UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,September 30, 2020
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________________
Commission File Number 1-12434
1-12434

M/I HOMES, INC.
(Exact name of registrant as specified in it charter)
Ohio31-1210837
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

3 Easton Oval, 4131 Worth Avenue, Suite 500,, Columbus,, Ohio43219
(Address of principal executive offices) (Zip Code)

(614) (614) 418-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, par value $.01MHONew 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 the definitions 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 not 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. q



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, par value $.01 per share: 28,523,32928,745,649 shares outstanding as of April 29,October 28, 2020.



M/I HOMES, INC.
FORM 10-Q
M/I HOMES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART 1.FINANCIAL INFORMATION
Item 1.M/I Homes, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets at March 31,September 30, 2020 and December 31, 2019
3
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended March 31,September 30, 2020 and 2019
4
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Three and Nine Months Ended March 31,September 30, 2020 and 2019
5
Unaudited Condensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2020 and 2019
6
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.Quantitative and Qualitative Disclosures About Market Risk
4649
Item 4.Controls and Procedures
4851
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
4851
Item 1A.Risk Factors
4851
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
5053
Item 3.Defaults Upon Senior Securities
5053
Item 4.Mine Safety Disclosures
5053
Item 5.Other Information
5053
Item 6.Exhibits
5154
Signatures
5255



2



M/I HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par values)September 30,
2020		December 31,
2019
(unaudited)
ASSETS:
Cash, cash equivalents and restricted cash$202,512 $6,083 
Mortgage loans held for sale140,046 155,244 
Inventory1,843,409 1,769,507 
Property and equipment - net25,696 22,118 
Investment in joint venture arrangements34,038 37,885 
Operating lease right-of-use assets52,574 18,415 
Deferred income tax asset9,205 9,631 
Goodwill16,400 16,400 
Other assets96,675 70,311 
TOTAL ASSETS$2,420,555 $2,105,594 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accounts payable$176,581 $125,026 
Customer deposits66,632 34,462 
Operating lease liabilities52,666 18,415 
Other liabilities156,390 147,937 
Community development district obligations9,892 13,531 
Obligation for consolidated inventory not owned364 7,934 
Notes payable bank - homebuilding operations0 66,000 
Notes payable bank - financial services operations136,119 136,904 
Notes payable - other5,325 5,828 
Senior notes due 2021 - net0 298,988 
Senior notes due 2025 - net247,483 247,092 
Senior notes due 2028 - net394,363 0 
TOTAL LIABILITIES$1,245,815 $1,102,117 
Commitments and contingencies (Note 6)
0 0 
SHAREHOLDERS’ EQUITY:
Common shares - $0.01 par value; authorized 58,000,000 shares at both September 30, 2020 and December 31, 2019;
   issued 30,137,141 shares at both September 30, 2020 and December 31, 2019
301 301 
Additional paid-in capital336,623 332,861 
Retained earnings868,370 708,579 
Treasury shares - at cost - 1,391,492 and 1,750,685 shares at September 30, 2020 and December 31, 2019, respectively(30,554)(38,264)
TOTAL SHAREHOLDERS’ EQUITY$1,174,740 $1,003,477 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,420,555 $2,105,594 
(Dollars in thousands, except par values) March 31,
2020		 December 31,
2019
  (unaudited)  
     
ASSETS:    
Cash, cash equivalents and restricted cash $21,184
 $6,083
Mortgage loans held for sale 156,208
 155,244
Inventory 1,822,531
 1,769,507
Property and equipment - net 21,046
 22,118
Investment in joint venture arrangements 40,306
 37,885
Operating lease right-of-use assets 20,075
 18,415
Deferred income tax asset 9,540
 9,631
Goodwill 16,400
 16,400
Other assets 91,673
 70,311
TOTAL ASSETS $2,198,963
 $2,105,594
     
LIABILITIES AND SHAREHOLDERS’ EQUITY    
     
LIABILITIES:    
Accounts payable $150,256
 $125,026
Customer deposits 45,099
 34,462
Operating lease liabilities 20,075
 18,415
Other liabilities 117,942
 147,937
Community development district obligations 12,914
 13,531
Obligation for consolidated inventory not owned 14,284
 7,934
Notes payable bank - homebuilding operations 6,900
 66,000
Notes payable bank - financial services operations 145,055
 136,904
Notes payable - other 7,546
 5,828
Senior notes due 2021 - net —
 298,988
Senior notes due 2025 - net 247,222
 247,092
Senior notes due 2028 - net 393,989
 —
TOTAL LIABILITIES $1,161,282
 $1,102,117
     
Commitments and contingencies (Note 6)
 —
 —
     
SHAREHOLDERS’ EQUITY:    
Common shares - $.01 par value; authorized 58,000,000 shares at both March 31, 2020 and December 31, 2019;
   issued 30,137,141 shares at both March 31, 2020 and December 31, 2019
 301
 301
Additional paid-in capital 332,490
 332,861
Retained earnings 740,325
 708,579
Treasury shares - at cost - 1,613,812 and 1,750,685 shares at March 31, 2020 and December 31, 2019, respectively (35,435) (38,264)
TOTAL SHAREHOLDERS’ EQUITY $1,037,681
 $1,003,477
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $2,198,963
 $2,105,594

See Notes to Unaudited Condensed Consolidated Financial Statements.

3

M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share amounts)2020201920202019
Revenue$847,921 $653,345 $2,139,718 $1,758,140 
Costs and expenses:
Land and housing653,407 519,164 1,672,122 1,411,488 
General and administrative48,879 39,385 123,763 106,248 
Selling49,539 40,147 127,494 109,150 
Equity in income from joint venture arrangements(252)(52)(307)(118)
Interest1,239 4,637 8,454 16,626 
Total costs and expenses752,812 603,281 1,931,526 1,643,394 
Income before income taxes95,109 50,064 208,192 114,746 
Provision for income taxes21,572 12,226 48,401 28,939 
Net income$73,537 $37,838 $159,791 $85,807 
Earnings per common share:
Basic$2.57 $1.35 $5.60 $3.10 
Diluted$2.51 $1.32 $5.50 $3.04 
Weighted average shares outstanding:
Basic28,653 27,981 28,554 27,695 
Diluted29,286 28,598 29,030 28,238 
 Three Months Ended March 31,
(In thousands, except per share amounts)2020 2019
    
Revenue$577,603
 $481,109
Costs and expenses:   
Land and housing460,924
 388,467
General and administrative33,847
 30,699
Selling36,828
 31,551
Equity in (income) loss from joint venture arrangements(52) 121
Interest4,700
 6,792
Total costs and expenses536,247
 457,630
    
Income before income taxes41,356
 23,479
    
Provision for income taxes9,610
 5,756
    
Net income31,746
 17,723
Earnings per common share:   
Basic$1.11
 $0.64
Diluted$1.09
 $0.63
    
Weighted average shares outstanding:   
Basic28,478
 27,498
Diluted29,009
 27,970

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2020

Three Months Ended September 30, 2020
Common Shares
Shares OutstandingAdditional Paid-in CapitalRetained EarningsTreasury SharesTotal Shareholders’ Equity
(Dollars in thousands)Amount
Balance at June 30, 202028,543,629 $301 $334,261 $794,833 $(34,990)$1,094,405 
Net income— — — 73,537 — 73,537 
Stock options exercised202,020 — 173 — 4,436 4,609 
Stock-based compensation expense— — 2,189 — — 2,189 
Balance at September 30, 202028,745,649 $301 $336,623 $868,370 $(30,554)$1,174,740 
 Common Shares        
 Shares Outstanding   Additional Paid-in Capital Retained Earnings Treasury Shares Total Shareholders’ Equity
(Dollars in thousands) Amount    
Balance at December 31, 201928,386,456
 $301
 $332,861
 $708,579
 $(38,264) $1,003,477
Net income—
 —
 —
 31,746
 —
 31,746
Stock options exercised132,300
 —
 290
 —
 2,892
 3,182
Stock-based compensation expense—
 —
 973
 —
 —
 973
Repurchase of common shares(80,000) —
 —
 —
 (1,912) (1,912)
Deferral of executive and director compensation—
 —
 215
 —
 —
 215
Executive and director deferred compensation distributions84,573
 —
 (1,849) —
 1,849
 —
Balance at March 31, 202028,523,329
 $301
 $332,490
 $740,325
 $(35,435) $1,037,681



Nine Months Ended September 30, 2020
Common Shares
Shares OutstandingAdditional Paid-in CapitalRetained EarningsTreasury SharesTotal Shareholders’ Equity
(Dollars in thousands)Amount
Balance at December 31, 201928,386,456 $301 $332,861 $708,579 $(38,264)$1,003,477 
Net income— — — 159,791 — 159,791 
Stock options exercised354,620 — 481 — 7,773 8,254 
Stock-based compensation expense— — 4,915 — — 4,915 
Repurchase of common shares(80,000)— — — (1,912)(1,912)
Deferral of executive and director compensation— — 215 — — 215 
Executive and director deferred compensation distributions84,573 — (1,849)— 1,849 0 
Balance at September 30, 202028,745,649 $301 $336,623 $868,370 $(30,554)$1,174,740 

Three Months Ended March 31, 2019

Three Months Ended September 30, 2019
Common Shares
Shares OutstandingAdditional Paid-in CapitalRetained EarningsTreasury SharesTotal Shareholders’ Equity
(Dollars in thousands)Amount
Balance at June 30, 201927,617,366 $301 $330,052 $628,961 $(55,074)$904,240 
Net income— — — 37,838 — 37,838 
Stock options exercised525,550 — (416)— 11,487 11,071 
Stock-based compensation expense— — 1,492 — — 1,492 
Balance at September 30, 201928,142,916 $301 $331,128 $666,799 $(43,587)$954,641 
 Common Shares        
 Shares Outstanding   Additional Paid-in Capital Retained Earnings Treasury Shares Total Shareholders’ Equity
(Dollars in thousands) Amount    
Balance at December 31, 201827,516,218
 $301
 $330,517
 $580,992
 $(56,507) $855,303
Net income—
 —
 —
 17,723
 —
 17,723
Stock options exercised136,740
 —
 (550) —
 2,978
 2,428
Stock-based compensation expense—
 —
 912
 —
 —
 912
Repurchase of common shares(201,088) —
 —
 —
 (5,150) (5,150)
Deferral of executive and director compensation—
 —
 246
 —
 —
 246
Executive and director deferred compensation distributions116,956
 —
 (2,545) —
 2,545
 —
Balance at March 31, 201927,568,826
 $301
 $328,580
 $598,715
 $(56,134) $871,462

Nine Months Ended September 30, 2019
Common Shares
Shares OutstandingAdditional Paid-in CapitalRetained EarningsTreasury SharesTotal Shareholders’ Equity
(Dollars in thousands)Amount
Balance at December 31, 201827,516,218 $301 $330,517 $580,992 $(56,507)$855,303 
Net income— — — 85,807 — 85,807 
Stock options exercised710,830 — (1,177)— 15,525 14,348 
Stock-based compensation expense— — 4,086 — — 4,086 
Repurchase of common shares(201,088)— — — (5,150)(5,150)
Deferral of executive and director compensation— — 247 — — 247 
Executive and director deferred compensation distributions116,956 — (2,545)— 2,545 0 
Balance at September 30, 201928,142,916 $301 $331,128 $666,799 $(43,587)$954,641 

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Dollars in thousands)20202019
OPERATING ACTIVITIES:
Net income$159,791 $85,807 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in income from joint venture arrangements(307)(118)
Mortgage loan originations(1,287,426)(959,022)
Proceeds from the sale of mortgage loans1,301,713 997,369 
Fair value adjustment of mortgage loans held for sale911 2,982 
Fair value adjustment of mortgage servicing rights507 0 
Capitalization of originated mortgage servicing rights(4,119)(3,366)
Amortization of mortgage servicing rights1,847 1,112 
Depreciation9,298 8,655 
Amortization of debt issue costs1,869 2,029 
Loss on early extinguishment of debt950 0 
Stock-based compensation expense4,915 4,086 
Deferred income tax expense426 1,494 
Change in assets and liabilities:
Inventory(62,524)(156,073)
Other assets(18,493)(3,952)
Accounts payable51,555 38,017 
Customer deposits32,170 4,195 
Accrued compensation(4,990)(11,629)
Other liabilities9,133 (10,609)
Net cash provided by operating activities197,226 977 
INVESTING ACTIVITIES:
Purchase of property and equipment(8,465)(2,626)
Return of capital from joint venture arrangements1,213 438 
Investment in joint venture arrangements(24,075)(23,522)
Net cash used in investing activities(31,327)(25,710)
FINANCING ACTIVITIES:
Repayment of senior notes due 2021(300,000)0 
Net proceeds from issuance of senior notes due 2028400,000 0 
Proceeds from bank borrowings - homebuilding operations306,800 568,900 
Repayment of bank borrowings - homebuilding operations(372,800)(496,400)
Net repayments of bank borrowings - financial services operations(785)(44,574)
Principal repayments of notes payable - other and community development district bond obligations(503)(429)
Repurchase of common shares(1,912)(5,150)
Debt issue costs(8,524)(40)
Proceeds from exercise of stock options8,254 14,348 
Net cash provided by financing activities30,530 36,655 
Net increase in cash, cash equivalents and restricted cash196,429 11,922 
Cash, cash equivalents and restricted cash balance at beginning of period6,083 21,529 
Cash, cash equivalents and restricted cash balance at end of period$202,512 $33,451 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest — net of amount capitalized$15,644 $23,034 
Income taxes$39,510 $26,578 
NON-CASH TRANSACTIONS DURING THE PERIOD:
Community development district infrastructure$(3,639)$1,936 
Consolidated inventory not owned$(7,570)$(12,621)
Distribution of single-family lots from joint venture arrangements$27,016 $11,515 
 Three Months Ended March 31,
(Dollars in thousands)2020 2019
OPERATING ACTIVITIES:   
Net income$31,746
 $17,723
Adjustments to reconcile net income to net cash (used in) provided by operating activities:   
Equity in (income) loss from joint venture arrangements(52) 121
Mortgage loan originations(345,950) (251,200)
Proceeds from the sale of mortgage loans348,725
 299,823
Fair value adjustment of mortgage loans held for sale(3,739) 1,363
Fair value adjustment of mortgage servicing rights1,000
 —
Capitalization of originated mortgage servicing rights(1,307) (803)
Amortization of mortgage servicing rights564
 300
Depreciation3,035
 2,841
Amortization of debt discount and debt issue costs625
 676
Loss on early extinguishment of debt950
 —
Stock-based compensation expense973
 912
Deferred income tax expense91
 335
Change in assets and liabilities:   
Inventory(45,078) (60,737)
Other assets(20,532) 2,225
Accounts payable25,230
 1,424
Customer deposits10,637
 4,281
Accrued compensation(26,952) (24,835)
Other liabilities(4,193) (17,082)
Net cash used in operating activities(24,227) (22,633)
    
INVESTING ACTIVITIES:   
Purchase of property and equipment(451) (460)
Return of capital from joint venture arrangements363
 —
Investment in joint venture arrangements(6,458) (6,041)
Net cash used in investing activities(6,546) (6,501)
    
FINANCING ACTIVITIES:   
Repayment of senior notes due 2021(300,000) —
Net proceeds from issuance of senior notes due 2028400,000
 —
Proceeds from bank borrowings - homebuilding operations194,300
 218,100
Repayment of bank borrowings - homebuilding operations(253,400) (116,700)
Net proceeds from bank borrowings - financial services operations8,151
 (49,142)
Proceeds from notes payable - other and community development district bond obligations1,718
 —
Repurchase of common shares(1,912) (5,150)
Debt issue costs(6,165) —
Proceeds from exercise of stock options3,182
 2,428
Net cash provided by financing activities45,874
 49,536
Net increase in cash, cash equivalents and restricted cash15,101
 20,402
Cash, cash equivalents and restricted cash balance at beginning of period6,083
 21,529
Cash, cash equivalents and restricted cash balance at end of period$21,184
 $41,931
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:   
Cash paid during the year for:   
Interest — net of amount capitalized$12,501
 $14,460
Income taxes$408
 $362
    
NON-CASH TRANSACTIONS DURING THE PERIOD:   
Community development district infrastructure$(617) $(664)
Consolidated inventory not owned$6,350
 $(3,388)
Distribution of single-family lots from joint venture arrangements$3,726
 $1,054
    

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

M/I HOMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements (the “financial statements”) of M/I Homes, Inc. and its subsidiaries (the “Company”) and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The financial statements include the accounts of the Company. All intercompany transactions have been eliminated. Results for the interim period are not necessarily indicative of results for a full year, including as a result of the novel coronavirus (COVID-19) pandemic which has disrupted, and is expected to continue to disrupt, our business. In the opinion of management, the accompanying financial statements reflect all adjustments (all of which are normal and recurring in nature) necessary for a fair presentation of financial results for the interim periods presented. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019“2019 Form 10-K”).


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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that period. Actual results could differ from these estimates and have a significant impact on the financial condition and results of operations and cash flows. With regard to the Company, estimates and assumptions are inherent in calculations relating to valuation of inventory and investment in unconsolidated joint ventures, property and equipment depreciation, valuation of derivative financial instruments, accounts payable on inventory, accruals for costs to complete inventory, accruals for warranty claims, accruals for self-insured general liability claims, litigation, accruals for health care and workers’ compensation, accruals for guaranteed or indemnified loans, stock-based compensation expense, income taxes, and contingencies. Items that could have a significant impact on these estimates and assumptions include the risks and uncertainties listed in “Item 1A. Risk Factors” in Part I of our 2019 Form 10-K and in “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q, as the same may be updated from time to time in our subsequent filings with the SEC.

Reclassifications

As a result of the Company's change in reportable segments during the second quarter of 2019, the Company recast certain prior year amounts in the condensed consolidated financial statements to conform with the new presentation (see
Note 11). These reclassifications had no impact on the Company's results of operations.

Subsequent Events

Beginning in the latter portion of the first quarter of 2020, the United States was severely impacted by the novel coronavirus (COVID-19) pandemic. While the response to the COVID-19 outbreak continues to rapidly evolve, it has led to quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates across the country that have significantly disrupted activities in large segments of the economy. Because all of the states in which we operate (other than Michigan) recognize housing constructions and mortgage services as essential businesses, most of our communities remain open for continued construction of homes and sales by appointment. Although we continue to build and sell homes in these markets, traffic and sales have slowed significantly, home cancellations have increased significantly and our construction and home delivery cycles have been negatively impacted as well. We expect that the COVID-19 pandemic will negatively impact our business, results of operations, financial condition and/or cash flows in the second quarter of 2020 and subsequent reporting periods.  However, the future impacts of COVID-19 on our results of operations, financial condition, and cash flows are contingent upon the duration and severity of the outbreak, as well as the extent of the associated decline in economic activity and timing of the subsequent recovery. Further discussion of the potential impacts on our business, results of operations, financial condition and cash flows from the COVID-19 pandemic is provided below under Part II, Item 1A “Risk Factors.”

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for our fiscal year beginning January 1, 2020. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-19”) in November 2018,


ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), in April 2019, and ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326) Targeted Transition Relief (“ASU 2019-05”) in May 2019. These ASUs do not change the core principle of the guidance in ASU 2016-13. Instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. These ASUs will have the same effective date and transition requirements as ASU 2016-13. The adoption of ASU 2016-13 on January 1, 2020 did not have a material impact on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements and removes the requirement to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements. ASU 2018-13 requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For all entities, ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Our adoption of ASU 2018-13 on January 1, 2020 did not have a material impact on our consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the US
7

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
Impact of New Accounting Standards and SEC Guidance
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016 (described above). ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP that are intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. We are currently evaluating the effect of adopting this new accounting guidance, but we do not expect that adoption will have a material impact on our consolidated financial statements and disclosures.

In May 2020, the SEC adopted Release No.33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (the “Final Rule”). The Final Rule is effective on January 1, 2021. However, voluntary early adoption is permitted. We are currently evaluating the effect of adopting this new accounting guidance, but we do not expect that adoption will have a material impact on our consolidated financial statements and disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (“ASU 2020-06”), to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently evaluating the effect of adopting this new accounting guidance, but we do not expect that adoption will have a material impact on our consolidated financial statements and disclosures.

In August 2020, the SEC adopted Release No. 33-10825 “Modernization of Regulation S-K Items 101, 103, and 105” (the “Final S-K Rule”). The Final S-K Rule is effective on November 9, 2020. We are currently evaluating the effect of the Final S-K Rule, but we do not expect it will have a material impact on our consolidated financial statements and disclosures.

Significant Accounting Policies

We believe that there have been no significant changes to our significant accounting policies during the quarter ended March 31,September 30, 2020 as compared to those disclosed in our 2019 Form 10-K.
NOTE 2. Inventory and Capitalized Interest
Inventory
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the landinventory is impaired, at which point the inventory is written down to fair value (see Note 4 to our financial statements for additional details relating to our procedures for evaluating our inventories for impairment). Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction, and common costs that benefit the entire community, less impairments, if any.

8


A summary of the Company’s inventory as of March 31,September 30, 2020 and December 31, 2019 is as follows:
(In thousands)September 30, 2020December 31, 2019
Single-family lots, land and land development costs$840,637 $858,065 
Land held for sale4,357 5,670 
Homes under construction863,603 756,998 
Model homes and furnishings - at cost (less accumulated depreciation: September 30, 2020 - $14,186;
   December 31, 2019 - $12,723)
87,192 98,777 
Community development district infrastructure9,892 13,531 
Land purchase deposits37,364 28,532 
Consolidated inventory not owned364 7,934 
Total inventory$1,843,409 $1,769,507 
(In thousands)March 31, 2020 December 31, 2019
Single-family lots, land and land development costs$837,686
 $858,065
Land held for sale1,164
 5,670
Homes under construction829,230
 756,998
Model homes and furnishings - at cost (less accumulated depreciation: March 31, 2020 - $13,265;
   December 31, 2019 - $12,723)
95,548
 98,777
Community development district infrastructure12,914
 13,531
Land purchase deposits31,705
 28,532
Consolidated inventory not owned14,284
 7,934
Total inventory$1,822,531
 $1,769,507


Single-family lots, land and land development costs include raw land that the Company has purchased to develop into lots, costs incurred to develop the raw land into lots, and lots for which development has been completed, but which have not yet been used to start construction of a home.
Homes under construction include homes that are in various stages of construction. As of March 31,September 30, 2020 and December 31, 2019,, we had 1,3221,113 homes (with a carrying value of $255.1$188.4 million) and 1,459 homes (with a carrying value of $304.0 million)$304.0 million), respectively, included in homes under construction that were not subject to a sales contract.
Model homes and furnishings include homes that are under construction or have been completed and are being used as sales models. The amount also includes the net book value of furnishings included in our model homes. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful life of the assets, which is typically three years.
We own lots in certain communities in Florida that have Community Development Districts (“CDDs”). The Company records a liability for the estimated developer obligations that are probable and estimable and user fees that are required to be paid or transferred at the time the parcel or unit is sold to an end user.  The Company reduces this liability at the time of closing and the transfer of the property.  The Company recorded a $12.9an $9.9 million liability and a $13.5 million liability related to these CDD bond obligations as of March 31,September 30, 2020 and December 31, 2019, respectively, along with the related inventory infrastructure.

Land purchase deposits include both refundable and non-refundable amounts paid to third party sellers relating to the purchase of land. On an ongoing basis, the Company evaluates the land option agreements relating to the land purchase deposits. InThe Company expenses any deposits and accumulated pre-acquisition costs relating to such agreements in the period during whichwhen the Company makes the decision not to proceed with the purchase of land under an agreement, the Company expenses any deposits and accumulated pre-acquisition costs relating to such agreement.
Capitalized Interest
The Company capitalizes interest during land development and home construction.  Capitalized interest is charged to land and housing costs and expensed as the related inventory is delivered to a third party.  The summary of capitalized interest for the three and nine months ended March 31,September 30, 2020 and 2019 is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Capitalized interest, beginning of period$22,203 $22,162 $21,607 $20,765 
Interest capitalized to inventory8,758 8,291 23,678 22,461 
Capitalized interest charged to land and housing costs and expenses(8,803)(7,836)(23,127)(20,609)
Capitalized interest, end of period$22,158 $22,617 $22,158 $22,617 
Interest incurred$9,997 $12,928 $32,132 $39,087 
 Three Months Ended March 31,
(In thousands)2020 2019
Capitalized interest, beginning of period$21,607
 $20,765
Interest capitalized to inventory7,162
 6,134
Capitalized interest charged to land and housing costs and expenses(6,570) (5,393)
Capitalized interest, end of period$22,199
 $21,506
    
Interest incurred$11,862
 $12,926
9



NOTE 3. Investment in Joint Venture Arrangements
Investment in Joint Venture Arrangements
In order to minimize our investment and risk of land exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the land investment and development of a property through joint ownership and development agreements, joint ventures, and other similar arrangements. As of March 31,September 30, 2020 and December 31, 2019, our investment in such joint venture arrangements totaled $40.3$34.0 million and $37.9 million, respectively, and was reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets. The $2.4$3.9 million increasedecrease during the three-monthnine-month period ended March 31,September 30, 2020 was driven primarily by lot distributions from our joint venture arrangements of $27.0 million, offset, in part, by our cash contributions to our joint venture arrangements during the first quarternine months of 2020 of $6.5 million, offset, in part, by lot distributions from our joint venture arrangements of $3.7$24.1 million.
The majority of our investment in joint venture arrangements for both March 31,September 30, 2020 and December 31, 2019 consisted of joint ownership and development agreements for which a special purpose entity was not established (“JODAs”). In these JODAs, we own the property jointly with partners which are typically other builders, and land development activities are funded jointly until the developed lots are subdivided for separate ownership by the partners in accordance with the JODA and the approved site plan. As of March 31,September 30, 2020 and December 31, 2019, the Company had $38.1$32.1 million and $35.5 million, respectively, invested in JODAs.
The remainder of our investment in joint venture arrangements was comprised of joint venture arrangements where a special purpose entity was established to own and develop the property. For these joint venture arrangements, we generally enter into limited liability company or similar arrangements (“LLCs”) with the other partners. These entities typically engage in land development activities for the purpose of distributing or selling developed lots to the Company and its partners in the LLC. As of March 31,September 30, 2020 and December 31, 2019, the Company had $2.2$1.9 million and $2.4 million, respectively, of equity invested in LLCs. The Company’s percentage of ownership in these LLCs as of both March 31,September 30, 2020 and December 31, 2019 ranged from 25% to 74%.
We use the equity method of accounting for investments in LLCs and other joint venture arrangements, including JODAs, over which we exercise significant influence but do not have a controlling interest. Under the equity method, our share of the LLCs’ earnings or loss, if any, is included in our Unaudited Condensed Consolidated Statements of Income. The Company’s equity in the income relating to earnings from its LLCs was $0.3 million and less than $0.1 million for the period ending March 31,three months ended September 30, 2020 and its equity in loss was2019, respectively, and $0.3 million and $0.1 million for the period ending March 31,nine months ended September 30, 2020 and 2019. Our share of the profit relating to lots we purchase from our LLCs is deferred until homes are delivered by us and title passes to a homebuyer.
We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of March 31,September 30, 2020 was the amount invested of $40.3$34.0 million, which is reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets. We expect to invest further amounts in these joint venture arrangements as development of the properties progresses.
The Company assesses its investments in unconsolidated LLCs for recoverability on a quarterly basis. See Note 4 to our financial statements for additional details relating to our procedures for evaluating our investments for impairment.
Variable Interest Entities
With respect to our investments in these LLCs, we are required, under ASC 810-10, Consolidation (“ASC 810”), to evaluate whether or not such entities should be consolidated into our consolidated financial statements. We initially perform these evaluations when each new entity is created and upon any events that require reconsideration of the entity. See Note 1, “Summary of Significant Accounting Policies - Variable Interest Entities” in the Company’s 2019 Form 10-K for additional information regarding the Company’s methodology for evaluating entities for consolidation.
Land Option Agreements
In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.  In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are variable interest entities (“VIEs”) and, if so, whether we are the primary beneficiary, as further described in Note 1, “Summary of Significant Accounting Policies - Land Option Agreements” in the Company’s 2019 Form 10-K. If we are deemed to be the
10

primary beneficiary of the VIE, we will consolidate the VIE in our consolidated financial statements and reflect such assets and liabilities in our Consolidated Inventory notNot Owned in our Unaudited Condensed Consolidated Balance Sheets. At both March 31,September 30, 2020 and December 31, 2019, we


concluded that we were not the primary beneficiary of any VIEs from which we are purchasing land under option or purchase agreements.
NOTE 4. Fair Value Measurements
There are three measurement input levels for determining fair value: Level 1, Level 2, and Level 3. Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
Assets Measured on a Recurring Basis
The Company measures both mortgage loans held for sale and interest rate lock commitments (“IRLCs”) at fair value. Fair value measurement results in a better presentation of the changes in fair values of the loans and the derivative instruments used to economically hedge them.
In the normal course of business, our financial services segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within established time frames.  Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to an investor.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  The Company does not engage in speculative trading or derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers or investors are undesignated derivatives, and accordingly, are marked to fair value through earnings.  Changes in fair value measurements are included in earnings in the accompanying statements of income.
The fair value of mortgage loans held for sale is estimated based primarily on published prices for mortgage-backed securities with similar characteristics.  To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  The Company applies a fallout rate to IRLCs when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on management’s judgment and company experience.
The Company sells loans on a servicing released or servicing retained basis and receives servicing compensation.  Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors and depends on the loan type. Mortgage servicing rights (Level 3 financial instruments as they are measured using significant unobservable inputs such as mortgage prepayment rates, discount rates and delinquency rates) are periodically evaluated for impairment. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value.value, which is calculated using third-party valuations. Impairment, if any, is recognized through a valuation allowance and a reduction of revenue. The carrying value and fair value of mortgage servicing rights was $10.4$11.9 million and $9.4$11.4 million, respectively, at March 31,September 30, 2020. Therefore, the Company recorded aincreased its $0.4 million valuation allowance and impairment related to our mortgage servicing rights taken during the first half of $1.02020 by $0.1 million during the quarter ended September 30, 2020 (which was recorded as a decrease in revenue during the quarter) to bring the carrying value down to the fair value, for a net valuation allowance and impairment of $0.5 million for the quarternine months ended March 31,September 30, 2020. This $0.5 million decrease in the value of our mortgage servicing rights was caused by the disruption in the mortgage industry as a result of the COVID-19 pandemic. At December 31, 2019, the carrying value and fair value of our mortgage servicing rights were both $9.6 million.
The fair value of the Company’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date.  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
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Interest Rate Lock Commitments. IRLCs are extended to certain home-buyinghomebuying customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. Typically, the IRLCs will have a term of less than six months; however, in certain markets, the term could extend to nine months.
Some IRLCs are committed to a specific third-party investor through the use of whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings.


Forward Sales of Mortgage-Backed Securities. Forward sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted IRLC loans against the risk of changes in interest rates between the lock date and the funding date. FMBSs related to uncommitted IRLCs and FMBSs related to mortgage loans held for sale are classified and accounted for as non-designated derivative instruments and are recorded at fair value, with gains and losses recorded in current earnings.

Mortgage Loans Held for Sale. Mortgage loans held for sale consists primarily of single-family residential loans collateralized by the underlying property.  Generally, all of the mortgage loans and related servicing rights are sold to third-party investors shortly after origination.  During the period between when a loan is closed and when it is sold to an investor, the interest rate risk is covered through the use of a whole loan contract or by FMBSs.
The table below shows the notional amounts of our financial instruments at March 31,September 30, 2020 and December 31, 2019:2019:
Description of Financial Instrument (in thousands)March 31, 2020 December 31, 2019
Whole loan contracts and related committed IRLCs$980
 $1,445
Uncommitted IRLCs158,153
 87,340
FMBSs related to uncommitted IRLCs137,000
 88,000
Whole loan contracts and related mortgage loans held for sale4,085
 6,125
FMBSs related to mortgage loans held for sale145,000
 144,000
Mortgage loans held for sale covered by FMBSs145,338
 144,411

Description of Financial Instrument (in thousands)September 30, 2020December 31, 2019
Whole loan contracts and related committed IRLCs$2,924 $1,445 
Uncommitted IRLCs213,146 87,340 
FMBSs related to uncommitted IRLCs186,000 88,000 
Whole loan contracts and related mortgage loans held for sale13,750 6,125 
FMBSs related to mortgage loans held for sale116,000 144,000 
Mortgage loans held for sale covered by FMBSs120,257 144,411 
The following table sets forth the amount of (loss) gain recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Income, on assets and liabilities measured on a recurring basis for the three and nine months ended March 31,September 30, 2020 and 2019:2019:
Three Months Ended September 30,Nine Months Ended September 30,
Description (in thousands)2020201920202019
Mortgage loans held for sale$(1,338)$(1,964)$(911)$(2,981)
Forward sales of mortgage-backed securities1,670 2,299 507 3,631 
Interest rate lock commitments(853)(686)704 (258)
Whole loan contracts(20)121 (68)174 
Total (loss) gain recognized$(541)$(230)$232 $566 
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 Three Months Ended March 31,
Description (in thousands)2020 2019
Mortgage loans held for sale$3,739
 $(1,363)
Forward sales of mortgage-backed securities(6,580) 1,934
Interest rate lock commitments2,383
 (42)
Whole loan contracts54
 14
Total (loss) gain recognized$(404) $543


The following tables set forth the fair value of the Company’s derivative instruments and their location within the Unaudited Condensed Consolidated Balance Sheets for the periods indicated (except for mortgage loans held for sale which are disclosed as a separate line item):
Asset DerivativesLiability Derivatives
September 30, 2020September 30, 2020
Description of DerivativesBalance Sheet
Location		Fair Value
(in thousands)		Balance Sheet LocationFair Value
(in thousands)
Forward sales of mortgage-backed securitiesOther assets$171 Other liabilities$0 
Interest rate lock commitmentsOther assets1,380 Other liabilities0 
Whole loan contractsOther assets0 Other liabilities106 
Total fair value measurements$1,551 $106 
  Asset Derivatives Liability Derivatives
  March 31, 2020 March 31, 2020
Description of Derivatives 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities Other assets $—
 Other liabilities $6,916
Interest rate lock commitments Other assets 3,095
 Other liabilities —
Whole loan contracts Other assets —
 Other liabilities 20
Total fair value measurements   $3,095
   $6,936
  Asset Derivatives Liability Derivatives
  December 31, 2019 December 31, 2019
Description of Derivatives 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities Other assets $—
 Other liabilities $336
Interest rate lock commitments Other assets 654
 Other liabilities —
Whole loan contracts Other assets —
 Other liabilities 16
Total fair value measurements   $654
   $352

Asset DerivativesLiability Derivatives
December 31, 2019December 31, 2019
Description of DerivativesBalance Sheet
Location		Fair Value
(in thousands)		Balance Sheet LocationFair Value
(in thousands)
Forward sales of mortgage-backed securitiesOther assets$0 Other liabilities$336 
Interest rate lock commitmentsOther assets654 Other liabilities0 
Whole loan contractsOther assets0 Other liabilities16 
Total fair value measurements$654 $352 
Assets Measured on a Non-Recurring Basis
Inventory. The Company assesses inventory for recoverability on a quarterly basis based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. Determining the fair value of a community’s inventory involves a number of variables, estimates and projections, which are Level 3 measurement inputs. See Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company’s 2019 Form 10-K for additional information regarding the Company’s methodology for determining fair value.


The Company uses significant assumptions to evaluate the recoverability of its inventory, such as estimated average selling price, construction and development costs, absorption rate (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including disposition of all or a portion of the land owned), or discount rates. Changes in these assumptions could materially impact future cash flow and fair value estimates and may lead the Company to incur additional impairment charges in the future. Our analysis is conducted only if indicators of a decline in value of our inventory exist, which include, among other things, declines in gross margin on sales contracts in backlog or homes that have been delivered, slower than anticipated absorption pace, declines in average sales price or high incentive offers by management to improve absorptions, declines in margins regarding future land sales, or declines in the value of the land itself as a result of third party appraisals. If communities are not recoverable based on the estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. During the three and nine months ended March 31,September 30, 2020 and 2019, the Company did 0t record any impairment charges on its inventory.
Investment in Unconsolidated Joint Ventures.  We evaluate our investments in unconsolidated joint ventures for impairment on a quarterly basis based on the difference in the investment’s carrying value and its fair value at the time of the evaluation. If the Company has determined that the decline in value is other than temporary, the Company would write down the value of the investment to its estimated fair value. Determining the fair value of investments in unconsolidated joint ventures involves a number of variables, estimates and assumptions, which are Level 3 measurement inputs. See Note 1, “Summary of Significant Accounting Policies - Investment in Unconsolidated Joint Ventures,” in the Company’s 2019 Form 10-K for additional information regarding the Company’s methodology for determining fair value. Because of the high degree of judgment involved in developing these assumptions, it is possible that changes in these assumptions could materially impact future cash flow and fair value estimates of the investments which may lead the Company to incur additional impairment charges in the future. During the three and nine months ended March 31,September 30, 2020 and 2019, the Company did 0t record any impairment charges on its investments in unconsolidated joint ventures.
Financial Instruments
Counterparty Credit Risk. To reduce the risk associated with losses that would be recognized if counterparties failed to perform as contracted, the Company limits the entities with whom management can enter into commitments. This risk of
13

accounting loss is the difference between the market rate at the time of non-performance by the counterparty and the rate to which the Company committed.
The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31,September 30, 2020 and December 31, 2019.2019. The objective of the fair value measurement is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions.
September 30, 2020December 31, 2019
(In thousands)Fair Value HierarchyCarrying AmountFair ValueCarrying AmountFair Value
Assets:
Cash, cash equivalents and restricted cashLevel 1$202,512 $202,512 $6,083 $6,083 
Mortgage loans held for saleLevel 2140,046 140,046 155,244 155,244 
Interest rate lock commitmentsLevel 21,380 1,380 654 654 
Forward sales of mortgage-backed securitiesLevel 2171 171 0 0 
Liabilities:
Notes payable - homebuilding operationsLevel 20 0 66,000 66,000 
Notes payable - financial services operationsLevel 2136,119 136,119 136,904 136,904 
Notes payable - otherLevel 25,325 5,016 5,828 5,286 
Senior notes due 2021 (a)
Level 20 0 300,000 299,250 
Senior notes due 2025 (a)
Level 2250,000 258,125 250,000 261,563 
Senior notes due 2028 (a)
Level 2400,000 412,000 0 0 
Whole loan contracts for committed IRLCs and mortgage loans held for saleLevel 2106 106 16 16 
Forward sales of mortgage-backed securitiesLevel 20 0 336 336 
(a)Our senior notes are stated at the principal amount outstanding which does not include the impact of premiums, discounts, and debt issuance costs that are amortized to interest cost over the respective terms of the notes.
  March 31, 2020 December 31, 2019
(In thousands)Fair Value HierarchyCarrying Amount Fair Value Carrying Amount Fair Value
Assets:        
Cash, cash equivalents and restricted cashLevel 1$21,184
 $21,184
 $6,083
 $6,083
Mortgage loans held for saleLevel 2156,208
 156,208
 155,244
 155,244
Interest rate lock commitmentsLevel 23,095
 3,095
 654
 654
Liabilities:        
Notes payable - homebuilding operationsLevel 26,900
 6,900
 66,000
 66,000
Notes payable - financial services operationsLevel 2145,055
 145,055
 136,904
 136,904
Notes payable - otherLevel 27,546
 7,008
 5,828
 5,286
Senior notes due 2021 (a)
Level 2—
 —
 300,000
 299,250
Senior notes due 2025 (a)
Level 2250,000
 225,000
 250,000
 261,563
Senior notes due 2028 (a)
Level 2400,000
 336,000
 —
 —
Whole loan contracts for committed IRLCs and mortgage loans held for saleLevel 220
 20
 16
 16
Forward sales of mortgage-backed securitiesLevel 26,916
 6,916
 336
 336
(a)Our senior notes are stated at the principal amount outstanding which does not include the impact of premiums, discounts, and debt issuance costs that are amortized to interest cost over the respective terms of the notes.
The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments at March 31,September 30, 2020 and December 31, 2019:
Cash, Cash Equivalents and Restricted Cash. The carrying amounts of these items approximate fair value because they are short-term by nature.


Mortgage Loans Held for Sale, Forward Sales of Mortgage-Backed Securities, Commitments to Extend Real Estate Loans, Whole loan Contracts for Committed IRLCs and Mortgage Loans Held for Sale, Senior Notes due 2021, Senior Notes due 2025 and  Senior Notes due 2028. The fair value of these financial instruments was determined based upon market quotes at March 31,September 30, 2020 and December 31, 2019.2019. The market quotes used were quoted prices for similar assets or liabilities along with inputs taken from observable market data by correlation. The inputs were adjusted to account for the condition of the asset or liability.
Notes Payable - Homebuilding Operations. The interest rate available to the Company during the quarter ended March 31,September 30, 2020 under the Company’s $500 million unsecured revolving credit facility, dated July 18, 2013,, as amended most recently on June 30, 2020 (the “Credit Facility”), fluctuated daily with the one-month LIBOR rate plus a margin of 250 basis points, and thus the carrying value is a reasonable estimate of fair value. See Note 8 to our financial statements for additional information regarding the Credit Facility.
Notes Payable - Financial Services Operations. M/I Financial, LLC (“M/I Financial”) is a party to two credit agreements: (1) a $125 million secured mortgage warehousing agreement (which increases to $160 million from September 25, 2020 to October 15, 2020 and to $185 million from November 15, 2020 to February 4, 2021, which are periods of increased volume of mortgage originations), dated June 24, 2016,, as amended (the “MIF Mortgage Warehousing Agreement”); and (2) a $65 million mortgage repurchase agreement, dated October 30, 2017,, as amended (the “MIF Mortgage Repurchase Facility”). For each of these credit facilities, the interest rate is based on a variable rate index, and thus their carrying value is a reasonable estimate of fair value. The interest rate available to M/I Financial during the firstthird quarter of 2020 fluctuated with LIBOR. See Note 8 to our financial statements for additional information regarding the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility.

Notes Payable - Other. The estimated fair value was determined by calculating the present value of the future cash flows using the Company’s current incremental borrowing rate.
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NOTE 5. Guarantees and Indemnifications
In the ordinary course of business, M/I Financial, a 100%-owned subsidiary of M/I Homes, Inc., enters into agreements that provide a limited-life guarantee on loans sold to certain third-party purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur, primarily if the mortgagor does not meet the terms of the loan within the first six months after the sale of the loan. Loans totaling approximately $44.6$5.7 million and $48.1 million were covered under these guarantees as of March 31,September 30, 2020 and December 31, 2019, respectively.  The decrease in loans covered by these guarantees from December 31, 2019 is a result of a change in the mix of investors and their related purchase terms.  A portion of the revenue paid to M/I Financial for providing the guarantees on these loans was deferred at March 31,September 30, 2020, and will be recognized in income as M/I Financial is released from its obligation under the guarantees. The risk associated with the guarantees above is offset by the value of the underlying assets.
M/I Financial has received inquiries concerning underwriting matters from purchasers of its loans regarding certain loans totaling approximately $0.6 million at both March 31,September 30, 2020 and December 31, 2019.
M/I Financial has also guaranteed the collectability of certain loans to third party insurers (U.S. Department of Housing and Urban Development and U.S. Veterans Administration) of those loans for periods ranging from five to thirty years. As of both March 31,September 30, 2020 and December 31, 2019, the total of all loans indemnified to third party insurers relating to the above agreements was $0.6 million and $1.0 million.million, respectively. The maximum potential amount of future payments is equal to the outstanding loan value less the value of the underlying asset plus administrative costs incurred related to foreclosure on the loans, should this event occur.
The Company recorded a liability relating to the guarantees described above totaling $0.5 million at both March 31,September 30, 2020 and December 31, 2019, which is management’s best estimate of the Company’s liability with respect to such guarantees.
NOTE 6. Commitments and Contingencies
Warranty
We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered.  The amounts charged are estimated by management to be adequate to cover expected warranty-related costs under the Company’s warranty programs. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”) and our transferable structural warranty in Other Liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.
The warranty reserves for the HBLW are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the


HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.
Our warranty reserves for our transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house is delivered, the sufficiency of the structural warranty per unit charge and total reserve is re-evaluatedreevaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.
Our warranty reserve amounts are based upon historical experience and geographic location. While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs.
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A summary of warranty activity for the three and nine months ended March 31,September 30, 2020 and 2019 is as follows:
Three Months Ended September 30,Nine Months Ended
September 30,
(In thousands)2020201920202019
Warranty reserves, beginning of period$26,175 $25,474 $26,420 $26,459 
Warranty expense on homes delivered during the period4,961 3,851 12,624 10,332 
Changes in estimates for pre-existing warranties416 255 (228)990 
Charges related to stucco-related claims0 0 0 (a)0 
Settlements made during the period(4,578)(4,044)(11,842)(12,245)
Warranty reserves, end of period$26,974 $25,536 $26,974 $25,536 
 Three Months Ended March 31,
(In thousands)2020 2019
Warranty reserves, beginning of period$26,420
 $26,459
Warranty expense on homes delivered during the period3,421
 2,840
Changes in estimates for pre-existing warranties(21) 178
Settlements made during the period(3,780) (4,257)
Warranty reserves, end of period$26,040
 $25,220
(a) Represents charges for stucco-related repair costs, net of recoveries during the period.

We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets and have been named as a defendant in legal proceedings initiated by certain of such homeowners. These claims primarily relate to homes built prior to 2014 which have second story elevations with frame construction.

During the three month period ended March 31,September 30, 2020, we did not record any additional warranty charges or receive any additional recoveries for stucco-related repair costs. During the nine month period ended September 30, 2020, we (1) incurred $0.5 million of additional stucco-related charges and (2) also received $0.5 million of additional recoveries for past stucco-related claims, resulting in a net charge of zero. At March 31,September 30, 2020, the remaining reserve for (1) homes in our Florida communities that we have identified as needing repair but have not yet completed the repair and (2) estimated repair costs for homes in our Florida communities that we have not yet identified as needing repair but that may require repair in the future included within our warranty reserve was $4.4$3.7 million. We believe that this amount is sufficient to cover both known and estimated future repair costs as of March 31,September 30, 2020. Our remaining stucco-related reserve is gross of any recoveries. Stucco-related recoveries are recorded in the period the reimbursement is received.
Our review of the stucco-related issues in our Florida communities is ongoing. Our estimate of future costs of stucco-related repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate, including to reflect additional estimated future stucco-related repairs costs, which revision could be material.
We continue to investigate the extent to which we may be able to further recover a portion of our stucco repair and claims handling costs from other sources, including our direct insurers, the subcontractors involved with the construction of the homes and their insurers. As of March 31,September 30, 2020, we are unable to estimate any additional amount that we believe is probable of recovery from these sources and, as noted above, we have not recorded a receivable for recoveries nor included an estimated amount of recoveries in determining our stucco-related warranty reserve.



Performance Bonds and Letters of Credit

At March 31,September 30, 2020, the Company had outstanding approximately $237.8$267.7 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities that expire at various times through November 2027. Included in this total are: (1) $165.8$194.1 million of performance and maintenance bonds and $52.2$55.1 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $13.7$11.5 million of financial letters of credit, of which $13.2$11.0 million represent deposits on land and lot purchase agreements; and (3) $6.1$7.0 million of financial bonds.

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Land Option Contracts and Other Similar Contracts

At March 31,September 30, 2020, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $720.9$801.4 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.
Legal Matters

In addition to the legal proceedings related to stucco, the Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial position, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved. At March 31,September 30, 2020 and December 31, 2019, we had $0.9 million and $0.7 million reserved for legal expenses, respectively.
NOTE 7. Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. In connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan in March of 2018, the Company recorded goodwill of $16.4 million, which is included as Goodwill in our Consolidated Balance Sheets. This amount was based on the estimated fair values of the acquired assets and liabilities at the date of the acquisition in accordance with ASC 350.

In accordance with ASC 350, the Company analyzes goodwill for impairment on an annual basis (or more often if indicators of impairment exist). The Company performs a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value. The Company performed its annual goodwill impairment analysis during the fourth quarter of 2019, and as no indicators for impairment existed at December 31, 2019, no impairment was recorded. As a result of the temporary shut-downshutdown of our Detroit operations due to COVID-19 from March 23, 2020 through May 7, 2020 (as the state of Michigan doesdid not deem housing construction an essential business), we performed a goodwill impairment analysis of our Detroit reporting unit at September 30, 2020 and determined no impairment existed at March 31, 2020.existed. However, we will continue to monitor the fair value of the reporting unit in future periods if conditions worsen operations are not permitted to re-open, or other events occur that could impact the fair value of the reporting unit.
NOTE 8. Debt
Notes Payable - Homebuilding
The Credit Facility provides for an aggregate commitment amount of $500 million including a $125and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $600 million, sub-facility for letters of credit.subject to obtaining additional commitments from lenders. The Credit Facility expiresmatures on July 18, 2023 for $475 million of commitments and July 18, 2021. for $25 million of commitments. Interest on amounts borrowed under the Credit Facility is payable at a rate which is adjusted daily and is equal to the sum of the one-month LIBOR rate(subject to a floor of 0.75%) plus a margin of 250 basis points. The margin is subjectpoints (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio.ratio). The Credit Facility also contains certain financial covenants. At March 31,September 30, 2020, the Company was in compliance with all financial covenants of the Credit Facility.


The available amount under the Credit Facility is computed in accordance with a borrowing base, which is calculated by applying various advance rates for different categories of inventory, and totaled $626.6$829.6 million of availability for additional senior debt at March 31,September 30, 2020. As a result, the full $500 million commitment amount of the Credit Facility was available, less any borrowings and letters of credit outstanding. At March 31,September 30, 2020, there were $6.9 million of0 borrowings outstanding and $65.8$66.6 million of letters of credit outstanding, leaving a net remaining borrowing availability of $427.3$433.4 million. The Credit Facility includes a $125 million sub-facility for letters of credit.
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The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 12 to our financial statements), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indentures forgoverning the Company’s $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028 (the “2028 Senior Notes”) and the Company’s $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”). The guarantors for the Credit Facility (the “Guarantor Subsidiaries”) are the same subsidiaries that guarantee the 2028 Senior Notes and the 2025 Senior Notes.
The Company’s obligations under the Credit Facility are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness. Our obligations under the Credit Facility are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
Notes Payable — Financial Services
The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides for a maximum borrowing availability of $125 million, which increasedincreases to $160 million from September 25, 20192020 to October 15, 20192020 and to $185 million from November 15, 20192020 to February 4, 20202021 (periods of increased volume of mortgage originations). The MIF Mortgage Warehousing Agreement expires on June 19, 2020.May 28, 2021. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the floatingone-month LIBOR rate (subject to a floor of 1.0%) plus a spread of 200 basis points. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At March 31,September 30, 2020, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Warehousing Agreement.
The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Repurchase Facility provides for a mortgage repurchase facility with a maximum borrowing availability of $65 million. The MIF Mortgage Repurchase Facility expireswas scheduled to expire on October 26, 2020.2020. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floatingone-month LIBOR rate plus 175 or 200 basis points depending on the loan type. Effective October 26, 2020, M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility which, among other things, extends the term of the facility for an additional year to October 25, 2021, increases the maximum borrowing availability to $90 million and establishes a floor on one-month LIBOR of 1.0%. The MIF Mortgage Repurchase Facility also contains certain financial covenants. At March 31,September 30, 2020, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.
At March 31,both September 30, 2020 and December 31, 2019, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $190.0 million and $225.0 million, respectively.million. At March 31,September 30, 2020 and December 31, 2019, M/I Financial had $145.1$136.1 million and $136.9 million outstanding on a combined basis under its credit facilities, respectively.
Senior Notes
On January 22, 2020, the Company issued $400.0 million aggregate principal amount of the 2028 Senior Notes. The 2028 Senior Notes bear interest at a rate of 4.95% per year, payable semiannually in arrears on February 1 and August 1 of each year (commencing on August 1, 2020), and mature on February 1, 2028.2028. We may redeem all or any portion of the 2028 Senior Notes on or after February 1, 2023 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 103.713% of the principal amount outstanding, but will decline to 102.475% of the principal amount outstanding if redeemed during the 12-month period beginning on February 1, 2024, will further decline to 101.238% of the principal amount outstanding if redeemed during the 12-month period beginning on February 1, 2025 and will further decline to 100.000% of the principal amount outstanding if redeemed on or after February 1, 2026, but prior to maturity.
The Company used a portion of the net proceeds from the issuance of the 2028 Senior Notes to redeem all $300 million aggregate principal amount of its then outstanding 6.75% Senior Notes due 2021 (the “2021 Senior Notes”) at 100.000% of the principal amount outstanding, plus accrued and unpaid interest thereon, on January 22, 2020.

As of both March 31,September 30, 2020 and December 31, 2019, we had $250.0 million of our 2025 Senior Notes outstanding. The 2025 Senior Notes bear interest at a rate of 5.625% per year, payable semiannually in arrears on February 1 and August 1 of each year, and mature on August 1, 2025.2025. We may redeem all or any portion of the 2025 Senior Notes on or after August 1, 2020 at a stated


redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be
18

104.219% of the principal amount outstanding, but will decline to 102.813% of the principal amount outstanding if redeemed during the 12-month period beginning on August 1, 2021, will further decline to 101.406% of the principal amount outstanding if redeemed during the 12-month period beginning on August 1, 2022 and will further decline to 100.000% of the principal amount outstanding if redeemed on or after August 1, 2023, but prior to maturity.
The 2028 Senior Notes and the 2025 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2028 Senior Notes and the indenture governing the 2025 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2028 Senior Notes and the indenture governing the 2025 Senior Notes. As of March 31,September 30, 2020, the Company was in compliance with all terms, conditions, and covenants under the indentures.
The 2028 Senior Notes and the 2025 Senior Notes are fully and unconditionally guaranteed jointly and severally on a senior unsecured basis by the Guarantor Subsidiaries. The 2028 Senior Notes and the 2025 Senior Notes are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness.  The 2028 Senior Notes and the 2025 Senior Notes are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
The indenture governing our 2028 Senior Notes and the indenture governing the 2025 Senior Notes limit our ability to pay dividends on, and repurchase, our common shares and any of our preferred shares then outstanding to the amount of the positive balance in our “restricted payments basket,” as defined in the indentures. In each case, the “restricted payments basket” is equal to $125.0 million plus (1) 50% of our aggregate consolidated net income (or minus 100% of our aggregate consolidated net loss) from October 1, 2015, excluding income or loss from Unrestricted Subsidiaries, plus (2) 100% of the net cash proceeds from either contributions to the common equity of the Company after December 1, 2015 or the sale of qualified equity interests after December 1, 2015, plus other items and subject to other exceptions. The positive balance in our restricted payments basket was $276.3$328.6 million at March 31,September 30, 2020 and $264.5 million at December 31, 2019. The determination to pay future dividends on, or make future repurchases of, our common shares will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and compliance with debt covenants, and other factors deemed relevant by our board of directors.
Notes Payable - Other
The Company had other borrowings, which are reported in Notes Payable - Other in our Unaudited Condensed Consolidated Balance Sheets, totaling $7.5$5.3 million and $5.8 million as of March 31,September 30, 2020 and December 31, 2019, respectively, which are comprised of notes payable acquired in the normal course of business.


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NOTE 9. Earnings Per Share
The table below presents a reconciliation between basic and diluted weighted average shares outstanding, net income, and basic and diluted income per share for the three and nine months ended March 31,September 30, 2020 and 2019:2019:
 Three Months Ended
 March 31,
(In thousands, except per share amounts)2020 2019
NUMERATOR   
Net income$31,746
 $17,723
DENOMINATOR   
Basic weighted average shares outstanding28,478
 27,498
Effect of dilutive securities:   
Stock option awards310
 244
Deferred compensation awards221
 228
Diluted weighted average shares outstanding$29,009
 $27,970
Earnings per common share:   
Basic$1.11
 $0.64
Diluted$1.09
 $0.63
Anti-dilutive equity awards not included in the calculation of diluted earnings per common share211
 606

Three Months EndedNine Months Ended
September 30,September 30,
(In thousands, except per share amounts)2020201920202019
NUMERATOR
Net income$73,537 $37,838 $159,791 $85,807 
DENOMINATOR
Basic weighted average shares outstanding28,653 27,981 28,554 27,695 
Effect of dilutive securities:
Stock option awards376 403 253 338 
Deferred compensation awards257 214 223 205 
Diluted weighted average shares outstanding$29,286 $28,598 $29,030 $28,238 
Earnings per common share:
Basic$2.57 $1.35 $5.60 $3.10 
Diluted$2.51 $1.32 $5.50 $3.04 
Anti-dilutive equity awards not included in the calculation of diluted earnings per common share435 0 360 412 
NOTE 10. Income Taxes
During the three months ended March 31,September 30, 2020 and 2019, the Company recorded a tax provision of $9.6$21.6 million and $5.8$12.2 million, respectively, which reflects income tax expense related to the periods’ income before income taxes. The effective tax rate for the three months ended March 31,September 30, 2020 and 2019 was 22.7% and 24.4%, respectively. During the three months ended September 30, 2020, we recorded a $2.5 million tax benefit related to the retroactive reinstatement of energy efficient homes tax credits. During the nine months ended September 30, 2020 and 2019, the Company recorded a tax provision of $48.4 million and $28.9 million, respectively. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 23.2% and 24.5%25.2%, respectively. During the quarternine months ended March 31,September 30, 2020, we recorded a $0.4$3.7 million tax benefit related to the retroactive reinstatement of energy efficient homes tax credits and a $0.4 million increase in tax benefit from equity compensation taken during the quarter ended March 31,first nine months of 2020.
The Company had $0.5$0.2 million of state NOLnet operating loss (“NOL”) carryforwards, net of the federal benefit, at March 31,September 30, 2020. Our state NOLs may be carried forward from one to 15 years, depending on the tax jurisdiction, with $0.4$0.1 million expiring between 2022 and 2027 and $0.1 million expiring between 2028 and 2032, absent sufficient state taxable income.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law (the “CARES Act”).law. The CARES Act includes several significant business tax provisions including modifications for net operating losses, credit for prior-year minimum tax liability and limitations on business interest and charitable contributions. The CARES Act also provides for an employee retention credit and technical corrections regarding qualified improvement property. We are assessing the tax impact of the CARES Act as it relates to the Company.Company but do not expect it to have a material impact on our tax rate for 2020.


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NOTE 11. Business Segments
The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our individual homebuilding operating segments and the results of our financial services operations; (2) the results of our homebuilding reportable segments; and (3) our consolidated financial results.
In accordance with ASC 280, Segment Reporting (“ASC 280”), we have identified each homebuilding division as an operating segment and have elected to aggregate our operating segments into separate reportable segments as they share similar aggregation characteristics prescribed in ASC 280 in the following regards: (1) long-term economic characteristics; (2) historical and expected future long-term gross margin percentages; (3) housing products, production processes and methods of distribution; and (4) geographical proximity.
During 2019, we decided to wind down our Washington D.C. operations, which was substantially complete by December 31, 2019. As a result, during the second quarter of 2019, we re-evaluated our reportable segments and elected to aggregate our Charlotte and Raleigh, North Carolina operating segments into our existing Southern region based on the aggregation criteria described above. As a result of this re-evaluation, we determined that our reportable segments are: Northern homebuilding; Southern homebuilding; and financial services operations. All prior year segment information has been recast to conform with this new presentation. The change in the reportable segments has no effect on the Company's condensed consolidated balance sheets, statement of income or statement of cash flows for the periods presented.
The homebuilding operating segments that comprise each of our reportable segments are as follows:
NorthernSouthern
Chicago, IllinoisOrlando, Florida
Cincinnati, OhioSarasota, Florida
Columbus, OhioTampa, Florida
Indianapolis, IndianaAustin, Texas
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas
Detroit, MichiganHouston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina
NorthernSouthern
Chicago, IllinoisOrlando, Florida
Cincinnati, OhioSarasota, Florida
Columbus, OhioTampa, Florida
Indianapolis, IndianaAustin, Texas
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas
Detroit, MichiganHouston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina



The following table shows, by segment:segment, revenue, operating income and interest expense for the three and nine months ended March 31,September 30, 2020 and 2019, as well as the Company’s income before income taxes for such periods:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Revenue:
Northern homebuilding$350,591 $270,063 $890,201 $723,295 
Southern homebuilding468,384 369,828 1,188,056 995,305 
Financial services (a)
28,946 13,454 61,461 39,540 
Total revenue$847,921 $653,345 $2,139,718 $1,758,140 
Operating income:
Northern homebuilding$38,365 $29,587 (b)$91,487 $70,559 (b)
Southern homebuilding55,861 32,500 129,037 76,308 
Financial services (a)
19,887 6,609 37,706 19,943 
Less: Corporate selling, general and administrative expense(18,017)(14,047)(41,891)(35,556)
Total operating income$96,096 $54,649 (b)$216,339 $131,254 (b)
Interest expense:
Northern homebuilding$122 $1,505 $2,636 $5,360 
Southern homebuilding409 2,146 3,759 8,602 
Financial services (a)
708 986 2,059 2,664 
Total interest expense$1,239 $4,637 $8,454 $16,626 
Equity in income from joint venture arrangements(252)(52)(307)(118)
Income before income taxes$95,109 $50,064 $208,192 $114,746 
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of an immaterial amount of mortgage refinancing.
(b)Includes $0.1 million of acquisition-related charges taken during the three months ended September 30, 2019 and $0.6 million of acquisition-related charges taken during the nine months ended September 30, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
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 Three Months Ended March 31,
(In thousands)2020 2019
Revenue:   
Northern homebuilding$240,270
 $200,362
Southern homebuilding323,866
 268,964
Financial services (a)
13,467
 11,783
Total revenue$577,603
 $481,109
    
Operating income:   
Northern homebuilding (b)
$20,881
 $16,535
Southern homebuilding28,857
 17,594
Financial services (a)
6,362
 5,695
Less: Corporate selling, general and administrative expense(10,096) (9,432)
Total operating income (b)
$46,004
 $30,392
    
Interest expense:   
Northern homebuilding$1,811
 $2,481
Southern homebuilding2,158
 3,568
Financial services (a)
731
 743
Total interest expense$4,700
 $6,792
    
Equity in (income) loss from joint venture arrangements(52) 121
    
Income before income taxes$41,356
 $23,479
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of an immaterial amount of mortgage refinancing.
(b)Includes $0.4 million of acquisition-related charges taken during the three months ended March 31, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
The following tables show total assets by segment at March 31,September 30, 2020 and December 31, 20192019:
September 30, 2020
(In thousands)NorthernSouthernCorporate, Financial Services and UnallocatedTotal
Deposits on real estate under option or contract$4,173 $33,191 $0 $37,364 
Inventory (a)
832,855 973,190 0 1,806,045 
Investments in joint venture arrangements1,324 32,714 0 34,038 
Other assets39,462 64,660 (b)438,986 (c)543,108 
Total assets$877,814 $1,103,755 $438,986 $2,420,555 
:
December 31, 2019
(In thousands)NorthernSouthernCorporate, Financial Services and UnallocatedTotal
Deposits on real estate under option or contract$3,655 $24,877 $0 $28,532 
Inventory (a)
783,972 957,003 0 1,740,975 
Investments in joint venture arrangements1,672 36,213 0 37,885 
Other assets21,564 52,662 (b)223,976 298,202 
Total assets$810,863 $1,070,755 $223,976 $2,105,594 
(a)Inventory includes single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.
(c)Includes a $34.2 million increase in operating lease right-of-use assets primarily due to the commencement of a ten-year renewable lease on June 29, 2020 for the Company’s new corporate headquarters.

 March 31, 2020
(In thousands)Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$4,407
 $27,298
 $—
 $31,705
Inventory (a)
821,291
 969,535
 —
 1,790,826
Investments in joint venture arrangements1,688
 38,618
 —
 40,306
Other assets26,571
 52,959
(b) 
256,596
 336,126
Total assets$853,957
 $1,088,410
 $256,596
 $2,198,963
 December 31, 2019
(In thousands)Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$3,655
 $24,877
 $—
 $28,532
Inventory (a)
783,972
 957,003
 —
 1,740,975
Investments in joint venture arrangements1,672
 36,213
 —
 37,885
Other assets21,564
 52,662
(b) 
223,976
 298,202
Total assets$810,863
 $1,070,755
 $223,976
 $2,105,594
(a)Inventory includes single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.



NOTE 12. Supplemental Guarantor Information
The Company’s obligations under the 2028 Senior Notes and the 2025 Senior Notes are not guaranteed by all of the Company’s subsidiaries and, therefore, the Company has disclosed condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The Guarantor Subsidiaries of the 2028 Senior Notes and the 2025 Senior Notes are the same.
The following condensed consolidating financial information includes balance sheets, statements of income and cash flow information for M/I Homes, Inc. (the parent company and the issuer of the aforementioned guaranteed notes), the Guarantor Subsidiaries, collectively, and for all other subsidiaries and joint ventures of the Company (the “Unrestricted Subsidiaries”), collectively. Each Guarantor Subsidiary is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. and has fully and unconditionally guaranteed the (1) 2028 Senior Notes on a joint and several senior unsecured basis and (2) 2025 Senior Notes on a joint and several senior unsecured basis.
There are no significant restrictions on the parent company’s ability to obtain funds from its Guarantor Subsidiaries in the form of a dividend, loan, or other means.
As of March 31,September 30, 2020, each of the Company’s subsidiaries is a Guarantor Subsidiary, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries, subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indenture governing the 2028 Senior Notes and the indenture governing the 2025 Senior Notes.
In the condensed financial tables presented below, the parent company presents all of its 100%-owned subsidiaries as if they were accounted for under the equity method. All applicable corporate expenses have been allocated appropriately among the Guarantor Subsidiaries and Unrestricted Subsidiaries.

22

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended September 30, 2020
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
Revenue$0 $818,975 $28,946 $0 $847,921 
Costs and expenses:
Land and housing0 653,407 0 0 653,407 
General and administrative0 39,325 9,554 0 48,879 
Selling0 49,539 0 0 49,539 
Equity in income from joint venture arrangements0 0 (252)0 (252)
Interest0 531 708 0 1,239 
Total costs and expenses0 742,802 10,010 0 752,812 
Income before income taxes0 76,173 18,936 0 95,109 
Provision for income taxes0 17,533 4,039 0 21,572 
Equity in subsidiaries73,537 0 0 (73,537)0 
Net income$73,537 $58,640 $14,897 $(73,537)$73,537 

Three Months Ended September 30, 2019
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
Revenue$0 $639,891 $13,454 $0 $653,345 
Costs and expenses:
Land and housing0 519,164 0 0 519,164 
General and administrative0 32,332 7,053 0 39,385 
Selling0 40,147 0 0 40,147 
Equity in income from joint venture arrangements0 0 (52)0 (52)
Interest0 3,650 987 0 4,637 
Total costs and expenses0 595,293 7,988 0 603,281 
Income before income taxes0 44,598 5,466 0 50,064 
Provision for income taxes0 11,222 1,004 0 12,226 
Equity in subsidiaries37,838 0 0 (37,838)0 
Net income$37,838 $33,376 $4,462 $(37,838)$37,838 
23

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Nine Months Ended September 30, 2020
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
Revenue$0 $2,078,257 $61,461 $0 $2,139,718 
Costs and expenses:
Land and housing0 1,672,122 0 0 1,672,122 
General and administrative0 99,065 24,698 0 123,763 
Selling0 127,494 0 0 127,494 
Equity in income from joint venture arrangements0 0 (307)0 (307)
Interest0 6,395 2,059 0 8,454 
Total costs and expenses0 1,905,076 26,450 0 1,931,526 
Income before income taxes0 173,181 35,011 0 208,192 
Provision for income taxes0 41,181 7,220 0 48,401 
Equity in subsidiaries159,791 0 0 (159,791)0 
Net income$159,791 $132,000 $27,791 $(159,791)$159,791 

Nine Months Ended September 30, 2019
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
Revenue$0 $1,718,600 $39,540 $0 $1,758,140 
Costs and expenses:
Land and housing0 1,411,488 0 0 1,411,488 
General and administrative0 86,080 20,168 0 106,248 
Selling0 109,150 0 0 109,150 
Equity in income from joint venture arrangements0 0 (118)0 (118)
Interest0 13,962 2,664 0 16,626 
Total costs and expenses0 1,620,680 22,714 0 1,643,394 
Income before income taxes0 97,920 16,826 0 114,746 
Provision for income taxes0 25,555 3,384 0 28,939 
Equity in subsidiaries85,807 0 0 (85,807)0 
Net income$85,807 $72,365 $13,442 $(85,807)$85,807 
24

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2020
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
ASSETS:
Cash, cash equivalents and restricted cash$0 $156,744 $45,768 $0 $202,512 
Mortgage loans held for sale0 0 140,046 0 140,046 
Inventory0 1,843,409 0 0 1,843,409 
Property and equipment - net0 24,919 777 0 25,696 
Investment in joint venture arrangements0 32,139 1,899 0 34,038 
Operating lease right-of-use assets0 42,405 10,169 0 52,574 
Deferred income tax asset0 9,205 0 0 9,205 
Investment in subsidiaries1,079,323 0 0 (1,079,323)0 
Intercompany assets734,269 0 0 (734,269)0 
Goodwill0 16,400 0 0 16,400 
Other assets2,994 78,709 14,972 0 96,675 
TOTAL ASSETS$1,816,586 $2,203,930 $213,631 $(1,813,592)$2,420,555 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accounts payable$0 $175,668 $913 $0 $176,581 
Customer deposits0 66,632 0 0 66,632 
Operating lease liabilities0 42,497 10,169 0 52,666 
Intercompany liabilities0 733,275 994 (734,269)0 
Other liabilities0 147,478 8,912 0 156,390 
Community development district obligations0 9,892 0 0 9,892 
Obligation for consolidated inventory not owned0 364 0 0 364 
Notes payable bank - homebuilding operations0 0 0 0 0 
Notes payable bank - financial services operations0 0 136,119 0 136,119 
Notes payable - other0 5,325 0 0 5,325 
Senior notes due 2025 - net247,483 0 0 0 247,483 
Senior notes due 2028 - net394,363 0 0 0 394,363 
TOTAL LIABILITIES641,846 1,181,131 157,107 (734,269)1,245,815 
SHAREHOLDERS’ EQUITY1,174,740 1,022,799 56,524 (1,079,323)1,174,740 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,816,586 $2,203,930 $213,631 $(1,813,592)$2,420,555 

25

  Three Months Ended March 31, 2020
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $—
$564,136
$13,467
$—
$577,603
Costs and expenses:      
Land and housing —
460,924
—
—
460,924
General and administrative —
26,563
7,284
—
33,847
Selling —
36,828
—
—
36,828
Equity in income from joint venture arrangements —
—
(52)—
(52)
Interest —
3,969
731
—
4,700
Total costs and expenses —
528,284
7,963
—
536,247
       
Income before income taxes —
35,852
5,504
—
41,356
       
Provision for income taxes —
8,581
1,029
—
9,610
       
Equity in subsidiaries 31,746
—
—
(31,746)—
       
Net income $31,746
$27,271
$4,475
$(31,746)$31,746
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2019
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
ASSETS:
Cash, cash equivalents and restricted cash$0 $219 $11,589 $(5,725)$6,083 
Mortgage loans held for sale0 0 155,244 0 155,244 
Inventory0 1,769,507 0 0 1,769,507 
Property and equipment - net0 21,372 746 0 22,118 
Investment in joint venture arrangements0 35,391 2,494 0 37,885 
Operating lease right-of-use assets0 15,689 2,726 0 18,415 
Deferred income tax asset0 9,631 0 0 9,631 
Investment in subsidiaries928,942 0 0 (928,942)0 
Intercompany assets619,204 0 0 (619,204)0 
Goodwill0 16,400 0 0 16,400 
Other assets1,411 56,134 12,766 0 70,311 
TOTAL ASSETS$1,549,557 $1,924,343 $185,565 $(1,553,871)$2,105,594 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accounts payable$0 $130,136 $615 $(5,725)$125,026 
Customer deposits0 34,462 0 0 34,462 
Intercompany liabilities0 618,946 258 (619,204)0 
Operating lease liabilities0 15,691 2,724 0 18,415 
Other liabilities0 141,015 6,922 0 147,937 
Community development district obligations0 13,531 0 0 13,531 
Obligation for consolidated inventory not owned0 7,934 0 0 7,934 
Notes payable bank - homebuilding operations0 66,000 0 0 66,000 
Notes payable bank - financial services operations0 0 136,904 0 136,904 
Notes payable - other0 5,828 0 0 5,828 
Senior notes due 2021 - net298,988 0 0 0 298,988 
Senior notes due 2025 - net247,092 0 0 0 247,092 
TOTAL LIABILITIES546,080 1,033,543 147,423 (624,929)1,102,117 
SHAREHOLDERS’ EQUITY1,003,477 890,800 38,142 (928,942)1,003,477 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,549,557 $1,924,343 $185,565 $(1,553,871)$2,105,594 

  Three Months Ended March 31, 2019
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $—
$469,326
$11,783
$—
$481,109
Costs and expenses:      
Land and housing —
388,467
—
—
388,467
General and administrative —
24,433
6,266
—
30,699
Selling —
31,551
—
—
31,551
Equity in loss from joint venture arrangements —
—
121
—
121
Interest —
6,049
743
—
6,792
Total costs and expenses —
450,500
7,130
—
457,630
       
Income before income taxes —
18,826
4,653
—
23,479
       
Provision for income taxes —
4,755
1,001
—
5,756
       
Equity in subsidiaries 17,723
—
—
(17,723)—
       
Net income $17,723
$14,071
$3,652
$(17,723)$17,723




UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
       
  March 31, 2020
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
ASSETS:      
Cash, cash equivalents and restricted cash $—
$486
$22,856
$(2,158)$21,184
Mortgage loans held for sale —
—
156,208
—
156,208
Inventory —
1,822,531
—
—
1,822,531
Property and equipment - net —
20,372
674
—
21,046
Investment in joint venture arrangements —
38,077
2,229
—
40,306
Operating lease right-of-use assets —
16,700
3,375
—
20,075
Deferred income tax asset —
9,540
—
—
9,540
Investment in subsidiaries 959,789
—
—
(959,789)—
Intercompany assets 717,921
—
—
(717,921)—
Goodwill —
16,400
—
—
16,400
Other assets 1,182
71,741
18,750
—
91,673
TOTAL ASSETS $1,678,892
$1,995,847
$204,092
$(1,679,868)$2,198,963
      
LIABILITIES AND SHAREHOLDERS’ EQUITY  
      
LIABILITIES:     
Accounts payable $—
$151,591
$823
$(2,158)$150,256
Customer deposits —
45,099
—
—
45,099
Operating lease liabilities —
16,700
3,375
—
20,075
Intercompany liabilities —
715,527
2,394
(717,921)—
Other liabilities —
107,214
10,728
—
117,942
Community development district obligations —
12,914
—
—
12,914
Obligation for consolidated inventory not owned —
14,284
—
—
14,284
Notes payable bank - homebuilding operations —
6,900
—
—
6,900
Notes payable bank - financial services operations —
—
145,055
—
145,055
Notes payable - other —
7,546
—
—
7,546
Senior notes due 2025 - net 247,222
—
—
—
247,222
Senior notes due 2028 - net 393,989
—
—
—
393,989
TOTAL LIABILITIES 641,211
1,077,775
162,375
(720,079)1,161,282
       
SHAREHOLDERS’ EQUITY 1,037,681
918,072
41,717
(959,789)1,037,681
       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,678,892
$1,995,847
$204,092
$(1,679,868)$2,198,963




CONDENSED CONSOLIDATING BALANCE SHEET
       
  December 31, 2019
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
ASSETS:      
Cash, cash equivalents and restricted cash $—
$219
$11,589
$(5,725)$6,083
Mortgage loans held for sale —
—
155,244
—
155,244
Inventory —
1,769,507
—
—
1,769,507
Property and equipment - net —
21,372
746
—
22,118
Investment in joint venture arrangements —
35,391
2,494
—
37,885
Operating lease right-of-use assets —
15,689
2,726
—
18,415
Deferred income tax asset —
9,631
—
—
9,631
Investment in subsidiaries 928,942
—
—
(928,942)—
Intercompany assets 619,204
—
—
(619,204)—
Goodwill —
16,400
—
—
16,400
Other assets 1,411
56,134
12,766
—
70,311
TOTAL ASSETS $1,549,557
$1,924,343
$185,565
$(1,553,871)$2,105,594
      
LIABILITIES AND SHAREHOLDERS’ EQUITY  
      
LIABILITIES:     
Accounts payable $—
$130,136
$615
$(5,725)$125,026
Customer deposits —
34,462
—
—
34,462
Intercompany liabilities —
618,946
258
(619,204)—
Operating lease liabilities —
15,691
2,724
—
18,415
Other liabilities —
141,015
6,922
—
147,937
Community development district obligations —
13,531
—
—
13,531
Obligation for consolidated inventory not owned —
7,934
—
—
7,934
Notes payable bank - homebuilding operations —
66,000
—
—
66,000
Notes payable bank - financial services operations —
—
136,904
—
136,904
Notes payable - other —
5,828
—
—
5,828
Senior notes due 2021 - net 298,988
—
—
—
298,988
Senior notes due 2025 - net 247,092
—
—
—
247,092
TOTAL LIABILITIES 546,080
1,033,543
147,423
(624,929)1,102,117
       
SHAREHOLDERS’ EQUITY 1,003,477
890,800
38,142
(928,942)1,003,477
       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,549,557
$1,924,343
$185,565
$(1,553,871)$2,105,594





26

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31, 2020Nine Months Ended September 30, 2020
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES: CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities$1,850
$(26,758)$1,581
$(900)$(24,227)Net cash provided by (used in) operating activities$10,360 $153,255 $43,021 $(9,410)$197,226 
 
CASH FLOWS FROM INVESTING ACTIVITIES: CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment—
(440)(11)—
(451)Purchase of property and equipment0 (8,151)(314)0 (8,465)
Return of capital from unconsolidated joint ventures—
—
363
—
363
Return of capital from unconsolidated joint ventures0 0 1,213 0 1,213 
Intercompany investing(96,955)—
—
96,955
—
Intercompany investing(110,525)0 0 110,525 0 
Investments in and advances to joint venture arrangements—
(6,451)(7)—
(6,458)Investments in and advances to joint venture arrangements0 (24,060)(15)0 (24,075)
Net cash (used in) provided by investing activities(96,955)(6,891)345
96,955
(6,546)Net cash (used in) provided by investing activities(110,525)(32,211)884 110,525 (31,327)
 
CASH FLOWS FROM FINANCING ACTIVITIES: CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes due 2021(300,000)—
—
—
(300,000)Repayment of senior notes due 2021(300,000)0 0 0 (300,000)
Proceeds from issuance of senior notes due 2028400,000
—
—
—
400,000
Proceeds from issuance of senior notes due 2028400,000 0 0 0 400,000 
Proceeds from bank borrowings - homebuilding operations—
194,300
—
—
194,300
Proceeds from bank borrowings - homebuilding operations0 306,800 0 0 306,800 
Principal repayments of bank borrowings - homebuilding operations—
(253,400)—
—
(253,400)Principal repayments of bank borrowings - homebuilding operations0 (372,800)0 0 (372,800)
Net proceeds from bank borrowings - financial services operations—
—
8,151
—
8,151
Proceeds from notes payable - other and CDD bond obligations—
1,718
—
—
1,718
Net repayments of bank borrowings - financial services operationsNet repayments of bank borrowings - financial services operations0 0 (785)0 (785)
Principal repayments of notes payable - other and CDD bond obligationsPrincipal repayments of notes payable - other and CDD bond obligations0 (503)0 0 (503)
Intercompany financing—
91,298
2,090
(93,388)—
Intercompany financing0 104,291 509 (104,800)0 
Repurchase of common shares(1,912)—
—
—
(1,912)Repurchase of common shares(1,912)0 0 0 (1,912)
Dividends paid—
—
(900)900
—
Dividends paid0 0 (9,410)9,410 0 
Debt issue costs(6,165)—
—


(6,165)Debt issue costs(6,177)(2,307)(40)0 (8,524)
Proceeds from exercise of stock options3,182
—
—
—
3,182
Proceeds from exercise of stock options8,254 0 0 0 8,254 
Net cash provided by (used in) financing activities95,105
33,916
9,341
(92,488)45,874
Net cash provided by (used in) financing activities100,165 35,481 (9,726)(95,390)30,530 
 
Net increase in cash, cash equivalents and restricted cash—
267
11,267
3,567
15,101
Net increase in cash, cash equivalents and restricted cash0 156,525 34,179 5,725 196,429 
Cash, cash equivalents and restricted cash balance at beginning of period—
219
11,589
(5,725)6,083
Cash, cash equivalents and restricted cash balance at beginning of period0 219 11,589 (5,725)6,083 
Cash, cash equivalents and restricted cash balance at end of period$—
$486
$22,856
$(2,158)$21,184
Cash, cash equivalents and restricted cash balance at end of period$0 $156,744 $45,768 $0 $202,512 

 Three Months Ended March 31, 2019
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
      
CASH FLOWS FROM OPERATING ACTIVITIES:     
Net cash provided by (used in) operating activities$4,180
$(72,925)$50,292
$(4,180)$(22,633)
      
CASH FLOWS FROM INVESTING ACTIVITIES:     
Purchase of property and equipment—
(427)(33)—
(460)
Intercompany Investing(1,458)—
—
1,458
—
Investments in and advances to joint venture arrangements—
(5,928)(113)—
(6,041)
Net cash (used in) provided by investing activities(1,458)(6,355)(146)1,458
(6,501)
      
CASH FLOWS FROM FINANCING ACTIVITIES:     
Proceeds from bank borrowings - homebuilding operations—
218,100
—
—
218,100
Principal repayments of bank borrowings - homebuilding operations—
(116,700)—
—
(116,700)
Net repayments of bank borrowings - financial services operations—
—
(49,142)—
(49,142)
Intercompany financing—
(792)2,250
(1,458)—
Repurchase of common shares(5,150)—
—
—
(5,150)
Dividends paid—
—
(4,180)4,180
—
Proceeds from exercise of stock options2,428
—
—
—
2,428
Net cash (used in) provided by financing activities(2,722)100,608
(51,072)2,722
49,536
      
Net increase (decrease) in cash, cash equivalents and restricted cash—
21,328
(926)—
20,402
Cash, cash equivalents and restricted cash balance at beginning of period—
5,554
15,975
—
21,529
Cash, cash equivalents and restricted cash balance at end of period$—
$26,882
$15,049
$—
$41,931


Nine Months Ended September 30, 2019
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities$9,530 $(48,625)$49,602 $(9,530)$977 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment0 (2,438)(188)0 (2,626)
Return of capital from unconsolidated joint ventures0 0 438 0 438 
Intercompany Investing(18,728)0 0 18,728 0 
Investments in and advances to joint venture arrangements0 (23,351)(171)0 (23,522)
Net cash (used in) provided by investing activities(18,728)(25,789)79 18,728 (25,710)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - homebuilding operations0 568,900 0 0 568,900 
Principal repayments of bank borrowings - homebuilding operations0 (496,400)0 0 (496,400)
Net repayments of bank borrowings - financial services operations0 0 (44,574)0 (44,574)
Principal repayments of notes payable - other and CDD bond obligations0 (429)0 0 (429)
Intercompany financing0 16,155 2,573 (18,728)0 
Repurchase of common shares(5,150)0 0 0 (5,150)
Dividends paid0 0 (9,530)9,530 0 
Debt issue costs0 0 (40)0 (40)
Proceeds from exercise of stock options14,348 0 0 0 14,348 
Net cash provided by (used in) financing activities9,198 88,226 (51,571)(9,198)36,655 
Net increase (decrease) in cash, cash equivalents and restricted cash0 13,812 (1,890)0 11,922 
Cash, cash equivalents and restricted cash balance at beginning of period0 5,554 15,975 0 21,529 
Cash, cash equivalents and restricted cash balance at end of period$0 $19,366 $14,085 $0 $33,451 


27

NOTE 13. Share Repurchase Program
On August 14, 2018, the Company announced that its Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”) pursuant to which the Company may purchase up to $50 million of its outstanding common shares through open market transactions, privately negotiated transactions or otherwise in accordance with all applicable laws. During the first quarter of 2020, the Company repurchased 0.1 million outstanding common shares at an aggregate purchase price of $1.9 million under the 2018 Share Repurchase Program. The Company did not repurchase any shares during the second or third quarter of 2020. As of March 31,September 30, 2020, the Company has repurchased 1.4 million outstanding common shares at an aggregate purchase price of $32.8 million under the 2018 Share Repurchase Program and $17.2 million remains available for repurchases under the 2018 Share Repurchase Program. The timing, amount and other terms and conditions of any additional repurchases under the 2018 Share Repurchase Program will be determined by the Company’s management at its discretion based on a variety of factors, including the market price of the Company’s common shares, corporate considerations, general market and economic conditions and legal requirements. The 2018 Share Repurchase Program does not have an expiration date and the Board may modify, discontinue or suspend it at any time.

NOTE 14. Revenue Recognition
Revenue and the related profit from the sale of a home and revenue and the related profit from the sale of land to third parties are recognized in the financial statements on the date of closing if delivery has occurred, title has passed to the buyer, all performance obligations (as defined below) have been met, and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to receive in exchange for the home or land. If not received immediately upon closing, cash proceeds from home closings are held in escrow for the Company’s benefit, typically for up to three days, and are included in Cash, cash equivalents and restricted cash on the Condensed Consolidated Balance Sheets.

Sales incentives vary by type of incentive and by amount on a community-by-community and home-by-home basis. The costs of any sales incentives in the form of free or discounted products and services provided to homebuyers are reflected in Land and housing costs in the Condensed Consolidated Statements of Income because such incentives are identified in our home purchase contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the contracts. Sales incentives that we may provide in the form of closing cost allowances are recorded as a reduction of housing revenue at the time the home is delivered.

We record sales commissions within Selling expenses in the Condensed Consolidated Statements of Income when incurred (i.e., when the home is delivered) as the amortization period is generally one year or less and therefore capitalization is not required as part of the practical expedient for incremental costs of obtaining a contract.

Contract liabilities include customer deposits related to sold but undelivered homes. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. Contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our home purchase contracts have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Deferred revenue resulting from uncompleted performance obligations existing at the time we deliver new homes to our homebuyers is not material.

Although our third party land sale contracts may include multiple performance obligations, the revenue we expect to recognize in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. We do not disclose the value of unsatisfied performance obligations for land sale contracts with an original expected duration of one year or less.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party sub-service arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee (note that guarantees are excluded from the scope of ASC 606, Revenue from Contracts with Customers). We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of
28

which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.


The following table presents our revenues disaggregated by revenue source:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands)2020201920202019
Housing$812,999 $631,380 $2,067,148 $1,695,558 
Land sales5,976 8,511 11,109 23,042 
Financial services (a)
28,946 (b)13,454 61,461 (b)39,540 
Total revenue$847,921 $653,345 $2,139,718 $1,758,140 
 Three Months Ended March 31,
(Dollars in thousands)2020 2019
Housing$559,449
 $466,308
Land sales4,687
 3,018
Financial services (a)
13,467
 11,783
Total revenue$577,603
 $481,109
(a)Revenues include hedging losses of $5.7 million and $4.7 million for the three months ended September 30, 2020 and 2019, respectively, and $16.3 million and $10.7 million for the nine months ended September 30, 2020 and 2019, respectively. Hedging losses do not represent revenues recognized from contracts with customers.
(a)Revenues include hedging losses of $3.6 million and $3.4 million for the three months ended March 31, 2020 and 2019, respectively. Hedging gains and losses do not represent revenues recognized from contracts with customers. Revenues for the first quarter of 2020 also include a $1.0 million impairment charge on our mortgage serving rights recorded as a reduction to revenue. This impairment charge was caused by the disruption in the mortgage industry as a result of the COVID-19 pandemic.
(b)Revenues for the three and nine months ended September 30, 2020 include $0.1 million and $0.5 million of net impairment charges taken on our mortgage serving rights, respectively, which was recorded as a reduction of revenue. The net impairment charges were caused by the disruption in the mortgage industry as a result of the COVID-19 pandemic.

Refer to Note 11 for presentation of our revenues disaggregated by geography. As our homebuilding operations accounted for over 98%97% of our total revenues for the three and nine months ended March 31,September 30, 2020 and 2019, with most of those revenues generated from home purchase contracts with customers, we believe the disaggregation of revenues as disclosed above and in Note 11 fairly depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors.


NOTE 15. Stock-Based Compensation
29
At our 2018 Annual Meeting of Shareholders, our shareholders approved the M/I Homes, Inc. 2018 Long-Term Incentive Plan (the “2018 LTIP”), an equity compensation plan. The 2018 LTIP is administered by the Compensation Committee of our Board of Directors. Under the 2018 LTIP, the Company is permitted to grant (1) nonqualified stock options to purchase common shares, (2) incentive stock options to purchase common shares, (3) stock appreciation rights, (4) restricted common shares, (5) other stock-based awards (awards that are valued in whole or in part by reference to, or otherwise based on, the fair market value of the common shares), and (6) cash-based awards to its officers, employees, non-employee directors and other eligible participants. Subject to certain adjustments, the 2018 LTIP authorizes awards to officers, employees, non-employee directors and other eligible participants for up to 2,250,000 common shares, of which 1,189,010 remain available for grant at March 31, 2020.

The 2018 LTIP replaced the M/I Homes, Inc. 2009 Long-Term Incentive Plan (the “2009 LTIP”), which was terminated immediately following our 2018 Annual Meeting of Shareholders. Awards outstanding under the 2009 LTIP Plan remain in effect in accordance with their respective terms.
Stock Options
On February 18, 2020, the Company awarded certain of its employees 424,500 (in the aggregate) nonqualified stock options at an exercise price of $42.23 (the closing price of our common shares on the New York Stock Exchange on such date) and a fair value of $12.65 that vest ratably over a five-year period. Total stock-based compensation expense related to stock option awards that has been charged against income relating to the 2018 LTIP was $1.0 million for both the three months ended March 31, 2020 and 2019.  As of March 31, 2020, there was a total of $12.1 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as stock-based compensation expense as the awards vest over a weighted average period of 2.3 years.
Performance Share Unit Awards
On February 18, 2020, February 19, 2019 and February 15, 2018, the Company awarded its executive officers (in the aggregate) a target number of performance share units (“PSU’s”) equal to 45,771, 53,692 and 46,444 PSU’s, respectively. Each PSU represents a contingent right to receive one common share of the Company if vesting is satisfied at the end of a three-year performance period (the “Performance Period”). The ultimate number of PSU’s that will vest and be earned, if any, after the completion of the Performance Period, is based on (1) (a) the Company’s cumulative pre-tax income from operations, excluding extraordinary items, as defined in the underlying award agreements with the executive officers, over the Performance Period (weighted 80%) (the “Performance Condition”), and (b) the Company’s relative total shareholder return over the Performance Period compared to the total shareholder return of a peer group of other publicly-traded homebuilders (weighted 20%) (the “Market Condition”) and (2) the participant’s continued employment through the end of the Performance Period, except in the case of termination due to death, disability or retirement or involuntary termination without cause by the Company. The number of PSU’s that vest may increase by up to 50% from the target number based on levels of achievement of the above criteria as set forth in the applicable award agreements and decrease to zero if the Company fails to meet the minimum performance levels for both of the above criteria. If the Company achieves the minimum performance levels for both of the above criteria, 50% of the target number of PSU’s will vest and be earned. Any portion of PSU’s that does not vest at the end of the Performance Period will be forfeited. Additionally, the PSU’s have no dividend or voting rights during the Performance Period.


The grant date fair value of the portion of the PSU’s subject to the Performance Condition and the Market Condition component was $42.23 and $37.51 for the 2020 PSU’s, respectively, $27.62 and $32.52 for the 2019 PSU’s, respectively, $31.93 and $33.57 for the 2018 PSU’s, respectively. In accordance with ASC 718, for the portion of the PSU’s subject to a Market Condition, stock-based compensation expense is derived using the Monte Carlo simulation methodology and is recognized ratably over the service period regardless of whether or not the attainment of the Market Condition is probable. Therefore, the Company recognized less than $0.1 million in stock-based compensation expense during the first quarter of 2020 related to the Market Condition portion of the 2020, 2019 and 2018 PSU awards. There was a total of $0.3 million of unrecognized stock-based compensation expense related to the Market Condition portion of the 2020, 2019 and 2018 PSU awards as of March 31, 2020.
For the portion of the PSU’s subject to the Performance Condition, we recognize stock-based compensation expense on a straight-line basis over the Performance Period based on the probable outcome of the related Performance Condition. Otherwise, stock-based compensation expense recognition is deferred until probability is attained and a cumulative stock-based compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reassesses the probability of the satisfaction of the Performance Condition on a quarterly basis, and stock-based compensation expense is adjusted based on the portion of the requisite service period that has passed. As of March 31, 2020, the Company had not recognized any stock-based compensation expense related to the Performance Condition portion of the 2020 or the 2019 PSU awards. If the Company achieves the minimum performance levels for the Performance Conditions to be met for the 2020 and the 2019 PSU awards, the Company would record unrecognized stock-based compensation expense of $1.3 million as of March 31, 2020, for which $0.3 million would be immediately recognized had attainment been probable at March 31, 2020. The Company recognized less than $0.1 million of stock-based compensation expense related to the Performance Condition portion of the 2018 PSU awards during the first quarter of 2020 based on the probability of attaining the performance condition. The Company has $0.1 million of unrecognized stock-based compensation expense for the 2018 PSU awards as of March 31, 2020.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW
M/I Homes, Inc. and subsidiaries (the “Company” or “we”) is one of the nation’s leading builders of single-family homes having sold over 120,300125,500 homes since commencing homebuilding activities in 1976.  The Company’s homes are marketed and sold primarily under the M/I Homes brand (M/I Homes and Showcase Collection (exclusively by M/I)). In addition, the Hans Hagen brand is used in older communities in our Minneapolis/St. Paul, Minnesota market. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; and Charlotte and Raleigh, North Carolina.
Included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company’s performance and financial condition:
•Information Relating to Forward-Looking Statements;
•Application of Critical Accounting Estimates and Policies;
•Results of Operations;
•Discussion of Our Liquidity and Capital Resources;
•Summary of Our Contractual Obligations;
•Discussion of Our Utilization of Off-Balance Sheet Arrangements; and
•Impact of Interest Rates and Inflation.


FORWARD-LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition.  Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements.  Forward-looking statements also include statements regarding the impacts of the COVID-19 pandemic. Forward-looking statements involve a number of risks and uncertainties.  Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors, including, without limitation, factors relating to the economic environment, the negative impact of the coronavirus (COVID-19),COVID-19, interest rates, availability of resources, competition, market concentration, land development activities, integration of acquisitions, construction defects, product liability and warranty claims and various governmental rules and regulations.  See “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2020, as the same may be updated from time to time in our subsequent filings with the SEC, for more information regarding those risk factors.
Any forward-looking statement speaks only as of the date made. Except as required by applicable law, 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 our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
30

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent 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 assumptions on historical experience and various other factors that it believes are 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.  On an ongoing basis, management evaluates such estimates and assumptions and makes adjustments as deemed necessary.  Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.  See Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our 2019 Form 10-K for additional information about our accounting policies.
We believe that there have been no significant changes to our critical accounting policies during the quarter ended March 31,September 30, 2020 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K, other than the changes described in Note 1 (Basis of Presentation) to our financial statements of this Quarterly Report on Form 10-Q.10-K.


RESULTS OF OPERATIONS
During 2019, we decided to wind down our Washington D.C. operations, which was substantially complete by December 31, 2019. As a result, during the second quarter of 2019, we re-evaluated our reportable segments and elected to aggregate our Charlotte and Raleigh, North Carolina operating segments into our existing Southern region based on the aggregation criteria described in Note 11. As a result of this re-evaluation, we have determined ourOur reportable segments are: Northern homebuilding; Southern homebuilding; and financial services operations. All prior year segment information has been recast to conform with the 2019 presentation. The change in the reportable segments has no effect on the Company's condensed consolidated balance sheets, statement of income or statement of cash flows for the periods presented.
The homebuilding operating segments that comprise each of our reportable segments are as follows:
NorthernSouthern
Chicago, IllinoisOrlando, Florida
Cincinnati, OhioSarasota, Florida
Columbus, OhioTampa, Florida
Indianapolis, IndianaAustin, Texas
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas
Detroit, MichiganHouston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina
NorthernSouthern
Chicago, IllinoisOrlando, Florida
Cincinnati, OhioSarasota, Florida
Columbus, OhioTampa, Florida
Indianapolis, IndianaAustin, Texas
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas
Detroit, MichiganHouston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina
Overview
WeFor both the third quarter and nine months ended September 30, 2020, we achieved first quarter record levels of new contracts, homes delivered, revenue and income before income taxes and net income duringtaxes. During the firstthird quarter of 2020. We2020, we also achieved all-time quarterly records infor income before income taxes, new contracts, homes delivered, number of homes in backlog and backlog sales value (with backlog sales value reaching $1.3 billion).value. In addition, our financial services operations achieved all-time quarterly records for revenue and income before income taxes and originated a record number of loans during the third quarter, while operating inbenefiting from a lower mortgage interest rate environment duringin both the quarter.third quarter and nine months ended September 30, 2020.
Our first quarter record-setting results, however, were hindered during the latter half of March 2020 due to the COVID-19 pandemic. Our business was negatively impacted as state and municipal governments issued quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. All of the states where we have operations, with the exception of Michigan, have recognized housing construction and mortgage services as essential businesses. Thus, most of our communities across the country have remained open, albeit at
Following a reduced rate of operation, so as to safeguard our employees, customers and building partners. We have implemented appointment-only customer interactions and have been able to continue to sell homes via our digital platform and virtual correspondence. Our mortgage operations have also been able to continue to close loans, at times utilizing drive-through closings. Despite these measures, our weekly pace ofsubstantial decline in new home contracts began to decline significantly and our cancellation rates began to increase significantly beginning in the latter half of March 2020 and extending into April 2020, despite an overall decline in cancellation rates during the first quarteras a result of 2020 to 11.3% compared to 12.0% for the first quarter of 2019. We expect that the COVID-19 pandemic, will negatively impactwe experienced a sharp recovery and an increase in sales activity commencing in May as pandemic-related restrictions began to ease. This trend of increasing sales volume continued into our business, results of operations, financial condition and/or cash flowsthird quarter, resulting in the secondCompany achieving an all-time quarterly record for new contracts in the third quarter, along with all-time quarterly records in a number of other operating and financial metrics described further below. We believe that the homebuilding industry benefited from record-low interest rates, a continued undersupply of available homes and consumers’ desire to move from rental apartments and densely populated areas to single family homes in suburban locations. We believe these factors will continue to support demand for the remainder of 2020 and subsequent reporting periods. However, dueinto 2021, subject to the uncertainty regardinguncertainties caused by the magnitude and duration of theCOVID-19 pandemic, including future developments, as well as the timing and extent of athe associated decline in economic activity and subsequent recovery, we cannot reasonably estimate such negative impacts, which could be material. In addition torecovery.

During the actions noted above, we have taken a number of strategic measures to help us manage through this unexpected pandemic as effectively as possible. These measures include strategically managing our land acquisition, land developmentthird quarter and other cash expenditures. Further discussion of the potential impacts on our business, results of operations, financial condition and cash flows from the COVID-19 pandemic is provided below under Part II, Item 1A “Risk Factors.”
Despite these weakening conditions during the latter half of Marchnine months ended September 30, 2020, we achieved the following record results during the three months ended March 31, 2020 in comparison to the firstthird quarter ofand nine months ended September 30, 2019:
•New contracts increased 27%71% to 2,089 - an2,949 (an all-time quarterly record for the Companyrecord) and 43% to 7,299, respectively
•Homes delivered increased 26%29% to a first quarter2,137 homes (an all-time quarterly record) and 25% to 5,467 homes, respectively
•Number of homes in backlog at September 30, 2020 increased 54% to an all-time record 1,4954,503 homes
•
Number of homes in backlog at March 31, 2020 increased 23% to a first quarter record 3,265
Total sales value in backlog increased 22%60% to $1.3$1.8 billion, - an all-time quarterly record for the Company

31


•Revenue increased 20%30% to a first quarter record $577.6$847.9 million (an all-time quarterly record) and 22% to $2.1 billion, respectively
•
•Income before income taxes increased 90% to $95.1 million (an all-time quarterly record) and 81% to $208.2 million, respectively

Income before income taxes increased76% to a first quarter record $41.4 million
Net income increased 79% to a first quarter record $31.7 million
Number of active communities at March 31, 2020 increased 4% to a first quarter record 223
In addition to the results described above, ourwe achieved net income of $73.5 million for the third quarter of 2020, a 94% increase from prior year, and $159.8 million for the nine months ended September 30, 2020, an 86% increase. Our financial services operations also achieved record income before income taxes for the third quarter, benefiting from an increase in homes closed, the number of mortgages originated and higher margins, as well as technology enabled efficiencies. Our company-wide absorption pace of sales per community for the firstthird quarter of 2020 was 3.1improved to 4.6 per month versuscompared to 2.6 per month for the prior year’s firstthird quarter. Partially as a result of this accelerated sales pace, our number of active communities declined to 207 from 221 at the end of the third quarter of 2019 and 220 at the end of 2020’s second quarter. We believe we maintain a strong land position, and we continue to place additional land under contract for communities that will be brought online in future periods. However, our ability to replace existing communities timely could impact our ability to meet current demand and negatively impact our recent growth trends in the number of active communities. We continue to work to open new communities, and we are also actively managing sales pace, in part by selectively increasing prices, to better match our availability of lots and production schedule.
Summary of Company Financial Results

Income before income taxes for the firstthird quarter of 2020 increased 76%90% from $23.5$50.1 million in the firstthird quarter of 2019 to a first quarteran all-time quarterly record $41.4$95.1 million in 2020. For the nine months ended September 30, 2020, income before income taxes increased 81% from $114.7 million for the nine months ended September 30, 2019 to $208.2 million. Income before income taxes for the threenine months ended March 31,September 30, 2019 was unfavorably impacted by $0.4$0.6 million of acquisition-related charges as a result of our acquisition of Pinnacle Homes in March 2018.
We achieved firstthird quarter record net income of $31.7$73.5 million, or $1.09$2.51 per diluted share, in 2020's firstthird quarter, a 79%94% increase, or $14.0$35.7 million, from net income of $17.7$37.8 million, or $0.63$1.32 per diluted share, in 2019's firstthird quarter. Our effective tax rate was 22.7% in 2020’s third quarter compared to 24.4% in 2019. In the nine months ended September 30, 2020, we achieved net income of $159.8 million, or $5.50 per diluted share, compared to net income of $85.8 million, or $3.04 per diluted share, in the nine months ended September 30, 2019, which included $0.4$0.6 million of pre-tax acquisition-related charges ($0.02 per diluted share) as discussed above. Our effective tax rate was 23.2%23.3% in 2020’s2020's first quarternine months compared to 24.5%25.2% in the same period in 2019.
During the quarter ended March 31,September 30, 2020, we recorded all-time quarterly record first quarter total revenue of $577.6$847.9 million, of which $559.4$813.0 million was from homes delivered, $4.7$6.0 million was from land sales and $13.5$28.9 million was from our financial services operations. Revenue from homes delivered increased 20%29% in 2020's firstthird quarter compared to the same period in 2019 driven primarily by a 26%29% increase in the number of homes delivered (309(486 units), offset, in part, by a 5%1% decrease in the average sales price of homes delivered ($19,0002,000 per home delivered), which was primarily the result of the mix of homes delivered. Revenue from land sales increased $1.7decreased $2.5 million from the firstthird quarter of 2019 primarily due to morefewer land sales in our SouthernNorthern region in 2020's firstthird quarter compared to the prior year. Revenue from our financial services segment increased 14%115% to $13.5an all-time quarterly record $28.9 million in the firstthird quarter of 2020 as a result of an increase in loans closed and sold and higher margins on loans sold, in each case, during the period compared to 2019's first quarter. However,prior year. In the nine months ended September 30, 2020, we recorded record total revenue of $2.1 billion, of which $2.07 billion was reducedfrom homes delivered, $11.1 million was from land sales and $61.5 million was from our financial services operations. Revenue from homes delivered increased 22% in the nine months ended September 30, 2020 compared to the same period in 2019 driven primarily by a decline25% increase in the fair market valuenumber of homes delivered (1,092 units), partially offset by a 3% decrease in the average sales price of homes delivered ($10,000 per home delivered). Revenue from land sales decreased $11.9 million from the nine months ended September 30, 2019 due to fewer land sales in both our mortgage servicing rights (as discussedNorthern and Southern regions in further detail2020's first nine months compared to the prior year. Revenue from our financial services segment increased 55% to $61.5 million in Note 4).the first nine months of 2020 as a result of an increase in loans closed and sold in the first nine months of 2020, in addition to higher margins on loans sold during the period compared to the prior year.
Total gross margin (total revenue less total land and housing costs) increased $24.0$60.3 million in the firstthird quarter of 2020 compared to the firstthird quarter of 2019 as a result of a $22.3$44.8 million improvement in the gross margin of our homebuilding operations and a $1.7$15.5 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered (housing gross margin) improved $44.7 million primarily as a result of the 26%29% increase in the number of homes delivered. Our housing gross margin percentage improved 110120 basis points from 17.3%19.1% in prior year's firstthird quarter to 18.4%20.3% in 2020's firstthird quarter, primarily as a result of the mix of homes delivered during 2020's firstthird quarter. Our gross margin on land sales (land sale gross margin) improved $0.1 million in the third quarter
32

of 2020 compared to the third quarter of 2019. The firstgross margin of our financial services operations increased $15.5 million in the third quarter of 2020 compared to the third quarter of 2019 as a result of increases in the number of loan originations and the average loan amount, in addition to higher margins on loans sold during the third quarter of 2020 compared to the third quarter of 2019. Total gross margin increased $120.9 million in the nine months ended September 30, 2020 compared to the same period in 2019 as a result of a $99.0 million improvement in the gross margin of our homebuilding operations and a $21.9 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $99.3 million as a result of the 25% increase in the number of homes delivered, offset partially by the 3% decrease in the average sales price of homes delivered. Our housing gross margin percentage improved 150 basis points from 18.1% in prior year’s first nine months to 19.6% in 2020's first nine months, primarily as a result of the mix of homes delivered during the period. The nine months ended September 30, 2019 includes $0.4$0.6 million of acquisition-related charges (as discussed above). Our gross margin on land sales (land sale gross margin) remained flatdeclined $0.3 million in the2020's first quarter of 2020nine months compared to the first quarter ofsame period in 2019. The gross margin of our financial services operations increased $1.7$21.9 million in the nine months ended September 30, 2020 compared to the same period in 2019 as a result of increases in the number of loan originations, in addition to higher margins on loans sold during the first quarternine months of 2020 compared to the first quarter of 2019 primarily as a result of the increase in revenue discussed above.

nine months ended September 30, 2019.
We opened 1751 new communities during the first quarter ofnine months ended September 30, 2020. We sell a variety of home types in various communities and markets, each of which yields a different gross margin. The timing of the openings of new replacement communities as well as underlying lot costs varies from year to year. As a result, our new contracts and housing gross margin may fluctuate up or down from quarter to quarter depending on the mix of communities delivering homes. As a result of the record number of sales this year, we are selling through communities faster; therefore, our ability to replace existing communities timely could impact our ability to meet current demand and negatively impact our recent growth trends in number of active communities.
For the three months ended March 31,September 30, 2020, selling, general and administrative expense increased $8.4$18.9 million, which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 12.9%12.2% in the firstthird quarter of 2019 to 12.2%11.6% in the firstthird quarter of 2020. Selling expense increased $5.3$9.4 million from 2019's firstthird quarter but improved as a percentage of revenue to 6.4%5.8% in 2020's firstthird quarter from 6.6%6.1% for the same period in 2019. Variable selling expense for sales commissions contributed $4.8$8.8 million to the increase due to the higher number of homes delivered in the quarter. The increase in selling expense was also attributable to a $0.5$0.6 million increase in non-variable selling expense primarily related to costs associated withincreased headcount in our sales offices and models as a result of our increased average community count.models. General and administrative expense increased $3.1$9.5 million compared to the firstthird quarter of 2019 but declined as a percentage of revenue from 6.4%6.0% in the firstthird quarter of 2019 to 5.9%5.8% in the firstthird quarter of 2020. The dollar increase in general and administrative expense was primarily due to a $1.6$5.6 million increase in compensation relatedcompensation-related expenses due to our improvedstrong performance induring the quarter, a $0.7 million increase in professional fees, a $0.6 million increase in corporate home office rent-related expenses, a $0.5 million increase in land relatedland-related expenses, due to the increase in average community count, and a $0.3 million increase in COVID-19-related cleaning expenses, a $0.3 million increase in rent related to our division offices and a $1.5 million increase in miscellaneous expenses. For the nine months ended September 30, 2020, selling, general and administrative expense increased $35.9 million, which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 12.3% in the nine months ended September 30, 2019 to 11.7% in the nine months ended September 30, 2020. Selling expense increased $18.3 million from the nine months ended September 30, 2019 but improved as a percentage of revenue to 6.0% in 2020’s first nine months from 6.2% for the same period in 2019. Variable selling expense for sales commissions contributed $18.0 million to the increase due to the higher number of homes delivered year to date. The increase in selling expense was also attributable to a $0.3 million increase in non-variable selling expense primarily related to increased headcount in our sales offices and models. General and administrative expense increased $17.5 million compared to the nine months ended September 30, 2019 but declined as a percentage of revenue from 6.0% in the nine month period ended September 30, 2019 to 5.8% in the nine months ended September 30, 2020. The dollar increase in general and administrative expense was primarily due to a $10.8 million increase in compensation-related expenses due to our increased headcount and our strong financial performance during the period, a $1.3 million increase in corporate home office rent-related expenses, a $1.3 million increase in professional fees.fees, a $1.0 million increase in land-related expenses, a $0.9 million increase in rent related to our division offices, a $0.9 million increase in COVID-19-related cleaning expenses, and a $1.3 million increase in miscellaneous expenses.


33

Outlook
We believe that new home sales will continue to benefit from record-low interest rates, a continued undersupply of available homes and consumer demographics, including a growing number of homebuyers moving from rental apartments and more densely populated areas to single family homes in suburban locations. However, we also expect that overall economic conditions in the United States will continue to be negatively impacted by the COVID-19 pandemic, as discussed underalthough the “Overview” section above, though the full magnitude and duration of such impact is uncertain. We further expect that the effects of the COVID-19 pandemic, including the economic slowdownuncertain, and temporary or longer-term job losses, willsuch conditions could negatively impact new home sales across our markets for the secondfourth quarter of 2020 and depending on conditions,potentially into subsequent reporting periods, butperiods.

In both our second and third quarters of 2020, we believe that it is reasonably possible that this impact will be bufferedexperienced cost increases in certain construction materials and are actively managing and monitoring those costs. We have been able to some extent by low interest ratesraise home prices in many of our communities to offset these cost increases and low inventory levels.

While wepreserve or increase our margins. During the third quarter, our ability to raise prices, together with cost management, allowed us to achieve a total gross margin percentage of 22.9%, an improvement of 100 basis points compared with 2020’s second quarter. We remain sensitive to changes in market conditions, weand continue to focus on controlling overhead leverage and carefully managing our investment in land and land development spending.

We are also closely monitoring mortgage availability and a recent tightening of lending standards related to an expected decline in the economy. Although interest rates remain at historic lows, we have seen a decline in mortgage availability beginning in late March including a tightening of underwriting standards. To date, this tightening has not had a significant impact on our business, although it has had some effect on lower credit quality borrowers and those using non-agency loan programs. We are seeing an impact related to mortgage availability due to layoffs and concerns about employment and business shutdowns, particularly with self-employed borrowers, and to address these concerns, we have reduced the time frames for verifying employment and we are following agency recommendations for pre-closing documentation. In addition, we are aggressively working to deliver and fund loans with investors more quickly.

We expect to emphasize the following strategic business objectives throughout the remainder of 2020:
•managing our land spend and inventory levels;
•accelerating the readiness of new communities wherever possible;
•maintaining a strong balance sheet and liquidity levels;
•expanding the availability of our more affordable Smart Series homes; and
•emphasizing customer service, product quality and design, and premier locations.
During the first threenine months ofended September 30, 2020, we invested $75.7$266.8 million in land acquisitions and $62.0$222.6 million in land development. We are carefully reviewingcontinue to closely review all of our land acquisition and land development spending and due to the uncertainty of the current environment, we have taken measures to extend or delay a substantial amount of future land purchases and delayed the timing of land development. We will continue to monitor market conditions and our ongoing pace of home sales and deliveries, including any potential effects as a result of the COVID-19 pandemic, and we will continue to adjust our land and inventory home investment spend accordingly. As a result, we are withdrawing our previously issued guidance regarding our aggregate land acquisition and land development expenditures in 2020 and are not providing land spending estimates for 2020 at this time.
We opened 17 communities and closed 19 communities in the first quarter of 2020, ending the first quarter with a total of 223 communities compared to 214 communities at March 31, 2019. Due to the uncertainty of the current environment, and the unknown effects on the specific timing of opening and closing out communities, we are also withdrawing our previously issued guidance regarding our 2020 average community count and are not providing estimated community count information for 2020 at this time. However, as a result of our accelerated pace of home sales, we are selling through communities at a faster pace, which will make it challenging to achieve an increase in our number of active communities for the full year in 2020. We opened 51 communities and closed 69 communities in the nine months ended September 30, 2020, ending the third quarter with a total of 207 communities, compared to 221 at the end of last year’s third quarter.
We believe our abilitiesability to design and develop attractive homes in desirable locations at an affordable cost, and to grow our business while also leveraging our fixed costs, has enabled us to maintain and improve our strong financial results. We further believe that our experienced management team will navigate, make necessary adjustments and guide our Company through the current adverse market conditions and that we are well positioned with a strong balance sheet to manage through the current economic environment. However, in the foreseeable future we believe our positive trends will be negatively impacted and we can provide no assurance of when those positive trends reflected in our financial and operating metrics will return.
See Part II, Item 1A., “Risk Factors,” for further information regarding the potential impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows.

34


The following table shows, by segment:segment, revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest expense for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Revenue:
Northern homebuilding$350,591 $270,063 $890,201 $723,295 
Southern homebuilding468,384 369,828 1,188,056 995,305 
Financial services (a)
28,946 13,454 61,461 39,540 
Total revenue$847,921 $653,345 $2,139,718 $1,758,140 
Gross margin:
Northern homebuilding$67,644 $51,768 (b)$167,270 $131,461 (b)
Southern homebuilding97,924 68,959 238,865 175,651 
Financial services (a)
28,946 13,454 61,461 39,540 
Total gross margin$194,514 $134,181 (b)$467,596 $346,652 (b)
Selling, general and administrative expense:
Northern homebuilding$29,279 $22,181 $75,783 $60,902 
Southern homebuilding42,063 36,459 109,828 99,343 
Financial services (a)
9,059 6,845 23,755 19,597 
Corporate18,017 14,047 41,891 35,556 
Total selling, general and administrative expense$98,418 $79,532 $251,257 $215,398 
Operating income (loss):
Northern homebuilding$38,365 $29,587 (b)$91,487 $70,559 (b)
Southern homebuilding55,861 32,500 129,037 76,308 
Financial services (a)
19,887 6,609 37,706 19,943 
Less: Corporate selling, general and administrative expense(18,017)(14,047)(41,891)(35,556)
Total operating income$96,096 $54,649 (b)$216,339 $131,254 (b)
Interest expense:
Northern homebuilding$122 $1,505 $2,636 $5,360 
Southern homebuilding409 2,146 3,759 8,602 
Financial services (a)
708 986 2,059 2,664 
Total interest expense$1,239 $4,637 $8,454 $16,626 
Equity in income of joint venture arrangements(252)(52)(307)(118)
Income before income taxes$95,109 $50,064 $208,192 $114,746 
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage refinancing.
(b)Includes $0.1 million of acquisition-related charges taken during the three months ended September 30, 2019 and $0.6 million of acquisition-related charges taken during the nine months ended September 30, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 31, 2020 and 2019:1, 2018.
35

 Three Months Ended March 31,
(In thousands)2020 2019
Revenue:   
Northern homebuilding$240,270
 $200,362
Southern homebuilding323,866
 268,964
Financial services (a)
13,467
 11,783
Total revenue$577,603
 $481,109
    
Gross margin:   
Northern homebuilding (b)
$42,558
 $34,554
Southern homebuilding60,654
 46,305
Financial services (a)
13,467
 11,783
Total gross margin (b)
$116,679
 $92,642
    
Selling, general and administrative expense:   
Northern homebuilding$21,677
 $18,019
Southern homebuilding31,797
 28,711
Financial services (a)
7,105
 6,088
Corporate10,096
 9,432
Total selling, general and administrative expense$70,675
 $62,250
    
Operating income (loss):   
Northern homebuilding (b)
$20,881
 $16,535
Southern homebuilding28,857
 17,594
Financial services (a)
6,362
 5,695
Less: Corporate selling, general and administrative expense(10,096) (9,432)
Total operating income (b)
$46,004
 $30,392
    
Interest expense:   
Northern homebuilding$1,811
 $2,481
Southern homebuilding2,158
 3,568
Financial services (a)
731
 743
Total interest expense$4,700
 $6,792
    
Equity in (income) loss of joint venture arrangements(52) 121
    
Income before income taxes$41,356
 $23,479
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage refinancing.
(b)Includes $0.4 million of acquisition-related charges taken during the three months ended March 31, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.


The following tables show total assets by segment at March 31,September 30, 2020 and December 31, 20192019:
At September 30, 2020
(In thousands)NorthernSouthernCorporate, Financial Services and UnallocatedTotal
Deposits on real estate under option or contract$4,173 $33,191 $— $37,364 
Inventory (a)
832,855 973,190 — 1,806,045 
Investments in joint venture arrangements1,324 32,714 — 34,038 
Other assets39,462 64,660 (b)438,986 (c)543,108 
Total assets$877,814 $1,103,755 $438,986 $2,420,555 
At December 31, 2019
(In thousands)NorthernSouthernCorporate, Financial Services and UnallocatedTotal
Deposits on real estate under option or contract$3,655 $24,877 $— $28,532 
Inventory (a)
783,972 957,003 — 1,740,975 
Investments in joint venture arrangements1,672 36,213 — 37,885 
Other assets21,564 52,662 (b)223,976 298,202 
Total assets$810,863 $1,070,755 $223,976 $2,105,594 
(a):Inventory includes single-family lots; land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.
(c)Includes a $34.2 million increase in operating lease right-of-use assets due to the commencement of a ten-year renewable lease on June 29, 2020 for the Company’s new corporate headquarters.

36
 At March 31, 2020
(In thousands)Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$4,407
 $27,298
 $—
 $31,705
Inventory (a)
821,291
 969,535
 —
 1,790,826
Investments in joint venture arrangements1,688
 38,618
 —
 40,306
Other assets26,571
 52,959
(b) 
256,596
 336,126
Total assets$853,957
 $1,088,410
 $256,596
 $2,198,963

 At December 31, 2019
(In thousands)Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$3,655
 $24,877
 $—
 $28,532
Inventory (a)
783,972
 957,003
 —
 1,740,975
Investments in joint venture arrangements1,672
 36,213
 —
 37,885
Other assets21,564
 52,662
(b) 
223,976
 298,202
Total assets$810,863
 $1,070,755
 $223,976
 $2,105,594
(a)Inventory includes single-family lots; land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.



Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands)2020201920202019
Northern Region
Homes delivered868 651 2,190 1,739 
New contracts, net1,176 635 2,951 2,040 
Backlog at end of period1,904 1,231 1,904 1,231 
Average sales price of homes delivered$402 $406 $405 $412 
Average sales price of homes in backlog$427 $430 $427 $430 
Aggregate sales value of homes in backlog$813,909 $529,090 $813,909 $529,090 
Housing revenue$348,774 $264,274 $887,662 $716,421 
Land sale revenue$1,817 $5,789 $2,539 $6,874 
Operating income homes (a)
$38,308 $29,511 (b)$91,385 $70,428 (b)
Operating income land$57 $76 $102 $131 
Number of average active communities90 89 94 89 
Number of active communities, end of period86 89 86 89 
Southern Region
Homes delivered1,269 1,000 3,277 2,636 
New contracts, net1,773 1,086 4,348 3,056 
Backlog at end of period2,599 1,684 2,599 1,684 
Average sales price of homes delivered$366 $367 $360 $371 
Average sales price of homes in backlog$387 $361 $387 $361 
Aggregate sales value of homes in backlog$1,005,322 $608,117 $1,005,322 $608,117 
Housing revenue$464,225 $367,106 $1,179,486 $979,137 
Land sale revenue$4,159 $2,722 $8,570 $16,168 
Operating income homes (a)
$55,731 $32,502 $128,888 $75,910 
Operating income (loss) land$130 $(2)$149 $398 
Number of average active communities124 132 125 127 
Number of active communities, end of period121 132 121 132 
Total Homebuilding Regions
Homes delivered2,137 1,651 5,467 4,375 
New contracts, net2,949 1,721 7,299 5,096 
Backlog at end of period4,503 2,915 4,503 2,915 
Average sales price of homes delivered$380 $382 $378 $388 
Average sales price of homes in backlog$404 $390 $404 $390 
Aggregate sales value of homes in backlog$1,819,231 $1,137,207 $1,819,231 $1,137,207 
Housing revenue$812,999 $631,380 $2,067,148 $1,695,558 
Land sale revenue$5,976 $8,511 $11,109 $23,042 
Operating income homes (a)
$94,039 $62,013 (b)$220,273 $146,338 (b)
Operating income land$187 $74 $251 $529 
Number of average active communities214 221 219 216 
Number of active communities, end of period207 221 207 221 
(a)Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
(b)Includes $0.1 million of acquisition-related charges taken during the three months ended September 30, 2019 and $0.6 million of acquisition-related charges taken during the nine months ended September 30, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 31, 2020 and 2019:1, 2018.
37

 Three Months Ended March 31,
(Dollars in thousands)2020 2019
Northern Region   
Homes delivered588
 474
New contracts, net853
 702
Backlog at end of period1,408
 1,158
Average sales price of homes delivered$407
 $420
Average sales price of homes in backlog$423
 $430
Aggregate sales value of homes in backlog$596,138
 $498,305
Housing revenue$239,548
 $199,277
Land sale revenue$722
 $1,085
Operating income homes (a) (b)
$20,835
 $16,480
Operating income land$46
 $55
Number of average active communities97
 90
Number of active communities, end of period98
 90
Southern Region   
Homes delivered907
 712
New contracts, net1,236
 942
Backlog at end of period1,857
 1,494
Average sales price of homes delivered$353
 $375
Average sales price of homes in backlog$380
 $383
Aggregate sales value of homes in backlog$705,188
 $571,769
Housing revenue$319,901
 $267,031
Land sale revenue$3,965
 $1,933
Operating income homes (a)
$28,834
 $17,594
Operating (loss) income land$23
 $—
Number of average active communities127
 122
Number of active communities, end of period125
 124
Total Homebuilding Regions   
Homes delivered1,495
 1,186
New contracts, net2,089
 1,644
Backlog at end of period3,265
 2,652
Average sales price of homes delivered$374
 $393
Average sales price of homes in backlog$399
 $403
Aggregate sales value of homes in backlog$1,301,326
 $1,070,074
Housing revenue$559,449
 $466,308
Land sale revenue$4,687
 $3,018
Operating income homes (a) (b)
$49,669
 $34,074
Operating income land$69
 $55
Number of average active communities224
 212
Number of active communities, end of period223
 214
(a)Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
(b)Includes $0.4 million of acquisition-related charges taken during the three months ended March 31, 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
 Three Months Ended March 31,
(Dollars in thousands)2020 2019
Financial Services   
Number of loans originated1,131
 798
Value of loans originated$345,950
 $251,200
    
Revenue$13,467
 $11,783
Less: Selling, general and administrative expenses7,105
 6,088
Less: Interest expense731
 743
    
Income before income taxes$5,631
 $4,952


Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands)2020201920202019
Financial Services
Number of loans originated1,636 1,243 4,142 3,078 
Value of loans originated$513,456 $388,033 $1,287,426 $959,022 
Revenue$28,946 $13,454 $61,461 $39,540 
Less: Selling, general and administrative expenses9,059 6,845 23,755 19,597 
Less: Interest expense708 986 2,059 2,664 
Income before income taxes$19,179 $5,623 $35,647 $17,279 
A home is included in “new contracts” when our standard sales contract is executed. “Homes delivered” represents homes for which the closing of the sale has occurred. “Backlog” represents homes for which the standard sales contract has been executed, but which are not included in homes delivered because closings for these homes have not yet occurred as of the end of the period specified.
The composition of our homes delivered, new contracts, net and backlog is constantly changing and may be based on a dissimilar mix of communities between periods as new communities open and existing communities wind down. Further, home types and individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots. These variations may result in a lack of meaningful comparability between homes delivered, new contracts, net and backlog due to the changing mix between periods.
Cancellation Rates
The following table sets forth the cancellation rates for each of our homebuilding segments for the three and nine months ended March 31,September 30, 2020 and 2019:2019:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Northern8.2 %10.9 %9.7 %10.6 %
Southern10.4 %13.5 %12.6 %14.4 %
Total cancellation rate9.5 %12.6 %11.5 %12.9 %
 Three Months Ended March 31,
 2020 2019
Northern9.7% 8.6%
Southern12.4% 14.4%
    
Total cancellation rate11.3% 12.0%

Seasonality
Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase substantially in the second half of the year compared to the first half of the year. We believe that this seasonality reflects the tendency of homebuyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Our financial services operations also experience seasonality because loan originations correspond with the delivery of homes in our homebuilding operations. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our results for the three and nine months ended March 31,September 30, 2020 are not necessarily indicative of the results that we may achieve in future periods.
Year Over Year Comparison
Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019

Northern Region. During the first quarter ofthree months ended September 30, 2020, homebuilding revenue in our Northern region increased $39.9$80.5 million, from $200.4$270.1 million in the first three monthsthird quarter of 2019 to $240.3$350.6 million in the first three monthsthird quarter of 2020. This 20%30% increase in homebuilding revenue was primarily the result of a 24%33% increase in the number of homes delivered (114(217 units), offset partially offset by a 3% decrease in the average sales price of homes delivered ($13,0004,000 per home delivered) and a $0.4 million decrease in land sale revenue.which was due to the mix of communities delivering homes. Operating income in our Northern region increased $4.4$8.8 million from $16.5$29.6 million duringin the firstthird quarter of 2019 to $20.9$38.4 million during the three monthsquarter ended March 31,September 30, 2020. TheThis increase in operating income was primarily the result of a $8.0$15.9 million increaseimprovement in our gross margin, offset in part,partially by a $3.7$7.1 million increase in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $8.0$15.9 million primarily due to the 24%33% increase in the number of homes delivered noted above. Our housing gross margin percentage declined 20 basis points to 19.4% in the third quarter of 2020 from 19.6% in the prior year’s third quarter. The decline in
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housing gross margin percentage was primarily due to changes in product type and market mix of homes delivered compared to 2019's same period. Our land sale gross margin remained flat in the third quarter of 2020 compared to the same period in 2019.

Selling, general and administrative expense increased $7.1 million, from $22.2 million for the quarter ended September 30, 2019 to $29.3 million for the quarter ended September 30, 2020, and increased as a percentage of revenue to 8.4% in 2020's third quarter from 8.2% in 2019's third quarter. The increase in selling, general and administrative expense was attributable, in part, to a $4.8 million increase in selling expense due to (1) a $4.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, and (2) a $0.8 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models as a result of increased headcount. The increase in selling, general and administrative expense was also attributable to a $2.3 million increase in general and administrative expense primarily related to a $0.9 million increase in land-related expenses, a $0.7 million increase in incentive compensation as a result of our improved performance, a $0.5 million increase in professional fees and a $0.2 million increase in COVID-19-related cleaning expenses.
During the three months ended September 30, 2020, we experienced an 85% increase in new contracts in our Northern region, from 635 in the third quarter of 2019 to 1,176 in the third quarter of 2020, and a 55% increase in homes in backlog from 1,231 homes at September 30, 2019 to 1,904 homes at September 30, 2020. The increases in new contracts and homes in backlog were primarily due to improving demand in our newer communities compared to prior year. Average sales price in backlog decreased, however, to $427,000 at September 30, 2020 compared to $430,000 at September 30, 2019 which was primarily due to changes in product type and market mix. During the three months ended September 30, 2020, we opened five new communities in our Northern region compared to opening six communities during 2019's third quarter. Our monthly absorption rate in our Northern region improved to 4.4 per community in the third quarter of 2020 compared to 2.4 per community in 2019's third quarter.
Southern Region.During the three month period ended September 30, 2020, homebuilding revenue in our Southern region increased $98.6 million, from $369.8 million in the third quarter of 2019 to $468.4 million in the third quarter of 2020. This 27% increase in homebuilding revenue was the result of a 27% increase in the number of homes delivered (269 units), offset partially by a decrease in the average sales price of homes delivered ($1,000 per home delivered) which was due to the mix of communities delivering homes. Operating income in our Southern region increased $23.4 million from $32.5 million in the third quarter of 2019 to $55.9 million during the quarter ended September 30, 2020. This increase in operating income was the result of a $29.0 million improvement in our gross margin, partially offset by a $5.6 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $28.8 million, due primarily to the 27% increase in the number of homes delivered noted above. Our housing gross margin percentage improved from 18.8% in prior year’s third quarter to 21.1% in the third quarter of 2020, largely due to the more affordable mix of communities delivering homes and construction efficiencies. Our land sale gross margin improved $0.2 million in the third quarter of 2020 compared to the third quarter of 2019. We did not record any additional warranty charges for stucco-related repair costs in our Florida communities during the third quarter of 2020. With respect to this matter, during the quarter ended September 30, 2020, we identified 20 additional homes in need of repair and completed repairs on 22 homes, and, at September 30, 2020, we have 113 homes in various stages of repair.  See Note 6 to our financial statements for further information.
Selling, general and administrative expense increased $5.6 million from $36.5 million in the third quarter of 2019 to $42.1 million in the third quarter of 2020 but declined as a percentage of revenue to 9.0% from 9.9% in the third quarter of 2019. The increase in selling, general and administrative expense was attributable, in part, to a $4.6 million increase in selling expense due to a $4.8 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, partially offset by a $0.2 million decrease in non-variable selling expenses primarily related to the timing of sales office and model openings and a reduction in marketing costs. The increase in selling, general and administrative expense was also attributable to a $1.0 million increase in general and administrative expense primarily related to an increase in incentive compensation due to our improved performance.
During the three months ended September 30, 2020, we experienced a 63% increase in new contracts in our Southern region, from 1,086 in the third quarter of 2019 to 1,773 in the third quarter of 2020, and a 54% increase in homes in backlog from 1,684 homes at September 30, 2019 to 2,599 homes at September 30, 2020. The increases in new contracts and backlog were primarily due to improving demand in our more affordable communities compared to prior year. Average sales price in backlog also increased to $387,000 at September 30, 2020 from $361,000 at September 30, 2019 due to changes in product type and market mix. During the three months ended September 30, 2020, we opened seven new communities in our Southern region compared to opening 10 communities during 2019's third quarter. Our monthly absorption rate in our Southern region improved to 4.8 per community in the third quarter of 2020 compared to 2.7 per community in the third quarter of 2019.
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Financial Services. Revenue from our mortgage and title operations increased 115% to a third quarter record of $28.9 million in the third quarter of 2020 from $13.5 million in the third quarter of 2019 due to a 32% increase in the number of loan originations from 1,243 in 2019's third quarter to 1,636 in the third quarter of 2020 as well as an increase in the average loan amount from $312,000 in the quarter ended September 30, 2019 to $314,000 in the quarter ended September 30, 2020. We also experienced higher margins on loans sold during the period compared to prior year’s third quarter.
We experienced a $13.3 million increase in operating income in the third quarter of 2020 compared to 2019's third quarter, which was primarily due to the increase in revenue discussed above, offset partially by a $2.2 million increase in selling, general and administrative expense compared to the third quarter of 2019. This increase was primarily due to an increase in compensation expense related to our increase in employee headcount due to new mortgage locations.
At September 30, 2020, M/I Financial, LLC (“M/I Financial”) provided financing services in all of our markets.
Approximately 85% of our homes delivered during the third quarter of 2020 were financed through M/I Financial, the same as in the third quarter of 2019. Capture rate is influenced by financing availability and competition in the mortgage market, and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $4.0 million from $14.0 million for the third quarter of 2019 to $18.0 million for the third quarter of 2020. This increase primarily resulted from a $2.0 million increase in compensation expense due to our improved performance, a $0.7 million increase in computer costs related to our investment in new information systems, a $0.5 million increase in rent-related expense due to our new home office headquarters and a $0.8 million increase in miscellaneous expenses.
Equity in Income from Joint Venture Arrangements. Equity in income from joint venture arrangements represents our portion of pre-tax earnings from our joint venture arrangements where a special purpose entity is established (“LLCs”) with the other partners. The Company earned $0.3 million and less than $0.1 million, respectively, of equity in income from its LLCs during the three months ended September 30, 2020 and 2019, respectively.
Interest Expense - Net. Interest expense for the Company decreased $3.4 million from $4.6 million for the three months ended September 30, 2019 to $1.2 million for the three months ended September 30, 2020. This decrease was primarily the result of a decrease in average borrowings under our Credit Facility (as defined below) during the third quarter of 2020 compared to prior year. Our weighted average borrowings decreased from $848.9 million in 2019's third quarter to $736.3 million in 2020's third quarter. Our weighted average borrowing rate decreased from 6.13% in the third quarter of 2019 to 5.57% for third quarter of 2020.
Income Taxes. Our overall effective tax rate was 22.7% for the three months ended September 30, 2020 and 24.4% for the same period in 2019. The decrease in the effective rate from the three months ended September 30, 2019 was primarily attributable to a $2.5 million tax benefit related to the retroactive reinstatement of energy efficient homes tax credits (see Note 10 to our financial statements for more information).
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Northern Region. During the nine months ended September 30, 2020, homebuilding revenue in our Northern region increased $166.9 million, from $723.3 million in the nine months ended September 30, 2019 to $890.2 million in the nine months ended September 30, 2020. This 23% increase in homebuilding revenue was the result of a 26% increase in the number of homes delivered (451 units), partially offset by a 2% decrease in the average sales price of homes delivered ($7,000 per home delivered) and a $4.3 million decrease in land sale revenue. Operating income in our Northern region increased $20.9 million, from $70.6 million during the nine months ended September 30, 2019 to $91.5 million during the nine months ended September 30, 2020. The increase in operating income was primarily the result of a $35.8 million increase in our gross margin, offset, in part, by a $14.9 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $35.8 million, primarily due to the 26% increase in the number of homes delivered. Our housing gross margin percentage improved 4050 basis points from 17.3%18.3% in the prior year's first quarternine months ended September 30, 2019 to 17.7%18.8% for the same period in 2020, primarily due to a change in product type and market mix of homes delivered compared to the prior year offset by increased lot costs.year. Our housing gross margin for the first threenine months ofended September 30, 2019 was unfavorably impacted by $0.4$0.6 million of acquisition-related charges from our Detroit acquisition. Our land sale gross margin remained flatimproved slightly by 10 basis points in the first quarter ofnine months ended September 30, 2020 compared to the same period in 2019.

Selling, general and administrative expense increased $3.7$14.9 million, from $18.0$60.9 million for the threenine months ended March 31,September 30, 2019 to $21.7$75.8 million for the threenine months ended March 31,September 30, 2020, but remained flatand increased slightly as a percentage of revenue at 9.0%to 8.5% in both the first quarternine months of 2020 and 2019 .compared to 8.4% in the same period in 2019. The increase in selling, general and
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administrative expense was attributable, in part, to a $2.9$10.3 million increase in selling expense due to (1) a $1.8an $8.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, and (2) a $1.1$2.3 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models as a result of our increased average community count. The increase in selling, general and administrative expense was also attributable to a $0.8$4.6 million increase in general and administrative expense, which was primarily related to ana $1.9 million increase in compensation-related expensesexpense due to increased headcount as well as anour improved performance during the period, a $1.4 million increase in professional fees.


fees, a $0.8 million increase in land-related expenses and a $0.5 million increase in COVID-19-related cleaning expenses.
During the threenine months ended March 31,September 30, 2020, we experienced an 22%a 45% increase in new contracts in our Northern region, from 7022,040 in the threenine months ended March 31,September 30, 2019 to 8532,951 in the first quarternine months of 2020, and a 55% increase in homes in backlog from 1,231 homes at September 30, 2019 to 1,904 homes at September 30, 2020. The increaseincreases in new contracts wasand homes in backlog were due to improving demand in our newer communities compared to prior year and due to an increase in our average number of communities during the period. Homes in backlog increased 22% from 1,158 homes at March 31, 2019 to 1,408 homes at March 31, 2020. Average sales price in backlog decreased, however, to $423,000$427,000 at March 31,September 30, 2020 compared to $430,000 at March 31,September 30, 2019, which was primarily due to product type and market mix. During the threenine months ended March 31,September 30, 2020, we opened 921 new communities in our Northern region compared to four14 during 2019's first quarter.the same period in 2019. Our monthly absorption rate in our Northern region improved to 2.93.5 per community in the first quarter ofnine months ended September 30, 2020 from 2.62.5 per community in the first quarter ofsame period in 2019.
Southern Region. During the threenine months ended March 31,September 30, 2020, homebuilding revenue in our Southern region increased $54.9$192.8 million from $269.0$995.3 million in the first quarter ofnine months ended September 30, 2019 to $323.9 million$1.19 billion in the first quarter ofnine months ended September 30, 2020. This 20%19% increase in homebuilding revenue was the result of a 27%24% increase in the number of homes delivered (195(641 units) and, offset partially by a $2.0$7.6 million increasedecrease in land sale revenue offset partially byand a 6%3% decrease in the average sales price of homes delivered ($22,00011,000 per home delivered). Operating income in our Southern region increased $11.3$52.7 million from $17.6$76.3 million in the first quarter ofnine months ended September 30, 2019 to $28.9$129.0 million during the threenine months ended March 31,September 30, 2020. This increase in operating income was the result of an $14.3a $63.2 million improvement in our gross margin offset, in part, by a $3.1$10.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $14.3$63.5 million, due primarily to the 27%24% increase in the number of homes delivered noted above. Our housing gross margin percentage improved 170230 basis points from 17.3%17.9% in prior year's first quarterthe nine months ended September 30, 2019 to 19.0%20.2% in the same period in 2020, largely due to the more affordable mix of communities delivering homes offset partially by risinghomes. construction efficiencies and decreased lot costs. Our land sale gross margin remained flatdeclined $0.3 million in the first quarter ofnine months ended September 30, 2020 compared to the same period in 2019. We did not record any additional warranty charges for stucco-related repair costs in our Florida communities during the first quarter of 2020. With respect to this matter, during the quarter ended March 31, 2020, we identified 36 additional homes in need of repair and completed repairs on 11 homes, and, at March 31, 2020, we have 161 homes in various stages of repair.  See Note 6 to our financial statements for further information.
Selling, general and administrative expense increased $3.1$10.5 million from $28.7$99.3 million in the first quarter ofnine months ended September 30, 2019 to $31.8$109.8 million in the first quarter ofnine months ended September 30, 2020 but declined as a percentage of revenue to 9.8%9.2% compared to 10.7%10.0% for the first quarter ofnine months ended September 30, 2019. The increase in selling, general and administrative expense was attributable to a $2.4an $8.0 million increase in selling expense due to (1) a $3.0$10.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, offset partially by a $0.6$2.0 million decrease in non-variable selling expenses primarily related to the timing of sales office and model openings and a reduction in marketing costs. The increase in selling, general and administrative expense was also attributable to a $0.7$2.5 million increase in general and administrative expense, which was primarily related to an increase in land related expenses.incentive compensation due to our improved performance.

During the threenine months ended March 31,September 30, 2020, we experienced a 31%42% increase in new contracts in our Southern region, from 9423,056 in the threenine months ended March 31,September 30, 2019 to 1,2364,348 in the first quarternine months of 2020, and a 24%54% increase in backlog from 1,4941,684 homes at March 31,September 30, 2019 to 1,8572,599 homes at March 31,September 30, 2020. The increases in new contracts and backlog were primarily due to changes in product type and market mix as well as due to an increaseimproving demand in our average number ofmore affordable communities during the period.compared to prior year. Average sales price in backlog decreasedalso increased from $383,000$361,000 at March 31,September 30, 2019 to $380,000$387,000 at March 31,September 30, 2020 due to a change in product type and market mix. During the threenine months ended March 31,September 30, 2020, we opened 830 communities in our Southern region compared to 1444 during 2019's first quarter.the same period in 2019. Our monthly absorption rate in our Southern region improved to 3.23.9 per community in the first quarter ofnine months ended September 30, 2020 from 2.62.7 per community in the first quarter ofnine months ended September 30, 2019.
Financial Services. Revenue from our mortgage and title operations increased $1.7$22.0 million (14%(55%) from $11.8$39.5 million in the first quarter ofnine months ended September 30, 2019 to $13.5$61.5 million in the first quarter ofnine months ended September 30, 2020 due to a 42%35% increase in the number of loan originations from 7983,078 in the first quarter ofnine months ended September 30, 2019 to 1,1314,142 in the first quarter ofnine months ended September 30, 2020, offset partially by a decrease in the average loan amount from $315,000$312,000 in the threenine months ended March 31,September 30, 2019 to $306,000$311,000 in the threenine months ended March 31,September 30, 2020. The revenueWe also experienced higher margins on loans sold during the period compared to 2019's first nine months. Revenue was reduced by a $1.0$0.5 million impairment charge on our
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mortgage servicing rights caused by the disruption in the mortgage industry as a result of the COVID-19 pandemic. See Note 4 to our financial statements for further information.
We experienced a $0.7$17.8 million increase in operating income in the first quarter ofnine months ended September 30, 2020 compared to the first quarter ofsame period in 2019, which was primarily due to the increase in revenue discussed above offset partially by a $1.0$4.2 million increase in selling, general and administrative expense compared to 2019's first quarter.the nine months ended September 30, 2019. The increase in selling, general and administrative expense was primarily attributable to an increase in compensation expense related to an increase in employee headcount and an increase in incentive compensation due to improved results.
At March 31,September 30, 2020, M/I Financial provided financing services in all of our markets. Approximately 85%84% of our homes delivered during the first quarter ofnine months ended September 30, 2020 were financed through M/I Financial, compared to 79%81% in 2019's first quarter.the nine months ended September 30, 2019. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.


Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $0.7$6.3 million from $9.4$35.6 million for the threenine months ended March 31,September 30, 2019 to $10.1$41.9 million for the threenine months ended March 31,September 30, 2020. The increase was primarily due to ana $3.0 million increase in incentive compensation expense due to improved results during the quarter.period, a $1.2 million increase in corporate home office rent-related expense, a $0.9 million increase due to computer costs, a $0.3 million increase in charitable contributions and a $0.9 million increase in miscellaneous expenses.
Equity in (Income) LossIncome from Joint Venture Arrangements. Equity in income (loss) from joint venture arrangements represents our portion of pre-tax earnings (loss) from our joint venture arrangements where a special purpose entity is established (“LLCs”) with the other partners. During the three months ended March 31, 2020, theThe Company earned less than$0.3 million and $0.1 million of equity in income from its LLCs compared to $0.1 million of equity in loss during the threenine months ended March 31, 2019.September 30, 2020 and 2019, respectively.
Interest Expense - Net. Interest expense for the Company decreased $2.1$8.2 million from $6.8$16.6 million in the threenine months ended March 31,September 30, 2019 to $4.7$8.5 million in the threenine months ended March 31,September 30, 2020. This decrease was primarily the result of a decrease in average borrowings under our Credit Facility (as defined below) during the first quarternine months of 2020 compared to prior year, the redemption of our 20216.75% Senior Notes due 2021 (the “2021 Senior Notes”) at the beginning of the first quarter of 2020, and the issuance of our new 2028 Senior Notes, which were not outstanding at all during the first quarter ofnine months ended September 30, 2019 and hadhave a lower interest rate than the 2021 Senior Notes. Our weighted average borrowings decreased from $833.7$845.9 million in the first quarter ofnine months ended September 30, 2019 to $768.1$783.3 million in the first quarter ofnine months ended September 30, 2020, and our weighted average borrowing rate declined from 6.26%6.21% in 2019's first quarternine months to 6.17%5.51% in 2020's first quarter.nine months.
Income Taxes. Our overall effective tax rate was 23.2% for the threenine months ended March 31,September 30, 2020 and 24.5%25.2% for the threenine months ended March 31,September 30, 2019. The decrease in the effective rate for the threenine months ended March 31,September 30, 2020 was primarily attributable to a $0.4$3.7 million tax benefit related to the retroactive reinstatement of energy efficient homes tax credits and a $0.4 million increase in tax benefit from equity compensation taken during the quarter ended March 31, 20202020's first nine months (see Note 10 to our financial statements for more information).
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At March 31,September 30, 2020, we had $21.2$202.5 million of cash, cash equivalents and restricted cash, with $20.7$202.3 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $14.8$196.5 million increase in unrestricted cash and cash equivalents from December 31, 2019. Our principal uses of cash for the threenine months ended March 31,September 30, 2020 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, debt service requirements, including the redemption of our 2021 Senior Notes and the repayment of amounts outstanding under our credit facilities, and the repurchase of $1.9 million of our outstanding common shares under our 2018 Share Repurchase Program (as defined below). during the first quarter of 2020. In order to fund these uses of cash, we used proceeds from home deliveries and the sale of mortgage loans, as well as excess cash balances, proceeds from the issuance of our 2028 Senior Notes (as described below), borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to three primary credit agreements: (1) a $500 million unsecured revolving credit facility, dated July 18, 2013, as amended most recently on June 30, 2020 (the “Credit Facility”), with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly owned homebuilding subsidiaries
(the “Credit Facility”);subsidiaries; (2) a $125 million secured mortgage warehousing agreement (which increases to $160 million during certain periods)from September 25, 2020 to October 15, 2020 and to $185 million from November 15, 2020 to February 4, 2021), dated June 24, 2016, as amended most recently on May 29, 2020, with M/I Financial as borrower (the “MIF
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“MIF Mortgage Warehousing Agreement”);
and (3) a $65$90 million mortgage repurchase agreement, dated October 30, 2017, as amended most recently on October 26, 2020, with M/I Financial as borrower (the
“MIF “MIF Mortgage Repurchase Facility”).

In January 2020, we issued $400 million aggregate principal amount of our 2028 Senior Notes at par, for net proceeds of approximately $393.9 million. We used $300.4 million of the net proceeds to redeem all $300.0 million aggregate principal amount of our 6.75%2021 Senior Notes, due 2021, at par, and we used the remaining net proceeds to repay a portion of our outstanding borrowings under the Credit Facility. As of March 31,September 30, 2020, there were $6.9 million ofno borrowings outstanding and $65.8$66.6 million of letters of credit outstanding under our $500 million Credit Facility, leaving $427.3$433.4 million available.

The economic impacts from the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and into 2021. We expect to continue managing our balance sheet and liquidity carefully by managing our spending on land acquisition and development and construction of inventory homes, as well as overhead expenditures, relative to our ongoing volume of home deliveries, in orderand we expect to meet our current and anticipated capital requirements from cash receipts and availability under our Credit Facility.

During the first quarter ofnine months ended September 30, 2020, we delivered 1,4955,467 homes, started 1,7776,193 homes, and spent $75.7$266.8 million on land purchases and $62.0$222.6 million on land development. We are selectively acquiring and developing lots in our markets to replenish our lot supply; however, we have taken measures to extend or delay a number of land purchasessupply and the timing of development due to the uncertainty in the current environment. We will continue to monitor market conditions and our pace of home sales and deliveries


and will adjust our land spending accordingly. Pursuant to our land option agreements, as of March 31,September 30, 2020, we had a total of 19,04224,532 lots under contract, with an aggregate purchase price of approximately $720.9$801.4 million to be acquired during the remainder of 2020 through 2028.
Operating Cash Flow Activities. During the three-monthnine-month period ended March 31,September 30, 2020, we used $24.2generated $197.2 million of cash from operating activities, compared to using $22.6generating $1.0 million of cash in operating activities during the first quarter ofnine months ended September 30, 2019. The cash usedgenerated from operating activities in the first quarternine months of 2020 was primarily a result of a $45.1 million increase in inventory, an increase in other assets of $20.5 million, and a decrease in accrued compensation of $27.0 million, offset by a net income of $31.7$159.8 million, and an increase in accounts payable and customer deposits totaling $35.9 million. The $22.6 million of cash used in operating activities in 2019's first quarter was primarily a result of a $60.7 million increase in inventory and a decrease in accrued compensation of $24.8 million, offset partially by net income of $17.7 million, along with $48.6$14.3 million of proceeds from the sale of mortgage loans net of mortgage loan originations.originations, and an increase in accounts payable, other liabilities and customer deposits totaling $92.9 million, offset, in part, by a $62.5 million increase in inventory and an increase in other assets of $18.5 million. The $1.0 million of cash generated in operating activities in 2019's first nine months was primarily a result of net income of $85.8 million, $38.3 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable and customer deposits totaling $42.2 million, offset partially by a $156.1 million increase in inventory and a decrease in accrued compensation and other liabilities of $22.2 million.

Investing Cash Flow Activities. During the first quarter ofnine months ended September 30, 2020, we used $6.5$31.3 million of cash in investing activities, the same as used during the first quarter of 2019. The $6.5compared to using $25.7 million of cash usedin investing activities during both periodsthe nine months ended September 30, 2019. This increase in cash used was primarily due to an increase in our investment in joint venture arrangements.purchases of property and equipment during the period compared to prior year.

Financing Cash Flow Activities. During the threenine months ended March 31,September 30, 2020, we generated $45.9$30.5 million of cash from financing activities, compared to generating $49.5$36.7 million of cash during the first threenine months ofended September 30, 2019. The cash generated from financing activities in 2020 was primarily due to the issuance of our 2028 Senior Notes, net of debt issueissuance costs, for $393.9$391.5 million, offset partially by the redemption of all $300.0 million aggregate principal amount of our then outstanding 2021 Senior Notes, and repayments of $59.1$66.0 million (net of proceeds from borrowings) under our Credit Facility during the first quarter ofnine months ended September 30, 2020. The cash generated from financing activities during the first threenine months of 2019 was primarily due to higher borrowings (net of repayments) of $101.4 million under our Credit Facility, partially offset partially by net repayments (net of proceeds from borrowings)borrowings under our MIFtwo M/I Financial credit facilities of $49.1 million, and $5.2 million of repurchases of our common shares under our 2018 Share Repurchase Program (as defined below) during the first quarter of 2019.facilities.
On August 14, 2018, the Company announced that its Board of Directors authorized a share repurchase program (the “2018 Repurchase Program”) pursuant to which the Company may purchase up to $50 million of its outstanding common shares (see Note 13 to our financial statements). During the first quarter of 2020, the Company repurchased 80,000 common shares with an aggregate purchase price of $1.9 million which was funded with cash on hand and borrowings under our Credit Facility. As of March 31,September 30, 2020, the Company is authorized to repurchase an additional $17.2 million of outstanding common shares under the 2018 Share Repurchase Program.

At March 31,September 30, 2020 and December 31, 2019, our ratio of homebuilding debt to capital was 39%36% and 38%, respectively, calculated as the carrying value of our outstanding homebuilding debt divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders.
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We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. While it is difficult to estimate cash receipts and expenditures in the current environment as a result of the COVID-19 pandemic, including uncertainty regarding the duration and magnitude of the pandemic, weWe believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the next twelve months. In addition, we routinely monitor current and anticipated operational and debt service requirements, financial market conditions, and credit relationships, and we may choose to seek additional capital by issuing new debt and/or equity securities or engaging in other financial transactions to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated sales volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot purchases, debt maturity dates, and other factors. If we seek such additional capital or to engage in such other financial transactions, there can be no assurance that we would be able to obtain such additional capital or consummate such other financial transactions on terms acceptable to us, if at all, and such additional equity or debt financing or other financial transactions could dilute the interests of our existing shareholders, add operational limitations and/or increase our interest costs, particularly given the current uncertainty created by the COVID-19 pandemic and the volatile economic and financial market conditions.costs.


Included in the table below is a summary of our available sources of cash from the Credit Facility, the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility as of September 30, 2020:
(In thousands)Expiration
Date		Outstanding
Balance		Available
Amount
Notes payable – homebuilding (a)
(a)$— $433,434 
Notes payable – financial services (b)
(b)$136,119 $964 
(a)March 31,The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $829.6 million of availability for additional senior debt at September 30, 2020. As a result, the full $500 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $66.6 million of letters of credit outstanding at September 30, 2020,: leaving $433.4 million available. The Credit Facility has an expiration date of July 18, 2023 for $475.0 million of commitments and July 18, 2021 for $25.0 million of commitments.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral.  The maximum aggregate commitment amount of M/I Financial’s warehousing agreements as of September 30, 2020 was $225 million. The MIF Mortgage Warehousing Agreement has an expiration date of May 28, 2021. Subsequent to the quarter ended September 30, 2020, M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility which extended its term for an additional year to October 25, 2021 and also increased the maximum borrowing availability to $90 million from $65 million.
(In thousands)
Expiration
Date
Outstanding
Balance
Available
Amount
Notes payable – homebuilding (a)
7/18/2021$6,900
$427,279
Notes payable – financial services (b)
(b)$145,055
$3,084
(a)The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $626.6 million of availability for additional senior debt at March 31, 2020. As a result, the full $500 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were $6.9 million of borrowings outstanding and $65.8 million of letters of credit outstanding at March 31, 2020, leaving $427.3 million available. The Credit Facility has an expiration date of July 18, 2021.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral.  The maximum aggregate commitment amount of M/I Financial’s warehousing agreements as of March 31, 2020 was $190 million. The MIF Mortgage Warehousing Agreement has an expiration date of June 19, 2020 and the MIF Mortgage Repurchase Facility has an expiration date of October 26, 2020.
Notes Payable - Homebuilding.  

Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of $500 million, including a $125and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $600 million, sub-facility for letters of credit.subject to obtaining additional commitments from lenders. The Credit Facility matures on July 18, 2021.2023 for $475.0 million of commitments and July 18, 2021 for $25.0 million of commitments. Interest on amounts borrowed under the Credit Facility is payable at a rate which is adjusted daily and is equal to the sum of the one-month LIBOR rate(subject to a floor of 0.75%) plus a margin of 250 basis points. The margin is subjectpoints (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio.ratio).

Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility also provides for a $125 million sub-facility for letters of credit. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $599.8$779.1 million (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility).

The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 12 to our financial statements), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028 (the “2028 Senior Notes”) and our $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”).
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As of March 31,September 30, 2020, the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of March 31,September 30, 2020:
Financial CovenantCovenant RequirementActual
 (Dollars in millions)
Consolidated Tangible Net Worth≥$779.1 $1,091.4 
Leverage Ratio≤0.600.32
Interest Coverage Ratio≥1.5 to 1.07.7 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures≤$327.4 $2.3 
Unsold Housing Units and Model Homes≤2,780 905 
Financial Covenant Covenant Requirement Actual
   (Dollars in millions)
Consolidated Tangible Net Worth≥$599.8
 $969.0
Leverage Ratio≤0.60
 0.41
Interest Coverage Ratio≥1.5 to 1.0
 5.5 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures≤$290.7
 $2.6
Unsold Housing Units and Model Homes≤2,391
 1,248

Notes Payable - Financial Services.

MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides a maximum borrowing availability of $125 million, which increasedincreases to $160 million from September 25, 2020 to October 15, 2020 and to $185 million from November 15, 20192020 to February 4, 2020 (a period2021, which are periods of higherexpected increases in the volume of mortgage originations).originations. The MIF Mortgage Warehousing Agreement expires on June 19, 2020.May 28, 2021. Interest on amounts


borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the floatingone-month LIBOR rate (subject to a floor of 1.0%) plus a spread of 200 basis points.
As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Warehousing Agreement was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Warehousing Agreement on or prior to the current expiration date of June 19, 2020, but we cannot provide any assurance that we will be able to obtain such an extension.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement.
As of March 31,September 30, 2020,, there was $104.6$97.8 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Warehousing Agreement, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of March 31, 2020:September 30, 2020:
Financial Covenant Covenant Requirement ActualFinancial CovenantCovenant RequirementActual
 (Dollars in millions)(Dollars in millions)
Leverage Ratio≤10.0 to 1.0
 4.9 to 1.0
Leverage Ratio≤10.0 to 1.03.5 to 1.0
Liquidity≥$6.25
 $20.7
Liquidity≥$6.25 $43.2 
Adjusted Net Income>$0.0
 $13.2
Adjusted Net Income>$0.0 $25.5 
Tangible Net Worth≥$12.5
 $33.9
Tangible Net Worth≥$12.5 $46.0 
MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility. The MIF Mortgage Repurchase Facility provides for a maximum borrowing availability of $65 million. The MIF Mortgage Repurchase Facility expireswas scheduled to expire on October 26, 2020. As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Repurchase Facility was set at approximately one year.
M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floatingone-month LIBOR rate plus 175 or 200 basis points depending on the loan type.
Subsequent to the quarter ended September 30, 2020, M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility with an effective date of October 26, 2020. The amendment, among other things, extends the term of the MIF Mortgage Repurchase Facility for an additional year to October 25, 2021, increases the maximum borrowing availability to $90 million, and establishes a floor on one-month LIBOR of 1.0%.
The covenants in the MIF Mortgage Repurchase Facility are substantially similar to the covenants in the MIF Mortgage Warehousing Agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings, which are substantially similar to the restrictions in the MIF Mortgage Warehousing Agreement. There are no guarantors of the MIF Mortgage Repurchase Facility. As of March 31,September 30, 2020, there was $40.5$38.3 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all financial covenants under the MIF Mortgage Repurchase Facility as of September 30, 2020.
March 31, 2020.
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Senior Notes.

4.95% Senior Notes. On January 22, 2020, the Company issued $400 million aggregate principal amount of 4.95% Senior Notes due 2028. The 2028 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2028 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2028 Senior Notes. As of March 31,September 30, 2020, the Company was in compliance with all terms, conditions, and covenants under the indenture.

The Company used a portion of the net proceeds from the issuance of the 2028 Senior Notes to redeem all of its outstanding 2021 Senior Notes at 100.000% of the principal amount outstanding, plus accrued and unpaid interest thereon, on January 22, 2020. See Note 8 to our Consolidated Financial Statementsfinancial statements for more information regarding the 2028 Senior Notes.
5.625% Senior Notes. In August 2017, the Company issued $250 million aggregate principal amount of 5.625% Senior Notes due 2025. The 2025 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2025 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other


companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes. As of March 31,September 30, 2020, the Company was in compliance with all terms, conditions, and covenants under the indenture. See Note 8 to our financial statements for more information regarding the 2025 Senior Notes.
Weighted Average Borrowings. For the three months ended March 31,September 30, 2020 and 2019, our weighted average borrowings outstanding were $768.1$736.3 million and $833.7$848.9 million, respectively, with a weighted average interest rate of 6.17%5.57% and 6.26%6.13%, respectively. The decrease in our weighted average borrowings and our weighted average interest rate related to decreased borrowings under our Credit Facility during the firstthird quarter of 2020 compared to the same period in 2019 as well as the issuance of our 2028 Senior Notes on January 22, 2020, which hadhave a lower interest rate than our 2021 Senior Notes which were redeemed on January 22, 2020.

At March 31,September 30, 2020, we had $6.9 million ofno borrowings outstanding under the Credit Facility a decrease fromcompared to $66.0 million of borrowings outstanding at December 31, 2019. During the first quarternine months of 2020, the Company used the Credit Facility for investment in land and land development, construction of homes, operating expenses, working capital requirements and share repurchases under our 2018 Share Repurchase Program. During the threenine months ended March 31,September 30, 2020, the average daily amount outstanding under the Credit Facility was $58.4$23.1 million and the maximum amount outstanding under the Credit Facility was $111.3 million. TheBased on our currently anticipated spending on home construction, land acquisition and development during the remainder of 2020, offset by expected cash receipts from home deliveries, we do not expect to borrow under the Credit Facility through the end of 2020. Our expectation not to borrow under the Credit Facility during the remainder of 2020 is based on numerous assumptions, including homebuilding conditions not materially changing during the period as a result of the COVID-19 pandemic or otherwise. To the extent our assumptions or market conditions change, we may borrow under the Credit Facility and the actual amount borrowed during the remainder of 2020 willand the related timing would be subject to numerous factors, includingwhich are subject to significant variation as a result of the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, and cash receipts from home deliveries,deliveries. The amount borrowed would also be impacted by other cash receipts and payments, any capital markets transactions or other additional financings by the Company, any repayments or redemptions of outstanding debt, any additional share repurchases under the 2018 Share Repurchase Program and any other extraordinary events or transactions.transactions, including the uncertain effects of the COVID-19 pandemic.  The Company may also experience significant variation in cash and Credit Facility balances from week to week due to the timing of such receipts and payments. We expect to use our Credit Facility as part of our liquidity management but cannot estimate our maximum borrowings in 2020 at this time as a result of the COVID-19 pandemic.
There were $65.8$66.6 million of letters of credit issued and outstanding under the Credit Facility at March 31,September 30, 2020. During the threenine months ended March 31,September 30, 2020, the average daily amount of letters of credit outstanding under the Credit Facility was $68.6$67.4 million and the maximum amount of letters of credit outstanding under the Credit Facility was $69.9 million.

At March 31,September 30, 2020, M/I Financial had $104.6$97.8 million outstanding under the MIF Mortgage Warehousing Agreement.  During the threenine months ended March 31,September 30, 2020, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $42.9$37.3 million and the maximum amount outstanding was $104.6$109.2 million, which occurred during March.April.
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At March 31,September 30, 2020, M/I Financial had $40.5$38.3 million outstanding under the MIF Mortgage Repurchase Facility.  During the threenine months ended March 31,September 30, 2020, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $33.5$31.7 million and the maximum amount outstanding was $51.2$59.9 million, which occurred during January.August.
Universal Shelf Registration. In June 2019, the Company filed a $400 million universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2022. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.


CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations appearing in the Contractual Obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019.2019, except for the Third Amendment to the Credit Facility entered into on June 30, 2020, the Fourth Amendment to the MIF Warehousing Agreement, dated May 29, 2020, and the Third Amendment to the MIF Mortgage Repurchase Facility, dated October 26, 2020, as described above in Note 8 of our financial statements and the “Liquidity and Capital Resources” section.

OFF-BALANCE SHEET ARRANGEMENTS
Notes 3, 5 and 6 to our Condensed Consolidated Financial Statements discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated.
Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. Our use of these arrangements is for the purpose of securing the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company.  Additionally, in the ordinary course of its business, M/I Financial issues guarantees and indemnities relating to the sale of loans to third parties.
Land Option Agreements.  In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.  In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are VIEsvariable interest entities (“VIE”) and, if so, whether we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires a company to consolidate a VIE if the company is determined to be the primary beneficiary. In cases where we are the primary beneficiary, even though we do not have title to such land, we are required to consolidate these purchase/option agreements and reflect such assets and liabilities as Consolidated Inventory not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both March 31,September 30, 2020 and December 31, 2019, we have concluded that we were not the primary beneficiary of any VIEs from which we are purchasing under land option or purchase agreements.
In addition, we evaluate our land option or purchase agreements to determine for each contract if (1) a portion or all of the purchase price is a specific performance requirement, or (2) the amount of deposits and prepaid acquisition and development costs have exceeded certain thresholds relative to the remaining purchase price of the lots. If either is the case, then the remaining purchase price of the lots (or the specific performance amount, if applicable) is recorded as an asset and liability in Consolidated Inventory Not Owned on our Consolidated Balance Sheets.
At March 31,September 30, 2020,, “Consolidated Inventory Not Owned” was $14.3$0.4 million. At March 31,September 30, 2020, the corresponding liability of $14.3$0.4 million has been classified as Obligation for Consolidated Inventory Not Owned on our Unaudited Condensed Consolidated Balance Sheets.

Other than the Consolidated Inventory Not Owned balance, the Company currently believes that its maximum exposure as of March 31,September 30, 2020 related to our land option agreements is equal to the amount of the Company’s outstanding deposits and prepaid acquisition costs, which totaled $55.8$61.6 million, including cash deposits of $31.7$37.4 million, prepaid acquisition costs of $7.4$9.8 million, letters of credit of $13.2$11.0 million and $3.5$3.4 million of other non-cash deposits.
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Letters of Credit and Completion Bonds.  The Company provides standby letters of credit and completion bonds for development work in progress, deposits on land and lot purchase agreements and miscellaneous deposits.  As of March 31,September 30, 2020, the Company had outstanding $237.8$267.7 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities, that expire at various times through November 2027.  Included in this total are: (1) $165.8$194.1 million of performance and maintenance bonds and $52.2$55.1 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $13.7$11.5 million of financial letters of credit; and (3) $6.1$7.0 million of financial bonds.  The development agreements under which we are required to provide completion bonds or letters of credit are generally not subject to a required completion date and only require that the improvements are in place in phases as houses are built and sold.  In locations where development has progressed, the amount of development work remaining to be completed is typically less than the remaining amount of bonds or letters of credit due to timing delays in obtaining release of the bonds or letters of credit.
Guarantees and Indemnities. In the ordinary course of business, M/I Financial enters into agreements that guarantee purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur.  The risks associated with these guarantees


are offset by the value of the underlying assets, and the Company accrues its best estimate of the probable loss on these loans.  Additionally, the Company has provided certain other guarantees and indemnities in connection with the acquisition and development of land by our homebuilding operations.  See Note 5 to our Condensed Consolidated Financial Statements for additional details relating to our guarantees and indemnities.

INTEREST RATES AND INFLATION

Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation.  Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them.  The impact of increased rates can be offset, in part, by offering variable rate loans with lower interest rates.  In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through borrowings under our revolving credit facilities, consisting of the Credit Facility, the MIF Mortgage Warehousing Agreement, and the MIF Mortgage Repurchase Facility which permitted borrowings of up to $690$725 million as of March 31,September 30, 2020, subject to availability constraints. Additionally, M/I Financial is exposed to interest rate risk associated with its mortgage loan origination services.

Interest Rate Lock Commitments: Interest rate lock commitments (“IRLCs”) are extended to certain homebuying customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. Typically, the IRLCs will have a duration of less than six months; however, in certain markets, the duration could extend to nine months.

Some IRLCs are committed to a specific third party investor through the use of whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings.

Forward Sales of Mortgage-Backed Securities: Forward sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted IRLC loans against the risk of changes in interest rates between the lock date and the funding date. FMBSs related to uncommitted IRLCs are classified and accounted for as non-designated derivative instruments and are recorded at fair value, with gains and losses recorded in current earnings.

Mortgage Loans Held for Sale: Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. During the period between when a loan is closed and when it is sold to an investor, the interest rate risk is covered through the use of a whole loan contract or by FMBSs. The FMBSs are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings.

The table below shows the notional amounts of our financial instruments at March 31,September 30, 2020 and December 31, 20192019:
September 30,December 31,
Description of Financial Instrument (in thousands)20202019
Whole loan contracts and related committed IRLCs$2,924 $1,445 
Uncommitted IRLCs213,146 87,340 
FMBSs related to uncommitted IRLCs186,000 88,000 
Whole loan contracts and related mortgage loans held for sale13,750 6,125 
FMBSs related to mortgage loans held for sale116,000 144,000 
Mortgage loans held for sale covered by FMBSs120,257 144,411 
:
 March 31, December 31,
Description of Financial Instrument (in thousands)2020 2019
Whole loan contracts and related committed IRLCs$980
 $1,445
Uncommitted IRLCs158,153
 87,340
FMBSs related to uncommitted IRLCs137,000
 88,000
Whole loan contracts and related mortgage loans held for sale4,085
 6,125
FMBSs related to mortgage loans held for sale145,000
 144,000
Mortgage loans held for sale covered by FMBSs145,338
 144,411

The table below shows the measurement of assets and liabilities at March 31,September 30, 2020 and December 31, 2019:2019:
September 30,December 31,
Description of Financial Instrument (in thousands)20202019
Mortgage loans held for sale$140,046 $155,244 
Forward sales of mortgage-backed securities171 (336)
Interest rate lock commitments1,380 654 
Whole loan contracts(106)(16)
Total$141,491 $155,546 
 March 31, December 31,
Description of Financial Instrument (in thousands)2020 2019
Mortgage loans held for sale$156,208
 $155,244
Forward sales of mortgage-backed securities(6,916) (336)
Interest rate lock commitments3,095
 654
Whole loan contracts(20) (16)
Total$152,367
 $155,546

The following table sets forth the amount of (loss) gain recognized on assets and liabilities for the three and nine months ended March 31,September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
Description (in thousands)2020201920202019
Mortgage loans held for sale$(1,338)$(1,964)$(911)$(2,981)
Forward sales of mortgage-backed securities1,670 2,299 507 3,631 
Interest rate lock commitments(853)(686)704 (258)
Whole loan contracts(20)121 (68)174 
Total (loss) gain recognized$(541)$(230)$232 $566 

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 Three Months Ended March 31,
Description (in thousands)2020 2019
Mortgage loans held for sale$3,739
 $(1,363)
Forward sales of mortgage-backed securities(6,580) 1,934
Interest rate lock commitments2,383
 (42)
Whole loan contracts54
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Total (loss) gain recognized$(404) $543



The following table provides the expected future cash flows and current fair values of borrowings under our credit facilities and mortgage loan origination services that are subject to market risk as interest rates fluctuate, as of March 31, 2020.September 30, 2020. Because the MIF Mortgage Warehousing Agreement and MIF Mortgage Repurchase Facility are effectively secured by certain mortgage loans held for sale which are typically sold within 30 to 45 days, their outstanding balances are included in the most current period presented. The interest rates for our variable rate debt represent the weighted average interest rates in effect at March 31, 2020.September 30, 2020. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.
Expected Cash Flows by PeriodFair Value
(Dollars in thousands)20202021202220232024ThereafterTotal9/30/2020
ASSETS:
Mortgage loans held for sale:
Fixed rate$145,475 — — — — — $145,475 $140,046 
Weighted average interest rate2.86 %— — — — — 2.86 %
LIABILITIES:
Long-term debt — fixed rate$127 $1,215 $1,039 $304 $77 $650,000 $652,762 $672,613 
Weighted average interest rate5.63 %5.63 %5.63 %5.63 %5.63 %5.21 %5.21 %
Short-term debt — variable rate$136,119 — — — — — $136,119 $136,119 
Weighted average interest rate2.72 %— — — — — 2.72 %

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 Expected Cash Flows by Period Fair Value
(Dollars in thousands)2020 2021 2022 2023 2024 Thereafter Total 3/31/2020
ASSETS:               
Mortgage loans held for sale:               
Fixed rate$156,697
 —
 —
 —
 —
 —
 $156,697
 $155,599
Weighted average interest rate3.47% —
 —
 —
 —
 —
 3.47%  
                
LIABILITIES:               
Long-term debt — fixed rate$1,501
 $1,215
 $1,039
 $304
 $77
 $650,000
 $654,136
 $564,738
Weighted average interest rate5.63% 5.63% 5.63% 5.63% 5.63% 5.21% 5.21%  
Short-term debt — variable rate$151,955
 —
 —
 —
 —
 —
 $151,955
 $151,955
Weighted average interest rate3.02% —
 —
 —
 —
 —
 3.02%  



ITEM 4:  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

An evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) was performed by the Company’s management, with the participation of the Company’s principal executive officer and principal financial officer.  Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Part II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company and certain of its subsidiaries have received claims from homeowners in certain of our communities in our Tampa and Orlando, Florida markets (and been named as a defendant in legal proceedings initiated by certain of such homeowners) related to stucco on their homes. See Note 6 to the Company’s financial statements for further information regarding these stucco claims.

The Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial condition, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Our business has been, and may continue tocould be materially and adversely disrupted by the present outbreak of COVID-19 and could be materially and adversely disruptedor by another epidemic, pandemic or similar public health issue, or fear of such an event, and the measures that international, federal, state and local governments, agencies and/or health authorities implement to address it.

An epidemic, pandemic or similar public health issue, or fear of such an event, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse effect on our business, results of operations, financial condition and/or cash flows.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency with respect to the COVID-19 outbreak, and several states and municipalities have declared public health emergencies. Numerous international, federal, state and local public health and governmental authorities have taken extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

In response to these developments, we have undertaken a number of actions and initiatives. We began encouragingencouraged all employees at our corporate and division offices whose duties could be performed from home to work remotely until further notice, transitioned all of our Design Studios to appointment-only with pre-screened individuals or virtual appointments, instituted mandatory social distancing and hygiene/sanitation guidelines in accordance with recommended protocols throughout the organization (including

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(including in our Design Studios, and with respect to trade partners and their employees on our jobsites) and postponed non-essential customer care service and warranty requests.

While we believe thatnecessary and appropriate, the above-referenced actions and initiatives, are necessary and appropriate in light oftogether with the unprecedented uncertainty resulting from the COVID-19 pandemic they impactand related factors, impacted our ability to operate our business in the ordinary course consistent with our past practices. These actions and initiatives, combined with a reduction in the availability, capacity and efficiency of municipal and private services necessary to progress land development, homebuilding, mortgage loan originations and home closings which(which, in each case, has varied by market depending on the scope of the restrictions state and local authoritiesgovernments have established, haveestablished) and the unprecedented uncertainty resulting from the COVID-19 pandemic, caused our sales pace to significantly decline, our cancellation rate to significantly increase and our home construction and deliveries in certain of our markets to be delayed commencing in the latter half of March and continuing through April. Conditions started to improve in May as state and local governments in our markets began to ease public health restrictions and we began to take steps to gradually resume our normal operations (including opening our Design Studios and model homes to the date of this report. Thegeneral public) and our sales and closings have rebounded since May. However, the potential magnitude and duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, are uncertain andwhich include, among other things, high unemployment levels and significant volatility in the financial markets, and a significant decrease in the value of equity securities, including our common shares.are uncertain. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will not be able to conduct any business operations in certain of our markets or at all for an indefinite period.period, particularly in response to any resurgence in COVID-19 cases, including the rise in cases that certain of our markets are currently experiencing.

Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home, cause civil unrest, and/or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our homes and/or impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows, and/or access the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or decrease the supply of building materials or the availability of labor and subcontractors; and/or result in our recognizing material charges in future periods for inventory impairments or land option contract abandonments, or both. The unprecedented uncertainty surrounding COVID-19, due, in part, to rapidly changing governmental directives, public health challenges and progress, macroeconomic consequences and market reactions thereto also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth orand achieve our objectives for 2020.objectives.

Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect tocould experience, among other things, increases in our cancellation rate and decreases in our new contracts, homes delivered, revenues and profitability, as we have experienced in the first fewseveral weeks of our second quarter. Such impacts could be material to our business, results of operations, financial condition and cash flows in the secondfourth quarter and subsequent reporting periods. We could also be forced to reduce our average selling prices to generate demand or in response to actions taken by our competitors. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our markets, we could generate few or no new contracts and deliver few, if any, homes during the applicable period, which could be prolonged. Also, if there are prolonged government restrictions on our business and customers and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business, comply with the terms of the covenants and other requirements under our Credit Facility, indentures governing our senior notes, mortgage financing arrangements, land contracts due to land sellers and other loans;loans and/or service our outstanding debt. Such a circumstance could, among other things, exhaust our available liquidity and ability to access additional liquidity sources and/or trigger an acceleration to pay a significant portion or all of our then-outstanding indebtedness, which we may be unable to do.

In addition to the risks described above, the COVID-19 pandemic may also have the effect of heightening other risks disclosed in the Risk Factors section of our Annual Report on2019 Form 10-K, including, but not limited to, risks related to deterioration in homebuilding and general economic conditions, competition, availability of mortgage financing, impairments, supply and/or labor shortages, changes in energy prices, access to capital markets (including the debt and secondary mortgage markets), our ability to resell mortgages or liability for mortgages sold, compliance with the terms of our indebtedness (including the Credit Facility and the indentures governing our senior notes) and our leverage.

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

(a) Recent Sales of Unregistered Securities —- None.

(b) Use of Proceeds —- Not Applicable.

(c) Purchases of Equity Securities

CommonThere were no purchases made by, or on behalf of, the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934, as amended) of the Company’s common shares purchased during the three months ended March 31, 2020 were as follows:
PeriodTotal Number of Shares Purchased Average Price Paid per Share 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)
        
January 1, 2020 - January 31, 2020—
 —
 —
 $19,140,577
February 1, 2020 - February 28, 2020—
 —
 —
 $19,140,577
March 1, 2020 - March 31, 202080,000
 $23.90
 80,000
 $17,228,585
        
Quarter ended March 31, 202080,000
 $23.90
 80,000
 $17,228,585
September 30, 2020.
(1) On August 14, 2018 the Company announced that its Board of Directors authorized the 2018 Share Repurchase Program pursuant to which the Company may purchase up to $50 million of its outstanding common shares through open market transactions, privately negotiated transactions or otherwise in accordance with all applicable laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The 2018 Share Repurchase Program does not have an expiration date and may be modified, suspended or discontinued at any time. See
Note 13 to our Condensed Consolidated Financial Statements for additional information.

See Note 8 to our Condensed Consolidated Financial Statements above for more information regarding the limit imposed by the indenture governing our 2028 Senior Notes and the indenture governing our 2025 Senior Notes on our ability to pay dividends on, and repurchase, our common shares and any preferred shares of the Company then outstanding to the amount of the positive balance in our “restricted payments basket,” as defined in the indentures.

The timing, amount and other terms and conditions of any future repurchases under the 2018 Share Repurchase Program will be determined by the Company’s management at its discretion based on a variety of factors, including the market price of the Company’s common shares, corporate considerations, general market and economic conditions and legal requirements.

Item 3. Defaults Upon Senior Securities - None.

Item 4. Mine Safety Disclosures - None.

Item 5. Other Information - None.


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Item 6. Exhibits

The exhibits required to be filed herewith are set forth below.

Exhibit NumberDescription
Exhibit Number10.1Description
4.1
Indenture, datedThird Amendment to Second Amended and Restated Master Repurchase Agreement effective as of January 22,October 26, 2020 by and amongbetween M/I Homes, Inc., the guarantors named thereinFinancial and U.S.Sterling National Bank National Association, as trustee of M/I Homes, Inc.’s 4.95% Senior Notes due 2028, incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 22, 2020.. (Filed herewith.)
4.231.1
Form of 4.95% Senior Notes due 2028 incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 22, 2020.
4.3
Registration Rights Agreement, dated as of January 22, 2020, by and among M/I Homes, Inc., the guarantors named therein and the initial purchasers named therein, incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on January 22, 2020.
31.1
Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2
Certification by Phillip G. Creek, Chief Financial Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1
Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2
Certification by Phillip G. Creek, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101.INSXBRL Instance Document. (Furnished herewith.)
101.SCHXBRL Taxonomy Extension Schema Document. (Furnished herewith.)
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. (Furnished herewith.)
101.LABXBRL Taxonomy Extension Label Linkbase Document. (Furnished herewith.)
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. (Furnished herewith.)
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. (Furnished herewith.)
104Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).



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SIGNATURES

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.

M/I Homes, Inc.
(Registrant)
Date:October 30, 2020M/I Homes, Inc.
By:(Registrant)
Date:May 1, 2020By:/s/ Robert H. Schottenstein
Robert H. Schottenstein
Chairman, Chief Executive Officer and
President
(Principal Executive Officer)
Date:May 1,October 30, 2020By:/s/ Ann Marie W. Hunker
Ann Marie W. Hunker
Vice President, Corporate Controller
(Principal Accounting Officer)


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