Company Quick10K Filing
Quick10K
MI Homes
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$28.58 28 $788
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-24 Earnings, Exhibits
8-K 2019-06-21 Enter Agreement, Exhibits
8-K 2019-06-06 Amend Bylaw, Exhibits
8-K 2019-05-07 Shareholder Vote
8-K 2019-04-24 Earnings, Exhibits
8-K 2019-02-06 Officers, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-08-14 Other Events, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-22 Enter Agreement, Exhibits
8-K 2018-05-08 Officers, Shareholder Vote, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-02-28 Other Events
8-K 2018-02-26 Regulation FD, Exhibits
8-K 2018-02-21 Suspend Trading, Exhibits
8-K 2018-02-15 Shareholder Rights, Exhibits
8-K 2018-02-01 Earnings, Exhibits
KR Kroger 20,250
TTD Trade Desk 8,420
WWE World Wrestling Entertainmentinc 6,550
CBD Brazilian Distribution Co Companhia Brasileira De Distr Cbd 5,620
COLB Columbia Banking System 2,740
CHMI Cherry Hill Mortgage Investment 285
AXU Alexco Resource 113
DRAD Digirad 14
HPPI Hedgepath Pharmaceuticals 0
KSHB Kush Bottles 0
MHO 2019-06-30
Note 1. Basis of Presentation
Note 2. Inventory and Capitalized Interest
Note 3. Investment in Joint Venture Arrangements
Note 4. Fair Value Measurements
Note 5. Guarantees and Indemnifications
Note 6. Commitments and Contingencies
Note 7. Acquisition and Goodwill
Note 8. Debt
Note 9. Earnings per Share
Note 10. Income Taxes
Note 11. Business Segments
Note 12. Supplemental Guarantor Information
Note 13. Share Repurchase Program
Note 14. Revenue Recognition
Note 15. Operating Leases
Item 2: Management's Discussion and Analysis of Financial Condition And
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities - None.
Item 4. Mine Safety Disclosures - None.
Item 5. Other Information - None.
Item 6. Exhibits
EX-3.1 exhibit31amendedandres.htm
EX-31.1 exhibit311ceocertifica.htm
EX-31.2 exhibit312cfocertifica.htm
EX-32.1 exhibit321ceocertifica.htm
EX-32.2 exhibit322cfocertifica.htm

MI Homes Earnings 2019-06-30

MHO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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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 June 30, 2019
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

M/I HOMES, INC.
(Exact name of registrant as specified in it charter)
 
Ohio
 
31-1210837
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 

3 Easton Oval, Suite 500, Columbus, Ohio 43219
(Address of principal executive offices) (Zip Code)

(614) 418-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value $.01
MHO
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
X
 
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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
X
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: 27,617,366 shares outstanding as of July 24, 2019.




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 June 30, 2019 and December 31, 2018
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months ended June 30, 2019 and 2018
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Three and Six Months Ended June 30, 2019
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 



2





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

(Dollars in thousands, except par values)
 
June 30,
2019
 
December 31,
2018
 
 
(unaudited)
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
20,393

 
$
21,529

Mortgage loans held for sale
 
123,909

 
169,651

Inventory
 
1,763,479

 
1,674,460

Property and equipment - net
 
28,094

 
29,395

Investment in joint venture arrangements
 
41,344

 
35,870

Operating lease right-of-use assets
 
19,397

 

Deferred income tax asset
 
12,594

 
13,482

Goodwill
 
16,400

 
16,400

Other assets
 
63,596

 
60,794

TOTAL ASSETS
 
$
2,089,206

 
$
2,021,581

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
Accounts payable
 
$
154,070

 
$
131,511

Customer deposits
 
38,048

 
32,055

Operating lease liabilities
 
19,397

 

Other liabilities
 
120,813

 
150,051

Community development district obligations
 
10,866

 
12,392

Obligation for consolidated inventory not owned
 
13,109

 
19,308

Notes payable bank - homebuilding operations
 
174,300

 
117,400

Notes payable bank - financial services operations
 
104,003

 
153,168

Notes payable - other
 
5,092

 
5,938

Senior notes due 2021 - net
 
298,436

 
297,884

Senior notes due 2025 - net
 
246,832

 
246,571

TOTAL LIABILITIES
 
$
1,184,966

 
$
1,166,278

 
 
 
 
 
Commitments and contingencies (Note 6)
 

 

 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
 
Common shares - $.01 par value; authorized 58,000,000 shares at both June 30, 2019 and December 31, 2018;
   issued 30,137,141 shares at both June 30, 2019 and December 31, 2018
 
301

 
301

Additional paid-in capital
 
330,052

 
330,517

Retained earnings
 
628,961

 
580,992

Treasury shares - at cost - 2,519,775 and 2,620,923 shares at June 30, 2019 and December 31, 2018, respectively
 
(55,074
)
 
(56,507
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
904,240

 
$
855,303

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,089,206

 
$
2,021,581


See Notes to Unaudited Condensed Consolidated Financial Statements.

3



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Revenue
$
623,686

 
$
558,098

 
$
1,104,795

 
$
995,955

Costs and expenses:
 
 
 
 
 
 
 
Land and housing
503,857

 
449,336

 
892,324

 
798,038

General and administrative
36,164

 
34,666

 
66,863

 
62,617

Selling
37,452

 
35,591

 
69,003

 
65,654

Acquisition and integration costs

 

 

 
1,700

Equity in (income) loss from joint venture arrangements
(187
)
 
86

 
(66
)
 
(224
)
Interest
5,197

 
4,888

 
11,989

 
10,766

Total costs and expenses
582,483

 
524,567

 
1,040,113

 
938,551

 
 
 
 
 
 
 
 
Income before income taxes
41,203

 
33,531

 
64,682

 
57,404

 
 
 
 
 
 
 
 
Provision for income taxes
10,957

 
5,620

 
16,713

 
11,430

 
 
 
 
 
 
 
 
Net income
30,246

 
27,911

 
47,969

 
45,974

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.10

 
$
0.98

 
$
1.74

 
$
1.62

Diluted
$
1.08

 
$
0.96

 
$
1.71

 
$
1.56

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
27,599

 
28,571

 
27,549

 
28,349

Diluted
28,090

 
29,101

 
28,027

 
29,818


See Notes to Unaudited Condensed Consolidated Financial Statements.

4



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

 
Six Months Ended June 30, 2019
 
Common Shares
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Shares
 
Total Shareholders’ Equity
(Dollars in thousands)
 
Amount
 
 
 
 
Balance at December 31, 2018
27,516,218

 
$
301

 
$
330,517

 
$
580,992

 
$
(56,507
)
 
$
855,303

Net income

 

 

 
17,723

 

 
17,723

Stock options exercised
136,740

 

 
(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 distributions
116,956

 

 
(2,545
)
 

 
2,545

 

Balance at March 31, 2019
27,568,826

 
$
301

 
$
328,580

 
$
598,715

 
$
(56,134
)
 
$
871,462

Net income

 

 

 
30,246

 

 
30,246

Stock options exercised
48,540

 

 
(211
)
 

 
1,060

 
849

Stock-based compensation expense

 

 
1,682

 

 

 
1,682

Deferral of executive and director compensation

 

 
1

 

 

 
1

Balance at June 30, 2019
27,617,366

 
$
301

 
$
330,052

 
$
628,961

 
$
(55,074
)
 
$
904,240


 
Six Months Ended June 30, 2018
 
Common Shares
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Shares
 
Total Shareholders’ Equity
(Dollars in thousands)
 
Amount
 
 
 
 
Balance at December 31, 2017
27,856,752

 
$
295

 
$
306,483

 
$
473,329

 
$
(32,809
)
 
$
747,298

Net income

 

 

 
18,063

 

 
18,063

Stock options exercised
24,220

 

 
(56
)
 

 
482

 
426

Stock-based compensation expense

 

 
1,039

 

 

 
1,039

Common share issuance for conversion of convertible notes
628,515

 
6

 
20,303

 

 

 
20,309

Deferral of executive and director compensation

 

 
185

 

 

 
185

Executive and director deferred compensation distributions
61,366

 

 
(2,174
)
 

 
1,219

 
(955
)
Balance at March 31, 2018
28,570,853

 
$
301

 
$
325,780

 
$
491,392

 
$
(31,108
)
 
$
786,365

Net income

 

 

 
27,911

 

 
27,911

Stock-based compensation expense

 

 
1,691

 

 

 
1,691

Deferral of executive and director compensation

 

 
(1
)
 

 

 
(1
)
Balance at June 30, 2018
28,570,853

 
$
301

 
$
327,470

 
$
519,303

 
$
(31,108
)
 
$
815,966


See Notes to Unaudited Condensed Consolidated Financial Statements.

5



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
47,969

 
$
45,974

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Equity in income from joint venture arrangements
(66
)
 
(224
)
Mortgage loan originations
(570,989
)
 
(519,802
)
Proceeds from the sale of mortgage loans
615,714

 
584,700

Fair value adjustment of mortgage loans held for sale
1,017

 
(1,318
)
Capitalization of originated mortgage servicing rights
(1,588
)
 
(2,486
)
Amortization of mortgage servicing rights
657

 
383

Depreciation
5,698

 
5,278

Amortization of debt discount and debt issue costs
1,352

 
1,443

Gain on sale of mortgage servicing rights

 
(1,224
)
Stock-based compensation expense
2,594

 
2,730

Deferred income tax expense
888

 
910

Change in assets and liabilities:
 
 
 
Inventory
(89,853
)
 
(137,689
)
Other assets
240

 
(4,166
)
Accounts payable
22,560

 
13,730

Customer deposits
5,993

 
10,976

Accrued compensation
(18,486
)
 
(15,467
)
Other liabilities
(13,083
)
 
(4,673
)
Net cash provided by (used in) operating activities
10,617

 
(20,925
)
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(1,599
)
 
(4,615
)
Return of capital from joint venture arrangements
150

 
676

Acquisition

 
(100,960
)
Investment in joint venture arrangements
(15,281
)
 
(4,321
)
Proceeds from sale of mortgage servicing rights

 
6,335

Net cash used in investing activities
(16,730
)
 
(102,885
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Repayment of convertible senior subordinated notes due 2018

 
(65,941
)
Proceeds from bank borrowings - homebuilding operations
374,500

 
353,900

Repayment of bank borrowings - homebuilding operations
(317,600
)
 
(172,100
)
Net repayment of bank borrowings - financial services operations
(49,165
)
 
(75,032
)
Principal repayment of notes payable - other and community development district bond obligations
(845
)
 
(1,214
)
Repurchase of common shares
(5,150
)
 

Debt issue costs
(40
)
 
(115
)
Proceeds from exercise of stock options
3,277

 
426

Net cash provided by financing activities
4,977

 
39,924

Net decrease in cash, cash equivalents and restricted cash
(1,136
)
 
(83,886
)
Cash, cash equivalents and restricted cash balance at beginning of period
21,529

 
151,703

Cash, cash equivalents and restricted cash balance at end of period
$
20,393

 
$
67,817

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the year for:
 
 
 
Interest — net of amount capitalized
$
10,585

 
$
9,643

Income taxes
$
13,557

 
$
10,176

 
 
 
 
NON-CASH TRANSACTIONS DURING THE PERIOD:
 
 
 
Community development district infrastructure
$
(1,526
)
 
$
(1,260
)
Consolidated inventory not owned
$
(6,199
)
 
$
(6,751
)
Distribution of single-family lots from joint venture arrangements
$
9,723

 
$
10,641

Common stock issued for conversion of convertible notes
$

 
$
20,309

 
 
 
 

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. 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, 2018 (the “2018 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 2018 Form 10-K, 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, the Company recast certain prior year amounts in the condensed consolidated financial statements to conform with the 2019 presentation (see Note 11). These reclassifications had no impact on the Company's results of operations.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”), which requires organizations that lease assets - referred to as “lessees” - to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for all lease agreements. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities will be expanded to include qualitative and specific quantitative information. For publicly traded companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Following the issuance of ASU 2016-02, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”), ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), and ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements (“ASU 2018-20”). In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”) which clarifies how to apply certain aspects of the new lease standard as discussed in more detail below. These ASUs do not change the core principle of the guidance stated in ASU 2016-02, but are instead intended to clarify and improve the operability of certain topics addressed by ASU 2016-02 and provide practical expedients for certain aspects of the guidance to aid companies in transition. These additional ASUs have the same effective date and transition requirements as ASU 2016-02.

We adopted ASU 2016-02 and the subsequently issued ASUs identified above on January 1, 2019 using the additional modified retrospective transition method in accordance with ASU 2018-11, which includes a cumulative catch-up in retained earnings on the initial date of adoption (i.e., the initial date of adoption method). The adoption of the new lease standard did not have any impact on our retained earnings. At January 1, 2019, we recognized Operating Right-of-Use (“ROU”) Assets and Operating Lease Liabilities of $20.9 million on our Unaudited Condensed Consolidated Balance Sheets. As a result of adopting the standard, we added certain internal controls to our control framework and ensured that these controls were designed and operating as part of

7



the implementation process. See Note 15 to the Company’s financial statements for the additional expanded disclosures required by the new standard.

In August 2018, the SEC issued SEC Final Rule 33-10532, Disclosure Update and Simplification, which revised or eliminated certain of the SEC’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded in light of other SEC and or GAAP disclosure requirements. As a result of the final rule’s amendments, the SEC now requires a registrant to reconcile its changes in stockholders' equity for both the current and comparative interim and year-to-date periods, with subtotals. This final rule was effective on November 5, 2018. Our Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 reflect adoption of this final rule.
Impact of New Accounting Standards
In June 2016, the FASB issued 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. We are currently evaluating the impact that the adoption of ASU 2016-13 may have on our consolidated financial statements and disclosures. 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.

In August 2018, the FASB issued ASU 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. We are currently evaluating the effect that this guidance will have on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). ASU 2018-15 requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. For publicly traded companies, ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently evaluating the effect that this guidance will have on our consolidated financial statements and disclosures.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”), which provides clarification on implementation issues associated with adopting ASU 2016-02. The implementation issues noted in ASU 2019-01 include determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows for sales-type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. We applied the guidance on January 1, 2019, the date we adopted ASU 2016-02. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.


8



Significant Accounting Policies

We believe that there have been no significant changes to our significant accounting policies during the quarter ended June 30, 2019 as compared to those disclosed in our 2018 Form 10-K, other than the changes described above under “Reclassifications” and below.
Leases
The Company leases certain office space and model homes under operating leases with remaining terms of one to six years.  The Company sells model homes to investors with the express purpose of leasing the homes back as sales models for a specified period of time.  Under ASC 842, the Company records the sale of the model home and the profit on the sale at the time of the home delivery.

The Company determines if an arrangement is a lease at inception when the arrangement transfers the right to control the use of an identified asset to the Company. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make payments arising from the lease agreement. The Company has operating leases, but does not have any financing leases.

Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. The lease term may include an option to extend or terminate a lease when it is reasonably certain that the option will be exercised. The exercise of these lease renewal options is generally at our discretion.  The operating lease ROU assets include any lease payments made in advance and exclude any lease incentives. Lease payments include both lease and non-lease components as a single lease component. Lease expense is recognized on a straight-line basis over the lease term. The expense recognition pattern for our leases remained substantially unchanged as a result of the adoption of ASC 842. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are expensed as incurred. Short-term leases include leases with terms of less than one year without renewal options that are reasonably certain to be exercised and are recognized on a straight-line basis over the lease term. Due to our election of the practical expedient, leases with an initial term of twelve months or less are not recorded on the balance sheet. As the rate implicit in our leases is not readily determinable, the Company uses its estimated incremental borrowing rate at the commencement date in determining the present value of the lease payments. We give consideration to our recent debt issuances as well as to the current rate available under our Credit Facility (defined below) when calculating our incremental borrowing rate. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. See Note 15 to our financial statements for further discussion.
NOTE 2. Inventory and Capitalized Interest
Inventory
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the land 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.
A summary of the Company’s inventory as of June 30, 2019 and December 31, 2018 is as follows:
(In thousands)
June 30, 2019
 
December 31, 2018
Single-family lots, land and land development costs
$
804,453

 
$
778,943

Land held for sale
13,018

 
12,633

Homes under construction
796,479

 
730,390

Model homes and furnishings - at cost (less accumulated depreciation: June 30, 2019 - $13,132;
   December 31, 2018 - $13,441)
93,201

 
87,132

Community development district infrastructure
10,866

 
12,392

Land purchase deposits
32,353

 
33,662

Consolidated inventory not owned
13,109

 
19,308

Total inventory
$
1,763,479

 
$
1,674,460



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.

9



Homes under construction include homes that are in various stages of construction. As of June 30, 2019 and December 31, 2018, we had 1,413 homes (with a carrying value of $264.9 million) and 1,443 homes (with a carrying value of $311.0 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 $10.9 million and $12.4 million liability related to these CDD bond obligations as of June 30, 2019 and December 31, 2018, 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. In the period during which 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 six months ended June 30, 2019 and 2018 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Capitalized interest, beginning of period
$
21,506

 
$
18,264

 
$
20,765

 
$
17,169

Interest capitalized to inventory
8,036

 
7,191

 
14,170

 
13,150

Capitalized interest charged to land and housing costs and expenses
(7,380
)
 
(6,203
)
 
(12,773
)
 
(11,067
)
Capitalized interest, end of period
$
22,162

 
$
19,252

 
$
22,162

 
$
19,252

 
 
 
 
 
 
 
 
Interest incurred
$
13,233

 
$
12,079

 
$
26,159

 
$
23,916


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. During the six-month period ended June 30, 2019, we increased our total investment in such joint venture arrangements by $5.5 million from $35.9 million at December 31, 2018 to $41.3 million at June 30, 2019, which was driven primarily by our cash investments in our joint venture arrangements during the first half of 2019 of $15.3 million, offset, in part, by our increased lot distributions from joint venture arrangements of $9.7 million.
We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of June 30, 2019 is the amount invested of $41.3 million, which is reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets, although we expect to invest further amounts in these joint venture arrangements as development of the properties progresses.
We use the equity method of accounting for investments in unconsolidated joint ventures over which we exercise significant influence but do not have a controlling interest. Under the equity method, our share of the unconsolidated joint ventures’ earnings or loss, if any, is included in our consolidated statement of income. The Company assesses its investments in unconsolidated joint ventures 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.
For joint venture arrangements where a special purpose entity is established to own the property, we generally enter into limited liability company or similar arrangements (“LLCs”) with the other partners. The Company’s ownership in these LLCs as of both June 30, 2019 and December 31, 2018 ranged from 25% to 97%. 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.

10



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 2018 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 2018 Form 10-K. If we are deemed to be the 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 not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both June 30, 2019 and December 31, 2018, 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 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. 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 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.

11



Interest Rate Lock Commitments. IRLCs are extended to certain home-buying 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 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 June 30, 2019 and December 31, 2018:
Description of Financial Instrument (in thousands)
June 30, 2019
 
December 31, 2018
Whole loan contracts and related committed IRLCs
$
3,879

 
$
5,823

Uncommitted IRLCs
141,479

 
76,117

FMBSs related to uncommitted IRLCs
141,000

 
83,000

Whole loan contracts and related mortgage loans held for sale
4,331

 
14,285

FMBSs related to mortgage loans held for sale
117,000

 
150,000

Mortgage loans held for sale covered by FMBSs
117,030

 
149,980


The table below shows the level and measurement of assets and liabilities measured on a recurring basis at June 30, 2019 and December 31, 2018:
Description of Financial Instrument (in thousands)
Fair Value Measurements
June 30, 2019
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
123,909

 
$

 
$
123,909

 
$

 
Forward sales of mortgage-backed securities
(1,973
)
 

 
(1,973
)
 

 
Interest rate lock commitments
1,432

 

 
1,432

 

 
Whole loan contracts
(116
)
 

 
(116
)
 

 
Total
$
123,252

 
$

 
$
123,252

 
$

 
Description of Financial Instrument (in thousands)
Fair Value Measurements
December 31, 2018
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
169,651

 
$

 
$
169,651

 
$

 
Forward sales of mortgage-backed securities
(3,305
)
 

 
(3,305
)
 

 
Interest rate lock commitments
989

 

 
989

 

 
Whole loan contracts
(154
)
 

 
(154
)
 

 
Total
$
167,181

 
$

 
$
167,181

 
$

 


The following table sets forth the amount of gain (loss) 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 six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Description (in thousands)
2019
 
2018
 
2019
 
2018
Mortgage loans held for sale
$
346

 
$
642

 
$
(1,017
)
 
$
1,317

Forward sales of mortgage-backed securities
(602
)
 
(658
)
 
1,332

 
(960
)
Interest rate lock commitments
470

 
138

 
428

 
843

Whole loan contracts
39

 
(61
)
 
53

 
(144
)
Total gain recognized
$
253

 
$
61

 
$
796

 
$
1,056


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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 Derivatives
 
Liability Derivatives
 
 
June 30, 2019
 
June 30, 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
 
$
1,973

Interest rate lock commitments
 
Other assets
 
1,432

 
Other liabilities
 

Whole loan contracts
 
Other assets
 
50

 
Other liabilities
 
166

Total fair value measurements
 
 
 
$
1,482

 
 
 
$
2,139

 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2018
 
December 31, 2018
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
 
$
3,305

Interest rate lock commitments
 
Other assets
 
989

 
Other liabilities
 

Whole loan contracts
 
Other assets
 

 
Other liabilities
 
154

Total fair value measurements
 
 
 
$
989

 
 
 
$
3,459


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 2018 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 six months ended June 30, 2019 and 2018, the Company did not 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 2018 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 six months ended June 30, 2019 and 2018, the Company did not record any impairment charges on its investments in unconsolidated joint ventures.
Asset Held For Sale.  The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when the assets are deemed to be impaired. Assets held for sale are reported at the lower of cost or fair value. Cost to sell are accrued separately. Our home office building in Columbus, Ohio met the held for sale classification criteria for the period ended September 30, 2018 as it was being actively marketed. The carrying value of the building as of June 30, 2019 was $5.6 million.

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The Company estimated the fair value of the building using the market values for similar properties, and the building was considered a Level 2 asset as defined in ASC 820, “Fair Value Measurements.” During the three and six months ended June 30, 2019, the Company did not record any impairment charges on its asset held for sale.
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 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 June 30, 2019 and December 31, 2018. 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.
 
 
June 30, 2019
 
December 31, 2018
(In thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
20,393

 
$
20,393

 
$
21,529

 
$
21,529

Mortgage loans held for sale
 
123,909

 
123,909

 
169,651

 
169,651

Split dollar life insurance policies
 
206

 
206

 
206

 
206

Commitments to extend real estate loans
 
1,432

 
1,432

 
989

 
989

Liabilities:
 
 
 
 
 
 
 
 
Notes payable - homebuilding operations
 
174,300

 
174,300

 
117,400

 
117,400

Notes payable - financial services operations
 
104,003

 
104,003

 
153,168

 
153,168

Notes payable - other
 
5,092

 
4,440

 
5,938

 
5,112

Senior notes due 2021 (a)
 
300,000

 
304,875

 
300,000

 
298,500

Senior notes due 2025 (a)
 
250,000

 
253,750

 
250,000

 
228,750

Whole loan contracts for committed IRLCs and mortgage loans held for sale
 
116

 
116

 
154

 
154

Forward sales of mortgage-backed securities
 
1,973

 
1,973

 
3,305

 
3,305

Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
Letters of credit
 

 
1,457

 

 
944

(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 June 30, 2019 and December 31, 2018:
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 and Senior Notes due 2025. The fair value of these financial instruments was determined based upon market quotes at June 30, 2019 and December 31, 2018. 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.
Split Dollar Life Insurance Policy and Notes Receivable. The estimated fair value was determined by calculating the present value of the amounts based on the estimated timing of receipts using discount rates that incorporate management’s estimate of risk associated with the corresponding note receivable.
Notes Payable - Homebuilding Operations. The interest rate available to the Company during the quarter ended June 30, 2019 under the Company’s $500 million unsecured revolving credit facility, dated July 18, 2013, as amended (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, dated June 24, 2016, as amended (the “MIF Mortgage Warehousing

14



Agreement”); and (2) a $50 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 second quarter of 2019 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.
Letters of Credit. Letters of credit of $58.9 million and $52.7 million represent potential commitments at June 30, 2019 and December 31, 2018, respectively. The letters of credit generally expire within one or two years. The estimated fair value of letters of credit was determined using fees currently charged for similar agreements.
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 guarantee certain 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 $82.1 million and $63.6 million were covered under these guarantees as of June 30, 2019 and December 31, 2018, respectively.  The increase in loans covered by these guarantees from December 31, 2018 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 June 30, 2019, 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 $1.2 million and $0.6 million at June 30, 2019 and December 31, 2018, respectively.
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 June 30, 2019 and December 31, 2018, the total of all loans indemnified to third party insurers relating to the above agreements was $1.0 million. 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 $0.7 million and $0.6 million at June 30, 2019 and December 31, 2018, respectively, 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. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”), and our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 in all of our markets except our Texas markets) or 10-year (offered on all homes sold in our Texas markets) 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.

15



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-evaluated 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.
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.
A summary of warranty activity for the three and six months ended June 30, 2019 and 2018 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Warranty reserves, beginning of period
$
25,220

 
$
24,301

 
$
26,459

 
$
26,133

Warranty expense on homes delivered during the period
3,641

 
3,299

 
6,481

 
5,842

Changes in estimates for pre-existing warranties
557

 
557

 
735

 
465

Charges related to stucco-related claims (a)

 

 

 

Settlements made during the period
(3,944
)
 
(4,878
)
 
(8,201
)
 
(9,161
)
Warranty reserves, end of period
$
25,474

 
$
23,279

 
$
25,474

 
$
23,279


(a)
These amounts represent charges for stucco-related repair costs net of recoveries from insurers 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 and six month periods ended June 30, 2019, we did not record any additional warranty charges or receive any additional recoveries for stucco-related repair costs. At June 30, 2019, 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 $5.3 million. We believe that this amount is sufficient to cover both known and estimated future repair costs as of June 30, 2019. 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 June 30, 2019, 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 June 30, 2019, the Company had outstanding approximately $233.5 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 September 2026. Included in this total are: (1) $167.7 million of performance and maintenance bonds and $48.8 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $10.0 million of financial letters of credit, of which $9.6 million represent deposits on land and lot purchase agreements; and (3) $7.0 million of financial bonds.


16



Land Option Contracts and Other Similar Contracts

At June 30, 2019, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $574.1 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 June 30, 2019 and December 31, 2018, we had $0.5 million and $0.4 million reserved for legal expenses, respectively.
NOTE 7. Acquisition and Goodwill
Acquisition
In March 2018, we entered the Detroit, Michigan market through the acquisition of the homebuilding assets and operations of Pinnacle Homes for a purchase price of $101.0 million. The results of Pinnacle Homes’ operations have been included in our financial statements since March 1, 2018, the effective date of the acquisition. As a result of the transaction, we recorded $16.4 million of goodwill (all of which is tax deductible) which relates to expected synergies from establishing a market presence in Detroit, the experience and knowledge of the acquired workforce and the capital-efficient operating structure of the business acquired. The remaining basis of $84.6 million is almost entirely comprised of the fair value of the acquired inventory with an insignificant amount attributable to other assets and liabilities.
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 described above, 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 2018, and as no indicators for impairment existed at December 31, 2018, no impairment was recorded. In addition, no indicators for impairment existed at June 30, 2019.
NOTE 8. Debt
Notes Payable - Homebuilding
The Credit Facility provides an aggregate commitment amount of $500 million, including a $125 million sub-facility for letters of credit. The Credit Facility expires on July 18, 2021. 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 plus a margin of 250 basis points. The margin is subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio. The Credit Facility also contains certain financial covenants. At June 30, 2019, the Company was in compliance with all financial covenants of the Credit Facility.

17



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 $669.2 million of availability for additional senior debt at June 30, 2019. As a result, the full $500 million commitment amount of the Credit Facility was available, less any borrowings and letters of credit outstanding. At June 30, 2019, there were $174.3 million of borrowings outstanding and $58.9 million of letters of credit outstanding, leaving net remaining borrowing availability of $266.8 million.
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 for the Company’s $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) and the Company’s $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Senior Notes”). The guarantors for the Credit Facility (the “Guarantor Subsidiaries”) are the same subsidiaries that guarantee the 2025 Senior Notes and the 2021 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. In June 2019, the Company entered into an amendment to the MIF Mortgage Warehousing Agreement, which, among other things, extends the expiration date to June 19, 2020 and increases the maximum borrowing availability to $160 million from September 25, 2019 to October 15, 2019 and from November 15, 2019 to February 4, 2020, which are periods of expected increases in the volume of mortgage originations. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the floating LIBOR rate plus a spread of 200 basis points. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At June 30, 2019, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Warehousing Agreement.