M.D.C. HOLDINGS, INC. - Quarter Report: 2014 March (Form 10-Q)

mdc20140331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

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

(303) 773-1100

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

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


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐ (Do not check if a smaller reporting company)	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 ☒

As of April 29, 2014, 48,821,676 shares of M.D.C. Holdings, Inc. common stock were outstanding.

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

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2014

INDEX

			Page No.
PartI. Financial Information:

	Item1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at March 31, 2014 and December 31, 2013	1

		Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2014 and 2013	2

		Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	3

		Notes to Unaudited Consolidated Financial Statements	4

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

	Item 4.	Controls and Procedures	40

Part II. Other Information:

	Item 1.	Legal Proceedings	41

	Item1A.	Risk Factors	41

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

	Item 3.	Defaults Upon Senior Securities	42

	Item 4.	Mine Safety Disclosures	42

	Item 5.	Other Information	42

	Item 6.	Exhibits	43

	Signature		43

(i)

ITEM 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

	March 31, 2014		December 31, 2013
	(Dollars in thousands, except per share amounts)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	68,897	$	148,634
Marketable securities		508,744		569,021
Restricted cash		1,505		2,195
Trade and other receivables		30,134		23,407
Inventories:
Housing completed or under construction		712,069		636,700
Land and land under development		838,703		774,961
Total inventories		1,550,772		1,411,661
Property and equipment, net		30,897		31,248
Deferred tax asset, net of valuation allowance of $8,201 at March 31, 2014 and December 31, 2013, respectively		174,006		176,262
Metropolitan district bond securities (related party)		13,027		12,729
Prepaid and other assets		62,138		53,525
Total homebuilding assets		2,440,120		2,428,682
Financial Services:
Cash and cash equivalents		25,922		50,704
Marketable securities		15,870		19,046
Mortgage loans held-for-sale, net		64,800		92,578
Other assets		3,525		4,439
Total financial services assets		110,117		166,767
Total Assets	$	2,550,237	$	2,595,449
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	31,591	$	15,046
Accrued liabilities		118,524		152,821
Senior notes, net		1,095,958		1,095,620
Total homebuilding liabilities		1,246,073		1,263,487
Financial Services:
Accounts payable and accrued liabilities		55,135		55,639
Mortgage repurchase facility		39,340		63,074
Total financial services liabilities		94,475		118,713
Total Liabilities		1,340,548		1,382,200
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-		-
Common stock, $0.01 par value; 250,000,000 shares authorized; 48,821,676 and 48,788,887 issued and outstanding at March 31, 2014 and December 31, 2013, respectively		488		488
Additional paid-in-capital		909,278		908,090
Retained earnings		292,394		293,096
Accumulated other comprehensive income		7,529		11,575
Total Stockholders' Equity		1,209,689		1,213,249
Total Liabilities and Stockholders' Equity	$	2,550,237	$	2,595,449

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

- 1 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
	(Unaudited)
Homebuilding:
Home sale revenues	$	318,534		$	331,748
Home cost of sales		(259,478	)		(274,076	)
Gross margin		59,056			57,672
Selling, general and administrative expenses		(48,341	)		(48,201	)
Interest and other income		13,549			6,549
Interest expense		(685	)		(817	)
Other expense		(614	)		(356	)
Loss on early extinguishment of debt		(9,412	)		-
Homebuilding pretax income		13,553			14,847

Financial Services:
Revenues		9,223			12,506
Expenses		(4,924	)		(5,642	)
Interest and other income		788			875
Financial services pretax income		5,087			7,739

Income before income taxes		18,640			22,586
Provision for income taxes		(7,136	)		(70	)
Net income	$	11,504		$	22,516

Other comprehensive income (loss) related to available for sale securities, net of tax		(4,046	)		2,535
Comprehensive income	$	7,458		$	25,051

Earnings per share:
Basic	$	0.24		$	0.46
Diluted	$	0.23		$	0.45

Weighted average common shares outstanding
Basic		48,585,757			48,342,145
Diluted		48,854,675			48,922,335

Dividends declared per share	$	0.25		$	-

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

- 2 -

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
	(Unaudited)
Operating Activities:
Net income	$	11,504		$	22,516
Adjustments to reconcile net income to net cash used in operating activities:
Loss on early extinguishment of debt		9,412			-
Stock-based compensation expense		1,292			3,376
Depreciation and amortization		934			1,078
Amortization of discount (premium) on marketable debt securities		(90	)		619
Deferred income tax		7,103			-
Net changes in assets and liabilities:
Restricted cash		690			(667	)
Trade and other receivables		(8,711	)		(3,970	)
Mortgage loans held-for-sale		27,778			33,524
Housing completed or under construction		(75,190	)		(8,618	)
Land and land under development		(63,718	)		(44,770	)
Prepaid expenses and other assets		(6,881	)		(6,470	)
Accounts payable and accrued liabilities		(18,371	)		(52,036	)
Net cash used in operating activities		(114,248	)		(55,418	)

Investing Activities:
Purchases of marketable securities		(356,287	)		(150,811	)
Maturities of marketable securities		133,724			-
Sales of marketable securities		279,450			44,668
Purchases of property and equipment		(545	)		(926	)
Net cash provided by (used in) investing activities		56,342			(107,069	)

Financing Activities:
Advances (payments) on mortgage repurchase facility, net		(23,734	)		(34,859	)
Proceeds from issuance of senior notes		248,375			247,813
Repayment of senior notes		(259,118	)		-
Dividend payments		(12,207	)		-
Proceeds from exercise of stock options		71			5,118
Net cash provided by (used in) financing activities		(46,613	)		218,072

Net increase (decrease) in cash and cash equivalents		(104,519	)		55,585
Cash and cash equivalents:
Beginning of period		199,338			160,095
End of period	$	94,819		$	215,680

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

- 3 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2014 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

2.	Segment Reporting

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

We have identified each homebuilding division as an operating segment. Our operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

●

West (Arizona, California, Nevada and Washington)

●

Mountain (Colorado and Utah)

●

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

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income we consider HomeAmerican to be a reportable segment (“Mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“Other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

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

The table set forth below summarizes home sale revenues for our homebuilding operations and revenues for our financial services operations.

- 4 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	Three Months Ended March 31,
	2014		2013
	(Dollars in thousands)
Homebuilding
West	$	136,422	$	134,979
Mountain		100,945		133,377
East		81,167		63,392
Total home sale revenues	$	318,534	$	331,748

Financial Services
Mortgage operations	$	5,119	$	9,044
Other		4,104		3,462
Total financial services revenues	$	9,223	$	12,506

The following table summarizes pretax income for our homebuilding and financial services operations.

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Homebuilding
West	$	12,650		$	10,611
Mountain		7,359			12,996
East		2,661			1,528
Corporate		(9,117	)		(10,288	)
Total homebuilding pretax income	$	13,553		$	14,847

Financial Services
Mortgage operations	$	2,559		$	5,999
Other		2,528			1,740
Total financial services pretax income	$	5,087		$	7,739

Total pretax income	$	18,640		$	22,586

The table set forth below summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment consist primarily of cash and cash equivalents, marketable securities and our deferred tax asset. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

- 5 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Homebuilding assets
West	$	837,792	$	760,450
Mountain		467,630		418,796
East		325,042		297,627
Corporate		809,656		951,809
Total homebuilding assets	$	2,440,120	$	2,428,682

Financial services assets
Mortgage operations	$	70,848	$	99,065
Other		39,269		67,702
Total financial services assets	$	110,117	$	166,767

Total assets	$	2,550,237	$	2,595,449

3.	Earnings Per Share

A company that has participating securities (for example, holders of unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method to calculate earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Currently, we have one class of security and we have participating security holders consisting of shareholders of unvested restricted stock. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding. The following table shows basic and diluted EPS calculations:

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
Numerator
Net income	$	11,504		$	22,516
Less: distributed earnings allocated to participating securities		(52	)		-
Less: undistributed earnings allocated to participating securities		-			(375	)
Net income attributable to common stockholders (numerator for basic earnings per share)		11,452			22,141
Add back: undistributed earnings allocated to participating securities		-			375
Less: undistributed earnings reallocated to participating securities		-			(370	)
Numerator for diluted earnings per share under two class method	$	11,452		$	22,146

Denominator
Weighted-average common shares outstanding		48,585,757			48,342,145
Add: dilutive effect of stock options		268,918			580,190
Denominator for diluted earnings per share under two class method		48,854,675			48,922,335

Basic Earnings Per Common Share	$	0.24		$	0.46
Diluted Earnings Per Common Share	$	0.23		$	0.45

Diluted EPS for the quarters ended March 31, 2014 and 2013 excluded options to purchase approximately 3.7 million and 2.9 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive.

- 6 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

4.	Accumulated Other Comprehensive Income

The following table sets forth our changes in accumulated other comprehensive income:

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Unrealized gains (losses) on available-for-sale marketable securities ⁽¹⁾ :
Beginning balance	$	7,655		$	4,838
Other comprehensive income (loss) before reclassifications		(33	)		2,221
Amounts reclassified from accumulated other comprehensive income ⁽²⁾		(4,013	)		314
Ending balance	$	3,609		$	7,373

Unrealized gains on available-for-sale metropolitan district bond securities ⁽¹⁾ :
Beginning balance	$	3,920		$	-
Other comprehensive income before reclassifications		-			-
Amounts reclassified from accumulated other comprehensive income		-			-
Ending balance	$	3,920		$	-

Total ending accumulated other comprehensive income	$	7,529		$	7,373

⁽¹⁾

All amounts net-of-tax.

⁽²⁾

See separate table below for details about these reclassifications.

The following table sets forth the activity related to reclassifications out of accumulated other comprehensive income (loss) related to available for sale securities:

	Three Months Ended March 31,
Affected Line Item in the Statements of Operations	2014			2013
	(Dollars in thousands)
Homebuilding interest and other income	$	6,537		$	(295	)
Financial services interest and other income		(12	)		(19	)
Income before income taxes		6,525			(314	)
Provision for income taxes		(2,512	)		-
Net income	$	4,013		$	(314	)

5.	Fair Value Measurements

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

- 7 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

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

		Fair Value
Financial Instrument	Hierarchy	March 31, 2014		December 31, 2013
		(Dollars in thousands)
Marketable securities (available-for-sale)
Equity securities	Level 1	$	459,314	$	389,323
Debt securities - maturity less than 1 year	Level 2		14,053		72,577
Debt securities - maturity 1 to 5 years	Level 2		34,653		106,566
Debt securities - maturity greater than 5 years	Level 2		16,594		19,601
Total available-for-sale securities		$	524,614	$	588,067

Mortgage loans held-for-sale, net	Level 2	$	64,800	$	92,578

Metropolitan district bond securities (related party) (available-for-sale)	Level 3	$	13,027	$	12,729

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

The fair value of our cash and cash equivalents, restricted cash, trade and other receivables, inventories, prepaid and other assets, accounts payable, and accrued liabilities approximate their carrying value.

Marketable Securities. We have marketable debt and equity securities. Our equity securities consist primarily of holdings in mutual fund securities, which invest mostly in debt securities. The remaining equity securities in our investment portfolio are holdings in corporate equities. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. We measure the fair value of our debt securities using a third party pricing service that either provides quoted market prices in active markets for identical or similar securities which are level 1 inputs, or uses observable inputs for their pricing, which are level 2 inputs. As of March 31, 2014 and December 31, 2013, all of our marketable securities were treated as available-for-sale investments and, as such, we have recorded all of our marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income.

The following tables set forth the amortized cost and estimated fair value of our available-for-sale marketable securities.

	March 31, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding:
Equity securities	$	450,095	$	455,214	$	375,142	$	385,303
Debt securities		53,125		53,530		181,635		183,718
Total homebuilding available-for-sale securities	$	503,220	$	508,744	$	556,777	$	569,021

Financial Services:
Equity securities	$	4,000	$	4,100	$	4,000	$	4,020
Debt securities		11,482		11,770		14,721		15,026
Total financial services available-for-sale debt securities	$	15,482	$	15,870	$	18,721	$	19,046

Total available-for-sale marketable securities	$	518,702	$	524,614	$	575,498	$	588,067

As of March 31, 2014 and December 31, 2013, our marketable securities were in net unrealized gain positions totaling $5.9 million and $12.6 million, respectively. Our marketable securities that are in unrealized loss positions aggregated to unrealized losses of $1.3 million and $1.1 million as of March 31, 2014 and December 31, 2013, respectively. The table below sets forth the debt and equity securities that were in an aggregate loss position. We do not believe that the aggregate unrealized loss related to our debt or equity securities as of March 31, 2014 is material to our operations.

- 8 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	March 31, 2014							December 31, 2013
	Number of Securities in Loss Position		Aggregate Loss Position			Aggregate Fair Value of Securities in a Loss Position		Number of Securities in Loss Position		Aggregate Loss Position			Aggregate Fair Value of Securities in a Loss Position
	(Dollars in thousands)
Type of Investment
Debt		39	$	(211	)	$	26,628		72	$	(430	)	$	46,440
Equity		6		(1,052	)		202,183		7		(713	)		14,174
Total		45	$	(1,263	)	$	228,811		79	$	(1,143	)	$	60,614

The followings table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities, which were included in either interest and other income in the homebuilding section or interest and other income in the financial services section of our consolidated statements of operations.

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Gross realized gains on sales of available-for-sale securities
Equity securities	$	5,431		$	-
Debt securities		1,261			46
Total	$	6,692		$	46

Gross realized losses on sales of available-for-sale securities
Equity securities	$	(154	)	$	-
Debt securities		(12	)		(404	)
Total	$	(166	)	$	(404	)

Net realized gain (loss) on sales of available-for-sale securities	$	6,526		$	(358	)

Mortgage Loans Held-for-Sale, Net. As of March 31, 2014, the primary components of our mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At March 31, 2014 and December 31, 2013, we had $46.4 million and $66.1 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon Level 2 inputs, which were the quoted market prices for those mortgage loans. At March 31, 2014 and December 31, 2013, we had $18.4 million and $26.5 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party which is a Level 2 fair value input.

Metropolitan District Bond Securities (Related Party). The Metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our accompanying consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District that are supported by an annual levy on the taxable value of real estate and personal property within the Metro District’s boundaries and a one-time fee assessed on permits obtained by MDC in the Metro District. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments into perpetuity until the unpaid principal and accrued interest is paid in full. Since 2007 and through the first quarter of 2013, we accounted for these securities under the cost recovery method and they were not carried at fair value in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).

In the second quarter of 2013, we determined that these securities no longer were required to be accounted for under the cost recovery method due to an increase in the number of new homes delivered in the community coupled with improvements in property values within the Metro District. In accordance with ASC 310-30, we will adjust the bond principal balance on a prospective basis using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we will update its fair value on a quarterly basis, with the adjustment being recorded through other comprehensive income. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The two primary unobservable inputs used in our discounted cash flow model are the forecasted number of homes to be closed, as they drive any increases to the tax base for the Metro District, and the discount rate. The table below provides quantitative data regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

- 9 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Quantitative Data

Sensitivity Analysis

Unobservable Input

Range

Weighted Average

Movement in
Fair Value from
Increase in Input

Movement in
Fair Value from
Decrease in Input

Number of homes closed per year

0 to 155

Increase

Decrease

Discount rate

6% to 16%

10.0

Decrease

Increase

The table set forth below summarizes the activity for our Metro Bonds:

	Three Months Ended March 31,
	2014		2013
	(Dollars in thousands)
Balance at beginning of period	$	12,729	$	5,818
Increase in fair value (recorded in other comprehensive income)		-		-
Change due to accretion of principal		298		-
Cash receipts		-		-
Balance at end of period	$	13,027	$	5,818

Mortgage Repurchase Facility. The debt associated with our Mortgage Repurchase Facility is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

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

	March 31, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5⅜% Senior Notes due December 2014, net		-		-		249,814		258,750
5⅜% Senior Notes due July 2015, net		249,946		260,313		249,935		262,562
5⅝% Senior Notes due February 2020, net		246,012		266,250		245,871		259,688
5½% Senior Notes due January 2024, net		250,000		255,313		-		-
6% Senior Notes due January 2043		350,000		309,750		350,000		305,083
Total	$	1,095,958	$	1,091,626	$	1,095,620	$	1,086,083

- 10 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

6.	Inventories

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

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Housing Completed or Under Construction:
West	$	313,078	$	270,778
Mountain		225,403		194,101
East		173,588		171,821
Subtotal		712,069		636,700
Land and Land Under Development:
West		492,603		459,512
Mountain		219,944		211,526
East		126,156		103,923
Subtotal		838,703		774,961
Total Inventories	$	1,550,772	$	1,411,661

Our inventories are primarily associated with communities where we intend to construct and sell homes on the land, including models and unsold started homes. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

•

actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all direct incremental costs associated with the home closing, including sales commissions) for homes closed;

•

estimated future undiscounted cash flows and Operating Margin;

•

forecasted Operating Margin for homes in backlog;

•

actual and trending net and gross home orders;

•

base sales price and home sales incentive information for homes closed, homes in backlog and homes available for sale;

•

market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

•

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

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. For each of the three months ended March 31, 2014 and 2013, we did not record any inventory impairment charges.

- 11 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

7.	Capitalization of Interest

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales as related units or lots are sold. To the extent our homebuilding debt exceeds our qualified assets, as defined in ASC 835, we expense a portion of interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity.

The homebuilding interest expensed in the table below relates to the portion of interest incurred where our homebuilding debt exceeded our qualified inventory for such periods in accordance with ASC 835.

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Homebuilding interest incurred	$	19,182		$	14,339
Less: Interest capitalized		(18,497	)		(13,522	)
Homebuilding interest expensed	$	685		$	817

Interest capitalized, beginning of period	$	74,155		$	69,143
Interest capitalized during period		18,497			13,522
Less: Previously capitalized interest included in home cost of sales		(11,724	)		(9,874	)
Interest capitalized, end of period	$	80,928		$	72,791

8.	Homebuilding Prepaid Expenses and Other Assets

The following table sets forth the components of homebuilding prepaid expenses and other assets.

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Land option deposits	$	17,908	$	15,221
Deferred marketing costs		20,272		15,830
Prepaid expenses		4,260		4,349
Goodwill		6,008		6,008
Deferred debt issuance costs, net		13,047		11,527
Other		643		590
Total	$	62,138	$	53,525

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

9.	Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

The following table sets forth information relating to homebuilding accrued liabilities.

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Accrued compensation and related expenses	$	12,127	$	35,990
Accrued executive deferred compensation		30,796		30,796
Accrued interest		14,391		24,198
Warranty reserves		21,447		22,238
Customer and escrow deposits		11,758		10,759
Land development and home construction accruals		8,168		9,592
Other accrued liabilities		19,837		19,248
Total accrued liabilities	$	118,524	$	152,821

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

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Insurance reserves	$	49,076	$	49,637
Accounts payable and other accrued liabilities		6,059		6,002
Total accounts payable and accrued liabilities	$	55,135	$	55,639

10.

Warranty Accrual

Our homes are sold with limited third-party warranties. We record expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. Warranty reserves are established based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The establishment of warranty reserves for closed homes and the evaluation of our warranty reserve balance is based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

Warranty reserves are included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty reserves are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations.

The table set forth below summarizes warranty accrual and payment activity for the three months ended March 31, 2014 and 2013. Adjustments in the three month periods ended March 31, 2014 and 2013 were not material to our operations. Furthermore, the impact of the change in our warranty expense provision rate from the first quarter of 2013 to the first quarter of 2014 did not materially affect our warranty expense or our gross margin from home sales for the three months ended March 31, 2014.

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	22,238		$	23,151
Expense provisions		991			1,122
Cash payments		(982	)		(1,475	)
Adjustments		(800	)		300
Balance at end of period	$	21,447		$	23,098

11.

Insurance Reserves

The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarially developed studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments.

The table set forth below summarizes the insurance reserve activity for the three months ended March 31, 2014 and 2013. The insurance reserve is included as a component of accrued liabilities in the financial services section of the accompanying consolidated balance sheets.

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	49,637		$	47,852
Expense provisions		1,310			1,527
Cash payments, net of recoveries		(1,871	)		(430	)
Balance at end of period	$	49,076		$	48,949

In the ordinary course of business, we make payments from our insurance reserves to settle litigation claims arising primarily from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three months ended March 31, 2014 and 2013 are not necessarily indicative of what future cash payments will be for subsequent periods.

12.

Deferred Compensation Retirement Plans

Effective August 1, 2008, the Company entered into amended and restated employment agreements (as amended on March 8, 2012, the “Employment Agreements”) with Larry A. Mizel, Chairman of the Board and Chief Executive Officer, and David D. Mandarich, President and Chief Operating Officer (collectively, the “Executive Officers”), which provided certain annual post-retirement pension benefits (the “Retirement Benefits”) depending on the year of retirement. In response to concerns expressed by significant institutional investors, and in accordance with the recommendation of an independent compensation consultant to the Company’s Compensation Committee, the Company announced that it had reached agreements (collectively, the “Second Amendments”) with the Executive Officers for the early termination, effective on October 18, 2013, of the Retirement Benefits contained in their respective Employment Agreements. Pursuant to the Second Amendments, the Company will pay each of Mr. Mizel and Mr. Mandarich a deferred lump sum in the amount of $14.8 million and $16.0 million, respectively, in full satisfaction of their past, present and future Retirement Benefits. The Company’s termination of the Retirement Benefits is irrevocable. These payments, which equal the amounts accrued on the books of the Company as of June 30, 2013 with respect to the Company’s estimated liability to pay Retirement Benefits, will be made to the Executive Officers on October 20, 2014. As a result of the termination of the Retirement Benefits, the Company no longer accrues additional expenses relating to Retirement Benefits.

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

13.

Income Taxes

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. As a result, we recorded income tax expense of $7.1 million and $0.1 million for the three months ended March 31, 2014 and 2013, respectively, while our overall effective income tax rates were 38.3% and 0.3% for the three months ended March 31, 2014 and 2013, respectively. The increase in the effective tax rate during the 2014 first quarter, compared with the same period during 2013, resulted primarily from the reversal of substantially all of our deferred tax asset valuation allowance of $227.3 million in the second quarter of 2013. As a result of the valuation allowance release during 2013 and changes in unrecognized tax benefits, our effective tax rate during the first quarter of 2013 was not meaningful as the income tax benefit was not directly correlated to the amount of pretax income generated in such period.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to our net deferred tax asset are as follows:

	March 31, 2014			December 31, 2013
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	75,706		$	72,915
State net operating loss carryforwards		42,909			40,227
Alternative minimum tax and other tax credit carryforwards		24,196			24,196
Stock-based compensation expense		25,443			26,651
Warranty, litigation and other reserves		15,313			15,543
Accrued compensation		1,823			11,136
Asset impairment charges		4,965			5,889
Inventory, additional costs capitalized for tax purposes		7,021			7,064
Other, net		3,986			3,446
Total deferred tax assets		201,362			207,067
Valuation allowance		(8,201	)		(8,201	)
Total deferred tax assets, net of valuation allowance		193,161			198,866

Deferred tax liabilities:
Property, equipment and other assets		5,422			5,512
Discount on notes receivable		4,204			4,204
Deferred revenue		3,110			3,985
Unrealized gain on marketable securities		4,754			7,368
Other, net		1,665			1,535
Total deferred tax liabilities		19,155			22,604
Net deferred tax asset	$	174,006		$	176,262

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

14.

Senior Notes

The following table sets forth the carrying amount of our senior notes as of March 31, 2014 and December 31, 2013, net of applicable discounts:

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
5⅜% Senior Notes due December 2014, net	$	-	$	249,814
5⅜% Senior Notes due July 2015, net		249,946		249,935
5⅝% Senior Notes due February 2020, net		246,012		245,871
5½% Senior Notes due January 2024, net		250,000		-
6% Senior Notes due January 2043		350,000		350,000
Total	$	1,095,958	$	1,095,620

On January 15, 2014, we issued $250 million of 5½% Senior Notes due 2024 (the “5½% Notes”). The 5½% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, with payments commencing July 15, 2014, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $248.4 million, net of underwriting fees of $1.6 million.

During the quarter, we redeemed our 5⅜% Senior Notes due December 2014. As a result of this transaction, we paid $259.1 million to extinguish $250 million in debt principal with a carrying value, including unamortized deferred financing costs, of $249.7 million and recorded a $9.4 million expense for loss on extinguishment of debt.

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 substantially all of our homebuilding segment subsidiaries.

15.

Stock Based Compensation

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

During the three months ended March 31, 2014 and 2013, we expensed $0.6 million and $2.0 million, respectively, for stock option grants. The decrease in expense was primarily driven by $1.2 million of expense recorded for performance-based awards for our CEO and COO in the first quarter of 2013, which was not recorded in the first quarter of 2014. We expensed $0.7 million and $1.4 million for restricted stock awards during the three months ended March 31, 2014 and 2013, respectively.

16.

Commitments and Contingencies

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2014, we had issued and outstanding surety bonds and letters of credit totaling $110.3 million and $32.2 million, respectively, including $16.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $47.1 million and $5.4 million, respectively. The letters of credit as of March 31, 2014, excluding those issued by HomeAmerican, were outstanding under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

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

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Mortgage Loan Loss Reserves. In the normal course of business, we establish reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. In addition to reserves established for mortgage loans previously sold to third-parties, we establish reserves for loans that we have repurchased if we believe the loss is likely and estimable. Our mortgage loan reserves are reflected as a component of accrued liabilities in the financial services section of the accompanying consolidated balance sheets, and the associated expenses are included in expenses in the financial services section of the accompanying consolidated statements of operations.

The following table summarizes the mortgage loan loss reserve activity.

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	1,370		$	805
Expense provisions		-			250
Cash payments		-			(86	)
Adjustments		(497	)		-
Balance at end of period	$	873		$	969

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

Lot Option Contracts. In the normal course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments and minimizes the amount of our land inventories on our consolidated balance sheets. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At March 31, 2014, we had cash deposits and letters of credit totaling $11.0 million and $3.0 million, respectively, at risk associated with the option to purchase 2,635 lots.

17.

Derivative Financial Instruments

The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations with an offset to prepaid expenses and other assets or accounts payable and accrued liabilities in the financial services section of our accompanying consolidated balance sheets, depending on the nature of the change.

At March 31, 2014, we had interest rate lock commitments with an aggregate principal balance of approximately $71.4 million. Additionally, we had $18.4 million of mortgage loans held-for-sale that were not under commitments to sell at March 31, 2014. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $64.0 million at March 31, 2014.

For the three months ended March 31, 2014 and 2013, we recorded net gains (losses) on our derivatives of $(0.4) million and $0.8 million, respectively.

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

18.

Lines of Credit

Revolving Credit Facility. On December 13, 2013, we entered into an unsecured revolving credit facility (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. Our Revolving Credit Facility has an aggregate commitment amount of $450 million (the “Commitment”) and a maturity date of December 13, 2018. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders. Interest rates on outstanding borrowings are determined by reference to a specified London Interbank Offered Rate (LIBOR), a specified federal funds effective rate or a specified prime rate, plus a margin that is determined based on our credit ratings and leverage ratio, as defined in the facility agreement. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the facility agreement. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) would result in an event of default.

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of March 31, 2014.

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 2014 and December 31, 2013, there were $15.5 million and $14.9 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We did not have any borrowings outstanding under the Revolving Credit Facility as of March 31, 2014 and December 31, 2013.

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement, (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”). This agreement was amended on September 20, 2013 and extended until September 19, 2014. 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. The Mortgage Repurchase Facility, which had a temporary increase in the maximum aggregate commitment from $50 million to $80 million from December 31, 2013 through January 30, 2014, had a maximum aggregate commitment of $50 million as of March 31, 2014. At March 31, 2014 and December 31, 2013, we had $39.3 million and $63.1 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 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 2.75%, or (ii) 3.00%. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2014.

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

19.

Supplemental Guarantor Information

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

●

M.D.C. Land Corporation

●

RAH of Florida, Inc.

●

Richmond American Construction, Inc.

●

Richmond American Homes of Arizona, Inc.

●

Richmond American Homes of Colorado, Inc.

●

Richmond American Homes of Delaware, Inc.

●

Richmond American Homes of Florida, LP

●

Richmond American Homes of Illinois, Inc.

●

Richmond American Homes of Maryland, Inc.

●

Richmond American Homes of Nevada, Inc.

●

Richmond American Homes of New Jersey, Inc.

●

Richmond American Homes of Pennsylvania, Inc.

●

Richmond American Homes of Utah, Inc.

●

Richmond American Homes of Virginia, Inc.

●

Richmond American Homes of Washington, Inc.

The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.

Supplemental Condensed Combining Balance Sheet

	March 31, 2014
	MDC		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
	Dollars in thousands
ASSETS
Homebuilding:
Cash and cash equivalents	$	65,504	$	3,393	$	-	$	-		$	68,897
Marketable securities		508,744		-		-		-			508,744
Restricted cash		-		1,505		-		-			1,505
Trade Receivables		8,844		23,641		-		(2,351	)		30,134
Inventories:
Housing completed or under construction		-		712,069		-		-			712,069
Land and land under development		-		838,703		-		-			838,703
Total inventories		-		1,550,772		-		-			1,550,772

Intercompany receivables		1,394,954		2,858		5,827		(1,403,639	)		-
Investment in subsidiaries		201,913		-		-		(201,913	)		-
Deferred tax asset		170,884		-		-		3,122			174,006
Metropolitan district bond securities (related party)		13,027		-		-		-			13,027
Other assets, net		41,882		51,153		-		-			93,035
Total Homebuilding Assets		2,405,752		1,633,322		5,827		(1,604,781	)		2,440,120

Financial Services:
Cash and cash equivalents		-		-		25,922		-			25,922
Marketable securities		-		-		15,870		-			15,870
Intercompany receivables		-		-		39,963		(39,963	)		-
Mortgage loans held-for-sale, net		-		-		64,800		-			64,800
Other assets, net		-		-		6,647		(3,122	)		3,525
Total Financial Services Assets		-		-		153,202		(43,085	)		110,117
Total Assets	$	2,405,752	$	1,633,322	$	159,029	$	(1,647,866	)	$	2,550,237

LIABILITIES AND EQUITY

Homebuilding:
Accounts payable	$	-	$	31,591	$	-	$	-		$	31,591
Accrued liabilities		51,457		66,285		59		723			118,524
Advances and notes payable to parent and subsidiaries		48,648		1,368,142		23,791		(1,440,581	)		-
Senior notes, net		1,095,958		-		-		-			1,095,958
Total Homebuilding Liabilities		1,196,063		1,466,018		23,850		(1,439,858	)		1,246,073

Financial Services:
Accounts payable and other liabilities		-		-		58,209		(3,074	)		55,135
Advances and notes payable to parent and subsidiaries		-		-		3,021		(3,021	)		-
Mortgage repurchase facility		-		-		39,340		-			39,340
Total Financial Services Liabilities		-		-		100,570		(6,095	)		94,475
Total Liabilities		1,196,063		1,466,018		124,420		(1,445,953	)		1,340,548

Equity:
Total Stockholders' Equity		1,209,689		167,304		34,609		(201,913	)		1,209,689
Total Liabilities and Stockholders' Equity	$	2,405,752	$	1,633,322	$	159,029	$	(1,647,866	)	$	2,550,237

- 20 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Balance Sheet

	December 31, 2013
	MDC		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
	(Dollars in thousands)
ASSETS
Homebuilding:
Cash and cash equivalents	$	145,180	$	3,454	$	-	$	-		$	148,634
Marketable securities		569,021		-		-		-			569,021
Restricted cash		-		2,195		-		-			2,195
Trade Receivables		915		27,951		-		(5,459	)		23,407
Inventories:
Housing completed or under construction		-		636,700		-		-			636,700
Land and land under development		-		774,961		-		-			774,961
Total inventories		-		1,411,661		-		-			1,411,661

Intercompany receivables		1,144,292		2,576		1,899		(1,148,767	)		-
Investment in subsidiaries		335,870		-		-		(335,870	)		-
Deferred tax asset		172,975		-		-		3,287			176,262
Other assets, net		53,933		43,569		-		-			97,502
Total Homebuilding Assets		2,422,186		1,491,406		1,899		(1,486,809	)		2,428,682

Financial Services:
Cash and cash equivalents		-		-		50,704		-			50,704
Marketable securities		-		-		19,046		-			19,046
Intercompany receivables		-		-		11,216		(11,216	)		-
Mortgage loans held-for-sale, net		-		-		92,578		-			92,578
Other assets, net		-		-		7,726		(3,287	)		4,439
Total Financial Services Assets		-		-		181,270		(14,503	)		166,767
Total Assets	$	2,422,186	$	1,491,406	$	183,169	$	(1,501,312	)	$	2,595,449

LIABILITIES AND EQUITY

Homebuilding:
Accounts payable	$	13	$	15,033	$	-	$	-		$	15,046
Accrued liabilities		97,612		56,334		82		(1,207	)		152,821
Intercompany payables		15,692		1,121,581		19,668		(1,156,941	)		-
Senior notes, net		1,095,620		-		-		-			1,095,620
Total Homebuilding Liabilities		1,208,937		1,192,948		19,750		(1,158,148	)		1,263,487

Financial Services:
Accounts payable and other liabilities		-		-		59,891		(4,252	)		55,639
Intercompany payables		-		-		3,042		(3,042	)		-
Mortgage repurchase facility		-		-		63,074		-			63,074
Total Financial Services Liabilities		-		-		126,007		(7,294	)		118,713
Total Liabilities		1,208,937		1,192,948		145,757		(1,165,442	)		1,382,200

Equity:
Total Stockholders' Equity		1,213,249		298,458		37,412		(335,870	)		1,213,249
Total Liabilities and Stockholders' Equity	$	2,422,186	$	1,491,406	$	183,169	$	(1,501,312	)	$	2,595,449

- 21 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Operations

	Three Months Ended March 31, 2014
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	318,534		$	-		$	-		$	318,534
Cost of Sales		-			(259,478	)		-			-			(259,478	)
Gross margin		-			59,056			-			-			59,056

Selling, general, and administrative expenses		(12,077	)		(36,109	)		-			(155	)		(48,341	)
Equity income of subsidiaries		17,073			-			-			(17,073	)		-
Interest and other income		13,227			329			3			(10	)		13,549
Interest expense		(685	)		-			-			-			(685	)
Other expense		(2	)		(612	)		-			-			(614	)
Loss on extinguishment of debt		(9,412	)		-			-			-			(9,412	)
Homebuilding pretax income (loss)		8,124			22,664			3			(17,238	)		13,553

Financial Services:
Financial services pretax income		-			-			4,922			165			5,087

Income before income taxes		8,124			22,664			4,925			(17,073	)		18,640
(Provision) benefit for income taxes		3,380			(8,677	)		(1,839	)		-			(7,136	)

Net income	$	11,504		$	13,987		$	3,086		$	(17,073	)	$	11,504

Other comprehensive income related to available for sale securities, net of tax		(4,046	)		-			62			(62	)		(4,046	)
Comprehensive income	$	7,458		$	13,987		$	3,148		$	(17,135	)	$	7,458

- 22 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Operations

	Three Months Ended March 31, 2013
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(Dollars in thousands)
Homebuilding:
Revenues	$	-		$	332,996		$	-		$	(1,248	)	$	331,748
Cost of Sales		-			(275,324	)		-			1,248			(274,076	)
Gross margin		-			57,672			-			-			57,672

Selling, general, and administrative expenses		(15,579	)		(32,546	)		-			(76	)		(48,201	)
Equity income of subsidiaries		29,829			-			-			(29,829	)		-
Interest and other income		6,193			356			-			-			6,549
Interest expense		(817	)		-			-			-			(817	)
Other expense		(3	)		(353	)		-			-			(356	)
Homebuilding pretax income (loss)		19,623			25,129			-			(29,905	)		14,847

Financial Services:
Financial services pretax income		-			-			7,663			76			7,739

Income before income taxes		19,623			25,129			7,663			(29,829	)		22,586
(Provision) benefit for income taxes		2,893			(78	)		(2,885	)		-			(70	)

Net income	$	22,516		$	25,051		$	4,778		$	(29,829	)	$	22,516

Other comprehensive income related to available for sale securities, net of tax		2,535			-			(96	)		96			2,535
Comprehensive income	$	25,051		$	25,051		$	4,682		$	(29,733	)	$	25,051

- 23 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Cash Flows

	Three Months Ended March 31, 2014
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(Dollars in thousands)
Net cash provided by (used in) operating activities	$	(43,521	)	$	(101,004	)	$	30,277		$	-		$	(114,248	)
Net cash provided by (used in) investing activities		(13,276	)		(80	)		3,187			66,511			56,342
Financing activities:
Payments from (advances to) subsidiaries		-			101,023			(34,512	)		(66,511	)		-
Mortgage repurchase facility		-			-			(23,734	)		-			(23,734	)
Proceeds from issuance of senior notes		248,375			-			-			-			248,375
Repayment of senior notes		(259,118	)		-			-			-			(259,118	)
Dividend payments		(12,207	)		-			-			-			(12,207	)
Proceeds from the exercise of stock options		71			-			-			-			71
Net cash provided by (used in) financing activities		(22,879	)		101,023			(58,246	)		(66,511	)		(46,613	)

Net increase in cash and cash equivalents		(79,676	)		(61	)		(24,782	)		-			(104,519	)
Cash and cash equivalents:
Beginning of period		145,180			3,454			50,704			-			199,338
End of period	$	65,504		$	3,393		$	25,922		$	-		$	94,819

- 24 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

Supplemental Condensed Combining Statement of Cash Flows

	Three Months Ended March 31, 2013
	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
	(Dollars in thousands)
Net cash provided by (used in) operating activities	$	(7,369	)	$	(151,915	)	$	103,866		$	-		$	(55,418	)
Net cash used in investing activities		(192,538	)		(571	)		(909	)		86,949			(107,069	)
Financing activities:
Payments from (advances to) subsidiaries		-			153,486			(66,537	)		(86,949	)		-
Mortgage repurchase facility		-			-			(34,859	)		-			(34,859	)
Proceeds from the issuance of senior notes		247,813			-			-			-			247,813
Proceeds from the exercise of stock options		5,118			-			-			-			5,118
Net cash provided by (used in) financing activities		252,931			153,486			(101,396	)		(86,949	)		218,072

Net increase (decrease) in cash and cash equivalents		53,024			1,000			1,561			-			55,585
Cash and cash equivalents:
Beginning of period		125,904			3,308			30,883			-			160,095
End of period	$	178,928		$	4,308		$	32,444		$	-		$	215,680

- 25 -

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013 and this Quarterly Report on Form 10-Q.

	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	318,534		$	331,748
Home cost of sales		(259,478	)		(274,076	)
Gross margin		59,056			57,672
Gross margin %		18.5	%		17.4	%
Selling, general and administrative expenses		(48,341	)		(48,201	)
Interest and other income		13,549			6,549
Interest expense		(685	)		(817	)
Other expense		(614	)		(356	)
Loss on early extinguishment of debt		(9,412	)		-
Homebuilding pretax income		13,553			14,847

Financial Services:
Revenues		9,223			12,506
Expenses		(4,924	)		(5,642	)
Interest and other income		788			875
Financial services pretax income		5,087			7,739

Income before income taxes		18,640			22,586
Provision for income taxes		(7,136	)		(70	)
Net income	$	11,504		$	22,516

Earnings per share:
Basic	$	0.24		$	0.46
Diluted	$	0.23		$	0.45

Weighted average common shares outstanding:
Basic		48,585,757			48,342,145
Diluted		48,854,675			48,922,335

Dividends declared per share	$	0.25		$	-

Cash provided by (used in):
Operating Activities	$	(114,248	)	$	(55,418	)
Investing Activities	$	56,342		$	(107,069	)
Financing Activities	$	(46,613	)	$	218,072

- 26 -

Overview

For the 2014 first quarter, we recorded pretax income of $18.6 million, a year-over-year decrease of $3.9 million. Excluding early extinguishment of debt charges of $9.4 million¹, our pretax earnings increased 24% year-over-year. Other items impacting the year-over-year improvement in pretax results included a 110 basis point improvement in our gross margin percentage to 18.5% and a $6.5 million net realized gain from the sale of the marketable securities, which were slightly offset by a 4% decline in home sale revenues and a $2.7 million reduction in pretax income from our financial services operations. We continued to see significant volatility in the demand for new homes. Early in the quarter, our new home orders were negatively impacted by slow overall market conditions, similar to the last half of 2013, as well as adverse weather conditions in certain markets in our East segment. In contrast, we saw significant improvements in the latter part of the quarter that drove a year-over-year improvement in our total dollar value of new home orders for the full quarter, despite our unit number of orders falling slightly short of last year.

Our net income was $11.5 million, or $0.23 per diluted share, for the 2014 first quarter, compared to net income of $22.5 million, or $0.45 per diluted share for the year earlier period. The year-over-year decline was driven primarily by a $9.4 million charge related to the early extinguishment of debt and an increase in income tax expense to $7.1 million from $0.1 million a year ago, partially offset by a $7.0 million increase in homebuilding interest and other income.

We had a slight increase in total gross margin to $59.1 million from $57.7 million a year ago, despite a 14% decrease in the number of homes delivered for the 2014 first quarter. The decrease in homes delivered was driven by a 23% year-over-year decrease in number of homes in backlog to start the quarter, partially offset by an increase in the number of homes that were both sold and delivered during the quarter. However, the impact of the lower deliveries was more than offset by a 12% increase in our average selling price of homes delivered and a 110 basis point increase in our gross margin percentage, both largely the result of price increases achieved during much of 2013, and, to a lesser extent, the geographic mix of homes delivered.

Our dollar value of net new home orders was up 6% year-over-year to $466.0 million for the 2014 first quarter as a result of an 11% increase in the average price of new orders, which was driven by our ability to increase prices in most of our communities during 2013. The impact of the average price improvement was partly offset by a 5% decrease in the number of orders generated to 1,236 homes. We believe that our prospects for improving net orders in future quarters is strengthened by our community count, which increased by 13% to 157 at March 31, 2014 from 139 at March 31, 2013, our first year-over-year increase since the 2012 second quarter.

During the quarter, we redeemed $250 million of senior notes due December 2014, which resulted in an early extinguishment of debt charge of $9.4 million. We also increased inventories by $139.1 million, including the purchase of nearly 1,300 lots in 46 communities during the 2014 first quarter, resulting in a 26% year-over-year increase in the total supply of lots owned and under option at March 31, 2014. To fund both the early redemption of our senior notes due December 2014 and the increase in inventories, we (1) used proceeds from the issuance of $250 million of 10-year senior notes due in 2024, and (2) sold a portion of our marketable securities portfolio. The sale of the marketable securities resulted in a net realized gain of $6.5 million, which drove an increase in our homebuilding interest and other income to $13.5 million for the 2014 first quarter as compared with $6.5 million for the same quarter of 2013. Including our $450 million revolving credit facility, which we entered into in the 2013 fourth quarter, we ended the 2014 first quarter with overall liquidity of $1.1 billion, up 22% over the prior year. We believe that this level of liquidity provides the appropriate balance for us between supporting potential growth opportunities and providing protection from the volatile and cyclical nature of the housing market.

¹ Pretax income excluding early extinguishment of debt charges is a non-GAAP financial measure. We believe this information is meaningful as it improves the comparability between the first quarters of 2014 and 2013.

- 27 -

Homebuilding

Pretax Income

	Three Months Ended
	March 31,						Change
	2014			2013			Amount			%
	(Dollars in thousands)
West	$	12,650		$	10,611		$	2,039			19	%
Mountain		7,359			12,996			(5,637	)		(43)	%
East		2,661			1,528			1,133			74	%
Corporate		(9,117	)		(10,288	)		1,171			(11)	%
Total homebuilding pretax income	$	13,553		$	14,847		$	(1,294	)		(9)	%

For the 2014 first quarter, we reported homebuilding pretax income of $13.6 million, compared to pretax income of $14.8 million for the first quarter of 2013. The $1.3 million decline was driven primarily by the $9.4 million charge related to the early redemption of our senior notes due December 2014, which was largely offset by a 110 basis point improvement in our gross margin from home sales and $7.0 million increase in interest and other income related to the net realized gain on the sale of marketable securities.

Our West and East segments each showed improvements in pretax results for the three months ended March 31, 2014 as compared with the same period in 2013. In the East, the improvement was primarily the result of increased home sale revenues, while in the West the increase was mostly the result of an improvement in gross margin from home sales. Pretax income in our Mountain segment decreased primarily due to a 24% decline in home sale revenues resulting from a 27% drop in new home deliveries. For our Corporate segment, higher interest and other income and lower incentive-based and stock-based compensation expense partially offset the $9.4 million early extinguishment of debt charge.

Assets

	March 31,		December 31,		Change
	2014		2013		Amount			%
	(Dollars in thousands)
West	$	837,792	$	760,450	$	77,342			10	%
Mountain		467,630		418,796		48,834			12	%
East		325,042		297,627		27,415			9	%
Corporate		809,656		951,809		(142,153	)		(15)	%
Total homebuilding assets	$	2,440,120	$	2,428,682	$	11,438			0	%

Homebuilding assets in our West, Mountain and East segments increased from December 31, 2013 as higher construction and land acquisition activity drove an increase in our inventory balances. Assets in our Corporate segment declined by $142.2 million primarily due to the early redemption of $250 million of senior notes and the incremental investment of Corporate funds into assets in each of our homebuilding operating segments, partially offset by our January issuance of $250 million of new senior notes.

Home sale revenues

	Three Months Ended
	March 31,				Change
	2014		2013		Amount			%
	(Dollars in thousands)
West	$	136,422	$	134,979	$	1,443			1	%
Mountain		100,945		133,377		(32,432	)		(24)	%
East		81,167		63,392		17,775			28	%
Total home and revenues	$	318,534	$	331,748	$	(13,214	)		(4)	%

The decrease in home sale revenues for the quarter ended March 31, 2014 was driven primarily by a 14% decrease in new home deliveries, which was partially offset by a 12% increase in our average selling price.

- 28 -

New Home Deliveries

	Three Months Ended March 31,
	2014						2013						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		125	$	32,672	$	261.4		140	$	33,161	$	236.9		(11)	%		(1)	%		10	%
California		92		41,100		446.7		146		49,589		339.7		(37)	%		(17)	%		31	%
Nevada		120		39,937		332.8		133		32,745		246.2		(10)	%		22	%		35	%
Washington		64		22,713		354.9		61		19,484		319.4		5	%		17	%		11	%
West		401		136,422		340.2		480		134,979		281.2		(16)	%		1	%		21	%
Colorado		248		93,383		376.5		304		113,488		373.3		(18)	%		(18)	%		1	%
Utah		24		7,562		315.1		67		19,889		296.9		(64)	%		(62)	%		6	%
Mountain		272		100,945		371.1		371		133,377		359.5		(27)	%		(24)	%		3	%
Maryland		77		36,905		479.3		54		21,704		401.9		43	%		70	%		19	%
Virginia		57		27,267		478.4		63		29,119		462.2		(10)	%		(6)	%		4	%
Florida		66		16,995		257.5		50		12,569		251.4		32	%		35	%		2	%
East		200		81,167		405.8		167		63,392		379.6		20	%		28	%		7	%
Total		873	$	318,534	$	364.9		1,018	$	331,748	$	325.9		(14)	%		(4)	%		12	%

The decline in the dollar value of new home deliveries was driven by a 13% year-over-year decrease in the dollar value of beginning backlog, partially offset by a year-over-year increase in the number of homes both sold and delivered during the quarter, which was the direct result of our decision to increase our inventory of speculative homes during the last half of 2013. The most significant decrease in the dollar value of home deliveries occurred in Utah, as the dollar value of beginning backlog in this market declined more than any of our other markets. Conversely, the dollar value of homes delivered in Maryland, Florida, Nevada and Washington increased during the 2014 first quarter. All four markets increased the number of homes both sold and delivered during the quarter compared to the prior year. Maryland, Nevada and Washington also benefited from a higher rate of deliveries from beginning backlog, whereas Florida benefited from a 61% increase in the dollar value of its beginning backlog.

The increase in average selling price of deliveries during the 2014 first quarter occurred in all of our segments and was driven largely by price increases implemented during 2013. The mix of homes closed in each market also contributed to the increased average selling price, especially in Nevada, California and Maryland.

Gross Margin

Gross margin from home sales for the 2014 first quarter was 18.5%, compared to 17.4% for both the year-earlier period and the 2013 fourth quarter. The year-over-year increase was primarily attributable to our focus on increasing pricing during much of 2013. On a sequential basis, gross margin from home sales increased during the 2014 first quarter due to a shift in the mix of homes closed, including a higher percentage of deliveries from our Nevada division, which has a gross margin percentage that is higher than the company-wide average and experienced construction delays that temporarily decreased its contribution of closings in the 2013 fourth quarter.

Our gross margin percentage excluding interest in cost of sales for the three months ended March 31, 2014 was 22.2%, compared to 20.4% for the same period in 2013. The table set forth below is a reconciliation of our gross margin from home sales to gross margin from home sales excluding interest in cost of sales, which is a non-GAAP measure.

- 29 -

	Three Months Ended March 31,
	2014		Gross Margin %			2013		Gross Margin %
	(Dollars in thousands)
Gross Margin from Home Sales	$	59,056		18.5	%	$	57,672		17.4	%
Add: Interest in Cost of Sales		11,724					9,874
Gross Margin Excluding Interest in Cost of Sales	$	70,780		22.2	%	$	67,546		20.4	%

⁽¹⁾

Gross margin from home sales excluding interest in cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that interest has 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.

Inventory Impairments

We did not recognize any impairments for the three months ended March 31, 2014 or 2013.

The following table shows the number of subdivisions and carrying value of the inventory we tested for impairment during the first quarter of 2014 and 2013.

Three Months Ended	Total Subdivisions Tested for Impairment During Quarter		Carrying Value of Inventory Tested for Impairment During Quarter		Carrying Value of Impaired Inventory Before Impairment at Quarter End		Inventory Impairments		Fair Value of Inventory After Impairments		Number of Subdivisions Impaired During the Quarter		Number of Lots Impaired During the Quarter
	(Dollars in thousands)
March 31, 2014		16	$	37,404	$	-	$	-	$	-		-		-

March 31, 2013		17	$	42,919	$	-	$	-	$	-		-		-

Selling, General and Administrative (“SG&A”) Expenses

Our SG&A rate increased 70 basis points from 14.5% in the 2013 first quarter to 15.2% in the 2014 first quarter. The increase in our SG&A rate was attributable mostly to the 4% decline in home sale revenues and to a lesser extent due to an increase in marketing expenses resulting from our recent focus on increasing active community count.

Interest and Other Income

Our interest and other income increased $7.0 million from the 2013 first quarter to $13.5 million. The increase was primarily driven by the sale of various debt and equity marketable securities for a net realized gain of $6.5 million.

Early Extinguishment of Debt

During the quarter, we redeemed $250 million of senior notes due December 2014, which resulted in an early extinguishment of debt charge of $9.4 million. We funded the early redemption of our senior notes using proceeds from the issuance of $250 million of 10-year senior notes due in 2024 and from selling a portion of our marketable securities portfolio.

- 30 -

Other Homebuilding Operating Data

Net New Orders:

	Three Months Ended March 31,
	2014								2013								% Change
	Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes			Dollar Value			Average Price			Monthly Absorption Rate *
	(Dollars in thousands)
Arizona		191	$	52,392	$	274.3		2.32		127	$	30,293	$	238.5		2.82		50	%		73	%		15	%		(18)	%
California		153		75,421		492.9		4.08		164		60,401		368.3		4.37		(7)	%		25	%		34	%		(7)	%
Nevada		150		44,861		299.1		3.16		170		47,042		276.7		5.15		(12)	%		(5)	%		8	%		(39)	%
Washington		92		34,017		369.8		2.67		93		28,546		306.9		3.01		(1)	%		19	%		20	%		(11)	%
West		586		206,691		352.7		2.90		554		166,282		300.1		3.78		6	%		24	%		18	%		(23)	%
Colorado		396		157,613		398.0		3.52		418		147,589		353.1		3.57		(5)	%		7	%		13	%		(1)	%
Utah		43		14,481		336.8		2.61		65		20,238		311.4		1.92		(34)	%		(28)	%		8	%		36	%
Mountain		439		172,094		392.0		3.40		483		167,827		347.5		3.20		(9)	%		3	%		13	%		6	%
Maryland		68		31,347		461.0		1.35		90		38,450		427.2		1.67		(24)	%		(18)	%		8	%		(19)	%
Virginia		59		29,893		506.7		1.87		93		48,656		523.2		2.52		(37)	%		(39)	%		(3)	%		(26)	%
Florida		84		25,930		308.7		2.19		80		19,981		249.8		1.93		5	%		30	%		24	%		13	%
East		211		87,170		413.1		1.76		263		107,087		407.2		1.99		(20)	%		(19)	%		1	%		(12)	%
Total		1,236	$	465,955	$	377.0		2.74		1,300	$	441,196	$	339.4		3.03		(5)	%		6	%		11	%		(10)	%

* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period

The dollar value of our net new orders increased 6% year-over-year, driven largely by an 11% increase in our average selling price that was partially offset by a 5% decline in units ordered. The decrease in units ordered resulted from a 10% decline in our monthly sales absorption rate to 2.74 per community as demand across most markets was slower than the prior year period, especially early in the quarter, similar to the conditions experienced during the last half of 2013. The absorption rate in Maryland and Virginia was also impacted by extreme winter weather conditions, which slowed traffic to our subdivisions in those markets. In Nevada, which experienced the most significant year-over-year decline in absorption rate, demand was impacted by higher prices as this market has experienced the highest year-over-year increase in average selling price for homes delivered during the quarter. In addition, an increase in the average number of active subdivisions partially offset the impact of the overall decline in the Company absorption rate, especially in Arizona.

The increase in average selling price of orders during the quarter occurred in almost all of our segments and was driven largely by price increases implemented during much of 2013. The mix of homes closed in each market also contributed to the increased average selling price, especially in California and Florida.

- 31 -

Active Subdivisions:

	March 31,				%
	2014		2013		Change
Arizona		31		16		94	%
California		15		12		25	%
Nevada		17		9		89	%
Washington		11		12		(8)	%
West		74		49		51	%
Colorado		38		36		6	%
Utah		6		9		(33)	%
Mountain		44		45		(2)	%
Maryland		15		19		(21)	%
Virginia		10		12		(17)	%
Florida		14		14		0	%
East		39		45		(13)	%
Total		157		139		13	%
Average for quarter ended		150		143		5	%

At March 31, 2014, we had 157 active subdivisions, a 13% increase from 139 active subdivisions at March 31, 2013 and an increase of 8% from December 31, 2013. The year-over-year increase in active subdivisions at March 31, 2014 was our first since the 2012 second quarter and was driven primarily by significant land acquisition activity over the past 18 months, particularly in our West markets. As a result of this activity, we have had two consecutive quarters of sequential active subdivision increases.

Cancellation Rate:

	Three Months Ended March 31,						Change in
	2014			2013			Percentage
Arizona		19	%		22	%		(3)	%
California		22	%		19	%		3	%
Nevada		20	%		22	%		(2)	%
Washington		16	%		11	%		5	%
West		19	%		20	%		(1)	%
Colorado		15	%		16	%		(1)	%
Utah		12	%		16	%		(4)	%
Mountain		15	%		16	%		(1)	%
Maryland		28	%		22	%		6	%
Virginia		27	%		21	%		6	%
Florida		22	%		20	%		2	%
East		25	%		21	%		4	%
Total		19	%		18	%		1	%

Our cancellation rate for the three months ended March 31, 2014 was 19%, nearly unchanged from 18% in the prior year period. The main driver for the slight increase in our cancellation rate was due to a 4% reduction in the gross new home orders (before cancellations), as our total cancellations remained relatively consistent year-over-year. Our Maryland and Virginia markets in our East segment had the greatest increases in cancellation rate due to significant declines in the number of homes sold during the quarter, as compared to the same period in the prior year.

- 32 -

Backlog:

	March 31,
	2014						2013						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		226	$	63,587	$	281.4		137	$	32,224	$	235.2		65	%		97	%		20	%
California		208		106,121		510.2		247		89,688		363.1		(16)	%		18	%		41	%
Nevada		170		53,490		314.6		241		64,216		266.5		(29)	%		(17)	%		18	%
Washington		74		27,427		370.6		111		36,118		325.4		(33)	%		(24)	%		14	%
West		678		250,625		369.7		736		222,246		302.0		(8)	%		13	%		22	%
Colorado		565		237,413		420.2		584		212,109		363.2		(3)	%		12	%		16	%
Utah		45		15,232		338.5		79		25,556		323.5		(43)	%		(40)	%		5	%
Mountain		610		252,645		414.2		663		237,665		358.5		(8)	%		6	%		16	%
Maryland		120		57,871		482.3		219		95,970		438.2		(45)	%		(40)	%		10	%
Virginia		105		53,278		507.4		215		111,823		520.1		(51)	%		(52)	%		(2)	%
Florida		112		36,852		329.0		94		25,350		269.7		19	%		45	%		22	%
East		337		148,001		439.2		528		233,143		441.6		(36)	%		(37)	%		(1)	%
Total		1,625	$	651,271	$	400.8		1,927	$	693,054	$	359.7		(16)	%		(6)	%		11	%

We ended the 2014 first quarter with 1,625 homes in backlog, with an estimated sales value of $651.3 million, compared with a backlog of 1,927 homes with an estimated sales value of $693.1 million at March 31, 2013. The decline in our backlog was due primarily to lower backlog at the beginning of 2014 as compared to 2013.

Homes Completed or Under Construction (WIP lots):

	March 31,				%
	2014		2013		Change
Unsold:
Completed		484		222		118	%
Under construction		740		514		44	%
Total unsold started homes (speculative homes)		1,224		736		66	%
Sold homes under construction or completed		1,245		1,345		(7)	%
Model homes		258		221		17	%
Total homes completed or under construction		2,727		2,302		18	%

Our total homes completed or under construction increased 18% to 2,727 at March 31, 2014 from 2,302 at March 31, 2013, primarily relating to our deliberate effort to start more speculative homes in the latter half of 2013 due to higher homebuyer demand for speculative homes.

- 33 -

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

	March 31, 2014						March 31, 2013
	Lots Owned		Lots Optioned		Total		Lots Owned		Lots Optioned		Total		Total % Change
Arizona		2,861		40		2,901		2,146		40		2,186		33	%
California		1,779		23		1,802		997		-		997		81	%
Nevada		1,591		290		1,881		1,442		39		1,481		27	%
Washington		687		140		827		493		168		661		25	%
West		6,918		493		7,411		5,078		247		5,325		39	%
Colorado		4,220		1,239		5,459		3,336		1,327		4,663		17	%
Utah		533		20		553		465		13		478		16	%
Mountain		4,753		1,259		6,012		3,801		1,340		5,141		17	%
Maryland		427		311		738		592		297		889		(17)	%
Virginia		466		421		887		507		287		794		12	%
Florida		844		151		995		479		113		592		68	%
East		1,737		883		2,620		1,578		697		2,275		15	%
Total		13,408		2,635		16,043		10,457		2,284		12,741		26	%

As a result of the significant increase in our land acquisition activity during the past 12 months, we increased our owned and optioned lot supply as of March 31, 2014 by 26% year-over-year. We increased our lot supply in most of our markets, with a heavier concentration in markets where we have experienced stronger buyer demand, which includes the entire West segment, Colorado and Florida, where we have expanded our operations in Orlando and South Florida.

Financial Services

	Three Months Ended
	March 31,				Change
	2014		2013		Amount			%
	(Dollars in thousands)
Financial services revenues
Mortgage operations	$	5,119	$	9,044		(3,925	)		(43)	%
Other		4,104		3,462		642			19	%
Total financial services revenues	$	9,223	$	12,506		(3,283	)		(26)	%

Financial services pretax income
Mortgage operations		2,559		5,999		(3,440	)		(57)	%
Other		2,528		1,740		788			45	%
Total financial services pretax income	$	5,087	$	7,739		(2,652	)		(34)	%

Our financial services pretax income for the quarter ended March 31, 2014 was down 34% or $2.7 million from the prior year period. The decrease was primarily driven by a $3.4 million decrease in our mortgage operations segment due to reduced volumes of loans locked and sold and lower per unit origination income and gains on loans locked and sold compared to a year ago, resulting primarily from a more competitive mortgage market and higher interest rates.

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.

- 34 -

	Three Months Ended						% or
	March 31,						Percentage
	2014			2013			Change
	(Dollars in thousands)
Total Originations (including transfer loans):
Loans		514			649			(21)	%
Principal	$	158,953		$	186,320			(15)	%
Capture Rate Data:
Capture rate as % of all homes delivered		58	%		62	%		(4)	%
Capture rate as % of all homes delivered excluding cash sales		62	%		66	%		(4)	%
Mortgage Loan Origination Product Mix:
FHA loans		14	%		28	%		(14)	%
Other government loans (VA & USDA)		29	%		28	%		1	%
Total government loans		43	%		56	%		(13)	%
Conventional loans		57	%		44	%		13	%
		100	%		100	%		0	%
Loan Type:
Fixed rate		93	%		99	%		(6)	%
ARM		7	%		1	%		6	%
Credit Quality:
Average FICO Score		736			733			0	%
Other Data:
Average Combined LTV ratio		85	%		90	%		(5)	%
Full documentation loans		100	%		100	%		0	%
Non-full documentation loans		0	%		0	%		0	%

Loans Sold to Third Parties:
Loans		604			748			(19)	%
Principal	$	185,851		$	217,654			(15)	%

Income Taxes

We had income tax expense of $7.1 million for three months ended March 31, 2014, compared to an income tax expense of $0.1 million for the same period in 2013. For the 2014 first quarter, we recorded our provision based on an effective income tax rate of 38.3% while the nominal tax provision in the 2013 first quarter was the result of the Company having a full valuation allowance reserve against its deferred tax asset.

- 35 -

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

We use our liquidity and capital resources to (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, revolving credit facility and mortgage repurchase facility. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.25 billion.

We have marketable debt and equity securities. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. Our equity securities consist primarily of holdings in mutual fund securities, which invest mostly in debt securities. The remaining equity securities in our investment portfolio are holdings in corporate equities.

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 5⅜% senior notes due 2015, 5⅝% senior notes due 2020, 5½% senior notes due 2024, and our 6% senior notes due 2043; (3) our revolving credit facility and (4) our mortgage repurchase facility. Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our revolving credit facility and mortgage repurchase facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See “Forward-Looking Statements” below.

We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether 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, Revolving Credit Facility and Mortgage Repurchase Facility

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

On January 15, 2014, we issued $250 million of 5½% Senior Notes due 2024 (the “5½% Notes”). The 5½% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2014, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $248.4 million, net of underwriting fees of $1.6 million.

On March 26, 2014, we redeemed our 5⅜% Senior Notes due December 2014. As a result of this transaction, we paid $259.1 million to extinguish $250 million in debt principal with a carrying value, including unamortized deferred financing costs, of $249.7 million and recorded a $9.4 million expense for loss on extinguishment of debt.

- 36 -

As of March 31, 2014, we had no borrowings and had $15.5 million in letters of credit outstanding under the Revolving Credit Facility.

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement, (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”). This agreement was amended on September 20, 2013 and extended until September 19, 2014. 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. The Mortgage Repurchase Facility had a temporary increase in the maximum aggregate commitment from $50 million to $80 million from December 31, 2013 through January 30, 2014. At March 31, 2014 and December 31, 2013, we had $39.3 million and $63.1 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 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 2.75%, or (ii) 3.00%. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth Ratio, (iii) a minimum Adjusted Net Income requirement, and (iv) a minimum Liquidity requirement. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2014.

Dividends

For the quarter ended March 31, 2014, we paid a dividend of $0.25 per share. There were no dividends paid during the quarter ended March 31, 2013 as a $1.00 accelerated dividend was paid in the fourth quarter of 2012 in lieu of declaring and paying regular quarterly dividends in calendar year 2013.

MDC Common Stock Repurchase Program

At March 31, 2014, 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 quarter ended March 31, 2014.

- 37 -

Consolidated Cash Flow

During the three months ended March 31, 2014, we used $114.2 million of cash from operating activities, primarily resulting from: (1) increasing our inventory from December 31, 2013, which resulted in the use of $138.9 million in cash, and (2) a decrease in accounts payable and accrued liabilities from December 31, 2013 of $18.4 million. These items were partially offset by net income of $11.5 million and a $27.8 million decrease in mortgage loans held-for-sale.

During the three months ended March 31, 2014, we generated $56.3 million in cash for investing activities, primarily attributable to the sale or maturity of $413.2 million of marketable securities, partially offset by the purchase of $356.3 million of marketable securities.

During the three months ended March 31, 2014, we used $46.6 million in cash from financing activities, primarily attributable to the redemption of $250 million of our senior notes, repayments totaling $23.7 million on our mortgage repurchase facility and a quarterly dividend payment of $12.2 million, partially offset by the issuance of $250 million of our 10-year 5½% senior notes.

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 March 31, 2014, we had deposits of $11.0 million in the form of cash and $3.0 million in the form of letters of credit that secured option contracts to purchase 2,635 lots for a total estimated purchase price of $191.8 million.

Surety Bonds and Letters of Credit. At March 31, 2014, we had issued and outstanding surety bonds and letters of credit totaling $110.3 million and $32.2 million, respectively, including $16.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $47.1 million and $5.4 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

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

- 38 -

IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2013 Annual Report on Form 10-K.

OTHER

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of 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 considered. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our cash and investment policy and strategy is to achieve an appropriate investment return while preserving principal and managing risk. Our cash and cash equivalents may include immediately available commercial bank deposits, commercial paper, money market funds, certificates of deposit and time deposits. Our marketable securities contain both debt and equity instruments, held directly or through mutual funds. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. Our equity securities consist primarily of holdings in mutual fund securities, which invest mostly in debt securities. The remaining equity securities in our investment portfolio are holdings in corporate equities. The market value and/or income derived from our debt and equity securities can be negatively impacted by a number of market risk factors, including changes in interest rates, general economic conditions and equity markets. As of March 31, 2014, we had marketable securities in unrealized loss positions totaling $1.3 million. There can be no assurances that the cost basis of these securities will be recovered in the future. If we elect to sell, or are otherwise were required to sell these securities, we could be required to record losses if the market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.

We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments, and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate locked commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at March 31, 2014 had an aggregate principal balance of approximately $71.4 million, all of which were under interest rate lock commitments at an average interest rate of 4.03%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $63.5 million at March 31, 2014, of which $18.0 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.12%. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $64.0 million and $64.5 million at March 31, 2014 and 2013, respectively.

HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 15 and 40 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations with an offset to either derivative assets or liabilities, depending on the nature of the change.

- 39 -

We utilize our Revolving Credit Facility, our Mortgage Repurchase Facility and senior notes in our financing strategy. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. We do not have an obligation to prepay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value do not have an impact on our financial position, results of operations or cash flows. See “Forward-Looking Statements” above.

Item 4. Controls and Procedures

(a) Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at March 31, 2014.

(b) Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 40 -

M.D.C. HOLDINGS, INC.

FORM 10-Q

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2013. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2013, which include the following:

●

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.

●

A deterioration in homebuilding industry conditions or in the broader economic conditions, including government shutdowns and debt ceiling debates, could have adverse effects on our business and financial results.

●

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 sale revenues and results of operations.

●

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.

●

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

●

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

●

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

●

Increases in our cancellations could have a negative impact on our gross margin from home sales and home sale revenues.

●

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.

●

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

●

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.

●

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.

- 41 -

●

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.

●

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

●

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

●

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.

●

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

●

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

●

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

●

Information technology failures and data security breaches could harm our business.

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

The Company did not repurchase any shares during the three months ended March 31, 2014. Additionally, there were no sales of unregistered equity securities during the period.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

- 42 -

Item 6. Exhibits

4.11

Supplemental Indenture (5.500% Senior Notes due 2024), dated as of January 15, 2014, among the Company, the guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed January 15, 2014). *

31.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

* Incorporated by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 1, 2014	M.D.C. HOLDINGS, INC.
	(Registrant)


	By:	/s/ John M. Stephens
		John M. Stephens
		Senior Vice President, Chief Financial Officer and Principal Accounting Officer (principal financial officer and duly authorized officer)

- 43 -

INDEX TO EXHIBITS

Exhibit

Number

4.11

31.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

* Incorporated by reference.

- 44 -