City

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 ~~September~~June 30, ~~2021~~2022


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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


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


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

(303) 773-1100

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

~~552676108~~MDC

New York Stock Exchange

6% Senior Notes due January 2043

~~552676AQ1~~MDC 43

New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~October~~July 26, ~~2021, 70,679,388~~2022, 71,156,158 shares of M.D.C. Holdings, Inc. common stock were outstanding.

~~Table~~Ta ble of Contents

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~September~~June 30, ~~2021~~2022

INDEX


		Page No.
Part I. Financial Information:

Item 1.	Unaudited Consolidated Financial Statements:

	Consolidated Balance Sheets at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021	1

	Consolidated Statements of Operations and Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021	2

	Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021	3

	Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021	54

	Notes to Unaudited Consolidated Financial Statements	65

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	3839

Part II. Other Information:

Item 1.	Legal Proceedings	3940

Item 1A.	Risk Factors	3940

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3940

Item 6.	Exhibits	4041

Signature		41

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PART II. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
							(unaudited)
		(Dollars in thousands, except per share amounts)					(Dollars in thousands, except per share amounts)
ASSETS	ASSETS					ASSETS
Homebuilding:	Homebuilding:					Homebuilding:
Cash and cash equivalents	Cash and cash equivalents	$	761,715	$	411,362	Cash and cash equivalents	$	475,254	$	485,839
Restricted cash	Restricted cash	12,047		15,343		Restricted cash	5,994		12,799
Trade and other receivables	Trade and other receivables	125,556		72,466		Trade and other receivables	121,202		98,580
Inventories:	Inventories:					Inventories:
Housing completed or under construction	Housing completed or under construction	1,948,211		1,486,587		Housing completed or under construction	2,385,563		1,917,616
Land and land under development	Land and land under development	1,464,603		1,345,643		Land and land under development	1,717,022		1,843,235
Total inventories	Total inventories	3,412,814		2,832,230		Total inventories	4,102,585		3,760,851
Property and equipment, net	Property and equipment, net	61,590		61,880		Property and equipment, net	61,574		60,561
Deferred tax asset, net	Deferred tax asset, net	16,301		11,454		Deferred tax asset, net	16,735		17,942
Prepaids and other assets	Prepaids and other assets	105,860		101,685		Prepaids and other assets	95,956		106,562
Total homebuilding assets	Total homebuilding assets	4,495,883		3,506,420		Total homebuilding assets	4,879,300		4,543,134
Financial Services:	Financial Services:					Financial Services:
Cash and cash equivalents	Cash and cash equivalents	93,884		77,267		Cash and cash equivalents	114,989		104,821

Mortgage loans held-for-sale, net	Mortgage loans held-for-sale, net	248,921		232,556		Mortgage loans held-for-sale, net	190,070		282,529
Other assets	Other assets	35,716		48,677		Other assets	48,468		33,044
Total financial services assets	Total financial services assets	378,521		358,500		Total financial services assets	353,527		420,394
Total Assets	Total Assets	$	4,874,404	$	3,864,920	Total Assets	$	5,232,827	$	4,963,528
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Homebuilding:	Homebuilding:					Homebuilding:
Accounts payable	Accounts payable	$	154,376	$	98,862	Accounts payable	$	186,252	$	149,488
Accrued and other liabilities	Accrued and other liabilities	334,712		300,735		Accrued and other liabilities	397,349		370,910
Revolving credit facility	Revolving credit facility	10,000		10,000		Revolving credit facility	10,000		10,000
Senior notes, net	Senior notes, net	1,607,658		1,037,391		Senior notes, net	1,482,174		1,481,781
Total homebuilding liabilities	Total homebuilding liabilities	2,106,746		1,446,988		Total homebuilding liabilities	2,075,775		2,012,179
Financial Services:	Financial Services:					Financial Services:
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	93,880		95,630		Accounts payable and accrued liabilities	107,170		97,903
Mortgage repurchase facility	Mortgage repurchase facility	215,794		202,390		Mortgage repurchase facility	175,565		256,300
Total financial services liabilities	Total financial services liabilities	309,674		298,020		Total financial services liabilities	282,735		354,203
Total Liabilities	Total Liabilities	2,416,420		1,745,008		Total Liabilities	2,358,510		2,366,382
Stockholders' Equity	Stockholders' Equity					Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding	Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding	—		—		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; 70,679,612 and 64,851,126 issued and outstanding at September 30, 2021 and December 31, 2020, respectively		707		649
Common stock, $0.01 par value; 250,000,000 shares authorized; 71,157,875 and 70,668,093 issued and outstanding at June 30, 2022 and December 31, 2021, respectively						Common stock, $0.01 par value; 250,000,000 shares authorized; 71,157,875 and 70,668,093 issued and outstanding at June 30, 2022 and December 31, 2021, respectively	712		707
Additional paid-in-capital	Additional paid-in-capital	1,697,435		1,407,597		Additional paid-in-capital	1,719,642		1,709,276
Retained earnings	Retained earnings	759,842		711,666		Retained earnings	1,153,963		887,163
Total Stockholders' Equity	Total Stockholders' Equity	2,457,984		2,119,912		Total Stockholders' Equity	2,874,317		2,597,146
Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity	$	4,874,404	$	3,864,920	Total Liabilities and Stockholders' Equity	$	5,232,827	$	4,963,528

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands, except per share amounts)									(Dollars in thousands, except per share amounts)
Homebuilding:	Homebuilding:									Homebuilding:
Home sale revenues	Home sale revenues	$	1,257,701	$	1,000,549	$	3,667,332	$	2,584,392	Home sale revenues	$	1,450,823	$	1,367,773	$	2,691,343	$	2,409,631
Home cost of sales	Home cost of sales	(962,078)		(795,172)		(2,827,147)		(2,061,608)		Home cost of sales	(1,062,016)		(1,051,181)		(1,983,394)		(1,865,069)

Inventory impairments										Inventory impairments	—		—		(660)		—
Total cost of sales										Total cost of sales	(1,062,016)		(1,051,181)		(1,984,054)		(1,865,069)
Gross profit	Gross profit	295,623		205,377		840,185		522,784		Gross profit	388,807		316,592		707,289		544,562
Selling, general and administrative expenses	Selling, general and administrative expenses	(120,116)		(103,632)		(363,970)		(285,269)		Selling, general and administrative expenses	(133,849)		(128,861)		(263,163)		(243,854)
Loss on debt retirement		(12,150)		—		(12,150)		—
Interest and other income	Interest and other income	3,149		756		4,984		3,365		Interest and other income	822		868		1,577		1,835
Other expense	Other expense	(1,354)		(851)		(2,881)		(4,640)		Other expense	(15,509)		(1,090)		(16,933)		(1,527)
Homebuilding pretax income	Homebuilding pretax income	165,152		101,650		466,168		236,240		Homebuilding pretax income	240,271		187,509		428,770		301,016

Financial Services:	Financial Services:									Financial Services:
Revenues	Revenues	43,104		36,803		121,445		91,653		Revenues	36,229		33,318		65,360		78,341
Expenses	Expenses	(16,377)		(13,294)		(47,922)		(36,401)		Expenses	(18,801)		(16,440)		(35,736)		(31,545)
Other income (expense), net		813		859		2,855		(5,274)
Other income, net										Other income, net	1,264		1,155		2,451		2,042
Financial services pretax income	Financial services pretax income	27,540		24,368		76,378		49,978		Financial services pretax income	18,692		18,033		32,075		48,838

Income before income taxes	Income before income taxes	192,692		126,018		542,546		286,218		Income before income taxes	258,963		205,542		460,845		349,854
Provision for income taxes	Provision for income taxes	(46,738)		(27,080)		(131,550)		(66,124)		Provision for income taxes	(69,421)		(51,190)		(122,882)		(84,812)
Net income	Net income	$	145,954	$	98,938	$	410,996	$	220,094	Net income	$	189,542	$	154,352	$	337,963	$	265,042

Comprehensive income	Comprehensive income	$	145,954	$	98,938	$	410,996	$	220,094	Comprehensive income	$	189,542	$	154,352	$	337,963	$	265,042

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	2.07	$	1.42	$	5.83	$	3.21	Basic	$	2.66	$	2.19	$	4.75	$	3.76
Diluted	Diluted	$	1.99	$	1.38	$	5.62	$	3.12	Diluted	$	2.59	$	2.11	$	4.61	$	3.62

Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	70,301,085		68,977,965		70,130,853		68,179,403		Basic	70,841,476		70,291,057		70,804,019		70,044,326
Diluted	Diluted	72,800,011		71,090,903		72,770,432		70,167,443		Diluted	72,881,012		72,715,273		72,945,748		72,754,141

Dividends declared per share	Dividends declared per share	$	0.40	$	0.31	$	1.17	$	0.92	Dividends declared per share	$	0.50	$	0.40	$	1.00	$	0.77

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)


	Six Months Ended June 30, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2021	70,668,093	$	707	$	1,709,276	$	887,163	$	2,597,146
Net income	—	—		—		148,421		148,421
Shares issued under stock-based compensation programs, net	498,921	5		(12,633)		—		(12,628)
Cash dividends declared	—	—		—		(35,583)		(35,583)
Stock-based compensation expense	—	—		13,726		—		13,726
Forfeiture of restricted stock	(4,769)	—		—		—		—
Balance at March 31, 2022	71,162,245	$	712	$	1,710,369	$	1,000,001	$	2,711,082
Net Income	—	—		—		189,542		189,542
Shares issued under stock-based compensation programs, net	(1,573)	—		(58)		—		(58)
Cash dividends declared	—	—		—		(35,580)		(35,580)
Stock-based compensation expense	—	—		9,331		—		9,331
Forfeiture of restricted stock	(2,797)	—		—		—		—
Balance at June 30, 2022	71,157,875	$	712	$	1,719,642	$	1,153,963	$	2,874,317


		Nine Months Ended September 30, 2021															Six Months Ended June 30, 2021
		Common Stock			Additional Paid-in Capital				Retained Earnings					Total			Common Stock							Additional Paid-in Capital		Retained Earnings		Total
		Shares	Amount										Shares					Amount
Balance at December 31, 2020	Balance at December 31, 2020	64,851,126	$	649			$	1,407,597			$	711,666					$	2,119,912	Balance at December 31, 2020	64,851,126			$		649	$	1,407,597	$	711,666	$	2,119,912
Net Income		—	—		—				110,690					110,690
Net income																Net income	—				—			—		110,690		110,690
Shares issued under stock-based compensation programs, net	Shares issued under stock-based compensation programs, net	221,303	2		1,007				—					1,009		Shares issued under stock-based compensation programs, net	221,303				2			1,007		—		1,009
Cash dividends declared	Cash dividends declared	—	—		—				(25,978)					(25,978)		Cash dividends declared	—				—			—		(25,978)		(25,978)
Stock dividend declared		5,192,776	52		279,579				(280,318)					(687)
Stock dividends declared																Stock dividends declared	5,192,776				52			279,579		(280,318)		(687)
Stock-based compensation expense	Stock-based compensation expense	—	—		9,926				—					9,926		Stock-based compensation expense	—				—			9,926		—		9,926

Balance at March 31, 2021	Balance at March 31, 2021	70,265,205	$	703	$	1,698,109			$	516,060				$	2,214,872	Balance at March 31, 2021	70,265,205				$	703		$	1,698,109	$	516,060	$	2,214,872
Net Income	Net Income	—	—		—				154,352					154,352		Net Income	—				—			—		154,352		154,352
Shares issued under stock-based compensation programs, net	Shares issued under stock-based compensation programs, net	358,993	3		(16,546)				—					(16,543)		Shares issued under stock-based compensation programs, net	358,993				3			(16,546)		—		(16,543)
Cash dividends declared	Cash dividends declared	—	—		—				(28,248)					(28,248)		Cash dividends declared	—				—			—		(28,248)		(28,248)
Stock-based compensation expense	Stock-based compensation expense	—	—		8,126				—					8,126		Stock-based compensation expense	—				—			8,126		—		8,126
Forfeiture of restricted stock	Forfeiture of restricted stock	(4,560)	—		—				—					—		Forfeiture of restricted stock	(4,560)				—			—		—		—
Balance at June 30, 2021	Balance at June 30, 2021	70,619,638	$	706	$	1,689,689			$	642,164				$	2,332,559	Balance at June 30, 2021	70,619,638				$	706		$	1,689,689	$	642,164	$	2,332,559
Net Income		—	—		—				145,954					145,954
Shares issued under stock-based compensation programs, net		69,512	1		(20)				—					(19)
Cash dividends declared		—	—		—				(28,276)					(28,276)
Stock-based compensation expense		—	—		7,766				—					7,766
Forfeiture of restricted stock		(9,538)	—		—				—					—
Balance at September 30, 2021		70,679,612	$	707	$	1,697,435			$	759,842				$	2,457,984

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows~~Changes in Stockholders’ Equity (Continued)~~

~~(Dollars in thousands, except share amounts)~~

Nine Months Ended September 30, 2020
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shares Amount
Balance at December 31, 2019 62,574,961 $ 626 $ 1,348,733 $ 433,126 $ 1,782,485
Cumulative effect of newly adopted accounting standards — — — (34) (34)
Balance at January 1, 2020 62,574,961 626 1,348,733 433,092 1,782,451
Net Income — — — 36,760 36,760
Shares issued under stock-based compensation programs, net 477,582 5 8,189 — 8,194
Cash dividends declared — — — (20,768) (20,768)
Stock-based compensation expense — — 4,440 — 4,440
Forfeiture of restricted stock (48) — — — —
Balance at March 31, 2020 63,052,495 $ 631 $ 1,361,362 $ 449,084 $ 1,811,077
Net Income — — — 84,396 84,396
Shares issued under stock-based compensation programs, net 334,178 3 (6,865) — (6,862)
Cash dividends declared — — — (20,914) (20,914)
Stock-based compensation expense — — 5,488 — 5,488
Forfeiture of restricted stock (1,807) — — — —
Balance at June 30, 2020 63,384,866 $ 634 $ 1,359,985 $ 512,566 $ 1,873,185
Net Income — — — 98,938 98,938
Shares issued under stock-based compensation programs, net 1,480,711 15 28,627 — 28,642
Cash dividends declared — — — (21,374) (21,374)
Stock-based compensation expense — — 8,608 — 8,608
Balance at September 30, 2020 64,865,577 $ 649 $ 1,397,220 $ 590,130 $ 1,987,999


	Six Months Ended June 30,
	2022		2021

	(Dollars in thousands)
Operating Activities:
Net income	$	337,963	$	265,042
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation expense	24,793		18,867
Depreciation and amortization	13,903		16,178
Inventory impairments	660		—
Deferred income tax expense (benefit)	1,207		(3,339)
Net changes in assets and liabilities:
Trade and other receivables	(22,332)		(57,105)
Mortgage loans held-for-sale, net	92,459		46,470
Housing completed or under construction	(468,301)		(385,698)
Land and land under development	126,300		36,379
Prepaids and other assets	(5,775)		4,695
Accounts payable and accrued and other liabilities	70,183		70,595
Net cash provided by operating activities	171,060		12,084

Investing Activities:
Purchases of property and equipment	(13,698)		(13,447)
Net cash (used in) investing activities	(13,698)		(13,447)

Financing Activities:
Proceeds from (payments on) mortgage repurchase facility, net	(80,735)		(37,709)


Proceeds from issuance of senior notes	—		347,725
Dividend payments	(71,163)		(54,913)
Payments of deferred financing costs	—		(819)
Issuance of shares under stock-based compensation programs, net	(12,686)		(15,534)
Net cash provided by (used in) financing activities	(164,584)		238,750

Net increase (decrease) in cash, cash equivalents and restricted cash	(7,222)		237,387
Cash, cash equivalents and restricted cash:
Beginning of period	603,459		503,972
End of period	$	596,237	$	741,359

Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents	$	475,254	$	638,547
Restricted cash	5,994		14,158
Financial Services:
Cash and cash equivalents	114,989		88,654
Total cash, cash equivalents and restricted cash	$	596,237	$	741,359

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

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~~M.D.C. HOLDINGS, INC.~~

~~Consolidated Statements of Cash Flows~~
Nine Months Ended
September 30,
2021 2020
(Dollars in thousands)
Operating Activities:
Net income $ 410,996 $ 220,094
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense 26,832 18,536
Depreciation and amortization 23,930 18,881
Net loss on marketable equity securities — 8,285
Gain on sale of other assets (2,014) —
Loss on debt retirement 12,150 —
Deferred income tax expense (4,847) 8,493
Net changes in assets and liabilities:
Trade and other receivables (55,529) (17,512)
Mortgage loans held-for-sale, net (16,365) 36,515
Housing completed or under construction (461,105) (387,269)
Land and land under development (118,762) 108,710
Prepaids and other assets 9,919 (20,314)
Accounts payable and accrued and other liabilities 88,273 35,023
Net cash provided by (used in) operating activities (86,522) 29,442
Investing Activities:
Purchases of marketable securities — (10,804)
Sales of marketable securities — 59,266
Proceeds from sale of other assets 2,014 —
Purchases of property and equipment (23,028) (20,885)
Net cash provided by (used in) investing activities (21,014) 27,577
Financing Activities:
Payments on mortgage repurchase facility, net 13,404 (18,755)
Payments on homebuilding line of credit, net — (5,000)
Repayment of senior notes (136,394) (250,000)
Proceeds from issuance of senior notes 694,662 298,050
Dividend payments (83,189) (63,056)
Payments of deferred financing costs (1,720) —
Issuance of shares under stock-based compensation programs, net (15,553) 29,974
Net cash provided by (used in) financing activities 471,210 (8,787)
Net increase in cash, cash equivalents and restricted cash 363,674 48,232
Cash, cash equivalents and restricted cash:
Beginning of period 503,972 474,212
End of period $ 867,646 $ 522,444
Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents $ 761,715 $ 432,277
Restricted cash 12,047 19,732
Financial Services:
Cash and cash equivalents 93,884 70,435
Total cash, cash equivalents and restricted cash $ 867,646 $ 522,444

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

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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 ~~September~~June 30, ~~2021~~2022 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, ~~2020.~~

~~On January 25, 2021, MDC's board of directors declared an 8% stock dividend that was distributed on March 17, 2021 to shareholders of record on March 3,~~ 2021. ~~In accordance with Accounting Standards Codification ("ASC") Topic 260,~~ ~~Earnings Per Share~~ ~~("ASC 260"), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any period or dates prior to the stock dividend record date.~~

Included in these footnotes are certain statements that 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 operations, 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 section 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.

Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

2. Recently Issued Accounting Standards

~~Adoption of New Accounting Standards~~There are no recently issued accounting standards applicable to the Company.

~~In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic~~ ~~326~~):~~Measurement of Credit Losses on Financial Instruments~~ ~~(“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in~~ ~~ASU 2016-13~~ eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. On January 1, 2020, we adopted ASU 2016-13 using the modified retrospective transition method, resulting in a cumulative effect adjustment that decreased the opening balance of retained earnings by less than $0.1 million. The standard did not materially impact our consolidated statements of operations and comprehensive income or consolidated cash flows.

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3. Segment Reporting

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Executive Chairman and the Chief Executive Officer (“CEO”).

We have identified each homebuilding division as an operating segment. Our homebuilding 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:~~follows

•West (Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington)

•Mountain (Colorado, Idaho and Utah)

•East ~~(mid-Atlantic,~~(Florida, mid-Atlantic, which includes Maryland, Pennsylvania and Virginia, ~~Florida~~ and Tennessee)

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 1 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, treasury, information technology, insurance, 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 operations section of our consolidated statements of operations and comprehensive income.

The following table summarizes revenues for our homebuilding and financial services operations:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Homebuilding	Homebuilding									Homebuilding
West	West	$	729,777	$	552,319	$	2,194,071	$	1,447,934	West	$	788,279	$	847,683	$	1,495,590	$	1,464,294
Mountain	Mountain	379,041		347,095		1,104,391		886,619		Mountain	437,001		400,633		772,129		725,350
East	East	148,883		101,135		368,870		249,839		East	225,543		119,457		423,624		219,987

Total homebuilding revenues	Total homebuilding revenues	$	1,257,701	$	1,000,549	$	3,667,332	$	2,584,392	Total homebuilding revenues	$	1,450,823	$	1,367,773	$	2,691,343	$	2,409,631

Financial Services	Financial Services									Financial Services
Mortgage operations	Mortgage operations	$	31,122	$	28,548	$	89,608	$	67,536	Mortgage operations	$	22,077	$	23,321	$	39,678	$	58,486
Other	Other	11,982		8,255		31,837		24,117		Other	14,152		9,997		25,682		19,855
Total financial services revenues	Total financial services revenues	$	43,104	$	36,803	$	121,445	$	91,653	Total financial services revenues	$	36,229	$	33,318	$	65,360	$	78,341

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The following table summarizes pretax income (loss) for our homebuilding and financial services operations:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Homebuilding	Homebuilding									Homebuilding
West	West	$	120,284	$	59,120	$	330,390	$	144,441	West	$	148,508	$	132,919	$	279,034	$	210,106
Mountain	Mountain	55,386		48,053		165,296		111,372		Mountain	79,135		64,052		129,641		109,910
East	East	15,410		6,020		34,091		9,993		East	34,407		10,846		65,801		18,681

Corporate	Corporate	(25,928)		(11,543)		(63,609)		(29,566)		Corporate	(21,779)		(20,308)		(45,706)		(37,681)
Total homebuilding pretax income	Total homebuilding pretax income	$	165,152	$	101,650	$	466,168	$	236,240	Total homebuilding pretax income	$	240,271	$	187,509	$	428,770	$	301,016
Financial Services	Financial Services									Financial Services
Mortgage operations	Mortgage operations	$	21,214	$	20,809	$	61,341	$	46,558	Mortgage operations	$	10,673	$	14,088	$	18,106	$	40,127
Other	Other	6,326		3,559		15,037		3,420		Other	8,019		3,945		13,969		8,711
Total financial services pretax income	Total financial services pretax income	$	27,540	$	24,368	$	76,378	$	49,978	Total financial services pretax income	$	18,692	$	18,033	$	32,075	$	48,838

Total pretax income	Total pretax income	$	192,692	$	126,018	$	542,546	$	286,218	Total pretax income	$	258,963	$	205,542	$	460,845	$	349,854

The following table 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 primarily include our cash and cash equivalents and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents and mortgage loans held-for-sale.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
Homebuilding assets	Homebuilding assets					Homebuilding assets
West	West	$	2,229,687	$	1,855,567	West	$	2,653,052	$	2,472,378
Mountain	Mountain	1,030,407		905,007		Mountain	1,169,938		1,072,717
East	East	419,212		274,937		East	508,690		450,675

Corporate	Corporate	816,577		470,909		Corporate	547,620		547,364
Total homebuilding assets	Total homebuilding assets	$	4,495,883	$	3,506,420	Total homebuilding assets	$	4,879,300	$	4,543,134
Financial services assets	Financial services assets					Financial services assets
Mortgage operations	Mortgage operations	$	279,938	$	279,649	Mortgage operations	$	232,139	$	313,373
Other	Other	98,583		78,851		Other	121,388		107,021
Total financial services assets	Total financial services assets	$	378,521	$	358,500	Total financial services assets	$	353,527	$	420,394

Total assets	Total assets	$	4,874,404	$	3,864,920	Total assets	$	5,232,827	$	4,963,528

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4. Earnings Per Share

Accounting Standards Codification ("ASC") Topic 260, Earnings per Share ("ASC 260") requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating 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)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding and contingently issuable equity awards. The table below shows our basic and diluted EPS calculations.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands, except per share amounts)									(Dollars in thousands, except per share amounts)
Numerator	Numerator									Numerator
Net income	Net income	$	145,954	$	98,938	$	410,996	$	220,094	Net income	$	189,542	$	154,352	$	337,963	$	265,042
Less: distributed earnings allocated to participating securities	Less: distributed earnings allocated to participating securities	(155)		(148)		(446)		(404)		Less: distributed earnings allocated to participating securities	(161)		(133)		(355)		(291)
Less: undistributed earnings allocated to participating securities	Less: undistributed earnings allocated to participating securities	(602)		(502)		(1,668)		(952)		Less: undistributed earnings allocated to participating securities	(689)		(589)		(1,261)		(1,067)
Net income attributable to common stockholders (numerator for basic earnings per share)	Net income attributable to common stockholders (numerator for basic earnings per share)	145,197		98,288		408,882		218,738		Net income attributable to common stockholders (numerator for basic earnings per share)	188,692		153,630		336,347		263,684
Add back: undistributed earnings allocated to participating securities	Add back: undistributed earnings allocated to participating securities	602		502		1,668		952		Add back: undistributed earnings allocated to participating securities	689		589		1,261		1,067
Less: undistributed earnings reallocated to participating securities	Less: undistributed earnings reallocated to participating securities	(584)		(488)		(1,615)		(929)		Less: undistributed earnings reallocated to participating securities	(676)		(569)		(1,231)		(1,032)
Numerator for diluted earnings per share under two class method	Numerator for diluted earnings per share under two class method	$	145,215	$	98,302	$	408,935	$	218,761	Numerator for diluted earnings per share under two class method	$	188,705	$	153,650	$	336,377	$	263,719

Denominator	Denominator									Denominator
Weighted-average common shares outstanding	Weighted-average common shares outstanding	70,301,085		68,977,965		70,130,853		68,179,403		Weighted-average common shares outstanding	70,841,476		70,291,057		70,804,019		70,044,326
Add: dilutive effect of stock options	Add: dilutive effect of stock options	2,202,045		1,955,474		2,330,667		1,727,700		Add: dilutive effect of stock options	1,406,274		2,424,216		1,738,041		2,394,887
Add: dilutive effect of contingently issuable equity awards	Add: dilutive effect of contingently issuable equity awards	296,881		157,464		308,912		260,340		Add: dilutive effect of contingently issuable equity awards	633,262		—		403,688		314,928
Denominator for diluted earnings per share under two class method	Denominator for diluted earnings per share under two class method	72,800,011		71,090,903		72,770,432		70,167,443		Denominator for diluted earnings per share under two class method	72,881,012		72,715,273		72,945,748		72,754,141

Basic Earnings Per Common Share	Basic Earnings Per Common Share	$	2.07	$	1.42	$	5.83	$	3.21	Basic Earnings Per Common Share	$	2.66	$	2.19	$	4.75	$	3.76
Diluted Earnings Per Common Share	Diluted Earnings Per Common Share	$	1.99	$	1.38	$	5.62	$	3.12	Diluted Earnings Per Common Share	$	2.59	$	2.11	$	4.61	$	3.62

Diluted EPS for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 excluded options to purchase 15,000 shares ~~respectively,~~of common stock, because the effect of their inclusion would be anti-dilutive. ~~Their~~There were zero ~~and 800,000~~ anti-dilutive options for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively.~~2021.

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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.

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The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring ~~basis:~~basis, except those for which the carrying values approximate fair values:

Fair Value

Financial Instrument

Hierarchy

September 30,
2021

December 31,
2020

Financial Instrument

Hierarchy

June 30,
2022

December 31,
2021

(Dollars in thousands)

Mortgage loans held-for-sale, net

Level 2

248,921

232,556

Mortgage loans held-for-sale, net

Level 2

190,070

282,529

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~

~~Cash and cash equivalents~~(excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaids and other assets, accounts payable, accrued and other liabilities and borrowings on our revolving credit facility. ~~Fair value approximates carrying value.~~

~~Equitysecurities~~. Our equity securities consisted of holdings in common stock and exchange traded funds and were recorded at fair value with all changes in fair value recorded to other income (expense), net in the financial services section of our consolidated statements of operations and comprehensive income.

The following table reconciles the net gain (loss) recognized during the three and nine months ended September 30, 2021 and 2020 on equity securities to the unrealized gain recognized during the periods on equity securities still held at the reporting date.

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Net gain (loss) recognized during the period on equity securities $ — $ — $ — $ (8,285)
Less: Net gain (loss) recognized during the period on equity securities sold during the period — — — (8,285)
Unrealized gain (loss) loss recognized during the reporting period on equity securities still held at the reporting date $ — $ — $ — $ —
2021.

Mortgage loans held-for-sale, net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had ~~$142.2~~$134.4 million and ~~$137.3~~$157.7 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had ~~$106.7~~$55.7 million and ~~$95.3~~$124.9 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.

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we recorded ~~net gains~~gain (loss) on ~~the sales of~~ mortgage loans held-for-sale, net of ~~$23.6~~$(4.3) million and ~~$73.5~~$(9.3) million, ~~respectively,~~ compared to ~~$26.8~~$28.8 million and ~~$64.3~~$46.2 million for the same ~~periods~~period in the prior ~~year, respectively.~~year.

~~-10-~~For the financial assets and liabilities that the Company does not reflect at fair value, the following methods and assumptions were used to estimate the fair value of each class of financial instruments.

~~Table~~Cash and cash equivalents(excluding debt securities with an original maturity of ~~Contents~~three months or less), restricted cash, trade and other receivables, prepaids and other assets, accounts payable, accrued and other liabilities and borrowings on our revolving credit facility.

Fair value approximates carrying value.

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating 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, which primarily reflect estimated prices for our senior notes that were provided by multiple sources.


		September 30, 2021				December 31, 2020					June 30, 2022				December 31, 2021
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value

		(Dollars in thousands)									(Dollars in thousands)
$250 million 5.500% Senior Notes due January 2024, net		$	126,071	$	137,109	$	249,233	$	275,463
$300 million 3.850% Senior Notes due January 2030, net	$300 million 3.850% Senior Notes due January 2030, net	297,638		322,680		297,458		331,384		$300 million 3.850% Senior Notes due January 2030, net	$	297,821	$	251,498	$	297,699	$	319,057
$350 million 2.500% Senior Notes due January 2031, net	$350 million 2.500% Senior Notes due January 2031, net	347,055		341,457		—		—		$350 million 2.500% Senior Notes due January 2031, net	347,269		257,216		347,126		339,185
$500 million 6.000% Senior Notes due January 2043, net	$500 million 6.000% Senior Notes due January 2043, net	490,851		625,275		490,700		667,288		$500 million 6.000% Senior Notes due January 2043, net	491,010		410,815		490,903		628,092
$350 million 3.966% Senior Notes due August 2061, net	$350 million 3.966% Senior Notes due August 2061, net	346,043		334,664		—		—		$350 million 3.966% Senior Notes due August 2061, net	346,074		200,097		346,053		337,017
Total	Total	$	1,607,658	$	1,761,185	$	1,037,391	$	1,274,135	Total	$	1,482,174	$	1,119,626	$	1,481,781	$	1,623,351

~~During the three months ended September 30, 2021, we accelerated the retirement~~

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6. Inventories

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
Housing completed or under construction:	Housing completed or under construction:					Housing completed or under construction:
West	West	$	1,077,320	$	902,842	West	$	1,362,339	$	1,077,256
Mountain	Mountain	636,090		464,501		Mountain	720,864		596,164
East	East	234,801		119,244		East	302,360		244,196

Subtotal	Subtotal	1,948,211		1,486,587		Subtotal	2,385,563		1,917,616
Land and land under development:	Land and land under development:					Land and land under development:
West	West	974,380		822,504		West	1,143,752		1,235,363
Mountain	Mountain	340,702		391,054		Mountain	403,142		435,958
East	East	149,521		132,085		East	170,128		171,914

Subtotal	Subtotal	1,464,603		1,345,643		Subtotal	1,717,022		1,843,235
Total inventories	Total inventories	$	3,412,814	$	2,832,230	Total inventories	$	4,102,585	$	3,760,851

Our inventories are primarily associated with communities where we intend to construct and sell homes, including ~~models.~~models and unsold 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.

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In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, 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 ~~“Homebuilding~~“Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

•estimated future undiscounted cash flows and Operating Margin;

•forecasted ~~Homebuilding~~Operating Margin for homes in backlog;

•actual and trending net home orders;

•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 (including capitalized interest) 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, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

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If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

Inventory impairments recognized by segment for the three and six months ended ended June 30, 2022 and 2021 are shown in the table below.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in thousands)				(Dollars in thousands)
West	$	—	$	—	$	660	$	—
Mountain	—		—		—		—
East	—		—		—		—
Total Inventory Impairments	$	—	$	—	$	660	$	—

The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory.

Impairment Data

Quantitative Data

Three Months Ended

Number of Subdivisions Impaired

Inventory

Impairments

Fair Value of

Inventory After Impairments

Discount Rate

(Dollars in thousands)

March 31, 2022

660

1,728

N/A

Total

660

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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 during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the 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. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Homebuilding interest incurred	Homebuilding interest incurred	$	19,108	$	14,799	$	53,849	$	46,427	Homebuilding interest incurred	$	17,382	$	17,409	$	34,640	$	34,741
Less: Interest capitalized	Less: Interest capitalized	(19,108)		(14,799)		(53,849)		(46,427)		Less: Interest capitalized	(17,382)		(17,409)		(34,640)		(34,741)
Homebuilding interest expensed	Homebuilding interest expensed	$	—	$	—	$	—	$	—	Homebuilding interest expensed	$	—	$	—	$	—	$	—

Interest capitalized, beginning of period	Interest capitalized, beginning of period	$	54,351	$	56,929	$	52,777	$	55,310	Interest capitalized, beginning of period	$	60,468	$	55,268	$	58,054	$	52,777
Plus: Interest capitalized during period	Plus: Interest capitalized during period	19,108		14,799		53,849		46,427		Plus: Interest capitalized during period	17,382		17,409		34,640		34,741
Less: Previously capitalized interest included in home cost of sales	Less: Previously capitalized interest included in home cost of sales	(16,024)		(16,511)		(49,191)		(46,520)		Less: Previously capitalized interest included in home cost of sales	(15,681)		(18,326)		(30,525)		(33,167)
Interest capitalized, end of period	Interest capitalized, end of period	$	57,435	$	55,217	$	57,435	$	55,217	Interest capitalized, end of period	$	62,169	$	54,351	$	62,169	$	54,351

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8. Leases

We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters. All of our property related leases are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and do not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.

The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.

Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Operating lease cost 1	Operating lease cost 1	$	2,018	$	2,083	$	5,990	$	6,249	Operating lease cost 1	$	2,107	$	1,995	$	4,238	$	3,972
Less: Sublease income (Note 19)	Less: Sublease income (Note 19)	(39)		(38)		(117)		(114)		Less: Sublease income (Note 19)	(142)		(39)		(225)		(78)
Net lease cost	Net lease cost	$	1,979	$	2,045	$	5,873	$	6,135	Net lease cost	$	1,965	$	1,956	$	4,013	$	3,894

1Includes variable lease costs, which are immaterial.

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Supplemental cash flow information related to leases was as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:									Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	1,900	$	1,792	$	5,645	$	5,439	Operating cash flows from operating leases	$	1,999	$	1,887	$	4,021	$	3,745
Leased assets obtained in exchange for new operating lease liabilities		$	—	$	—	$	830	$	4,050
Right of use assets obtained in exchange for new operating lease liabilities										Right of use assets obtained in exchange for new operating lease liabilities	$	547	$	—	$	4,295	$	830

Weighted-average remaining lease term and discount rate for operating leases were as follows:


	~~September 30, 2021~~
~~Weighted-average remaining lease term (in years)~~	~~4.7~~
~~Weighted-average discount rate~~	~~5.5~~	%


	June 30, 2022		June 30, 2021
Weighted-average remaining lease term (in years)	4.4		4.9
Weighted-average discount rate	5.5	%	5.5	%

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Maturities of operating lease liabilities were as follows:


		Year Ended December 31,			Year Ended December 31,
		(Dollars in thousands)			(Dollars in thousands)
2021 (excluding the nine months ended September 30, 2021)		$	1,269
2022		7,430
2022 (excluding the six months ended June 30, 2022)				2022 (excluding the six months ended June 30, 2022)	$	3,451
2023	2023	6,416		2023	7,150
2024	2024	5,717		2024	6,498
2025	2025	5,493		2025	6,373
2026				2026	5,573
Thereafter	Thereafter	4,869		Thereafter	1,119
Total operating lease payments 1	Total operating lease payments 1	$	31,194	Total operating lease payments 1	$	30,164

Less: Interest	Less: Interest	3,760		Less: Interest	3,396
Present value of operating lease liabilities 2	Present value of operating lease liabilities 2	$	27,434	Present value of operating lease liabilities 2	$	26,768

1Operating lease payments exclude ~~$2.5~~$1.3 million of legally binding lease payments for leases signed but not yet commenced.

2Homebuilding and financial services operating lease liabilities of ~~$27.1~~$26.7 million and ~~$0.4~~$0.1 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services ~~section~~sections of our consolidated balance sheet at ~~September~~June 30, ~~2021.~~2022.

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9. Homebuilding Prepaids and Other Assets

The following table sets forth the components of homebuilding prepaids and other assets:


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
Operating lease right-of-use asset (Note 8)						Operating lease right-of-use asset (Note 8)	$	25,689	$	25,514
Land option deposits	Land option deposits	$	47,194	$	29,987	Land option deposits	43,564		41,617
Operating lease right-of-use asset		26,058		29,226
Prepaids	Prepaids	18,884		26,929		Prepaids	14,302		26,058
Deferred debt issuance costs on revolving credit facility, net	Deferred debt issuance costs on revolving credit facility, net	7,620		9,043		Deferred debt issuance costs on revolving credit facility, net	6,192		7,166
Goodwill	Goodwill	6,008		6,008		Goodwill	6,008		6,008
Other	Other	96		492		Other	201		199
Total prepaids and other assets	Total prepaids and other assets	$	105,860	$	101,685	Total prepaids and other assets	$	95,956	$	106,562

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10. Homebuilding Accrued and Other Liabilities and Financial Services Accounts Payable and Accrued Liabilities

The following table sets forth information relating to homebuilding accrued and other liabilities:


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
Customer and escrow deposits	Customer and escrow deposits	$	88,441	$	67,022	Customer and escrow deposits	$	89,287	$	89,353
Accrued compensation and related expenses	Accrued compensation and related expenses	67,079		56,682		Accrued compensation and related expenses	70,525		81,417
Warranty accrual (Note 11)	Warranty accrual (Note 11)	36,120		33,664		Warranty accrual (Note 11)	42,711		37,491
Accrued interest						Accrued interest	30,934		30,934
Lease liability (Note 8)	Lease liability (Note 8)	27,052		30,221		Lease liability (Note 8)	26,705		26,440
Accrued interest		16,626		27,650
Land development and home construction accruals	Land development and home construction accruals	15,469		10,824		Land development and home construction accruals	25,670		22,012
Income taxes payable						Income taxes payable	22,937		9,836
Construction defect claim reserves (Note 12)	Construction defect claim reserves (Note 12)	8,596		8,479		Construction defect claim reserves (Note 12)	9,174		9,287
Income taxes payable		1,771		8,285
Other accrued liabilities	Other accrued liabilities	73,558		57,908		Other accrued liabilities	79,406		64,140
Total accrued and other liabilities	Total accrued and other liabilities	$	334,712	$	300,735	Total accrued and other liabilities	$	397,349	$	370,910

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
Insurance reserves (Note 12)	Insurance reserves (Note 12)	$	70,403	$	61,575	Insurance reserves (Note 12)	$	78,750	$	72,900
Accounts payable and other accrued liabilities	Accounts payable and other accrued liabilities	23,477		34,055		Accounts payable and other accrued liabilities	28,420		25,003
Total accounts payable and accrued liabilities	Total accounts payable and accrued liabilities	$	93,880	$	95,630	Total accounts payable and accrued liabilities	$	107,170	$	97,903

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11. Warranty Accrual

Our homes are sold with limited third-party warranties and, under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage, and paying for ~~substantially all of the~~certain work required to be performed ~~during years~~subsequent to year ~~three~~two ~~through~~ ~~ten~~ ~~of the warranties.~~. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is recorded 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 determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are 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.

Our warranty accrual is included in accrued and other liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. The warranty accrual for the three months ended June 30, 2022 increased due to the increase in the number of home closings.
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Balance at beginning of period $ 35,017 $ 30,458 $ 33,664 $ 31,386
Expense provisions 5,618 4,493 15,706 11,595
Cash payments (4,834) (2,683) (13,569) (8,713)
Adjustments 319 (171) 319 (2,171)
Balance at end of period $ 36,120 $ 32,097 $ 36,120 $ 32,097
The warranty accrual for the six months ended June 30, 2022 increased also due to a $2.4 million adjustment to increase our warranty accrual during the period. This adjustment was due to higher general warranty related expenditures. There were no warranty adjustments during the three and six months ended June 30, 2021.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(Dollars in thousands)
Balance at beginning of period	$	40,946	$	33,873	$	37,491	$	33,664
Expense provisions	6,787		5,703		12,619		10,088
Cash payments	(5,022)		(4,559)		(9,839)		(8,735)
Adjustments	—		—		2,440		—

Balance at end of period	$	42,711	$	35,017	$	42,711	$	35,017

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12. Insurance and Construction Defect Claim 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 actuarial 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. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.

The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with: (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant, are based on actuarial studies that include known facts similar to those for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.

The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in the financial services and homebuilding sections, respectively, of the consolidated balance sheets.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Balance at beginning of period	Balance at beginning of period	$	76,286	$	63,881	$	70,054	$	60,415	Balance at beginning of period	$	84,424	$	74,003	$	82,187	$	70,054
Expense provisions	Expense provisions	4,776		4,058		14,447		10,562		Expense provisions	5,020		5,388		9,452		9,671
Cash payments, net of recoveries	Cash payments, net of recoveries	(2,063)		(859)		(5,502)		(3,897)		Cash payments, net of recoveries	(1,520)		(3,105)		(3,715)		(3,439)
Balance at end of period	Balance at end of period	$	78,999	$	67,080	$	78,999	$	67,080	Balance at end of period	$	87,924	$	76,286	$	87,924	$	76,286

In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising 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 and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are not necessarily indicative of what future cash payments will be for subsequent periods.

13. Income Taxes

Our overall effective income tax rates were ~~24.3%~~26.8% and 26.7% for the three and six months ended June 30, 2022 and 24.9% and 24.2% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021 and 21.5% and 23.1% for the three and nine months ended September 30, 2020, respectively.~~2021. The rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 resulted in income tax expense of ~~$46.7~~$69.4 million and ~~$131.5~~$122.9 million, respectively, compared to income tax expense of ~~$27.1~~$51.2 million and ~~$66.1~~$84.8 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively. The year-over-year increase in ~~our~~the effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, is~~2022, was primarily due to energy tax credits not being extended into 2022 and a decrease in ~~tax windfalls recognized upon~~ the ~~vesting~~windfall on non-qualifying stock options exercised and ~~exercise of equity awards, which is partially offset by a year-over-year increase in home energy credits.~~lapsed restricted stock during the respective periods.

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14. Senior Notes

The carrying values of our senior notes as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, net of any unamortized debt issuance costs or discount, were as follows:


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(Dollars in thousands)					(Dollars in thousands)
5.500% Senior Notes due January 2024, net		$	126,071	$	249,233
3.850% Senior Notes due January 2030, net	3.850% Senior Notes due January 2030, net	297,638		297,458		3.850% Senior Notes due January 2030, net	$	297,821	$	297,699
2.500% Senior Notes due January 2031, net	2.500% Senior Notes due January 2031, net	347,055		—		2.500% Senior Notes due January 2031, net	347,269		347,126
6.000% Senior Notes due January 2043, net	6.000% Senior Notes due January 2043, net	490,851		490,700		6.000% Senior Notes due January 2043, net	491,010		490,903
3.966% Senior Notes due August 2061, net	3.966% Senior Notes due August 2061, net	346,043		—		3.966% Senior Notes due August 2061, net	346,074		346,053
Total	Total	$	1,607,658	$	1,037,391	Total	$	1,482,174	$	1,481,781

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.

In January 2021, ~~the Company issued~~we completed an offering of $350.0 million of 2.500% senior notes due January 2031 at 100% of par. In August 2021, the Company issued $350.0 million of 3.966% senior notes due August 2061 at 100% of par. We used the net proceeds for general corporate purposes, which included the ~~cash tender offer discussed below.~~

~~In September 2021, we accelerated the~~ retirement ~~of $123.6 million~~ of our 5.500% senior notes discussed further below, which were scheduled to mature in January ~~2024 through a cash tender offer. The retirement resulted in a loss of $12.2 million, which included the write-off of debt issuance costs and transaction fees.~~2024.

15. Stock-Based Compensation

The following table sets forth share-based award expense activity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, which is included as a component of selling, general and administrative expenses and expenses in the homebuilding and financial services sections, respectively, of our consolidated statements of operations and comprehensive ~~income, respectively:~~income:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)
Stock option grants expense	Stock option grants expense	$	600	$	814	$	2,189	$	2,026	Stock option grants expense	$	593	$	725	$	1,180	$	1,589
Restricted stock awards expense	Restricted stock awards expense	3,026		2,271		6,947		4,841		Restricted stock awards expense	2,041		1,452		4,628		3,921
Performance share units expense	Performance share units expense	4,293		5,523		17,728		11,669		Performance share units expense	7,277		6,842		18,985		13,435
Total stock-based compensation	Total stock-based compensation	$	7,919	$	8,608	$	26,864	$	18,536	Total stock-based compensation	$	9,911	$	9,019	$	24,793	$	18,945

Additional detail on the performance share units ("PSUs") expense is included below:

2018 PSU Grants. The 2018 PSU awards vested on April 29, 2021. For the ~~nine~~three and six months ended ~~September~~June 30, 2021, the Company recorded share-based award expense of $1.3 million related to these awards.

2019 PSU Grants. The 2019 PSU awards vested on February 3, 2022. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company recorded share-based award expense of ~~$1.3~~$1.8 million and ~~$6.0~~$3.7 million, respectively, related to these awards.

~~2019 PSU Grant~~s. As of September 30, 2021, the Company recorded the required share-based award expense related to the awards of $1.8 million and $5.5 million for the three and nine months ended September 30, 2021, based on its assessment of the probability for achievement of the performance targets. For each of the three and nine months ended September 30, 2020, the Company recorded share-based award expense of $4.2 million, respectively, related to these awards.

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2020 PSU Grants. As of ~~September~~June 30, ~~2021,~~2022, the Company recorded the required share-based award expense related to the awards of $2.5 million and ~~$10.9~~$4.9 million for the three and ~~nine~~six months ended ~~September~~June 30, 2022, based on its assessment of the probability for achievement of the performance targets. For the three and six months ended June 30, 2021, the Company recorded share-based award expense of $5.0 million and $8.5 million, respectively, related to these awards.

2021 PSU Grants. As of June 30, 2022, the Company recorded the required share-based award expense related to the awards of $4.8 million and $14.1 million for the three and six months ended June 30, 2022, based on its assessment of the probability for achievement of the performance targets.

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~~2021 PSU Grants.~~ ~~The 2021 PSUs were granted on July 14, 2021 and included a target number~~Ta ble of share units of 397,500. The grant date fair value was $44.35 per share unit. As of September 30, 2021, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense and as such, no expense related to these awards was recognized.Contents

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 ~~September~~June 30, ~~2021,~~2022, we had outstanding surety bonds and letters of credit totaling ~~$330.9~~$379.6 million and ~~$169.7~~$211.0 million, respectively, including ~~$130.0~~$159.8 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately ~~$159.0~~$186.7 million and ~~$113.9~~$167.3 million, respectively. All letters of credit as of ~~September~~June 30, ~~2021,~~2022, excluding those issued by HomeAmerican, were issued 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.

Litigation. Due to 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 ordinary 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 land inventories on our consolidated balance sheets. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At ~~September~~June 30, ~~2021,~~2022, we had cash deposits and letters of credit totaling ~~$40.6~~$40.9 million and ~~$14.5~~$11.0 million, respectively, at risk associated with the option to purchase ~~12,375~~7,296 lots.

~~Coronavirus/COVID-19 Pandemic.~~ In response to the pandemic, many state and local governments instituted restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. While many of these restrictions have been or are in the process of being eased, there is still significant uncertainty as a result of the pandemic and its potential to continue to negatively impact the U.S. economy and consumer confidence. We continue to construct, market and sell homes in all markets in which we operate, but increased restrictions could have a negative impact on traffic at our sales centers and model homes, cancellation rates and our ability to physically construct homes. While the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, including whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus, the pandemic and its associated impact on the U.S. economy and consumer confidence could have a material impact to the Company’s future results of operations, financial condition and cash flows.

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17. Derivative Financial Instruments

~~The derivative instruments we utilize in~~In the normal course of business, ~~are~~we enter into interest rate lock commitments ("IRLCs") with borrowers who have applied for loan funding and meet defined credit and underwriting criteria. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements.

Market risk arises if interest rates move adversely between the time of the IRLCs and the date the loan is committed or sold to an investor. We mitigate our exposure to interest rate market risk relating to mortgage loans held-for-sale and IRLCs using: (1) forward sales of mortgage-backed securities, ~~both~~which are commitments to sell a specified financial instrument at a specified future date for a specified price, (2) mandatory delivery forward loan sale commitments, which are obligations of an investor to buy loans at a specified price within a specified time period, and (3) best-effort delivery forward loan sale commitments, which ~~typically~~ are ~~short-term~~obligations of an investor to buy loans at a specified price subject to the underlying mortgage loans being funded and closed. The best-effort delivery forward loan sale commitments do not meet the definition of derivative financial instruments in ~~nature.~~ accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). We have elected the fair value option for the firm commitment financial instruments in accordance with ASC Topic 825, Financial Instruments ("ASC 825").

Forward sales of mortgage-backed securities are ~~utilized~~the predominant derivative financial instruments we use to ~~hedge changes in fair value of our~~minimize market risk during the period from the time we extend an interest rate lock ~~commitments as well as mortgage loans held-for-sale not~~to a loan applicant until the time the loan is committed under ~~commitments to sell. For~~a best-effort or mandatory delivery forward ~~sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at~~loan sale commitment.

The following table sets forth the ~~end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section~~notional amounts of our ~~consolidated statements of operations~~financial instruments at June 30, 2022 and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.December 31, 2021:

At September 30, 2021, we had interest rate lock commitments with an aggregate principal balance of $305.2 million. Additionally, we had $103.0 million of mortgage loans held-for-sale at September 30, 2021 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $264.5 million at September 30, 2021.


	June 30, 2022		December 31, 2021

	(Dollars in thousands)
Interest rate lock commitments	$	871,839	$	268,796
Forward sales of mortgage-backed securities	553,000		275,600
Mandatory delivery forward loan sale commitments	99,117		128,391
Best-effort delivery forward loan sale commitments	351,237		51,993

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we recorded net ~~gain (loss)~~gains on ~~derivatives~~these financial instruments measured on a recurring basis of ~~$0.6~~$19.7 million and ~~$1.6~~$37.3 million, respectively, in revenues in the financial services section of our consolidated statements of operations and comprehensive income, compared to net ~~gains~~gain (loss) of ~~$1.6~~$(8.5) million and ~~$4.9~~$6.6 million for the same periods in ~~2020.~~2021. There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal.

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18. Lines of Credit

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on December 28, 2020 to (1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the “Commitment”), (2) extend the Revolving Credit Facility maturity of $1.125 billion of the Commitments to December 18, 2025 with the remaining Commitment continuing to terminate on December 18, 2023 and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.7 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. 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 provides for a transition from the eurocurrency rate to a benchmark replacement upon the occurrence of certain events.

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 Revolving Credit Facility. 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) or a violation of anti-corruption or sanctions laws 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, a violation of anti-corruption or sanctions laws, 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 ~~September~~June 30, ~~2021.~~2022.

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~$39.7~~$51.1 million and ~~$25.1~~$40.1 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had $10.0 million and $10.0 million, respectively, outstanding under the Revolving Credit Facility. As of ~~September~~June 30, ~~2021,~~2022, availability under the Revolving Credit Facility was approximately ~~$1.15~~$1.14 billion.

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Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) 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. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended on September 24, 2020, March 25, 2021, ~~and~~ May 20, 2021, December 21, 2021 and May 19, 2022 to adjust the commitments to purchase for specific time periods. ~~As part~~The total capacity of the amendments, the commitments to purchase (subject to increase by up to $75 million under certain conditions) were increased as follows: (1) $200 million for the periods December 22, 2020 through February 4, 2021 and December 21, 2021 through February 3,facility at June 30, 2022 (2) $175 million for the periods March 25, 2021 through April 22, 2021, June 23, 2021 through July 22, 2021 and September 22, 2021 through October 21, 2021 and (3) $150 million for the period March 23, 2022 through April 21, 2022.was $225 million. The ~~Mortgage Repurchase Facility terminates on~~ May 19, ~~2022.~~2022 amendment extended the termination date of the Repurchase Agreement to May 18, 2023.

The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased by $75 million on September 27, 2021 effective through October 21, 2021. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased by $50 million on December 28, 2020 effective through January 27, 2021. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, HomeAmerican had ~~$215.8~~$175.6 million and ~~$202.4~~$256.3 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is 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~~The December 21, 2021 amendment also provides for a ~~price range that is~~transition from a pricing rate based on ~~a LIBOR rate or successor benchmark rate.~~the London Interbank Offered Rate (LIBOR) to one based on the Secured Overnight Financing Rate (SOFR).

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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 capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of ~~September~~June 30, ~~2021.~~2022.

19. Related Party Transactions

The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Executive Chairman of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company ~~since 2005.~~as disclosed in the Form 8-K filed July 27, 2005 and the Form 8-K filed March 28, 2006. The current sublease term commenced November 1, 2016 and will continue through October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the term from $26.50 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.

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20. 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 Construction NM, Inc. ~~(formerly known as Richmond American Homes Five, Inc.)~~

•Richmond American Homes of Arizona, Inc.

•Richmond American Homes of Colorado, Inc.

•Richmond American Homes of Florida, LP

•Richmond American Homes of Idaho, Inc. ~~(formerly known as Richmond American Homes of Illinois, Inc.)~~

•Richmond American Homes of Maryland, Inc.

•Richmond American Homes of Nevada, Inc.

•Richmond American Homes of New Mexico, Inc. ~~(formerly known as Richmond American Homes Three, Inc.)~~

•Richmond American Homes of Oregon, Inc.

•Richmond American Homes of Pennsylvania, Inc.

•Richmond American Homes of Tennessee, Inc. ~~(formerly known as Richmond American Homes of New Jersey, Inc.)~~

•Richmond American Homes of Texas, Inc. ~~(formerly known as Richmond American Homes Four, 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. Other than for the senior notes due 2061, the senior note indentures, 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). The indenture for the senior notes due 2061 provides that, if a Guarantor is released under its guarantees of our credit facilities or other publicly traded debt securities, the Guarantor will also be released under its guarantee of the senior notes due 2061. 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.

As the combined assets, liabilities and results of operations of M.D.C. Holdings, Inc. and the Guarantor Subsidiaries (the “Obligor Group”) are not materially different from those in the homebuilding section of our consolidated balance sheets and consolidated statements of operations and comprehensive income, separate summarized financial information of the Obligor Group has not been included. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, amounts due to non-guarantor subsidiaries from the Obligor Group totaled ~~$61.0~~$59.4 million and ~~$65.8~~$60.2 million, respectively.

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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. The forward-looking statements are based upon management’s experiences, observations, and analyses. 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, ~~2020~~2021 and this Quarterly Report on Form 10-Q.


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
		2021			2020			2021			2020				2022			2021			2022			2021

		(Dollars in thousands, except per share amounts)													(Dollars in thousands, except per share amounts)
Homebuilding:	Homebuilding:													Homebuilding:
Home sale revenues	Home sale revenues	$	1,257,701		$	1,000,549		$	3,667,332		$	2,584,392		Home sale revenues	$	1,450,823		$	1,367,773		$	2,691,343		$	2,409,631
Home cost of sales	Home cost of sales	(962,078)			(795,172)			(2,827,147)			(2,061,608)			Home cost of sales	(1,062,016)			(1,051,181)			(1,983,394)			(1,865,069)

Inventory impairments														Inventory impairments	—			—			(660)			—
Total cost of sales														Total cost of sales	(1,062,016)			(1,051,181)			(1,984,054)			(1,865,069)
Gross profit	Gross profit	295,623			205,377			840,185			522,784			Gross profit	388,807			316,592			707,289			544,562
Gross margin	Gross margin	23.5		%	20.5		%	22.9		%	20.2		%	Gross margin	26.8		%	23.1		%	26.3		%	22.6		%
Selling, general and administrative expenses	Selling, general and administrative expenses	(120,116)			(103,632)			(363,970)			(285,269)			Selling, general and administrative expenses	(133,849)			(128,861)			(263,163)			(243,854)
Loss on debt retirement		(12,150)			—			(12,150)			—
Interest and other income	Interest and other income	3,149			756			4,984			3,365			Interest and other income	822			868			1,577			1,835
Other expense	Other expense	(1,354)			(851)			(2,881)			(4,640)			Other expense	(15,509)			(1,090)			(16,933)			(1,527)
Homebuilding pretax income	Homebuilding pretax income	165,152			101,650			466,168			236,240			Homebuilding pretax income	240,271			187,509			428,770			301,016

Financial Services:	Financial Services:													Financial Services:
Revenues	Revenues	43,104			36,803			121,445			91,653			Revenues	36,229			33,318			65,360			78,341
Expenses	Expenses	(16,377)			(13,294)			(47,922)			(36,401)			Expenses	(18,801)			(16,440)			(35,736)			(31,545)
Other income (expense), net		813			859			2,855			(5,274)
Other income, net														Other income, net	1,264			1,155			2,451			2,042
Financial services pretax income	Financial services pretax income	27,540			24,368			76,378			49,978			Financial services pretax income	18,692			18,033			32,075			48,838

Income before income taxes	Income before income taxes	192,692			126,018			542,546			286,218			Income before income taxes	258,963			205,542			460,845			349,854
Provision for income taxes	Provision for income taxes	(46,738)			(27,080)			(131,550)			(66,124)			Provision for income taxes	(69,421)			(51,190)			(122,882)			(84,812)
Net income	Net income	$	145,954		$	98,938		$	410,996		$	220,094		Net income	$	189,542		$	154,352		$	337,963		$	265,042

Earnings per share:	Earnings per share:													Earnings per share:
Basic	Basic	$	2.07		$	1.42		$	5.83		$	3.21		Basic	$	2.66		$	2.19		$	4.75		$	3.76
Diluted	Diluted	$	1.99		$	1.38		$	5.62		$	3.12		Diluted	$	2.59		$	2.11		$	4.61		$	3.62

Weighted average common shares outstanding:	Weighted average common shares outstanding:													Weighted average common shares outstanding:
Basic	Basic	70,301,085			68,977,965			70,130,853			68,179,403			Basic	70,841,476			70,291,057			70,804,019			70,044,326
Diluted	Diluted	72,800,011			71,090,903			72,770,432			70,167,443			Diluted	72,881,012			72,715,273			72,945,748			72,754,141

Dividends declared per share	Dividends declared per share	$	0.40		$	0.31		$	1.17		$	0.92		Dividends declared per share	$	0.50		$	0.40		$	1.00		$	0.77

Cash provided by (used in):	Cash provided by (used in):													Cash provided by (used in):
Operating Activities	Operating Activities	$	(98,606)		$	(26,262)		$	(86,522)		$	29,442		Operating Activities	$	53,005		$	70,041		$	171,060		$	12,084
Investing Activities	Investing Activities	$	(7,567)		$	(7,917)		$	(21,014)		$	27,577		Investing Activities	$	(6,814)		$	(7,698)		$	(13,698)		$	(13,447)
Financing Activities	Financing Activities	$	232,460		$	(3,965)		$	471,210		$	(8,787)		Financing Activities	$	(38,304)		$	(97,592)		$	(164,584)		$	238,750

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Overview

Industry Conditions and Outlook for MDC*

The strong demand ~~for new homes continued~~experienced in the housing market over the last two years slowed during the ~~third~~second quarter of ~~2021, driven~~2022 as the average 30-year fixed mortgage rate approached 6.0% in June, representing its largest year-over-year basis point increase in over 40 years. The magnitude and speed of these recent rate increases has caused many buyers to pause and reconsider a home purchase, resulting in lower gross demand and higher cancellations during the second quarter. Longer-term, after buyers acclimate to higher interest rates, we believe that a more normalized level of housing activity should continue to be supported by ~~the current supply-demand imbalance,~~low levels of existing home inventory, a continued focus on suburban ~~homeownership, low~~home ownership and interest rates that remain low by historical standards. However, we also believe that there is increasing risk that housing activity could be negatively impacted by broader economic factors such as declining consumer confidence or higher inflation.

Throughout the homebuilding industry we have continued to see production challenges due to supply chain disruptions, labor market tightness, and ~~an improving economy.~~ shortages of certain building materials. These disruptions have caused our cycle times to extend year-over-year compared to the three and six months ended June 30, 2021. However, during the second quarter we began to see signs that the pressure on our cycle times may be abating. We continue to work with our suppliers and trade partners to address ongoing issues, but it remains uncertain whether or not conditions will improve in the near term. Continued supply chain disruptions and labor and material shortages could further extend delivery times and increase cost pressures.

We believe ~~many~~we are well-positioned to navigate the ever evolving market conditions given our strong financial position. We ended the quarter with total cash and cash equivalents of ~~these factors will~~$590.2 million, total liquidity of $1.74 billion and no senior note maturities until 2030. We remain focused on cash flow as we continue to ~~support new home demand~~build through our homes in ~~future periods. However, the~~backlog, and as a result have slowed our pace of ~~net new orders~~land acquisition and approval activity during the ~~third~~second quarter of ~~2021 was lower than~~2022. We ended the ~~prior year, in part due to the return~~quarter with 33,130 lots controlled, which represents a decrease of ~~more normal seasonal patterns that were not present in the third quarter of~~4% from the prior year.

Supply chains remained stressed and construction cycle times have extended throughout the industry, as a result of the strong demand for new homes as well as challenges brought about by the pandemic. Even with these supply chain challenges, we continued to see strong top and bottom line growth during the third quarter and we remain on track to meet our goal of delivering over 10,000 homes for the fiscal year. We also made significant progress during the quarter towards growing our active community count. We ended the third quarter with 203 active communities, representing a 9% increase from June 30, 2021 and a 5% increase from the prior year-end. In addition, we controlled 36,666 lots at the end of the third quarter, representing a 37% increase over the prior year period. While the exact timing of when future communities become active is uncertain and subject to land development and permitting lead times, we remain confident in our ability to further increase our active community count in advance of the 2022 spring selling season.

We continued to take steps during the third quarter to further improve our financial position and to ensure we have sufficient capital to meet our growth goals. During the quarter we issued $350 million of 40-year senior notes at a rate of 3.966%, which helped to increase our total liquidity to $2.03 billion as of period end and provides a long-term low-cost source of capital as we continue to grow our business. We also accelerated the retirement of $123.6 million of our 5.500% senior notes scheduled to mature in January 2024 through a cash tender offer, which lowered our debt to capital ratio to 39.7% as of September 30, 2021. While we remain confident in the ~~long term~~long-term growth prospects for the industry ~~we continue~~given the underproduction of new homes over the past decade, the current demand for new homes is subject to ~~closely monitor developments related~~continued and increasing uncertainty due to many factors. These include the current geopolitical environment, the Federal Reserve's continued quantitative tightening, the sharp rise in mortgage interest rates, ongoing inflation concerns, the impact of the COVID-19 ~~which are~~pandemic and other factors. The potential effect of these factors is highly uncertain and could adversely and materially impact our operations and financial results in future periods.

Three Months Ended ~~September~~June 30, ~~2021~~2022

For the three months ended ~~September~~June 30, ~~2021,~~2022, our net income was ~~$146.0~~$189.5 million, or ~~$1.99~~$2.59 per diluted share, a ~~48%~~23% increase compared to net income of ~~$98.9~~$154.4 million, or $1.38 per diluted share, for the same period in the prior year. The increase was driven by our homebuilding operations, which generated pretax income of $165.2 million. This represented an increase of $63.5 million, or 62% from the third quarter of 2020. The increase in homebuilding pretax income was the result of a 26% increase in home sale revenues and a 380 basis point increase in our operating margin. These increases were partially offset by a loss on debt retirement of $12.2 million.

The dollar value of our net new home orders decreased 21% from the prior year period, due to a 32% decrease in the number of net new orders, which was partially offset by a 16% increase in the average selling price of those orders. The decrease in the number of net new orders was due to a decrease in our monthly sales absorption rate resulting from (1) the return of more normal seasonal patterns following the unseasonably high new home demand experienced in the second half of fiscal year 2020 as a result of the pandemic and (2) our efforts to moderate sales activity to better align with our current pace of production. Our monthly sales absorption rate was 4.1 during the third quarter of 2021, which was our second highest third quarter rate in the last 15 years. The increase in the average selling price was the result of strong demand over the past twelve months as well as our efforts to moderate sales activity as mentioned above.

~~Nine Months Ended September 30, 2021~~

~~For the nine months ended September 30, 2021, our net income was $411.0 million, or $5.62 per diluted share, an 87% increase compared to net income of $220.1 million, or $3.12~~$2.11 per diluted share, for the same period in the prior year. Both our homebuilding and financial services businesses contributed to the increase, as pretax income from our homebuilding operations increased ~~$229.9~~$52.8 million, or ~~97%~~28%, and our financial services pretax income increased ~~$26.4~~$0.7 million, or ~~53%.~~4%, compared to the same period in the prior year. The ~~main drivers of the~~ increase in homebuilding pretax income ~~are consistent with~~was the ~~third~~result of a 6% increase in home sale revenues and an increase in gross margin from home sales of 370 basis points. This was partially offset by project abandonment expense of $15.5 million, as we intentionally slowed land approval and acquisition activity during the quarter ~~discussed~~as noted above. The increase in financial services pretax income was primarily due to our insurance operations, which benefited from increased premium revenue within our captive insurance companies. This was partly offset by our mortgage operations business, as we have seen profitability per loan locked, sold and closed return to more historical levels during the ~~overall~~period ended June 30, 2022 as competition in the primary mortgage market has increased. The decrease in mortgage operations was partly offset by an increase in interest rate lock volume as well as an increase in mortgage servicing revenue, as additions to our mortgage servicing portfolio increased year-over-year.

The dollar value of our ~~homebuilding operations. Additionally, $8.3 million of~~ net ~~losses on equity securities were recognized in~~new home orders decreased 40% from the prior year period, ~~further impacting~~due to a 48% decrease in the number of net new orders, which was slightly offset by a 16% increase in the average selling price of net new orders. The decrease in the number of net new orders was due to a decrease in the monthly sales absorption rate, which was partially offset by an increase in average active communities year-over-year from 188 to 203 communities. The increase in the average selling price was the result of price increases implemented in the second half of 2021 and the first quarter of 2022.

Six Months Ended June 30, 2022

For the six months ended June 30, 2022, our net income was $338.0 million, or $4.61 per diluted share, a 28% increase compared to net income of $265.0 million, or $3.62 per diluted share, for the same period in the prior year. Our homebuilding business was the driver of the increase, as pretax income from our homebuilding operations increased $127.8 million, or 42%. This was slightly offset by our financial services pretax income, which decreased $16.8 million, or 34%. The main drivers of the

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increase in homebuilding pretax income are consistent with the second quarter commentary discussed above. The decrease in financial services pretax ~~income.~~income was primarily due to our mortgage operations, which was slightly offset by our insurance operations. The main drivers of the decrease in mortgage operations and increase in insurance operations are consistent with the second quarter commentary discussed above.

* See "Forward-Looking Statements" below.

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Homebuilding

Pretax ~~Income:~~Income (Loss):


		Three Months Ended								Nine Months Ended									Three Months Ended								Six Months Ended
		September 30,				Change				September 30,				Change					June 30,				Change				June 30,				Change
		2021		2020		Amount		%		2021		2020		Amount		%			2022		2021		Amount		%		2022		2021		Amount		%

		(Dollars in thousands)																	(Dollars in thousands)
West	West	$	120,284	$	59,120	$	61,164	103	%	$	330,390	$	144,441	$	185,949	129	%	West	$	148,508	$	132,919	$	15,589	12	%	$	279,034	$	210,106	$	68,928	33	%
Mountain	Mountain	55,386		48,053		7,333		15	%	165,296		111,372		53,924		48	%	Mountain	79,135		64,052		15,083		24	%	129,641		109,910		19,731		18	%
East	East	15,410		6,020		9,390		156	%	34,091		9,993		24,098		241	%	East	34,407		10,846		23,561		217	%	65,801		18,681		47,120		252	%

Corporate	Corporate	(25,928)		(11,543)		(14,385)		(125)	%	(63,609)		(29,566)		(34,043)		(115)	%	Corporate	(21,779)		(20,308)		(1,471)		(7)	%	(45,706)		(37,681)		(8,025)		(21)	%
Total Homebuilding pretax income	Total Homebuilding pretax income	$	165,152	$	101,650	$	63,502	62	%	$	466,168	$	236,240	$	229,928	97	%	Total Homebuilding pretax income	$	240,271	$	187,509	$	52,762	28	%	$	428,770	$	301,016	$	127,754	42	%

For the three months ended ~~September~~June 30, ~~2021,~~2022, we recorded homebuilding pretax income of ~~$165.2~~$240.3 million, an increase of ~~62%~~28% from ~~$101.6~~$187.5 million for the same period in the prior year. The increase was due to a ~~26%~~6% increase in home sale revenues, a ~~300~~370 basis point increase in our gross margin from home sales and ~~an 80~~a 20 basis point decrease in our selling, general and administrative expenses as a percentage of revenue.

Our West segment experienced a ~~$61.2~~$15.6 million year-over-year increase in pretax income, due to an improved gross margin, ~~and~~slightly offset by a ~~32% increase~~7% decrease in home ~~sales revenue.~~sale revenues. Our Mountain segment experienced a ~~$7.3~~$15.1 million increase in pretax income from the prior year, as a result of a 9% increase in home ~~sales revenue~~sale revenues and an improved gross margin. Our East segment experienced a ~~$9.4~~$23.6 million increase in pretax income from the prior year, due primarily to a 89% increase in home sale revenues as well as an improved gross ~~margin as well as a 47% increase in home sales revenue. Each of our~~margin. Our Mountain and East homebuilding segments also benefited from decreased selling, general and administrative expenses as a percentage of revenue driven by improved operating leverage. Our Corporate segment experienced a ~~$14.4~~$1.5 million decrease in pretax income, due primarily to increased stock-based and deferred compensation expense. This was partially offset by an increase in ~~pretax loss, primarily due~~the amount of corporate cost allocated to ~~the $12.2 million loss on retirement of debt recognized in the current year quarter.~~our homebuilding and financial services segments.

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we recorded homebuilding pretax income of ~~$466.2~~$428.8 million, an increase of ~~97%~~42% from ~~$236.2~~$301.0 million for the same period in the prior year. The increase was due to a ~~42%~~12% increase in home sale revenues, a ~~270~~370 basis point increase in our gross margin from home sales and a ~~110~~30 basis point decrease in our selling, general and administrative expenses as a percentage of revenue. Our West segment experienced a $68.9 million increase in pretax income, due to an improved gross margin, a 2% increase in home sale revenue, and a decrease in selling, general and administrative expenses as a percentage of revenue. Commentary on the drivers of the increase in pretax income in our ~~individual~~Mountain and East homebuilding segments is consistent with the ~~2021 third~~2022 second quarter discussion above. In addition to the loss on retirement of debt, the pretax loss for our Corporate segment was further impacted by increases in stock-based and deferred compensation expenses, increased bonus expense and increased charitable contributions.

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Assets:


		September 30, 2021			December 31, 2020			Change						June 30, 2022					December 31, 2021			Change
							Amount			%							Amount					%

				(Dollars in thousands)														(Dollars in thousands)
West	West	$	2,229,687		$	1,855,567		$	374,120		20	%	West		$	2,653,052				$	2,472,378		$	180,674		7		%
Mountain	Mountain	1,030,407			905,007			125,400			14	%	Mountain	1,169,938					1,072,717			97,221			9		%
East	East	419,212			274,937			144,275			52	%	East	508,690					450,675			58,015			13		%

Corporate	Corporate	816,577			470,909			345,668			73	%	Corporate	547,620					547,364			256			0		%
Total homebuilding assets	Total homebuilding assets	$	4,495,883		$	3,506,420		$	989,463		28	%	Total homebuilding assets	$	4,879,300				$	4,543,134		$	336,166		7		%

Total homebuilding assets increased ~~28%~~7% from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021. Increases~~2022. Homebuilding assets increased in each orof our ~~homebuilding~~operating segments ~~were the result~~largely due to a greater number of ~~increases in our inventory balances. These increases were driven by an increase in~~ homes completed or under construction as of period end and, with the exception of our Mountain segment, a greater number of lots acquired during the period than those delivered to homebuyers. The increase in our Corporate segment was due to the proceeds from the issuance of senior notes during the year. This increase was partially offset by the funding of land acquisition and construction activity by our Corporate segment as well as the retirement of $123.6 million of our 5.500% senior notes scheduled to mature in January 2024 through a cash tender offer.period-end.

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New Home Deliveries & Home Sale Revenues:

Changes in home sale revenues are impacted by changes in the number of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below.


		Three Months Ended September 30,																	Three Months Ended June 30,
		2021					2020					% Change							2022					2021					% Change
		Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price			Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price

		(Dollars in thousands)																	(Dollars in thousands)
West	West	1,376	$	729,777	$	530.4	1,135	$	552,319	$	486.6	21	%	32	%	9	%	West	1,371	$	788,279	$	575.0	1,672	$	847,683	$	507.0	(18)	%	(7)	%	13	%
Mountain	Mountain	666	379,041		569.1		677	347,095		512.7		(2)	%	9	%	11	%	Mountain	665	437,001		657.1		711	400,633		563.5		(6)	%	9	%	17	%
East	East	377	148,883		394.9		335	101,135		301.9		13	%	47	%	31	%	East	500	225,543		451.1		339	119,457		352.4		47	%	89	%	28	%
Total	Total	2,419	$	1,257,701	$	519.9	2,147	$	1,000,549	$	466.0	13	%	26	%	12	%	Total	2,536	$	1,450,823	$	572.1	2,722	$	1,367,773	$	502.5	(7)	%	6	%	14	%

Nine Months Ended September 30,
2021 2020 % Change
Homes Home Sale
Revenues Average
Price Homes Home Sale
Revenues Average
Price Homes Home
Sale
Revenues Average Price
(Dollars in thousands)
West 4,324 $ 2,194,071 $ 507.4 3,023 $ 1,447,934 $ 479.0 43 % 52 % 6 %
Mountain 1,989 1,104,391 555.2 1,720 886,619 515.5 16 % 25 % 8 %
East 1,006 368,870 366.7 851 249,839 293.6 18 % 48 % 25 %
Total 7,319 $ 3,667,332 $ 501.1 5,594 $ 2,584,392 $ 462.0 31 % 42 % 8 %


	Six Months Ended June 30,
	2022					2021					% Change
	Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price

	(Dollars in thousands)
West	2,614	$	1,495,590	$	572.1	2,948	$	1,464,294	$	496.7	(11)	%	2	%	15	%
Mountain	1,213	772,129		636.5		1,323	725,350		548.3		(8)	%	6	%	16	%
East	942	423,624		449.7		629	219,987		349.7		50	%	93	%	29	%
Total	4,769	$	2,691,343	$	564.3	4,900	$	2,409,631	$	491.8	(3)	%	12	%	15	%

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the number of new homes delivered in each of our segments was negatively impacted by an increase in construction cycle ~~times. Our average sale to close cycle time during the third quarter of 2021~~times year-over-year. This increase was approximately 37 weeks. Cycle times increased approximately two weeks from the second to third quarter of 2021 and have increased approximately six weeks year-over-year, from the third quarter of 2020 to the third quarter of 2021. These increases are primarily the result of extended permitting times, supply chain disruptions and labor shortages as a result of the pandemic as well as the ~~increased~~strong demand for new ~~homes.~~homes experienced in recent periods.

West Segment Commentary

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the ~~increase~~decrease in new home deliveries was the result of ~~an increase in the number of homes in backlog to begin the respective periods. These increases were partially offset by~~ a decrease in backlog conversion rates in most of our markets within this segment as a result of the increased construction cycle times discussed above. The average selling price of homes delivered increased as a result of price increases implemented over the last twelve months as well as a shift in geographic mix of homes delivered from Arizona to Southern California. These increases were partially offset by a shift in mix to lower priced communities.

~~Mountain Segment Commentary~~

For the three months ended September 30, 2021, the decrease in new home deliveries was the result of a decrease in backlog conversion rates in each of our markets within this segment as a result of (1) the increased construction cycle times discussed above and (2) the construction status of homes in beginning backlog, which on average were at a more preliminary stage of construction as compared to the prior year period. This decrease was ~~mostly~~partially offset by an increase in the number of homes in backlog to begin the ~~period.~~

For the nine months ended September 30, 2021, the increase in new home deliveries was the result of an increase in the number of homes in backlog to begin the period. This increase were partially offset by a decrease in backlog conversion rates as a result of the increased construction cycle times discussed above.

~~For the three and nine months ended September 30, 2021, the increase in the average selling price of homes delivered was the result of price increases implemented over the past twelve months.~~

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~~East Segment Commentary~~

~~For the three and nine months ended September 30, 2021, the increase in new home deliveries was the result of an increase in the number of homes in backlog to begin the~~ respective periods. This increase was partially offset by a decrease in backlog conversion rates due to (1) the increased construction cycle times discussed above and (2) a lower percentage of homes both sold and delivered in the respective periods as compared to the prior year periods. The average selling price of homes delivered increased as a result of price increases implemented over the ~~last twelve~~past two years. These increases were slightly offset by a shift in mix to lower priced communities.

Mountain Segment Commentary

For the three and six months ended June 30, 2022, the decrease in new home deliveries was the result of a decrease in backlog conversion rates in most of our markets within this segment as a result of the increased construction cycle times discussed above. This decrease was partially offset by an increase in the number of homes in backlog to begin the period. The average selling price of homes delivered increased as a result of price increases implemented over the past two years.

East Segment Commentary

For the three and six months ended June 30, 2022, the increase in new home deliveries was due to an increase in the number of homes in backlog to begin the period as well as an increase in backlog conversion rates as a result of the construction status of those homes in beginning backlog. The average selling price of homes delivered increased as a result of price increases implemented over the past two years as well as a shift in ~~geographic~~ mix ~~of homes delivered~~within several markets to ~~our mid-Atlantic market.~~higher priced communities.

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Gross Margin from Home Sales:

Our gross margin from home sales for the three months ended ~~September~~June 30, ~~2021,~~2022, increased ~~300~~370 basis points year-over-year from ~~20.5%~~23.1% to ~~23.5%~~26.8%. Gross margin from home sales increased across each of our segments on both build-to-order and speculative home deliveries driven by price increases implemented ~~across nearly all of our communities over the past twelve months. Our gross margin from home sales~~ in the second half of 2021 ~~third~~and the first quarter ~~was also positively impacted by a decrease in our capitalized interest in cost~~ of ~~sales as a percentage of home sale revenues. These improvements were~~2022. This increase was partially offset by an increase in building ~~material and labor~~ costs year-over-year.

Our gross margin from home sales for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, increased ~~270~~370 basis points year-over-year from ~~20.2%~~22.6% to ~~22.9%~~26.3%. The ~~primary drivers of the improved~~increase in gross margin from home sales ~~for the nine months ended September 30, 2021~~ are consistent with ~~those noted above for~~ the ~~three~~second quarter discussed above. This increase was partially offset by an increase in building costs year-over-year, a $0.7 million inventory impairment and a $2.4 million warranty accrual adjustment recognized during the six months ended ~~September~~June 30, ~~2021.~~2022.

Selling, General and Administrative Expenses:

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
(Dollars in thousands)
General and administrative expenses $ 59,935 $ 45,980 $ 13,955 $ 179,056 $ 131,488 $ 47,568
General and administrative expenses as a percentage of home sale revenues
4.8 % 4.6 % 20 bps 4.9 % 5.1 % -20 bps
Marketing expenses $ 25,660 $ 24,725 $ 935 $ 78,195 $ 68,828 $ 9,367
Marketing expenses as a percentage of home sale revenues
2.0 % 2.5 % -50 bps 2.1 % 2.7 % -60 bps
Commissions expenses $ 34,521 $ 32,927 $ 1,594 $ 106,719 $ 84,953 $ 21,766
Commissions expenses as a percentage of home sale revenues
2.7 % 3.3 % -60 bps 2.9 % 3.3 % -40 bps
Total selling, general and administrative expenses $ 120,116 $ 103,632 $ 16,484 $ 363,970 $ 285,269 $ 78,701
Total selling, general and administrative expenses as a percentage of home sale revenues
9.6 % 10.4 % -80 bps 9.9 % 11.0 % -110 bps


	Three Months Ended June 30,								Six Months Ended June 30,
	2022			2021			Change		2022			2021			Change

	(Dollars in thousands)
General and administrative expenses	$	72,894		$	61,958		$	10,936	$	144,877		$	119,121		$	25,756
General and administrative expenses as a percentage of home sale revenues	5.0		%	4.5		%	50 bps		5.4		%	4.9		%	50 bps
Marketing expenses	$	26,035		$	26,832		$	(797)	$	51,667		$	52,535		$	(868)
Marketing expenses as a percentage of home sale revenues	1.8		%	2.0		%	-20 bps		1.9		%	2.2		%	-30 bps
Commissions expenses	$	34,920		$	40,071		$	(5,151)	$	66,619		$	72,198		$	(5,579)
Commissions expenses as a percentage of home sale revenues	2.4		%	2.9		%	-50 bps		2.5		%	3.0		%	-50 bps
Total selling, general and administrative expenses	$	133,849		$	128,861		$	4,988	$	263,163		$	243,854		$	19,309
Total selling, general and administrative expenses as a percentage of home sale revenues	9.2		%	9.4		%	-20 bps		9.8		%	10.1		%	-30 bps

General and administrative expenses increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 due to ~~(1)~~ increased stock-based and deferred compensation expenses ~~(2) increased bonus expense and (3)~~as well as increased salary related expenses due to higher average ~~headcount during~~headcount. For the ~~respective periods.~~six months ended June 30, 2022, the increase was also due to increased bonus expenses.

Marketing expenses ~~increased~~were consistent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the previous period, as ~~a result~~increased salary related expenses were offset by decreased amortization of ~~increased~~ deferred selling ~~amortization and master marketing fees resulting from increased closings.~~cost.

Commissions expenses ~~increased~~decreased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 due to ~~the increase~~changes in ~~homes~~our commission structure, which were partially offset by increases in home sale ~~revenues year-over-year.~~revenues.

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Other Homebuilding Operating Data

Net New Orders and Active Subdivisions:

Changes in the dollar value of net new orders are impacted by changes in the number of net new orders and the average selling price of those homes. Commentary for each of our segments on significant changes in these two metrics is provided below.


		Three Months Ended September 30,																		Three Months Ended June 30,
		2021						2020						% Change									2022						2021						% 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			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)																		(Dollars in thousands)
West	West	1,437	$	783,072	$	544.9	4.91	1,955	$	932,111	$	476.8	6.58	(26)	%	(16)	%	14	%	(25)	%	West	857	$	543,584	$	634.3	2.45	1,602	$	850,742	$	531.0	5.67	(47)	%	(36)	%	19	%	(57)	%
Mountain	Mountain	505	323,018		639.6		2.99	1,051	542,375		516.1		5.70	(52)	%	(40)	%	24	%	(48)	%	Mountain	277	196,340		708.8		1.79	706	433,793		614.4		4.18	(61)	%	(55)	%	15	%	(57)	%
East	East	457	199,985		437.6		3.67	509	176,896		347.5		5.39	(10)	%	13	%	26	%	(32)	%	East	270	142,221		526.7		2.63	406	180,205		443.9		3.56	(33)	%	(21)	%	19	%	(26)	%
Total	Total	2,399	$	1,306,075	$	544.4	4.10	3,515	$	1,651,382	$	469.8	6.10	(32)	%	(21)	%	16	%	(33)	%	Total	1,404	$	882,145	$	628.3	2.31	2,714	$	1,464,740	$	539.7	4.80	(48)	%	(40)	%	16	%	(52)	%

Nine Months Ended September 30,
2021 2020 % 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)
West 4,814 $ 2,613,279 $ 542.8 5.42 4,646 $ 2,265,557 $ 487.6 5.47 4 % 15 % 11 % (1) %
Mountain 2,222 1,375,442 619.0 4.35 2,502 1,309,176 523.3 4.39 (11) % 5 % 18 % (1) %
East 1,286 558,716 434.5 3.91 1,156 393,913 340.8 4.23 11 % 42 % 27 % (8) %
Total 8,322 $ 4,547,437 $ 546.4 4.82 8,304 $ 3,968,646 $ 477.9 4.91 — % 15 % 14 % (2) %


	Six Months Ended June 30,
	2022						2021						% 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)
West	2,561	$	1,574,372	$	614.7	3.91	3,377	$	1,791,809	$	530.6	5.73	(24)	%	(12)	%	16	%	(32)	%
Mountain	1,197	799,482		667.9		3.76	1,717	1,017,585		592.7		5.03	(30)	%	(21)	%	13	%	(25)	%
East	797	399,780		501.6		3.73	829	354,950		428.2		4.03	(4)	%	13	%	17	%	(7)	%
Total	4,555	$	2,773,634	$	608.9	3.83	5,923	$	3,164,344	$	534.2	5.21	(23)	%	(12)	%	14	%	(26)	%

*Calculated as total net new orders (gross orders less cancellations) in period ÷ average active communities during period ÷ number of months in period.


						Average Active Subdivisions				Average Active Subdivisions									Average Active Subdivisions				Average Active Subdivisions
		Active Subdivisions				Three Months Ended				Nine Months Ended					Active Subdivisions				Three Months Ended				Six Months Ended
		September 30,		%		September 30,		%		September 30,		%			June 30,		%		June 30,		%		June 30,		%
		2021	2020	Change		2021	2020	Change		2021	2020	Change			2022	2021	Change		2022	2021	Change		2022	2021	Change
West	West	104	102	2	%	98	99	(1)	%	99	94	5	%	West	122	91	34	%	117	94	24	%	109	98	11	%
Mountain	Mountain	56	61	(8)	%	56	62	(10)	%	57	63	(10)	%	Mountain	51	55	(7)	%	52	56	(7)	%	53	57	(7)	%
East	East	43	31	39	%	42	32	31	%	37	30	23	%	East	34	41	(17)	%	34	38	(11)	%	36	34	6	%
Total	Total	203	194	5	%	196	193	2	%	193	187	3	%	Total	207	187	11	%	203	188	8	%	198	189	5	%

For the three and six months ended June 30, 2022, the number of net new orders in each of our segments was negatively impacted by a decrease in the monthly sales absorption pace. This was driven by a lower pace of gross sales (before cancellations) as well as an increase in cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”). The lower pace of gross sales experienced during the respective periods was the result of the sharp rise in mortgage interest rates during the first half of 2022 and to a lesser extent the return of more seasonal sale patterns during the second quarter of 2022. See the "Cancellation Rate" section below for commentary on the increase in our cancellation rate. The increase in average selling price for the three and six months ended June 30, 2022 was due to price increases implemented in the second half of 2021 and the first quarter of 2022.

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West Segment Commentary

For the three and six months ended ~~September~~June 30, ~~2021,~~2022, the decrease in net new orders was due to a decrease in the monthly sales absorption rate as ~~previously discussed.~~

~~For the three and nine months ended September 30, 2021, the~~discussed above. This was partially offset by an increase in average active subdivisions year-over-year. The increase in average selling price was ~~due to price increases implemented over the past twelve months within nearly all of our communities. This increase was slightly~~partially offset by a shift in mix to ~~lower priced~~our more affordable communities.

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~~Table of Contents~~

Mountain Segment Commentary

For the three and six months ended ~~September~~June 30, ~~2021,~~2022, the decrease in net new orders was ~~primarily~~ due to a decrease in the monthly sales absorption ~~rate~~rates as ~~previously discussed. For the three and nine months ended September 30, 2021, net new orders were also negatively impacted by~~discussed above, as well as a decrease in average active subdivisions within our ~~Colorado markets.~~

~~For the three and nine months ended September 30, 2021, the increase in average selling price was due to price increases implemented over the last twelve months within nearly all of our communities.~~Utah market.

East Segment Commentary

For the three and six months ended ~~September~~June 30, ~~2021,~~2022, the decrease in net new orders was due to a decrease in the monthly sales absorption rate as ~~previously discussed. This~~discussed above. For the three months ended June 30, 2022, the decrease in net new orders was also due to a decrease in average active subdivisions year-over-year. For the six months ended June 30, 2022, the decrease in net new orders was partially offset by an increase in average active subdivisions ~~within each of our Florida and mid-Atlantic markets.~~

For the nine months ended September 30, 2021, the increase in net new orders was driven by an increase in average active subdivisions within each of our Florida and mid-Atlantic markets. This increase was partially offset by a decrease in the monthly sales absorption rate.

For the three and nine months ended September 30, 2021, the increase in average selling price was due to price increases implemented over the last twelve months within nearly all of our communities. Additionally, we experienced a shift in mix within several markets to higher priced communities.year-over-year.

Cancellation Rate:


		Cancellations as a Percentage of Homes in Beginning Backlog													Cancellations as a Percentage of Homes in Beginning Backlog
		2021						2020							2022				2021
		Three Months Ended													Three Months Ended
		March 31,		June 30,		September 30,		March 31,		June 30,		September 30,			March 31,		June 30,		March 31,		June 30,
West	West	7	%	5	%	8	%	15	%	14	%	11	%	West	8	%	10	%	7	%	5	%
Mountain	Mountain	8	%	5	%	7	%	22	%	20	%	12	%	Mountain	8	%	9	%	8	%	5	%
East	East	13	%	9	%	7	%	23	%	22	%	18	%	East	9	%	11	%	13	%	9	%
Total	Total	8	%	6	%	7	%	18	%	17	%	12	%	Total	8	%	10	%	8	%	6	%

Our ~~cancellations as a percentage of homes in beginning backlog to start the quarter (“~~cancellation ~~rate”) decreased~~rate increased year-over-year in each of our segments ~~due~~during the three months ended June 30, 2022. The increase in cancellation rates was a result of the sharp increase in mortgage interest rates during the first half of 2022 and its impact on our homebuyers in backlog who where unable to ~~the strong demand for new homes.~~

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~~Table of Contents~~

lock their interest rate prior to these increases.

Backlog:


		September 30,																	June 30,
		2021					2020					% Change							2022					2021					% Change
		Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price			Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price

		(Dollars in thousands)																	(Dollars in thousands)
West	West	4,200	$	2,295,570	$	546.6	3,646	$	1,743,547	$	478.2	15	%	32	%	14	%	West	4,163	$	2,438,184	$	585.7	4,139	$	2,204,500	$	532.6	1	%	11	%	10	%
Mountain	Mountain	2,251	1,408,945		625.9		1,993	1,033,264		518.4		13	%	36	%	21	%	Mountain	2,158	1,450,194		672.0		2,412	1,426,496		591.4		(11)	%	2	%	14	%
East	East	1,207	537,983		445.7		872	298,965		342.9		38	%	80	%	30	%	East	1,105	549,721		497.5		1,127	482,736		428.3		(2)	%	14	%	16	%
Total	Total	7,658	$	4,242,498	$	554.0	6,511	$	3,075,776	$	472.4	18	%	38	%	17	%	Total	7,426	$	4,438,099	$	597.6	7,678	$	4,113,732	$	535.8	(3)	%	8	%	12	%

At ~~September~~June 30, ~~2021,~~2022, we had ~~7,658~~7,426 homes in backlog with a total value of ~~$4.24~~$4.44 billion. This represented ~~an 18% increase~~a 3% decrease in the number of homes in backlog and ~~a 38%~~an 8% increase in the dollar value of homes in backlog from ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in the number of homes in backlog is primarily a result of ~~the unseasonably high net new order volume~~increased cancellations and a decrease in the ~~fourth~~pace of gross sales during the second quarter of ~~2020 as well as~~2022. This was partially offset by an increase in cycle times year-over-year within nearly all of our markets. The increase in the average selling price of homes in backlog iswas due to price increases implemented ~~over~~in the ~~past twelve months in nearly all~~second half of ~~our communities as well as~~2021 and the first quarter of 2022. These increases were slightly offset by a shift in ~~our net new order~~ mix to lower priced communities, most notably in our ~~East~~West segment, ~~as discussed above.~~consistent with our ongoing strategy of offering more affordable home plans. Our ability to convert backlog into closings could be negatively impacted in future periods by the pandemic, rising mortgage interest rates and other factors, the extent to which is highly uncertain and depends on future developments. ~~See~~

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~~"Forward-Looking Statements"~~Ta ble of Contents ~~below.~~

Homes Completed or Under Construction (WIP lots):


		September 30,		%			June 30,		%
		2021	2020	Change			2022	2021	Change
Unsold:	Unsold:					Unsold:
Completed	Completed	21	74	(72)	%	Completed	46	19	142	%
Under construction	Under construction	345	129	167	%	Under construction	607	214	184	%
Total unsold started homes	Total unsold started homes	366	203	80	%	Total unsold started homes	653	233	180	%
Sold homes under construction or completed	Sold homes under construction or completed	6,468	4,540	42	%	Sold homes under construction or completed	7,007	6,655	5	%
Model homes under construction or completed	Model homes under construction or completed	490	505	(3)	%	Model homes under construction or completed	524	502	4	%
Total homes completed or under construction	Total homes completed or under construction	7,324	5,248	40	%	Total homes completed or under construction	8,184	7,390	11	%

The increase in ~~sold~~total unsold started homes ~~under construction or completed~~ is due to ~~the year-over-year~~an increase in the ~~number of homes in backlog as noted above as well as a 1,400 basis point decrease year-over-year in~~cancellation rate during the ~~number of homes in backlog that were sold but where construction had not yet started as of period end.~~three months ended June 30, 2022.

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

September 30, 2021 September 30, 2020
Lots
Owned Lots
Optioned Total Lots
Owned Lots
Optioned Total Total
%
Change
West 14,209 5,811 20,020 10,140 3,280 13,420 49 %
Mountain 6,258 4,236 10,494 6,217 2,708 8,925 18 %
East 3,824 2,328 6,152 2,716 1,769 4,485 37 %
Total 24,291 12,375 36,666 19,073 7,757 26,830 37 %


	June 30, 2022			June 30, 2021
	Lots Owned	Lots Optioned	Total	Lots Owned	Lots Optioned	Total	Total % Change
West	15,027	1,963	16,990	13,265	4,729	17,994	(6)	%
Mountain	6,696	2,961	9,657	6,599	4,174	10,773	(10)	%
East	4,111	2,372	6,483	3,636	1,997	5,633	15	%
Total	25,834	7,296	33,130	23,500	10,900	34,400	(4)	%

Our total owned and optioned lots at ~~September~~June 30, ~~2021~~2022 were ~~36,666,~~33,130, which ~~was~~represented a ~~37% increase~~4% decrease year-over-year. This decrease is a result of our intentional slowdown in land acquisition and approval activity due to current market uncertainty. We believe that our total lot supply ~~coupled~~is sufficient to meet our operating needs for several years, consistent with our ~~planned acquisition activity, can support growth in future periods.~~philosophy of maintaining a two to three year supply of land. See "Forward-Looking Statements" below.

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Financial Services


		Three Months Ended								Nine Months Ended									Three Months Ended								Six Months Ended
		September 30,				Change				September 30,				Change					June 30,				Change				June 30,				Change
		2021		2020		Amount		%		2021		2020		Amount		%			2022		2021		Amount		%		2022		2021		Amount		%

		(Dollars in thousands)																	(Dollars in thousands)
Financial services revenues	Financial services revenues																	Financial services revenues
Mortgage operations	Mortgage operations	$	31,122	$	28,548	$	2,574	9	%	$	89,608	$	67,536	$	22,072	33	%	Mortgage operations	$	22,077	$	23,321	$	(1,244)	(5)	%	$	39,678	$	58,486	$	(18,808)	(32)	%
Other	Other	11,982		8,255		3,727		45	%	31,837		24,117		7,720		32	%	Other	14,152		9,997		4,155		42	%	25,682		19,855		5,827		29	%
Total financial services revenues	Total financial services revenues	$	43,104	$	36,803	$	6,301	17	%	$	121,445	$	91,653	$	29,792	33	%	Total financial services revenues	$	36,229	$	33,318	$	2,911	9	%	$	65,360	$	78,341	$	(12,981)	(17)	%
Financial services pretax income	Financial services pretax income																	Financial services pretax income
Mortgage operations	Mortgage operations	$	21,214	$	20,809	405		2	%	$	61,341	$	46,558	$	14,783	32	%	Mortgage operations	$	10,673	$	14,088	$	(3,415)	(24)	%	$	18,106	$	40,127	$	(22,022)	(55)	%
Other	Other	6,326		3,559		2,767		78	%	15,037		3,420		$	11,617	N/M		Other	8,019		3,945		4,074		103	%	13,969		8,711		$	5,258	60	%
Total financial services pretax income (loss)		$	27,540	$	24,368	3,172		13	%	$	76,378	$	49,978	$	26,400	53	%
Total financial services pretax income																		Total financial services pretax income	$	18,692	$	18,033	$	659	4	%	$	32,075	$	48,838	$	(16,763)	(34)	%

For the three months ended ~~September~~June 30, ~~2021,~~2022, our financial services pretax income increased ~~by $3.2~~to $18.7 million ~~or 13% from the same period~~compared to $18.0 million in the ~~prior year.~~second quarter of 2021. The increase in financial services pretax income was primarily due to ~~other financial services, driven~~our insurance operations, which benefited from increased premium revenue within our captive insurance companies. This was mostly offset by ~~the overall increase in volume of our homebuilding operations. The increase in~~ our mortgage operations ~~was~~business, due to ~~a $3.5 million gain recognized on the sale of conventional mortgage servicing rights~~decreased profitability per loan locked and sold during the ~~period. This was mostly offset~~period ended June 30, 2022 driven by increased competition in the primary mortgage market, as well as ~~increased~~an increase to compensation ~~related costs.~~expense due to higher headcount. The decrease in mortgage operations was partly offset by an increase in mortgage servicing revenue due to an increase in additions to the servicing portfolio year-over-year, as well as an increase in interest rate lock commitments as many homebuyers elected to take advantage of long-term lock opportunities during the quarter. The accounting treatment for these rate lock commitments had a favorable pull-forward effect on pre-tax income in the second quarter of 2022.

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, our financial services pretax income ~~increased $26.4~~decreased to $32.1 million ~~or 53% from the same period~~compared to $48.8 million in the prior ~~year.~~year period. The ~~increase~~decrease in financial services pretax income was primarily due to ~~both~~ our mortgage operations, as a result of decreased profitability per loan locked and sold as well as ~~other financial services. The increase in our mortgage operations was due to~~compensation expense, partially offset by an increase in ~~loan origination~~mortgage servicing revenue and ~~sales activity driven~~interest rate lock commitments. The decrease was also partly offset by ~~the overall~~an increase in ~~volume~~premium revenue within our captive insurance companies. The main drivers of the decrease in mortgage operations and increase related to our ~~homebuilding operations as well as~~captive insurance companies are consistent with the ~~gain on sale of servicing noted~~second quarter commentary discussed above. The increase in other financial services was the result of $8.3 million of net losses on equity securities recognized during the prior year period and to a lesser extent the increase in volume of our homebuilding operations.

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The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate.


		Three Months Ended						% or Percentage			Nine Months Ended									% or Percentage Change			Three Months Ended								% or Percentage				Six Months Ended								% or Percentage Change
		September 30,								September 30,									June 30,											June 30,
		2021			2020					Change				2021				2020								2022				2021					Change				2022						2021

		(Dollars in thousands)																					(Dollars in thousands)
Total Originations (including transfer loans):	Total Originations (including transfer loans):																					Total Originations (including transfer loans):
Loans	Loans	1,453			1,476			(2)	%		4,585				3,841							19	%	Loans		1,517				1,564			(3)	%				2,831				3,132			(10)	%
Principal	Principal	$	620,454		$	563,047		10	%		$	1,879,587			$	1,439,918				31	%	Principal	$	703,325			$	643,129			9	%			$	1,309,125			$	1,259,134			4	%
Capture Rate Data:	Capture Rate Data:																					Capture Rate Data:
Capture rate as % of all homes delivered	Capture rate as % of all homes delivered	60		%	68		%	(8)	%		62		%		68		%			(6)	%	Capture rate as % of all homes delivered	60		%		57		%		3	%			59		%		64		%		(5)	%
Capture rate as % of all homes delivered (excludes cash sales)	Capture rate as % of all homes delivered (excludes cash sales)	62		%	71		%	(9)	%		65		%		71		%			(6)	%	Capture rate as % of all homes delivered (excludes cash sales)	63		%		60		%		3	%			63		%		66		%		(3)	%
Mortgage Loan Origination Product Mix:	Mortgage Loan Origination Product Mix:																					Mortgage Loan Origination Product Mix:
FHA loans	FHA loans	14		%	20		%	(6)	%		17		%		21		%			(4)	%	FHA loans	14		%		18		%		(4)	%			13		%		19		%		(6)	%
Other government loans (VA & USDA)	Other government loans (VA & USDA)	19		%	22		%	(3)	%		18		%		22		%			(4)	%	Other government loans (VA & USDA)	22		%		18		%		4	%			21		%		18		%		3	%
Total government loans	Total government loans	33		%	42		%	(9)	%		35		%		43		%			(8)	%	Total government loans	36		%		36		%		—	%			34		%		37		%		(3)	%
Conventional loans	Conventional loans	67		%	58		%	9	%		65		%		57		%			8	%	Conventional loans	64		%		64		%		—	%			66		%		63		%		3	%
		100		%	100		%	—	%		100		%		100		%			—	%		100		%		100		%		—	%			100		%		100		%		—	%
Loan Type:	Loan Type:																					Loan Type:
Fixed rate	Fixed rate	100		%	100		%	—	%		100		%		99		%			1	%	Fixed rate	97		%		100		%		(3)	%			98		%		100		%		(2)	%
ARM	ARM	—		%	—		%	—	%		—		%		1		%			(1)	%	ARM	3		%		—		%		3	%			2		%		—		%		2	%
Credit Quality:	Credit Quality:																					Credit Quality:
Average FICO Score	Average FICO Score	740			736			1	%		739				736					—	%	Average FICO Score	744				740				1	%			743				739				1	%
Other Data:	Other Data:	`			`																	Other Data:	`				`
Average Combined LTV ratio	Average Combined LTV ratio	84		%	85		%	(1)	%		84		%		85		%			(1)	%	Average Combined LTV ratio	81		%		84		%		(3)	%			82		%		85		%		(3)	%
Full documentation loans	Full documentation loans	100		%	100		%	—	%		100		%		100		%			—	%	Full documentation loans	100		%		100		%		—	%			100		%		100		%		—	%
Loans Sold to Third Parties:	Loans Sold to Third Parties:																					Loans Sold to Third Parties:
Loans	Loans	1,325			1,530			(13)	%		4,612				3,958					17	%	Loans	1,502				1,701				(12)	%			3,029				3,287				(8)	%
Principal	Principal	$	557,876		$	574,239		(3)	%		$	1,858,303			$	1,472,452				26	%	Principal	$	700,058			$	689,530			2	%			$	1,391,416			$	1,300,428			7	%

Income Taxes

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. 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, ~~2020.~~2021.

LIQUIDITY AND CAPITAL RESOURCES

We use our liquidity and capital resources ~~to:~~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, Revolving Credit Facility (as defined below) and Mortgage Repurchase Facility ~~(both~~(as defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to ~~$2.0 billion. Following~~$5.0 billion, of which $5.0 billion remains.

Material Cash Requirements

We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the ~~issuance~~Consolidated Balance Sheet as of ~~$350~~June 30, 2022, while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, payments due on our Mortgage Repurchase Facility, purchase obligations related to expected acquisition of land under purchase agreements and land development agreements (many of which are secured by letters of credit or surety bonds) and operating leases. Other material cash requirements include land acquisition and development costs not yet contracted for, home construction costs, operating expenses, including our selling, general and administrative expenses, investments and funding of capital improvements and dividend payments.

At June 30, 2022, we had outstanding senior notes with varying maturities totaling an aggregate principal amount of $1.5 billion, with none payable within 12 months. Future interest payments associated with the notes total $1.3 billion, with $64.2 million payable within 12 months. As of June 30, 2022, we had $30.2 million of ~~3.966% senior notes on August 6, 2021, $1.00 billion remains on~~required operating lease future minimum payments.

At June 30, 2022, we had deposits of $43.6 million in the form of cash and $11.6 million in the form of letters of credit that secured option contracts to purchase 7,296 lots for a total estimated purchase price of $743.1 million.

At June 30, 2022, we had outstanding surety bonds and letters of credit totaling $379.6 million and $211.0 million, respectively, including $159.8 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $186.7 million and $167.3 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 ~~effective shelf registration statement.~~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.

Capital Resources

Our capital structure is primarily a combination ~~of:~~of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our ~~5.500% senior notes due 2024,~~ 3.850% senior notes due 2030, 2.500% senior notes due 2031, 6.000% senior notes due 2043, and ~~our~~ 3.966% senior notes due 2061; (3) our Revolving Credit Facility ~~(defined below);~~ and (4) our Mortgage Repurchase ~~Facility (defined below).~~Facility. Because of our current balance of cash, cash equivalents, 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

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short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "“Forward-Looking ~~Statements~~Statements”~~" below.~~ above.

We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether through 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.

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Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders, which may be used for general corporate purposes. This agreement was amended on December 28, 2020 to (1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the ~~“Commitment”~~"Commitment"), (2) extend the Revolving Credit Facility maturity of $1.125 billion of the Commitments to December 18, 2025 with the remaining Commitment continuing to ~~termination~~terminate on December 18, 2023 and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.7 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. 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 provides for a transition from the eurocurrency rate to a benchmark replacement upon the occurrence of certain events.

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Mortgage Repurchase Facility.HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) 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. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended on September 24, 2020, March 25, 2021, ~~and~~ May 20, 2021, December 21, 2021 and May 19, 2022 to adjust the commitments to purchase for specific time periods. ~~As part~~The total capacity of the amendments, the commitments to purchase (subject to increase by up to $75 million under certain conditions) were increased as follows: (1) $200 million for the periods December 22, 2020 through February 4, 2021 and December 21, 2021 through February 3,facility at June 30, 2022 (2) $175 million for the periods March 25, 2021 through April 22, 2021, June 23, 2021 through July 22, 2021 and September 22, 2021 through October 21, 2021 and (3) $150 million for the period March 23, 2022 through April 21, 2022.was $225 million. The ~~Mortgage Repurchase Facility terminates on~~ May 19, ~~2022.~~2022 amendment extended the termination date of the Repurchase Agreement to May 18, 2023.

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the London Interbank Offered Rate (LIBOR) to one based on the Secured Overnight Financing Rate (SOFR).

Dividends

During the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, we paid cash dividends of $0.50 per share and $0.40 per share, respectively. During the six months ended June 30, 2022 and ~~$0.31~~2021, we paid cash dividends of $1.00 per share and $0.77 per share, respectively. Additionally, during the six months ended June 30, 2021, we distributed an 8% stock dividend.

MDC Common Stock Repurchase Program

At ~~September~~June 30, ~~2021,~~2022, we were authorized to repurchase up to ~~4,000,000~~4.0 million shares of our common stock. We did not repurchase any shares of our common stock during the three and six months ended ~~September~~June 30, ~~2021.~~2022.

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Consolidated Cash Flow

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, net cash ~~used in~~provided by operating activities was ~~$86.5~~$171.1 million compared with ~~net cash generated by operating activities of $29.4~~$12.1 million in the prior year period. Cash used to increase housing completed or under construction for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$461.1~~$468.3 million and ~~$387.3~~$385.7 million, respectively, as homes in inventory increased ~~significantly~~ during both periods. ~~Cash used to increase land and land under development for~~During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, the most significant source of cash provided by operating activities was ~~$118.8~~net income of $338.0 million ~~driven~~and $265.0 million, respectively. Cash provided by the ~~acquisition~~decrease in mortgage loans held-for-sale was $92.5 million and $46.5 million in the six months ended June 30, 2022 and 2021, respectively, as a result of ~~10,131 lots~~the above average level of originations that occur during the ~~period.~~fourth quarter. Cash provided by the decrease in land and land under development ~~was $108.7 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2022 and 2021 was $126.3 million and $36.4 million, respectively, as home starts outnumbered lot acquisitions during the ~~period.~~respective periods. Cash used to increase trade and other receivables for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$55.5~~$22.3 million and ~~$17.5~~$57.1 million, respectively, due to the year-over-year increases in the dollar amount of home deliveries during both periods. ~~The most significant source of cash provided by operating activities in both periods was net income.~~ Cash provided by the change in accounts payable and accrued liabilities for the ~~nine~~three months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$88.3~~$70.2 million and ~~$35.0~~$70.6 million, respectively, due to the increased construction spend during both periods as a result of the ~~year-over-year increases in home deliveries as well as the~~ increase in homes in inventory at both period ends.

During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, net cash used in investing activities was ~~$21.0~~$13.7 million and $13.4 million, respectively. This primarily relates to cash used to purchase property and equipment, which was consistent year-over-year.

During the six months ended June 30, 2022, net cash used in financing activities was $164.6 million compared with net cash provided by ~~investing~~financing activities of $27.6 million in the prior year period. This difference primarily relates to $48.5 million in net cash provided by the sale of marketable securities during the nine months ended September 30, 2020. Cash used to purchase property and equipment remained consistent year-over-year.

~~During the nine months ended September 30, 2021, net cash provided by financing activities was $471.2 million compared with cash use of $8.8~~$238.8 million in the prior year period. The primary driver of this ~~increase~~decrease in net cash provided by financing activities was the proceeds from the issuance of senior notes of ~~$694.7~~$347.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021, which was partially offset by $136.4 million~~2021. Cash used to ~~accelerate~~decrease the ~~retirement of a portion of our unsecured notes scheduled to mature in January 2024 through a cash tender offer. Net~~mortgage repurchase facility was $80.7 million and $37.7 million for the six months ended June 30, 2022 and 2021, respectively, driven by the increased proceeds from the ~~issuance~~sale of ~~senior notes was $48.1 million during the nine months ended September 30, 2020.~~

~~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 September 30, 2021, we had deposits of $47.2 million in the form of cash and $17.1 million in the form of letters of credit that secured option contracts to purchase 12,375 lots for a total estimated purchase price of $1.00 billion.

~~Surety Bonds and Letters of Credit.~~ At September 30, 2021, we had outstanding surety bonds and letters of credit totaling $330.9 million and $169.7 million, respectively, including $130.0 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $159.0 million and $113.9 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 themortgage loans.

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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.~~

~~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, 2020 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 operations, 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, ~~2020~~2021 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have a cash and investment policy that enables us to achieve an appropriate investment return while preserving principal and managing risk. Under this policy, cash and cash equivalents may include U.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, and time deposits, with maturities of three months or less. Marketable securities under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate debt securities.

As of ~~September~~June 30, ~~2021,~~2022, our cash and cash equivalents included commercial bank deposits and money market funds.

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~~Financial 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~~commitments to ~~manage~~sell a specified financial instrument at a specified future date for a specified price, mandatory delivery forward loan sale commitments, which are obligations of an investor to buy loans at a specified price within a specified time period, and best-effort delivery forward loan sale commitments, which are obligations of an investor to buy loans at a specified price subject to the ~~price risk on fluctuations in interest rates on our~~underlying mortgage loans ~~in inventory~~being funded and ~~interest rate lock commitments to originate mortgage loans.~~closed. Such contracts are the only significant financial and derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which aan interest rate ~~and price~~lock commitment had been made to a borrower that had not closed at ~~September~~June 30, ~~2021~~2022 had an aggregate principal balance of ~~$305.2~~$871.8 million, ~~all~~ of which ~~were under interest rate lock commitments at an average interest rate of 2.96%.~~$556.6 million had not yet been committed to a mortgage purchaser. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of ~~$241.5~~$190.3 million at ~~September~~June 30, ~~2021,~~2022, of which ~~$103.0~~$55.1 million had not yet been committed to a mortgage ~~purchaser and had an average interest rate of 2.84%.~~purchaser. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale ~~which~~that had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling ~~$264.5~~$553.0 million and ~~$203.0~~$275.6 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

HomeAmerican provides mortgage loans that generally are sold forward on a best-efforts or mandatory commitment basis and subsequently delivered to a third-party purchaser between 5 and 35 ~~days.~~days after closing. Forward sale commitments and forward sales of mortgage-backed securities are used for non-trading purposes to sell mortgage loans and economically hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not ~~closed.~~closed and mortgage loans held-for-sale. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, forward sales of mortgage-backed securities ~~as well as interest rate lock~~and commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the changes in fair value of ~~the derivatives~~these financial instruments in revenues in the financial services section of ~~our~~the consolidated statements of operations and comprehensive income with an offset to either other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.

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 do not affect our earnings or

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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. For variable rate debt such as our Revolving Credit Facility and Mortgage Repurchase Facility, changes in interest rates generally do not affect the fair value of the outstanding borrowing on the debt facilities, but do affect our earnings and 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 Executive Chairman (principal executive officer) and the Chief Financial Officer (principal financial officer). Based on that evaluation, our management, including the Executive Chairman and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(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 ~~September~~June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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M.D.C. HOLDINGS, INC.

FORM 10-Q

PART IIII. OTHER INFORMATION

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

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A. Risk Factors in the Company’s ~~2020~~2021 Annual Report on Form 10-K. There are no material changes from the risk factors included within the Company’s ~~2020~~2021 Annual Report on Form ~~10-K, other than the risk described below.~~

~~The recent global Coronavirus/COVID-19 pandemic could harm business and results of operations of the Company.~~

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, availability of financing for homebuyers, interest rates, consumer confidence, wage growth, household formations, levels of new and existing homes for sale, cost of land, labor and construction materials, demographic trends and housing demand. These factors, in particular consumer confidence, can be significantly and adversely affected by a variety of factors beyond our control. In response to the pandemic, many state and local governments instituted restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. While many of these restrictions have been or are in the process of being eased, there is still significant uncertainty as a result of the pandemic and its potential to continue to negatively impact the U.S. economy and consumer confidence. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments that are highly uncertain, including new information that may emerge concerning the severity of the pandemic, whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus. If the pandemic continues to cause significant negative impacts to the U.S. economy and consumer confidence, our results of operations, financial condition and cash flows could be significantly and adversely impacted.10-K.

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

The following table provides information about our repurchase of common stock during the three months ended ~~September~~June 30, ~~2021:~~2022:
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (2)
Maximum Number of Shares that may yet be Purchased under the Plan or Program (2)
July 1 to July 31, 2021 402 $ 47.80 — 4,000,000
August 1 to August 31, 2021 — N/A — 4,000,000
September 1 to September 30, 2021 — N/A — 4,000,000


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (2)	Maximum Number of Shares that may yet be Purchased under the Plan or Program (2)
April 1 to April 30, 2022	—	N/A		—	4,000,000
May 1 to May 31, 2022	1,573	$	36.95	—	4,000,000
June 1 to June 30, 2022	—	N/A		—	4,000,000

(1) Represents shares of common stock withheld by us to cover withholding taxes due upon the vesting of restricted stock award shares, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.

(2) We are authorized to repurchase up to 4,000,000 shares of our common stock. There were no shares of MDC common stock repurchased under this repurchase program during the three month period ended ~~September~~June 30, ~~2021.~~2022.

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Item 6. Exhibits


~~4.1~~2.1			~~Supplemental Indenture (3.966% Senior Notes due 2061),~~Asset Purchase Agreement, dated as of ~~August 6, 2021, among the~~April 21, 2022, between Richmond American Homes of Tennessee, Inc. and The Jones Company ~~the guarantors named therein and U.S. Bank National Association, as Trustee~~of Tennessee, L.L.C. (incorporated by reference to Exhibit ~~4.2~~2.1 of the Company's Current Report on Form 8-K filed ~~August 6, 2021)~~April 22, 2022).*
~~10.1~~10.8			~~Form~~Ninth Amendment to Amended and Restated Master Repurchase Agreement between HomeAmerican Mortgage Corporation, as Seller, and U.S. Bank National Association, as Agent and Buyer, dated as of ~~Senior Executive Officer Performance Share Unit Grant Agreement (2021 Equity Incentive Plan)~~May 19, 2022 (incorporated by reference to Exhibit 10.1 toof the ~~Company’s~~Company's Current Report on Form 8-K filed ~~July 19, 2021).~~ *
~~10.2~~			~~Form of Executive Officer Performance Share Unit Grant Agreement (2021 Equity Incentive Plan) (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed July 19, 2021).~~ *
~~10.3~~			~~Consulting Agreement dated as of September 1, 2021, between Leslie B. Fox and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 1, 2021)~~May 20, 2022). *
22			Subsidiary Guarantors (incorporated by reference to Exhibit 22 to the ~~Company’s~~Company's Form 10-Q for the quarter ended June 30, 2021). * *
31.1			Certification of principal 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 principal 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 principal 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 principal 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 Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, (ii) Consolidated Statements of Operations and Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (iv) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020;~~2021; and (v) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

____________________

*Incorporated by reference.

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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: ~~October~~July 28, ~~2021~~2022			M.D.C. HOLDINGS, INC.
			(Registrant)

			By: /s/ Robert N. Martin
			Robert N. Martin Senior Vice President and Chief Financial Officer ~~(principal~~ (principal financial officer andduly authorized officer)

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	Nine Months Ended September 30, 2020
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2019	62,574,961	$	626	$	1,348,733	$	433,126	$	1,782,485
Cumulative effect of newly adopted accounting standards	—	—		—		(34)		(34)
Balance at January 1, 2020	62,574,961	626		1,348,733		433,092		1,782,451
Net Income	—	—		—		36,760		36,760
Shares issued under stock-based compensation programs, net	477,582	5		8,189		—		8,194
Cash dividends declared	—	—		—		(20,768)		(20,768)
Stock-based compensation expense	—	—		4,440		—		4,440
Forfeiture of restricted stock	(48)	—		—		—		—
Balance at March 31, 2020	63,052,495	$	631	$	1,361,362	$	449,084	$	1,811,077
Net Income	—	—		—		84,396		84,396
Shares issued under stock-based compensation programs, net	334,178	3		(6,865)		—		(6,862)
Cash dividends declared	—	—		—		(20,914)		(20,914)
Stock-based compensation expense	—	—		5,488		—		5,488
Forfeiture of restricted stock	(1,807)	—		—		—		—
Balance at June 30, 2020	63,384,866	$	634	$	1,359,985	$	512,566	$	1,873,185
Net Income	—	—		—		98,938		98,938
Shares issued under stock-based compensation programs, net	1,480,711	15		28,627		—		28,642
Cash dividends declared	—	—		—		(21,374)		(21,374)
Stock-based compensation expense	—	—		8,608		—		8,608
Balance at September 30, 2020	64,865,577	$	649	$	1,397,220	$	590,130	$	1,987,999


	Nine Months Ended September 30,
	2021					2020					% Change
	Homes	Home Sale Revenues		Average Price		Homes	Home Sale Revenues		Average Price		Homes		Home Sale Revenues		Average Price

	(Dollars in thousands)
West	4,324	$	2,194,071	$	507.4	3,023	$	1,447,934	$	479.0	43	%	52	%	6	%
Mountain	1,989	1,104,391		555.2		1,720	886,619		515.5		16	%	25	%	8	%
East	1,006	368,870		366.7		851	249,839		293.6		18	%	48	%	25	%
Total	7,319	$	3,667,332	$	501.1	5,594	$	2,584,392	$	462.0	31	%	42	%	8	%


	September 30, 2021			September 30, 2020
	Lots Owned	Lots Optioned	Total	Lots Owned	Lots Optioned	Total	Total % Change
West	14,209	5,811	20,020	10,140	3,280	13,420	49	%
Mountain	6,258	4,236	10,494	6,217	2,708	8,925	18	%
East	3,824	2,328	6,152	2,716	1,769	4,485	37	%

Total	24,291	12,375	36,666	19,073	7,757	26,830	37	%