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

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017March 31, 2018
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
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)

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.
YesX 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).
YesX No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerX 
 Non-accelerated filer  Smaller reporting company  
  (Do not check if a 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  NoX
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: 25,104,72928,570,853 shares outstanding as of July 26, 2017.April 25, 2018.


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, 2017March 31, 2018 and December 31, 20162017
    
  Unaudited Condensed Consolidated Statements of Income for the Three and Six Months ended June 30,March 31, 2018 and 2017 and 2016
    
  Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the SixThree Months Ended June 30, 2017March 31, 2018
    
  Unaudited Condensed Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2018 and 2017 and 2016
    
  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  
    
Exhibit Index  






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

(Dollars in thousands, except par values) June 30,
2017
 December 31,
2016
 March 31,
2018
 December 31,
2017
 (unaudited)   (unaudited)  
        
ASSETS:        
Cash, cash equivalents and restricted cash $29,940
 $34,441
 $53,577
 $151,703
Mortgage loans held for sale 91,986
 154,020
 110,612
 171,580
Inventory 1,379,544
 1,215,934
 1,580,344
 1,414,574
Property and equipment - net 22,255
 22,299
 25,872
 26,816
Investment in unconsolidated joint ventures 22,877
 28,016
Deferred income taxes 30,078
 30,875
Investment in unconsolidated joint venture arrangements 22,066
 20,525
Deferred income tax asset 18,104
 18,438
Goodwill 16,400
 
Other assets 54,706
 62,926
 67,398
 61,135
TOTAL ASSETS $1,631,386
 $1,548,511
 $1,894,373
 $1,864,771
        
LIABILITIES AND SHAREHOLDERS’ EQUITY        
        
LIABILITIES:        
Accounts payable $113,072
 $103,212
 $118,839
 $117,233
Customer deposits 29,655
 22,156
 37,454
 26,378
Other liabilities 106,637
 123,162
 102,758
 131,534
Community development district obligations 5,875
 476
 12,499
 13,049
Obligation for consolidated inventory not owned 12,263
 7,528
 18,199
 21,545
Notes payable bank - homebuilding operations 138,000
 40,300
 162,300
 
Notes payable bank - financial services operations 89,518
 152,895
 102,711
 168,195
Notes payable - other 3,663
 6,415
 10,011
 10,576
Convertible senior subordinated notes due 2017 - net 57,380
 57,093
Convertible senior subordinated notes due 2018 - net 85,777
 85,423
 
 86,132
Senior notes due 2021 - net 296,229
 295,677
 297,056
 296,780
Senior notes due 2025 - net 246,181
 246,051
TOTAL LIABILITIES $938,069
 $894,337
 $1,108,008
 $1,117,473
        
Commitments and contingencies (Note 6) 
 
Commitments and contingencies (Note 6)
 
 
        
SHAREHOLDERS’ EQUITY:        
Preferred shares - $.01 par value; authorized 2,000,000 shares; 2,000 shares issued and outstanding at both
June 30, 2017 and December 31, 2016
 $48,163
 $48,163
Common shares - $.01 par value; authorized 58,000,000 shares at both June 30, 2017 and December 31, 2016; issued 27,092,723 shares at both June 30, 2017 and December 31, 2016 271
 271
Common shares - $.01 par value; authorized 58,000,000 shares at both March 31, 2018 and December 31, 2017; issued 30,137,141 and 29,508,626 shares at March 31, 2018 and December 31, 2017, respectively 301
 295
Additional paid-in capital 245,775
 246,549
 325,780
 306,483
Retained earnings 438,595
 407,161
 491,392
 473,329
Treasury shares - at cost - 1,988,171 and 2,415,290 shares at June 30, 2017 and December 31, 2016, respectively (39,487) (47,970)
Treasury shares - at cost - 1,566,288 and 1,651,874 shares at March 31, 2018 and December 31, 2017, respectively (31,108) (32,809)
TOTAL SHAREHOLDERS’ EQUITY $693,317
 $654,174
 $786,365
 $747,298
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,631,386
 $1,548,511
 $1,894,373
 $1,864,771

See Notes to Unaudited Condensed Consolidated Financial Statements.


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

Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands, except per share amounts)2017 2016 2017 20162018 2017
          
Revenue$456,866
 $401,247
 $863,846
 $725,617
$437,857
 $406,980
Costs and expenses:          
Land and housing367,598
 319,708
 687,879
 579,880
348,702
 320,281
General and administrative30,112
 26,830
 57,872
 49,089
27,951
 27,760
Selling30,247
 25,533
 57,530
 47,799
30,063
 27,283
Acquisition and integration costs1,700
 
Equity in income of unconsolidated joint ventures(110) (82) (127) (389)(310) (17)
Interest3,834
 4,308
 9,172
 9,573
5,878
 5,338
Total costs and expenses431,681
 376,297
 812,326
 685,952
413,984
 380,645
          
Income before income taxes25,185
 24,950
 51,520
 39,665
23,873
 26,335
          
Provision for income taxes8,196
 9,034
 17,648
 14,560
5,810
 9,452
          
Net income16,989
 15,916
 33,872
 25,105
18,063
 16,883
          
Preferred dividends1,219
 1,219
 2,438
 2,438

 1,219
          
Net income to common shareholders$15,770
 $14,697
 $31,434
 $22,667
Net income available to common shareholders$18,063
 $15,664
          
Earnings per common share:          
Basic$0.63
 $0.60
 $1.26
 $0.92
$0.64
 $0.63
Diluted$0.55
 $0.52
 $1.09
 $0.81
$0.60
 $0.55
          
Weighted average shares outstanding:          
Basic24,990
 24,669
 24,864
 24,663
28,124
 24,738
Diluted30,619
 30,077
 30,471
 30,055
30,544
 30,329

See Notes to Unaudited Condensed Consolidated Financial Statements.


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

Six Months Ended June 30, 2017Three Months Ended March 31, 2018
Preferred Shares Common Shares        Common Shares        
Shares Outstanding   Shares Outstanding   Additional Paid-in Capital Retained Earnings Treasury Shares Total Shareholders’ EquityShares Outstanding   Additional Paid-in Capital Retained Earnings Treasury Shares Total Shareholders’ Equity
(Dollars in thousands) Amount Amount  Amount 
Balance at December 31, 20162,000
 $48,163
 24,677,433
 $271
 $246,549
 $407,161
 $(47,970) $654,174
Balance at December 31, 201727,856,752
 $295
 $306,483
 $473,329
 $(32,809) $747,298
Net income
 
 
 
 
 33,872
 
 33,872

 
 
 18,063
 
 18,063
Dividends declared to preferred shareholders
 
 
 
 
 (2,438) 
 (2,438)
Common share issuance for conversion of convertible notes628,515
 6
 20,303
 
 
 20,309
Stock options exercised
 
 342,661
 
 (2,014) 
 6,806
 4,792
24,220
 
 (56) 
 482
 426
Stock-based compensation expense
 
 
 
 2,566
 
 
 2,566

 
 1,039
 
 
 1,039
Deferral of executive and director compensation
 
 
 
 351
 
 
 351

 
 185
 
 
 185
Executive and director deferred compensation distributions
 
 84,458
 
 (1,677) 
 1,677
 
61,366
 
 (2,174) 
 1,219
 (955)
Balance at June 30, 20172,000
 $48,163
 25,104,552
 $271
 $245,775
 $438,595
 $(39,487) $693,317
Balance at March 31, 201828,570,853
 $301
 $325,780
 $491,392
 $(31,108) $786,365

See Notes to Unaudited Condensed Consolidated Financial Statements.


M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2017 20162018 2017
OPERATING ACTIVITIES:      
Net income$33,872
 $25,105
$18,063
 $16,883
Adjustments to reconcile net income to net cash used in operating activities:      
Equity in income of joint venture arrangements(127) (389)(310) (17)
Mortgage loan originations(468,832) (404,599)(235,481) (217,346)
Proceeds from the sale of mortgage loans535,256
 433,406
297,125
 262,644
Fair value adjustment of mortgage loans held for sale(4,390) (2,185)(676) (4,874)
Capitalization of originated mortgage servicing rights(2,239) (2,964)(1,066) (975)
Amortization of mortgage servicing rights546
 751
297
 448
Depreciation4,608
 4,149
2,570
 2,281
Amortization of debt discount and debt issue costs1,712
 1,701
782
 854
Stock-based compensation expense2,566
 2,126
1,039
 1,028
Deferred income tax expense797
 13,832
335
 426
Change in assets and liabilities:      
Inventory(146,171) (46,856)(70,119) (54,758)
Other assets1,897
 (7,185)(7,229) (348)
Accounts payable9,860
 18,791
(8,914) (8,809)
Customer deposits7,499
 7,848
6,790
 4,524
Accrued compensation(13,415) (10,566)(22,454) (20,159)
Other liabilities(2,759) 7,974
(11,942) (5,077)
Net cash (used in) provided by operating activities(39,320) 40,939
Net cash used in operating activities(31,190) (23,275)
      
INVESTING ACTIVITIES:      
Purchase of property and equipment(1,872) (11,029)(130) (993)
Return of capital from unconsolidated joint ventures1,078
 
Acquisition(100,763) 
Investment in unconsolidated joint ventures(5,807) (5,782)(1,890) (3,197)
Net proceeds from sale of mortgage servicing rights7,558
 
5,111
 7,396
Net cash provided by (used in) investing activities957
 (16,811)
Net cash (used in) provided by investing activities(97,672) 3,206
      
FINANCING ACTIVITIES:      
Repayment of convertible senior subordinated notes due 2018(65,941) 
Proceeds from bank borrowings - homebuilding operations289,400
 192,200
233,500
 162,000
Repayment of bank borrowings - homebuilding operations(191,700) (166,000)(71,200) (91,400)
Net repayment of bank borrowings - financial services operations(63,377) (30,982)(65,484) (45,958)
Proceeds from notes payable-other and community development district bond obligations(2,752) 111
(Principal repayment of) proceeds from notes payable - other and community development district bond obligations(565) 607
Dividends paid on preferred shares(2,438) (2,438)
 (1,219)
Debt issue costs(63) (193)
Proceeds from exercise of stock options4,792
 73
426
 496
Net cash provided by (used in) financing activities33,862
 (7,229)
Net cash provided by financing activities30,736
 24,526
Net (decrease) increase in cash, cash equivalents and restricted cash(4,501) 16,899
(98,126) 4,457
Cash, cash equivalents and restricted cash balance at beginning of period34,441
 13,101
151,703
 34,441
Cash, cash equivalents and restricted cash balance at end of period$29,940
 $30,000
$53,577
 $38,898
      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:      
Cash paid during the year for:      
Interest — net of amount capitalized$7,381
 $(2,152)$13,905
 $10,503
Income taxes$17,770
 $1,801
$122
 $72
      
NON-CASH TRANSACTIONS DURING THE PERIOD:      
Community development district infrastructure$5,399
 $(296)$(550) $5,801
Consolidated inventory not owned$4,735
 $(838)$(3,346) $4,440
Distribution of single-family lots from joint venture arrangements$9,995
 $14,978
$659
 $7,012
Common stock issued for conversion of convertible notes$20,309
 $
      

See Notes to Unaudited Condensed Consolidated Financial Statements.


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, 20162017 (the “20162017 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 20162017 Form 10-K, as the same may be updated from time to time in our subsequent filings with the SEC, including the Company’s Quarterly Report on Form 10-Q forSEC.

Significant Accounting Policies

We believe that there have been no significant changes to our significant accounting policies during the quarter ended March 31, 2017.2018 as compared to those disclosed in our 2017 Form 10-K, other than the changes described below.
Revenue Recognition.  On January 1, 2018, we adopted ASC 606, Revenue from Contracts from Customers (“ASC 606”),using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for existing contracts (those that are not completed) as of, and new contracts after, January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”). We did not have any material adjustments to our 2018 results under ASC 606.
Revenue from the sale of a home and revenue from the sale of land to third parties is recognized in the financial statements on the date of closing (point in time) if delivery has occurred, title has passed, all performance obligations have been met (please see definition of performance obligations below), and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to in exchange for the home or land.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party subservice arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee (note that guarantees are excluded from the scope of ASC 606). We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our contracts to sell homes have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our third party land contracts may include multiple performance obligations; however, revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.



We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general, selling and administrative expenses as part of our sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

The following table presents our revenues disaggregated by geography:
 Three Months Ended March 31,
(In thousands)
2018 (a)
 2017
    
Midwest homebuilding$158,620
 $146,422
Southern homebuilding190,388
 149,365
Mid-Atlantic homebuilding73,823
 96,886
Financial services (b)
15,026
 14,307
Total revenue$437,857
 $406,980
(a)As noted above, prior period amounts have not been adjusted under the cumulative catch-up transition method.
(b)Revenues include $3.0 million and $4.6 million related to hedging gains for the three months ended March 31, 2018 and 2017, respectively, which do not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by revenue source:
 Three Months Ended March 31,
(Dollars in thousands)
2018 (a)
 2017
    
Housing$418,424
 $387,458
Land sales4,407
 5,215
Financial services (b)
15,026
 14,307
Total revenue$437,857
 $406,980
(a)As noted above, prior period amounts have not been adjusted under the cumulative catch-up transition method.
(b)Revenues include $3.0 million and $4.6 million related to hedging gains for the three months ended March 31, 2018 and 2017, respectively, which do not represent revenues recognized from contracts with customers.

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. Because the purchase price allocation is subject to change within a measurement period of up to one year from the acquisition date pursuant to ASC 805, in connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan, the Company recorded a provisional amount of goodwill of approximately $16.4 million as of March 31, 2018, which is included as Goodwill in our Unaudited Condensed Consolidated Balance Sheets. This provisional amount was based on the estimated fair values of the acquired assets and assumed liabilities at the date of the acquisition in accordance with ASC 350, Intangibles, Goodwill and Other (“ASC 350”). Please see Note 7 to our financial statements for further discussion.

Reclassifications

Certain financial statement line items reflected onIn January 2017, the June 30, 2016 StatementFASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of Cash Flows were affectedgoodwill. Step 2 measures a goodwill impairment loss by comparing the Company’s early adoptionimplied fair value of Accounting Standards Update (“ASU”) No. 2016-18, Statementa reporting unit’s goodwill with the carrying amount of Cash Flows: Restricted Cash (“ASU 2016-18”) during the fourth quarter of 2016 asthat goodwill. As a result of this ASU, the changeCompany will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.  ASU 2017-04 is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively. The Company has elected to early adopt this ASU effective for the current reporting period in accounting principle.its impairment testing and analyses. The Company’s goodwill is described in Note 7 to our financial statements.

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. When performing a qualitative assessment, the Company evaluates qualitative factors such as (1) macroeconomic conditions, such as a deterioration in general economic conditions; (2) industry and market considerations such as deterioration in the environment in which the entity operates; (3) cost factors such as increases in raw materials and labor costs; and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings, to determine if it is more-likely-than-not that the fair value of the 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 evaluation of goodwill for possible impairment includes estimating fair value using one or a combination of valuation techniques, such as discounted cash flows. These valuations require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Recently Adopted Accounting Standards

In March 2016,May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard in the first quarter of 2017. Excess tax benefits or deficiencies for stock-based compensation are now reflected in the Condensed Consolidated Statements of Income as a component of income tax expense, whereas previously they were recognized in equity. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and disclosures.
Impact of New Accounting Standards
In May 2014, the FASB issued ASU Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC 605Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.


Subsequent to the issuance of ASU 2014-09, the FASB has issued several ASUs, such as ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of the guidance stated in ASU 2014-09. Instead, these amendments are intended to clarify and improve the operability of certain topics addressed by ASU 2014-09. These additional ASUs will have the same effective date and transition requirements as ASU 2014-09, as amended. See below
We adopted the standard, and the subsequently issued standards mentioned above, on January 1, 2018 using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for additional explanationexisting contracts (those that are not completed) as of, each of these additional ASUs.and new contracts after, January 1, 2018. The Company does not believe the adoption of these additional ASUs willdid not have a material impact on our consolidated financial statements.
The guidance in ASU 2014-09 permits two methodsamount and timing of adoption: retrospectivelyour housing and land revenue remained substantially unchanged, and we did not have significant changes to each prior reporting period presented (full retrospective method),our business processes, systems, or retrospectively with the cumulative effectinternal controls as a result of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard is effective for our fiscal year beginning January 1, 2018, and, at that time, we currently anticipate adopting the standard usingstandard. The Company has developed the cumulative catch-up transition method.

We anticipate this standard willadditional expanded disclosures required (please see our Significant Accounting Policies section above and our Critical Accounting Policies section within Management’s Discussion and Analysis of Financial Condition and Results of Operations below); however, the adoption did not have a material impact on ourits consolidated results of operations, financial statements. While we are continuing to assess all potential impacts of the standard, and have been involved in industry-specific discussions with the FASB on the treatment of certain items, we currently believe the most significant impact could relate to our accounting for sale of land and/or lots to third parties that have continuing performance obligations. We expect the amount and timing of our homebuilding revenue to remain substantially unchanged. Due to the complexity of certain of our land contracts, however, the actual revenue recognition treatment required under the standard for land sales will depend on contract-specific terms, and may vary in some instances from recognition at the time of closing. We are continuing to evaluate the impact the adoption of ASU 2014-09 may have on other aspects of our business and on our consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require 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 leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities will expand to include qualitative and specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently evaluating the potential impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance stated in ASU 2014-09 on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”).  ASU 2016-10 provides guidance on identifying performance obligations and licensing. This update clarifies the guidance in ASU 2014-09 relating to identifying performance obligations and licensing.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 provides for amendments to ASU 2014-09 regarding transition, collectability, noncash consideration, and presentation of sales tax and other similar taxes.  Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all or substantially all of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receiptsposition and cash payments are to be presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the condensed consolidated statement of cash flows but is not expected to have a material effect on the Company’s consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which provides a more robust framework for determining whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017,


and interim periods within those fiscal years. The Company is currently evaluating the potential impact the adoption of ASU 2017-01 will have on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of ASU 2017-04 will have a material impact on the Company’s consolidated financial statements and disclosures.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 is intended to clarify the scope of the original guidance within Subtopic 610-20 that was issued in connection with ASU 2014-09, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 additionally added guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We arewere required to adopt ASU 2017-05 concurrent with the adoption of ASU 2014-09. The adoption of ASU 2017-05 did not have a material impact on the Company’s consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2016-15 did not modify the Company's current disclosures within the condensed consolidated statement of cash flows and did not have any impact on the Company’s consolidated financial statements and disclosures.


In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which provides a more robust framework for determining whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the standard on January 1, 2018. The adoption of ASU 2017-01 did not have an impact on the Company’s consolidated financial statements and disclosures as the Company’s acquisition during the first quarter of 2018 met all requirements to be accounted for as a business acquisition.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is currently evaluatingeffective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the standard on January 1, 2018. The adoption of ASU 2017-04 did not have an impact on the Company’s consolidated financial statements and disclosures as it will perform its annual goodwill impairment analysis during the fourth quarter of 2018 (as no indicators existed at March 31, 2018).
Impact of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require 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 leases with lease terms of more than 12 months. 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 public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company continues to evaluate the potential impact the adoption of ASU 2017-052016-02 will have on the Company’s consolidated financial statements and disclosures.disclosures; however, because a large majority of our leases are for office space, which we have determined will be treated as operating leases under ASU 2016-02, we anticipate recording a right-of-use asset and related lease liability for these leases, but do not expect our expense recognition pattern to change.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not believe the adoption of ASU 2017-08 will have a material impact on the Company’s consolidated financial statements and disclosures.

In May 2017,January 2018, the FASB issued ASU 2017-09,2018-01, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting Land Easement Practical Expedient for Transition to Topic 842(“ASU 2017-09” (ASU 2018-01”), which provides clarification on when modification accountingan optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should be used for changesevaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the terms or conditionsdefinition of a share-based payment award.lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This ASU doesis not changeexpected to have a significant impact on the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. For all entities, ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believeCompany's expected impact of the adoption of ASU 2017-09 will have a material impact on the Company’s2016-02 (discussed above) or its consolidated financial statements and disclosures.

In March 2018, the FASB issued ASU 2018-05, which amends Income Taxes (Topic 740) by incorporating the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118. Please see Note 10 to our financial statements for additional disclosures.



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(please 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, 2017March 31, 2018 and December 31, 20162017 is as follows:
(In thousands)June 30, 2017 December 31, 2016March 31, 2018 December 31, 2017
Single-family lots, land and land development costs$637,268
 $602,528
$752,921
 $687,260
Land held for sale17,051
 12,155
3,571
 6,491
Homes under construction600,376
 494,664
678,122
 579,051
Model homes and furnishings - at cost (less accumulated depreciation: June 30, 2017 - $13,413;
December 31, 2016 - $11,835)
76,824
 68,727
Model homes and furnishings - at cost (less accumulated depreciation: March 31, 2018 - $13,199;
December 31, 2017 - $12,715)
78,869
 74,622
Community development district infrastructure5,875
 476
12,499
 13,049
Land purchase deposits29,887
 29,856
36,163
 32,556
Consolidated inventory not owned12,263
 7,528
18,199
 21,545
Total inventory$1,379,544
 $1,215,934
$1,580,344
 $1,414,574

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 June 30, 2017March 31, 2018 and December 31, 20162017, we had 1,0931,104 homes (with a carrying value of $210.8$229.6 million) and 9961,134 homes (with a carrying value of $199.4242.7 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 $5.9$12.5 million and $0.5$13.0 million liability related to these CDD bond obligations as of June 30, 2017March 31, 2018 and December 31, 2016,2017, 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,March 31, 2018 and 2017 and 2016 is as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2017 2016 2017 20162018 2017
Capitalized interest, beginning of period$16,008
 $16,952
 $16,012
 $16,740
$17,169
 $16,012
Interest capitalized to inventory5,300
 4,497
 9,062
 8,253
5,959
 3,762
Capitalized interest charged to land and housing costs and expenses(4,843) (4,631) (8,609) (8,175)(4,864) (3,766)
Capitalized interest, end of period$16,465
 $16,818
 $16,465
 $16,818
$18,264
 $16,008
          
Interest incurred$9,134
 $8,805
 $18,234
 $17,826
$11,837
 $9,100


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-monththree-month period ended June 30, 2017,March 31, 2018, we decreasedincreased our total investment in such joint venture arrangements by $5.1$1.6 million from $28.0$20.5 million at December 31, 20162017 to $22.9$22.1 million at June 30, 2017,March 31, 2018, which was driven primarily by our increased lot distributions from unconsolidated joint ventures of $10.0 million, offset, in part, by our cash contributions to our unconsolidated joint ventures during the first halfquarter of 20172018 of $5.8$1.9 million, offset, in part, by our increased lot distributions from unconsolidated joint ventures of $0.7 million.
We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of June 30, 2017March 31, 2018 is the amount invested of $22.9$22.1 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. Refer toPlease 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 June 30,both March 31, 2018 and December 31, 2017 ranged from 25% to 97% and at December 31, 2016 ranged from 25% to 74%. 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.
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. SeePlease see Note 1, “Summary of Significant Accounting Policies - Variable Interest Entities” in the Company’s 20162017 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 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 20162017 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, 2017March 31, 2018 and December 31, 2016,2017, 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.
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 best-efforts 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 best-effortswhole loan contract or by FMBSs.
The table below shows the notional amounts of our financial instruments at June 30, 2017March 31, 2018 and December 31, 20162017:
Description of Financial Instrument (in thousands)June 30, 2017 December 31, 2016March 31, 2018 December 31, 2017
Best efforts contracts and related committed IRLCs$9,555
 $6,607
Whole loan contracts and related committed IRLCs$3,350
 $2,182
Uncommitted IRLCs109,140
 66,875
109,800
 50,746
FMBSs related to uncommitted IRLCs109,000
 66,000
110,000
 53,000
Best efforts contracts and related mortgage loans held for sale8,324
 125,348
Whole loan contracts and related mortgage loans held for sale7,465
 80,956
FMBSs related to mortgage loans held for sale82,284
 33,000
101,000
 91,000
Mortgage loans held for sale covered by FMBSs82,330
 32,870
101,171
 90,781


The table below shows the level and measurement of assets and liabilities measured on a recurring basis at June 30, 2017March 31, 2018 and December 31, 20162017:
Description of Financial Instrument (in thousands)
Fair Value Measurements
June 30, 2017
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value Measurements
March 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$91,986
 $
 $91,986
 $
 $110,612
 $
 $110,612
 $
 
Forward sales of mortgage-backed securities599
 
 599
 
 (125) 
 (125) 
 
Interest rate lock commitments344
 
 344
 
 971
 
 971
 
 
Best-efforts contracts(19) 
 (19) 
 
Whole loan contracts(66) 
 (66) 
 
Total$92,910
 $
 $92,910
 $
 $111,392
 $
 $111,392
 $
 
Description of Financial Instrument (in thousands)
Fair Value Measurements
December 31, 2016
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value Measurements
December 31, 2017
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$154,020
 $
 $154,020
 $
 $171,580
 $
 $171,580
 $
 
Forward sales of mortgage-backed securities230
 
 230
 
 177
 
 177
 
 
Interest rate lock commitments250
 
 250
 
 271
 
 271
 
 
Best-efforts contracts(90) 
 (90) 
 
Whole loan contracts12
 
 12
 
 
Total$154,410
 $
 $154,410
 $
 $172,040
 $
 $172,040
 $
 

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,March 31, 2018 and 2017 and 2016:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
Description (in thousands)2017 2016 2017 20162018 2017
Mortgage loans held for sale$(484) $826
 $4,390
 $2,186
$675
 $4,874
Forward sales of mortgage-backed securities1,280
 (922) 369
 (1,688)(302) (911)
Interest rate lock commitments(748) 350
 94
 919
705
 842
Best-efforts contracts305
 (53) 71
 16
Whole loan contracts(83) (234)
Total gain recognized$353
 $201
 $4,924
 $1,433
$995
 $4,571

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 is disclosed as a separate line item):
 Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives
 June 30, 2017 June 30, 2017 March 31, 2018 March 31, 2018
Description of Derivatives 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities Other assets $599
 Other liabilities $
 Other assets $
 Other liabilities $125
Interest rate lock commitments Other assets 344
 Other liabilities 
 Other assets 971
 Other liabilities 
Best-efforts contracts Other assets 
 Other liabilities 19
Whole loan contracts Other assets 
 Other liabilities 66
Total fair value measurements $943
 $19
 $971
 $191
 Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives
 December 31, 2016 December 31, 2016 December 31, 2017 December 31, 2017
Description of Derivatives 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 Balance Sheet Location 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities Other assets $230
 Other liabilities $
 Other assets $177
 Other liabilities $
Interest rate lock commitments Other assets 250
 Other liabilities 
 Other assets 271
 Other liabilities 
Best-efforts contracts Other assets 
 Other liabilities 90
Whole loan contracts Other assets 12
 Other liabilities 
Total fair value measurements $480
 $90
 $460
 $
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. SeePlease see Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company’s 20162017 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 pace (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,March 31, 2018 and 2017, and 2016, 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. SeePlease see Note 1, “Summary of Significant Accounting


Policies - Investment in Unconsolidated Joint Ventures,” in the Company’s 20162017 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 sixthree months ended June 30,March 31, 2018 and 2017, and 2016, 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 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, 2017March 31, 2018 and December 31, 20162017. 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, 2017 December 31, 2016 March 31, 2018 December 31, 2017
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value
Assets:                
Cash, cash equivalents and restricted cash $29,940
 $29,940
 $34,441
 $34,441
 $53,577
 $53,577
 $151,703
 $151,703
Mortgage loans held for sale 91,986
 91,986
 154,020
 154,020
 110,612
 110,612
 171,580
 171,580
Split dollar life insurance policies 212
 212
 214
 214
 209
 209
 209
 209
Notes receivable 162
 146
 763
 687
Commitments to extend real estate loans 344
 344
 250
 250
 971
 971
 271
 271
Whole loan contracts for committed IRLCs and mortgage loans held for sale 
 
 12
 12
Forward sales of mortgage-backed securities 599
 599
 230
 230
 
 
 177
 177
Liabilities:                
Notes payable - homebuilding operations 138,000
 138,000
 40,300
 40,300
 162,300
 162,300
 
 
Notes payable - financial services operations 89,518
 89,518
 152,895
 152,895
 102,711
 102,711
 168,195
 168,195
Notes payable - other 3,663
 3,434
 6,415
 5,999
 10,011
 9,012
 10,576
 9,437
Convertible senior subordinated notes due 2017 (a)
 57,500
 69,791
 57,500
 65,957
Convertible senior subordinated notes due 2018 (a)
 86,250
 89,053
 86,250
 88,105
 
 
 86,250
 93,581
Senior notes due 2021 (a)
 300,000
 315,000
 300,000
 314,250
 300,000
 308,625
 300,000
 310,875
Best-efforts contracts for committed IRLCs and mortgage loans held for sale 19
 19
 90
 90
Senior notes due 2025 (a)
 250,000
 238,750
 250,000
 252,500
Whole loan contracts for committed IRLCs and mortgage loans held for sale 66
 66
 
 
Forward sales of mortgage-backed securities 
 
 
 
 125
 125
 
 
Off-Balance Sheet Financial Instruments:                
Letters of credit 
 924
 
 702
 
 972
 
 1,083
(a)Our senior notes and convertible senior subordinated 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, 2017March 31, 2018 and December 31, 2016:2017:
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, Best-EffortsWhole loan Contracts for Committed IRLCs and Mortgage Loans Held for Sale, Convertible Senior Subordinated Notes due 2017, Convertible2018, Senior Subordinated Notes due 20182021 and Senior Notes due 2021.2025. The fair value of these financial instruments was determined based upon market quotes at June 30, 2017March 31, 2018 and December 31, 20162017. 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, 2017March 31, 2018 fluctuated with the Alternate Base Rate or the Eurodollar Rate forunder the Company’s $400$475 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. Refer toPlease see Note 128 and Note 7to 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 (increasedsecured mortgage warehousing agreement (which increases to $150 million during certain periods of expected increases in the volume of mortgage originations, specifically from September 25, 2017 to October 16, 2017 and from December 15, 2017 to February 2, 2018) secured mortgage warehousing agreement,periods), dated June 24, 2016, as amended on June 23, 2017 (the “MIF Mortgage Warehousing Agreement”); and (2) a $35 million mortgage repurchase agreement, dated November 3, 2015, as most recently amended and restated on May 16,October 30, 2017 (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 secondfirst quarter of 20172018 fluctuated with LIBOR. Refer toPlease see Note 78 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 $41.9$51.2 million and $37.749.7 million represent potential commitments at June 30, 2017March 31, 2018 and December 31, 20162017, 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 $37.6$55.5 million and $27.6$46.8 million were covered under these guarantees as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.  The increase in loans covered by these guarantees from December 31, 20162017 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, 2017,March 31, 2018, 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 $0.7$1.0 million and $0.9$1.2 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, 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 June 30, 2017both March 31, 2018 and December 31, 2016,2017, the total of all loans indemnified to third party insurers relating to the above agreements was $1.4 million and $1.6 million, respectively.$1.3 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 $0.8 million and $0.9 million at June 30, 2017both March 31, 2018 and December 31, 2016, respectively,2017 which is management’s best estimate of the Company’s liability.


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.
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,March 31, 2018 and 2017 and 2016 is as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2017 2016 2017 20162018 2017
Warranty reserves, beginning of period$24,980
 $15,295
 $27,732
 $14,281
$26,133
 $27,732
Warranty expense on homes delivered during the period2,783
 2,482
 5,212
 4,522
2,542
 2,429
Changes in estimates for pre-existing warranties332
 (646) 1,062
 37
(91) 730
Charges related to stucco-related claims (a)
8,500
 2,754
 8,500
 4,909
Settlements made during the period(6,292) (4,070) (12,203) (7,934)(4,283) (5,911)
Warranty reserves, end of period$30,303
 $15,815
 $30,303
 $15,815
$24,301
 $24,980
(a)Estimated stucco-related claim costs, as described below, have been included in warranty accruals.
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 2015, we repaired certain of the identified homes2016 and accrued for the estimated future cost of repairs for the other identified homes on which repairs had yet to be completed. The aggregate amounts of such repair costs and accruals were not material, and the reserve for identified homes in need of more than minor repair at December 31, 2015 was $0.5 million.
During 2016, in response to an increased level of claims, we conducted a review of the stucco issues to determine their causes and to enable us to make a reasonable estimate of the overall cost of stucco-related repairs to homes in our Florida communities. Our review included an analysis of a number of factors, including: (1) the date of delivery of each home in our Florida communities and the expiration date of the 10-year statutory period of repose and contractual warranty period with respect to each such home; (2) the number of each type of home (i.e., one story, 1.5 stories or 2 stories); (3) our stucco-related claims experience with respect to each type of home and each individual community; and (4) other relevant factors and observations gained from the field. In connection with such review,2017, we recorded $19.4an aggregate total of $28.4 million of warranty charges for stucco-related repair costs for (1) homes in our Florida communities that we had identified as needing repair but havehad not yet completed the repair and (2) estimated repair costs for homes in our Florida communities that we had not yet identified as needing repair but that may require repair in the future. These
We did not record any additional warranty charges were included as changes in estimate within our warranty reserve.for stucco-related repair costs during the first quarter of 2018. The remaining reserve for both known repair costs and an estimate of future costs of stucco-related repairs at March 31, 20172018 included within our warranty reserve was $8.8$7.9 million.
During the second quarter of 2017, we continued our review of the stucco issues in our Florida communities. Based on an analysis of the relevant data, including additional data We believe that we had gathered during the period since the 2016 review, we determinedthis amount is sufficient to increase our previous estimate of thecover both known and estimated future stucco-related repair costs in our Florida communities. The three primary factors which contributed to the increase in our estimate were: (1) the incidenceas of new stucco-related claims did not decline as much as we had previously estimated; (2) we started to receive stucco-related claims in communities which were not included in our previous estimate because we did not have any claims history in those communities; and (3) we incurred higher than estimated costs in completing stucco-related repairs on identified homes. As a result, during the second quarter of 2017, we recorded an additional


$8.5 million warranty charge for stucco-related repairs in our Florida communities. The remaining reserve for both known repair costs and an estimate of future costs of stucco-related repairs at June 30, 2017 included within our warranty reserve was $14.1 million.March 31, 2018.
Our review of the stucco-related issues in our Florida communities is ongoing. While we believe that our remaining reserve is sufficient to cover both known and estimated future repair costs, ourOur estimate as of June 30, 2017, 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 stuccostucco-related repairs costs, which revision could be material.
We also are continuing to investigate the extent to which we may be able to 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, 2017,March 31, 2018, we are unable to estimate an amount, if any, that we believe is probable that we will recover from these sources and, accordingly, we have not recorded a receivable for estimated recoveries nor included an estimated amount of recoveries in determining our warranty reserves.

Performance Bonds and Letters of Credit

At June 30, 2017,March 31, 2018, the Company had outstanding approximately $168.6$179.9 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 2024. Included in this total are: (1) $119.1$121.0 million of performance and maintenance bonds and $32.8$43.5 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $9.2$7.7 million of financial letters of credit, of which $7.7$7.0 million represent deposits on land and lot purchase agreements; and (3) $7.5$7.7 million of financial bonds.

Land Option Contracts and Other Similar Contracts

At June 30, 2017,March 31, 2018, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $654.7$757.7 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, 2017March 31, 2018 and December 31, 2016,2017, we had $0.4$0.3 million and $0.3$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. The purchase price was approximately $100.8 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 a provisional $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 $84.4 million is almost entirely comprised of the fair value of the acquired inventory with an insignificant amount attributable to other assets and liabilities. In accordance with ASC 805-10, Business Combinations (“ASC 805”), we will update such balances, if necessary, upon further verification of the fair values on certain other assets, more relevant history on profitability of backlog, and further understanding of cost to complete activities, if any, on purchased communities.

Self-insurance Reserves.Goodwill
Our general liability claims are insured by a third party,Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. Because the purchase price allocation is subject to change within a deductible. Effective for home closings occurring on or after July 1, 2017,measurement period of up to one year from the acquisition date pursuant to ASC 805, in connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan described above, the Company renewed its general liability insurance coveragerecorded a provisional amount of goodwill of approximately $16.4 million as of March 31, 2018, which among other things, changed the structure ofis included as Goodwill in our completed operations/construction defect deductible to $10.0 million for the entire company (for closings prior to July 1, 2017, our completed operations/construction defect deductibleUnaudited Condensed Consolidated Balance Sheets. This provisional amount was $7.5 million for each of our regions), and decreased our third party claims deductible to $250,000 (a decrease from $500,000 for closings prior to July 1, 2017). The Company records a reserve for general liability claims falling below the Company’s deductible. The reserve estimate is based on an actuarial evaluationthe estimated fair values of our past historythe acquired assets and liabilities at the date of general liability claims, other industry specific factorsthe acquisition in accordance with ASC 350, Intangibles, Goodwill and specific event analysis.Other (“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. As of March 31, 2018, there were no indicators that our goodwill was impaired.
NOTE 7.8. Debt
Notes Payable - Homebuilding
The Credit Facility provides for an aggregate commitment amount of $400$475 million, including a $125 million sub-facility for letters of credit. In addition, the Credit Facility has an accordion feature under which the Company may increase the aggregate commitment amount up to $500 million, subject to certain conditions, including obtaining additional commitments from existing or new lenders. The Credit Facility expires on October 20, 2018. For the quarter ended June 30, 2017, interestJuly 18, 2021. Interest on amounts borrowed under the Credit Facility was payable at eithera rate which is adjusted daily and is equal to the Alternate Base Rate plus a marginsum of 150 basis points, or at the Eurodollar Rateone-month LIBOR rate plus a margin of 250 basis points. These interest rates areThe margin is subject to adjustment in subsequent quarterly periods based on the Company'sCompany’s leverage ratio. The Credit Facility also contains certain financial covenants. At June 30, 2017,March 31, 2018, 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 $646.8$539.0 million of availability for additional senior debt at June 30, 2017.March 31, 2018. As a result, the full $400$475 million commitment amount of the Credit Facility was available, less any borrowings and letters of credit outstanding. At June 30, 2017,March 31, 2018, there were $138.0$162.3 million of borrowings outstanding and $41.3$44.3 million of letters of credit outstanding, leaving net remaining borrowing availability of $220.7$268.4 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 1112) 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 indentureindentures 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 $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”) and the Company’s $86.3 million aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”).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.
Refer to Note 12 for a description of the amendment to the Company’s Credit Facility entered into on July 18, 2017.

As of June 30, 2017,March 31, 2018, the Company was a party to a secured credit facility agreement for the issuance of letters of credit (the “Letter of Credit Facility”), with a maturity date of September 30, 2017,2018 which allows for the issuance of letters of credit up to a total of $2.0$1.0 million. At both June 30, 2017March 31, 2018 and December 31, 2016,2017, there was $0.3 million and $0.6 million, respectively, of outstanding letters of credit in aggregate under the Company’s Letter of Credit Facility, which were collateralized with $0.3 million and $0.6 million, respectively, of the Company’s cash.
Through the acquisition of Pinnacle Homes during the first quarter of 2018, the Company also assumed the obligation for $6.6 million of outstanding letters of credit under a separate facility, which was collateralized with $6.6 million of restricted cash.
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. Inmillion which increased to $150 million from September 25, 2017 to October 16, 2017 and from December 15, 2017 to February 2, 2018. The MIF Mortgage Warehousing Agreement expires on June 2017, the Company entered into an amendment to22, 2018. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement which, among other things, extended the expiration date to June 22, 2018 and adjusted the interest rate tois payable at a per annum rate equal to the greater of (1) the floating LIBOR rate plus a spread of 237.5 basis points and (2) 2.75%. The spread over floating LIBOR had previously been 250 basis points. The amendment also allows the maximum borrowing availability to be increased to $150 million during certain periods of expected increases in the volume of mortgage originations, specifically from September 25, 2017 to October 16, 2017 and from December 15, 2017 to February 2, 2018. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At June 30, 2017,March 31, 2018, 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. In May 2017, theThe MIF Repurchase Facility was amended to increase theprovides for a mortgage repurchase facility with a maximum borrowing availability of $35 million which increased to $50 million from $15 million to $35 million.November 15, 2017 through February 1, 2018 (a period during which we typically experience higher mortgage origination volume). The MIF Mortgage Repurchase Facility expires on October 30, 2017.29, 2018. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floating LIBOR rate plus 250 or 275 basis points depending on the loan type. The MIF Mortgage Repurchase Facility also contains certain financial covenants. At June 30, 2017,March 31, 2018, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.


At June 30,March 31, 2018 and December 31, 2017, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $160.0 million a decrease from $185.0and $200.0 million, at Decemberrespectively. At March 31, 2016 due to the expiration of the seasonal increase on the MIF Mortgage Warehousing Agreement that was in effect from December 15, 2016 through February 1, 2017. At June 30, 20172018 and December 31, 2016,2017, M/I Financial had $89.5$102.7 million and $152.9$168.2 million outstanding on a combined basis under its credit facilities, respectively.
Senior Notes
As of both June 30, 2017March 31, 2018 and December 31, 2016,2017, 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 (commencing on February 1, 2018), 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 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.
As of both March 31, 2018 and December 31, 2017, we had $300.0 million of our 2021 Senior Notes outstanding. The 2021 Senior Notes bear interest at a rate of 6.75% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2021. TheAs of January 15, 2018, we may redeem all or any portion of the 2021 Senior Notes are general, unsecured senior obligationsat 103.375% of the Companyprincipal amount outstanding. This rate declines to 101.688% of the principal amount outstanding if redeemed during the 12-month period beginning on January 15, 2019, and will further decline to 100.000% of the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness. principal amount outstanding if redeemed on or after January 15, 2020, but prior to maturity.
The 20212025 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 2021 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes. As of June 30, 2017,March 31, 2018, the Company was in compliance with all terms, conditions, and covenants under the indenture.indentures.
The 2025 Senior Notes and the 2021 Senior Notes are fully and unconditionally guaranteed jointly and severally on a senior unsecured basis by the Guarantor Subsidiaries.
The Company may redeem all or any portion of2025 Senior Notes and the 2021 Senior Notes on or after January 15, 2018 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 103.375%are general, unsecured senior obligations of the principal amount outstanding, but will declineCompany 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 2025 Senior Notes and the 2021 Senior Notes are effectively subordinated to 101.688% ofour and the principal amount outstanding if redeemed during the 12-month period beginning on January 15, 2019,Guarantor Subsidiaries’ existing and will further declinefuture secured indebtedness with respect to 100.000% of the principal amount outstanding if redeemed onany assets comprising security or after January 15, 2020, but prior to maturity.collateral for such indebtedness.
The indenture governing our 2025 Senior Notes and the indenture governing the 2021 Senior Notes limits our ability to pay dividends on, and repurchase, our common shares and any of our 9.75% Series A Preferred Shares (the “Series A Preferred Shares”)preferred shares then outstanding to the amount of the positive balance in our “restricted payments basket,” as defined in the indenture. Theindentures. 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 31, 20161, 2015 or the sale of qualified equity interests after December 1, 2015, plus other items and subject to other exceptions. The restricted payments basket was $154.7$202.0 million and $144.9$176.1 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. The determination to pay future dividends on, or make future repurchases of, our common shares or Series A Preferred 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 the terms of our Series A Preferred Shares, and other factors deemed relevant by our board of directors.


Convertible Senior Subordinated Notes
On March 1, 2013, the Company issued $86.3 million in aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”). The 2018 Convertible Senior Subordinated Notes were scheduled to mature on March 1, 2018 and the deadline for holders to convert the 2018 Convertible Senior Subordinated Notes was February 27, 2018. As a result of both June 30, 2017conversion elections made by holders of the 2018 Convertible Senior Subordinated Notes, (1) approximately $20.3 million in aggregate principal amount of the 2018 Convertible Senior Subordinated Notes were converted and settled through the issuance of approximately 0.629 million of our common shares (at a conversion price per common share of $32.31) and (2) the Company repaid in cash approximately $65.9 million in aggregate principal amount of the 2018 Convertible Senor Subordinated Notes at maturity. In accordance with the indenture governing the 2018 Convertible Senior Subordinated Notes, the Company paid interest on the 2018 Convertible Senior Subordinated Notes to, but excluding, March 1, 2018. On December 31, 2016,2017, we had $86.3 million of our 2018 Convertible Senior Subordinated Notes outstanding. The 2018 Convertible Senior Subordinated Notes bear interest at a rate of 3.0% per year, payable semiannually in arrears on March 1 and September 1 of each year. The 2018 Convertible Senior Subordinated Notes mature on March 1, 2018. At any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2018 Convertible Senior Subordinated Notes into the Company’s common shares. The conversion rate initially equals 30.9478 shares per $1,000 of principal amount. This corresponds to an initial conversion price of approximately $32.31 per common share, which equates to approximately 2.7 million common shares. The conversion rate is subject to adjustment upon the occurrence of certain events. The 2018 Convertible Senior Subordinated Notes are fully and unconditionally guaranteed jointly and severally on a senior subordinated unsecured basis by the Guarantor Subsidiaries. The 2018 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the Guarantor Subsidiaries, are subordinated in right of payment to our and the Guarantor Subsidiaries’ existing and future senior indebtedness and are also 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 the 2018 Convertible Senior Subordinated Notes requires the Company


to repurchase the notes (subject to certain exceptions), at a holder’s option, upon the occurrence of a fundamental change (as defined in the indenture).
The Company may redeem for cash any or all of the 2018 Convertible Senior Subordinated Notes (except for any 2018 Convertible Senior Subordinated Notes that the Company is required to repurchase in connection with a fundamental change), but only if the last reported sale price of the Company’s common shares exceeds 130% of the applicable conversion price for the notes on each of at least 20 applicable trading days. The 20 trading days do not need to be consecutive, but must occur during a period of 30 consecutive trading days that ends within 10 trading days immediately prior to the date the Company provides the notice of redemption. The redemption price for the 2018 Convertible Senior Subordinated Notes to be redeemed will equal 100% of the principal amount, plus accrued and unpaid interest, if any.
As of both June 30, 2017 and December 31, 2016, we had $57.5 million of our 2017 Convertible Senior Subordinated Notes outstanding. The 2017 Convertible Senior Subordinated Notes bear interest at a rate of 3.25% per year, payable semiannually in arrears on March 15 and September 15 of each year. The 2017 Convertible Senior Subordinated Notes mature on September 15, 2017. At any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Convertible Senior Subordinated Notes into the Company’s common shares. The conversion rate initially equals 42.0159 shares per $1,000 of principal amount. This corresponds to an initial conversion price of approximately $23.80 per common share, which equates to approximately 2.4 million common shares. The conversion rate is subject to adjustment upon the occurrence of certain events. The 2017 Convertible Senior Subordinated Notes are fully and unconditionally guaranteed jointly and severally on a senior subordinated unsecured basis by the Guarantor Subsidiaries. The 2017 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the Guarantor Subsidiaries, are subordinated in right of payment to our and the Guarantor Subsidiaries’ existing and future senior indebtedness and are also 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 the 2017 Convertible Senior Subordinated Notes provides that we may not redeem the notes prior to their stated maturity date, but also contains provisions requiring the Company to repurchase the 2017 Convertible Senior Subordinated Notes (subject to certain exceptions), at a holder’s option, upon the occurrence of a fundamental change (as defined in the indenture).
Notes Payable - Other
The Company had other borrowings, which are reported in Notes Payable - Other in our Unaudited Condensed Consolidated Balance Sheets, totaling $3.7$10.0 million and $6.4$10.6 million as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.  The balance at December 31, 2016 included a mortgage note payable on our principal executive office building with a principal balance outstanding of $3.4 million, which was subsequently paid off in April of 2017. The remaining balance is made up of other notes payable incurred throughacquired in the normal course of business.


NOTE 8.9. Earnings Per Share
The table below presents a reconciliation between basic and diluted weighted average shares outstanding, net income available to common shareholders and basic and diluted income per share for the three and six months ended June 30,March 31, 2018 and 2017 and 2016:
 Three Months Ended Six Months Ended Three Months Ended
 June 30, June 30, March 31,
(In thousands, except per share amounts) 2017 2016 2017 2016 2018 2017
NUMERATOR            
Net income $16,989
 $15,916
 $33,872
 $25,105
 $18,063
 $16,883
Preferred stock dividends(a) (1,219) (1,219) (2,438) (2,438) 
 (1,219)
Net income to common shareholders 15,770
 14,697
 31,434
 22,667
Net income available to common shareholders 18,063
 15,664
Interest on 3.25% convertible senior subordinated notes due 2017(b) 391
 390
 782
 774
 
 392
Interest on 3.00% convertible senior subordinated notes due 2018(c) 527
 526
 1,055
 1,043
 410
 528
Diluted income available to common shareholders $16,688
 $15,613
 $33,271
 $24,484
 $18,473
 $16,584
DENOMINATOR            
Basic weighted average shares outstanding 24,990
 24,669
 24,864
 24,663
 28,124
 24,738
Effect of dilutive securities:            
Stock option awards 335
 185
 330
 177
 466
 332
Deferred compensation awards 209
 138
 192
 130
 211
 174
3.25% convertible senior subordinated notes due 2017(b) 2,416
 2,416
 2,416
 2,416
 
 2,416
3.00% convertible senior subordinated notes due 2018(c) 2,669
 2,669
 2,669
 2,669
 1,743
 2,669
Diluted weighted average shares outstanding - adjusted for assumed conversions 30,619
 30,077
 30,471
 30,055
 30,544
 30,329
Earnings per common share:            
Basic $0.63
 $0.60
 $1.26
 $0.92
 $0.64
 $0.63
Diluted $0.55
 $0.52
 $1.09
 $0.81
 $0.60
 $0.55
Anti-dilutive equity awards not included in the calculation of diluted earnings per common share 
 1,261
 47
 1,301
 
 95


(a)The Company’s Articles of Incorporation authorize the issuance of up to 2,000,000 preferred shares, par value $.01 per share.  On March 15, 2007, the Company issued 4,000,000 depositary shares, each representing 1/1000th of a 9.75% Series A Preferred Share of the Company (the “Series A Preferred Shares”), or 4,000 Series A Preferred Shares in the aggregate.  On April 10, 2013, the Company redeemed 2,000 of its Series A Preferred Shares (and the 2,000,000 related depositary shares) for an aggregate redemption price of approximately $50.4 million in cash. On October 16, 2017, the Company redeemed the remaining 2,000 outstanding Series A Preferred Shares (and the 2,000,000 related depositary shares) for an aggregate redemption price of approximately $50.4 million in cash. The Company declared and paid a quarterly cash dividend of $609.375 per share on its then outstanding Series A Preferred Shares in the first quarter of 2017 for an aggregate dividend payment on the Series A Preferred Shares of $1.2 million in the first quarter of 2017.
(b)On September 11, 2012, the Company issued $57.5 million in aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”). The 2017 Convertible Senior Subordinated Notes were scheduled to mature on September 15, 2017 and the deadline for holders to convert the 2017 Convertible Senior Subordinated Notes was September 13, 2017. As a result of conversion elections made by holders of the 2017 Convertible Senior Subordinated Notes, all $57.5 million in aggregate principal amount of the 2017 Convertible Senior Subordinated Notes were converted and settled through the issuance of our common shares. In total, we issued approximately 2.4 million common shares (at a conversion price per common share of $23.80).
(c)On March 1, 2013, the Company issued $86.3 million in aggregate principal amount of 2018 Convertible Senior Subordinated Notes. The 2018 Convertible Senior Subordinated Notes were scheduled to mature on March 1, 2018 and the deadline for holders to convert the 2018 Convertible Senior Subordinated Notes was February 27, 2018. As a result of conversion elections made by holders of the 2018 Convertible Senior Subordinated Notes, (1) approximately $20.3 million in aggregate principal amount of the 2018 Convertible Senior Subordinated Notes were converted and settled through the issuance of approximately 0.629 million of our common shares (at a conversion price per common share of $32.31) and (2) the Company repaid in cash approximately $65.9 million in aggregate principal amount of the 2018 Convertible Senor Subordinated Notes at maturity.
For the three and six months ended June 30,March 31, 2018 and 2017, and 2016, the effect of our convertible debt then outstanding was included in the diluted earnings per share calculations.
NOTE 9.10. Income Taxes
During the three and six months ended June 30, 2017,March 31, 2018, the Company recorded a tax provision of $8.2$5.8 million, and $17.6 million, respectively, which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three and six months ended June 30, 2017March 31, 2018 was 32.5% and 34.3%24.3%, respectively, which included the new 21% corporate tax rate and tax expense related to the expected tax benefits forrepeal of the domestic production activities deductionsection 162(m) performance-based compensation exception, both as a result of the Tax Act, and excess tax benefits from employee share-based payment transactions exercised during the second quarterfirst three months of 20172018 per ASU 2016-09.No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The Company is still analyzing certain aspects of the Tax Act and the retroactive reinstatement of expired energy tax credits under the Bipartisan Budget Act of 2018. The final impact is yet to be determined. During the three and six months ended June 30, 2016,March 31, 2017, the Company recorded a tax provision of $9.0$9.5 million, and $14.6 million, respectively, which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three and six months ended June 30, 2016March 31, 2017 was 36.2% and 36.7%35.9%, respectively, which included the former 35% corporate tax rate and tax expense related to the expected tax benefits for the domestic production activities deduction and energy tax credits.deduction.
During 2016, the Company fully utilized its federal NOL carryforwards and federal credit carryforwards. The Company had $4.7$4.6 million of state NOL carryforwards, net of the federal benefit, at June 30, 2017.March 31, 2018. Our state NOLs may be carried forward from one to 1615 years, depending on the tax jurisdiction, with $1.3$1.4 million expiring between 2022 and 2027 and $3.4$3.2 million expiring between 2028 and 2032, absent sufficient state taxable income.
NOTE 10.11. Business Segments
The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 1516 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three 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 as each homebuilding division engages in business activities from which it earns revenue, primarily from the sale and construction of single-family attached and detached homes, acquisition and development of land, and the occasional sale of lots


to third parties. Our financial services operations generate revenue primarily from the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company’s homes and are included in our financial services reportable segment. In accordance with the aggregation criteria defined in ASC 280, we have identified each homebuilding division as an operating segment and have determined our reportable segments are as follows: Midwest homebuilding; Southern homebuilding; Mid-Atlantic homebuilding; and financial services operations.  The homebuilding operating segments that are included within each reportable segment have been aggregated because they share similar aggregation characteristics as 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:
MidwestSouthernMid-Atlantic
Chicago, IllinoisOrlando, FloridaCharlotte, North Carolina
Cincinnati, OhioSarasota, FloridaRaleigh, North Carolina
Columbus, OhioTampa, FloridaWashington, D.C.
Indianapolis, IndianaAustin, Texas 
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas 
Detroit, MichiganHouston, Texas 
 San Antonio, Texas 

The following table shows, by segment: revenue, operating income and interest expense for the three and six months ended June 30,March 31, 2018 and 2017, and 2016:as well as the Company’s income before income taxes for such periods:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2017 2016 2017 20162018 2017
Revenue:          
Midwest homebuilding$168,469
 $152,918
 $314,891
 $271,088
$158,620
 $146,422
Southern homebuilding178,780
 148,965
 328,145
 271,659
190,388
 149,365
Mid-Atlantic homebuilding97,749
 89,415
 194,635
 162,868
73,823
 96,886
Financial services (a)
11,868
 9,949
 26,175
 20,002
15,026
 14,307
Total revenue$456,866
 $401,247
 $863,846
 $725,617
$437,857
 $406,980
          
Operating income:          
Midwest homebuilding$17,984
 $17,987
 $32,843
 $28,315
Southern homebuilding (b)
4,709
 7,199
 13,421
 13,629
Midwest homebuilding (b)
$12,217
 $14,859
Southern homebuilding14,850
 8,712
Mid-Atlantic homebuilding9,588
 7,584
 16,841
 11,468
2,592
 7,253
Financial services (a)
6,860
 5,362
 16,090
 11,637
9,540
 9,230
Less: Corporate selling, general and administrative expense(10,232) (8,956) (18,630) (16,200)(8,058) (8,398)
Total operating income (b)
$28,909
 $29,176
 $60,565
 $48,849
$31,141
 $31,656
          
Interest expense:          
Midwest homebuilding$863
 $613
 $2,240
 $1,892
$2,066
 $1,377
Southern homebuilding1,791
 2,136
 4,168
 4,330
2,287
 2,377
Mid-Atlantic homebuilding515
 1,049
 1,431
 2,457
756
 916
Financial services (a)
665
 510
 1,333
 894
769
 668
Total interest expense$3,834
 $4,308
 $9,172
 $9,573
$5,878
 $5,338
          
Equity in income of joint venture arrangements(110) (82) (127) (389)(310) (17)
Acquisition and integration costs (c)
1,700
 
          
Income before income taxes$25,185
 $24,950
 $51,520
 $39,665
$23,873
 $26,335
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of an immaterial amount of mortgage refinancing.
(b)
Includes an $8.5$0.9 million and a $2.8 million charge for stucco-related repair costs in certain of our Florida communitiescharges related to purchase accounting adjustments taken during the three months ended June 30, 2017 and 2016, respectively, and an $8.5 million andfirst quarter of 2018 as a $4.9 million charge for stucco-related repair costs in certainresult of our Florida communities taken during the six months ended June 30, 2017acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)Represents costs which include, but are not limited to, legal fees and 2016, respectively (as more fully discussed in Note 6).expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses, and miscellaneous expenses related to our recent acquisition of Pinnacle Homes. As these costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.


The following tables show total assets by segment at June 30, 2017March 31, 2018 and December 31, 20162017:
June 30, 2017March 31, 2018
(In thousands)Midwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated TotalMidwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$6,035
 $19,272
 $4,580
 $
 $29,887
$6,253
 $23,163
 $6,747
 $
 $36,163
Inventory (a)
464,186
 582,405
 303,066
 
 1,349,657
615,973
 686,632
 241,576
 
 1,544,181
Investments in joint venture arrangements4,649
 10,333
 7,895
 
 22,877
4,972
 10,169
 6,925
 
 22,066
Other assets13,301
 35,136
(b) 
8,546
 171,982
 228,965
20,198
 41,147
(b) 
11,305
 219,313
 291,963
Total assets$488,171
 $647,146
 $324,087
 $171,982
 $1,631,386
$647,396
 $761,111
 $266,553
 $219,313
 $1,894,373

December 31, 2016December 31, 2017
(In thousands)Midwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated TotalMidwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$3,989
 $22,607
 $3,260
 $
 $29,856
$4,933
 $20,719
 $6,904
 $
 $32,556
Inventory (a)
399,814
 484,038
 302,226
 
 1,186,078
500,671
 636,019
 245,328
 
 1,382,018
Investments in joint venture arrangements10,155
 10,630
 7,231
 
 28,016
4,410
 9,677
 6,438
 
 20,525
Other assets25,747
 35,622
(b) 
13,912
 229,280
 304,561
13,573
 38,784
(b) 
13,311
 364,004
 429,672
Total assets$439,705
 $552,897
 $326,629
 $229,280
 $1,548,511
$523,587
 $705,199
 $271,981
 $364,004
 $1,864,771
(a)Inventory includes single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.
NOTE 11.12. Supplemental Guarantor Information
The Company’s obligations under the 20212025 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible2021 Senior Subordinated Notes are not guaranteed by all of the Company’s subsidiaries and therefore, the Company has disclosed condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The Guarantor Subsidiaries of the 20212025 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible2021 Senior Subordinated Notes are the same.
The following condensed consolidating financial information includes balance sheets, statements of income and cash flow information for M/I Homes, Inc. (the parent company and the issuer of the aforementioned guaranteed notes), the Guarantor Subsidiaries, collectively, and for all other subsidiaries and joint ventures of the Company (the “Unrestricted Subsidiaries”), collectively. Each Guarantor Subsidiary is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. and has fully and unconditionally guaranteed the (a) 20212025 Senior Notes on a joint and several senior unsecured basis and (b) 2017 Convertible2021 Senior Subordinated Notes on a joint and several senior subordinated unsecured basis and (c) 2018 Convertible Senior Subordinated Notes on a joint and several senior subordinated unsecured basis.
There are no significant restrictions on the parent company’s ability to obtain funds from its Guarantor Subsidiaries in the form of a dividend, loan, or other means.
As of June 30, 2017,March 31, 2018, each of the Company’s subsidiaries is a Guarantor Subsidiary, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries, subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes.
In the condensed financial tables presented below, the parent company presents all of its 100%-owned subsidiaries as if they were accounted for under the equity method. All applicable corporate expenses have been allocated appropriately among the Guarantor Subsidiaries and Unrestricted Subsidiaries.


UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
       
  Three Months Ended June 30, 2017
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $
$444,998
$11,868
$
$456,866
Costs and expenses:      
Land and housing 
367,598


367,598
General and administrative 
24,915
5,197

30,112
Selling 
30,247


30,247
Equity in income of joint venture arrangements 

(110)
(110)
Interest 
3,169
665

3,834
Total costs and expenses 
425,929
5,752

431,681
       
Income before income taxes 
19,069
6,116

25,185
       
Provision for income taxes 
6,246
1,950

8,196
       
Equity in subsidiaries 16,989


(16,989)
       
Net income 16,989
12,823
4,166
(16,989)16,989
       
Preferred dividends 1,219



1,219
       
Net income to common shareholders $15,770
$12,823
$4,166
$(16,989)$15,770
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
  Three Months Ended March 31, 2018
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $
$422,831
$15,026
$
$437,857
Costs and expenses:      
Land and housing 
348,702


348,702
General and administrative 
22,171
5,780

27,951
Selling 
30,063


30,063
Acquisition and integration costs 
1,700


1,700
Equity in income of joint venture arrangements 

(310)
(310)
Interest 
5,108
770

5,878
Total costs and expenses 
407,744
6,240

413,984
       
Income before income taxes 
15,087
8,786

23,873
       
Provision for income taxes 
3,906
1,904

5,810
       
Equity in subsidiaries 18,063


(18,063)
       
Net income $18,063
$11,181
$6,882
$(18,063)$18,063

  Three Months Ended June 30, 2016
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $
$391,297
$9,950
$
$401,247
Costs and expenses:      
Land and housing 
319,708


319,708
General and administrative 
22,085
4,745

26,830
Selling 
25,533


25,533
Equity in income of joint venture arrangements 

(82)
(82)
Interest 
3,798
510

4,308
Total costs and expenses 
371,124
5,173

376,297
       
Income before income taxes 
20,173
4,777

24,950
       
Provision for income taxes 
7,442
1,592

9,034
       
Equity in subsidiaries 15,916


(15,916)
       
Net income 15,916
12,731
3,185
(15,916)15,916
       
Preferred dividends 1,219



1,219
       
Net income to common shareholders $14,697
$12,731
$3,185
$(15,916)$14,697


UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
       
  Six Months Ended June 30, 2017
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
       
Revenue $
$837,671
$26,175
$
$863,846
Costs and expenses:      
Land and housing 
687,879


687,879
General and administrative 
47,375
10,497

57,872
Selling 
57,530


57,530
Equity in income of joint venture arrangements 

(127)
(127)
Interest 
7,839
1,333

9,172
Total costs and expenses 
800,623
11,703

812,326
       
Income before income taxes 
37,048
14,472

51,520
       
Provision for income taxes 
12,735
4,913

17,648
       
Equity in subsidiaries 33,872


(33,872)
       
Net income 33,872
24,313
9,559
(33,872)33,872
       
Preferred dividends 2,438



2,438
       
Net income to common shareholders $31,434
$24,313
$9,559
$(33,872)$31,434

 Six Months Ended June 30, 2016 Three Months Ended March 31, 2017
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
    
Revenue $
$705,614
$20,003
$
$725,617
 $
$392,673
$14,307
$
$406,980
Costs and expenses:    
Land and housing 
579,880


579,880
 
320,281


320,281
General and administrative 
40,387
8,702

49,089
 
22,460
5,300

27,760
Selling 
47,799


47,799
 
27,283


27,283
Equity in income of joint venture arrangements 

(389)
(389) 

(17)
(17)
Interest 
8,679
894

9,573
 
4,670
668

5,338
Total costs and expenses 
676,745
9,207

685,952
 
374,694
5,951

380,645
    
Income before income taxes 
28,869
10,796

39,665
 
17,979
8,356

26,335
    
Provision for income taxes 
10,886
3,674

14,560
 
6,489
2,963

9,452
    
Equity in subsidiaries 25,105


(25,105)
 16,883


(16,883)
    
Net income 25,105
17,983
7,122
(25,105)25,105
 16,883
11,490
5,393
(16,883)16,883
    
Preferred dividends 2,438



2,438
 1,219



1,219
    
Net income to common shareholders $22,667
$17,983
$7,122
$(25,105)$22,667
Net income available to common shareholders $15,664
$11,490
$5,393
$(16,883)$15,664



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
    
 June 30, 2017 March 31, 2018
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
    
ASSETS:    
Cash, cash equivalents and restricted cash $
$6,095
$23,845
$
$29,940
 $
$30,416
$23,161
$
$53,577
Mortgage loans held for sale 

91,986

91,986
 

110,612

110,612
Inventory 
1,379,544


1,379,544
 
1,580,344


1,580,344
Property and equipment - net 
21,264
991

22,255
 
24,915
957

25,872
Investment in joint venture arrangements 
14,627
8,250

22,877
 
14,784
7,282

22,066
Deferred income taxes, net of valuation allowances 
29,971
107

30,078
Deferred income tax asset 
18,104


18,104
Investment in subsidiaries 694,380


(694,380)
 737,821


(737,821)
Intercompany assets 437,100


(437,100)
 588,850


(588,850)
Goodwill 
16,400


16,400
Other assets 1,223
44,030
9,453

54,706
 2,931
56,700
7,767

67,398
TOTAL ASSETS $1,132,703
$1,495,531
$134,632
$(1,131,480)$1,631,386
 $1,329,602
$1,741,663
$149,779
$(1,326,671)$1,894,373
  
  
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
  
  
LIABILITIES:  
  
Accounts payable $
$112,702
$370
$
$113,072
 $
$118,482
$357
$
$118,839
Customer deposits 
29,655


29,655
 
37,454


37,454
Intercompany liabilities 
430,472
6,628
(437,100)
 
581,356
7,494
(588,850)
Other liabilities 
101,238
5,399

106,637
 
97,363
5,395

102,758
Community development district obligations 
5,875


5,875
 
12,499


12,499
Obligation for consolidated inventory not owned 
12,263


12,263
 
18,199


18,199
Notes payable bank - homebuilding operations 
138,000


138,000
 
162,300


162,300
Notes payable bank - financial services operations 

89,518

89,518
 

102,711

102,711
Notes payable - other 
3,663


3,663
 
10,011


10,011
Convertible senior subordinated notes due 2017 - net 57,380



57,380
Convertible senior subordinated notes due 2018 - net 85,777



85,777
Senior notes due 2021 - net 296,229



296,229
 297,056



297,056
Senior notes due 2025 - net 246,181



246,181
TOTAL LIABILITIES 439,386
833,868
101,915
(437,100)938,069
 543,237
1,037,664
115,957
(588,850)1,108,008
    
SHAREHOLDERS’ EQUITY 693,317
661,663
32,717
(694,380)693,317
 786,365
703,999
33,822
(737,821)786,365
    
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,132,703
$1,495,531
$134,632
$(1,131,480)$1,631,386
 $1,329,602
$1,741,663
$149,779
$(1,326,671)$1,894,373




CONDENSED CONSOLIDATING BALANCE SHEET
    
 December 31, 2016 December 31, 2017
(In thousands) M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
    
ASSETS:    
Cash, cash equivalents and restricted cash $
$20,927
$13,514
$
$34,441
 $
$131,522
$20,181
$
$151,703
Mortgage loans held for sale 

154,020

154,020
 

171,580

171,580
Inventory 
1,215,934


1,215,934
 
1,414,574


1,414,574
Property and equipment - net 
21,242
1,057

22,299
 
25,815
1,001

26,816
Investment in joint venture arrangements 
12,537
15,479

28,016
 
13,930
6,595

20,525
Deferred income taxes, net of valuation allowances 
30,767
108

30,875
Deferred income tax asset 
18,438


18,438
Investment in subsidiaries 666,008


(666,008)
 722,508


(722,508)
Intercompany assets 424,669


(424,669)
 650,599


(650,599)
Other assets 1,690
43,809
17,427

62,926
 3,154
48,430
9,551

61,135
TOTAL ASSETS $1,092,367
$1,345,216
$201,605
$(1,090,677)$1,548,511
 $1,376,261
$1,652,709
$208,908
$(1,373,107)$1,864,771
  
  
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
  
  
LIABILITIES:  
  
Accounts payable $
$102,663
$549
$
$103,212
 $
$116,773
$460
$
$117,233
Customer deposits 
22,156


22,156
 
26,378


26,378
Intercompany liabilities 
411,196
13,473
(424,669)
 
645,048
5,551
(650,599)
Other liabilities 
117,133
6,029

123,162
 
126,522
5,012

131,534
Community development district obligations 
476


476
 
13,049


13,049
Obligation for consolidated inventory not owned 
7,528


7,528
 
21,545


21,545
Notes payable bank - homebuilding operations 
40,300


40,300
Notes payable bank - financial services operations 

152,895

152,895
 

168,195

168,195
Notes payable - other 
6,415


6,415
 
10,576


10,576
Convertible senior subordinated notes due 2017 - net 57,093



57,093
Convertible senior subordinated notes due 2018 - net 85,423



85,423
 86,132



86,132
Senior notes due 2021 - net 295,677



295,677
 296,780



296,780
Senior notes due 2025 - net 246,051



246,051
TOTAL LIABILITIES 438,193
707,867
172,946
(424,669)894,337
 628,963
959,891
179,218
(650,599)1,117,473
    
SHAREHOLDERS’ EQUITY 654,174
637,349
28,659
(666,008)654,174
 747,298
692,818
29,690
(722,508)747,298
    
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,092,367
$1,345,216
$201,605
$(1,090,677)$1,548,511
 $1,376,261
$1,652,709
$208,908
$(1,373,107)$1,864,771




UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
  
Six Months Ended June 30, 2017Three Months Ended March 31, 2018
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidatedM/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
  
OPERATING ACTIVITIES:  
Net cash provided by (used in) operating activities$5,500
$(120,894)$81,574
$(5,500)$(39,320)$2,750
$(96,116)$64,926
$(2,750)$(31,190)
  
INVESTING ACTIVITIES:  
Purchase of property and equipment
(1,785)(87)
(1,872)
(95)(35)
(130)
Acquisition
(100,763)

(100,763)
Intercompany investing(7,854)

7,854

(3,176)

3,176

Investments in and advances to joint venture arrangements
(2,128)(3,679)
(5,807)
(1,327)(563)
(1,890)
Return of capital from unconsolidated joint ventures

1,078

1,078
Net proceeds from the sale of mortgage servicing rights

7,558

7,558


5,111

5,111
Net cash (used in) provided by investing activities(7,854)(3,913)4,870
7,854
957
(3,176)(102,185)4,513
3,176
(97,672)
  
FINANCING ACTIVITIES:  
Repayment of convertible senior subordinated notes due 2018
(65,941)

(65,941)
Proceeds from bank borrowings - homebuilding operations
289,400


289,400

233,500


233,500
Principal repayments of bank borrowings - homebuilding operations
(191,700)

(191,700)
(71,200)

(71,200)
Net repayments of bank borrowings - financial services operations

(63,377)
(63,377)

(65,484)
(65,484)
Principal proceeds from notes payable - other and CDD bond obligations
(2,752)

(2,752)
Principal repayment of notes payable - other and CDD bond obligations
(565)

(565)
Proceeds from exercise of stock options4,792



4,792
426



426
Intercompany financing
15,027
(7,173)(7,854)

1,401
1,775
(3,176)
Dividends paid(2,438)
(5,500)5,500
(2,438)

(2,750)2,750

Debt issue costs

(63)
(63)
Net cash provided by (used in) financing activities2,354
109,975
(76,113)(2,354)33,862
426
97,195
(66,459)(426)30,736
  
Net (decrease) increase in cash, cash equivalents and restricted cash
(14,832)10,331

(4,501)
(101,106)2,980

(98,126)
Cash, cash equivalents and restricted cash balance at beginning of period
20,927
13,514

34,441

131,522
20,181

151,703
Cash, cash equivalents and restricted cash balance at end of period$
$6,095
$23,845
$
$29,940
$
$30,416
$23,161
$
$53,577

Six Months Ended June 30, 2016Three Months Ended March 31, 2017
(In thousands)M/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidatedM/I Homes, Inc.Guarantor SubsidiariesUnrestricted SubsidiariesEliminationsConsolidated
  
OPERATING ACTIVITIES:  
Net cash provided by (used in) operating activities (1)
$4,938
$2,523
$38,416
$(4,938)$40,939
$200
$(77,003)$53,728
$(200)$(23,275)
  
INVESTING ACTIVITIES:  
Purchase of property and equipment
(10,996)(33)
(11,029)
(932)(61)
(993)
Intercompany Investing(2,573)

2,573

523


(523)
Investments in and advances to joint venture arrangements
(3,525)(2,257)
(5,782)
(857)(2,340)
(3,197)
Net cash (used in) provided by investing activities (1)
(2,573)(14,521)(2,290)2,573
(16,811)
Net proceeds from the sale of mortgage servicing rights

7,396

7,396
Net cash provided by (used in) investing activities523
(1,789)4,995
(523)3,206
  
FINANCING ACTIVITIES:  
Proceeds from bank borrowings - homebuilding operations
192,200


192,200

162,000


162,000
Principal repayments of bank borrowings - homebuilding operations
(166,000)

(166,000)
(91,400)

(91,400)
Net repayments of bank borrowings - financial services operations

(30,982)
(30,982)

(45,958)
(45,958)
Principal proceeds from notes payable - other and CDD bond obligations
111


111
Proceeds from notes payable - other and CDD bond obligations
607


607
Intercompany financing
15
(5,393)5,378


1,816
(2,339)523

Dividends paid(2,438)
(4,938)4,938
(2,438)(1,219)
(200)200
(1,219)
Debt issue costs
(153)(40)
(193)
Proceeds from exercise of stock options73



73
496



496
Net cash (used in) provided by financing activities(2,365)26,173
(41,353)10,316
(7,229)(723)73,023
(48,497)723
24,526
  
Net increase (decrease) in cash, cash equivalents and restricted cash
14,175
(5,227)7,951
16,899

(5,769)10,226

4,457
Cash, cash equivalents and restricted cash balance at beginning of period
2,896
18,156
(7,951)13,101

20,927
13,514

34,441
Cash, cash equivalents and restricted cash balance at end of period$
$17,071
$12,929
$
$30,000
$
$15,158
$23,740
$
$38,898
(1)
During the fourth quarter of 2016, we elected to early-adopt Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Certain amounts above have been adjusted to apply the new method retrospectively.



NOTE 12. Subsequent Event13. Stock-Based Compensation
On July 18, 2017,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 entered into an amendmentis permitted to the Credit Facility (the “Second Amendment”), which, amonggrant (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 things, (a) extended the maturity date of the Credit Facilitystock-based awards – awards that are valued in whole or in part by reference to, July 18, 2021, (b) streamlined the interest rate to be adjusted daily based on one month LIBOR plus a margin of 250 basis points (the margin is subject to adjustment in subsequent quarterly periodsor otherwise based on, the Company’s leverage ratio)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 3,900,000 common shares, of which 983,845 remain available for grant at March 31, 2018.
The 2009 LTIP replaced the M/I Homes, Inc. 1993 Stock Incentive Plan as Amended (the “1993 Plan”), (c) increased the maximum borrowing availabilitywhich expired by its terms on April 22, 2009. Awards outstanding under the facility1993 Plan remain in effect in accordance with their respective terms.
Stock Options
On February 15, 2018, the Company awarded certain of its employees 431,500 (in the aggregate) nonqualified stock options at an exercise price of $31.93 (the closing price of our common shares on the New York Stock Exchange on such date) and a fair value of $11.31 that vest ratably over a five-year period. Total stock-based compensation expense related to stock option awards that has been charged against income relating to the 2009 LTIP was $1.0 million for both the three months ended March 31, 2018 and 2017.  As of March 31, 2018, there was a total of $10.6 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.
Performance Share Unit Awards
On February 15, 2018, February 8, 2017 and February 16, 2016, the Company awarded its executive officers (in the aggregate) a target number of performance share units (“PSU’s”) equal to 46,444, 57,110 and 79,108 PSU’s, respectively. Each PSU represents a contingent right to receive one common share of the Company if vesting is satisfied at the end of a three-year performance period (the “Performance Period”). The ultimate number of PSU’s that will vest and be earned, if any, after the completion of the Performance Period, is based on (1) (a) the Company’s cumulative pre-tax income from $400 millionoperations, excluding extraordinary items, as defined in the underlying award agreements with the executive officers, over the Performance Period (weighted 80%) (the “Performance Condition”), and (b) the Company’s relative total shareholder return over the Performance Period compared to $475 million,the total shareholder return of a peer group of other publicly-traded homebuilders (weighted 20%) (the “Market Condition”) and (d) added a $25 million accordion feature under which(2) the maximum borrowing availability can be increasedparticipant’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 $500 million,50% from the target number based on levels of achievement of the above criteria as set forth in the applicable award agreements and decrease to zero if the Company fails to meet the minimum performance levels for both of the above criteria. If the Company achieves the minimum performance levels for both of the above criteria, 50% of the target number of PSU’s will vest and be earned. Any portion of PSU’s that does not vest at the end of the Performance Period will be forfeited. Additionally, the PSU’s have no dividend or voting rights during the Performance Period.
The grant date fair value of the portion of the PSU’s subject to obtaining additional commitments.the Performance Condition and the Market Condition component was $31.93 and $33.57 for the 2018 PSU’s, respectively, $23.34 and $19.69 for the 2017 PSU’s, respectively, and $16.85 and $15.75 for the 2016 PSU’s, respectively. In accordance with ASC 718, for the portion of the PSU’s subject to a Market Condition, stock-based compensation expense is derived using the Monte Carlo simulation methodology and is recognized ratably over the service period regardless of whether or not the attainment of the Market Condition is probable. Therefore, the Company recognized less than $0.1 million in stock-based compensation expense during the first quarter of 2018 related to the Market Condition portion of the 2018, 2017 and 2016 PSU awards. There was a total of $0.4 million of unrecognized stock-based compensation expense related to the Market Condition portion of the 2018, 2017 and 2016 PSU awards as of March 31, 2018.
For the portion of the PSU’s subject to the Performance Condition, we recognize stock-based compensation expense on a straight-line basis over the Performance Period based on the probable outcome of the related Performance Condition. Otherwise, stock-based compensation expense recognition is deferred until probability is attained and a cumulative stock-based compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reassesses the probability of the satisfaction of the Performance Condition on a quarterly basis, and stock-based compensation expense is adjusted based on the portion of the requisite service period that has passed. As of March 31, 2018, the Company had not recognized any stock-based compensation expense related to the Performance Condition portion of the 2018 or the 2017 PSU awards. If the Company achieves the minimum performance levels for the Performance Conditions to be met for the 2018 and the 2017 awards, the Company would record unrecognized stock-based compensation expense of $1.0 million as of March 31, 2018, for which $0.3 million would


be immediately recognized had attainment been probable at March 31, 2018. The Credit Facility, as amended byCompany recognized less than $0.1 million of stock-based compensation expense related to the Second Amendment (the “Amended Credit Facility”), contains various representations, warranties and covenants that the Company considers customary for such facilities. Under the termsPerformance Condition portion of the Amended Credit Facility, we are required, among other things, to maintain compliance with various financial covenants, including a minimum consolidated tangible net worth requirement, a maximum leverage ratio and minimum interest coverage requirement. The Second Amendment did not change these or2016 PSU awards during the other financial covenants in the Credit Facility, except that the minimum consolidated tangible net worth requirement was reset to a minimumfirst quarter of $465.2 million (subject to increases over time2018 based on earnings and proceeds from equity offerings afterthe probability of attaining the performance condition. The Company has $0.1 million of unrecognized stock-based compensation expense for the 2016 PSU awards as of March 31, 2017).

2018.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW
M/I Homes, Inc. (the “Company” or “we”) is one of the nation’s leading builders of single-family homes having sold over 103,000107,000 homes since we commenced homebuilding activities in 1976.  The Company’s homes are marketed and sold primarily under the M/I Homes brand (M/I Homes and Showcase Collection (exclusively by M/I)). In addition, the Hans Hagen brand is used in older communities in its Minneapolis/St. Paul, Minnesota market, and, following our recent acquisition of the assets and operations of Pinnacle Homes, a privately-held homebuilder in the Minneapolis/St. PaulDetroit, Michigan market (“Pinnacle Homes”), in December 2015, we also useMarch 2018, the Hans HagenPinnacle Homes brand is used in that market. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of Washington, D.C.
Included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company’s performance and financial condition:
Information Relating to Forward-Looking Statements;
Application of Critical Accounting Estimates and Policies;
Results of Operations;
Discussion of Our Liquidity and Capital Resources;
Summary of Our Contractual Obligations;
Discussion of Our Utilization of Off-Balance Sheet Arrangements; and
Impact of Interest Rates and Inflation.
FORWARD-LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition.  Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements.  These statements involve a number of risks and uncertainties.  Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors.  Please see “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”), and “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, for more information regarding those risk factors.
Any forward-looking statement speaks only as of the date made. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.


APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Management bases its estimates and assumptions on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  On an ongoing basis, management evaluates such estimates and assumptions and makes adjustments as deemed necessary.  Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.  SeePlease see Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our 20162017 Form 10-K for additional information about our accounting policies.
We believe that there have been no significant changes to our critical accounting policies during the quarter ended June 30, 2017March 31, 2018 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20162017 Form 10-K, other than the changechanges described below.
Self-insurance Reserves.Revenue Recognition.  Our general liability claimsOn January 1, 2018, we adopted ASC 606, Revenue from Contracts from Customers (“ASC 606”),using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for existing contracts (those that are insured bynot completed) as of, and new contracts after, January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”). We did not have any material adjustments to our 2018 results under ASC 606.
Revenue from the sale of a home and revenue from the sale of land to third parties is recognized in the financial statements on the date of closing (point in time) if delivery has occurred, title has passed, all performance obligations have been met (please see definition of performance obligations below), and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to in exchange for the home or land.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party subservice arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee (note that guarantees are excluded from the scope of ASC 606). We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our contracts to sell homes have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our third party land contracts may include multiple performance obligations; however, revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general, selling and administrative expenses as part of our sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Business Combinations. The Company accounts for business combinations in accordance with FASB ASC 805, Business Combinations (“ASC 805”). ASC 805 requires that business combinations be accounted for under the acquisition method. The acquisition method requires: (1) identifying the acquirer; (2) determining the acquisition date; (3) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; and (4) recognizing and measuring goodwill or a gain from a bargain purchase. Under this method, all acquisition costs are expensed as incurred, and the assets and liabilities of the acquired entity are recorded at their acquisition date fair value, with any excess recorded as goodwill. 

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. Because the purchase price allocation is subject to change within a deductible. Effectivemeasurement period of up to one year from the acquisition date pursuant to ASC 805, in connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan, the Company recorded a provisional amount of goodwill of


approximately $16.4 million as of March 31, 2018, which is included as Goodwill in our Unaudited Condensed Consolidated Balance Sheets. This provisional amount was based on the estimated fair values of the acquired assets and assumed liabilities at the date of the acquisition in accordance with ASC 350, Intangibles, Goodwill and Other (“ASC 350”). Please see Note 7 to our financial statements for home closings occurring on or after July 1,further discussion.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. As a result of ASU 2017-04, the Company renewedwill apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its general liability insurance coverage which, among other things, changedfair value, not to exceed the structuretotal amount of our completed operations/construction defect deductiblegoodwill allocated to $10.0 millionthe reporting unit.  ASU 2017-04 is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively. The Company has elected to early adopt ASU 2017-04 effective for the entire company (for closings priorcurrent reporting period in its impairment testing and analyses. The Company’s goodwill is described in Note 7 to July 1, 2017, our completed operations/construction defect deductible was $7.5 millionfinancial statements.

In accordance with ASC 350, the Company analyzes goodwill for eachimpairment on an annual basis (or more often if indicators of our regions) and decreased our third party claims deductible to $250,000 (a decrease from $500,000 for closings prior to July 1, 2017)impairment exist). The Company recordsperforms a reservequalitative 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. When performing a qualitative assessment, the Company evaluates qualitative factors such as (1) macroeconomic conditions, such as a deterioration in general economic conditions; (2) industry and market considerations such as deterioration in the environment in which the entity operates; (3) cost factors such as increases in raw materials and labor costs; and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings, to determine if it is more-likely-than-not that the fair value of the 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 general liability claims falling below the Company’s deductible. amount of the excess of the carrying amount over the reporting unit’s fair value.

The reserve estimate is based on an actuarial evaluation of our past historygoodwill for possible impairment includes estimating fair value using one or a combination of general liability claims, other industry specific factorsvaluation techniques, such as discounted cash flows. These valuations require the Company to make estimates and specific event analysis.assumptions regarding future operating results, cash flows, changes in capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.


RESULTS OF OPERATIONS
The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 1516 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three 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 as each homebuilding division engages in business activities from which it earns revenue, primarily from the sale and construction of single-family attached and detached homes, acquisition and development of land, and the occasional sale of lots to third parties. Our financial services operations generate revenue primarily from the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company’s homes and are included in our financial services reportable segment. Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating segments by centralizing key administrative functions such as accounting, finance, treasury, information technology, insurance and risk management, litigation, marketing and human resources.
In accordance with the aggregation criteria defined in ASC 280, we have determined our reportable segments are as follows: Midwest homebuilding; Southern homebuilding; Mid-Atlantic homebuilding; and financial services operations.  The homebuilding operating segments included in each reportable segment have been aggregated because they share similar aggregation characteristics as 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. We may, however, be required to reclassify our reportable segments if markets that currently are being aggregated do not continue to share these aggregation characteristics which are evaluated annually.
The homebuilding operating segments that comprise each of our reportable segments are as follows:
MidwestSouthernMid-Atlantic
Chicago, IllinoisOrlando, FloridaCharlotte, North Carolina
Cincinnati, OhioSarasota, FloridaRaleigh, North Carolina
Columbus, OhioTampa, FloridaWashington, D.C.
Indianapolis, IndianaAustin, Texas 
Minneapolis/St. Paul, MinnesotaDallas/Fort Worth, Texas 
Detroit, MichiganHouston, Texas 
 San Antonio, Texas 
Overview
During bothFor the secondfirst quarter and first half of 2017,2018, we achieved record levels of new contracts, homes delivered, revenue and revenue. Conditionsbacklog sales value. Our complementary financial services business also achieved record results in mostthe first quarter of our markets2018. The housing market continued to be steady with modest improvement in demand for new homes compared with the same period in 2016,relatively strong and was supported by favorable fundamentals, including improved levels of household formation, continued increases in employment, low interest rates, improved consumer confidence and continued mortgage availability,growth in employment. The low unemployment rate and related labor shortage are driving wage growth which has added to our construction costs but also has expanded our customer base. These economic conditions, along with a constrained supply of both new and existing and new homes. These conditions andhomes, have resulted in improving housing demand across most of our markets when compared to the same period in 2017. The improving housing demand, together with the continued execution of our strategic business initiatives, enabled us to achieve the following improved Company results in comparison to the secondfirst quarter and first half of 2016:2017:
New contracts increased 3%20% to 1,400 and 7% to 2,854, respectively1,739 - an all-time quarterly record for the Company
Homes delivered increased 16%8% to 1,2111,122 homes and 17% to 2,249 homes, respectively
Average price of homes delivered increased 1% to $366,000 and 3% to $369,000, respectively
Number of homes in backlog at June 30, 2017March 31, 2018 increased 6%24% to 2,4092,744
Total sales value in backlog increased 8%31% to $909.3 million$1.1 billion
Average sales price of homes in backlog increased 6% to $398,000
Revenue increased 14%8% to $456.9$437.9 million and 19%
Number of active communities at March 31, 2018 increased 11% to $863.8 million, respectively205 - an all-time record for the Company
In addition, during the first quarter of 2018:

Income before income taxes for the second quarter of 2017 increased 1% from $25.0 million in the second quarter of 2016 to $25.2 million in the second quarter of 2017. Income before income taxes for both the second quarter of 2017
we entered the greater Detroit, Michigan market by acquiring the assets and operations of Pinnacle Homes, a privately-held homebuilder, which provided us with control of approximately 1,341 lots, of which 1,042 were owned and 299 were under option contracts with third parties, and contributed 113 units to our backlog on March 1, 2018 (please see Note 7 to our financial statements for additional information regarding this acquisition); and 2016 was unfavorably impacted by an $8.5 million and a $2.8 million charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 6), respectively. Excluding these stucco-related charges for the quarters ended June 30, 2017 and 2016, adjusted income before income taxes increased 22% from $27.7 million in the second quarter of 2016 to $33.7 million in the second quarter of 2017. For the six months ended June 30, 2017, income before income taxes increased 30% from $39.7 million for the first half of 2016 to $51.5 million for the first half of 2017. Income before income taxes for both the six months ended June 30, 2017 and 2016 was unfavorably impacted by an $8.5 million and a $4.9 million charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 6), respectively. Excluding these stucco-related charges in both periods, adjusted income before income taxes increased 35% from $44.6 million in 2016's first half to $60.0 million in 2017's first half.
We believe that our results in in both the second quarter and first half of 2017 were positively impacted by: the generally favorable demand for new homes discussed above; our strategic business initiatives, including investment in new communities; continued


improvement in our mix of communities and better locations within eachconnection with the maturity of our markets;$86.3 million in aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”) on March 1, 2018, we (1) repaid in cash approximately $65.9 million in aggregate principal amount and (2) converted approximately $20.3 million in aggregate principal amount into approximately 0.629 million common shares of the Company based upon the elections of the holders of the 2018 Convertible Senior Subordinated Notes.

Both of the above actions are more fully described in the notes to our continued focus on controlling overall costs;Unaudited Condensed Consolidated Financial Statements and the strong performancebelow under “Liquidity and Capital Resources.”

Summary of our financial services operations.Company Financial Results
The calculations of adjusted income before income taxes, adjusted net income available to common shareholders, and adjusted housing gross margin (referred to below), which we believe provide a clearer measure of the ongoing performance of our business, are described and reconciled to income before income taxes, net income available to common shareholders, and housing gross margin, the financial measures that are calculated using our GAAP results, below under “Non-GAAP Financial Measures.”

SummaryIncome before income taxes for the first quarter of Company Financial Results
In2018 decreased 9% from $26.3 million in the secondfirst quarter of 2017 weto $23.9 million in the first quarter of 2018. Income before income taxes for 2018's first quarter was unfavorably impacted by $0.9 million of charges for the amortization of inventory profit write-up related to purchase accounting adjustments on Detroit homes that were delivered during the first quarter of 2018 and $1.7 million of acquisition and integration costs, both incurred as a result of our Detroit acquisition. Excluding these acquisition-related charges for the quarter ended March 31, 2018, adjusted income before income taxes was $26.5 million in the first quarter of 2018, a 1% increase from income before income taxes of $26.3 million in the first quarter of 2017.
We achieved net income of $18.1 million, or $0.60 per diluted share, in 2018's first quarter, which includes a $0.9 million pre-tax charge for purchase accounting adjustments and a $1.7 million pre-tax charge for acquisition and integration costs in each case as discussed above. This compares to common shareholdersnet income of $15.8$16.9 million, or $0.55 per diluted share. This compares to net income to common shareholders of $14.7 million, or $0.52 per diluted share, in 2016's second2017's first quarter. Net income in each period included $1.2 million in dividend payments made to holdersExclusive of our Series A Preferred Shares. In the first half of 2017, we achieved net income to common shareholders of $31.4 million, or $1.09 per diluted share. This compares to net income to common shareholders of $22.7 million, or $0.81 per diluted share,these acquisition-related charges in the first halfquarter of 2016. Net2018, our adjusted net income in each period included $2.4increased $3.1 million in dividend payments made to holders of our Series A Preferred Shares.$20.0 million compared to prior year.
During the quarter ended June 30, 2017,March 31, 2018, we recorded second quarter record total revenue of $456.9$437.9 million, of which $443.1$418.5 million was from homes delivered, $1.9$4.4 million was from land sales and $11.9$15.0 million was from our financial services operations. Revenue from homes delivered increased 17%8% in 2017's second2018's first quarter compared to the same period in 20162017 driven primarily by a 16%an 8% increase in the number of homes delivered (169(84 units) and a 1% increase in the average sales price of homes delivered ($4,000 per home delivered). Revenue from land sales decreased $12.2$0.8 million from the secondfirst quarter of 20162017 primarily due to fewer land sales in our Southern region in 2017’s second2018's first quarter compared to the prior year. During the first half of 2017, we recorded total revenue of $863.8 million, of which $830.5 million was from homes delivered, $7.1 million was from land sales and $26.2 million was from our financial services operations. Revenue from homes delivered increased 21% during the first half of 2017 compared to the same period in 2016 driven primarily by a 17% increase in the number of homes delivered (331 units) and a 3% increase in the average sales price of homes delivered ($11,000 per home delivered). Revenue from land sales decreased $12.0 million during 2017's first half primarily due to fewer land sales in our Southern region in current year’s first half compared to the prior year. Revenue in our financial services segment increased 19%5% to $11.9 million and 31% to $26.2$15.0 million in the three and six months ended June 30, 2017, respectively, compared to the same periods in 20162018's first quarter as a result of increases in the number of loan originations, increases in the average loan amount, the sale of a portion of the servicing portfolio and thea higher volume of loans sold, as well as higher margins on our loans sold in the periods than we experienced in the prior year.sold.
Total gross margin (total revenue less total land and housing costs) increased $7.7$2.5 million in the secondfirst quarter of 20172018 compared to the secondfirst quarter of 20162017 as a result of a $5.8$1.8 million improvement in the gross margin of our homebuilding operations and a $1.9$0.7 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered (housing gross margin) improved $7.0$1.7 million as a result of the 16%8% increase in the number of homes delivered and the 1% increase in the average sales price of homes delivered, partially offset by an $8.5 million charge for additional estimated future stucco-related repair costs in certain of our Florida communities taken during 2017's second quarter (2016's second quarter included a $2.8 million charge for such repairs).delivered. Our housing gross margin percentage declined 120100 basis points from 18.6% in prior year's secondfirst quarter to 17.4%17.6% in 2017's second2018's first quarter. Exclusive of the stucco-related charges$0.9 million purchase accounting adjustment taken in both current and prior year second quarters,the first quarter of 2018 discussed above, our adjusted housing gross margin percentage remained flat at 19.4%decreased 80 basis points to 17.8% in both quarters ended June 30,2018's first quarter compared to the same period last year, primarily as a result of higher lot costs when compared to the same period of 2017 and 2016.as well as mix of homes delivered. We expect our gross margins throughout 2018 to be negatively impacted by these purchase accounting adjustments related to our Pinnacle Homes acquisition. Our gross margin on land sales (land sale gross margin) declined $1.2 million as a result of fewer third party land salesremained flat in the secondfirst quarter of 2017 compared to the second quarter of 2016. Total gross margin increased $30.2 million for the six months ended June 30, 20172018 compared to the first halfquarter of 2016 as a result of a $24.0 million improvement in the gross margin of our homebuilding operations and a $6.2 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin for the first half of 2017, our housing gross margin improved $25.6 million as a result of the 17% increase in the number of homes delivered and the 3% increase in the average sales price of homes delivered, partially offset by the $8.5 million charge in the first half of 2017 for stucco-related repair costs (2016's first half included charges of $4.9 million for such repairs). Our housing gross margin percentage remained flat at 18.0% in both the six months ended June 30, 2017 and 2016. Exclusive of the stucco-related charges taken during the first half ended June 30, 2017 and 2016, our adjusted housing gross margin percentage improved 30 basis points to 19.0% in the first half of 2017 from 18.7%, largely as a result of product mix and the mix of communities delivering homes, partially offset by higher construction and lot costs in 2017's first half compared to 2016's first half. Our gross margin on land sales declined $1.5 million as a result of fewer third party land sales in the first half of 2017 compared to 2016's first half.2017.

We believe the increased new contractsales volume and higher sales prices on homes delivered during the three and six months ended June 30, 2017March 31, 2018 compared to the three and six months ended June 30, 2016 wereMarch 31, 2017 was driven primarily by the strengthening economy described above, constrained supply/demand conditions as well as better pricing leverage in select locations and submarkets and shifts in both product and community mix. In addition, our new contracts benefited from the opening o


f 42of 22 new communities during the first halfquarter of 2017, although some of these new communities opened later in the quarter, and thus did not contribute a significant number of sales contracts in the quarter.2018. We sell a variety of home types in various communities and markets, each of which yields a different gross margin. In addition,The timing of the timingopenings of new replacement communities openingas well as underlying lot costs varies from year to year. As a result, our new contracts and housing gross margin may fluctuate up or down from quarter to quarter depending on the mix of communities delivering homes. The pricing improvements described above were partially offset by higher average lot and construction costs related to homebuilding industry conditions and normal supply and demand dynamics. During the three and six months ended June 30,March 31, 2018 and 2017, and 2016, we were able to pass a portion of the


higher construction and lot costs to our homebuyers in the form of higher sales prices. However, we cannot provide any assurance that we will be able to continue to raise prices.
For the three months ended June 30, 2017,March 31, 2018, selling, general and administrative expense increased $8.0$3.0 million, which partially offset the increase in our gross margin discussed above, and increasedbut decreased as a percentage of revenue from 13.1%13.5% in the secondfirst quarter of 20162017 to 13.2% in the secondfirst quarter of 2017.2018. Selling expense increased $4.7$2.8 million from 2016's second2017's first quarter and increased as a percentage of revenue to 6.6%6.9% in 2017's second2018's first quarter compared to 6.4%6.7% for the same period in 2016.2017. Variable selling expense for sales commissions contributed $2.8$1.7 million to the increase ($0.2 million of which related to start-up costs associated with our new Detroit division) due to the higher average sales pricenumber of homes delivered and higher number of homes delivered.in the quarter. The increase in selling expense was also attributable to a $1.9$1.1 million increase in non-variable selling expense primarily related to costs associated with our sales offices and models as a result of our increased community count. General and administrative expense increased $3.3 million compared to the second quarter of 2016 but decreased as a percentage of revenue to 6.6% in the second quarter of 2017 compared to 6.7% for the same period in 2016. This dollar increase was primarily due to a $1.9 million increase in compensation expense as a result of an increase in employee count as well as higher incentive compensation due to improved operating results, an $0.8 million increase in land related expenses primarily due to our increasedaverage community count and a $0.5$0.1 million increase related to start-up costs associated with our new Sarasota division, and increases in other miscellaneous expenses. For the six months ended June 30, 2017, selling, generalDetroit division. General and administrative expense increased $18.5$0.2 million which partially offsetcompared to the increase in our gross margin discussed above, and remained flatfirst quarter of 2017 but declined as a percentage of revenue at 13.4% in both the first half of 2017 and 2016. Selling expense increased $9.7 million from the first half of 2016 and increased as a percentage of revenue to 6.7% in 2017's first six months compared to 6.6% for the same period in 2016. Variable selling expense for sales commissions contributed $6.0 million to the increase due to the higher average sales price of homes delivered and higher number of homes delivered. The increase in selling expense was also attributable to a $3.7 million increase in non-variable selling expense primarily related to costs associated with our sales offices and models as a result of our increased community count. General and administrative expense increased $8.8 million compared to the first six months of 2016 but improved as a percentage of revenue to 6.7% in the first half of 2017 from 6.8% in the first halfquarter of 2016.2017 to 6.4% in the first quarter of 2018. This dollar increase was primarily due to a $4.3 million increase in compensation expense as a result of an increase in employee count as well as higher incentive compensation due to improved operating results, a $1.9 million increase in land related expenses primarily due to our increased community count, a $1.0 million increase related to start-up costs associated with our new Sarasota division, a $0.6 million increase in costs associated with new information systems in our financial services operation, and increases in other miscellaneous expenses.Detroit division.
Outlook
We believe that many of our housing markets will experience modest increases in total permitsindustry fundamentals are solid and new homes sales during the remainder of 2017, similar to the improvement in demand for new homes that occurred in 2016 and the first half of 2017, based on continued growth in employment, modest wage growth, historically low interest rates (despite recent increases in rates) and growing consumer confidence will lead to improved consumer confidence.levels of household formation and modest improvement in demand for new homes throughout 2018. We remain focusedalso expect the recently enacted Tax Cuts and Jobs Act of 2017 (the “Tax Act”) to have a positive impact on increasing our profitability by generatingbusiness and provide additional revenuemomentum to the economy, as a result of higher net income levels for some prospective home buyers and improving overhead operating leverage, continuing to expand our market share,a generally stimulative effect on employment, wages and investinggrowth in attractive land opportunities.the U.S. economy.
We expect to continue to emphasize the following strategic business objectives throughout the remainder of 2017:2018:
profitably growing our presence in our existing markets, including opening new communities;
reviewing new markets for investment opportunities;
maintaining a strong balance sheet; and
emphasizing customer service, product quality and design, and premier locations.
Consistent with these objectives, we took a number of steps during the first sixthree months of 20172018 for continued improvement in 2017our financial and operating results in 2018 and beyond, including investing $184.6$85.0 million in land acquisitions and $83.3$41.7 million in land development to help grow our presence in our existing markets. We currently estimate that we will spend approximately $500$550 million to $550$600 million on land purchases and land development in 2017.2018, including the $126.7 million spent during the first three months of 2018. However, land transactions are subject to a number of factors, including our financial condition and market conditions, as well as satisfaction of various conditions related to specific properties. We will continue to monitor market conditions and our ongoing pace of home sales and deliveries and we will adjust our land spending accordingly. We opened 4222 communities and closed 3315 communities in the first halfquarter of 2017,2018, ending 2017's2018's first halfquarter with a total of 187205 communities compared to 174184 communities at June 30, 2016.


March 31, 2017 (10 of which related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018).
Going forward, we believe our abilities to leverage our fixed costs, obtain land at desired rates of return, and open and grow our active communities provide our best opportunities for continuing to improve our financial results. However, we can provide no assurance that the positive trends reflected in our financial and operating metrics will continue in the future.


The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income;income (loss); and interest expense for the three and six months ended June 30,March 31, 2018 and 2017 and 2016:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2017 2016 2017 20162018 2017
Revenue:          
Midwest homebuilding$168,469
 $152,918
 $314,891
 $271,088
$158,620
 $146,422
Southern homebuilding178,780
 148,965
 328,145
 271,659
190,388
 149,365
Mid-Atlantic homebuilding97,749
 89,415
 194,635
 162,868
73,823
 96,886
Financial services (a)
11,868
 9,949
 26,175
 20,002
15,026
 14,307
Total revenue$456,866
 $401,247
 $863,846
 $725,617
$437,857
 $406,980
          
Gross margin:          
Midwest homebuilding$33,799
 $31,412
 $63,020
 $52,667
Southern homebuilding (b)
24,865
 23,351
 51,479
 43,964
Midwest homebuilding (b)
$27,709
 $29,221
Southern homebuilding35,772
 26,614
Mid-Atlantic homebuilding18,736
 16,827
 35,293
 29,104
10,648
 16,557
Financial services (a)
11,868
 9,949
 26,175
 20,002
15,026
 14,307
Total gross margin (b)
$89,268
 $81,539
 $175,967
 $145,737
$89,155
 $86,699
          
Selling, general and administrative expense:          
Midwest homebuilding$15,815
 $13,425
 $30,177
 $24,352
$15,492
 $14,362
Southern homebuilding20,156
 16,152
 38,058
 30,335
20,922
 17,902
Mid-Atlantic homebuilding9,148
 9,243
 18,452
 17,636
8,056
 9,304
Financial services (a)
5,008
 4,587
 10,085
 8,365
5,486
 5,077
Corporate10,232
 8,956
 18,630
 16,200
8,058
 8,398
Total selling, general and administrative expense$60,359
 $52,363
 $115,402
 $96,888
$58,014
 $55,043
          
Operating income:       
Midwest homebuilding$17,984
 $17,987
 $32,843
 $28,315
Southern homebuilding (b)
4,709
 7,199
 13,421
 13,629
Operating income (loss):   
Midwest homebuilding (b)
$12,217
 $14,859
Southern homebuilding14,850
 8,712
Mid-Atlantic homebuilding9,588
 7,584
 16,841
 11,468
2,592
 7,253
Financial services (a)
6,860
 5,362
 16,090
 11,637
9,540
 9,230
Less: Corporate selling, general and administrative expense(10,232) (8,956) (18,630) (16,200)(8,058) (8,398)
Total operating income (b)
$28,909
 $29,176
 $60,565
 $48,849
$31,141
 $31,656
          
Interest expense:          
Midwest homebuilding$863
 $613
 $2,240
 $1,892
$2,066
 $1,377
Southern homebuilding1,791
 2,136
 4,168
 4,330
2,287
 2,377
Mid-Atlantic homebuilding515
 1,049
 1,431
 2,457
756
 916
Financial services (a)
665
 510
 1,333
 894
769
 668
Total interest expense$3,834
 $4,308
 $9,172
 $9,573
$5,878
 $5,338
          
Equity in income of joint venture arrangements(110) (82) (127) (389)(310) (17)
Acquisition and integration costs (c)
1,700
 
          
Income before income taxes$25,185
 $24,950
 $51,520
 $39,665
$23,873
 $26,335
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage refinancing.
(b)
Includes an $8.5$0.9 million and a $2.8 million charge for stucco-related repair costs in certain of our Florida communitiescharges related to purchase accounting adjustments taken during the three months ended June 30, 2017 and 2016, respectively, and an $8.5 million andfirst quarter of 2018 as a $4.9 million charge for stucco-related repair costs in certainresult of our Florida communities taken during the six months ended June 30, 2017acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)Represents costs which include, but are not limited to, legal fees and 2016, respectively (as more fully discussed in Note 6).expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses, and miscellaneous expenses related to our acquisition of Pinnacle Homes. As these costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.



The following tables show total assets by segment at June 30, 2017March 31, 2018 and December 31, 20162017:
At June 30, 2017At March 31, 2018
(In thousands)Midwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated TotalMidwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$6,035
 $19,272
 $4,580
 $
 $29,887
$6,253
 $23,163
 $6,747
 $
 $36,163
Inventory (a)
464,186
 582,405
 303,066
 
 1,349,657
615,973
 686,632
 241,576
 
 1,544,181
Investments in joint venture arrangements4,649
 10,333
 7,895
 
 22,877
4,972
 10,169
 6,925
 
 22,066
Other assets13,301
 35,136
(b) 
8,546
 171,982
 228,965
20,198
 41,147
(b) 
11,305
 219,313
 291,963
Total assets$488,171
 $647,146
 $324,087
 $171,982
 $1,631,386
$647,396
 $761,111
 $266,553
 $219,313
 $1,894,373
At December 31, 2016At December 31, 2017
(In thousands)Midwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated TotalMidwest Southern Mid-Atlantic Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract$3,989
 $22,607
 $3,260
 $
 $29,856
$4,933
 $20,719
 $6,904
 $
 $32,556
Inventory (a)
399,814
 484,038
 302,226
 
 1,186,078
500,671
 636,019
 245,328
 
 1,382,018
Investments in joint venture arrangements10,155
 10,630
 7,231
 
 28,016
4,410
 9,677
 6,438
 
 20,525
Other assets25,747
 35,622
(b) 
13,912
 229,280
 304,561
13,573
 38,784
(b) 
13,311
 364,004
 429,672
Total assets$439,705
 $552,897
 $326,629
 $229,280
 $1,548,511
$523,587
 $705,199
 $271,981
 $364,004
 $1,864,771
(a)Inventory includes single-family lots; land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.


Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the three and six months ended June 30,March 31, 2018 and 2017 and 2016:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2017 2016 2017 20162018 2017
Midwest Region          
Homes delivered437
 398
 816
 720
411
 379
New contracts, net531
 507
 1,087
 1,002
698
 556
Backlog at end of period1,028
 954
 1,028
 954
1,228
 934
Average sales price of homes delivered$385
 $383
 $385
 $375
$386
 $385
Average sales price of homes in backlog$401
 $382
 $401
 $382
$423
 $400
Aggregate sales value of homes in backlog$412,203
 $364,303
 $412,203
 $364,303
$519,040
 $373,205
Housing revenue$168,305
 $152,578
 $314,101
 $269,823
$158,495
 $145,796
Land sale revenue$164
 $340
 $790
 $1,265
$125
 $626
Operating income homes (a)
$17,955
 $17,910
 $32,556
 $28,002
Operating income homes (a) (b)
$12,094
 $14,601
Operating income land$29
 $77
 $287
 $313
$123
 $258
Number of average active communities65
 69
 64
 70
77
 62
Number of active communities, end of period66
 65
 66
 65
84
 63
Southern Region          
Homes delivered520
 398
 939
 748
541
 419
New contracts, net625
 515
 1,215
 1,007
797
 590
Backlog at end of period950
 819
 950
 819
1,164
 845
Average sales price of homes delivered$344
 $345
 $346
 $343
$352
 $349
Average sales price of homes in backlog$347
 $352
 $347
 $352
$365
 $349
Aggregate sales value of homes in backlog$329,940
 $288,384
 $329,940
 $288,384
$424,599
 $295,031
Housing revenue$178,779
 $137,173
 $324,860
 $256,867
$190,151
 $146,081
Land sale revenue$1
 $11,792
 $3,285
 $14,792
$237
 $3,284
Operating income homes (a) (b)
$4,709
 $6,058
 $13,310
 $12,108
Operating income homes (a)
$14,691
 $8,601
Operating income land$
 $1,141
 $111
 $1,521
$159
 $111
Number of average active communities87
 69
 84
 68
89
 83
Number of active communities, end of period87
 70
 87
 70
91
 87
Mid-Atlantic Region          
Homes delivered254
 246
 494
 450
170
 240
New contracts, net244
 332
 552
 659
244
 308
Backlog at end of period431
 508
 431
 508
352
 441
Average sales price of homes delivered$378
 $356
 $388
 $355
$410
 $398
Average sales price of homes in backlog$388
 $374
 $388
 $374
$419
 $377
Aggregate sales value of homes in backlog$167,190
 $189,755
 $167,190
 $189,755
$147,555
 $166,179
Housing revenue$96,009
 $87,475
 $191,590
 $159,783
$69,778
 $95,581
Land sale revenue$1,740
 $1,940
 $3,045
 $3,085
$4,045
 $1,305
Operating income homes (a)
$9,475
 $7,499
 $16,721
 $11,270
$2,470
 $7,246
Operating income land$113
 $85
 $120
 $198
$122
 $7
Number of average active communities34
 40
 35
 39
31
 36
Number of active communities, end of period34
 39
 34
 39
30
 34
Total Homebuilding Regions          
Homes delivered1,211
 1,042
 2,249
 1,918
1,122
 1,038
New contracts, net1,400
 1,354
 2,854
 2,668
1,739
 1,454
Backlog at end of period2,409
 2,281
 2,409
 2,281
2,744
 2,220
Average sales price of homes delivered$366
 $362
 $369
 $358
$373
 $373
Average sales price of homes in backlog$377
 $369
 $377
 $369
$398
 $376
Aggregate sales value of homes in backlog$909,334
 $842,442
 $909,334
 $842,442
$1,091,194
 $834,415
Housing revenue$443,093
 $377,226
 $830,551
 $686,473
$418,424
 $387,458
Land sale revenue$1,905
 $14,072
 $7,120
 $19,142
$4,407
 $5,215
Operating income homes (a) (b)
$32,139
 $31,467
 $62,587
 $51,380
$29,255
 $30,448
Operating income land$142
 $1,303
 $518
 $2,032
$404
 $376
Number of average active communities186
 178
 183
 177
197
 181
Number of active communities, end of period187
 174
 187
 174
205
 184
(a)Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
(b)
Includes an $8.5$0.9 million and a $2.8 million charge for stucco-related repair costs in certain of our Florida communitiescharges related to purchase accounting adjustments taken during the three months ended June 30, 2017 and 2016, respectively, and an $8.5 million andfirst quarter of 2018 as a $4.9 million charge for stucco-related repair costs in certainresult of our Florida communities taken during the six months ended June 30, 2017 and 2016, respectively (as more fully discussedacquisition of Pinnacle Homes in Note 6).
Detroit, Michigan on March 1, 2018.



Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2017 2016 2017 20162018 2017
Financial Services          
Number of loans originated840
 761
 1,565
 1,365
781
 725
Value of loans originated$251,486
 $227,561
 $468,832
 $404,599
$235,481
 $217,346
          
Revenue$11,868
 $9,949
 $26,175
 $20,002
$15,026
 $14,307
Less: Selling, general and administrative expense5,008
 4,587
 10,085
 8,365
Less: Selling, general and administrative expenses5,486
 5,077
Interest expense665
 510
 1,333
 894
769
 668
          
Income before income taxes$6,195
 $4,852
 $14,757
 $10,743
$8,771
 $8,562

A home is included in “new contracts” when our standard sales contract is executed. “Homes delivered” represents homes for which the closing of the sale has occurred. “Backlog” represents homes for which the standard sales contract has been executed, but which are not included in homes delivered because closings for these homes have not yet occurred as of the end of the period specified.
The composition of our homes delivered, new contracts, net and backlog is constantly changing and may be based on a dissimilar mix of communities between periods as new communities open and existing communities wind down. Further, home types and individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots. These variations may result in a lack of meaningful comparability between homes delivered, new contracts, net and backlog due to the changing mix between periods.
Cancellation Rates
The following table sets forth the cancellation rates for each of our homebuilding segments for the three and six months ended June 30,March 31, 2018 and 2017 and 2016:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2017 2016 2017 20162018 2017
Midwest9.5% 12.0% 11.5% 11.4%10.2% 13.3%
Southern17.0% 17.2% 16.7% 15.7%13.5% 16.3%
Mid-Atlantic10.9% 11.5% 10.7% 9.0%10.6% 10.5%
          
Total cancellation rate13.3% 13.9% 13.6% 12.5%11.8% 14.0%

Seasonality
Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase substantially in the second half of the year compared to the first half of the year. We believe that this seasonality reflects the tendency of homebuyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Our financial services operations also experience seasonality because loan originations correspond with the delivery of homes in our homebuilding operations.


Non-GAAP Financial Measures
This report contains information about our adjusted housing gross margin, and adjusted income before income taxes and adjusted net income each of which constitutes a non-GAAP financial measure. Because adjusted housing gross margin, and adjusted income before income taxes and adjusted net income are not calculated in accordance with GAAP, these financial measures may not be completely comparable to similarly-titled measures used by other companies in the homebuilding industry and, therefore, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement our GAAP results in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted housing gross margin, and adjusted income before income taxes and adjusted net income are calculated as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2017 2016 2017 20162018 2017
Housing revenue$443,093
 $377,226
 $830,551
 $686,473
$418,424
 $387,458
Housing cost of sales365,835
 306,939
 681,277
 562,769
344,699
 315,442
          
Housing gross margin77,258
 70,287
 149,274
 123,704
73,725
 72,016
Add: Stucco-related charges (a)
8,500
 2,754
 8,500
 4,909
Add: Purchase accounting adjustments (a)
896
 
          
Adjusted housing gross margin$85,758
 $73,041
 $157,774
 $128,613
$74,621
 $72,016
          
Housing gross margin percentage17.4% 18.6% 18.0% 18.0%17.6% 18.6%
Adjusted housing gross margin percentage19.4% 19.4% 19.0% 18.7%17.8% 18.6%
          
Income before income taxes$25,185
 $24,950
 $51,520
 $39,665
$23,873
 $26,335
Add: Stucco-related charges (a)
8,500
 2,754
 8,500
 4,909
Add: Purchase accounting adjustments (a)
896
 
Add: Acquisition and integration expenses (b)
1,700
 
          
Adjusted income before income taxes$33,685
 $27,704
 $60,020
 $44,574
$26,469
 $26,335
          
Net income$18,063
 $16,883
Add: Purchase accounting adjustments (a)
663
 
Add: Acquisition and integration expenses (b)
1,258
 
   
Adjusted net income$19,984
 $16,883
   
(a)
Represents warranty chargespurchase accounting adjustments related to our acquisition of Pinnacle Homes in Detroit, Michigan during the first quarter of 2018.
(b)Represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses, and miscellaneous expenses related to our acquisition of Pinnacle Homes. As these costs are not eligible for stucco-related repaircapitalization as initial direct costs, in certain of our Florida communities (as more fully discussed in Note 6).such amounts are expensed as incurred.
We believe adjusted housing gross margin, and adjusted income before income taxes and adjusted net income are both relevant and useful financial measures to investors in evaluating our operating performance as they measure the gross profit, and income before income taxes and net income we generated specifically on our operations during a given period. These non-GAAP financial measures isolate the impact that the stucco-relatedacquisition-related charges have on housing gross margins, and income before income taxes and net income, and allow investors to make comparisons with our competitors that adjust housing gross margins, and income before income taxes, and net income in a similar manner. We also believe investors will find these adjusted housing gross margin and adjusted income before income taxesfinancial measures relevant and useful because they represent a profitability measure that may be compared to a prior period without regard to variability of stucco-related charges.the charges noted above. These financial measures assist us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
Year Over Year Comparison
Three Months Ended June 30, 2017March 31, 2018 Compared to Three Months Ended June 30, 2016March 31, 2017
The calculation of adjusted housing gross margin (referred to below), which we believe provides a clearer measure of the ongoing performance of our business, is described and reconciled to housing gross margin, the financial measure that is calculated using our GAAP results, below under “Segment Non-GAAP Financial Measures.”

Midwest Region. During the three months ended June 30, 2017,March 31, 2018, homebuilding revenue in our Midwest region increased $15.6$12.2 million, from $152.9$146.4 million in the secondfirst quarter of 20162017 to $168.5$158.6 million in the secondfirst quarter of 2017.2018. This 10%8% increase in homebuilding revenue was the result of a 10%an 8% increase in the number of homes delivered (39 units)(32 units, 14 of which were contributed


by our new Detroit division) and a 1%slight increase in the average sales price of homes delivered ($2,0001,000 per home delivered). Operating income in our Midwest region remained flat at $18.0decreased $2.7 million from $14.9 million in the first quarter of 2017 to $12.2 million during the three monthsquarter ended June 30, 2017,March 31, 2018. This decrease in operating income was the same as prior year’s second quarter.result of a $1.5 million decline in our gross margin in addition to a $1.1 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $2.4declined $1.4 million, partially due to the 10%$0.9 million charge for purchase accounting adjustments related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018 as well as a decline in housing gross margin percentage as a result of a change in product/market mix, offset partially by the 8% increase in the number of homes delivered and the 1% increase in the average sales price of homes delivered noted above.delivered. Our housing gross margin percentage declined 40250 basis points to 20.1%17.4% in the secondfirst quarter of 20172018 compared to 20.5%19.9% in the prior year’s secondfirst quarter. Exclusive of the purchase accounting charges, our housing gross margin for the first quarter of 2018 declined 190 basis points to 18.0% compared to last year’s first quarter. The decline in housing gross margin percentage was primarily due to increased lot costs compared to 2017’s same period as well as a change in product type and market mix. Our housing gross margin for 2016's second quarter was unfavorably impacted by a $0.4 million charge for purchase accounting adjustments from our 2015 Minneapolis/St. Paul acquisition. Exclusivemix of this charge, our adjusted housing gross margin percentage declined 70 basis points from 20.8% in last year’s second quarter.homes delivered. Our land sale gross margin remained flatdeclined $0.1 million as a result of fewer land sales in the first quarter of 2018 compared to the prior year.


same period in 2017.
Selling, general and administrative expense increased $2.4$1.1 million, from $13.4$14.4 million for the quarter ended June 30, 2016March 31, 2017 to $15.8$15.5 million for the quarter ended June 30, 2017,March 31, 2018, and increasedremained flat as a percentage of revenue to 9.4% from 8.8%at 9.8% in 2016's second quarter.both 2018’s and 2017’s first quarters. The increase in selling, general and administrative expense was attributable in part, to a $1.9$1.0 million increase in selling expense due to (1) a $0.8$0.4 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and higher number of homes delivered, $0.2 million of which was associated with our new Detroit, Michigan division, and (2) a $1.1$0.6 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models.models, $0.1 million of which related to our new Detroit, Michigan division. The increase in selling, general and administrative expense was also attributable to a $0.5$0.1 million increase in general and administrative expense which was primarily related to a $0.3 million increase in compensation expense and a $0.2 million increase in land related expenses.start-up costs from our Detroit, Michigan acquisition.
During the three months ended June 30, 2017,March 31, 2018, we experienced a 5%26% increase in new contracts in our Midwest region, from 507556 in the second quarter of 2016 to 531 in the secondfirst quarter of 2017 to 698 in the first quarter of 2018, and an 8%a 31% increase in backlog from 954934 homes at June 30, 2016March 31, 2017 to 1,0281,228 homes at June 30, 2017.March 31, 2018. The increases in new contracts and backlog were primarilypartially due to improving demand offset partially by a lower average numberin our newer communities compared to prior year, and backlog also benefited from the addition of communities during the period.113 homes from our recent acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018. Average sales price in backlog increased to $401,000$423,000 at June 30, 2017March 31, 2018 compared to $382,000$400,000 at June 30, 2016March 31, 2017 which was primarily due to higher-enda change in product offerings during the second quarter of 2017 compared to those products offered during the same period last year.type and market mix. During the three months ended June 30, 2017,March 31, 2018, we opened sixnine new communities in our Midwest region (excluding the 10 communities added as part of our acquisition in Detroit) compared to three11 during 2016's second2017's first quarter. Our monthly absorption rate in our Midwest region increased to 2.7remained flat at 3.0 per community in both the secondfirst quarter of 2017 from 2.5 per community in the second quarter of 2016.2018 and 2017.
Southern Region. During the three months ended June 30, 2017,March 31, 2018, homebuilding revenue in our Southern region increased $29.8$41.0 million, from $149.0$149.4 million in the secondfirst quarter of 20162017 to $178.8$190.4 million in the secondfirst quarter of 2017.2018. This 20%27% increase in homebuilding revenue was the result of a 31%29% increase in the number of homes delivered (122 units) and a 1% increase in the average sales price of homes delivered ($3,000 per home delivered), primarily due to product and market mix, offset partially by an $11.8a $3.0 million decrease in land sale revenue. Operating income in our Southern region decreased $2.5increased $6.2 million from $7.2$8.7 million in the secondfirst quarter of 20162017 to $4.7$14.9 million during the quarter ended June 30, 2017.March 31, 2018. This decreaseincrease in operating income was the result of a $4.0$9.2 million improvement in our gross margin, partially offset by a $3.0 million increase in selling, general, and administrative expense partially offset by a $1.5 million improvement in our gross margin.expense. With respect to our homebuilding gross margin, our housing gross margin improved $2.7$9.1 million, due primarily to the 31%29% increase in the number of homes delivered noted above, partially offset by an $8.5 million charge for stucco-related repair costs in certain of our Florida communities during 2017's second quarter (as more fully discussed in Note 6). 2016's second quarter included a $2.8 million charge for such repairs.above. Our housing gross margin percentage declinedimproved from 16.2%18.1% in prior year’s secondfirst quarter to 13.9%18.7% in the secondfirst quarter of 2017. Exclusive of the stucco-related charges in both the second quarter of 2017 and 2016, our adjusted housing gross margin percentage improved 50 basis points from 18.2% to 18.7%2018, largely due to the mix of communities delivering homes and a more favorable product mix.mix, offset in part, by rising lot and construction costs. Our land sale gross margin declined $1.1improved slightly by $0.1 million as a result of more land sales in the secondfirst quarter of 20172018 compared to the same period in 2016.2017. We did not record any additional warranty charges for stucco-related repair costs in our Florida communities during the first quarter of 2018. With respect to this matter, during the first quarter of 2018, we identified 58 additional homes in need of repair and completed repairs on 69 homes, and, at March 31, 2018, we have 201 homes in various stages of repair.  Please see Note 6 to our financial statements for further information.
Selling, general and administrative expense increased $4.0$3.0 million from $16.2$17.9 million in the secondfirst quarter of 20162017 to $20.2$20.9 million in the secondfirst quarter of 2017 and increased2018 but declined as a percentage of revenue to 11.3%11.0% from 10.8%12.0% in the secondfirst quarter of 2016.2017. The increase in selling, general and administrative expense was attributable, in part, to a $2.6$2.8 million increase in selling expense due to (1) a $1.8$2.2 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and (2) a $0.8$0.6 million increase in non-variable selling expenses primarily related to costs associated with our sales offices and models as a result of our increased community count. The increase in selling, general and administrative expense was also attributable to a $1.4$0.2 million increase in general and administrative expense, which was primarily related to a $0.8 millionan increase in land related expenses, a $0.5 million increase related to start-up costs associated with our new Sarasota division, and a $0.1 million increase in compensation expense.expenses.


During the three months ended June 30, 2017,March 31, 2018, we experienced a 21%35% increase in new contracts in our Southern region, from 515590 in the second quarter of 2016 to 625 for the secondfirst quarter of 2017 to 797 for the first quarter of 2018, and a 16%38% increase in backlog from 819845 homes at June 30, 2016March 31, 2017 to 9501,164 homes at June 30, 2017.March 31, 2018. The increases in new contracts and backlog were primarily due to an increase in our average number of communities during the period, along with a modest improvement in demand inacross our FloridaSouthern markets. Average sales price in backlog decreased, however,increased to $347,000$365,000 at June 30,March 31, 2018 from $349,000 at March 31, 2017 from $352,000 at June 30, 2016 due to a change in product type and market mix. During the three months ended June 30, 2017,March 31, 2018, we opened ninetwelve communities in our Southern region compared to seveneleven during 2016's second2017's first quarter. Our monthly absorption rate in our Southern region declinedincreased to 3.0 per community in the first quarter of 2018 from 2.4 per community in the secondfirst quarter of 2017 from 2.5 per community in the second quarter of 2016.2017.
Mid-Atlantic Region. During the three month period ended June 30, 2017,March 31, 2018, homebuilding revenue in our Mid-Atlantic region increased $8.3decreased $23.1 million from $89.4$96.9 million in the secondfirst quarter of 20162017 to $97.7$73.8 million in the secondfirst quarter of 2017.2018. This 9% increase24% decrease in homebuilding revenue was the result of a 3% increase29% decrease in the number of homes delivered (8(70 units) andprimarily due to a 6%decrease in the average number of communities during the period compared to prior year, offset partially by a 3% increase in the average sales price of homes delivered ($22,00012,000 per home delivered). Operating income in our Mid-Atlantic region increased $2.0decreased $4.7 million, from $7.6$7.3 million in the secondfirst quarter of 20162017 to $9.6$2.6 million during the quarter ended June 30, 2017.March 31, 2018. This improvementdecline in operating income was primarily the result of a $1.9$5.9 million increasedecrease in our gross margin, as well asoffset, in part, by a $0.1$1.2 million


decrease in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $1.9declined $6.0 million, due to the 3% increase29% decrease in the number of homes delivered and the 6% increase in the average sales price of homes delivered noted above in addition to an improvementand a decline in housing gross margin percentage.percentage, partially attributable to timing of new community openings as well as increased competition in the region. Our housing gross margin percentage improved by 20declined 220 basis points from 19.2%17.3% in last year’s secondfirst quarter to 19.4%15.1% in the secondfirst quarter of 20172018 due primarily to the mix of homes delivered. Our land sale gross margin remained flatimproved slightly by $0.1 million during the secondfirst quarter of 20172018 compared to prior year.
Selling, general and administrative expense decreased $0.1$1.2 million from $9.2$9.3 million in the secondfirst quarter of 20162017 to $9.1$8.1 million in the secondfirst quarter of 2017 and declined2018 but increased as a percentage of revenue to 9.4%10.9% compared to 10.3%9.6% for the secondfirst quarter of 2016.2017. The decrease in selling, general and administrative expense was primarily due to a $1.0 million decrease in general and administrative expense, which was primarily related to a decrease in incentive compensation related expenses, offset partially by an increase in variable selling expenses primarily as a result of increases indecreased sales commissions produced by the higher average sales price of homes delivered and higherlower number of homes delivered. General and administrative expense decreased $0.2 million primarily related to a decrease in land related expenses.
During the three months ended June 30, 2017,March 31, 2018, we experienced a 27%21% decrease in new contracts in our Mid-Atlantic region, from 332308 in the secondfirst quarter of 20162017 to 244 for the secondfirst quarter of 2017,2018, and a 15%20% decrease in the number of homes in backlog from 508441 homes at June 30, 2016March 31, 2017 to 431352 homes at June 30, 2017.March 31, 2018. The decreases in new contracts and backlog were primarily due to a decrease in the average number of active communities during the period compared to the prior year, partly as a result of the timing of openingdelays in planned new communities latercommunity openings in the quarter in 2017.period compared to the prior year’s first quarter. Average sales price of homes in backlog increased, however, from $374,000$377,000 at June 30, 2016March 31, 2017 to $388,000$419,000 at June 30, 2017.March 31, 2018 primarily due to the mix of homes delivered. During the three months ended June 30, 2017,March 31, 2018, we opened three communitiesone community in our Mid-Atlantic region compared to not opening any new communitiestwo during the secondfirst quarter of 2016.2017. Our monthly absorption rate in our Mid-Atlantic region declined to 2.42.6 per community in the secondfirst quarter of 20172018 from 2.82.9 per community in the secondfirst quarter of 2016.2017.
Financial Services. Revenue from our mortgage and title operations increased $2.0$0.7 million (20%(5%) from $9.9$14.3 million in the secondfirst quarter of 20162017 to $11.9$15.0 million in the secondfirst quarter of 20172018, an all-time record, as a result of a 10%an 8% increase in the number of loan originations, from 761725 in the secondfirst quarter of 20162017 to 840781 in the secondfirst quarter of 2017,2018, and an increase in the volume of loans sold. Our average loan amount remained flat at $299,000increased slightly from $300,000 in both the quartersquarter ended June 30,March 31, 2017 and 2016.to $302,000 in the quarter ended March 31, 2018. We also sold a portion of our servicing portfolio during the first quarter of 2018 for a $0.7 million gain. We experienced higherlower margins on loans sold in the period than we experienced in prior year.due to increased competitive pressures.
We ended our secondfirst quarter of 20172018 with a $1.5$0.3 million increase in operating income compared to 2016's second2017's first quarter, which was primarily due to the increase in our revenue discussed above partially offset in part, by a $0.4 million increase in selling, general and administrative expense compared to the secondfirst quarter of 2016,2017 which was attributable primarily to an increase in compensation expense.
At June 30, 2017,March 31, 2018, M/I Financial provided financing services in all of our markets. markets, except Detroit, Michigan. M/I Financial expects to provide financing services in the Detroit, Michigan market by the end of the second quarter of 2018.
Approximately 80%79% of our homes delivered during the secondfirst quarter of 20172018 were financed through M/I Financial, compared to 83%80% in the same period in 2016.2017. Capture rate is influenced by financing availability and competition in the mortgage market, and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $1.2decreased $0.3 million, from $9.0$8.4 million for the secondfirst quarter of 20162017 to $10.2$8.1 million for the secondfirst quarter of 2017. The increase was primarily due to an increase in compensation expense related to our improved operating results.2018.


Interest Expense - Net.Acquisition and Integration Costs. Interest expense for the Company decreased $0.5 million from $4.3 million forDuring the three months ended June 30, 2016 to $3.8March 31, 2018, the Company spent $1.7 million for the three months ended June 30, 2017. This decrease was primarily the result of higher capitalized interestin acquisition and integration related costs related to our increased land development during the second quarteracquisition of 2017 comparedPinnacle Homes in Detroit, Michigan on March 1, 2018. These costs include, but are not limited to, prior year. Partially offsetting this impact was a slight increase in our weighted average borrowing rate from 5.68% in the second quarterlegal fees and expenses, travel and communication expenses, cost of 2016 to 5.70%appraisals, accounting fees and expenses, and miscellaneous expenses. As these costs are not eligible for second quarter of 2017 in addition to an increase in our weighted average borrowings from $616.2 million in 2016's second quarter to $649.0 million in 2017's second quarter. The increase in our weighted average borrowing rate and our weighted average borrowings primarily related to increased borrowingcapitalization as initial direct costs under our Credit Facility (as defined below) at June 30, 2017 compared to June 30, 2016.GAAP, such amounts are expensed as incurred.
Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures represent our portion of pre-tax earnings from our joint ownership and development agreements, joint ventures and other similar arrangements. During the three months ended June 30, 2017 and 2016,March 31, 2018, the Company earned $0.1 million and less than $0.1$0.3 million in equity in income from unconsolidated joint ventures.
Income Taxes. Our overall effective tax rate was 32.5% forventures compared to less than $0.1 million during the three months ended June 30, 2017 and 36.2% for the same period in 2016. The decline in the effective rate from the three months ended June 30, 2016 was primarily attributable to an increase in the estimated impact of annual tax benefits expected for the domestic production activities deduction which was limited in 2016


due to our then NOL federal carryforward position and the recognition of excess tax benefits from employee share-based payment transactions during the second quarter of 2017 per ASU 2016-09.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Midwest Region. During the first half of 2017, homebuilding revenue in our Midwest region increased $43.8 million, from $271.1 million in the first six months of 2016 to $314.9 million in the first six months ofMarch 31, 2017. This 16% increase in homebuilding revenue was the result of a 13% increase in the number of homes delivered (96 units) and a 3% increase in the average sales price of homes delivered ($10,000 per home delivered), offset partially by a $0.5 million decrease in land sale revenue. Operating income in our Midwest region increased $4.5 million, from $28.3 million during the first half of 2016 to $32.8 million during the six months ended June 30, 2017. The increase in operating income was primarily the result of a $10.4 million increase in our gross margin, offset, in part, by a $5.8 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $10.4 million, due to the 13% increase in the number of homes delivered and the 3% increase in the average sales price of homes delivered noted above. Our housing gross margin percentage improved 60 basis points from 19.4% in prior year's first half to 20.0% for the same period in 2017 primarily due to a change in product type and market mix. Our housing gross margin for 2016’s first half was unfavorably impacted by a $1.1 million charge for purchase accounting adjustments from our 2015 Minneapolis/St. Paul acquisition. Exclusive of this charge, our adjusted housing gross margin percentage improved 20 basis points from 19.8% in last year’s first half. Our land sale gross margin remained flat compared to the prior year.

Selling, general and administrative expense increased $5.8 million, from $24.4 million for the six months ended June 30, 2016 to $30.2 million for the six months ended June 30, 2017, and increased as a percentage of revenue to 9.6% compared to 9.0% for the same period in 2016. The increase in selling, general and administrative expense was attributable, in part, to a $3.9 million increase in selling expense due to (1) a $2.3 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and higher number of homes delivered, and (2) a $1.6 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models. The increase in selling, general and administrative expense was also attributable to a $1.9 million increase in general and administrative expense, which was primarily related to a $0.7 million increase in compensation expense, a $0.5 million increase in land-related expenses, a $0.2 million increase in architectural expenses, and $0.5 million increase in other miscellaneous expenses.
During the six months ended June 30, 2017, we experienced an 8% increase in new contracts in our Midwest region, from 1,002 in the six months ended June 30, 2016 to 1,087 in the first half of 2017, and an 8% increase in backlog from 954 homes at June 30, 2016 to 1,028 homes at June 30, 2017. The increases in new contracts and backlog were primarily due to improving demand, offset partially by a lower average number of communities during the period. Average sales price in backlog increased to $401,000 at June 30, 2017 compared to $382,000 at June 30, 2016 which was primarily due to higher-end product offerings in 2017’s first half compared to those products offered during the same period last year. During the six months ended June 30, 2017, we opened 17 new communities in our Midwest region compared to four during 2016's first half. Our monthly absorption rate in our Midwest region increased to 2.9 per community in the first half of 2017 from 2.4 per community in the first half of 2016.
Southern Region.During the six months ended June 30, 2017, homebuilding revenue in our Southern region increased $56.4 million, from $271.7 million in the first half of 2016 to $328.1 million in the first half of 2017. This 21% increase in homebuilding revenue was the result of a 26% increase in the number of homes delivered (191 units) and a 1% increase in the average sales price of homes delivered ($3,000 per home delivered), partially offset by a $11.5 million decrease in land sale revenue. Operating income in our Southern region decreased $0.2 million from $13.6 million in the first half of 2016 to $13.4 million during the six months ended June 30, 2017. This decrease in operating income was the result of a $7.5 million improvement in our gross margin offset by a $7.8 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $8.9 million, due primarily to the 26% increase in the number of homes delivered and the 1% increase in the average sales price of homes delivered noted above, partially offset by an $8.5 million charge for stucco-related repair costs in certain of our Florida communities during 2017's first half (as more fully discussed in Note 6). 2016's first half included charges of $4.9 million for such repairs. Our housing gross margin percentage declined from 16.5% in prior year's first half to 15.8% for the same period in 2016. Exclusive of the stucco-related charges in both the first half of 2017 and 2016, our adjusted housing gross margin percentage remained flat at 18.4% in both periods largely due to the mix of communities delivering homes and higher construction and lot costs in 2017 when compared to the first half of 2016. Our land sale gross margin declined $1.4 million as a result of fewer strategic land sales in the first half of 2017 compared to the same period in 2016.
Selling, general and administrative expense increased $7.8 million from $30.3 million in the first half of 2016 to $38.1 million in the first half of 2017 and increased as a percentage of revenue to 11.6% compared to 11.2% for the first half of 2016. The increase in selling, general and administrative expense was attributable, in part, to a $4.9 million increase in selling expense due to (1) a $2.8 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number


of homes delivered and higher average sales price of homes delivered, and (2) a $2.1 million increase in non-variable selling expenses primarily related to costs associated with our sales offices and models as a result of our increased community count. The increase in selling, general and administrative expense was also attributable to a $2.9 million increase in general and administrative expense, which was primarily related to a $1.4 million increase in land related expenses, a $1.1 million increase in compensation related expense, $0.5 million of which related to our new Sarasota division, and a $0.4 million increase related to other costs associated with our new Sarasota division.
During the six months ended June 30, 2017, we experienced a 21% increase in new contracts in our Southern region, from 1,007 in the six months ended June 30, 2016 to 1,215 in the first half of 2017, and a 16% increase in backlog from 819 homes at June 30, 2016 to 950 homes at June 30, 2017. The increases in new contracts and backlog were primarily due to an increase in our average number of communities during the period, along with a modest improvement in demand in our Florida markets as well as continued growth in our Texas operations in the first half of 2017 compared to the first half of 2016. Average sales price in backlog decreased, however, to $347,000 at June 30, 2017 from $352,000 at June 30, 2016 due to a change in product type and market mix. During the six months ended June 30, 2017, we opened 20 communities in our Southern region compared to 13 during 2016's first half. Our monthly absorption rate in our Southern region declined to 2.4 per community in the first half of 2017 from 2.5 per community in the first half of 2016.
Mid-Atlantic Region. During the six months ended June 30, 2017, homebuilding revenue in our Mid-Atlantic region increased $31.7 million from $162.9 million in the first half of 2016 to $194.6 million in 2017's first half. This 19% increase in homebuilding revenue was the result of a 9% increase in the average sales price of homes delivered ($33,000 per home delivered) and a 10% increase in the number of homes delivered (44 units). Operating income in our Mid-Atlantic region increased $5.3 million, from $11.5 million in 2016's first half to $16.8 million during the first six months of 2017. This increase in operating income was primarily the result of a $6.2 million increase in our gross margin, partially offset by a $0.9 million increase in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $6.3 million, due to the 9% increase in the average sales price of homes delivered and the 10% increase in the number of homes delivered noted above. Our housing gross margin percentage improved by 30 basis points from 18.1% in prior year's first half to 18.4% in 2017's first half due to the mix of homes delivered. Our land sale gross margin declined $0.1 million in the first half of 2017 compared to the same period in 2016 due to lower profits on land sales in the current year compared to the prior year.
Selling, general and administrative expense increased $0.9 million from $17.6 million in the first half of 2016 to $18.5 million in 2017's first half but declined as a percentage of revenue to 9.5% compared to 10.8% for 2016's first half. The increase in selling, general and administrative expense was primarily attributable to an increase in selling expense primarily due to an increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and higher number of homes delivered.
During the six-month period ended June 30, 2017, we experienced a 16% decrease in new contracts in our Mid-Atlantic region, from 659 in the first half of 2016 to 552 in the first six months of 2017, and a 15% decrease in the number of homes in backlog from 508 homes at June 30, 2016 to 431 homes at June 30, 2017. The decreases in new contracts and backlog were primarily due to a decrease in the average number of active communities during the period compared to the prior year, partly as a result of the timing of opening new communities later in the six-month period in 2017. Average sales price of homes in backlog increased from $374,000 at June 30, 2016 to $388,000 at June 30, 2017. During the first half of 2017, we opened five communities in our Mid-Atlantic region compared to six during 2016's first half. Our monthly absorption rate in our Mid-Atlantic region decreased to 2.6 per community in the first six months of 2017 from 2.8 per community in the first half of 2016.
Financial Services. Revenue from our mortgage and title operations increased $6.2 million (31%) from $20.0 million in the first half of 2016 to $26.2 million in the first half of 2017 as a result of a 15% increase in the number of loan originations, from 1,365 in the first half of 2016 to 1,565 in the first half of 2017, and a 1% increase in the average loan amount from $296,000 in the six months ended June 30, 2016 to $300,000 in the six months ended June 30, 2017. We also experienced an increase in the volume of loans sold, a gain from the sale of a portion of our servicing portfolio during the first quarter of 2017, and higher margins on loans sold in the period than we experienced in prior year.

Our financial service operations ended the first half of 2017 with a $4.5 million increase in operating income compared to the first half of 2016, which was primarily due to the increase in our revenue discussed above, offset, in part, by a $1.7 million increase in selling, general and administrative expense compared to 2016's first half, which was primarily attributable to a $1.0 million increase in compensation expense, a $0.4 million increase in computer costs related to our investment in new information systems, and a $0.3 million increase in other miscellaneous expenses.
At June 30, 2017, M/I Financial provided financing services in all of our markets. Approximately 80% of our homes delivered during the first half of 2017 were financed through M/I Financial, compared to 82% in the same period in 2016. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.


Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $2.4 million, from $16.2 million for the six months ended June 30, 2016 to $18.6 million for the six months ended June 30, 2017. The increase was primarily due to a $1.8 million increase in compensation expense, a $0.2 million increase related to costs associated with new information systems, and a $0.4 million increase in other miscellaneous expenses.
Interest Expense - Net. Interest expense for the Company decreased $0.4increased $0.6 million from $9.6$5.3 million infor the sixthree months ended June 30, 2016March 31, 2017 to $9.2$5.9 million infor the sixthree months ended June 30, 2017.March 31, 2018. This decreaseincrease was primarily the result of a decline in our weighted average borrowing rate from 5.79% in the first half of 2016 to 5.73% for 2017's first half which was primarily due to the lower interest rate payable on our Credit Facility borrowings in addition to higher capitalized interest related to our increased land development during the first half of 2017 compared to prior year. Partially offsetting this decrease was an increase in our weighted average borrowings from $612.5$632.5 million in 2017's first quarter to $754.8 million in 2018's first quarter, in addition to an increase in our weighted average borrowing rate from 5.76% in the first halfquarter of 20162017 to $640.8 million in the6.22% for first halfquarter of 2017.2018. The increase in our weighted average borrowings and our weighted average borrowing rate primarily related to increasedthe issuance of our $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) during the third quarter of 2017, partially offset by the maturity of all of our 2017 Convertible Senior Subordinated Notes in September 2017 and all of our 2018 Convertible Senior Subordinated Notes in March 2018, and by a decrease in borrowings under our Credit Facility (as defined below) on a weighted average basis during 2017'sthe first halfquarter of 2018 compared to 2016's first half.
Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures represent our portion of pre-tax earnings from our joint ownership and development agreements, joint ventures and other similar arrangements. During the six months ended June 30, 2017 and 2016, the Company earned $0.1 million and $0.4 millionsame period in equity in income from unconsolidated joint ventures, respectively.2017.
Income Taxes. Our overall effective tax rate was 34.3%24.3% for the sixthree months ended June 30, 2017March 31, 2018 and 36.7%35.9% for the same period in 2016.2017. The decline in the effective rate decline forfrom the sixthree months ended June 30,March 31, 2017 was primarily attributable to an increasethe decrease in the estimated impactcorporate income tax rate from 35% to 21% offset by the repeal of annual tax benefits expected for the domestic production activitiesactivity deduction, both of which was limited in 2016 dueare the result of the enactment of the Tax Act during the fourth quarter of 2017 (please see Note 10 to our then NOL federal carryforward position and the recognition of excess tax benefits from employee share-based payment transactions during the first half of 2017 per ASU 2016-09.financial statements for more information).
Segment Non-GAAP Financial Measures. This report contains information about our adjusted housing gross margin, which constitutes a non-GAAP financial measure. Because adjusted housing gross margin is not calculated in accordance with GAAP, this financial measure may not be completely comparable to similarly-titled measures used by other companies in the homebuilding industry and, therefore, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted housing gross margin for our Midwest and Southern regionsregion is calculated as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2017 2016 2017 20162018 2017
          
Midwest region:          
Housing revenue$168,305
 $152,578
 $314,101
 $269,823
$158,495
 $145,796
Housing cost of sales134,535
 121,243
 251,368
 217,469
130,909
 116,833
          
Housing gross margin33,770
 31,335
 62,733
 52,354
27,586
 28,963
Add: Purchase accounting adjustments (a)

 381
 
 1,081
896
 
          
Adjusted housing gross margin$33,770
 $31,716
 $62,733
 $53,435
$28,482
 $28,963
          
Housing gross margin percentage20.1% 20.5% 20.0% 19.4%17.4% 19.9%
Adjusted housing gross margin percentage20.1% 20.8% 20.0% 19.8%18.0% 19.9%
          
Southern region:       
Housing revenue$178,779
 $137,173
 $324,860
 $256,867
Housing cost of sales153,914
 114,963
 273,492
 214,423
       
Housing gross margin24,865
 22,210
 51,368
 42,444
Add: Stucco-related charges (b)
8,500
 2,754
 8,500
 4,909
       
Adjusted housing gross margin$33,365
 $24,964
 $59,868
 $47,353
       
Housing gross margin percentage13.9% 16.2% 15.8% 16.5%
Adjusted housing gross margin percentage18.7% 18.2% 18.4% 18.4%
(a)Represents purchase accounting adjustments from our 2015 Minneapolis/St. Paul acquisition.acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(b)
Represents warranty charges for stucco-related repair costs in certain of our Florida communities taken during the three and six months ended June 30, 2017 and 2016. With respect to this matter, during the quarter ended June 30, 2017, we identified 243 additional homes in need of repair and completed repairs on 159 homes, and, at June 30, 2017, we have 359 homes in various stages of repair.  See Note 6 for further information.


LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At June 30, 2017,March 31, 2018, we had $29.9$53.6 million of cash, cash equivalents and restricted cash, with $29.1$45.9 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $4.3$104.8 million decrease in unrestricted cash and cash equivalents from December 31, 2016.2017. Our principal uses of cash for the sixthree months ended June 30, 2017March 31, 2018 were investment in land and land development, the acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018 (please see Note 7 to our financial statements for more information), construction of homes, mortgage loan originations, investment in joint ventures, operating


expenses, and short-term working capital and debt service requirements, including the repayment of amounts outstanding under our credit facilities.facilities and the repayment of approximately $65.9 million in aggregate principal amount of our 2018 Convertible Senior Subordinated Notes. In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans and the sale of mortgage servicing rights, as well as excess cash balances, borrowings under our credit facilities, and other sources of liquidity.
We are actively acquiring and developing lots in our markets to replenish and grow our lot supply and active community count. We expect to continue to expand our business based on the anticipated level of demand for new homes in our markets. Accordingly, we expect our cash outlays for land purchases, land development, home construction and operating expenses will continue to exceed our cash generated by operations during some monthly and quarterly periods in 2018, and we expect to continue to utilize our Credit Facility (as defined below) in 2018.
During the first halfquarter of 2017,2018, we delivered 2,2491,122 homes, started 2,8181,351 homes, and spent $184.6$85.0 million on land purchases and $83.3$41.7 million on land development. Based upon our business activity levels, market conditions, and opportunities for land in our markets, we currently estimate that we will spend approximately $500$550 million to $550$600 million on land purchases and land development during 2017,2018, including the $267.9$126.7 million spent during the first sixthree months of 2017.2018 and excluding our Detroit acquisition.
We also continue to enter into land option agreements, taking into consideration current and projected market conditions, to secure land for the construction of homes in the future. Pursuant to thesesuch land option agreements, as of June 30, 2017March 31, 2018, we had a total of 17,900 lots under contract, with an aggregate purchase agreementsprice of approximately $757.7 million to acquire $654.7 million of land and lotsbe acquired during the remainder of 20172018 through 2028.
Land transactions are subject to a number of factors, including our financial condition and market conditions, as well as satisfaction of various conditions related to specific properties. We will continue to monitor market conditions and our ongoing pace of home deliveries and adjust our land spending accordingly. The planned increase in our land spending in 2018 compared to 2017 is driven primarily by the growth of our business.
Operating Cash Flow Activities. During the six-monththree-month period ended June 30, 2017,March 31, 2018, we used $39.3$31.2 million of cash in operating activities, compared to $40.9using $23.3 million of cash provided byfor operating activities during the first halfquarter of 2016.2017. The cash used in operating activities in the first halfquarter of 20172018 was primarily a result of a $146.2$70.1 million increase in inventory, and a decrease in accrued compensation of $13.4$22.5 million and and a decrease in accounts payable and other assets totaling $16.1 million, offset partially by net income of $33.9$18.1 million, along with $66.4$61.6 million of proceeds from the sale of mortgage loans net of mortgage loan originations and an increase in accounts payable, other assets and customer deposits totaling $19.3 million.originations. The $40.9$23.3 million of cash provided byused in operating activities in the first halfquarter of 20162017 was primarily a result of a $54.8 million increase in inventory and a decrease in accounts payable, accrued compensation and other liabilities totaling $34.0 million, offset partially by net income and deferred tax expense totaling $38.9$16.9 million, along with $28.8$45.3 million of proceeds from the sale of mortgage loans net of mortgage loan originations and an increase in accounts payable of $18.8 million, offset partially by a $46.9 million increase in inventory.originations.

Investing Cash Flow Activities. During the first halfquarter of 2017,2018, we generated $1.0used $97.7 million of cash fromin investing activities, compared to $16.8generating $3.2 million of cash used in investing activities during the first halfquarter of 2016.2017. This decreaseincrease in cash used was primarily due to our purchaseacquisition of an airplanePinnacle Homes, a privately held homebuilder in Detroit, Michigan, during the first quarter of 2016, in addition to proceeds received related to the sale of mortgage servicing rights of $7.6 million that occurred during the first half of 2017.2018 for approximately $100.8 million.

Financing Cash Flow Activities. During the sixthree months ended June 30, 2017,March 31, 2018, we generated $33.9$30.7 million of cash from financing activities, compared to using $7.2generating $24.5 million of cash during the first sixthree months of 2016.2017. The $41.1$6.2 million increase in cash generated by financing activities was primarily due to increased net borrowings under our Credit Facility (as defined below) and our M/I Financial credit facilities during the period.period, offset, in part, by the repayment of that portion of our 2018 Convertible Senior Subordinated Notes that were not converted into common shares by the holders thereof.
At June 30, 2017March 31, 2018 and December 31, 2016,2017, our ratio of homebuilding debt to capital was 46%48% and 43%46%, respectively, calculated as the carrying value of our outstanding homebuilding debt divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. TheThis increase was due to higher debt levels compared to December 31, 2016 was due to a higher amount of homebuilding debt outstanding2017, offset partially offset by an increase in shareholders’ equity at June 30, 2017.March 31, 2018. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders.
We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the


next twelve months. In addition, we routinely monitor current operational and debt service requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated


sales volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot purchases, debt maturity dates, and other factors. If we seek such additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs.
The Company is a party to three primary credit agreements: (1) a $475 million unsecured revolving credit facility, dated July 18, 2013, as amended, with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly owned homebuilding subsidiaries;subsidiaries (the “Credit Facility”); (2) a $125 million (increasedsecured mortgage warehousing agreement (which increases to $150 million during certain periods of expected increases in the volume of mortgage originations, specifically from September 25, 2017 to October 16, 2017 and from December 15, 2017 to February 2, 2018) secured mortgage warehousing agreement, as amended onperiods), dated June 23, 2017, as amended, with M/I Financial as borrower (the “MIF Mortgage Warehousing Agreement”); and (3) a $35 million mortgage repurchase agreement dated November 3, 2015,(which increases to $50 million during certain periods), as most recently amended and restated on May 16,October 30, 2017, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”). For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the “Credit Facility” refers to the unsecured revolving credit facility dated July 18, 2013, as amended by a First Amendment dated October 20, 2014, and the “Amended Credit Facility” refers to the Credit Facility, as further amended by a Second Amendment dated July 18, 2017.
Included in the table below is a summary of our available sources of cash from the Credit Facility, the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility as of June 30, 2017March 31, 2018:
(In thousands)
Expiration
Date
Outstanding
Balance
Available
Amount
Expiration
Date
Outstanding
Balance
Available
Amount
Notes payable – homebuilding (a)
10/20/2018$138,000
$220,673
7/18/2021$162,300
$268,355
Notes payable – financial services (b)
(b)$89,518
$907
(b)$102,711
$3,881
(a)The available amount under the Credit Facility wasis computed in accordance with athe borrowing base calculation under the Credit Facility, which was calculated by applyingapplies various advance rates for different categories of inventory and totaled $646.8$539.0 million of availability for additional senior debt at June 30, 2017.March 31, 2018. As a result, the full $400$475 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were $138.0$162.3 million borrowings outstanding and $41.3$44.3 million of letters of credit outstanding at June 30, 2017,March 31, 2018, leaving $220.7$268.4 million available. The Amended Credit Facility has an expiration date of July 18, 2021.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral.  The maximum aggregate commitment amount of M/I Financial's warehousingthese agreements as of June 30, 2017March 31, 2018 was $160 million. The MIF Mortgage Warehousing Agreement has an expiration date of June 22, 2018 and the MIF Mortgage Repurchase Facility has an expiration date of October 30, 2017.29, 2018. M/I Financial expects to enter into an amendment to the MIF Mortgage Warehousing Agreement prior to its expiration that would extend its term for an additional year, but M/I Financial can provide no assurances that it will be able to obtain such an extension.
Notes Payable - Homebuilding.  

Homebuilding Credit Facility. The Amended Credit Facility provides for an aggregate commitment amount of $475 million, including a $125 million sub-facility for letters of credit. In addition, the Amended Credit Facility has an accordion feature under which the Company may increase the aggregate commitment amount up to $500 million, subject to certain conditions, including obtaining additional commitments from existing or new lenders. The Amended Credit Facility matures on July 18, 2021. Interest on amounts borrowed under the Amended 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.

Borrowings under the Amended Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Amended Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $465.2$492.8 million (subject to increase over time based on earnings and proceeds from equity offerings after March 31, 2017)offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Amended Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures. At closing of the Amended Credit Facility on July 18, 2017, we were in compliance with all closing conditions including all covenants. For more information regarding the terms of the Amended Credit Facility, refer to Note 12 of our Unaudited Condensed Consolidated Financial Statements.
The Company’s obligations under the Amended 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 1112) to our financial statements), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our 2025 Senior Notes and our $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Senior Notes”), our $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the.


“2017 Convertible Senior Subordinated Notes”), and our $86.3 million aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”).
As of June 30, 2017,March 31, 2018, the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of March 31, 2018:
Financial Covenant Covenant Requirement Actual
   (Dollars in millions)
Consolidated Tangible Net Worth$492.8
 $735.4
Leverage Ratio0.60
 0.49
Interest Coverage Ratio1.5 to 1.0
 4.8 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures$220.6
 $7.7
Unsold Housing Units and Model Homes1,894
 982

Homebuilding Letter of Credit Facility. As of June 30, 2017,March 31, 2018, the Company was a party to onea secured credit agreement for the issuance of letters of credit outside of the Credit Facility (the “Letter of Credit Facility”), with a maturity date of September 30, 2017,2018, which allows for the issuance of letters of credit up to a total of $2.0$1.0 million. Under the terms of the Letter of Credit Facility, letters of credit can be issued for maximum terms ranging from one year up to three years. The Letter of Credit Facility contains a cash collateral requirement of 101%. Upon maturity or the earlier termination of the Letter of Credit Facility, letters of credit that have been issued under the Letter of Credit Facility remain outstanding with cash collateral in place through the expiration date.

As of June 30, 2017,March 31, 2018, there was a total of $0.6$0.3 million of letters of credit issued under the Letter of Credit Facility, which was collateralized with $0.6$0.3 million of restricted cash.

Through the acquisition of Pinnacle Homes during the first quarter of 2018, the Company also assumed the obligation for $6.6 million of outstanding letters of credit under a separate facility, which was collateralized with $6.6 million of restricted cash.

Notes Payable - Financial Services.

MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides a maximum borrowing availability of $125 million. Inmillion, which increased to $150 million from September 25, 2017 to October 16, 2017 and again from December 15, 2017 to February 2, 2018. The MIF Mortgage Warehousing Agreement expires on June 2017, the Company entered into an amendment to22, 2018. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement which, among other things, extended the expiration date to June 22, 2018 and adjusted the interest rate tois payable at a per annum rate equal to the greater of (1) the floating LIBOR rate plus a spread of 237.5 basis points and (2) 2.75%. The LIBOR rate spread had previously been 250 basis points. The amendment also allows the maximum borrowing availability to be increased to $150 million during certain periods of expected increases
As is typical for similar credit facilities in the volumemortgage origination industry, at closing, the expiration of mortgage originations, specifically from September 25, 2017the MIF Mortgage Warehousing Agreement was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to October 16, 2017 and from December 15, 2017extend the MIF Mortgage Warehousing Agreement on or prior to February 2, 2018.the current expiration date of June 22, 2018, but we cannot provide any assurance that we will be able to obtain such an extension.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement, although M/I Financial may, at its election, designate from time to time any one or more of M/I Financial’s subsidiaries as guarantors.
As of June 30, 2017March 31, 2018, there was $60.1$77.7 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants.covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Warehousing Agreement, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of June 30, 2017March 31, 2018:
Financial Covenant Covenant Requirement Actual Covenant Requirement Actual
 (Dollars in millions) (Dollars in millions)
Leverage Ratio10.0 to 1.0
 4.1 to 1.0
10.0 to 1.0
 4.4 to 1.0
Liquidity$6.25
 $20.9
$6.25
 $18.2
Adjusted Net Income>$0.0
 $12.5
>$0.0
 $13.3
Tangible Net Worth$12.5
 $24.4
$12.5
 $25.9
MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility. In May 2017, theThe MIF Repurchase Facility was amended to increase theprovides for


a maximum borrowing availability from $15 million toof $35 million,. which increased to $50 million from November 15, 2017 through February 1, 2018. The MIF Mortgage Repurchase Facility expires on October 30, 2017.29, 2018. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floating LIBOR rate plus 250 or 275 basis points depending on the loan type. The covenants in the MIF Mortgage Repurchase Facility are substantially similar to the covenants in the MIF Mortgage Warehousing Agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings, which are substantially similar to the restrictions in the MIF Mortgage Warehousing Agreement. There are currently no guarantors of the MIF Mortgage Repurchase Facility. As of June 30, 2017March 31, 2018, there was $29.4$25.0 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all financial covenants as of June 30, 2017March 31, 2018.

Senior Notes.

5.625% Senior Notes. In August 2017, the Company issued $250 million aggregate principal amount of 5.625% Senior Notes due 2025. The 2025 Senior Notes contain certain covenants, as more fully described and Convertibledefined in the indenture governing the 2025 Senior SubordinatedNotes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes. As of March 31, 2018, the Company was in compliance with all terms, conditions, and covenants under the indenture. Please see Note 8 to our financial statements for more information regarding the 2025 Senior Notes.

6.75% Senior Notes. In December 2015, the Company issued $300 million aggregate principal amount of 6.75% Senior Notes due 2021. The 2021 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2021 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 2021 Senior Notes. As of June 30, 2017,March 31, 2018, the Company was in compliance with all terms, conditions, and covenants under the indenture. SeePlease see Note 78 to our financial statements for more information regarding the 2021 Senior Notes.

3.0% Convertible Senior Subordinated Notes. In March 2013, the Company issued $86.3 million aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018. The conversion rate initially equals 30.9478 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $32.31 per common share, which equates to approximately 2.7 million common shares. The 2018 Convertible Senior Subordinated Notes mature on March 1, 2018.  We will consider various alternatives for refinancing the 2018 Convertible Senior Subordinated Notes on or prior to their maturity date, including the issuance of debt and/or equity securities and other transactions and sources of capital. The timing and nature of such transactions, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.  To the extent that any of the 2018 Convertible Senior Subordinated Notes remain outstanding at maturity and are not converted into our common shares, we expect to pay the principal amount of such outstanding notes (plus any accrued and unpaid interest that is due and payable) on the maturity date in accordance with the terms of the indenture from amounts available under our Amended Credit Facility, the proceeds of any issuance of our debt and/or equity securities and/or other sources of capital. See Note 7 for more information regarding the 2018 Convertible Senior Subordinated Notes.

3.25% Convertible Senior Subordinated Notes. In September 2012, the Company issued $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017. The conversion rate initially equals 42.0159 shares per $1,000 of principal amount. This corresponds to an initial conversion price of approximately $23.80 per common share which equates to approximately 2.4 million common shares. The 2017 Convertible Senior Subordinated Notes mature on September 15, 2017. Because the current trading price of our common shares is above the conversion price, we currently expect that the holders of the 2017 Convertible Senior Subordinated Notes will convert them into common shares. However, to the extent that any of the 2017 Convertible Senior Subordinated Notes remain outstanding at maturity and are not converted into our common shares, we expect to pay the principal amount of such outstanding notes (plus any accrued and unpaid interest that is due and payable) on the maturity date in accordance with the terms of the indenture from amounts available under our Amended Credit Facility, the proceeds of any issuance of our debt and/or equity securities and/or other sources of capital. See Note 7 for more information regarding the 2017 Convertible Senior Subordinated Notes.

Weighted Average Borrowings. For the three months ended June 30,March 31, 2018 and 2017 and 2016, our weighted average borrowings outstanding were $649.0$754.8 million and $616.2$632.5 million, respectively, with a weighted average interest rate of 5.70%6.22% and 5.68%5.76%, respectively. The increase in our weighted average borrowings related to an increase related to the issuance of our $250.0 million aggregate principal amount of 2025 Senior Notes during the third quarter of 2017, partially offset by the maturity of all of our 2017 Convertible Senior Subordinated Notes in September 2017 and all of our 2018 Convertible Senior Subordinated Notes in March 2018, and by a decrease in borrowings under our Credit Facility (as defined below) on a weighted average basis during the first quarter of 2018 compared to the same period in 2017. Our weighted average interest rate increased as a result of the issuance of the 2025 Senior Notes in the third quarter of 2017, which have a higher interest rate than the 3.0% rate on the 2018 Convertible Senior Subordinated Notes and the 3.25% rate on the 2017 Convertible Senior Subordinated Notes, which were both outstanding during prior year’s first quarter.

At March 31, 2018, we had $162.3 million borrowings outstanding under the Credit Facility, duringan increase from having no outstanding borrowings at December 31, 2017. During the secondfirst quarter of 2017 compared to the second quarter of 2016.

At June 30, 2017, there was $138.0 million outstanding under2018, we used the Credit Facility.Facility to fund our acquisition of Pinnacle Homes, a privately-held homebuilder in Detroit, Michigan, and repay that portion of our 2018 Convertible Senior Subordinated Notes that were not converted into common shares, in addition to investment in land and land development, construction of homes, mortgage loan originations, operating expenses, and working capital requirements. During the sixthree months ended June 30, 2017,March 31, 2018, the average daily amount outstanding under the Credit Facility was $122.4$67.9 million and the maximum amount outstanding under the Credit Facility was $170.6$210.0 million. Based on our current anticipated spending on home construction, land acquisition and development in 2017,2018, offset by expected cash receipts from home deliveries, we expect to continue to borrow under the Amended Credit Facility during 2017,2018, with an estimated peak amount outstanding not expected to exceed $250$275 million. The actual amount borrowed during 20172018 (and the estimated peak amount outstanding) and related timing are subject to numerous factors, including the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, cash receipts from home deliveries, other cash receipts and payments, any capital markets transactions or other additional financings by the Company, and any repayments or redemptions of outstanding debt.debt and any other extraordinary events or transactions.  The Company may experience significant variation in cash and Credit Facility balances from week to week due to the timing of such receipts and payments.


There were $41.3$44.3 million of letters of credit issued and outstanding under the Credit Facility at June 30, 2017.March 31, 2018. During the sixthree months ended June 30, 2017,March 31, 2018, the average daily amount of letters of credit outstanding under the Credit Facility was $37.2$45.8 million and the maximum amount of letters of credit outstanding under the Credit Facility was $41.8$49.0 million.



At June 30, 2017,March 31, 2018, M/I Financial had $60.1$77.7 million outstanding under the MIF Mortgage Warehousing Agreement.  During the sixthree months ended June 30, 2017,March 31, 2018, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $58.8$48.8 million and the maximum amount outstanding was $120.1$128.1 million, which occurred during January, while the “seasonal increase”temporary increase provision was in effect and the maximum borrowing availability was $150.0 million.

At June 30, 2017,March 31, 2018, M/I Financial had $29.4$25.0 million outstanding under the MIF Mortgage Repurchase Facility.  During the sixthree months ended June 30, 2017,March 31, 2018, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $10.8$21.3 million and the maximum amount outstanding was $33.2$40.1 million, which occurred during January, while the “seasonal increase”temporary increase provision was in effect and the maximum borrowing availability was $35.0$50.0 million.
Preferred Shares. At June 30, 2017, we had 2,000,000 depositary shares, each representing 1/1000th of a Series A Preferred Share, or 2,000 Series A Preferred Shares in the aggregate, outstanding. The Series A Preferred Shares have a liquidation preference equal to $25 per depositary share (plus an amount equal to all accrued and unpaid dividends (whether or not earned or declared) for the then current quarterly dividend period accrued to but excluding the date of final distribution). Dividends on the Series A Preferred Shares are non-cumulative and, if declared by us, are paid at an annual rate of 9.75%. Dividends are payable quarterly in arrears, if declared by us, on March 15, June 15, September 15 and December 15. If there is a change of control of the Company and if the Company’s corporate credit rating is withdrawn or downgraded to a certain level (together constituting a “change of control event”), the dividends on the Series A Preferred Shares will increase to 10.75% per year. We may redeem the Series A Preferred Shares in whole or in part (provided, that any redemption that would reduce the aggregate liquidation preference of the Series A Preferred Shares below $25 million in the aggregate would be restricted to a redemption in whole only) at any time or from time to time at a cash redemption price equal to $25 per depositary share (plus an amount equal to all accrued and unpaid dividends (whether or not earned or declared) for the then current quarterly dividend period accrued to but excluding the redemption date). Holders of the Series A Preferred Shares have no right to require redemption of the Series A Preferred Shares. The Series A Preferred Shares have no stated maturity, are not subject to any sinking fund provisions, are not convertible into any other securities, and will remain outstanding indefinitely unless redeemed by us. Holders of the Series A Preferred Shares have no voting rights, except with respect to those specified matters set forth in the Company’s Amended and Restated Articles of Incorporation or as otherwise required by applicable Ohio law, and no preemptive rights. The outstanding depositary shares are listed on the New York Stock Exchange under the trading symbol “MHO-PrA.” There is no separate public trading market for the Series A Preferred Shares except as represented by the depositary shares.
The indenture governing our 2021 Senior Notes limits our ability to pay dividends on, and repurchase, our common shares and Series A Preferred Shares to the amount of the positive balance in our “restricted payments basket,” as defined in the indenture. The restricted payments basket was $154.7 million at June 30, 2017. We are permitted by the indenture to pay dividends on, and repurchase, our common shares and Series A Preferred Shares to the extent of such positive balance in our restricted payments basket. We declared and paid a quarterly dividend of $609.375 per share on our Series A Preferred Shares in both the second quarter of 2017 and 2016 for $1.2 million and have paid aggregate dividend payments of $2.4 million for the six months ended June 30, 2017 and 2016. The determination to pay future dividends on, and make future repurchases of, our common shares and Series A Preferred 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 the terms of our Series A Preferred Shares, and other factors deemed relevant by our board of directors.
Universal Shelf Registration. In October 2016, the Company filed a $400 million universal shelf registration statement with the SEC, which registration statement became effective on November 9, 2016 and will expire in November 2019. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.

CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations appearing in the Contractual Obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, except for the Second Amendment to the Credit Facility entered into on July 18, 2017, describedmaturity of our $86.3 million in aggregate principal amount of 2018 Convertible Senior Subordinated Notes, as further discussed above in Note 128 ofto our Unaudited Condensed Consolidated Financial Statementsfinancial statements and the “Liquidityin our Liquidity and Capital Resources” section and the renewal of our general liability insurance coverage as described above in Note 6 of our Unaudited Condensed Consolidated Financial Statements and the “Critical Accounting Policies”Resources section.



OFF-BALANCE SHEET ARRANGEMENTS
Notes 3, 5 and 6 to our financial statements discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated.
Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. Our use of these arrangements is for the purpose of securing the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company.  Additionally, in the ordinary course of its business, our financial services operations issueM/I Financial issues guarantees and indemnities relating to the sale of loans to third parties.
Land Option Agreements.  In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.  In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are VIEs and, if so, whether we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires a company to consolidate a VIE if the company is determined to be the primary beneficiary. In cases where we are the primary beneficiary, even though we do not have title to such land, we are required to consolidate these purchase/option agreements and reflect such assets and liabilities as Consolidated Inventory not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both June 30, 2017March 31, 2018 and December 31, 2016,2017, we have concluded that we were not the primary beneficiary of any VIEs from which we are purchasing under land option or purchase agreements.
At June 30, 2017March 31, 2018, “Consolidated Inventory Not Owned” was $12.3$18.2 million. At June 30, 2017,March 31, 2018, the corresponding liability of $12.3$18.2 million has been classified as Obligation for Consolidated Inventory Not Owned on our Unaudited Condensed Consolidated Balance Sheets.



Other than the Consolidated Inventory Not Owned balance, the Company currently believes that its maximum exposure as of June 30, 2017March 31, 2018 related to our land option agreements is equal to the amount of the Company’s outstanding deposits and prepaid acquisition costs, which totaled $48.2$54.2 million, including cash deposits of $29.9$36.2 million, prepaid acquisition costs of $5.4$6.7 million, letters of credit of $7.7$7.0 million and $5.2$4.3 million of other non-cash deposits.

Letters of Credit and Completion Bonds.  The Company provides standby letters of credit and completion bonds for development work in progress, deposits on land and lot purchase agreements and miscellaneous deposits.  As of June 30, 2017,March 31, 2018, the Company had outstanding $168.6$179.9 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 2024.  Included in this total are: (1) $119.1$121.0 million of performance and maintenance bonds and $32.8$43.5 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $9.2$7.7 million of financial letters of credit; and (3) $7.5$7.7 million of financial bonds.  The development agreements under which we are required to provide completion bonds or letters of credit are generally not subject to a required completion date and only require that the improvements are in place in phases as houses are built and sold.  In locations where development has progressed, the amount of development work remaining to be completed is typically less than the remaining amount of bonds or letters of credit due to timing delays in obtaining release of the bonds or letters of credit.
Guarantees and Indemnities. In the ordinary course of business, M/I Financial enters into agreements that guarantee purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur.  The risks associated with these guarantees are offset by the value of the underlying assets, and the Company accrues its best estimate of the probable loss on these loans.  Additionally, the Company has provided certain other guarantees and indemnities in connection with the acquisition and development of land by our homebuilding operations.  Refer toPlease see Note 5 to our financial statements for additional details relating to our guarantees and indemnities.

INTEREST RATES AND INFLATION

Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation.  Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them.  The impact of increased rates can be offset, in part, by offering


variable rate loans with lower interest rates.  In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.


ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through borrowings under our revolving credit and mortgage repurchase facilities, consisting of the Amended Credit Facility, the MIF Mortgage Warehousing Agreement, and the MIF Mortgage Repurchase Facility which permit borrowings of up to $660635 million, subject to availability constraints. Additionally, M/I Financial is exposed to interest rate risk associated with its mortgage loan origination services.

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

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

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

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

The table below shows the notional amounts of our financial instruments at June 30, 2017March 31, 2018 and December 31, 20162017:
June 30, December 31,March 31, December 31,
Description of Financial Instrument (in thousands)2017 20162018 2017
Best-effort contracts and related committed IRLCs$9,555
 $6,607
Whole loan contracts and related committed IRLCs$3,350
 $2,182
Uncommitted IRLCs109,140
 66,875
109,800
 50,746
FMBSs related to uncommitted IRLCs109,000
 66,000
110,000
 53,000
Best-effort contracts and related mortgage loans held for sale8,324
 125,348
Whole loan contracts and related mortgage loans held for sale7,465
 80,956
FMBSs related to mortgage loans held for sale82,284
 33,000
101,000
 91,000
Mortgage loans held for sale covered by FMBSs82,330
 32,870
101,171
 90,781

The table below shows the measurement of assets and liabilities at June 30, 2017March 31, 2018 and December 31, 20162017:
June 30, December 31,March 31, December 31,
Description of Financial Instrument (in thousands)2017 20162018 2017
Mortgage loans held for sale$91,986
 $154,020
$110,612
 $171,580
Forward sales of mortgage-backed securities599
 230
(125) 177
Interest rate lock commitments344
 250
971
 271
Best-efforts contracts(19) (90)
Whole loan contracts(66) 12
Total$92,910
 $154,410
$111,392
 $172,040

The following table sets forth the amount of gain (loss) recognized on assets and liabilities for the three and six months ended June 30, 2017March 31, 2018 and 2016:2017:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
Description (in thousands)2017 2016 2017 20162018 2017
Mortgage loans held for sale$(484) $826
 $4,390
 $2,186
$675
 $4,874
Forward sales of mortgage-backed securities1,280
 (922) 369
 (1,688)(302) (911)
Interest rate lock commitments(748) 350
 94
 919
705
 842
Best-efforts contracts305
 (53) 71
 16
Whole loan contracts(83) (234)
Total gain recognized$353
 $201
 $4,924
 $1,433
$995
 $4,571



The following table provides the expected future cash flows and current fair values of borrowings under our credit facilities and mortgage loan origination services that are subject to market risk as interest rates fluctuate, as of June 30, 2017March 31, 2018. Because the MIF Mortgage Warehousing Agreement and MIF Mortgage Repurchase Facility are effectively secured by certain mortgage loans held for sale which are typically sold within 30 to 45 days, their outstanding balances are included in the most current period presented. The interest rates for our variable rate debt represent the weighted average interest rates in effect at June 30, 2017March 31, 2018. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.
Expected Cash Flows by Period Fair ValueExpected Cash Flows by Period Fair Value
(Dollars in thousands)2017 2018 2019 2020 2021 Thereafter Total 6/30/20172018 2019 2020 2021 2022 Thereafter Total 3/31/2018
ASSETS:                              
Mortgage loans held for sale:                              
Fixed rate$88,657
 
 
 
 
 
 $88,657
 $87,007
$107,936
 
 
 
 
 
 $107,936
 $106,101
Weighted average interest rate3.97% 
 
 
 
 
 3.97%  4.31% 
 
 
 
 
 4.31%  
Variable rate$4,942
 
 
 
 
 
 $4,942
 $4,979
$4,568
 
 
 
 
 
 $4,568
 $4,511
Weighted average interest rate3.34% 
 
 
 
 
 3.34%  3.90% 
 
 
 
 
 3.90%  
                              
LIABILITIES:                              
Long-term debt — fixed rate$57,805
 $86,782
 $292
 $292
 $300,219
 
 $445,390
 $475,296
$2,465
 $1,214
 $1,693
 $301,310
 $866
 $250,000
 $557,548
 $554,017
Weighted average interest rate3.37% 3.02% 3.37% 3.37% 6.74% 
 5.56%  5.44% 5.44% 5.44% 6.72% 5.75% 5.63% 6.23%  
Short-term debt — variable rate$227,518
 
 
 
 
 
 $227,518
 $227,518
$265,011
 
 
 
 
 
 $265,011
 $265,011
Weighted average interest rate3.87% 
 
 
 
 
 3.87%  4.16% 
 
 
 
 
 4.16%  



ITEM 4:  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

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

The Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial 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.

Item 1A. Risk Factors

ThereExcept as set forth below, there have been no material changes to the risk factors appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017.

We may write-off intangible assets, such as updatedgoodwill.

We have recorded goodwill in connection with the acquisition of the assets and operations of Pinnacle Homes. On an ongoing basis, we will evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our Quarterly Report on Form 10-Q forresults of operations in the three months ended March 31, 2017.period in which the write-off occurs.

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

(a) Recent Sales of Unregistered Securities — None.

(b) Use of Proceeds — Not Applicable.

(c) Purchases of Equity Securities

There were no purchases made by, or on behalf of, the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of the Company’s common shares or Series A Preferred Shares during the three months ended June 30, 2017March 31, 2018.

SeePlease see Note 78 and the “Liquidity and Capital Resources” sectionto our financial statements above for more information regarding the limit imposed by the indenture governing our 2025 Senior Notes and the indenture governing our 2021 Senior Notes on our ability to pay dividends on, and repurchase, our


common shares and Series A Preferred Sharesany preferred shares of the Company then outstanding to the amount of the positive balance in our “restricted payments basket,” as defined in the indenture.indentures.

Item 3. Defaults Upon Senior Securities - None.

Item 4. Mine Safety Disclosures - None.

Item 5. Other Information - None.



Item 6. Exhibits

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

Exhibit Number Description
10.1
10.2
   
31.1 
   
31.2 
   
32.1 
   
32.2 
   
101.INS XBRL Instance Document. (Furnished herewith.)
   
101.SCH XBRL Taxonomy Extension Schema Document. (Furnished herewith.)
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Furnished herewith.)
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Furnished herewith.)
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Furnished herewith.)
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Furnished herewith.)




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    M/I Homes, Inc.
    (Registrant)
      
Date: July 28, 2017April 27, 2018 By:/s/ Robert H. Schottenstein
     Robert H. Schottenstein
     Chairman, Chief Executive Officer and
     President
     (Principal Executive Officer)
      
Date: July 28, 2017April 27, 2018 By:/s/ Ann Marie W. Hunker
     Ann Marie W. Hunker
     Vice President, Corporate Controller
     (Principal Accounting Officer)
      



EXHIBIT INDEX
   
Exhibit Number Description
10.1
10.2
   
31.1 
   
31.2 
   
32.1 
   
32.2 
   
101.INS XBRL Instance Document. (Furnished herewith.)
   
101.SCH XBRL Taxonomy Extension Schema Document. (Furnished herewith.)
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Furnished herewith.)
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Furnished herewith.)
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Furnished herewith.)
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Furnished herewith.)




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