0000799292-20-000114.txt : 20201030 0000799292-20-000114.hdr.sgml : 20201030 20201030102703 ACCESSION NUMBER: 0000799292-20-000114 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 76 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201030 DATE AS OF CHANGE: 20201030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M/I HOMES, INC. CENTRAL INDEX KEY: 0000799292 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 311210837 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12434 FILM NUMBER: 201275584 BUSINESS ADDRESS: STREET 1: 4132 WORTH AVENUE STE 500 CITY: COLUMBUS STATE: OH ZIP: 43219 BUSINESS PHONE: 6144188000 MAIL ADDRESS: STREET 1: 4132 WORTH AVENUE STE 500 CITY: COLUMBUS STATE: OH ZIP: 43219 FORMER COMPANY: FORMER CONFORMED NAME: M I HOMES INC DATE OF NAME CHANGE: 20040112 FORMER COMPANY: FORMER CONFORMED NAME: M I SCHOTTENSTEIN HOMES INC DATE OF NAME CHANGE: 19931228 10-Q 1 mho-20200930.htm 10-Q mho-20200930
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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 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

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.)

4131 Worth Avenue, 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 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 filerAccelerated filer
Non-accelerated filerSmaller 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: 28,745,649 shares outstanding as of October 28, 2020.



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 September 30, 2020 and December 31, 2019
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
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)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 assets
52,574 18,415 
Deferred income tax asset
9,205 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 operations 66,000 
Notes payable bank - financial services operations136,119 136,904 
Notes payable - other5,325 5,828 
Senior notes due 2021 - net 298,988 
Senior notes due 2025 - net247,483 247,092 
Senior notes due 2028 - net394,363  
TOTAL LIABILITIES$1,245,815 $1,102,117 
Commitments and contingencies (Note 6)
  
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 

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 

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 September 30, 2020
Common Shares
Shares OutstandingAdditional Paid-in CapitalRetained EarningsTreasury SharesTotal Shareholders’ Equity
(Dollars in thousands)Amount
Balance at June 30, 2020
28,543,629 $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 


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, 2019
28,386,456 $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  
Balance at September 30, 2020
28,745,649 $301 $336,623 $868,370 $(30,554)$1,174,740 


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, 2019
27,617,366 $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 

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, 2018
27,516,218 $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  
Balance at September 30, 2019
28,142,916 $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  
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  
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) 
Net proceeds from issuance of senior notes due 2028400,000  
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 

See Notes to Unaudited Condensed Consolidated Financial Statements.
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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 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.

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
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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 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 inventory 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.
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A summary of the Company’s inventory as of 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 

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 September 30, 2020 and December 31, 2019, we had 1,113 homes (with a carrying value of $188.4 million) and 1,459 homes (with a carrying value of $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 an $9.9 million liability and a $13.5 million liability related to these CDD bond obligations as of 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. The Company expenses any deposits and accumulated pre-acquisition costs relating to such agreements in the period when the Company makes the decision not to proceed with the purchase of land under an 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 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 
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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 September 30, 2020 and December 31, 2019, our investment in such joint venture arrangements totaled $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 $3.9 million decrease during the nine-month period ended 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 nine months of 2020 of $24.1 million.
The majority of our investment in joint venture arrangements for both 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 September 30, 2020 and December 31, 2019, the Company had $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 September 30, 2020 and December 31, 2019, the Company had $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 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 income relating to earnings from its LLCs was $0.3 million and less than $0.1 million for the three months ended September 30, 2020 and 2019, respectively, and $0.3 million and $0.1 million for the 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 September 30, 2020 was the amount invested of $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
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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 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, 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 $11.9 million and $11.4 million, respectively, at September 30, 2020. Therefore, the Company increased its $0.4 million valuation allowance and impairment related to our mortgage servicing rights taken during the first half of 2020 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 nine months ended 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 homebuying 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 September 30, 2020 and December 31, 2019:
Description of Financial Instrument (in thousands)September 30, 2020December 31, 2019
Whole loan contracts and related committed IRLCs$2,924 $1,445 
Uncommitted IRLCs213,146 87,340 
FMBSs related to uncommitted IRLCs186,000 88,000 
Whole loan contracts and related mortgage loans held for sale13,750 6,125 
FMBSs related to mortgage loans held for sale116,000 144,000 
Mortgage loans held for sale covered by FMBSs120,257 144,411 
The following table sets forth the amount of (loss) gain recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Income, on assets and liabilities measured on a recurring basis for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
Description (in thousands)2020201920202019
Mortgage loans held for sale$(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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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$171 Other liabilities$ 
Interest rate lock commitmentsOther assets1,380 Other liabilities 
Whole loan contractsOther assets Other liabilities106 
Total fair value measurements$1,551 $106 

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$ Other liabilities$336 
Interest rate lock commitmentsOther assets654 Other liabilities 
Whole loan contractsOther assets 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 September 30, 2020 and 2019, 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 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 September 30, 2020 and 2019, the Company did not 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
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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 September 30, 2020 and December 31, 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   
Liabilities:
Notes payable - homebuilding operationsLevel 2  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 2  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   
Whole loan contracts for committed IRLCs and mortgage loans held for saleLevel 2106 106 16 16 
Forward sales of mortgage-backed securitiesLevel 2  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 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 September 30, 2020 and December 31, 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 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 third 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 $5.7 million and $48.1 million were covered under these guarantees as of 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 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 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 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, 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 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 reevaluated 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 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 claims   
(a)
 
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 
(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 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 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 $3.7 million. We believe that this amount is sufficient to cover both known and estimated future repair costs as of 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 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 September 30, 2020, the Company had outstanding approximately $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) $194.1 million of performance and maintenance bonds and $55.1 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $11.5 million of financial letters of credit, of which $11.0 million represent deposits on land and lot purchase agreements; and (3) $7.0 million of financial bonds.

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Land Option Contracts and Other Similar Contracts

At 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 $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 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 shutdown of our Detroit operations due to COVID-19 from March 23, 2020 through May 7, 2020 (as the state of Michigan did 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. However, we will continue to monitor the fair value of the reporting unit in future periods if conditions worsen 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 and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $600 million, subject to obtaining additional commitments from lenders. The Credit Facility matures 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 (subject to a floor of 0.75%) plus a margin of 250 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio). The Credit Facility also contains certain financial covenants. At 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 $829.6 million of availability for additional senior debt at 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 September 30, 2020, there were no borrowings outstanding and $66.6 million of letters of credit outstanding, leaving a net remaining borrowing availability of $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 governing 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 increases to $160 million from September 25, 2020 to October 15, 2020 and to $185 million from November 15, 2020 to February 4, 2021 (periods of increased volume of mortgage originations). The MIF Mortgage Warehousing Agreement expires on May 28, 2021. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-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 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 was scheduled to expire on October 26, 2020. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the one-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 September 30, 2020, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.
At both September 30, 2020 and December 31, 2019, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $225.0 million. At September 30, 2020 and December 31, 2019, M/I Financial had $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 and mature on February 1, 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 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. 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
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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 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 $328.6 million at 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 $5.3 million and $5.8 million as of 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 September 30, 2020 and 2019:
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 share
435  360 412 
NOTE 10. Income Taxes
During the three months ended September 30, 2020 and 2019, the Company recorded a tax provision of $21.6 million and $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 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 25.2%, respectively. During the nine months ended September 30, 2020, we recorded a $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 first nine months of 2020.
The Company had $0.2 million of state net operating loss (“NOL”) carryforwards, net of the federal benefit, at September 30, 2020. Our state NOLs may be carried forward from one to 15 years, depending on the tax jurisdiction, with $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 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 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.
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

The following table shows, by segment, revenue, operating income and interest expense for the three and nine months ended 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