Stock-Based and Deferred Compensation

Stock Incentive Plans

The Company has an equity compensation plan, the M/I Homes, Inc. 2009 Long-Term Incentive Plan (the “2009 LTIP”) which has been amended from time to time. The 2009 LTIP was approved by our shareholders and is administered by the Compensation Committee of our Board of Directors. Under the 2009 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 plan authorizes awards to officers, employees, non-employee directors and other eligible participants for up to 2,600,000 common shares, of which 1,255,171 remain available for grant at December 31, 2014.

The 2009 LTIP replaced the M/I Homes, Inc. 1993 Stock Incentive Plan as Amended (the “1993 Plan”), which expired by its terms April 22, 2009. Awards outstanding under the 1993 Plan remain in effect in accordance with their respective terms.

Stock Options

Stock options are granted at the market price of the Company’s common shares at the close of business on the date of grant. Options awarded generally vest 20% annually over five years and expire after ten years. Under the 1993 Plan, in the case of termination due to death or disability, or in the case of a change in control of the Company, all options will become immediately exercisable. Under the 2009 LTIP, in the case of termination due to death, disability or retirement, all options will become immediately exercisable. Shares issued upon option exercise may consist of treasury shares, authorized but unissued common shares or common shares purchased by or on behalf of the Company in the open market.

Following is a summary of stock option activity for the year ended December 31, 2014, relating to the stock options awarded under the 2009 LTIP and the 1993 Plan:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (a) (In thousands)
Options outstanding at December 31, 2013	1,901,677		$	24.91	5.58	$	11,918
Granted	397,500		23.79
Exercised	(147,619	)	13.17
Forfeited	(135,190	)	41.07
Options outstanding at December 31, 2014	2,016,368		$	24.47	5.71	$	7,470
Options vested or expected to vest at December 31, 2014	1,990,146		$	24.51	5.67	$	7,407
Options exercisable at December 31, 2014	1,331,418		$	26.23	4.40	$	5,762

(a)Intrinsic value is defined as the amount by which the fair value of the underlying common shares exceeds the exercise price of the option.

The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $1.6 million, $2.2 million and $2.6 million, respectively.

The fair value of our five-year service stock options granted during the years ended December 31, 2014, 2013 and 2012 was established at the date of grant using the Black-Scholes pricing model, with the weighted average assumptions as follows:



	Year Ended December 31,
	2014			2013			2012
Risk-free interest rate	1.75		%	0.88		%	0.82		%
Expected volatility	57.99		%	56.70		%	53.08		%
Expected term (in years)	5.6			5.5			5.5
Weighted average grant date fair value of options granted during the period	$	12.64		$	11.97		$	5.85

The risk-free interest rate was based upon the U.S. Treasury constant maturity rate at the date of the grant. Expected volatility is based on an average of (1) historical volatility of the Company’s stock and (2) implied volatility from traded options on the Company’s stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted, with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected life of stock option awards granted is derived from historical exercise experience under the Company’s share-based payment plans, and represents the period of time that stock option awards granted are expected to be outstanding.

Total stock-based compensation expense related to stock option awards that has been charged against income relating to the 2009 LTIP and the 1993 Plan was $2.7 million, $2.0 million, and $1.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, there was a total of $7.5 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 2.2 years for the service awards.

Director Stock Units

Under the 2009 LTIP, the Company awarded its non-employee directors 17,500, 10,500 at and 7,000 stock units during the year ended December 31, 2014, 2013 and 2012, respectively. Each stock unit is the equivalent of one common share, vests immediately and will be converted to a common share upon termination of service as a director. The Company recognized the full stock-based compensation expense related to the awards of $0.4 million in 2014, $0.3 million in 2013 and less than $0.1 million in 2012 due to the immediate vesting provisions of the award.

On May 5, 2009, the Company’s board of directors terminated the M/I Homes, Inc. 2006 Director Equity Incentive Plan (the “Director Equity Plan”). Awards outstanding under the Director Equity Plan remain in effect in accordance with their respective terms. At December 31, 2014, there were 16,110 stock units outstanding under the Director Equity Plan with a value of $0.5 million.

Performance Share Unit Awards

On February 18, 2014, the Company awarded its executive officers (in the aggregate) a target number of PSU’s equal to 50,439 PSU’s. 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, 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 do 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 PSU’s with a performance condition component and the PSU’s with a market condition component was $23.79 and $21.00, respectively. In accordance with ASC 718, for PSU’s awarded with 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 $0.1 million in stock-based compensation expense and recorded $0.2 million in unrecognized stock-based compensation expense related to the Market Condition component of the 2014 PSU awards as of December 31, 2014. For PSU’s awarded with a 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 December 31, 2014, the Company had not recognized any stock-based compensation expense related to the Performance Condition component of the 2014 PSU awards. If the Company achieves the maximum performance levels for the Performance Condition, the Company would record unrecognized stock-based compensation expense of $1.4 million as of December 31, 2014, for which $0.5 million would be immediately recognized had attainment been probable at December 31, 2014.

Deferred Compensation Plans

Effective November 1, 1998, the Company adopted the Executive Plan, a non-qualified deferred compensation plan. The purpose of the Executive Plan is to provide an opportunity for certain eligible employees of the Company to defer a portion of their compensation and to invest in the Company’s common shares. In 1997, the Company adopted the Director Plan to provide its directors with an opportunity to defer their director compensation and to invest in the Company’s common shares.

Compensation expense deferred into the Executive Plan and the Director Plan (together the “Plans”) totaled $0.4 million for each of the years ended December 31, 2014 and December 31, 2013, and $0.1 million for the year ended December 31, 2012. The portion of cash compensation deferred by employees and directors under the Plans is invested in fully-vested equity units in the Plans. One equity unit is the equivalent of one common share. Equity units and the related dividends will be converted and distributed to the employee or director in the form of common shares at the earlier of his or her elected distribution date or termination of service as an employee or director of the Company. Distributions from the Plans totaled $0.2 million, $0.3 million and $0.6 million, respectively, during the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, there were a total of 88,131 equity units with a value of $1.9 million outstanding under the Plans. The aggregate fair market value of these units at December 31, 2014, based on the closing price of the underlying common shares, was approximately $2.0 million, and the associated deferred tax benefit the Company would recognize if the outstanding units were distributed was $1.3 million as of December 31, 2014. Common shares are issued from treasury shares upon distribution of deferred compensation from the Plans.

Profit Sharing

The Company has a deferred profit-sharing plan that covers substantially all Company employees and permits participants to make contributions to the plan on a pre-tax basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended. Company contributions to the plan are made at the discretion of the Company’s board of directors and resulted in a $1.0 million, $0.8 million and $0.6 million expense for the years ended December 31, 2014, 2013 and 2012, respectively.