ability of our homebuyers to obtain suitable mortgage loan financing and high levels of home order cancellations. Under such circumstances, we may be required to record additional impairments of our inventory. Additionally, due to the uncertainty in the homebuilding and mortgage lending industries and the overall United States economy, it is possible for us to experience declines in the market value of our homes and, as a result, additional inventory impairments could be recorded in future reporting periods. Any such additional inventory impairments would have a negative impact on our financial position and results of operations in the future reporting period in which they were recorded.

Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our results of operations.

The climates and geology of many of the markets in which we operate present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes, droughts, floods, heavy or prolonged precipitation, wildfires or other natural disasters or similar events occur, the financial and operating results of our business may be negatively impacted.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate as market conditions and our financial performance and operations change. We cannot provide complete assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs.

The availability of additional capital, whether from private capital sources or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if financing is available, it could be costly or have other adverse consequences.

There are a limited number of third-party purchasers of mortgage loans originated by HomeAmerican. If we see third-party purchasers of mortgage loans exit the business or experience, reduced investor demand for mortgage loans and mortgage-backed securities in the secondary mortgage markets or increased investor yield requirements for those loans and securities, this may have an adverse impact on our results of operations, financial position and/or cash flows. In addition, the sources and terms and conditions of warehouse financing and mortgage repurchase arrangements and other lending arrangements for the mortgage lending industry are changing. These changes can impact, among other things, availability of capital, terms and structures for debt and line of credit agreements, collateral requirements and collateral advance rates.

Our business is subject to numerous federal, local and state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.

Our operations are subject to continuing compliance requirements mandated by applicable federal, state and local statutes, ordinances, rules and regulations, including zoning and land use ordinances, building, plumbing and electrical codes, contractors’ licensing laws, state insurance laws, federal and state human resources laws and regulations and health and safety laws and regulations. Various localities in which we operate have imposed (or may impose in the future) fees on developers to fund schools, road improvements and low and moderate-income housing.

From time to time, various municipalities in which our homebuilding subsidiaries operate restrict or place moratoria on the availability of utilities, including water and sewer taps. Additionally, certain jurisdictions in which our homebuilding subsidiaries operate have proposed or enacted “slow growth” or “no growth” initiatives and other measures that may restrict the number of building permits available in any given year. These initiatives or other slow or no growth measures could reduce our ability to open new subdivisions and build and sell homes in the affected markets and may create additional costs and administration requirements, which in turn could negatively impact our future home sales and results of operations. Although future conditions or governmental actions may impact our ability to obtain necessary permits or water and sewer taps, we currently believe that we generally have, or can obtain, water and sewer taps and building permits for our homebuilding subsidiaries’ land inventory.

Our homebuilding operations also are affected by environmental laws and regulations pertaining to availability of water, municipal sewage treatment capacity, stormwater discharges, land use, hazardous waste disposal, dust controls, building materials, population density and preservation of endangered species, natural terrain and vegetation.

Due to these considerations, our homebuilding subsidiaries generally obtain an environmental site assessment for parcels of land that they acquire. The particular environmental laws and regulations that apply to any given homebuilding project vary greatly according to a particular site’s location, the site’s environmental conditions and the present and former uses. These environmental laws may result in project delays, cause us to incur substantial compliance and other costs and/or prohibit or severely restrict homebuilding activity in certain environmentally sensitive locations.

We also are subject to rules and regulations with respect to originating, processing, selling and servicing mortgage loans, which, among other things: prohibit discrimination and establish underwriting guidelines; provide for audits and inspections; require appraisals and/or credit reports on prospective borrowers and disclosure of certain information concerning credit and settlement costs; establish maximum loan amounts; prohibit predatory lending practices; and regulate the referral of business to affiliated entities. The turmoil caused by the increased number of defaults in subprime and other mortgages has encouraged consumer lawsuits and the investigation of financial services industry practices by governmental authorities. These investigations could include the examination of consumer lending practices, sales of mortgages to financial institutions and other investors and the practices in the financial services segments of homebuilding companies. New rules and regulations or revised interpretations of existing rules and regulations applicable to our mortgage lending operations could result in more stringent compliance standards, which may substantially increase costs of compliance. Additionally, potential changes to regulations, including but not limited to the Real Estate Settlement Procedures Act (RESPA) and the Dodd-Frank Act could have a significant impact on the ability of our affiliated businesses to provide services to Richmond American Homes customers, which could have a significant negative impact on our financial and operating results.

In the ordinary course of business, we are required to obtain surety bonds, the unavailability of which could adversely affect our results of operations and/or cash flows.

As is customary in the homebuilding industry, we often are required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit rating, capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies to issue surety bonds. If we were unable to obtain surety bonds when required, our results of operations and/or cash flows could be adversely impacted.

Decreases in the market value of our investments in marketable securities could have an adverse impact on our results of operations.

We have investments in marketable securities, the market value of which is subject to changes from period to period. Decreases in the market value of our marketable securities could have an adverse impact on our statements of financial position, results of operations and cash flow.

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.

As a homebuilder, we are subject to construction defect and home warranty claims, as well as claims associated with the sale and financing of our homes arising in the ordinary course of business. These types of claims can be costly. The costs of insuring against construction defect and product liability claims can be high and the amount of coverage offered by insurance companies may be limited. If we are not able to obtain adequate insurance against these claims, we may incur additional expenses that would have a negative impact on our results of operations in future

reporting periods. Additionally, changes in the facts and circumstances of our pending litigation matters could have a material impact on our results of operations and cash flows in future reporting periods.

Further uncertainty in the mortgage lending industry, including repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our results of operations.

We are subject to risks associated with mortgage loans, including, besides conventional mortgage loans, previously originated and sold as Alt-A loans, and sub-prime mortgage loans, second mortgage loans, high loan-to-value mortgage loans and jumbo mortgage loans (mortgage loans with principal balances that exceed various thresholds in our markets). These risks may include, among other things, compliance with mortgage loan underwriting criteria and the associated homebuyers’ performance, which could require HomeAmerican to repurchase certain of those mortgage loans or provide indemnification. Repurchased mortgage loans and/or the settlement of claims associated with such loans could have in the future a substantial impact on HomeAmerican’s results of operations, liquidity and cash flow.

Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

We may experience noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, the number of homes delivered and associated home sales revenue can increase during the third and fourth quarters, compared with the first and second quarters. We believe that this type of seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring and summer with deliveries scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets. There can be no assurance that this seasonality pattern will exist in future reporting periods.

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

Although we believe that we have made provision for adequately staffing current operations, because of our efforts to “right-size” our organization during the past five years, retaining our skilled people has become a critical area of focus. Our future success depends, in part, on our ability to attract, train and retain skilled personnel. If we are unable to retain our key employees or attract, train and retain other skilled personnel in the future, it could have an adverse impact on our financial and operating results.

The interests of certain controlling shareholders may be adverse to investors.

Larry A. Mizel, David D. Mandarich and other of our affiliates beneficially own, directly or indirectly, in the aggregate, approximately 25% of our common stock. To the extent they and their affiliates vote their shares in the same manner, their combined stock ownership may effectively give them the power to influence the election of members of our board of directors and other matters reserved for our shareholders. Circumstances may occur in which the interest of these shareholders could be in conflict with your interests. In addition, such persons may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in us, even though such transactions may involve risks to you.

Item 1B.

Unresolved Staff Comments.

None

Item 2.

Properties.

Our corporate office is located at 4350 South Monaco Street, Denver, Colorado 80237, where we lease office space in a 144,000 square foot office building. Our homebuilding divisions and, in some markets, other MDC subsidiaries, including American Home Insurance and American Home Title, lease additional office space. The table below outlines the number of office facilities that are leased and the approximate square footage leased in each market at December 31, 2012. While currently we are satisfied with the suitability and capacity of our office locations, we continue to evaluate them in view of market conditions and the size of our operations.


	Number of Leased Facilities		Total Square Footage Leased
Arizona		2		18,000
California		2		34,000
Colorado		6		150,000
Florida		1		10,000
Maryland		2		18,000
Nevada		1		10,000
Utah		1		6,000
Virginia		3		20,000
Washington		2		22,000

Total		20		288,000

Item 3.

Legal Proceedings.

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

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

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

At December 31, 2012, MDC had 628 shareholders of record. The shares of MDC common stock are traded on the New York Stock Exchange. The following table sets forth, for the periods indicated, the closing price ranges of MDC’s common stock.


	Three Months Ended
	March 31		June 30		September 30		December 31
2012
High	$	27.20	$	32.67	$	40.15	$	40.62
Low		17.77		23.76		30.81		33.11

2011
High	$	31.80	$	29.19	$	26.11	$	23.09
Low		24.79		24.18		16.09		15.39

The following table sets forth the cash dividends declared and paid in 2012 and 2011.


	Date of Declaration		Date of Payment		Dividend per Share		Total Dividends Paid
	(Dollars in thousands, except per share amounts)
2012
First quarter		01/23/12		02/22/12	$	0.25	$	11,994
Second quarter		04/23/12		05/23/12		0.25		11,996
Third quarter		07/24/12		08/22/12		0.25		12,056
Fourth quarter		10/22/12		11/21/12		0.25		12,172
Accelerated payment of 2013 dividends		12/13/12		12/28/12		1.00		48,697

					$	2.00	$	96,915

2011
First quarter		01/24/11		02/23/11	$	0.25	$	11,824
Second quarter		04/27/11		05/25/11		0.25		11,868
Third quarter		07/25/11		08/24/11		0.25		11,868
Fourth quarter		10/24/11		11/22/11		0.25		11,872

					$	1.00	$	47,432

There were no shares of MDC common stock repurchased during the years ended December 31, 2012, 2011 or 2010. At December 31, 2012, we were authorized to repurchase up to 4,000,000 shares of our common stock.

Performance Graph

Set forth below is a graph comparing the yearly change in the cumulative total return of MDC’s common stock with the cumulative total return of the Standard & Poor’s 500 Stock Index and with that of a peer group of other homebuilders over the five-year period ending on December 31, 2012, weighted as of the beginning of that period.

It is assumed in the graph that $100 was invested (1) in our common stock; (2) in the stocks of the companies in the Standard & Poor’s 500 Stock Index; and (3) in the stocks of the peer group companies, just prior to the commencement of the period and that all dividends received within a quarter were reinvested in that quarter. The peer group index is composed of the following companies: Beazer Homes USA, Inc., D.R. Horton, Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, M/I Homes, Inc., Meritage Homes Corporation, NVR, Inc., Pulte Homes, Inc., The Ryland Group, Inc., Standard Pacific Corp. and Toll Brothers, Inc.

The stock price performance shown on the following graph is not indicative of future price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN OF MDC COMMON STOCK, THE S&P 500 STOCK INDEX AND A SELECTED PEER GROUP

LOGO

Item 6.

Selected Financial Data

The data in these tables and related footnotes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements.


	Year Ended December 31,
	2012		2011			2010			2009			2008
	(Dollars in thousands, except per share amounts)
Income Statement Data
Home sale and land sale revenues	$	1,156,142	$	817,023		$	926,905		$	867,784		$	1,418,198
Financial services revenues		46,881		26,086			30,473			28,318			34,211

Total revenues	$	1,203,023	$	843,109		$	957,378		$	896,102		$	1,452,409

Homebuilding pretax income (loss)	$	32,617	$	(110,628	)	$	(80,896	)	$	(113,289	)	$	(393,813	)
Financial services pretax income		28,498		3,156			10,295			5,954			11,678

Total pretax income (loss)	$	61,115	$	(107,472	)	$	(70,601	)	$	(107,335	)	$	(382,135	)

Net income (loss)^(1)(2)(3)	$	62,699	$	(98,390	)	$	(64,770	)	$	24,679		$	(380,545	)
Basic earnings (loss) per share	$	1.29	$	(2.12	)	$	(1.40	)	$	0.52		$	(8.25	)
Diluted earnings (loss) per share	$	1.28	$	(2.12	)	$	(1.40	)	$	0.52		$	(8.25	)
Weighted Average Common
Shares Outstanding:
Basic		47,660,629		46,796,334			46,627,815			46,537,092			46,158,876
Diluted		48,064,839		46,796,334			46,627,815			46,919,362			46,158,876
Balance Sheet Data
Cash and cash equivalents	$	160,095	$	343,361		$	572,225		$	1,234,252		$	1,304,728
Marketable securities	$	551,938	$	519,943		$	968,729		$	327,944		$	54,864
Total inventories	$	1,002,521	$	806,052		$	787,659		$	523,184		$	657,071
Total assets	$	1,945,441	$	1,858,725		$	2,547,769		$	2,429,308		$	2,474,938
Senior notes⁽³⁾	$	744,842	$	744,108		$	1,242,815		$	997,991		$	997,527
Mortgage repurchase facility	$	76,327	$	48,702		$	25,434		$	29,115		$	34,873
Stockholders’ equity	$	880,897	$	868,636		$	983,683		$	1,073,146		$	1,080,920
Stockholders’ equity per common share	$	18.09	$	18.11		$	20.87		$	22.82		$	23.16
Cash dividends declared per share⁽⁴⁾	$	2.00	$	1.00		$	1.00		$	1.00		$	1.00
Operational Data
Homes delivered (units)		3,740		2,762			3,245			3,013			4,488
Average selling price	$	308	$	292		$	284		$	278		$	303
Net new orders (units)		4,342		2,887			3,261			3,306			3,074
Homes in backlog at period end (units)		1,645		1,043			842			826			533
Estimated backlog sales value at period end	$	579,000	$	330,000		$	269,000		$	265,000		$	173,000
Estimated average selling price of homes in backlog	$	352	$	316		$	320		$	321		$	325
Active subdivisions at period-end		148		187			148			133			191

(1)

Net income for the year ended December 31, 2009 includes the income tax benefit of being able to carry back $142.6 million of net operating losses due to the expanded NOL carryback provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009, signed into law on November 6, 2009.

(2)	Net loss for the years ended December 31, 2011, 2010, 2008 and 2007 includes the impact of recording valuation allowances of $45.1 million, $25.1 million, $134.3 million and $160.0 million, respectively, against our deferred tax assets.

(3)

During 2011, we completed a debt tender offer and redemptions of our 7% Senior Notes due 2012 and 5¹/₂% Senior Notes due 2013. As a result of these transactions, we paid $537.7 million to extinguish $500 million in debt principal and recorded a $38.8 million expense for loss on extinguishment of debt.

(4)	Total dividends declared per share for the year ended December 31, 2012 include $1.00 per share representing the accelerated payment of dividends for 2013.

Item 7.

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 Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. 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.”


	Year Ended December 31,
	2012			2011			2010
Homebuilding:	(Dollars in thousands, except per share amounts)
Home sale revenues	$	1,150,998		$	805,164		$	921,022
Land sale revenues		5,144			11,859			5,883

Total home sale and land sale revenues		1,156,142			817,023			926,905

Home cost of sales		(973,120	)		(686,661	)		(745,085	)
Land cost of sales		(4,823	)		(10,796	)		(5,366	)
Inventory impairments		(1,105	)		(12,965	)		(21,195	)

Total cost of sales		(979,048	)		(710,422	)		(771,646	)

Gross margin		177,094			106,601			155,259

Gross margin %		15.3%			13.0%			16.8%

Selling, general and administrative expenses		(167,295	)		(179,105	)		(219,685	)
Interest income		23,398			26,068			23,960
Interest expense		(808	)		(20,842	)		(38,157	)
Other income (expense)		228			(43,350	)		(2,273	)

Homebuilding pretax income (loss)		32,617			(110,628	)		(80,896	)

Financial Services:
Revenues		46,881			26,086			30,473
Expenses		(21,645	)		(26,306	)		(23,351	)
Interest and other income		3,262			3,376			3,173

Financial services pretax income		28,498			3,156			10,295

Income (loss) before income taxes		61,115			(107,472	)		(70,601	)
Benefit from income taxes		1,584			9,082			5,831

Net income (loss)	$	62,699		$	(98,390	)	$	(64,770	)

Earnings (loss) per share:
Basic	$	1.29		$	(2.12	)	$	(1.40	)
Diluted	$	1.28		$	(2.12	)	$	(1.40	)
Weighted Average Common Shares Outstanding:
Basic		47,660,629			46,796,334			46,627,815
Diluted		48,064,839			46,796,334			46,627,815
Dividends declared per share	$	2.00		$	1.00		$	1.00
Cash provided by (used in):
Operating activities	$	(109,213	)	$	(80,349	)	$	(209,100	)
Investing activities	$	(21,781	)	$	404,264		$	(644,466	)
Financing activities	$	(52,727	)	$	(552,779	)	$	191,539

EXECUTIVE SUMMARY

Overview

During 2012, we implemented various initiatives to help us achieve full-year profitability in 2012. These included reducing our selling, general and administrative expenses (“SG&A”), improving our sales processes and enhancing our product offerings, which consisted of more included features and new designs, and reducing our capital costs. For a more detailed discussion of these initiatives please refer to “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. In addition to these initiatives, we took advantage of a recovering housing market and improved overall economic conditions in most of our markets.

As a result of our strategic initiatives and a recovering housing market, we achieved full year profitability of $62.7 million for the year ended December 31, 2012, which represented four consecutive quarters of operating profits and more than a $160 million improvement in our net income over 2011. Our favorable results were largely attributable to better operating profits from our homebuilding segment, which experienced significant revenue growth as well as operating margin expansion. In addition, our financial services segment profit increased considerably as we took advantage of favorable mortgage market conditions, including higher volume and margins for our mortgage loan products.

For the year ended December 31, 2012, we reported net income of $62.7 million, or $1.28 per diluted share, compared to a net loss of $98.4 million, or $2.12 per diluted share for the year earlier period. The improvement in our net income was driven primarily by a 43% increase in home sale revenues, a 230 basis point improvement in our gross margin from home sales (inclusive of an $11.9 million reduction in inventory impairments), a 770 basis point reduction in our homebuilding SG&A expenses as a percentage of home sale revenues, a $20.0 million decrease in interest expense, and a $25.3 million increase in our financial services operations pretax income. Also, 2011 results were impacted by a $38.8 million charge related to the early extinguishment of $500 million of debt.

In addition to the improvement in market conditions, our efforts to improve our sales process, product offering and cancellation rate helped us drive significantly improved sales results. During 2012, net new orders increased 50% year-over-year to 4,342 homes, driven by a 48% improvement in our sales absorption pace per community which was substantially aided by a 1,300 basis point reduction in our cancellation rate. At the same time, we have worked to balance our improved absorption pace by increasing home prices and reducing incentives in many subdivisions across the country. This effort has helped us improve our gross margin from home sales year-over-year and on a sequential basis throughout the year. Our 2012 fourth quarter gross margin from home sales before impairments was 17.0% (16.7% including $1.1 million of inventory impairments), which represented a 150 basis point improvement over the 2012 third quarter gross margin from home sales and was on top of a 130 basis point improvement for the 2012 third quarter as compared to the 2012 second quarter.

Furthermore, in light of our improving sales absorption rates and improving housing market conditions, the Company accelerated its land acquisition activity during the second half of 2012. As of December 31, 2012, we owned or had under option over 11,400 lots, a 3% increase over our lot position at the end of 2011. We believe that this lot position, in addition to planned land acquisition activity going into the next fiscal year, will continue to provide us with a strong base to drive continued revenue growth in 2013.

Our financial position remained strong at the end of 2012, as evidenced by our total cash and marketable securities of $712 million, which was nearly equal to our total senior note debt of $745 million. Additionally, to further strengthen our liquidity, in January 2013 we issued $250 million of 30-year 6% senior unsecured notes due 2043. We believe that our strong financial position gives us a competitive advantage as we pursue attractive land acquisition opportunities as the housing market improves, which can help us further grow our operations in the future.

Homebuilding


	Year Ended December 31,									Change from 2011 to 2012		Change from 2010 to 2011
	2012			2011			2010			Change from 2011 to 2012		Change from 2010 to 2011
Homebuilding pretax income (loss):	(Dollars in thousands)
West	$	27,076		$	(16,889	)	$	9,910		$	43,965	$	(26,799	)
Mountain		24,302			1,397			1,060			22,905		337
East		11,011			(7,195	)		(3,048	)		18,206		(4,147	)
Corporate		(29,772	)		(87,941	)		(88,818	)		58,169		877

Total homebuilding pretax income (loss)	$	32,617		$	(110,628	)	$	(80,896	)	$	143,245	$	(29,732	)

For the year ended December 31, 2012, we reported homebuilding pretax income of $32.6 million, compared to a pretax loss of $110.6 million for year ended December 31, 2011. The $143.2 million improvement in our homebuilding financial performance was driven primarily by a 43% increase in home sale revenues, a 230 basis point improvement in our gross margin from home sales, a 770 basis point reduction in our SG&A expenses as a percentage of home sale revenues and a $20.0 million decrease in our interest expense. In addition, the 2011 results were adversely impacted by a $38.8 million charge related to the early extinguishment of $500 million of debt.

Our West, Mountain and East segments all showed improvements in pretax results for the year ended December 31, 2012 compared to 2011. The improvements in each of these segments were driven by reductions in SG&A expenses and improvements in our gross margins in many markets. The improvements in pretax results were also aided by increases in our homebuilding revenues in our West, Mountain and East segments due to increases in homebuilding deliveries and average price per home delivered. Our pretax results for our non-operating Corporate segment improved $58.2 million for the year ended December 31, 2012 due primarily to reductions in both interest and SG&A expenses, which included a various significant legal recoveries totaling $9.8 million during 2012, and a $38.8 million reduction in loss on extinguishment of senior debt that was recorded in 2011.

For the year ended December 31, 2011, we reported a homebuilding pretax loss of $110.6 million, compared to a pretax loss of $80.9 million for the year ended December 31, 2010. The $29.7 million decline in our homebuilding financial performance was driven primarily by a 13% decrease in home sale revenues, a 370 basis point decrease in gross margin from home sales and a $38.8 million charge related to the early extinguishment of debt, partially offset by a 170 basis point reduction in our homebuilding SG&A expenses as a percentage of home sale revenues.

Our West and East segments all showed declines in pretax results for the year ended December 31, 2011 compared to 2010. The decline in each of these segments was driven primarily by fewer home deliveries, lower gross margins, including the impact of lower adjustments to reduce warranty accruals in 2011 when compared to 2010. These items were partially offset by decreases in SG&A expenses and impairment charges. Our Mountain segment showed an increase in pretax income of $0.3 million during the year ended December 31, 2011 primarily resulting from declines in SG&A expenses and higher adjustments to reduce warranty reserves recorded during 2011 compared with warranty adjustment increases during 2010.


	December 31,				Change
	2012		2011		Change
Homebuilding assets:	(Dollars in thousands)
West	$	459,807	$	346,442	$	113,365
Mountain		332,939		262,787		70,152
East		274,199		255,074		19,125
Corporate		692,500		852,561		(160,061	)

Total homebuilding assets	$	1,759,445	$	1,716,864	$	42,581

Homebuilding assets in the West, Mountain and East segments increased $113.4 million, $70.2 million and $19.1 million, respectively, from December 31, 2011 to December 31, 2012, primarily due to increases in construction activity and land acquisition, both of which resulted in increased inventory balances. Homebuilding assets in the Corporate segment decreased $160.1 million from December 31, 2011 to December 31, 2012, primarily due to a $153 million decrease in cash and marketable securities related to investments in inventories.

Revenues


	Year Ended December 31,						$ Change from 2011 to 2012		% Change from 2011 to 2012		$ Change from 2010 to 2011			% Change from 2010 to 2011
	2012		2011		2010		$ Change from 2011 to 2012		% Change from 2011 to 2012		$ Change from 2010 to 2011			% Change from 2010 to 2011
Home and land sale revenues	(Dollars in thousands)
West	$	516,079	$	272,800	$	326,278	$	243,279		89%	$	(53,478	)		-16%
Mountain		355,368		316,189		346,289		39,179		12%		(30,100	)		-9%
East		284,695		228,034		254,338		56,661		25%		(26,304	)		-10%

Total home and land sale revenues	$	1,156,142	$	817,023	$	926,905	$	339,119		42%	$	(109,882	)		-12%

Total home and land sale revenues for the year ended December 31, 2012 increased 42% to nearly $1.2 billion compared to $817.0 million for the prior year period. For the period ended December 31, 2011, total home and land sales revenues decreased 12% to $817.0 million compared to $926.9 million for 2010. The change in revenues for both periods was driven by changes to the number and average price of new home deliveries as shown in the tables below.

New Home Deliveries:


	Year Ended December 31,
	2012				% Change				2011				% Change				2010
	Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value
	(Dollars in thousands)
Arizona		603		131,278		43%		64%		423		80,133		-26%		-27%		571		109,149
California		543		184,490		100%		121%		272		83,488		-9%		-24%		298		110,538
Nevada		604		125,725		82%		103%		331		61,833		-39%		-39%		544		101,203
Washington		247		73,074		69%		89%		146		38,710		N/M		N/M		-		-

West		1,997		514,567		70%		95%		1,172		264,164		-17%		-18%		1,413		320,890

Colorado		807		289,416		8%		15%		748		251,935		-5%		4%		789		243,379
Utah		226		64,006		0%		4%		225		61,761		-41%		-40%		383		102,415

Mountain		1,033		353,422		6%		13%		973		313,696		-17%		-9%		1,172		345,794

Maryland		233		99,476		13%		10%		207		90,312		-10%		-10%		231		100,813
Virginia		280		135,067		33%		49%		211		90,844		-11%		-17%		236		109,338
Florida		195		47,915		3%		10%		190		43,450		-2%		-2%		193		44,187
Illinois		2		551		N/M		N/M		9		2,698		N/M		N/M		-		-

East		710		283,009		15%		25%		617		227,304		-7%		-11%		660		254,338

Total		3,740		1,150,998		35%		43%		2,762		805,164		-15%		-13%		3,245		921,022

N/M - Not meaningful

The increase in new home deliveries for the year ended December 31, 2012 was primarily attributable to a 24% increase in the number of homes in backlog to start the period as compared to the prior year. The West segment was the primary driver of the increase, as beginning backlog rose 91% year-over-year due to increased demand, particularly in our Arizona, California and Nevada markets. Resale listings and the level of distressed properties in

many of our markets have been shrinking, particularly in the West, which has provided a boost in demand for new home sales.

Homes delivered during the year ended December 31, 2011 were down in each of our homebuilding segments. Contributing to the decline in home closings was the negative impact from the federal homebuyer tax credit, which expired during 2010. In our West segment, this impact was partially offset by closing 146 homes in our new Washington market.

Average Selling Prices:


	Year Ended December 31,
	2012		% Change		2011		% Change		2010
	(Dollars in thousands)
Arizona	$	217.7		15%	$	189.4		-1%	$	191.2
California		339.8		11%		306.9		-17%		370.9
Nevada		208.2		11%		186.8		0%		186.0
Washington		295.8		12%		265.1		N/M		-

West		257.7		14%		225.4		-1%		227.1

Colorado		358.6		6%		336.8		9%		308.5
Utah		283.2		3%		274.5		3%		267.4

Mountain		342.1		6%		322.4		9%		295.0

Maryland		426.9		-2%		436.3		0%		436.4
Virginia		482.4		12%		430.5		-7%		463.3
Florida		245.7		7%		228.7		0%		228.9
Illinois		275.5		-8%		299.8		N/M		-

East		398.6		8%		368.4		-4%		385.4

Total	$	307.8		6%	$	291.5		3%	$	283.8

N/M - Not meaningful

Our consolidated average home price increased 6% for the year ended December 31, 2012, primarily due to increased prices and lower incentives in certain of our markets, particularly in the West segment, coupled with a shift in the mix of closings to more desirable communities within individual markets.

During the year ended December 31, 2011, our consolidated average selling price of closed homes increased by 3% as we delivered a greater percentage of our homes in the higher-priced Colorado market and delivered fewer homes in our lower-priced markets of Arizona and Nevada.

Gross Margin

Gross margin from home sales for the year ended December 31, 2012 was 15.4%, up 230 basis points from 13.1% for the year earlier period. The increase in gross margins was primarily due to reduced incentives and increased prices in many of our markets, particularly in Arizona and Nevada. In addition, the gross margins were impacted in part by a reduction in impairment charges from $13.0 million in the year ended December 31, 2011 to $1.1 million in the year ended December 31, 2012, which was largely offset by a $6.4 million benefit recorded in 2011 from the settlement of a construction defect claim and the impact of project close-out adjustments and a $5.5 million warranty accrual reduction in 2011, while 2012 did not include any of these significant adjustments.

Gross margin from home sales of 13.1% for the year ended December 31, 2011 was down 370 basis points from the 16.8% in 2010. The decrease was attributable to a reduction in positive adjustments to warranty reserves as there

was a $5.5 million benefit to gross margin from home sales from reductions to warranty accruals for the year ended December 31, 2011 versus $20.8 million in benefits for the year ended December 31, 2010. We believe the lower warranty payment experience rate in the 2011 and 2010 periods were driven by, among other things, a tighter focus and controls over our warranty expenditures, a significant drop in sales volumes over the last several years, which resulted in fewer homes under warranty, and better quality controls and construction practices. In addition, gross margins from home sales in the first half of 2011 were negatively impacted by closing a high percentage of unsold started homes under construction, which historically are less profitable than homes that are started with a buyer under contract. The increase in the percentage of unsold started homes closed was driven by a strategy of offering elevated incentives to reduce the number of unsold started homes in inventory. During the second half of 2011, gross margin from home sales began to recover as our percentage of speculative homes under construction decreased.

Excluding inventory impairments, warranty accrual adjustments and interest in cost of sales, our adjusted gross margin percentage from home sales for the years ended December 31, 2012, 2011 and 2010 was 18.2%, 16.7% and 19.4%, respectively (please see table set forth below reconciling this non-GAAP measure to our gross margin from home sales). The 150 basis point year-over-year increase in adjusted gross margin from home sales for 2012 versus 2011 was positively impacted by generally improved housing market conditions and demand, a reduction in the level of incentives utilized, price increases realized in many of our communities, and delivering a 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 higher adjusted gross margin in 2010 as compared to 2011 was the result of a lower land basis expensed through cost of sales in 2010 due to previously impaired inventory as well as higher homebuyer demand in 2010 related to the impact of the federal homebuyer tax credit.

The table set forth below is a reconciliation of our gross margin and gross margin percentage, 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.


	Year Ended December 31,
	2012			Gross Margin %		2011			Gross Margin %		2010			Gross Margin %
	(Dollars in thousands)
Gross Margin	$	177,094			15.3%	$	106,601			13.0%	$	155,259			16.8%
Less: Land Sales Revenue		(5,144	)				(11,859	)				(5,883	)
Add: Land Cost of Sales		4,823					10,796					5,366

Gross Margin from Home Sales	$	176,773			15.4%	$	105,538			13.1%	$	154,742			16.8%
Add: Inventory Impairments		1,105					12,965					21,195

Gross Margin from Home Sales excluding Impairments⁽¹⁾	$	177,878			15.5%	$	118,503			14.7%	$	175,937			19.1%
Add: Interest in Cost of Sales		31,106					21,152					23,812
Less: Warranty Adjustments		-					(5,478	)				(20,845	)

Adjusted Gross Margin from Home Sales⁽¹⁾	$	208,984			18.2%	$	134,177			16.7%	$	178,904			19.4%

(1)

Gross margin from home sales excluding impairments and adjusted gross margin from home sales are both non-GAAP financial measures. 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 competitors, who also break out and adjust gross margins in a similar fashion. Furthermore, the adjusted gross margin measure has been used by us as one financial metric criterion for performance-based stock options for certain executive officers.

Inventory Impairments

Impairments recognized for the years ended December 31, 2012, 2011 and 2010 are shown in the table below:


	Year Ended December 31,
	2012		2011		2010
	(Dollars in thousands)
Housing Completed or Under Construction:
West	$	-	$	7,270	$	14,808
Mountain		-		1,850		555
East		295		1,804		542

Subtotal		295		10,924		15,905

Land and Land Under Development:
West		-		1,499		3,163
Mountain		-		449		964
East		810		93		1,163

Subtotal		810		2,041		5,290

Inventory impairments	$	1,105	$	12,965	$	21,195

During the year ended December 31, 2012, we recorded $1.1 million of inventory impairments related to two projects in our Maryland division. Based on the slow sales absorption rates experienced during 2012 and the estimated sales price reductions required to sell the remaining lots and houses in these communities, it was determined that the fair values were less than the carrying values.

During the year ended December 31, 2011, we recorded $13.0 million of inventory impairments. These impairments primarily were incurred during the 2011 second and third quarters in select subdivisions primarily in the California and Nevada markets of our West segment, and the Utah market of our Mountain segment. The impairment of these specific subdivisions, most of which were purchased during 2010, primarily resulted from lowering anticipated home sales prices from those that were expected at the time we purchased the land, based on our experience with homes sold or closed in these subdivisions. As a result of declining home sales prices, we determined based upon our impairment evaluation, that the fair market values of the land and homes in these subdivisions were less than their carrying values.

During the year ended December 31, 2010, we recorded $21.2 million of impairments. The impairments were concentrated in the Arizona and Nevada markets of our West segment and primarily resulted from lowering our estimated average selling prices of homes. This was primarily due to: (1) strong competition for sales of new homes; (2) overall low economic activity combined with high unemployment levels; (3) homebuyers having difficulty qualifying for new loans; and (4) the elevated levels of foreclosure and short-sale homes driving real estate values down.

The following table shows the number of subdivisions and carrying value of the inventory we tested for impairment during each quarter in the years ended December 31, 2012, 2011 and 2010. The table also includes impairments that we recorded during such periods, as well as the quarter-end fair value, number of lots and number of subdivisions for the impaired inventories. For the years ended December 31, 2012, 2011 and 2010, we used a discount rates generally ranging from 13% to 18% for the subdivisions that were impaired.


Quarter Ended	Total Subdivisions Tested for Impairment During Quarter		Value of Inventory Tested for Impairment During Quarter		Carrying Value of Impaired Inventory Before Impairment		Inventory Impairments		Fair Value of Impaired Inventory after Impairments		Number of Subdivisions Impaired During the Quarter		Number of Lots Impaired During the Quarter
	(Dollars in thousands)
March 31, 2012		33	$	81,492	$	-	$	-	$	-		-		-
June 30, 2012		27		63,616		-		-		-		-		-
September 30, 2012		22		62,681		-		-		-		-		-
December 31, 2012		17		62,808		3,840		1,105		2,735		2		25

Total		99	$	270,597	$	3,840	$	1,105	$	2,735		2		25

March 31, 2011		10	$	80,915	$	-	$	-	$	-		-		-
June 30, 2011		49		95,407		29,205		8,633		20,572		9		392
September 30, 2011		50		109,247		22,613		4,049		18,564		11		313
December 31, 2011		40		89,031		2,765		283		2,482		2		12

Total		149	$	374,600	$	54,583	$	12,965	$	41,618		22		717

March 31, 2010		9	$	16,879	$	-	$	-	$	-		-		-
June 30, 2010		33		54,220		-		-		-		-		-
September 30, 2010		52		82,444		11,258		3,633		7,625		8		214
December 31, 2010		53		90,138		59,765		17,562		42,203		38		964

Total		147	$	243,681	$	71,023	$	21,195	$	49,828		46		1,178

Selling, General and Administrative Expenses

Our SG&A expenses for the year ended December 31, 2012 decreased $11.8 million to $167.3 million, compared to $179.1 million for same period in 2011. The decrease in SG&A was attributable to reductions in salaries and other overhead costs and $9.8 million in various significant legal recoveries. These items were partially offset by a $10.7 million increase in commission expenses, which was driven by our 43% increase in home sale revenues. The decrease in SG&A expenses, combined with increased revenues, resulted in better operating leverage, with SG&A expenses as a percentage of home sale revenues decreasing to 14.5% for the year ended December 31, 2012 versus 22.2% for the same period in 2011.

Our SG&A expenses for the year ended December 31, 2011 decreased 18%, or $40.6 million, to $179.1 million, compared to $219.7 million for same period in 2010. The decrease in SG&A expenses was primarily attributable to a decrease in commission expenses of $5.3 million, which was driven by our decrease in home sale revenues, a $6.5 million decline in legal expenses, $5.0 million in reductions to executive bonuses and reductions in salaries and other overhead costs.

Interest Income

Our interest income for the years ended December 31, 2012, 2011 and 2010 was $23.4 million, $26.1 million and $24.0 million, respectively. The changes in interest income over each period were attributable to the year-over-year changes in our cash and cash equivalents and marketable securities balances, as well as changing yields.

Interest Expense

For the years ended December 31, 2012, 2011 and 2010, we expensed $0.8 million, $20.8 million and $38.2 million of interest, respectively, related to the portion of our homebuilding debt that exceeded our qualified assets. The year-over-year decrease from 2011 to 2012 related primarily to the repayment of $500 million of senior debt during the latter half of 2011, which significantly reduced the amount by which our homebuilding debt exceeded our qualified assets combined with the increase in total inventories from 2011 to 2012.

Other Income (Expense)

For the years ended December 31, 2012, 2011 and 2010, our other income (expense) was $0.2 million, $(43.4) million and $(2.3) million, respectively. Other expense for the year ended December 31, 2011 was largely related to a $38.8 million charge for the early extinguishment of $500 million of debt.

Other Homebuilding Operating Data

Net New Orders:


	Year Ended December 31,
	2012				% Change				2011				% Change				2010
	Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value
	(Dollars in thousands)
Arizona		625		137,159		34%		57%		467		87,223		-15%		-17%		552		105,195
California		654		225,174		110%		143%		311		92,760		3%		-14%		301		108,061
Nevada		652		146,094		59%		95%		411		75,011		-23%		-27%		532		102,117
Washington		272		82,325		119%		153%		124		32,577		N/M		N/M		-		-

West		2,203		590,752		68%		105%		1,313		287,571		-5%		-9%		1,385		315,373

Colorado		1,044		364,056		47%		51%		708		240,671		-17%		-9%		855		265,403
Utah		239		71,080		7%		15%		224		61,760		-37%		-36%		358		96,975

Mountain		1,283		435,136		38%		44%		932		302,431		-23%		-17%		1,213		362,378

Maryland		303		129,891		56%		49%		194		87,279		-16%		-9%		231		95,631
Virginia		362		179,744		48%		65%		244		109,103		5%		8%		233		101,153
Florida		189		46,493		-4%		2%		196		45,592		-1%		0%		198		45,371
Illinois		2		550		N/M		N/M		8		2,279		N/M		N/M		1		300

East		856		356,678		33%		46%		642		244,253		-3%		1%		663		242,455

Total		4,342		1,382,566		50%		67%		2,887		839,255		-11%		-9%		3,261		920,206

N/M - Not meaningful

Average Home Order Prices:


	Year Ended December 31,
	2012		% Change		2011		% Change		2010
	(Dollars in thousands)
Arizona	$	219.5		17%	$	186.8		-2%	$	190.6
California		344.3		15%		298.3		-17%		359.0
Nevada		224.1		23%		182.5		-5%		191.9
Washington		302.7		15%		262.7		N/M		-

West		268.2		22%		219.0		-4%		227.7

Colorado		348.7		3%		339.9		10%		310.4
Utah		297.4		8%		275.7		2%		270.9

Mountain		339.2		5%		324.5		9%		298.7

Maryland		428.7		-5%		449.9		9%		414.0
Virginia		496.5		11%		447.1		3%		434.1
Florida		246.0		6%		232.6		2%		229.1
Illinois		275.0		-3%		284.9		-5%		300.0

East		416.7		10%		380.5		4%		365.7

Total	$	318.4		10%	$	289.0		2%	$	282.2

N/M - Not meaningful

Net new orders for the year ended December 31, 2012 increased 50% to 4,342 homes, compared with 2,887 homes for the year ended December 31, 2011. Our monthly sales absorption rate for the year ended December 31, 2012 was 2.09 per community compared to 1.41 per community for the year ended December 31, 2011. We experienced substantial order growth in most of our homebuilding segments due to a combination of a change in our sales processes and procedures, and the overall improvement in housing market conditions. Our West segment experienced the most significant increase due to particularly strong demand.

Net new orders for the year ended December 31, 2011 decreased 11% to 2,887 homes, compared with 3,261 homes for the year ended December 31, 2010. Our monthly sales absorption rate for the year ended December 31, 2011 was 1.4 per community compared to 2.0 per community for the year ended December 31, 2010. The decrease was primarily due to significant decreases in the markets of our Mountain segment and the Arizona and Nevada markets of our West segment. The declines in those markets were driven primarily by the impact of the expiration of the 2010 federal homebuyer tax credit and increased volatility in our cancellation rates, partially offset by the 124 net orders for homes we received in our new Washington market and an increased number of active communities.

Active Subdivisions:


							% Change from 2011 to 2012		% Change from 2010 to 2011
	At December 31,
	2012		2011		2010
Arizona		12		25		26		-52%		-4%
California		13		17		13		-24%		31%
Nevada		12		20		18		-40%		11%
Washington		10		9		-		11%		N/M

West		47		71		57		-34%		25%

Colorado		42		47		39		-11%		21%
Utah		14		21		19		-33%		11%

Mountain		56		68		58		-18%		17%

Maryland		18		16		14		13%		14%
Virginia		12		15		8		-20%		88%
Florida		15		17		11		-12%		55%

East		45		48		33		-6%		45%

Total		148		187		148		-21%		26%

Average for year ended		173		171		137		0%		19%

At December 31, 2012, we had 148 active subdivisions, down 21% from 187 active subdivisions at December 31, 2011. The decrease was primarily caused by our decision to slow the pace of new community acquisitions during the second half of 2011 in light of uncertainties regarding future economic conditions at that time. In addition, higher than expected sales for the year ended December 31, 2012 resulted in certain subdivisions selling out more quickly than anticipated. In light of increased sales demand and higher sales absorption rates, we accelerated our land acquisition activities during the second half of 2012 in order to increase our active community count during 2013. We purchased approximately 4,450 lots during the year ended December 31, 2012, of which approximately 3,550 lots were purchased in the second half of 2012. With the significant increase in acquisition activity in the latter half of 2012, we expect our active subdivision count to increase in the first half of 2013.

Our active subdivisions at December 31, 2011 increased in each of our homebuilding segments compared with December 31, 2010 as a result of significant land acquisition activity in 2010 and the first half of 2011, including the purchase of assets to enter the Washington market.

Cancellation Rates:


	Year Ended December 31,						Change in Percentage from 2011 to 2012		Change in Percentage from 2010 to 2011
	2012		2011		2010		Change in Percentage from 2011 to 2012		Change in Percentage from 2010 to 2011
Arizona		21%		34%		22%		-13%		12%
California		23%		38%		25%		-15%		13%
Nevada		17%		37%		29%		-20%		8%
Washington		20%		19%		0%		1%		19%

West		20%		35%		26%		-15%		9%

Colorado		23%		36%		32%		-13%		4%
Utah		23%		42%		35%		-19%		7%

Mountain		23%		37%		33%		-14%		4%

Maryland		34%		44%		34%		-10%		10%
Virginia		25%		31%		32%		-6%		-1%
Florida		24%		38%		36%		-14%		2%

East		28%		38%		34%		-10%		4%

Total		23%		36%		30%		-13%		6%

Our cancellation rate for the year ended December 31, 2012 was 23% compared to 36% for the year ended December 31, 2011. The improvement in our cancellation rate reflected the 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. We experienced our highest cancellation rate in the East segment, due to more cancellations in our Maryland market resulting from efforts to reduce contingent buyers in backlog, and we experienced our lowest cancellation rate in the West segment, where we experienced strong demand in each market within this segment during 2012.

Our cancellation rate during the year ended December 31, 2011 was 36% compared to 30% for the year ended December 31, 2010. Each of our homebuilding segments experienced an increase in their cancellation rates, primarily due to the expiration of the federal homebuyer tax credit in 2010 and increased cancellation rate volatility following a series of large national sales campaigns in 2011.

Backlog:


	At December 31,
	2012				% Change				2011				% Change				2010
	Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value		Homes		Dollar Value
	(Dollars in thousands)
Arizona		150	$	35,064		17%		30%		128	$	26,875		52%		63%		84	$	16,469
California		229		78,400		94%		110%		118		37,341		49%		45%		79		25,743
Nevada		204		50,533		31%		69%		156		29,969		105%		88%		76		15,949
Washington		79		26,761		46%		79%		54		14,958		N/M		N/M		-		-

West		662		190,758		45%		75%		456		109,143		91%		88%		239		58,161

Colorado		470		174,280		102%		106%		233		84,519		-15%		-9%		273		92,447
Utah		81		25,058		19%		30%		68		19,253		-1%		-1%		69		19,477

Mountain		551		199,338		83%		92%		301		103,772		-12%		-7%		342		111,924

Maryland		183		79,162		62%		62%		113		48,987		-10%		-7%		126		52,832
Virginia		185		92,303		80%		85%		103		49,953		47%		62%		70		30,759
Florida		64		17,452		-9%		-3%		70		18,020		9%		21%		64		14,937

East		432		188,917		51%		62%		286		116,960		10%		19%		260		98,528

Total		1,645	$	579,013		58%		76%		1,043	$	329,875		24%		23%		841	$	268,613

N/M - Not meaningful

Average Prices of Homes in Backlog:


	At December 31,
	2012		% Change		2011		% Change		2010
	(Dollars in thousands)
Arizona		233.8		11%		210.0		7%		196.1
California		342.4		8%		316.4		-3%		325.9
Nevada		247.7		29%		192.1		-8%		209.9
Washington		338.7		22%		277.0		N/M		N/M

West		288.2		20%		239.3		-2%		243.4

Colorado		370.8		2%		362.7		7%		338.6
Utah		309.4		9%		283.1		0%		282.3

Mountain		361.8		5%		344.8		5%		327.3

Maryland		432.6		0%		433.5		3%		419.3
Virginia		498.9		3%		485.0		10%		439.4
Florida		272.7		6%		257.4		10%		233.4

East		437.3		7%		409.0		8%		379.0

Total		352.0		11%		316.3		-1%		319.4

N/M - Not meaningful

At December 31, 2012, we had 1,645 homes in backlog, with an estimated sales value of $579.0 million, compared with a backlog of 1,043 homes with an estimated sales value of $329.9 million at December 31, 2011. The 58% increase in the number of homes in our backlog was primarily the result of the increase in net orders during the year ended December 31, 2012. Our West and Mountain segments experienced the strongest growth in backlog due to improved market conditions, especially within each state within the West, and in Colorado in the Mountain segment.

The increase in our backlog at December 31, 2011 compared with December 31, 2010 was driven primarily by our West segment. Increases in net orders in addition to our expansion into the Seattle market drove a 91% increase in homes in backlog in our West segment.

Homes Completed or Under Construction (WIP lots):


	At December 31,						% Change from 2011 to 2012		% Change from 2010 to 2011
	2012		2011		2010		% Change from 2011 to 2012		% Change from 2010 to 2011
Unsold
Completed		221		146		119		51%		23%
Under construction - frame		421		249		722		69%		-66%
Under construction - foundation		183		79		103		132%		-23%

Total unsold started homes		825		474		944		74%		-50%
Sold homes under construction or completed		1,147		638		609		80%		5%
Model homes		221		226		242		-2%		-7%

Total homes completed or under construction		2,193		1,338		1,795		64%		-25%

Our total homes completed or under construction increased to 2,193 at December 31, 2012 from 1,338 at December 31, 2011, primarily related to a higher number of sold homes started in light of our year-over-year increase in backlog. We also intentionally increased our inventory of unsold started homes based on the overall improvement in housing market conditions and increased demand for started homes.

Our total homes completed or under construction decreased by 457 to 1,338 at December 31, 2011 from 1,795 at December 31, 2010. This decrease primarily resulted from our focused efforts to reduce our inventory of unsold started homes, which had increased during 2010 in light of poor market conditions at that time.

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


	December 31, 2012						December 31, 2011						December 31, 2010
	Lots Owned		Lots Optioned		Total Lots Controlled		Lots Owned		Lots Optioned		Total Lots Controlled		Lots Owned		Lots Optioned		Total Lots Controlled
Arizona		1,763		80		1,843		955		77		1,032		1,521		408		1,929
California		1,080		-		1,080		1,384		-		1,384		1,396		222		1,618
Nevada		1,226		40		1,266		1,191		33		1,224		1,234		838		2,072
Washington		472		162		634		385		147		532		-		-		-

West		4,541		282		4,823		3,915		257		4,172		4,151		1,468		5,619

Colorado		3,335		508		3,843		3,220		321		3,541		3,425		688		4,113
Utah		532		13		545		607		17		624		728		393		1,121

Mountain		3,867		521		4,388		3,827		338		4,165		4,153		1,081		5,234

Maryland		577		315		892		566		596		1,162		473		745		1,218
Virginia		553		263		816		678		173		851		558		132		690
Illinois		-		-		-		125		-		125		134		-		134
Florida		365		159		524		330		340		670		362		733		1,095

East		1,495		737		2,232		1,699		1,109		2,808		1,527		1,610		3,137

Total		9,903		1,540		11,443		9,441		1,704		11,145		9,831		4,159		13,990

We increased our supply of owned and optioned lots by 3% during the year ended December 31, 2012 to 11,443 total lots, even after a 35% increase in new home deliveries in 2012 as compared to the year earlier period. Our lot supply increased most significantly in the West, particularly in the Arizona market, which was up 79%, and in our Colorado market, which was up 9%. These increases were partially offset by a 21% decline in lots in our East segment due to decreases in each market within that segment.

The decrease in total owned and optioned lots at December 31, 2011 compared to December 31, 2010, primarily resulted from electing not to enter into many option contracts during the last part of 2011, as we determined we had a sufficient lot supply to satisfy existing demand.

Financial Services

We reported financial services pretax income of $28.5 million for the year ended December 31, 2012, compared to pretax income of $3.2 million for the year ended December 31, 2011. The increase in our financial services pretax income was driven primarily by a year-over-year increase of $23.5 million in our mortgage operations pretax income of $23.9 million for the year ended December 31, 2012. The improvement in our mortgage operation’s profitability was driven largely by a total of $14.0 million in year-over-year increases in: (1) the marketing gains on sales of mortgage loans; (2) the corresponding servicing rights from those sales and; (3) origination income for the year ended December 31, 2012. These increases were due to favorable mortgage market conditions, increases in the volume of loans locked and originated, and a decrease in the level of special financing programs that we offered our homebuyers. Our mortgage operation’s profitability for the year ended December 31, 2012 also benefited from a year-over-year decrease in our loan loss reserve expense by $7.7 million due to reduced repurchase and indemnity claims received from third-party purchasers of our mortgage loans and reductions in settlement claims paid by HomeAmerican. During 2011, the Company’s mortgage subsidiary entered into various settlements with third parties concerning claims and potential claims to repurchase certain previously sold mortgage loans, which resulted in an increase in its loan loss reserve of $8.0 million. The balance of our financial services pretax income, which consisted of income from our insurance and title operations, was $4.6 million for the year ended December 31, 2012, as compared with $2.8 million for the year ended December 31, 2011.

We reported financial services pretax income of $3.2 million for the year ended December 31, 2011, compared to pretax income of $10.3 million for the year ended December 31, 2010. The $7.1 million decrease in our financial services pretax income was primarily driven by a $6.2 million decline in gains on sale of mortgage loans and a $2.8 million decline in loan origination fees, both driven by a decrease in the volume of loan originations and higher incentives on loans for customers in 2011 compared to 2010, and an $8.0 million increase to our loan loss reserve due to various settlements with third parties concerning claims and potential claims to repurchase certain previously sold mortgage loans. These amounts were partially offset by improvements in fair values on our commitments to originate loans and forward sales commitments.

The following table sets forth information relating to the sources of revenues for our financial services operations.


	Year Ended December 31,
	2012		2011		2010
Financial services revenue:	(Dollars in thousands)
Mortgage operations	$	35,123	$	17,807	$	21,839
Other		11,758		8,279		8,634

Total financial services revenue	$	46,881	$	26,086	$	30,473

The following table sets forth information for our mortgage operations relating to mortgage loans originated and capture rate. The “Capture Rate” is defined as the number of mortgage loans originated by our mortgage operations for our homebuyers as a percent of our total home closings.


	Year Ended December 31,
	2012		2011		2010
Total Originations:	(Dollars in thousands)
Loans		2,557		2,076		2,734
Principal	$	715,542	$	556,558	$	699,951
Capture rate		66%		72%		81%
Percentage of cash buyers		7%		7%		6%
Loans Sold to Third Parties:
Loans		2,457		2,023		2,727
Principal	$	675,422	$	545,613	$	696,160
Mortgage Loan Origination Product Mix:
FHA loans		32%		40%		49%
Other government loans (VA & USDA)		30%		28%		23%

Total government loans		62%		68%		72%
Conventional loans		38%		32%		28%

		100%		100%		100%

Loan Type:
Fixed rate		99%		96%		97%
ARM		1%		4%		3%
Credit Quality:
Average FICO Score		737		736		734
Other Data:
Average Combined LTV ratio		90%		91%		90%
Full documentation loans		100%		100%		100%
Non-full documentation loans		0%		0%		0%

Income Taxes

Our income tax assets and liabilities and related effective tax rate are affected by various factors, the most significant of which is the valuation allowance recorded against our deferred tax assets. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2012, 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss.

We had income tax benefits of $1.6 million, $9.1 million and $5.8 million during the years ended December 31, 2012, 2011 and 2010, respectively. The $1.6 million income tax benefit for the year ended December 31, 2012 was primarily from the release of reserves attributable to the expiration of statute of limitations periods and our 2011 settlements with various taxing authorities. The $9.1 million income tax benefit for the year ended December 31, 2011 resulted primarily from settlements of various state income tax matters and our settlement with the IRS on its audit of our 2004 and 2005 federal income tax returns. The $5.8 million income tax benefit for the year ended December 31, 2010 resulted primarily from our finalization of various state income tax examinations.

LIQUIDITY AND CAPITAL RESOURCES

We use our liquidity and capital resources to (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities and Mortgage Repurchase Facility (as defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $750 million.

Our 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 equity securities consisting of mutual funds, which primarily invest in corporate bonds and other fixed income securities; and (3) deposit securities, which may include, among others, certificates of deposit and time deposits.

Capital Resources.

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our publicly traded 5.375% senior notes due 2014 and 2015, 5.625% senior notes due 2020 and our 6% senior notes due 2043; (3) our Mortgage Repurchase Facility and (4) our Letter of Credit Facilities. Because of our current balance of cash, cash equivalents, marketable securities and available capacity under our Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See “Forward-Looking Statements” below.

We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Senior Notes, Mortgage Repurchase Facility and Letter of Credit Facilities

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

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement, (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”) which was amended on September 21, 2012 and extended until September 20, 2013. 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 December 21, 2012, the Mortgage Repurchase Facility maximum aggregate commitment was temporarily increased to $80 million, which will return to $50 million after January 31, 2013.

At December 31, 2012 and 2011, we had $76.3 million and $48.7 million, respectively, of mortgage loans that we were 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 in the accompanying 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) 3.25%. 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, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility.

The table below sets forth the actual results of the covenant calculations and covenant requirements under the Mortgage Repurchase Facility at December 31, 2012.


	Covenant Test		Covenant Results
Adjusted Tangible Net Worth (minimum)	$	18,000,000	$	39,851,000
Adjusted Tangible Net Worth Ratio (maximum)		8.0 : 1.0		2.1 : 1.0
Adjusted Net Income (minimum)	$	1	$	14,757,000
Liquidity Test (minimum)	$	8,000,000	$	33,849,000

We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility and we are not aware of any covenant violations as of December 31, 2012.

Letter of Credit Facilities. At December 31, 2012, we had entered into letter of credit facilities with various lenders pursuant to which $8.0 million of letters of credit were issued and outstanding. Among these facilities are three committed revolving facilities, the terms of which provide that up to $65 million of letters of credit may be issued thereunder. The facilities, which are not secured, are fully and unconditionally guaranteed, jointly and severally, by all of our homebuilding subsidiaries and contain various financial and other covenants. We believe that we were in compliance with the covenants in these facilities as of December 31, 2012.

In addition, we had $6.7 million in letters of credit issued by HomeAmerican at December 31, 2012.

Dividends

For the year ended of December 31, 2012, we paid dividends of $2.00 per share. Of the $2.00 per share in dividends, $1.00 was in lieu of declaring and paying regular quarterly dividends in calendar year 2013.

MDC Common Stock Repurchase Program

At December 31, 2012, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the year ended December 31, 2012.

Consolidated Cash Flow

Our operating cash flows are primarily impacted by: (1) land purchases and construction of homes; (2) closing homes and the associated timing of collecting receivables from home closings; (3) sales of mortgage loans originated by HomeAmerican; (4) payments on accounts payables and accrued liabilities; and (5) funding for payroll. When we close on the sale of a house, our homebuilding subsidiaries will generally receive the proceeds from the sale of the homes within one to four days after it closes. Therefore, our home sales receivable balance can increase or decrease from period to period based upon the timing of our home closings. Additionally, the amount of mortgage loans held-for-sale can be impacted period to period based upon the number of mortgage loans that were originated by HomeAmerican that have not been sold to third party purchasers and by the timing of fundings by third party mortgage purchasers. Accordingly, mortgage loans held-for-sale may increase if HomeAmerican originates more

homes towards the end of one reporting period when compared with the same period in the previous year. HomeAmerican will generally sell mortgage loans it originates within 15 to 40 days after origination.

Year Ended December 31, 2012. We used $108.8 million in cash from operating activities during the year ended December 31, 2012, primarily resulting from: (1) increasing our inventory from December 31, 2011, which resulted in the use of $196.8 million in cash and (2) $41.6 million used in connection with originating mortgage loans held-for-sale. These items partially were offset by net income of $62.7 million and a $47.5 million increase in accounts payable.

We used $21.8 million in cash from investing activities during the year ended December 31, 2012, primarily attributable to purchasing $478.7 million of marketable securities. These items were significantly offset by the maturity and sale of marketable securities that increased our cash by $458.2 million.

We used $52.7 million of cash from financing activities during the year ended December 31, 2012, primarily resulting from $96.9 million of dividend payments. This was partially offset by net cash proceeds of $27.6 million from mortgage repurchase facility activity.

Year Ended December 31, 2011. We used $80.3 million of cash in operating activities, primarily resulting from: (1) using $65.6 million to reduce our accrued liabilities; (2) $13.2 million used in connection with originating mortgage loans; (3) $6.1 million associated with changes in our inventory levels; and (4) $5.7 million associated with net loss before non-cash items of $93.4 million. This use of cash was partially offset by generating $16.8 million in cash associated with reducing our income tax receivable.

We generated $404.3 million in cash from investing activities during the year ended December 31, 2011, primarily attributable to the maturity and sale of marketable securities that increased our cash by $942.7 million, partially offset by the purchase of $506.6 million of marketable securities. In addition, we used $31.9 million in cash for the purchase of property, equipment and other.

We used $552.8 million in cash for financing activities, primarily attributable to $537.7 million used to extinguish certain of our senior notes due 2012 and 2013 and $47.4 million used to pay cash dividends during 2011. These items partially were offset by net proceeds from our mortgage repurchase facility, which resulted in a $23.3 million increase in cash, and $9.0 million in cash proceeds from the exercise of stock options.

Year Ended December 31, 2010. We used $209.1 million of cash from operating activities during the year ended December 31, 2010, primarily resulting from: (1) increasing our inventory from December 31, 2009, which resulted in the use of $283.9 million in cash; (2) $27.2 million of cash used related to prepaid expenses and other assets, which was primarily driven by increases in our deferred marketing costs as we built approximately 150 new model homes during 2010; and (3) $32.2 million from a decrease in our accrued liabilities. These items were partially offset by collecting $143.1 million of our 2010 income tax receivable.

We used $644.5 million of cash in investing activities during the year ended December 31, 2010, primarily resulting from the purchase of $934.2 million of marketable securities and $8.1 million of property and equipment. The purchases of marketable securities were made seeking greater returns on certain securities whose original maturities to the Company were longer than three months. The purchase of property and equipment primarily related to the on-going development of our new enterprise resource planning system that began to be used at our Corporate office and certain subsidiaries during 2010. These uses of cash were partially offset by $296.2 million in sales and maturities of marketable securities.

We generated $191.5 million of cash from financing activities, due to our issuance of the 2020 Senior Notes, which generated $242.3 million in cash. This was partially offset by $47.1 million of dividend payments made during 2010.

Off-Balance Sheet Arrangements

Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At December 31, 2012, we had deposits of $6.7 million in the form of cash and $3.3 million in the form of letters of credit that were at risk to secure option contracts to purchase 1,540 lots.

Surety Bonds and Letter of Credit Facilities. At December 31, 2012, we had issued and outstanding surety bonds and letters of credit totaling $61.2 million and $14.7 million, respectively, including $6.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $24.2 million and $6.5 million, respectively. Among our letter of credit facilities are three committed revolving facilities, the terms of which provide that up to $65 million of letters of credit may be issued thereunder. The facilities, which are not secured, are fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding subsidiaries and contain various financial and other covenants. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit. We believe that we were in compliance with the covenants in these facilities as of December 31, 2012.

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

Contractual Obligations.

The table below summarizes our known contractual obligations at December 31, 2012.


	Payments due by Period (in thousands)
	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Senior note debt	$	750,000	$	-	$	500,000	$	-	$	250,000
Interest on senior note debt		172,657		40,938		68,438		28,125		35,156
Operating leases		15,617		4,451		6,953		3,562		651

Total^{(1) (2)}	$	938,274	$	45,389	$	575,391	$	31,687	$	285,807