News Column

MDC HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 29, 2014

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 Six Months Ended June 30, June 30, 2014 2013 2014 2013 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues $ 430,743$ 400,327$ 749,277$ 732,075 Land sale revenues 518 1,807 518 1,807 Total home and land sale revenues 431,261 402,134 749,795 733,882 Home cost of sales (356,175 ) (327,927 ) (615,653 ) (602,003 ) Land cost of sales (522 ) (1,435 ) (522 ) (1,435 ) Inventory impairments (850 ) - (850 ) - Total cost of sales (357,547 ) (329,362 ) (617,025 ) (603,438 ) Gross margin 73,714 72,772 132,770 130,444 Gross margin % 17.1 % 18.1 % 17.7 % 17.8 % Selling, general and administrative expenses (49,798 ) (51,908 ) (98,140 ) (100,109 ) Interest and other income 4,613 10,200 18,162 16,749 Interest expense - (909 ) (685 ) (1,726 ) Other expense (1,080 ) (366 ) (1,693 ) (722 ) Loss on early extinguishment of debt - - (9,412 ) - Homebuilding pretax income 27,449 29,789 41,002 44,636 Financial Services: Revenues 11,491 13,884 20,714 26,390 Expenses (5,615 ) (6,581 ) (10,539 ) (12,223 ) Interest and other income 701 920 1,489 1,795 Financial services pretax income 6,577 8,223 11,664 15,962 Income before income taxes 34,026 38,012 52,666 60,598 Benefit from (provision for) income taxes (12,484 ) 186,897 (19,620 ) 186,827 Net income $ 21,542 $



224,909 $ 33,046$ 247,425

Earnings per share: Basic $ 0.44$ 4.60$ 0.68$ 5.06 Diluted $ 0.44$ 4.55$ 0.67$ 5.01 Weighted average common shares outstanding: Basic 48,640,979 48,478,076 48,613,521 48,410,486 Diluted 48,852,696 48,946,055 48,842,527 48,916,988 Dividends declared per share $ 0.25 $



- $ 0.50 $ -

Cash provided by (used in): Operating Activities $ 24,881$ (90,825 )$ (96,272 )$ (146,243 ) Investing Activities $ 19,678$ 18,058$ 82,925$ (89,011 ) Financing Activities $ (9,347 )$ 106,505$ (55,960 )$ 324,577 - 25 -

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Overview For both the three and six months ended June 30, 2014, our results were impacted by slower homebuilding industry conditions compared with the same periods a year ago, including more modest home price appreciation and a reduced pace of homes sales. We believe that the industry volatility we have seen is a short-term phenomenon, resulting from caution shown by many potential homebuyers, especially in the first-time buyer segment, following a significant increase in home prices in 2013 and tepid economic trends that have persisted for much of the past year. Our increased active community count, inventory management strategies and efforts to contain overhead costs have helped us partially offset the impact of the short-term decrease in overall demand as well as the lower backlog level that we had at the beginning of both the three and six month periods. Additionally, toward the end of the second quarter, we saw improvements in employment levels and consumer confidence, which supports our long-term view that the homebuilding industry should improve in the coming years. Our net income for the 2014 second quarter was $21.5 million, or $0.44 per diluted share, compared to net income of $224.9 million, or $4.55 per diluted share, for the year earlier period. The decrease was attributable primarily to a $187.6 million benefit from the reversal of our deferred tax asset valuation allowance in the 2013 second quarter, while for the 2014 second quarter we had no such benefit and recognized $12.5 million of income tax expense. The quarter was also negatively impacted by a decline in our gross margin from home sales and a $5.6 million reduction in interest and other income, partially offset by an increase in home sale revenues and an improvement in our homebuilding selling, general and administrative ("SG&A") expenses as a percentage of home sale revenues ("SG&A rate"). For the 2014 second quarter, home sale revenues increased by $30.4 million, or 8%, year-over-year to $430.7 million, driven primarily by a 10% increase in average selling price, which was the result of price increases achieved during much of 2013, and, to a lesser extent, the geographic mix of homes delivered. Our home closings decreased only slightly for the quarter despite a 16% year-over-year decline in our beginning backlog, as we increased the number of homes that were both sold and delivered during the quarter, which was the direct result of our strategy to increase our supply of speculative homes available for quick delivery. Our gross margin from home sales for the quarter decreased 100 basis points year-over-year to 17.1%, in large part due to higher interest in cost of sales and a $0.9 million impairment. Excluding interest in cost of sales and impairments1, our gross margin was 21.1% for the 2014 second quarter, down 20 basis points versus 21.3% in the same quarter in 2013. In addition, cost increases, including direct construction and land costs, combined with additional incentives offered in certain markets to spur demand in a slower homebuilding environment partly offset the impact of home price increases we captured in prior periods. The decrease in our gross margin percentage, however, was more than offset by a year-over-year improvement in our SG&A rate of 140 basis points to 11.6%, resulting primarily from increases in home sale revenues, lower incentive and stock-based compensation expenses, and lower legal expenses. For the 2014 second quarter, we experienced our first year-over-year increase in net new orders since the first quarter of 2013. The dollar value of net new orders increased by $59.3 million, or 12%, year-over-year, to $544.8 million for the 2014 second quarter. The increase was driven by both a 5% increase in the number of net new orders, resulting from an 11% increase in average active communities to 158 for the 2014 second quarter, and a 7% increase in average selling price. For the six months ended June 30, 2014, our net income was $33.0 million, or $0.67 per diluted share, compared to net income of $247.4 million, or $5.01 per diluted share, for the year earlier period. The decrease was attributable primarily to the $187.6 million benefit from the reversal of our deferred tax asset valuation allowance in the 2013 second quarter, while for the six months ended June 30, 2014 we had no such benefit and recognized $19.6 million of income tax expense. The six month period for 2014 was also adversely impacted by a $9.4 million charge related to the early extinguishment of debt recognized in the 2014 first quarter and a 27% decline in financial services income due primarily to more competitive mortgage market conditions and higher interest rates, which was partially offset by a 60 basis point decrease in our SG&A rate. We increased inventories by $184.6 million since the beginning of the year, including the purchase of nearly 1,150 lots in 38 communities during the 2014 second quarter, resulting in a 13% year-over-year increase in the total supply of lots owned and under option at June 30, 2014. The investment in inventories was funded using our cash and marketable securities. Including amounts available under our $450 million revolving credit facility, we ended the second quarter with total liquidity of approximately $1.1 billion, up 20% 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.



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1 See reconciliation of non-GAAP measures in the Gross Margin section below.

- 26 - -------------------------------------------------------------------------------- Homebuilding Pretax Income Three Months Ended Six Months Ended June 30, Change June 30, Change 2014 2013 Amount % 2014 2013 Amount % (Dollars in thousands) West $ 16,695$ 16,779$ (84 ) (1) % $ 29,345$ 27,390$ 1,955 7 % Mountain 12,182 14,142 (1,960 ) (14) % 19,541 27,138 (7,597 ) (28) % East 5,296 4,523 773 17 % 7,957 6,051 1,906 31 % Corporate (6,724 ) (5,655 ) (1,069 )



19 % (15,841 ) (15,943 ) 102 (1) % Total homebuilding pretax income $ 27,449$ 29,789$ (2,340 )

(8) % $ 41,002$ 44,636$ (3,634 ) (8) % For the 2014 second quarter, homebuilding pretax income decreased $2.3 million to $27.4 million, compared to pretax income of $29.8 million for the second quarter of 2013. Overall, the impact of a 100 basis point decrease in our gross margin from home sales and a $5.6 million year-over-year reduction in interest and other income more than offset an 8% increase in home sale revenues and a 140 basis point improvement in our SG&A rate. The decline in interest and other income was the primary driver for the $1.1 million decrease in pretax income for our Corporate segment, although the impact was partially offset by lower incentive and stock-based compensation expense in the 2014 second quarter as compared to the prior year. The $2.0 million year-over-year decrease in pretax income for our Mountain segment resulted from higher SG&A expenses incurred to prepare for both growth in unit volume and the opening of new subdivisions. Homebuilding pretax income for the six months ended June 30, 2014 was $41.0 million, down $3.6 million from $44.6 million for the six months ended June 30, 2013, largely due to a charge of $9.4 million related to the early extinguishment of debt, which was partially offset by lower incentive and stock-based compensation expense. Pretax income in our Mountain segment decreased by $7.6 million year-over-year, largely due to a 7% decline in the dollar value of new homes delivered combined with a lower gross margin percentage as well as higher SG&A expenses incurred to prepare for both growth in unit volume and the opening of new subdivisions. This decrease was partially offset by higher pretax income in our West and East segments driven mostly by year-over-year improvements in home sale revenues and gross margin percentage. Assets June 30, December 31, Change 2014 2013 Amount % (Dollars in thousands) West $ 846,832$ 760,450$ 86,382 11 % Mountain 500,365 418,796 81,569 19 % East 333,174 297,627 35,547 12 % Corporate 809,298 951,809 (142,511 ) (15) % Total homebuilding assets $ 2,489,669$ 2,428,682$ 60,987 3 % Overall, homebuilding assets increased slightly during the first half of 2014. Homebuilding assets in our West, Mountain and East segments increased from December 31, 2013 as incremental investments in both land and new construction drove an increase in our inventory balances. The funds for these investments came from our Corporate segment, resulting in a decline in Corporate segment assets of $142.5 million. - 27 -

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Home and land sale revenues Three Months Ended Six Months Ended June 30, Change June 30, Change 2014 2013 Amount % 2014 2013 Amount % (Dollars in thousands) West $ 189,661$ 164,514$ 25,147 15 % $ 326,083$ 299,493$ 26,590 9 % Mountain 146,665 133,768 12,897 10 % 247,610 267,145 (19,535 ) (7) % East 94,935 103,852 (8,917 ) (9) % 176,102 167,244 8,858 5 % Total home and land sale revenues $ 431,261$ 402,134$ 29,127 7 % $ 749,795$ 733,882$ 15,913 2 % For the 2014 second quarter, home sale revenues increased by $29.1 million year-over-year to $431.3 million. For the six months ended June 30, 2014, home sale revenues increased by $15.9 million over the prior year period to $749.8 million. The increase for both periods was primarily driven by 10% and 11% increases, respectively, in our average selling prices. For the six month period, the increase in average selling price was largely offset by an 8% decrease in the number of homes delivered. New Home Deliveries Three Months Ended June 30, 2014 2013 % Change Dollar Average Dollar Average Dollar Average Price Homes Value Price Homes Value Price Homes Value (Dollars in thousands) Arizona 184 $ 47,413$ 257.7 130 $ 30,472$ 234.4 42 % 56 % 10 % California 143 70,898 495.8 167 61,199 366.5 (14) % 16 % 35 % Nevada 144 42,782 297.1 161 41,850 259.9 (11) % 2 % 14 % Washington 78 28,568 366.3 98 30,992 316.2 (20) % (8) % 16 % West 549 189,661 345.5 556 164,513 295.9 (1) % 15 % 17 % Colorado 328 132,004 402.5 309 113,320 366.7 6 % 16 % 10 % Utah 44 14,143 321.4 59 18,643 316.0 (25) % (24) % 2 % Mountain 372 146,147 392.9 368 131,963 358.6 1 % 11 % 10 % Maryland 81 36,351 448.8 83 35,407 426.6 (2) % 3 % 5 % Virginia 67 35,023 522.7 95 47,350 498.4 (29) % (26) % 5 % Florida 89 23,561 264.7 81 21,094 260.4 10 % 12 % 2 % East 237 94,935 400.6 259 103,851 401.0 (8) % (9) % (0) % Total 1,158 $ 430,743$ 372.0 1,183 $ 400,327$ 338.4 (2) % 8 % 10 % - 28 -

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Six Months Ended June 30, 2014 2013 % Change Dollar Average Dollar Average Dollar Average Price Homes Value Price Homes Value Price Homes Value (Dollars in thousands) Arizona 309 $ 80,085$ 259.2 270 $ 63,633$ 235.7 14 % 26 % 10 % California 235 111,998 476.6 313 110,788 354.0 (25) % 1 % 35 % Nevada 264 82,719 313.3 294 74,595 253.7 (10) % 11 % 23 % Washington 142 51,281 361.1 159 50,476 317.5 (11) % 2 % 14 % West 950 326,083 343.2 1,036 299,492 289.1 (8) % 9 % 19 % Colorado 576 225,387 391.3 613 226,808 370.0 (6) % (1) % 6 % Utah 68 21,705 319.2 126 38,532 305.8 (46) % (44) % 4 % Mountain 644 247,092 383.7 739 265,340 359.1 (13) % (7) % 7 % Maryland 158 73,256 463.6 137 57,111 416.9 15 % 28 % 11 % Virginia 124 62,290 502.3 158 76,469 484.0 (22) % (19) % 4 % Florida 155 40,556 261.7 131 33,663 257.0 18 % 20 % 2 % East 437 176,102 403.0 426 167,243 392.6 3 % 5 % 3 % Total 2,031 $ 749,277$ 368.9 2,201 $ 732,075$ 332.6 (8) % 2 % 11 % The number of homes delivered decreased by 2% and 8%, respectively, for the three and six months ended June 30, 2014. However, as a direct result of our strategy to increase our inventory of speculative homes during the last half of 2013, we were able to increase the number of homes both sold and delivered year-over-year during the three and six month periods ended June 30, 2014, which helped offset the impact of 23% and 16% year-over-year declines in our beginning backlog unit levels as of December 31, 2013 and March 31, 2014, respectively.



We experienced increases in the average selling price of homes delivered during the three and six months ended June 30, 2014 in all of our markets. The improvements in our average selling price were driven by price increases implemented during 2013 and a mix shift to higher-priced homes in certain markets, particularly in California.

Gross Margin Our gross margin from home sales for the 2014 second quarter decreased 100 basis points year-over-year to 17.1%, in large part due to higher capitalized interest in cost of sales and a $0.9 million impairment. Excluding interest in cost of sales and impairments, our gross margin was 21.1% for the 2014 second quarter, down 20 basis points versus 21.3% in the same quarter in 2013 (please see the table set forth below reconciling this non-GAAP measure to our gross margin from home sales). In addition, cost increases, including direct construction and land costs, combined with additional incentives offered in certain markets partially offset the impact of home price increases we captured in prior periods. On a sequential basis, our gross margin from home sales for the 2014 second quarter declined 140 basis points from 18.5%. Our gross margin from home sales for the six months ended June 30, 2014 was 17.7%, down slightly from 17.8% in the same period in the prior year. Gross margin excluding inventory impairments and interest in cost of sales for the six months ended June 30, 2014 was 21.6%, an increase from 20.9% 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 and inventory impairments, which is a non-GAAP measure.

- 29 - -------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, Gross Gross Gross Gross 2014 Margin % 2013 Margin % 2014 Margin % 2013 Margin % (Dollars in thousands) Gross Margin $ 73,714 17.1 % $ 72,772 18.1 % $ 132,770 17.7 % $ 130,444 17.8 % Less: Land Sales Revenue (518 ) (1,807 ) (518 ) (1,807 ) Add: Land Cost of Sales 522 1,435 522 1,435



Gross Margin from Home Sales 73,718 17.1 % 72,400 18.1 % 132,774 17.7 % 130,072 17.8 % Add: Inventory Impairments 850

- 850 - Gross Margin from Home Sales Excluding Impairments (1) 74,568 17.3 % 72,400 18.1 % 133,624 17.8 % 130,072 17.8 % Add: Interest in Cost of Sales 16,522 12,680 28,246 22,554 Adjusted Gross Margin from Home Sales (1) $ 91,090 21.1 % $ 85,080

21.3 % $ 161,870 21.6 % $ 152,626 20.8 %



(1) Gross Margin from Home Sales Excluding Impairments and Adjusted Gross Margin

from Home Sales are non-GAAP financial measures. We believe this information

is meaningful as it isolates the impact that interest and impairments have

on our Gross Margin from Home Sales and permits investors to make better

comparisons with our competitors, who also break out and adjust gross margins in a similar fashion. Inventory Impairments



For each of the three and six months ended June 30, 2014, we recorded $0.9 million of inventory impairment charges related to two projects in our East segment. No such charges were recorded during the three and six months ended June 30, 2013.

The following table sets forth the number of subdivisions and carrying value of the inventory we tested for impairment during the first and second quarters of 2014 and 2013. Total Carrying Value Carrying Value Subdivisions of Inventory of Impaired Number of Tested for Tested for Inventory Before Fair Value of Subdivisions Number of Lots Impairment Impairment



Impairment at Inventory Inventory After Impaired During Impaired During Six Months Ended

During Quarter During Quarter Quarter End Impairments Impairments the Quarter



the Quarter

(Dollars in thousands) March 31, 2014 16 $ 37,404 $ - $ - $ - - - June 30, 2014 16 53,591 5,135 850 4,285 2 23 Six Month Total 32 $ 90,995 $ 5,135 $ 850 $ 4,285 2 23 March 31, 2013 17 $ 42,919 $ - $ - $ - - - June 30, 2013 23 48,329 - - - - - Six Month Total 40 $ 91,248 $ - $ - $ - - -



Selling, General and Administrative Expenses

Our SG&A rate improved 140 basis points from 13.0% in the 2013 second quarter to 11.6% in the 2014 second quarter. For the six months ended June 30, 2014, our SG&A rate improved 60 basis points from 13.7% in 2013 to 13.1%. The improvement in our SG&A rate for both periods was attributable primarily to the increases in home sale revenues for both periods, lower incentive and stock-based compensation expenses, and lower legal expenses, including a net legal recovery of $1.4 million in our East segment. - 30 - --------------------------------------------------------------------------------

Interest and Other Income For the three months ended June 30, 2014, our interest and other income decreased $5.6 million from the same period in 2013. The decrease was primarily driven by significantly lower interest income resulting from lower overall cash and investment balances due to the increased investment in real estate inventories to grow our community count. For the six months ended June 30, 2014, our interest and other income increased $1.4 million from the same period in 2013. This increase was primarily driven by $6.4 million in net gains from the sale of debt and equity marketable securities, but was substantially offset by lower interest earned following the sale of those securities. Early Extinguishment of Debt During the six months ended June 30, 2014, 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 January 2014 issuance of $250 million 10-year senior notes due in 2024 and from selling a portion of our marketable securities portfolio.



Other Homebuilding Operating Data

Net New Orders: Three Months Ended June 30, 2014 2013 % Change Monthly Monthly Monthly Dollar Average Absorption Average Absorption Absorption Homes Value Price Rate * Homes Dollar Value Price Rate * Homes

Dollar Value Average Price Rate * (Dollars in thousands) Arizona 262 $ 74,051$ 282.6 2.65 196 $ 48,825$ 249.1 3.84 34 % 52 % 13 % (31) % California 214 101,695 475.2 4.14 196 79,196 404.1 5.23 9 % 28 % 18 % (21) % Nevada 180 57,456 319.2 3.75 152 49,085 322.9 4.94 18 % 17 % (1) % (24) % Washington 74 27,960 377.8 2.67 94 31,016 330.0 2.72 (21) % (10) % 14 % (2) % West 730 261,162 357.8 3.22 638 208,122 326.2 4.15 14 % 25 % 10 % (22) % Colorado 410 171,001 417.1 3.67 381 143,754 377.3 3.30 8 % 19 % 11 % 11 % Utah 55 17,517 318.5 3.06 44 14,582 331.4 2.10 25 % 20 % (4) % 46 % Mountain 465 188,518 405.4 3.58 425 158,336 372.6 3.11 9 % 19 % 9 % 15 % Maryland 77 37,877 491.9 1.71 112 53,091 474.0 1.84 (31) % (29) % 4 % (7) % Virginia 64 31,305 489.1 2.59 90 43,830 487.0 2.50 (29) % (29) % 0 % 4 % Florida 83 25,966 312.8 1.78 86 22,080 256.7 2.25 (30 % 18 % 22 % (21) % East 224 95,148 424.8 1.93 288 119,001 413.2 2.13 (22) % (20) % 3 % (9) % Total 1,419 $ 544,828$ 384.0 3.00 1,351 $ 485,459$ 359.3 3.18 5 % 12 % 7 % (6) % - 31 -

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Six Months Ended June 30, 2014 2013 % Change Monthly Monthly Monthly Average Absorption Average Absorption Absorption Homes Dollar Value Price Rate * Homes Dollar Value Price Rate * Homes Dollar Value Average Price Rate (Dollars in thousands) Arizona 453 $ 127,560$ 281.6 2.50 323 $ 79,760$ 246.9 3.36 40 % 60 % 14 % (26) % California 367 178,119 485.3 4.12 360 140,358 389.9 4.77 2 % 27 % 24 % (14) % Nevada 330 102,618 311.0 3.50 322 95,267 295.9 4.94 2 % 8 % 5 % (29) % Washington 166 62,212 374.8 2.69 187 59,942 320.5 2.91 (11) % 4 % 17 % (8) % West 1,316 470,509 357.5 3.09 1,192 375,327 314.9 3.96 10 % 25 % 14 % (22) % Colorado 806 333,920 414.3 3.60 799 291,343 364.6 3.40 1 % 15 % 14 % 6 % Utah 98 32,219 328.8 2.86 109 35,179 322.7 1.99 (10) % (8) % 2 % 44 % Mountain 904 366,139 405.0 3.50 908 326,522 359.6 3.13 (0) % 12 % 13 % 12 % Maryland 145 69,515 479.4 1.51 202 91,526 453.1 1.76 (28) % (24) % 6 % (14) % Virginia 123 61,485 499.9 2.21 183 92,714 506.6 2.51 (33) % (34) % (1) % (12) % Florida 167 52,490 314.3 1.97 166 42,626 256.8 2.11 1 % 23 % 22 % (7) % East 435 183,490 421.8 1.84 551 226,866 411.7 2.07 (21) % (19) % 2 % (11) % Total 2,655 $ 1,020,138$ 384.2 2.88 2,651 $ 928,715$ 350.3 3.09 0 % 10 % 10 % (7) %



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

For the three and six months ended June 30, 2014, the dollar value of net new orders increased 12% and 10%, respectively, compared to the same periods in the prior year. The year-over-year increases were driven primarily by increases in our average selling price, particularly in our West and Mountain segments. Our net new orders were up 5% for the 2014 second quarter, which was aided by an 11% increase in our average active community count, most notably in our West segment, while our monthly absorption rate was down 6% to 3.0 sales per community versus 3.2 in the prior year period. Our only increase in monthly absorption rate for both periods came in the Mountain segment, largely due to the strength in our Colorado market combined with the stabilization of our Utah market. The absorption declines in our other segments reflected slower demand in most of our markets compared with a year ago. Furthermore, the absorption rate in Maryland and Virginia during the first quarter of 2014 was also impacted by extreme winter weather conditions, which slowed traffic to our subdivisions in those markets. Active Subdivisions: June 30, % 2014 2013 Change Arizona 34 19 79 % California 20 11 82 % Nevada 16 13 23 % Washington 8 12 (33) % West 78 55 42 % Colorado 36 38 (5) % Utah 6 4 50 % Mountain 42 42 0 % Maryland 14 20 (30) % Virginia 8 11 (27) % Florida 17 12 42 % East 39 43 (9) % Total 159 140 14 % Average for quarter ended 158 142 11 % Average for the six months ended 153 143 7 % - 32 -

-------------------------------------------------------------------------------- At June 30, 2014, we had 159 active subdivisions, a 14% increase from 140 active subdivisions at June 30, 2013. The year-over-year increase in active subdivisions at June 30, 2014 was driven primarily by significant land acquisition activity over the past two years, particularly in our West markets. As a result of this activity, we have had three consecutive quarters of sequential active subdivision increases. Cancellation Rate: Three Months Ended June 30, Change in Six Months Ended June 30, Change in 2014 2013 Percentage 2014 2013 Percentage Arizona 20 % 14 % 6 % 20 % 17 % 3 % California 20 % 18 % 2 % 21 % 19 % 2 % Nevada 16 % 17 % (1) % 18 % 20 % (2) % Washington 19 % 18 % 1 % 17 % 15 % 2 % West 19 % 17 % 2 % 19 % 18 % 1 % Colorado 16 % 21 % (5) % 16 % 18 % (2) % Utah 15 % 17 % (2) % 14 % 16 % (2) % Mountain 16 % 20 % (4) % 16 % 18 % (2) % Maryland 17 % 24 % (7) % 22 % 23 % (1) % Virginia 19 % 24 % (5) % 23 % 22 % 1 % Florida 23 % 18 % 5 % 23 % 19 % 4 % East 20 % 23 % (3) % 23 % 22 % 1 % Total 18 % 19 % (1) % 19 % 19 % 0 % Our cancellation rate for the three and six months ended June 30, 2014 was 18% and 19%, respectively, nearly unchanged from 19% in both prior year periods. The year-over-year increase for our Arizona market for the 2014 second quarter was due primarily to an increase in lot transfers, which are reported as cancellations. The year-over-year decrease in our Maryland market for the 2014 second quarter was due to enhancements in the review of buyer creditworthiness before the ratification of sales contracts. Backlog: June 30, 2014 2013 % Change Dollar Average Dollar Average Dollar Homes Value Price Homes Value Price Homes Value Average Price (Dollars in thousands) Arizona 304 $ 90,028$ 296.1 203 $ 50,836$ 250.4 50 % 77 % 18 % California 279 135,197 484.6 276 107,950 391.1 1 % 25 % 24 % Nevada 206 66,713 323.8 232 71,488 308.1 (11) % (7) % 5 % Washington 70 26,127 373.2 107 36,118 337.6 (35) % (28 % 11 % West 859 318,065 370.3 818 266,392 325.7 5 % 19 % 14 % Colorado 647 278,643 430.7 656 246,797 376.2 (1) % 13 % 14 % Utah 56 18,583 331.8 64 21,576 337.1 (13) % (14) % (2) % Mountain 703 297,226 422.8 720 268,373 372.7 (2) % 11 % 13 % Maryland 116 58,674 505.8 248 113,824 459.0 (53) % (48) % 10 % Virginia 102 49,381 484.1 210 109,180 519.9 (51) % (55) % (7) % Florida 106 38,120 359.6 99 26,470 267.4 7 % 44 % 34 % East 324 146,175 451.2 557 249,474 447.9 (42) % (41) % 1 % Total 1,886 $ 761,466$ 403.7 2,095 $ 784,239$ 374.3 (10) % (3) % 8 % - 33 -

-------------------------------------------------------------------------------- We ended the 2014 second quarter with 1,886 homes in backlog, with an estimated sales value of $761.5 million, compared with a backlog of 2,095 homes with an estimated sales value of $784.2 million at June 30, 2013. The decline in our backlog was due primarily to lower backlog at the beginning of 2014 as compared to 2013 which was mostly the result of a lower average community count during fiscal 2013.



Homes Completed or Under Construction (WIP lots):

June 30, % 2014 2013 Change Unsold: Completed 419 185 126 % Under construction 725 628 15 % Total unsold started homes 1,144 813 41 % Sold homes under construction or completed 1,422 1,652 (14) % Model homes 263 207



27 % Total homes completed or under construction 2,829 2,672 6 %

Our total homes completed or under construction increased 6% to 2,829 at June 30, 2014 from 2,672 at June 30, 2013, primarily resulting from our decision to start more speculative homes in the latter half of 2013 in response to higher homebuyer demand for speculative homes. However, as a result of selling a greater number of speculative homes during the first half of 2014 as compared to the prior year period, our speculative home inventory has decreased by 19% since the beginning of 2014. Furthermore, due to the year-over-year increase in active and selling communities, our model home count increased by 27%.



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

June 30, 2014 June 30, 2013 Total Lots Owned Lots Optioned Total Lots Owned Lots Optioned Total % Change Arizona 2,683 50 2,733 2,707 239 2,946 (7) % California 1,655 132 1,787 971 - 971 84 % Nevada 1,534 434 1,968 1,573 136 1,709 15 % Washington 756 226 982 477 141 618 59 % West 6,628 842 7,470 5,728 516 6,244 20 % Colorado 4,439 983 5,422 4,174 1,079 5,253 3 % Utah 553 163 716 468 - 468 53 % Mountain 4,992 1,146 6,138 4,642 1,079 5,721 7 % Maryland 409 434 843 551 358 909 (7) % Virginia 569 499 1,068 491 284 775 38 % Florida 803 384 1,187 648 424 1,072 11 % East 1,781 1,317 3,098 1,690 1,066 2,756 12 % Total 13,401 3,305 16,706 12,060 2,661 14,721 13 % 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 June 30, 2014 by 13% year-over-year. We increased lot supply in all of our markets, with the exception of our Arizona and Maryland markets, where demand has been more heavily impacted by market volatility. - 34 - --------------------------------------------------------------------------------

Financial Services Three Months Ended



Six Months Ended

June 30, Change June 30, Change 2014 2013 Amount % 2014 2013 Amount % Financial (Dollars in thousands) services revenues Mortgage



operations $ 7,352$ 10,494 (3,142 ) (30) % $ 12,471$ 19,538 (7,067 ) (36) % Other

4,139 3,390 749 22 % 8,243 6,852 1,391 20 % Total financial services revenues $ 11,491$ 13,884 (2,393 ) (17) % $ 20,714$ 26,390 (5,676 ) (22) % Financial services pretax income Mortgage operations $ 4,501$ 6,855 (2,354 ) (34) % $ 7,060$ 12,854 (5,794 ) (45) % Other 2,076 1,368 708 52 % 4,604 3,108 1,496 48 % Total financial services pretax income $ 6,577$ 8,223 (1,646 ) (20) % $ 11,664$ 15,962 (4,298 ) (27) % Our financial services pretax income for the three and six months ended June 30, 2014 was down 20% and 27%, respectively, from the same prior year periods. The decreases were primarily driven by our mortgage operations segment which had lower pretax income for both periods presented due to: (1) reduced volumes of loans locked and sold; (2) lower per unit origination income; and (3) lower gains on loans locked and sold compared to a year ago. These results were caused primarily by a more competitive mortgage market. 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. Three Months Ended % or Six Months Ended % or June 30, Percentage June 30, Percentage 2014 2013 Change 2014 2013 Change (Dollars in thousands) (Dollars in thousands) Total Originations (including transfer loans): Loans 639 784 (18) % 1,153 1,433 (20) % Principal $ 195,541$ 235,734 (17) % $ 354,493$ 422,054 (16) % Capture Rate Data: Capture rate as % of all homes delivered 55 % 64 % (9) % 56 % 63 % (7) % Capture rate as % of all homes delivered (excludes cash sales) 59 % 68 % (9) % 60 % 67 % (7) % Mortgage Loan Origination Product Mix: FHA loans 15 % 26 % (11) % 15 % 27 % (12) % Other government loans (VA & USDA) 27 % 28 % (1) % 28 % 28 % 0 % Total government loans 42 % 54 % (12) % 43 % 55 % (12) % Conventional loans 58 % 46 % 12 % 57 % 45 % 12 % 100 % 100 % 0 % 100 % 100 % 0 % Loan Type: Fixed rate 91 % 98 % (7) % 92 % 98 % (6) % ARM 9 % 2 % 7 % 8 % 2 % 6 % Credit Quality: Average FICO Score 740 735 1 % 738 734 1 % Other Data: Average Combined LTV ratio 85 % 90 % (5) % 85 % 89 % (4) % Full documentation loans 100 % 100 % 0 % 100 % 100 % 0 % Non-full documentation loans 0 % 0 % 0 % 0 % 0 % 0 % Loans Sold to Third Parties: Loans 658 779 (16) % 1,262 1,527 (17) % Principal $ 201,792$ 227,598

(11) % $ 387,642$ 445,252 (13) % - 35 -

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Income Taxes For the three and six months ended June 30, 2014 we had income tax expense of $12.5 million and $19.6 million, respectively, compared to an income tax benefit of $186.9 million and $186.8 million for the same periods in 2013, respectively. For the three and six months end June 30, 2014, we recorded our income tax provision based on an effective income tax rate of 36.7% and 37.3%, respectively, while the significant benefit recognized in the 2013 second quarter was due to the $187.6 million reversal of the valuation allowance on our deferred tax asset. We concluded that the reversal of a portion of our valuation allowance during the 2013 second quarter was appropriate after determining that it was more likely than not, after our evaluation of all relevant positive and negative evidence, that we would be able to realize most of our deferred tax assets within the applicable carry forward periods. - 36 -

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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 5?% senior notes due 2015, 5?% senior notes due 2020, 5% 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 5% Senior Notes due 2024 (the "5% Notes"). The 5% 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 5?% 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. - 37 -

-------------------------------------------------------------------------------- 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 June 30, 2014.



As of June 30, 2014, we had $10.0 million in borrowings and $16.0 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 June 30, 2014 and December 31, 2013, we had $32.2 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 June 30, 2014. Dividends During the three and six months ended June 30, 2014, we paid a dividend of $0.25 per share and dividends totaling $0.50 per share, respectively. There were no dividends paid during the three or six months ended June 30, 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 June 30, 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 six months ended June 30, 2014. - 38 - --------------------------------------------------------------------------------

Consolidated Cash Flow During the six months ended June 30, 2014, we used $96.3 million in cash from operating activities, primarily resulting from increasing our inventory from December 31, 2013, which resulted in the use of $185.1 million in cash. This use of cash was partially offset by a $34.2 million decrease in mortgage loans held-for-sale, net income of $33.0 million, and the use of net operating loss carryforwards to reduce our current taxes payable. During the six months ended June 30, 2014, we generated $82.9 million of cash from investing activities, primarily attributable to $466.6 million in proceeds from the sale or maturity of marketable securities, partially offset by the purchase of $382.3 million of marketable securities. During the six months ended June 30, 2014, we used $56.0 million in cash from financing activities, primarily attributable to $259.1 million in cash used to redeem our 5?% Senior Notes due December 2014, repayments totaling $30.9 million on our mortgage repurchase facility and dividend payments totaling $24.4 million, partially offset by the issuance of $250 million of our 10-year 5% Senior Notes due 2024.



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 June 30, 2014, we had deposits of $16.6 million in the form of cash and $3.4 million in the form of letters of credit that secured option contracts to purchase 3,305 lots for a total estimated purchase price of $251.4 million. Surety Bonds and Letters of Credit. At June 30, 2014, we had issued and outstanding surety bonds and letters of credit totaling $116.5 million and $37.2 million, respectively, including $21.2 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 $7.1 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.

- 39 - --------------------------------------------------------------------------------

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.


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