10-Q 1 mho-20140630x10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

o | TRANSITION 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.

Yes | X |  | No |

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes | X |  | No |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer |  |  | Accelerated filer | X |
| Non-accelerated filer |  |  | Smaller reporting company |  |
| (Do not check if a smaller reporting company) |  |  |  |  |

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes |  |  | No | X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common shares, par value $.01 per share: 24,474,139 shares outstanding as of July 23, 2014.

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, 2014 and December 31, 2013 | 3
|  | Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2014 and 2013 | 4
|  | Unaudited Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2014 | 5
|  | Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 | 6
|  | Notes to Unaudited Condensed Consolidated Financial Statements | 7
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 27
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 46
| Item 4. | Controls and Procedures | 48
PART II. | OTHER INFORMATION |
| Item 1. | Legal Proceedings | 48
| Item 1A. | Risk Factors | 48
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 48
| Item 3. | Defaults Upon Senior Securities | 48
| Item 4. | Mine Safety Disclosures | 48
| Item 5. | Other Information | 48
| Item 6. | Exhibits | 49
Signatures |  |  | 50
Exhibit Index |  |  | 51

2

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

(Dollars in thousands, except par values) |  | June 30, 2014 |  | December 31, 2013
ASSETS: |  |  |  |
Cash and cash equivalents |  | $ | 33,643 |  |  | $ | 128,725 |
Restricted cash |  | 10,076 |  |  | 13,902 |
Mortgage loans held for sale |  | 64,782 |  |  | 81,810 |
Inventory |  | 816,140 |  |  | 690,934 |
Property and equipment - net |  | 11,283 |  |  | 10,536 |
Investment in unconsolidated joint ventures |  | 42,182 |  |  | 35,266 |
Deferred income taxes, net of valuation allowance of $9.3 million at December 31, 2013 |  | 109,558 |  |  | 110,911 |
Other assets |  | 39,042 |  |  | 38,092 |
TOTAL ASSETS |  | $ | 1,126,706 |  |  | $ | 1,110,176 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |
LIABILITIES: |  |  |  |
Accounts payable |  | $ | 87,325 |  |  | $ | 70,226 |
Customer deposits |  | 15,019 |  |  | 11,262 |
Other liabilities |  | 59,416 |  |  | 71,341 |
Community development district (“CDD”) obligations |  | 1,884 |  |  | 3,130 |
Obligation for consolidated inventory not owned |  | 1,268 |  |  | 1,775 |
Notes payable bank - financial services operations |  | 61,914 |  |  | 80,029 |
Notes payable - other |  | 7,717 |  |  | 7,790 |
Convertible senior subordinated notes due 2017 |  | 57,500 |  |  | 57,500 |
Convertible senior subordinated notes due 2018 |  | 86,250 |  |  | 86,250 |
Senior notes |  | 228,269 |  |  | 228,070 |
TOTAL LIABILITIES |  | 606,562 |  |  | 617,373 |
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, 2014 and December 31, 2013 |  | 48,163 |  |  | 48,163 |
Common shares - $.01 par value; authorized 58,000,000 and 38,000,000 shares at June 30, 2014 and December 31, 2013, respectively; issued 27,092,723 shares at both June 30, 2014 and December 31, 2013 |  | 271 |  |  | 271 |
Additional paid-in capital |  | 237,345 |  |  | 236,060 |
Retained earnings |  | 286,373 |  |  | 262,625 |
Treasury shares - at cost - 2,618,584 and 2,734,780 shares at June 30, 2014 and December 31, 2013, respectively |  | (52,008 | ) |  | (54,316 | )
TOTAL SHAREHOLDERS' EQUITY |  | 520,144 |  |  | 492,803 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |  | $ | 1,126,706 |  |  | $ | 1,110,176 |

See Notes to Unaudited Condensed Consolidated Financial Statements.
3

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

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands, except per share amounts) | 2014 |  | 2013 |  | 2014 |  | 2013
Revenue | $ | 281,608 |  |  | $ | 234,553 |  |  | $ | 516,449 |  |  | $ | 425,280 |
Costs and expenses: |  |  |  |  |  |  |
Land and housing | 221,217 |  |  | 187,136 |  |  | 405,181 |  |  | 338,649 |
Impairment of inventory and investment in unconsolidated joint ventures | 804 |  |  | 1,201 |  |  | 804 |  |  | 2,101 |
General and administrative | 21,281 |  |  | 18,149 |  |  | 39,596 |  |  | 34,128 |
Selling | 20,251 |  |  | 16,275 |  |  | 36,220 |  |  | 29,384 |
Equity in loss (income) of unconsolidated joint ventures | 22 |  |  | — |  |  | (40 | ) |  | — |
Interest | 2,730 |  |  | 4,397 |  |  | 6,900 |  |  | 8,737 |
Total costs and expenses | 266,305 |  |  | 227,158 |  |  | 488,661 |  |  | 412,999 |
Income before income taxes | 15,303 |  |  | 7,395 |  |  | 27,788 |  |  | 12,281 |
Provision for income taxes | 1,749 |  |  | 131 |  |  | 1,602 |  |  | 430 |
Net income | 13,554 |  |  | 7,264 |  |  | 26,186 |  |  | 11,851 |
Preferred dividends | 1,219 |  |  | 1,219 |  |  | 2,438 |  |  | 1,219 |
Excess of fair value over book value of preferred shares redeemed | — |  |  | — |  |  | — |  |  | 2,190 |
Net income to common shareholders | $ | 12,335 |  |  | $ | 6,045 |  |  | $ | 23,748 |  |  | $ | 8,442 |
Earnings per common share: |  |  |  |  |  |  |
Basic | $ | 0.50 |  |  | $ | 0.25 |  |  | $ | 0.97 |  |  | $ | 0.36 |
Diluted | $ | 0.44 |  |  | $ | 0.25 |  |  | $ | 0.85 |  |  | $ | 0.36 |
Weighted average shares outstanding: |  |  |  |  |  |  |
Basic | 24,470 |  |  | 24,271 |  |  | 24,444 |  |  | 23,278 |
Diluted | 29,913 |  |  | 24,646 |  |  | 29,891 |  |  | 23,671 |

See Notes to Unaudited Condensed Consolidated Financial Statements.
4

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

| Six Months Ended June 30, 2014
| Preferred Shares |  | Common Shares |  |  |  |  |  |  |  |
| Shares Outstanding |  |  |  | Shares Outstanding |  |  |  | Additional Paid-in Capital |  | Retained Earnings |  | Treasury Shares |  | Total Shareholders' Equity
(Dollars in thousands) |  | Amount |  |  | Amount |  |  |  |
Balance at December 31, 2013 | 2,000 |  |  | $ | 48,163 |  |  | 24,357,943 |  |  | $ | 271 |  |  | $ | 236,060 |  |  | $ | 262,625 |  |  | $ | (54,316 | ) |  | $ | 492,803 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 26,186 |  |  | — |  |  | 26,186 |
Dividends to shareholders, $609.375 per preferred share | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (2,438 | ) |  | — |  |  | (2,438 | )
Stock options exercised | — |  |  | — |  |  | 108,848 |  |  | — |  |  | (702 | ) |  | — |  |  | 2,162 |  |  | 1,460 |
Stock-based compensation expense | — |  |  | — |  |  | — |  |  | — |  |  | 1,794 |  |  | — |  |  | — |  |  | 1,794 |
Deferral of executive and director compensation | — |  |  | — |  |  | — |  |  | — |  |  | 339 |  |  | — |  |  | — |  |  | 339 |
Executive and director deferred compensation distributions | — |  |  | — |  |  | 7,348 |  |  | — |  |  | (146 | ) |  | — |  |  | 146 |  |  | — |
Balance at June 30, 2014 | 2,000 |  |  | $ | 48,163 |  |  | 24,474,139 |  |  | $ | 271 |  |  | $ | 237,345 |  |  | $ | 286,373 |  |  | $ | (52,008 | ) |  | $ | 520,144 |

See Notes to Unaudited Condensed Consolidated Financial Statements.
5

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

| Six Months Ended June 30,
(Dollars in thousands) | 2014 |  | 2013
OPERATING ACTIVITIES: |  |  |
Net income | $ | 26,186 |  |  | $ | 11,851 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |
Inventory valuation adjustments and abandoned land transaction write-offs | 804 |  |  | 2,101 |
Equity in income of unconsolidated joint ventures | (40 | ) |  | — |
Mortgage loan originations | (278,410 | ) |  | (260,976 | )
Proceeds from the sale of mortgage loans | 298,953 |  |  | 279,023 |
Fair value adjustment of mortgage loans held for sale | (3,515 | ) |  | 1,583 |
Capitalization of originated mortgage servicing rights | (2,006 | ) |  | — |
Amoritzation of mortgage servicing rights | 362 |  |  | — |
Depreciation | 2,392 |  |  | 2,566 |
Amortization of debt discount and debt issue costs | 1,557 |  |  | 1,753 |
Stock-based compensation expense | 1,794 |  |  | 1,316 |
Deferred income tax expense | 10,644 |  |  | 4,462 |
Deferred tax asset valuation allowances | (9,291 | ) |  | (4,462 | )
Change in assets and liabilities: |  |  |
Cash held in escrow | 7 |  |  | 71 |
Inventory | (122,616 | ) |  | (78,265 | )
Other assets | (2,760 | ) |  | (5,044 | )
Accounts payable | 17,099 |  |  | 14,198 |
Customer deposits | 3,757 |  |  | 5,233 |
Accrued compensation | (9,991 | ) |  | (3,646 | )
Other liabilities | (1,595 | ) |  | 3,058 |
Net cash used in operating activities | (66,669 | ) |  | (25,178 | )
INVESTING ACTIVITIES: |  |  |
Change in restricted cash | 3,819 |  |  | (3,869 | )
Purchase of property and equipment | (1,677 | ) |  | (1,050 | )
Investment in unconsolidated joint ventures | (13,484 | ) |  | (18,288 | )
Net proceeds from sale of mortgage servicing rights | 2,135 |  |  | — |
Net cash used in investing activities | (9,207 | ) |  | (23,207 | )
FINANCING ACTIVITIES: |  |  |
Proceeds from issuance of convertible senior subordinated notes due 2018 | — |  |  | 86,250 |
Repayments of bank borrowings - net | (18,115 | ) |  | (17,515 | )
Principal repayments of notes payable-other and CDD bond obligations | (73 | ) |  | (1,676 | )
Dividends paid on preferred shares | (2,438 | ) |  | (1,219 | )
Net proceeds from issuance of common shares | — |  |  | 54,617 |
Redemption of preferred shares | — |  |  | (50,352 | )
Debt issue costs | (40 | ) |  | (3,605 | )
Proceeds from exercise of stock options | 1,460 |  |  | 2,639 |
Net cash (used in) provided by financing activities | (19,206 | ) |  | 69,139 |
Net (decrease) increase in cash and cash equivalents | (95,082 | ) |  | 20,754 |
Cash and cash equivalents balance at beginning of period | 128,725 |  |  | 145,498 |
Cash and cash equivalents balance at end of period | $ | 33,643 |  |  | $ | 166,252 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |  |  |
Cash paid during the year for: |  |  |
Interest — net of amount capitalized | $ | 5,238 |  |  | $ | 6,235 |
Income taxes | $ | 550 |  |  | $ | 447 |
NON-CASH TRANSACTIONS DURING THE PERIOD: |  |  |
Community development district infrastructure | $ | (1,246 | ) |  | $ | (764 | )
Consolidated inventory not owned | $ | (507 | ) |  | $ | (17,224 | )
Distribution of single-family lots from unconsolidated joint ventures | $ | 6,608 |  |  | $ | 1,366 |

See Notes to Unaudited Condensed Consolidated Financial Statements.
6

M/I HOMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements (the “financial statements”) of M/I Homes, Inc. and its subsidiaries (the “Company”) and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The financial statements include the accounts of the Company. All intercompany transactions have been eliminated. Results for the interim period are not necessarily indicative of results for a full year. In the opinion of management, the accompanying financial statements reflect all adjustments (all of which are normal and recurring in nature) necessary for a fair presentation of financial results for the interim periods presented. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 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 2013 Form 10-K, as the same may be updated from time to time in our subsequent filings with the SEC.
Impact of New Accounting Standards
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation - Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material effect on the Company’s unaudited condensed consolidated financial statements or disclosures.
In May 2014, the FASB issued 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 Topic 605, “Revenue 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. ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s unaudited condensed consolidated financial statements and disclosures.
7

NOTE 2. 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 operations.
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 generally sells loans on a servicing released basis, and receives a servicing release premium upon sale. 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 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 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 intervening 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-efforts contract or by FMBSs. The FMBSs are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings.
8

The table below shows the notional amounts of our financial instruments at June 30, 2014 and December 31, 2013:

Description of Financial Instrument (in thousands) | June 30, 2014 |  | December 31, 2013
Best efforts contracts and related committed IRLCs | $ | 3,456 |  |  | $ | 2,494 |
Uncommitted IRLCs | 62,151 |  |  | 49,710 |
FMBSs related to uncommitted IRLCs | 63,000 |  |  | 48,000 |
Best efforts contracts and related mortgage loans held for sale | 24,934 |  |  | 63,386 |
FMBSs related to mortgage loans held for sale | 38,000 |  |  | 20,000 |
Mortgage loans held for sale covered by FMBSs | 38,180 |  |  | 19,884 |

The table below shows the level and measurement of assets and liabilities measured on a recurring basis at June 30, 2014 and December 31, 2013:

Description of Financial Instrument (in thousands) | Fair Value Measurements June 30, 2014 | 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 | $ | 64,782 |  |  | $ | — |  |  | $ | 64,782 |  |  | $ | — |  |
Forward sales of mortgage-backed securities | (439 | ) |  | — |  |  | (439 | ) |  | — |  |
Interest rate lock commitments | 578 |  |  | — |  |  | 578 |  |  | — |  |
Best-efforts contracts | (113 | ) |  | — |  |  | (113 | ) |  | — |  |
Total | $ | 64,808 |  |  | $ | — |  |  | $ | 64,808 |  |  | $ | — |  |

Description of Financial Instrument (in thousands) | Fair Value Measurements December 31, 2013 | 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 | $ | 81,810 |  |  | $ | — |  |  | $ | 81,810 |  |  | $ | — |  |
Forward sales of mortgage-backed securities | 745 |  |  | — |  |  | 745 |  |  | — |  |
Interest rate lock commitments | (319 | ) |  | — |  |  | (319 | ) |  | — |  |
Best-efforts contracts | 479 |  |  | — |  |  | 479 |  |  | — |  |
Total | $ | 82,715 |  |  | $ | — |  |  | $ | 82,715 |  |  | $ | — |  |

The following table sets forth the amount of gain (loss) recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Operations, on assets and liabilities measured on a recurring basis for the three and six months ended June 30, 2014 and 2013:

| Three Months Ended June 30, |  | Six Months Ended June 30,
Description (in thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Mortgage loans held for sale | $ | 727 |  |  | $ | (2,508 | ) |  | $ | 3,515 |  |  | $ | (1,584 | )
Forward sales of mortgage-backed securities | (619 | ) |  | 3,368 |  |  | (1,184 | ) |  | 3,038 |
Interest rate lock commitments | 176 |  |  | (929 | ) |  | 897 |  |  | (736 | )
Best-efforts contracts | (179 | ) |  | 140 |  |  | (592 | ) |  | 17 |
Total gain recognized | $ | 105 |  |  | $ | 71 |  |  | $ | 2,636 |  |  | $ | 735 |

9

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
|  | June 30, 2014 |  | June 30, 2014
Description of Derivatives |  | Balance Sheet Location |  | Fair Value (in thousands) |  | Balance Sheet Location |  | Fair Value (in thousands)
Forward sales of mortgage-backed securities |  | Other assets |  | $ | — |  |  | Other liabilities |  | $ | 439 |
Interest rate lock commitments |  | Other assets |  | 578 |  |  | Other liabilities |  | — |
Best-efforts contracts |  | Other assets |  | — |  |  | Other liabilities |  | 113 |
Total fair value measurements |  |  |  | $ | 578 |  |  |  |  | $ | 552 |

|  | Asset Derivatives |  | Liability Derivatives
|  | December 31, 2013 |  | December 31, 2013
Description of Derivatives |  | Balance Sheet Location |  | Fair Value (in thousands) |  | Balance Sheet Location |  | Fair Value (in thousands)
Forward sales of mortgage-backed securities |  | Other assets |  | $ | 745 |  |  | Other liabilities |  | $ | — |
Interest rate lock commitments |  | Other assets |  | — |  |  | Other liabilities |  | 319 |
Best-efforts contracts |  | Other assets |  | 479 |  |  | Other liabilities |  | — |
Total fair value measurements |  |  |  | $ | 1,224 |  |  |  |  | $ | 319 |

Assets Measured on a Non-Recurring Basis
The Company assesses inventory for recoverability on a quarterly basis based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. Determining the fair value of a community’s inventory involves a number of variables, estimates and projections, which are Level 3 measurement inputs. See Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company's 2013 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. As of June 30, 2014, the Company's projections generally assume a gradual improvement in market conditions over time. The Company assumed no increase in weighted average sales price or assumed weighted average costs to build and deliver homes in 2014, and a 2% increase in both in 2015 and beyond. 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. The Company estimates the fair value of each impaired community by determining the present value of the estimated future cash flows and discounting those cash flow projections using an appropriate risk-adjusted interest rate. As of June 30, 2014, we utilized discount rates ranging from 13% to 16% in our valuations.
Due to the fact that the Company's cash flow models and estimates of fair values are based upon management estimates and assumptions, unexpected changes in market conditions and/or changes in management's intentions with respect to the inventory may lead the Company to incur additional impairment charges in the future. Changes in our key assumptions, including 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, could materially impact future cash flow and fair value estimates.
The table below shows the level and measurement of the Company's assets measured on a non-recurring basis as of and for the three and six months ended June 30, 2014 and 2013:

|  |  | Three Months Ended June 30, |  | Six Months Ended June 30,
Description (in thousands) |  | Hierarchy | 2014 |  | 2013 (2) |  | 2014 |  | 2013 (2)
Adjusted basis of inventory (1) |  | Level 3 | $ | 1,529 |  |  | $ | 1,583 |  |  | $ | 1,529 |  |  | $ | 1,901 |
Total losses |  |  | 804 |  |  | 1,201 |  |  | 804 |  |  | 2,101 |
Initial basis of inventory |  |  | $ | 2,333 |  |  | $ | 2,784 |  |  | $ | 2,333 |  |  | $ | 4,002 |

(1) | The fair values in the table above represent only assets whose carrying values were adjusted in the respective period.

(2) | The carrying values for these assets may have subsequently increased or decreased from the fair value reported due to activities that have occurred since the measurement date.

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Variable Interest Entities. In order to minimize our investment and risk of land exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the land investment and development of a property through joint ownership and development agreements, joint ventures, and other similar arrangements. During the six month period ended June 30, 2014, we increased our total investment in such joint venture arrangements from December 31, 2013 by $6.9 million primarily due to a joint investment with another builder in a land development in our Southern region.
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 interest in these LLCs as of June 30, 2014 ranged from 25% to 61%. 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. With respect to our investments in these LLCs, we are required, under ASC 810-10, Consolidation (“ASC 810-10”), to evaluate whether or not such entities should be consolidated into our financial statements. We initially perform these evaluations when each new entity is created and upon any events that require reconsideration of the entity. In order to determine if we should consolidate an LLC, we determine (1) if the LLC is a variable interest entity (“VIE”) and (2) if we are the primary beneficiary of the entity.
As of June 30, 2014, we have determined that one of the LLCs in which we have an interest meets the requirements of a VIE due to a lack of equity at risk in the entity. However, we have determined that we do not have substantive control over the VIE as we do not have the ability to control the activities that most significantly impact its economic performance. As a result, we are not considered the primary beneficiary of the VIE and are not required to consolidate the VIE or any of the LLCs in which we have an interest into our financial statements. We instead recorded the VIE and the LLCs in Investment in Unconsolidated Joint Ventures on our Unaudited Condensed Consolidated Balance Sheets.
We enter into option or purchase agreements to acquire land or lots, for which we generally pay non-refundable deposits. We also analyze these agreements under ASC 810-10 to determine whether we are the primary beneficiary of the VIE, if applicable, using an analysis similar to that described above. If we are deemed to be the primary beneficiary of the VIE, we will consolidate the VIE in our consolidated financial statements. 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.
Investment In Unconsolidated Joint Ventures. 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 statement of operations. We evaluate our investments in unconsolidated joint ventures for impairment at least quarterly as described in Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company's 2013 Form 10-K. Determining the fair value of investments in unconsolidated joint ventures involves a number of variables, many of which are interrelated and require management to make certain assumptions. As of June 30, 2014, the Company used a discount rate of 16% in determining the fair value of its investments in unconsolidated joint ventures. In addition to the assumptions management must make to determine if the investment's fair value is less than the carrying value, management must also use judgment in determining whether the impairment is other than temporary. Because of the high degree of judgment involved in developing these assumptions, it is possible that the Company may determine the investment is not impaired in the current period; however, due to the passage of time, change in market conditions, and/or changes in management's intentions with respect to the investment, a change in assumptions could result and impairment could occur. During the three and six months ended June 30, 2014 and 2013, the Company did not record any impairment charges on its investments in unconsolidated joint ventures.
We believe that the Company's maximum exposure related to its investment in these unconsolidated joint ventures as of June 30, 2014 is the amount invested of $42.2 million, which is reported as Investment in Unconsolidated Joint Ventures on our Unaudited Condensed Consolidated Balance Sheets, in addition to a $2.5 million note due to the Company from one of the unconsolidated joint ventures (reported in Other Assets), although we expect to invest further amounts in these unconsolidated joint ventures as development of the properties progresses. Included in the Company's investment in unconsolidated joint ventures at both June 30, 2014 and December 31, 2013 were $0.8 million of capitalized interest and other costs.
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.
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The following table presents the carrying amounts and fair values of the Company's financial instruments at June 30, 2014 and December 31, 2013. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

|  | June 30, 2014 |  | December 31, 2013
(In thousands) |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Assets: |  |  |  |  |  |  |  |
Cash, cash equivalents and restricted cash |  | $ | 43,719 |  |  | $ | 43,719 |  |  | $ | 142,627 |  |  | $ | 142,627 |
Mortgage loans held for sale |  | 64,782 |  |  | 64,782 |  |  | 81,810 |  |  | 81,810 |
Split dollar life insurance policies |  | 189 |  |  | 189 |  |  | 171 |  |  | 171 |
Notes receivable |  | 4,495 |  |  | 3,740 |  |  | 3,151 |  |  | 2,784 |
Commitments to extend real estate loans |  | 578 |  |  | 578 |  |  | — |  |  | — |
Best-efforts contracts for committed IRLCs and mortgage loans held for sale |  | — |  |  | — |  |  | 479 |  |  | 479 |
Forward sales of mortgage-backed securities |  | — |  |  | — |  |  | 745 |  |  | 745 |
Liabilities: |  |  |  |  |  |  |  |
Notes payable - banks |  | 61,914 |  |  | 61,914 |  |  | 80,029 |  |  | 80,029 |
Notes payable - other |  | 7,717 |  |  | 7,366 |  |  | 7,790 |  |  | 7,452 |
Convertible senior subordinated notes due 2017 |  | 57,500 |  |  | 71,516 |  |  | 57,500 |  |  | 74,391 |
Convertible senior subordinated notes due 2018 |  | 86,250 |  |  | 93,150 |  |  | 86,250 |  |  | 95,845 |
Senior notes due 2018 |  | 228,269 |  |  | 244,088 |  |  | 228,070 |  |  | 248,975 |
Commitments to extend real estate loans |  | — |  |  | — |  |  | 319 |  |  | 319 |
Best-efforts contracts for committed IRLCs and mortgage loans held for sale |  | 113 |  |  | 113 |  |  | — |  |  | — |
Forward sales of mortgage-backed securities |  | 439 |  |  | 439 |  |  | — |  |  | — |
Off-Balance Sheet Financial Instruments: |  |  |  |  |  |  |  |
Letters of credit |  | — |  |  | 337 |  |  | — |  |  | 413 |

The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments at June 30, 2014 and December 31, 2013:
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-Efforts Contracts for Committed IRLCs and Mortgage Loans Held for Sale, 2017 Convertible Senior Subordinated Notes, 2018 Convertible Senior Subordinated Notes and 2018 Senior Notes. The fair value of these financial instruments was determined based upon market quotes at June 30, 2014 and December 31, 2013. 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 Policies 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 - Banks. The Company is a party to three primary credit agreements: (1) a $200 million unsecured revolving credit facility dated July 18, 2013, with M/I Homes, Inc. as borrower and guaranteed by the Company's wholly owned homebuilding subsidiaries (the “Credit Facility”); (2) a $110 million secured mortgage warehousing agreement, with M/I Financial as borrower, amended on March 28, 2014 (the “MIF Mortgage Warehousing Agreement”); and (3) a $15 million mortgage repurchase agreement, with M/I Financial as borrower, amended on November 6, 2013 (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 the Company during the second quarter of 2014 fluctuated with the Alternate Base Rate or the Eurodollar Rate (for the Credit Facility) or LIBOR (for the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility).
Notes Payable - Other. The estimated fair value was determined by calculating the present value of the future cash flows using the Company's current incremental borrowing rate.
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Letters of Credit. Letters of credit of $26.9 million and $25.8 million represent potential commitments at June 30, 2014 and December 31, 2013, 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 3. Inventory
A summary of the Company's inventory as of June 30, 2014 and December 31, 2013 is as follows:

(In thousands) | June 30, 2014 |  | December 31, 2013
Single-family lots, land and land development costs | $ | 366,945 |  |  | $ | 323,673 |
Land held for sale | 3,450 |  |  | 8,059 |
Homes under construction | 384,930 |  |  | 305,499 |
Model homes and furnishings - at cost (less accumulated depreciation: June 30, 2014 - $6,186; December 31, 2013 - $5,173) | 41,115 |  |  | 34,433 |
Community development district infrastructure | 1,884 |  |  | 3,130 |
Land purchase deposits | 16,548 |  |  | 14,365 |
Consolidated inventory not owned | 1,268 |  |  | 1,775 |
Total inventory | $ | 816,140 |  |  | $ | 690,934 |

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, 2014 and December 31, 2013, we had 948 homes (with a carrying value of $133.8 million) and 798 homes (with a carrying value of $123.3 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, typically three years.
The Company assesses inventory for recoverability on a quarterly basis. Refer to Note 2 of our Unaudited Condensed Consolidated Financial Statements for additional details relating to our procedures for evaluating our inventories for impairment.
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 writes off any deposits and accumulated pre-acquisition costs relating to such agreement.
NOTE 4. Capitalized Interest
The Company capitalizes interest during land development and home construction. Capitalized interest is charged to land and housing costs and expenses as the related inventory is delivered to a third party. The summary of capitalized interest for the three and six months ended June 30, 2014 and 2013 is as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Capitalized interest, beginning of period | $ | 13,944 |  |  | $ | 14,625 |  |  | $ | 13,802 |  |  | $ | 15,376 |
Interest capitalized to inventory | 4,730 |  |  | 3,328 |  |  | 7,980 |  |  | 6,105 |
Capitalized interest charged to land and housing costs and expenses | (3,843 | ) |  | (3,693 | ) |  | (6,951 | ) |  | (7,221 | )
Capitalized interest, end of period | $ | 14,831 |  |  | $ | 14,260 |  |  | $ | 14,831 |  |  | $ | 14,260 |
Interest incurred | $ | 7,460 |  |  | $ | 7,725 |  |  | $ | 14,880 |  |  | $ | 14,842 |

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NOTE 5. Guarantees and Indemnifications
Warranty
Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”) and our 10-year (Texas markets only) and 30-year (all markets excluding Texas) 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 closes, 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, 2014 and 2013 is as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Warranty reserves, beginning of period | $ | 11,769 |  |  | $ | 10,400 |  |  | $ | 12,291 |  |  | $ | 10,438 |
Warranty expense on homes delivered during the period | 1,680 |  |  | 1,667 |  |  | 3,039 |  |  | 3,005 |
Changes in estimates for pre-existing warranties | 652 |  |  | 101 |  |  | 890 |  |  | 101 |
Settlements made during the period | (2,881 | ) |  | (1,780 | ) |  | (5,000 | ) |  | (3,156 | )
Warranty reserves, end of period | $ | 11,220 |  |  | $ | 10,388 |  |  | $ | 11,220 |  |  | $ | 10,388 |

Guarantees
In the ordinary course of business, M/I Financial, LLC (“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 $21.5 million and $5.2 million were covered under these guarantees as of June 30, 2014 and December 31, 2013, respectively. A portion of the revenue paid to M/I Financial for providing the guarantees on these loans was deferred at June 30, 2014, and will be recognized in income as M/I Financial is released from its obligation under the guarantees. M/I Financial did not repurchase any loans under the above agreements during the six months ended June 30, 2014. The risk associated with the guarantees above is partially 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 $7.1 million and $8.2 million at June 30, 2014 and December 31, 2013, respectively. The risk associated with the guarantees above is partially offset by the value of the underlying assets.
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. Loans totaling approximately $1.6 million and $1.5 million were covered under these guarantees as of June 30, 2014 and December 31, 2013, respectively. The maximum potential amount of future payments is equal to the outstanding loan value less the value of the underlying asset plus administrative costs incurred related to foreclosure on the loans, should this event occur.
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The Company has recorded a liability relating to these guarantees to third parties totaling $2.3 million and $3.1 million at June 30, 2014 and December 31, 2013, respectively, which is management's best estimate of the Company's liability.
At June 30, 2014, the Company had outstanding $230.0 million aggregate principal amount of 8.625% Senior Notes due 2018 (the “2018 Senior Notes”), $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”) and $86.3 million aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”). The Company's obligations under the 2018 Senior Notes and the Credit Facility are guaranteed jointly and severally on a senior unsecured basis 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 11), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the Indenture for the 2018 Senior Notes. The Company's obligations under the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible Senior Subordinated Notes are guaranteed jointly and severally on a senior subordinated unsecured basis by the same subsidiaries of the Company that are guarantors for the 2018 Senior Notes and the Credit Facility (the “Guarantor Subsidiaries”).
NOTE 6. Commitments and Contingencies
At June 30, 2014, the Company had outstanding approximately $110.2 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 July 2019. Included in this total are: (1) $76.7 million of performance and maintenance bonds and $13.0 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $13.8 million of financial letters of credit, of which $8.0 million represent deposits on land and lot purchase agreements; and (3) $6.6 million of financial bonds.
At June 30, 2014, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $441.4 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.
The Company and certain of its subsidiaries have been named as defendants in certain claims, complaints and legal actions that are incidental to our business. Certain of the liabilities resulting from these matters are covered by insurance. While management currently believes that the ultimate resolution of these matters, individually and in the aggregate, will not have a material effect on the Company's financial position, results of operations and cash flows, such matters 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 matters. However, it is possible that the costs to resolve these matters could differ from the recorded estimates and, therefore, have a material effect on the Company's net income for the periods in which the matters are resolved. At June 30, 2014 and December 31, 2013, we had $0.2 million and $0.3 million reserved for legal expenses, respectively.
NOTE 7. Debt
Notes Payable - Homebuilding
The Credit Facility matures on July 18, 2016, and provides revolving credit financing for the Company with a maximum borrowing availability of $200 million and a sub-limit of $100 million for the issuance of letters of credit. The Credit Facility contains an uncommitted $25 million accordion feature under which its aggregate principal amount can be increased to up to $225 million, subject to certain conditions, including obtaining additional commitments from existing or new lenders. Interest on amounts borrowed under the Credit Facility is payable at a rate based on either the Alternate Base Rate plus 2.25% or at the Eurodollar Rate plus 3.25%. Borrowings under the Credit Facility are unsecured and availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants. At June 30, 2014, the Company was in compliance with all financial covenants of the Credit Facility.
At June 30, 2014, borrowing availability under the Credit Facility in accordance with the borrowing base calculation was $326.4 million, so the full amount of the $200 million facility was available. There were no borrowings outstanding and $17.2 million of letters of credit outstanding, leaving net remaining borrowing availability of $182.8 million as of June 30, 2014.
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,
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and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 11 to our Unaudited Condensed Consolidated 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 indenture for the 2018 Senior Notes. The guarantors for the Credit Facility are the same subsidiaries that guarantee the 2018 Senior Notes, the 2017 Convertible Senior Subordinated Notes, and the 2018 Convertible Senior Subordinated Notes.
The Company’s obligations under the Credit Facility are general, unsecured senior obligations of the Company and the subsidiary guarantors and rank equally in right of payment with all our existing and future unsecured senior indebtedness. Our obligations under the Credit Facility are effectively subordinated to our existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
The Company is party to three secured credit agreements for the issuance of letters of credit outside of the Credit Facility (collectively, the “Letter of Credit Facilities”), with maturities ranging from August 31, 2014 to June 1, 2015. During the three months ended June 30, 2014, the Company extended the maturity date on one of the Letter of Credit Facilities for an additional year to June 1, 2015. The agreements governing the Letter of Credit Facilities contain limits for the issuance of letters of credit ranging from $5.0 million to $10.0 million, for a combined letter of credit capacity of $20.0 million, of which $2.2 million was uncommitted at June 30, 2014 and could be withdrawn at any time. At June 30, 2014 and December 31, 2013, there was $9.7 million and $13.4 million of outstanding letters of credit in aggregate under the Company's three Letter of Credit Facilities, respectively, which were collateralized with $9.9 million and $13.7 million of the Company's cash, respectively.
Notes Payable — Financial Services
In March 2014, M/I Financial entered into an amendment to the MIF Mortgage Warehousing Agreement, which, among other things, increased the maximum borrowing availability to $110.0 million and included an accordion feature which allows for an increase of the maximum borrowing availability of up to an additional $20.0 million (subject to certain conditions, including obtaining additional commitments from existing or new lenders), extended the expiration date to March 27, 2015, increased the maximum principal amount permitted to be outstanding at any one time in aggregate under all warehouse credit lines to $150.0 million, and, effective with the quarter ending September 30, 2014, increased M/I Financial's minimum required tangible net worth requirement from $10.0 million to $11.0 million and the minimum required liquidity requirement from $5.0 million to $5.5 million. The interest rate was also adjusted to a per annum rate equal to the greater of (1) the floating LIBOR rate plus 275 basis points and (2) 3.0%.
In November 2012, M/I Financial entered into the MIF Mortgage Repurchase Facility, an additional mortgage financing agreement structured as a mortgage repurchase facility with a maximum borrowing availability of $15.0 million, to provide the Company with additional financing capacity. The MIF Mortgage Repurchase Facility, as amended on November 6, 2013, has an expiration date of November 5, 2014 and is used to finance eligible residential mortgage loans originated by M/I Financial. 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 275 or 300 basis points depending on the loan type.
At June 30, 2014 M/I Financial's total combined maximum borrowing availability under the two credit facilities was $125.0 million, an increase from $115.0 million at December 31, 2013. At June 30, 2014 and December 31, 2013, M/I Financial had $61.9 million and $80.0 million outstanding on a combined basis under its credit facilities, respectively, and was in compliance with all financial covenants of those agreements for both periods.
Senior Notes
In November 2010, the Company issued $200 million aggregate principal amount of 2018 Senior Notes. In May 2012, we issued an additional $30 million of 2018 Senior Notes under our 2018 Senior Notes indenture for a total outstanding balance of $230 million. As of both June 30, 2014 and December 31, 2013, we had $230.0 million of our 2018 Senior Notes outstanding. The 2018 Senior Notes bear interest at a rate of 8.625% per year, payable semiannually in arrears on May 15 and November 15 of each year, and mature on November 15, 2018. The 2018 Senior Notes are general, unsecured senior obligations of the Company and the subsidiary guarantors and rank equally in right of payment with all our existing and future unsecured senior indebtedness. The 2018 Senior Notes are effectively subordinated to our existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness. The 2018 Senior Notes contain certain covenants, as more fully described and defined in the indenture, 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
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exceptions and qualifications as described in the indenture governing the 2018 Senior Notes. As of June 30, 2014, the Company was in compliance with all terms, conditions, and financial covenants under the indenture.
The 2018 Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of our 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 11 to our Unaudited Condensed Consolidated 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 indenture for the 2018 Senior Notes. As of June 30, 2014, the guarantors for the 2018 Senior Notes are the same subsidiaries that guarantee the Credit Facility, the 2017 Convertible Senior Subordinated Notes, and the 2018 Convertible Senior Subordinated Notes.
The Company may redeem all or any portion of the 2018 Senior Notes on or after November 15, 2014 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 104.313% of the principal amount outstanding, but will decline to 102.156% of the principal amount outstanding if redeemed during the 12-month period beginning on November 15, 2015, and will further decline to 100.000% of the principal amount outstanding if redeemed on or after November 15, 2016, but prior to maturity.
The indenture governing our 2018 Senior Notes limits our ability to pay dividends on, and repurchase, our common shares and our 9.75% Series A Preferred Shares (the “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” is equal to $40 million (1) plus 50% of our aggregate consolidated net income (or minus 100% of our aggregate consolidated net loss) since October 1, 2010, excluding the income or loss from Unrestricted Subsidiaries, plus (2) 100% of the net cash proceeds from the sale of qualified equity interests, plus other items and subject to other exceptions. The restricted payments basket was $141.2 million at June 30, 2014. We are permitted to pay dividends on, and repurchase, our common shares and Series A Preferred Shares to the extent of the positive balance in our restricted payments basket. 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
In March 2013, the Company issued $86.3 million aggregate principal amount of 2018 Convertible Senior Subordinated Notes. 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 on a senior subordinated unsecured basis by those subsidiaries of the Company that are guarantors under the Company's 2018 Senior Notes and 2017 Convertible Senior Subordinated Notes. The 2018 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the subsidiary guarantors, are subordinated in right of payment to our existing and future senior indebtedness and are also effectively subordinated to our 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 provides that the Company may not redeem the 2018 Convertible Senior Subordinated Notes prior to March 6, 2016, but also contains provisions requiring 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).
On or after March 6, 2016, 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.
In September 2012, the Company issued $57.5 million aggregate principal amount of 2017 Convertible Senior Subordinated Notes. The 2017 Convertible Senior Subordinated Notes bear interest at a rate of 3.25% per year, payable semiannually in arrears on
17

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 on a senior subordinated unsecured basis by those subsidiaries of the Company that are guarantors under the Company's 2018 Senior Notes and 2018 Convertible Senior Subordinated Notes. The 2017 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the subsidiary guarantors, are subordinated in right of payment to our existing and future senior indebtedness and are also effectively subordinated to our 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 $7.7 million and $7.8 million as of June 30, 2014 and December 31, 2013, respectively. The balance consists primarily of a mortgage note payable with a $4.6 million principal balance outstanding at June 30, 2014 (and $4.8 million principal balance outstanding at December 31, 2013), which is secured by an office building, matures in 2017 and carries an interest rate of 8.1%. The remaining balance is made up of other notes payable incurred through the normal course of business.
NOTE 8. 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, 2014 and 2013:

|  | Three Months Ended |  | Six Months Ended
|  | June 30, |  | June 30,
(In thousands, except per share amounts) |  | 2014 |  | 2013 |  | 2014 |  | 2013
NUMERATOR |  |  |  |  |  |  |  |
Net income |  | $ | 13,554 |  |  | $ | 7,264 |  |  | $ | 26,186 |  |  | $ | 11,851 |
Preferred stock dividends |  | (1,219 | ) |  | (1,219 | ) |  | (2,438 | ) |  | (1,219 | )
Excess of fair value over book value of preferred shares redeemed |  | — |  |  | — |  |  | — |  |  | (2,190 | )
Net income to common shareholders |  | 12,335 |  |  | 6,045 |  |  | 23,748 |  |  | 8,442 |
Interest on 3.25% convertible senior subordinated notes due 2017 |  | 383 |  |  | — |  |  | 744 |  |  | — |
Interest on 3.00% convertible senior subordinated notes due 2018 |  | 517 |  |  | — |  |  | 1,002 |  |  | — |
Diluted income available to common shareholders |  | $ | 13,235 |  |  | $ | 6,045 |  |  | $ | 25,494 |  |  | $ | 8,442 |
DENOMINATOR |  |  |  |  |  |  |  |
Basic weighted average shares outstanding |  | 24,470 |  |  | 24,271 |  |  | 24,444 |  |  | 23,278 |
Effect of dilutive securities: |  |  |  |  |  |  |  |
Stock option awards |  | 218 |  |  | 262 |  |  | 228 |  |  | 278 |
Deferred compensation awards |  | 140 |  |  | 113 |  |  | 134 |  |  | 115 |
3.25% convertible senior subordinated notes due 2017 |  | 2,416 |  |  | — |  |  | 2,416 |  |  | — |
3.00% convertible senior subordinated notes due 2018 |  | 2,669 |  |  | — |  |  | 2,669 |  |  | — |
Diluted weighted average shares outstanding - adjusted for assumed conversions |  | 29,913 |  |  | 24,646 |  |  | 29,891 |  |  | 23,671 |
Earnings per common share: |  |  |  |  |  |  |  |
Basic |  | $ | 0.50 |  |  | $ | 0.25 |  |  | $ | 0.97 |  |  | $ | 0.36 |
Diluted |  | $ | 0.44 |  |  | $ | 0.25 |  |  | $ | 0.85 |  |  | $ | 0.36 |
Anti-dilutive equity awards not included in the calculation of diluted earnings per common share |  | 1,287 |  |  | 998 |  |  | 1,221 |  |  | 928 |

For the three and six months ended June 30, 2014, the effect of convertible debt was included in the diluted earnings per share calculations. For the three and six months ended June 30, 2013, the effect of convertible debt was not included in the diluted earnings per share calculations as it would have been anti-dilutive.
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NOTE 9. Income Taxes
During the three and six months ended June 30, 2014, the Company recorded a tax provision of $1.7 million and $1.6 million, respectively. The amounts reflect income tax expense related to the respective periods' pre-tax earnings as well as a $4.0 million and $9.3 million benefit for the three and six months ended June 30, 2014, respectively, from the reversal of our state deferred tax asset valuation allowance. During the three and six months ended June 30, 2013, the Company recorded a tax provision of $0.1 million and $0.4 million, respectively. The effective tax rate for the three and six months ended June 30, 2014 was 11.4% and 5.8%, respectively, which reflects tax expense of $5.7 million and $10.9 million, respectively, offset by the reversal of our state deferred tax asset valuation allowance. The effective rate for the three and six months ended June 30, 2014 is not reflective of our historical tax rate or our effective tax rate in future periods due to our state deferred tax asset valuation allowance reversals in 2014. The effective tax rate for the same periods in 2013 was not meaningful due to the effects of the deferred tax asset valuation allowance and federal and state tax net operating losses (“NOLs”), and there is no correlation between the effective tax rate and the amount of pre-tax income for those periods.
In accordance with ASC 740-10, Income Taxes, we determine our net deferred tax assets by taxing jurisdiction. We evaluate our net deferred tax assets, including the benefit from NOLs, by jurisdiction to determine if a valuation allowance is required. Companies must assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with operating losses and our experience of utilizing tax credit carryforwards and tax planning alternatives. We recorded a full valuation allowance against all of our deferred tax assets during 2008 due to economic conditions and the weight of negative evidence at that time.
During the year ended December 31, 2013, we reversed the valuation allowance against our federal deferred tax assets and our deferred tax assets in most of our state jurisdictions because the weight of the positive evidence in those jurisdictions exceeded that of the negative evidence. However, at December 31, 2013, we retained a valuation allowance for certain states which have shorter carryforward periods for utilization of NOL carryovers or lower current earnings relative to their NOL carryforward balance. In 2014, we determined that it is more likely than not that our state NOL carryforwards should be able to be realized and we reversed the remaining state deferred tax valuation allowance of $4.0 million in the second quarter of 2014 for a total of $9.3 million for the six months ended June 30, 2014.
At June 30, 2014, the Company had federal NOL carryforwards of approximately $62.3 million and federal credit carryforwards of $4.4 million. Federal NOL carryforwards may be carried forward up to 20 years to offset future taxable income. Our federal carryforward benefits begin to expire in 2028. The Company had $14.3 million of state NOL carryforwards at June 30, 2014. State NOLs may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with $7.5 million expiring between 2014 and 2027 and $6.8 million expiring between 2028 and 2032, absent sufficient state taxable income.
NOTE 10. Business Segments
The Company’s segment information is presented on the basis that the chief operating decision makers use in evaluating segment performance. The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 13 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding regions; and (3) our consolidated financial results. We have determined our reportable segments 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 similar operations and exhibit similar long-term economic characteristics. Our homebuilding operations include the acquisition and development of land, the sale and construction of single-family attached and detached homes, and the occasional sale of lots to third parties. The homebuilding operating segments that comprise each of our reportable segments are as follows:

Midwest | Southern | Mid-Atlantic
Columbus, Ohio | Tampa, Florida | Washington, D.C.
Cincinnati, Ohio | Orlando, Florida | Charlotte, North Carolina
Indianapolis, Indiana | Houston, Texas | Raleigh, North Carolina
Chicago, Illinois | San Antonio, Texas |
| Austin, Texas |
| Dallas/Fort Worth, Texas |

Our financial services operations include the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company's homes.
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The following table shows, by segment, revenue; operating income; interest expense; and income before income taxes for the three and six months ended June 30, 2014 and 2013:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Revenue: |  |  |  |  |  |  |
Midwest homebuilding | $ | 85,549 |  |  | $ | 79,498 |  |  | $ | 165,153 |  |  | $ | 140,201 |
Southern homebuilding | 101,122 |  |  | 68,946 |  |  | 181,322 |  |  | 119,906 |
Mid-Atlantic homebuilding | 88,467 |  |  | 78,857 |  |  | 155,639 |  |  | 149,511 |
Financial services (a) | 6,470 |  |  | 7,252 |  |  | 14,335 |  |  | 15,662 |
Total revenue | $ | 281,608 |  |  | $ | 234,553 |  |  | $ | 516,449 |  |  | $ | 425,280 |
Operating income: |  |  |  |  |  |  |
Midwest homebuilding (b) | $ | 6,726 |  |  | $ | 4,381 |  |  | $ | 13,969 |  |  | $ | 6,582 |
Southern homebuilding (b) | 8,649 |  |  | 3,858 |  |  | 14,526 |  |  | 6,949 |
Mid-Atlantic homebuilding (b) | 7,584 |  |  | 6,184 |  |  | 12,377 |  |  | 10,529 |
Financial services (a) | 3,374 |  |  | 4,169 |  |  | 8,400 |  |  | 9,625 |
Less: Corporate selling, general and administrative expense | (8,278 | ) |  | (6,800 | ) |  | (14,624 | ) |  | (12,667 | )
Total operating income | $ | 18,055 |  |  | $ | 11,792 |  |  | $ | 34,648 |  |  | $ | 21,018 |
Interest expense: |  |  |  |  |  |  |
Midwest homebuilding | $ | 492 |  |  | $ | 1,356 |  |  | $ | 1,761 |  |  | $ | 2,830 |
Southern homebuilding | 1,368 |  |  | 1,800 |  |  | 2,959 |  |  | 3,104 |
Mid-Atlantic homebuilding | 568 |  |  | 906 |  |  | 1,563 |  |  | 2,149 |
Financial services (a) | 302 |  |  | 335 |  |  | 617 |  |  | 654 |
Total interest expense | $ | 2,730 |  |  | $ | 4,397 |  |  | $ | 6,900 |  |  | $ | 8,737 |
Equity in loss (income) of unconsolidated joint ventures | 22 |  |  | — |  |  | (40 | ) |  | — |
Income before income taxes | $ | 15,303 |  |  | $ | 7,395 |  |  | $ | 27,788 |  |  | $ | 12,281 |

(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 re-financing.

(b) | For the three and six months ended June 30, 2014, the impact of charges relating to the impairment of operating communities in the Midwest region reduced operating income by $0.8 million. For the three months ended June 30, 2013, operating income was reduced by $0.6 million related to the impairment of future communities and $0.6 million related to the impairment of land held for sale in the Midwest region. For the six months ended June 30, 2013, the impact of charges relating to the impairment of future communities and land held for sale in the Midwest region reduced operating income by $0.8 million and $1.3 million, respectively. There were no impairment charges in the Mid-Atlantic or Southern regions for the three and six months ended June 30, 2014 and 2013.

The following tables show total assets by segment at June 30, 2014 and December 31, 2013:

| June 30, 2014
(In thousands) | Midwest |  | Southern |  | Mid-Atlantic |  | Corporate, Financial Services and Unallocated |  | Total
Deposits on real estate under option or contract | $ | 3,009 |  |  | $ | 8,364 |  |  | $ | 5,175 |  |  | $ | — |  |  | $ | 16,548 |
Inventory (a) | 274,305 |  |  | 295,883 |  |  | 229,404 |  |  | — |  |  | 799,592 |
Investments in unconsolidated joint ventures | 3,671 |  |  | 38,511 |  |  | — |  |  | — |  |  | 42,182 |
Other assets | 13,707 |  |  | 19,165 |  |  | 11,532 |  |  | 223,980 |  |  | 268,384 |
Total assets | $ | 294,692 |  |  | $ | 361,923 |  |  | $ | 246,111 |  |  | $ | 223,980 |  |  | $ | 1,126,706 |

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| December 31, 2013
(In thousands) | Midwest |  | Southern |  | Mid-Atlantic |  | Corporate, Financial Services and Unallocated |  | Total
Deposits on real estate under option or contract | $ | 2,003 |  |  | $ | 7,107 |  |  | $ | 5,255 |  |  | $ | — |  |  | $ | 14,365 |
Inventory (a) | 248,218 |  |  | 236,505 |  |  | 191,847 |  |  | — |  |  | 676,570 |
Investments in unconsolidated joint ventures | 5,331 |  |  | 29,935 |  |  | — |  |  | — |  |  | 35,266 |
Other assets | 10,571 |  |  | 982 |  |  | 11,050 |  |  | 361,372 |  |  | 383,975 |
Total assets | $ | 266,123 |  |  | $ | 274,529 |  |  | $ | 208,152 |  |  | $ | 361,372 |  |  | $ | 1,110,176 |

(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.

NOTE 11. Supplemental Guarantor Information
The Company's obligations under the 2018 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible 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 subsidiary guarantors of the 2018 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible Senior Subordinated Notes are the same.
The following condensed consolidating financial information includes balance sheets, statements of operations 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) 2018 Senior Notes, on a joint and several senior unsecured basis, (b) the 2017 Convertible Senior Subordinated Notes on a joint and several senior subordinated unsecured basis and (c) the 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, 2014, 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 for the 2018 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.
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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|  | Three Months Ended June 30, 2014
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
Revenue |  | $ | — |  | $ | 275,138 |  | $ | 6,470 |  | $ | — |  | $ | 281,608 |
Costs and expenses: |  |  |  |  |  |
Land and housing |  | — |  | 221,217 |  | — |  | — |  | 221,217 |
Impairment of inventory and investment in unconsolidated joint ventures |  | — |  | 804 |  | — |  | — |  | 804 |
General and administrative |  | — |  | 18,057 |  | 3,224 |  | — |  | 21,281 |
Selling |  | — |  | 20,251 |  | — |  | — |  | 20,251 |
Equity in loss of unconsolidated joint ventures |  | — |  | — |  | 22 |  | — |  | 22 |
Interest |  | — |  | 2,428 |  | 302 |  | — |  | 2,730 |
Total costs and expenses |  | — |  | 262,757 |  | 3,548 |  | — |  | 266,305 |
Income before income taxes |  | — |  | 12,381 |  | 2,922 |  | — |  | 15,303 |
Provision for income taxes |  | — |  | 344 |  | 1,405 |  | — |  | 1,749 |
Equity in subsidiaries |  | 13,554 |  | — |  | — |  | (13,554 | ) | — |
Net income |  | 13,554 |  | 12,037 |  | 1,517 |  | (13,554 | ) | 13,554 |
Preferred dividends |  | 1,219 |  | — |  | — |  | — |  | 1,219 |
Net income to common shareholders |  | $ | 12,335 |  | $ | 12,037 |  | $ | 1,517 |  | $ | (13,554 | ) | $ | 12,335 |

|  | Three Months Ended June 30, 2013
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
Revenue |  | $ | — |  | $ | 227,301 |  | $ | 7,252 |  | $ | — |  | $ | 234,553 |
Costs and expenses: |  |  |  |  |  |
Land and housing |  | — |  | 187,136 |  | — |  | — |  | 187,136 |
Impairment of inventory and investment in unconsolidated joint ventures |  | — |  | 1,201 |  | — |  | — |  | 1,201 |
General and administrative |  | — |  | 14,953 |  | 3,196 |  | — |  | 18,149 |
Selling |  | — |  | 16,246 |  | 29 |  | — |  | 16,275 |
Interest |  | — |  | 4,062 |  | 335 |  | — |  | 4,397 |
Total costs and expenses |  | — |  | 223,598 |  | 3,560 |  | — |  | 227,158 |
Income before income taxes |  | — |  | 3,703 |  | 3,692 |  | — |  | 7,395 |
(Benefit) provision for income taxes |  | — |  | (1,199 | ) | 1,330 |  | — |  | 131 |
Equity in subsidiaries |  | 7,264 |  | — |  | — |  | (7,264 | ) | — |
Net income |  | 7,264 |  | 4,902 |  | 2,362 |  | (7,264 | ) | 7,264 |
Preferred dividends |  | 1,219 |  | — |  | — |  | — |  | 1,219 |
Net income to common shareholders |  | $ | 6,045 |  | $ | 4,902 |  | $ | 2,362 |  | $ | (7,264 | ) | $ | 6,045 |

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|  | Six Months Ended June 30, 2014
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
Revenue |  | $ | — |  | $ | 502,114 |  | $ | 14,335 |  | $ | — |  | $ | 516,449 |
Costs and expenses: |  |  |  |  |  |
Land and housing |  | — |  | 405,181 |  | — |  | — |  | 405,181 |
Impairment of inventory and investment in unconsolidated joint ventures |  | — |  | 804 |  | — |  | — |  | 804 |
General and administrative |  | — |  | 33,348 |  | 6,248 |  | — |  | 39,596 |
Selling |  | — |  | 36,220 |  | — |  | — |  | 36,220 |
Equity in income of unconsolidated joint ventures |  | — |  | — |  | (40 | ) | — |  | (40 | )
Interest |  | — |  | 6,282 |  | 618 |  | — |  | 6,900 |
Total costs and expenses |  | — |  | 481,835 |  | 6,826 |  | — |  | 488,661 |
Income before income taxes |  | — |  | 20,279 |  | 7,509 |  | — |  | 27,788 |
(Benefit) provision for income taxes |  | — |  | (1,437 | ) | 3,039 |  | — |  | 1,602 |
Equity in subsidiaries |  | 26,186 |  | — |  | — |  | (26,186 | ) | — |
Net income |  | 26,186 |  | 21,716 |  | 4,470 |  | (26,186 | ) | 26,186 |
Preferred dividends |  | 2,438 |  | — |  | — |  | — |  | 2,438 |
Net income to common shareholders |  | $ | 23,748 |  | $ | 21,716 |  | $ | 4,470 |  | $ | (26,186 | ) | $ | 23,748 |

|  | Six Months Ended June 30, 2013
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
Revenue |  | $ | — |  | $ | 409,618 |  | $ | 15,662 |  | $ | — |  | $ | 425,280 |
Costs and expenses: |  |  |  |  |  |
Land and housing |  | — |  | 338,649 |  | — |  | — |  | 338,649 |
Impairment of inventory and investment in unconsolidated joint ventures |  | — |  | 2,101 |  | — |  | — |  | 2,101 |
General and administrative |  | — |  | 27,795 |  | 6,333 |  | — |  | 34,128 |
Selling |  | — |  | 29,338 |  | 46 |  | — |  | 29,384 |
Interest |  | — |  | 8,084 |  | 653 |  | — |  | 8,737 |
Total costs and expenses |  | — |  | 405,967 |  | 7,032 |  | — |  | 412,999 |
Income before income taxes |  | — |  | 3,651 |  | 8,630 |  | — |  | 12,281 |
(Benefit) provision for income taxes |  | — |  | (2,614 | ) | 3,044 |  | — |  | 430 |
Equity in subsidiaries |  | 11,851 |  | — |  | — |  | (11,851 | ) | — |
Net income |  | 11,851 |  | 6,265 |  | 5,586 |  | (11,851 | ) | 11,851 |
Preferred dividends |  | 1,219 |  | — |  | — |  | — |  | 1,219 |
Excess of fair value over book value of preferred shares redeemed |  | 2,190 |  | — |  | — |  | — |  | 2,190 |
Net income to common shareholders |  | $ | 8,442 |  | $ | 6,265 |  | $ | 5,586 |  | $ | (11,851 | ) | $ | 8,442 |

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CONDENSED CONSOLIDATING BALANCE SHEET
|  | June 30, 2014
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
ASSETS: |  |  |  |  |  |
Cash and cash equivalents |  | $ | — |  | $ | 19,707 |  | $ | 13,936 |  | $ | — |  | $ | 33,643 |
Restricted cash |  | — |  | 10,076 |  | — |  | — |  | 10,076 |
Mortgage loans held for sale |  | — |  | — |  | 64,782 |  | — |  | 64,782 |
Inventory |  | — |  | 816,140 |  | — |  | — |  | 816,140 |
Property and equipment - net |  | — |  | 10,969 |  | 314 |  | — |  | 11,283 |
Investment in unconsolidated joint ventures |  | — |  | 23,843 |  | 18,339 |  | — |  | 42,182 |
Deferred income taxes, net of valuation allowances |  | — |  | 108,626 |  | 932 |  | — |  | 109,558 |
Investment in subsidiaries |  | 555,665 |  | — |  | — |  | (555,665 | ) | — |
Intercompany assets |  | 327,915 |  | — |  | — |  | (327,915 | ) | — |
Other assets |  | 8,583 |  | 21,564 |  | 8,895 |  | — |  | 39,042 |
TOTAL ASSETS |  | $ | 892,163 |  | $ | 1,010,925 |  | $ | 107,198 |  | $ | (883,580 | ) | $ | 1,126,706 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
LIABILITIES: |  |  |  |  |  |
Accounts payable |  | $ | — |  | $ | 87,082 |  | $ | 243 |  | $ | — |  | $ | 87,325 |
Customer deposits |  | — |  | 15,019 |  | — |  | — |  | 15,019 |
Intercompany liabilities |  | — |  | 307,650 |  | 20,265 |  | (327,915 | ) | — |
Other liabilities |  | — |  | 54,096 |  | 5,320 |  | — |  | 59,416 |
Community development district obligations |  | — |  | 1,884 |  | — |  | — |  | 1,884 |
Obligation for consolidated inventory not owned |  | — |  | 1,268 |  | — |  | — |  | 1,268 |
Notes payable bank - financial services operations |  | — |  | — |  | 61,914 |  | — |  | 61,914 |
Notes payable - other |  | — |  | 7,717 |  | — |  | — |  | 7,717 |
Convertible senior subordinated notes due 2017 |  | 57,500 |  | — |  | — |  | — |  | 57,500 |
Convertible senior subordinated notes due 2018 |  | 86,250 |  | — |  | — |  | — |  | 86,250 |
Senior notes |  | 228,269 |  | — |  | — |  | — |  | 228,269 |
TOTAL LIABILITIES |  | 372,019 |  | 474,716 |  | 87,742 |  | (327,915 | ) | 606,562 |
SHAREHOLDERS’ EQUITY |  | 520,144 |  | 536,209 |  | 19,456 |  | (555,665 | ) | 520,144 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  | $ | 892,163 |  | $ | 1,010,925 |  | $ | 107,198 |  | $ | (883,580 | ) | $ | 1,126,706 |

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CONDENSED CONSOLIDATING BALANCE SHEET
|  | December 31, 2013
(In thousands) |  | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
ASSETS: |  |  |  |  |  |
Cash and cash equivalents |  | $ | — |  | $ | 113,407 |  | $ | 15,318 |  | $ | — |  | $ | 128,725 |
Restricted cash |  | — |  | 13,902 |  | — |  | — |  | 13,902 |
Mortgage loans held for sale |  | — |  | — |  | 81,810 |  | — |  | 81,810 |
Inventory |  | — |  | 690,934 |  | — |  | — |  | 690,934 |
Property and equipment - net |  | — |  | 10,267 |  | 269 |  | — |  | 10,536 |
Investment in unconsolidated joint ventures |  | — |  | 13,525 |  | 21,741 |  | — |  | 35,266 |
Deferred income taxes, net of valuation allowances |  | — |  | 109,763 |  | 1,148 |  | — |  | 110,911 |
Investment in subsidiaries |  | 535,879 |  | — |  | — |  | (535,879 | ) | — |
Intercompany assets |  | 318,852 |  | — |  | — |  | (318,852 | ) | — |
Other assets |  | 9,892 |  | 17,180 |  | 11,020 |  | — |  | 38,092 |
TOTAL ASSETS |  | $ | 864,623 |  | $ | 968,978 |  | $ | 131,306 |  | $ | (854,731 | ) | $ | 1,110,176 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
LIABILITIES: |  |  |  |  |  |
Accounts payable |  | $ | — |  | $ | 69,887 |  | $ | 339 |  | $ | — |  | $ | 70,226 |
Customer deposits |  | — |  | 11,262 |  | — |  | — |  | 11,262 |
Intercompany liabilities |  | — |  | 296,229 |  | 22,623 |  | (318,852 | ) | — |
Other liabilities |  | — |  | 64,413 |  | 6,928 |  | — |  | 71,341 |
Community development district obligations |  | — |  | 3,130 |  | — |  | — |  | 3,130 |
Obligation for consolidated inventory not owned |  | — |  | 1,775 |  | — |  | — |  | 1,775 |
Notes payable bank - financial services operations |  | — |  | — |  | 80,029 |  | — |  | 80,029 |
Notes payable - other |  | — |  | 7,790 |  | — |  | — |  | 7,790 |
Convertible senior subordinated notes due 2017 |  | 57,500 |  | — |  | — |  | — |  | 57,500 |
Convertible senior subordinated notes due 2018 |  | 86,250 |  | — |  | — |  | — |  | 86,250 |
Senior notes |  | 228,070 |  | — |  | — |  | — |  | 228,070 |
TOTAL LIABILITIES |  | 371,820 |  | 454,486 |  | 109,919 |  | (318,852 | ) | 617,373 |
SHAREHOLDERS’ EQUITY |  | 492,803 |  | 514,492 |  | 21,387 |  | (535,879 | ) | 492,803 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  | $ | 864,623 |  | $ | 968,978 |  | $ | 131,306 |  | $ | (854,731 | ) | $ | 1,110,176 |

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
| Six Months Ended June 30, 2014
(In thousands) | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
OPERATING ACTIVITIES: |  |  |  |  |
Net cash provided by (used in) operating activities | $ | 6,400 |  | $ | (93,426 | ) | $ | 26,757 |  | $ | (6,400 | ) | $ | (66,669 | )
INVESTING ACTIVITIES: |  |  |  |  |
Restricted cash | — |  | 3,819 |  | — |  | — |  | 3,819 |
Purchase of property and equipment | — |  | (1,578 | ) | (99 | ) | — |  | (1,677 | )
Investments in and advances to unconsolidated joint ventures | — |  | (10,318 | ) | (3,166 | ) | — |  | (13,484 | )
Net proceeds from the sale of mortgage servicing rights | — |  | — |  | 2,135 |  | — |  | 2,135 |
Net cash used in investing activities | — |  | (8,077 | ) | (1,130 | ) | — |  | (9,207 | )
FINANCING ACTIVITIES: |  |  |  |  |
Repayments of bank borrowings - net | — |  | — |  | (18,115 | ) | — |  | (18,115 | )
Principal repayments of note payable - other and community development district bond obligations | — |  | (73 | ) | — |  | — |  | (73 | )
Proceeds from exercise of stock options | 1,460 |  | — |  | — |  | — |  | 1,460 |
Intercompany financing | (5,422 | ) | 7,876 |  | (2,454 | ) | — |  | — |
Dividends paid | (2,438 | ) | — |  | (6,400 | ) | 6,400 |  | (2,438 | )
Debt issue costs | — |  | — |  | (40 | ) | — |  | (40 | )
Net cash (used in) provided by financing activities | (6,400 | ) | 7,803 |  | (27,009 | ) | 6,400 |  | (19,206 | )
Net decrease in cash and cash equivalents | — |  | (93,700 | ) | (1,382 | ) | — |  | (95,082 | )
Cash and cash equivalents balance at beginning of period | — |  | 113,407 |  | 15,318 |  | — |  | 128,725 |
Cash and cash equivalents balance at end of period | $ | — |  | $ | 19,707 |  | $ | 13,936 |  | $ | — |  | $ | 33,643 |

| Six Months Ended June 30, 2013
(In thousands) | M/I Homes, Inc. | Guarantor Subsidiaries | Unrestricted Subsidiaries | Eliminations | Consolidated
OPERATING ACTIVITIES: |  |  |  |  |
Net cash provided by (used in) operating activities | $ | 4,600 |  | $ | (47,747 | ) | $ | 22,569 |  | $ | (4,600 | ) | $ | (25,178 | )
INVESTING ACTIVITIES: |  |  |  |  |
Restricted cash | — |  | (3,869 | ) | — |  | — |  | (3,869 | )
Purchase of property and equipment | — |  | (991 | ) | (59 | ) | — |  | (1,050 | )
Investments in and advances to unconsolidated joint ventures | — |  | (10,160 | ) | (8,128 | ) | — |  | (18,288 | )
Net cash used in investing activities | — |  | (15,020 | ) | (8,187 | ) | — |  | (23,207 | )
FINANCING ACTIVITIES: |  |  |  |  |
Repayments from bank borrowings - net | — |  | — |  | (17,515 | ) | — |  | (17,515 | )
Principal repayments from note payable - other and community development district bond obligations | — |  | (1,676 | ) | — |  | — |  | (1,676 | )
Proceeds from issuance of convertible senior subordinated notes due 2018 | 86,250 |  | — |  | — |  | — |  | 86,250 |
Redemption of of preferred shares | (50,352 | ) | — |  | — |  | — |  | (50,352 | )
Proceeds from exercise of stock options | 2,639 |  | — |  | — |  | — |  | 2,639 |
Proceeds from issuance of common shares | 54,617 |  | — |  | — |  | — |  | 54,617 |
Intercompany financing | (96,535 | ) | 90,800 |  | 5,735 |  | — |  | — |
Dividends paid | (1,219 | ) | — |  | (4,600 | ) | 4,600 |  | (1,219 | )
Debt issue costs | — |  | (3,544 | ) | (61 | ) | — |  | (3,605 | )
Net cash (used in) provided by financing activities | (4,600 | ) | 85,580 |  | (16,441 | ) | 4,600 |  | 69,139 |
Net increase (decrease) in cash and cash equivalents | — |  | 22,813 |  | (2,059 | ) | — |  | 20,754 |
Cash and cash equivalents balance at beginning of period | — |  | 126,334 |  | 19,164 |  | — |  | 145,498 |
Cash and cash equivalents balance at end of period | $ | — |  | $ | 149,147 |  | $ | 17,105 |  | $ | — |  | $ | 166,252 |

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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 delivered more than 88,000 homes since we commenced homebuilding activities in 1976. The Company's homes are marketed and sold under the M/I Homes brand (M/I Homes and Showcase Collection (exclusively by M/I)). We also operate under the name Triumph Homes in certain communities in our Houston, Texas market. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Tampa 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;

• | Our Application of Critical Accounting Estimates and Policies;

• | Our 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,” “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, 2013 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 judgments on historical experience and on various other factors that are believed to be 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 judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 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, 2014 as compared to those disclosed in 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, 2013.
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RESULTS OF OPERATIONS
The Company’s segment information is presented on the basis that its chief operating decision makers use in evaluating segment performance. The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 13 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding regions; and (3) our consolidated financial results. We have determined our reportable segments 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 similar operations and exhibit similar long-term economic characteristics. Our homebuilding operations include the acquisition and development of land, the sale and construction of single-family attached and detached homes, and the occasional sale of lots and land to third parties. The homebuilding operating segments that comprise each of our reportable segments are as follows:

Midwest | Southern | Mid-Atlantic
Columbus, Ohio | Tampa, Florida | Washington, D.C.
Cincinnati, Ohio | Orlando, Florida | Charlotte, North Carolina
Indianapolis, Indiana | Houston, Texas | Raleigh, North Carolina
Chicago, Illinois | San Antonio, Texas |
| Austin, Texas |
| Dallas/Fort Worth, Texas |

Our financial services operations include the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company's homes.
Overview
We believe that housing market conditions, in general, remain healthy despite a moderation in the pace of new contracts in 2014's first half compared to 2013's first half. We believe this moderation in the housing industry was due to a number of factors, including (1) higher mortgage rates in the first half of 2014, (2) reduced affordability in certain markets as a result of higher average sales prices and higher mortgage rates, (3) a tepid economic recovery and uneven job creation, and (4) the imposition of lower loan limits on government-sponsored mortgages beginning in January 2014. Our results during the three and six months ended June 30, 2014 were also negatively impacted by the harsh weather conditions early in the year, which delayed the opening of certain of our new communities and their expected contribution to our new contracts, as well as lower traffic levels. Our new contracts declined by 6% for the three and six months ended June 30, 2014. Despite the moderation in new contracts in the first half of 2014, we experienced improvements in most of our financial and operating metrics for the three and six months ended June 30, 2014.
During the six months ended June 30, 2014, the Company reported revenue of $516.4 million, a 21.4% increase compared to the same period in 2013, and achieved net income of $26.2 million, of which $16.9 million ($0.54 per diluted share) related to our core profitability, and $9.3 million ($0.31 per diluted share) related to the accounting benefit from income taxes associated with the reversal of our remaining state deferred tax asset valuation allowance (see Note 9 to our Unaudited Condensed Consolidated Financial Statements for further information). We also achieved our highest year-to-date gross and operating margins since 2006, with gross margin reaching 21.5% and operating margin reaching 6.7% for the six months ended June 30, 2014. We believe our improved results of operations are attributable to (1) our strategic growth and investment in new communities, along with a shift in our mix of communities towards better performing locations within each of our markets; (2) our continued progress in shifting our investment to housing markets with stronger economic growth, including expansion into new markets; and (3) the contributions from our financial services operations. Please see further discussion of our financial and operating metrics below in the “Summary of Company Results” and our “Year Over Year Comparison” section.
Summary of Financial Results
For the quarter ended June 30, 2014, we achieved net income to common shareholders of $12.3 million, or $0.44 per diluted share, which included a $4.0 million accounting benefit from income taxes associated with the reversal of the remaining valuation allowance against our state deferred tax assets, $1.2 million of dividend payments made to holders of our Series A Preferred Shares and $0.8 million of pre-tax impairment charges. This compares to net income to common shareholders of $6.0 million, or $0.25 per diluted share, for the second quarter of 2013, which included $1.2 million of dividend payments made to holders of our Series A Preferred Shares and $1.2 million of pre-tax impairment charges. For the six months ended June 30, 2014, we achieved net income to common shareholders of $23.7 million, or $0.85 per diluted share, which included a $9.3 million accounting benefit from income taxes associated with the reversal of the remaining valuation allowance against our state deferred tax assets, $2.4 million of dividend payments made to holders of our Series A Preferred Shares and $0.8 million of pre-tax impairment charges.
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This compares to net income to common shareholders of $8.4 million, or $0.36 per diluted share, for the six months ended June 30, 2013, which included a $2.2 million non-cash equity adjustment resulting from the excess of fair value over carrying value of our Series A Preferred Shares that were called for redemption in the first quarter of 2013, $2.1 million of pre-tax impairment charges and $1.2 million of dividend payments made to holders of our Series A Preferred Shares.
During the quarter ended June 30, 2014, we recorded total revenue of $281.6 million, of which $273.4 million was from homes delivered, $1.8 million was from land sales and $6.4 million was from our financial services operations. Revenue from homes delivered increased 23% driven primarily by the 106 additional homes delivered in 2014's second quarter compared to the same period in 2013 and a 9% increase in the average sales price of homes delivered ($25,000 per home delivered). Revenue from land sales decreased $3.8 million during the second quarter of 2014 primarily due to two large land sales in our Midwest region and a large land sale in our Mid-Atlantic region in the prior year. Revenue in our financial services segment decreased 11% to $6.4 million in the second quarter of 2014 primarily due to the factors discussed below in our “Year Over Year Comparison” section. For the first half of 2014, we recorded total revenue of $516.4 million, of which $494.1 million was from homes delivered, $8.0 million was from land sales and $14.3 million was from our financial services operations. Revenue from homes delivered increased 24% driven primarily by the 216 additional homes delivered in the first half of 2014 compared to the same period in 2013 and a 7% increase in the average sales price of homes delivered ($21,000 per home delivered). Revenue from land sales decreased $2.1 million from 2013's first half primarily due to a large land sale in our Mid-Atlantic region in the prior year. Revenue in our financial services segment decreased 8% to $14.3 million in the first half of 2014 primarily due to the factors discussed below in our “Year Over Year Comparisons” section.
Total gross margin increased $13.4 million in the second quarter of 2014 compared to the second quarter of 2013 primarily as a result of a $14.2 million improvement in the gross margin of our homebuilding operations, offset partially by a $0.8 million decline in gross margin from our financial services operations. The increase in homebuilding gross margin for the second quarter of 2014 resulted primarily from the 9% increase in the average sales price of homes delivered ($25,000 per home delivered) and the 106 unit increase in the number of homes delivered. For the six months ended June 30, 2014, total gross margin increased $26.0 million compared to the first half of 2013, which was largely the result of a $27.3 million improvement in the gross margin of our homebuilding operations, offset partially by a $1.3 million decline in gross margin from our financial services operations. The increase in homebuilding gross margin for the first half of 2014 resulted primarily from the 7% increase in the average sales price of homes delivered ($21,000 per home delivered) and the 216 unit increase in the number of homes delivered.
The increased sales prices for both the three and six months ended June 30, 2014 were driven primarily by the performance of our newer communities, the strategic shift in our geographic footprint, which resulted in more homes delivered in our better performing markets and a shift in the mix of homes delivered to higher priced and larger homes. We also experienced better pricing leverage in select locations and submarkets. The pricing and unit improvements were partially offset by higher average lot and construction costs related to both the mix of homes delivered as well as cost increases associated with homebuilding industry conditions and normal supply and demand dynamics. In the six month period ended June 30, 2014, we were able to pass a majority of the higher costs to our homebuyers in the form of higher sales prices and lower incentives. However, recent moderation in the pace of improvement in the homebuilding industry may make it more difficult to continue to fully offset any additional increases in lot, material, labor and land costs that we may experience going forward.
Selling, general and administrative expense increased $7.1 million and $12.3 million for the three and six months ended June 30, 2014, respectively, which offset, in part, the increase in our gross margins discussed above. For the second quarter of 2014, selling expense increased $4.0 million from the prior year's second quarter and increased as a percentage of revenue to 7.2% compared to 6.9% in the second quarter of 2013. Variable selling expense for sales commissions contributed $2.7 million to the increase due to the increase in the number of homes delivered and the higher average sales price. The increase in selling expense was also attributable to a $1.3 million increase in non-variable selling expense primarily related to an increase in expenses associated with our sales offices and models resulting from the increase in our number of communities compared to 2013's second quarter. General and administrative expense increased $3.1 million during the second quarter of 2014 but improved slightly as a percentage of revenue to 7.6% compared to 7.7% for the second quarter of 2013. This increase was primarily due to a $0.8 million increase in incentive compensation expense and a $1.3 million increase in payroll-related expense, resulting primarily from the increase in our employee count related to our community count and backlog growth. For the six months ended June 30, 2014, selling expense increased $6.8 million from the first half of 2013 and increased slightly as a percentage of revenue to 7.0% compared to 6.9% in the first half of 2013. Variable selling expense for sales commissions contributed $4.3 million to the increase due to the increase in the number of homes delivered and the higher average sales price. The increase in selling expense was also attributable to a $2.6 million increase in non-variable selling expense primarily related to an increase in expenses associated with our sales offices and models resulting from the increase in our number of communities. General and administrative expense increased $5.5 million compared to the six months ended June 30, 2013 but improved as a percentage of revenue from 8.0% in the first half of 2013 to 7.7% in the first half of 2014. This increase was primarily due to a $1.9 million increase in incentive compensation expense and
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a $2.5 million increase in payroll-related expense, resulting primarily from a 22% increase in our employee count related to our community count and backlog growth. Overall, our selling, general and administrative expense was 14.7% of revenue in both the second quarter and first half of 2014, respectively, compared to 14.7% and 14.9% for the same periods in 2013, respectively.
Summary of Operational Results
In addition to the improving financial results noted above, certain of our operational metrics also improved. For the quarter ended June 30, 2014, we achieved a 13% increase in the number of homes delivered and a 9% increase in the average sales price of homes delivered compared to the same period a year ago. For the six months ended June 30, 2014, we achieved a 15% increase in the number of homes delivered and a 7% increase in the average sales price of homes delivered compared to 2013's first half. We also experienced a 13% increase in the average sales price of homes in backlog and an 11% increase in the overall sales value of our backlog at June 30, 2014 compared to June 30, 2013.
We continue to invest in communities and markets that we believe will help us attain improved profitability as housing markets improve and enhance our ability to establish market share and create a platform for future growth in our current markets. During the six month period ended June 30, 2014, we opened 22 communities and closed 34 communities. However, new contracts declined by 6% during the three and six months ended June 30, 2014 compared to a year ago and the number of homes in our backlog at June 30, 2014 declined by 2% compared to June 30, 2013. Our absorption rates per community also declined from 2.6 for the six months ended June 30, 2013 to 2.2 for the six months ended June 30, 2014. We believe this decline in new contracts, units in backlog and absorption rates from 2013's first half was the result of the general moderation of the pace of improvement in the housing market in the first half of 2014 compared to 2013's same period as well as harsh winter weather conditions that kept potential homebuyers at home and delayed our new community openings to later in the year. Additionally, comparing new contracts levels in the second quarter and first half of 2014 with the second quarter and first half of 2013 was challenging as a result of our strong level of new contracts in the first half of 2013, which represented a 34% increase compared to the first half of 2012.
Outlook
Looking ahead, we continue to believe that the fundamentals supporting the housing recovery remain in place, despite recent moderation in the demand for new homes. We believe overall housing market conditions will continue to be positive over the next several quarters but expect the pace of new contracts to be more moderate than we experienced in 2013. We expect that the level of demand for housing will be uneven and will remain largely dependent on (1) our ability to open new communities during the second half of 2014, (2) traffic levels, (3) the extent of job growth and consumer confidence, and (4) the stability in mortgage loan underwriting standards and interest rates. Furthermore, despite increased home prices and higher mortgage rates (which remain at historically low levels), we believe that the average cost of new home ownership currently provides value compared to the average cost of renting in most markets, and the current limited availability of housing inventory should increase the need for construction of new homes. We believe these conditions in the housing market, combined with our investments in land for new communities in desirable locations, should lead to continued positive comparisons of the Company's financial performance to prior year results through the remainder of 2014.
Given our expectations with respect to homebuilding market conditions, and consistent with our focus on improving long-term returns, we will continue to emphasize the following strategic business objectives during the remainder of 2014:

• | profitably growing our presence in our existing markets;

• | review new markets for investment opportunities;

• | maintaining a strong balance sheet; and

• | emphasizing customer service, product quality and design, and premier locations.

With these objectives in mind, we took a number of steps during the first half of 2014 to position the Company for the remainder of 2014 and beyond, including investing $124.9 million in land acquisitions and $51.9 million in land development to help grow our presence in our existing markets. We currently estimate that we will spend approximately $425 million to $475 million in 2014 on land purchases and land development. However, given varying results in each of our local markets, we will continue to adjust our strategies and investments based on housing demand and our performance in each of our markets.
Despite our positive expectations, it is unclear whether our financial results will continue to improve at the rate they did in 2013 and the first half of 2014. Going forward, we believe our abilities to leverage our fixed costs, obtain land at desired rates of return, and grow our active communities provide our best opportunities to continue improving our financial results. However, we can provide no assurance that the rate of positive annual trends and/or sequential trends experienced in our financial and operating metrics in 2013 and the first half of 2014 will continue throughout the remainder of 2014.
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The following table shows, by segment, revenue; gross margin; selling, general and administrative expense; operating income (loss); interest expense; and income before income taxes for the three and six months ended June 30, 2014 and 2013:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Revenue: |  |  |  |  |  |  |
Midwest homebuilding | $ | 85,549 |  |  | $ | 79,498 |  |  | $ | 165,153 |  |  | $ | 140,201 |
Southern homebuilding | 101,122 |  |  | 68,946 |  |  | 181,322 |  |  | 119,906 |
Mid-Atlantic homebuilding | 88,467 |  |  | 78,857 |  |  | 155,639 |  |  | 149,511 |
Financial services (a) | 6,470 |  |  | 7,252 |  |  | 14,335 |  |  | 15,662 |
Total revenue | $ | 281,608 |  |  | $ | 234,553 |  |  | $ | 516,449 |  |  | $ | 425,280 |
Gross margin: |  |  |  |  |  |  |
Midwest homebuilding | $ | 16,382 |  |  | $ | 12,560 |  |  | $ | 31,779 |  |  | $ | 21,750 |
Southern homebuilding | 20,180 |  |  | 12,299 |  |  | 35,396 |  |  | 22,084 |
Mid-Atlantic homebuilding | 16,555 |  |  | 14,105 |  |  | 28,954 |  |  | 25,034 |
Financial services (a) | 6,470 |  |  | 7,252 |  |  | 14,335 |  |  | 15,662 |
Total gross margin | $ | 59,587 |  |  | $ | 46,216 |  |  | $ | 110,464 |  |  | $ | 84,530 |
Selling, general and administrative expense: |  |  |  |  |  |  |
Midwest homebuilding | $ | 9,656 |  |  | $ | 8,180 |  |  | $ | 17,810 |  |  | $ | 15,168 |
Southern homebuilding | 11,531 |  |  | 8,441 |  |  | 20,870 |  |  | 15,136 |
Mid-Atlantic homebuilding | 8,971 |  |  | 7,921 |  |  | 16,577 |  |  | 14,504 |
Financial services (a) | 3,096 |  |  | 3,082 |  |  | 5,935 |  |  | 6,037 |
Corporate | 8,278 |  |  | 6,800 |  |  | 14,624 |  |  | 12,667 |
Total selling, general and administrative expense | $ | 41,532 |  |  | $ | 34,424 |  |  | $ | 75,816 |  |  | $ | 63,512 |
Operating income (loss): |  |  |  |  |  |  |
Midwest homebuilding | $ | 6,726 |  |  | $ | 4,381 |  |  | $ | 13,969 |  |  | $ | 6,582 |
Southern homebuilding | 8,649 |  |  | 3,858 |  |  | 14,526 |  |  | 6,949 |
Mid-Atlantic homebuilding | 7,584 |  |  | 6,184 |  |  | 12,377 |  |  | 10,529 |
Financial services (a) | 3,374 |  |  | 4,169 |  |  | 8,400 |  |  | 9,625 |
Corporate | (8,278 | ) |  | (6,800 | ) |  | (14,624 | ) |  | (12,667 | )
Total operating income | $ | 18,055 |  |  | $ | 11,792 |  |  | $ | 34,648 |  |  | $ | 21,018 |
Interest expense: |  |  |  |  |  |  |
Midwest homebuilding | $ | 492 |  |  | $ | 1,356 |  |  | $ | 1,761 |  |  | $ | 2,830 |
Southern homebuilding | 1,368 |  |  | 1,800 |  |  | 2,959 |  |  | 3,104 |
Mid-Atlantic homebuilding | 568 |  |  | 906 |  |  | 1,563 |  |  | 2,149 |
Financial services (a) | 302 |  |  | 335 |  |  | 617 |  |  | 654 |
Total interest expense | $ | 2,730 |  |  | $ | 4,397 |  |  | $ | 6,900 |  |  | $ | 8,737 |
Equity in loss (income) of unconsolidated joint ventures | 22 |  |  | — |  |  | (40 | ) |  | — |
Income before income taxes | $ | 15,303 |  |  | $ | 7,395 |  |  | $ | 27,788 |  |  | $ | 12,281 |

(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.

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The following tables show total assets by segment at June 30, 2014 and December 31, 2013:

| At June 30, 2014
(In thousands) | Midwest |  | Southern |  | Mid-Atlantic |  | Corporate, Financial Services and Unallocated |  | Total
Deposits on real estate under option or contract | $ | 3,009 |  |  | $ | 8,364 |  |  | $ | 5,175 |  |  | $ | — |  |  | $ | 16,548 |
Inventory (a) | 274,305 |  |  | 295,883 |  |  | 229,404 |  |  | — |  |  | 799,592 |
Investments in unconsolidated joint ventures | 3,671 |  |  | 38,511 |  |  | — |  |  | — |  |  | 42,182 |
Other assets | 13,707 |  |  | 19,165 |  |  | 11,532 |  |  | 223,980 |  |  | 268,384 |
Total assets | $ | 294,692 |  |  | $ | 361,923 |  |  | $ | 246,111 |  |  | $ | 223,980 |  |  | $ | 1,126,706 |

| At December 31, 2013
(In thousands) | Midwest |  | Southern |  | Mid-Atlantic |  | Corporate, Financial Services and Unallocated |  | Total
Deposits on real estate under option or contract | $ | 2,003 |  |  | $ | 7,107 |  |  | $ | 5,255 |  |  | $ | — |  |  | $ | 14,365 |
Inventory (a) | 248,218 |  |  | 236,505 |  |  | 191,847 |  |  | — |  |  | 676,570 |
Investments in unconsolidated joint ventures | 5,331 |  |  | 29,935 |  |  | — |  |  | — |  |  | 35,266 |
Other assets | 10,571 |  |  | 982 |  |  | 11,050 |  |  | 361,372 |  |  | 383,975 |
Total assets | $ | 266,123 |  |  | $ | 274,529 |  |  | $ | 208,152 |  |  | $ | 361,372 |  |  | $ | 1,110,176 |

(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.

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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, 2014 and 2013:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(Dollars in thousands) | 2014 |  | 2013 |  | 2014 |  | 2013
Midwest Region |  |  |  |  |  |  |
Homes delivered | 291 |  |  | 298 |  |  | 550 |  |  | 530 |
New contracts, net | 394 |  |  | 395 |  |  | 768 |  |  | 744 |
Backlog at end of period | 763 |  |  | 632 |  |  | 763 |  |  | 632 |
Average sales price per home delivered | $ | 293 |  |  | $ | 257 |  |  | $ | 294 |  |  | $ | 259 |
Average sales price of homes in backlog | $ | 324 |  |  | $ | 282 |  |  | $ | 324 |  |  | $ | 282 |
Aggregate sales value of homes in backlog | $ | 247,068 |  |  | $ | 178,379 |  |  | $ | 247,068 |  |  | $ | 178,379 |
Revenue homes | $ | 85,205 |  |  | $ | 76,674 |  |  | $ | 161,861 |  |  | $ | 137,377 |
Revenue third party land sales | $ | 344 |  |  | $ | 2,824 |  |  | $ | 3,292 |  |  | $ | 2,824 |
Operating income homes | $ | 6,635 |  |  | $ | 4,722 |  |  | $ | 12,971 |  |  | $ | 7,571 |
Operating income (loss) land | $ | 91 |  |  | $ | (341 | ) |  | $ | 998 |  |  | $ | (989 | )
Number of active communities | 60 |  |  | 65 |  |  | 60 |  |  | 65 |
Southern Region |  |  |  |  |  |  |
Homes delivered | 330 |  |  | 249 |  |  | 605 |  |  | 440 |
New contracts, net | 363 |  |  | 376 |  |  | 699 |  |  | 754 |
Backlog at end of period | 543 |  |  | 655 |  |  | 543 |  |  | 655 |
Average sales price per home delivered | $ | 306 |  |  | $ | 277 |  |  | $ | 296 |  |  | $ | 269 |
Average sales price of homes in backlog | $ | 336 |  |  | $ | 275 |  |  | $ | 336 |  |  | $ | 275 |
Aggregate sales value of homes in backlog | $ | 182,216 |  |  | $ | 180,363 |  |  | $ | 182,216 |  |  | $ | 180,363 |
Revenue homes | $ | 100,966 |  |  | $ | 68,946 |  |  | $ | 179,112 |  |  | $ | 118,203 |
Revenue third party land sales | $ | 156 |  |  | $ | — |  |  | $ | 2,210 |  |  | $ | 1,703 |
Operating income homes | $ | 8,623 |  |  | $ | 3,858 |  |  | $ | 14,379 |  |  | $ | 5,919 |
Operating income land | $ | 26 |  |  | $ | — |  |  | $ | 147 |  |  | $ | 1,030 |
Number of active communities | 50 |  |  | 40 |  |  | 50 |  |  | 40 |
Mid-Atlantic Region |  |  |  |  |  |  |
Homes delivered | 273 |  |  | 241 |  |  | 476 |  |  | 445 |
New contracts, net | 259 |  |  | 307 |  |  | 531 |  |  | 627 |
Backlog at end of period | 341 |  |  | 388 |  |  | 341 |  |  | 388 |
Average sales price per home delivered | $ | 319 |  |  | $ | 316 |  |  | $ | 322 |  |  | $ | 323 |
Average sales price of homes in backlog | $ | 343 |  |  | $ | 340 |  |  | $ | 343 |  |  | $ | 340 |
Aggregate sales value of homes in backlog | $ | 116,937 |  |  | $ | 132,028 |  |  | $ | 116,937 |  |  | $ | 132,028 |
Revenue homes | $ | 87,203 |  |  | $ | 76,080 |  |  | $ | 153,111 |  |  | $ | 143,910 |
Revenue third party land sales | $ | 1,264 |  |  | $ | 2,777 |  |  | $ | 2,528 |  |  | $ | 5,601 |
Operating income homes | $ | 7,259 |  |  | $ | 5,546 |  |  | $ | 11,759 |  |  | $ | 9,282 |
Operating income land | $ | 325 |  |  | $ | 638 |  |  | $ | 618 |  |  | $ | 1,247 |
Number of active communities | 35 |  |  | 35 |  |  | 35 |  |  | 35 |
Total Homebuilding Regions |  |  |  |  |  |  |
Homes delivered | 894 |  |  | 788 |  |  | 1,631 |  |  | 1,415 |
New contracts, net | 1,016 |  |  | 1,078 |  |  | 1,998 |  |  | 2,125 |
Backlog at end of period | 1,647 |  |  | 1,675 |  |  | 1,647 |  |  | 1,675 |
Average sales price per home delivered | $ | 306 |  |  | $ | 281 |  |  | $ | 303 |  |  | $ | 282 |
Average sales price of homes in backlog | $ | 332 |  |  | $ | 293 |  |  | $ | 332 |  |  | $ | 293 |
Aggregate sales value of homes in backlog | $ | 546,221 |  |  | $ | 490,769 |  |  | $ | 546,221 |  |  | $ | 490,770 |
Revenue homes | $ | 273,374 |  |  | $ | 221,700 |  |  | $ | 494,084 |  |  | $ | 399,490 |
Revenue third party land sales | $ | 1,764 |  |  | $ | 5,601 |  |  | $ | 8,030 |  |  | $ | 10,128 |
Operating income homes | $ | 22,517 |  |  | $ | 14,126 |  |  | $ | 39,109 |  |  | $ | 22,772 |
Operating income land | $ | 442 |  |  | $ | 297 |  |  | $ | 1,763 |  |  | $ | 1,288 |
Number of active communities | 145 |  |  | 140 |  |  | 145 |  |  | 140 |
Financial Services |  |  |  |  |  |  |
Number of loans originated | 607 |  |  | 597 |  |  | 1,100 |  |  | 1,094 |
Value of loans originated | $ | 154,048 |  |  | $ | 139,732 |  |  | $ | 278,410 |  |  | $ | 260,976 |
Revenue | $ | 6,470 |  |  | $ | 7,252 |  |  | $ | 14,335 |  |  | $ | 15,662 |
Less: Selling, general and administrative expense | 3,096 |  |  | 3,082 |  |  | 5,935 |  |  | 6,037 |
Interest expense | 302 |  |  | 335 |  |  | 617 |  |  | 654 |
Income before income taxes | $ | 3,072 |  |  | $ | 3,835 |  |  | $ | 7,783 |  |  | $ | 8,971 |

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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, 2014 and 2013:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Midwest | 15.6 | % |  | 18.6 | % |  | 16.3 | % |  | 18.8 | %
Southern | 17.7 | % |  | 13.2 | % |  | 18.8 | % |  | 13.7 | %
Mid-Atlantic | 9.4 | % |  | 10.2 | % |  | 9.1 | % |  | 10.0 | %
Total cancellation rate | 14.9 | % |  | 14.4 | % |  | 15.4 | % |  | 14.6 | %

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.
Year Over Year Comparison
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Midwest Region. Our Midwest region had operating income of $6.7 million for the three months ended June 30, 2014, a $2.3 million increase from our operating income of $4.4 million for the three months ended June 30, 2013. The increase in operating income was primarily the result of a $6.0 million improvement in our homebuilding revenue, offset partially by a $1.5 million increase in selling, general, and administrative expense.
For the quarter ended June 30, 2014, homebuilding revenue in our Midwest region increased $6.0 million, from $79.5 million in the second quarter of 2013 to $85.5 million in the second quarter of 2014. This 8% increase in homebuilding revenue was the result of a 14% increase in the average sales price of homes delivered ($36,000 per home delivered), partially offset by a 2% decrease in the number of homes delivered (7 units) and a $2.5 million decrease in land sale revenue. Our homebuilding gross margin increased $3.8 million and yielded a gross margin percentage of 19.1% for the quarter ended June 30, 2014, a 330 basis point improvement when compared to the same period in 2013. This gross margin percentage improvement resulted from the increase in our average sales price described above and the $0.4 million decrease in asset impairment charges taken in the second quarter of 2014 compared to the same period in 2013, partially offset by higher lot and construction costs related to both the mix of homes delivered and cost increases in labor and materials associated with housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $1.5 million, from $8.2 million for the quarter ended June 30, 2013 to $9.7 million for the quarter ended June 30, 2014 and increased as a percentage of revenue to 11.3% compared to 10.3% for the same period in 2013. The increase in selling, general and administrative expense was attributable, in part, to a $1.2 million increase in selling expense, which was primarily due to (1) a $0.5 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and (2) a $0.7 million increase in expenses primarily related to our design centers and sales offices as a result of our increased average community count. The increase in
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selling, general and administrative expense was also attributable to an increase in general and administrative expense, which was primarily due to a $0.3 million increase in compensation expense resulting primarily from the increase in employee count related to our community count and backlog growth as well as higher incentive compensation due to improved operating results.
During the three months ended June 30, 2014, new contracts were flat in our Midwest region compared to the second quarter of 2013. Backlog increased 21% from 632 homes at June 30, 2013 to 763 homes at June 30, 2014, with an average sales price in backlog of $324,000 at June 30, 2014 compared to $282,000 at June 30, 2013. Despite the impact of harsh winter weather conditions, we were able to achieve positive operating results in our Midwest region compared to prior year's second quarter due to higher-end product offerings, improving sub-market conditions and more attractive community locations. During the three months ended June 30, 2014, we opened three communities in our Midwest region compared to six during 2013's second quarter. Our monthly absorption rate in our Midwest region was 2.1 per community for 2014's second quarter, the same as in 2013's second quarter.
Southern Region. Our Southern region had operating income of $8.6 million for the quarter ended June 30, 2014, a $4.7 million increase from our operating income of $3.9 million for the second quarter of 2013. The increase in operating income was primarily the result of a $32.2 million improvement in our homebuilding revenue offset partially by a $3.1 million increase in selling, general and administrative expense.
During the three months ended June 30, 2014, homebuilding revenue in our Southern region increased $32.2 million, from $68.9 million in the second quarter of 2013 to $101.1 million in the second quarter of 2014. This 47% increase in homebuilding revenue was the result of a 33% increase in the number of homes delivered (81 units) and a 10% increase in the average sales price of homes delivered ($29,000 per home delivered). Our homebuilding gross margin increased $7.9 million and yielded a gross margin percentage of 20.0% for the quarter ended June 30, 2014 compared to 17.8% for the quarter ended June 30, 2013. The improvement in our gross margin percentage is primarily reflective of the improvements described above partially offset by higher lot and construction costs related to both the mix of homes delivered and cost increases associated with housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $3.1 million from $8.4 million in the second quarter of 2013 to $11.5 million in the second quarter of 2014 but declined as a percentage of revenue to 11.4% for the three months ended June 30, 2014 compared to 12.0% for the second quarter of 2013. The increase in selling, general and administrative expense was attributable, in part, to a $2.2 million increase in selling expense, which was due to (1) a $1.9 million increase in variable selling expenses resulting from increases in sales commissions from the higher average sales price of homes delivered and number of homes delivered, and (2) a $0.3 million increase in expenses related to our design centers and sales offices related to our increased average community count. The increase in selling, general and administrative expense was also attributable to a $0.9 million increase in general and administrative expense, which was primarily due to an increase in land-related expenses as well as an increase in payroll-related and other miscellaneous expenses associated with our new Austin and Dallas/Fort Worth divisions.
Average sales price in backlog increased to $336,000 at June 30, 2014 from $275,000 at June 30, 2013 due to improvements in the product and market mix. However, during the three months ended June 30, 2014, we experienced a 3% decrease in new contracts in our Southern region, from 376 in the second quarter of 2013 to 363 for the quarter ended June 30, 2014. Backlog also decreased 17% from 655 homes at June 30, 2013 to 543 homes at June 30, 2014. We believe the declines in new contracts and backlog were attributable to increased competition and the opening of certain of our new communities later in the quarter than we anticipated. Additionally, comparing new contracts levels in the second quarter of 2014 with the second quarter of 2013 was challenging as a result of our strong level of new contracts in the second quarter of 2013, which represented a 40% increase compared to the second quarter of 2012. During the three months ended June 30, 2014, we opened three communities in our Southern region compared to six during 2013's second quarter. Our monthly absorption rate in our Southern region declined from 3.2 per community in the second quarter of 2013 to 2.4 per community in the second quarter of 2014 primarily due to an increase in the number of average communities during the second quarter of 2014 compared to 2013's second quarter as well as due to the decline in new contracts compared to prior year discussed above.
Mid-Atlantic Region. Our Mid-Atlantic region had operating income of $7.6 million for the quarter ended June 30, 2014, a $1.4 million increase from our operating income of $6.2 million in the second quarter of 2013. The increase in operating income was primarily the result of a $9.6 million improvement in our homebuilding revenue offset partially by a $1.1 million increase in selling, general and administrative expense.
For the three month period ended June 30, 2014, homebuilding revenue in our Mid-Atlantic region increased $9.6 million from $78.9 million in the second quarter of 2013 to $88.5 million in the second quarter of 2014. This 12% increase in revenue was attributable to a 13% increase in the number of homes delivered (32 units) and a slight increase in the average sales price of homes
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delivered related to a change in product and market mix, offset, in part, by a decrease in land sale revenue of $1.5 million. Homebuilding gross margin increased $2.5 million compared to the second quarter of 2013 and yielded a gross margin percentage of 18.7%, which represents an 80 basis point improvement when compared to 17.9% for the quarter ended June 30, 2013. This improvement in gross margin percentage resulted from the improvements described above, partially offset by higher construction costs related to both the mix of homes delivered and cost increases in labor and materials associated with housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $1.1 million from $7.9 million in the second quarter of 2013 to $9.0 million in the second quarter of 2014 and increased slightly as a percentage of revenue from 10.0% to 10.1%. The increase in selling, general and administrative expense was attributable, in part, to a $0.6 million increase in selling expense, which was due to (1) a $0.3 million increase in variable selling expenses resulting from increases in sales commissions from the higher average sales price of homes delivered and number of homes delivered, and (2) a $0.3 million increase in expenses related to our design centers and sales offices related to our increased average community count. The increase in selling, general and administrative expense was attributable, in part, to a $0.4 million increase in general and administrative expense, which was primarily due to an increase in compensation expenses resulting primarily from the increase in employee count related to our average community count as well as other miscellaneous increases.
During the three months ended June 30, 2014, we experienced a 16% decrease in new contracts in our Mid-Atlantic region, from 307 in the second quarter of 2013 to 259 in the second quarter of 2014, as well as a 12% decrease in the number of homes in backlog from 388 homes at June 30, 2013 to 341 homes at June 30, 2014. These declines were primarily attributable to delayed openings of certain new communities resulting from harsh weather conditions in the first quarter that impacted our new contract results and a change in product mix. Average sales price of homes in backlog increased, however, from $340,000 at June 30, 2013 to $343,000 at June 30, 2014. We opened three communities in our Mid-Atlantic region during both the second quarter of 2014 and 2013. Our monthly absorption rate in our Mid-Atlantic region declined to 2.3 per community in the second quarter of 2014 from 2.9 per community in the second quarter of 2013 due to the decrease in new contracts and the increase in our average community count compared to prior year.
Financial Services. Loan originations of our mortgage and title operations increased 2% from 597 in the second quarter of 2013 to 607 in the second quarter of 2014, and we experienced a 9% increase in the average loan amount from $234,000 in the quarter ended June 30, 2013 to $254,000 in the quarter ended June 30, 2014. Despite these increases, our revenue from our mortgage and title operations decreased $0.8 million (11%) from $7.3 million in the second quarter of 2013 to $6.5 million in the second quarter of 2014. This decline in revenue was primarily attributable to lower margins on the loans sold compared to 2013's second quarter. In the second quarter of 2013, we experienced higher profit margins on our loan sales and servicing retained transactions as supply and demand factors were favorable during that time, and we also benefited from a strong refinance market. Additionally, the product mix of our loans sold continued to shift from government to conventional financing, which generally yields lower margins on sale. Competition in the industry has also recently increased, partially as the result of the mortgage industry's lower refinancing volume. We expect this increased level of competition, and a more challenging pricing environment, to continue for the foreseeable future.
We experienced a $0.8 million decrease in operating income in the second quarter of 2014 in our mortgage and title operations compared to 2013's second quarter, which was due to the decrease in revenue discussed above. Selling, general, and administrative expense for our mortgage and title operations remained flat for 2014's second quarter compared to the same period a year ago.
At June 30, 2014, M/I Financial provided financing services in all of our markets. Approximately 77% of our homes delivered during the second quarter of 2014 were financed through M/I Financial which was the same rate as in the second quarter of 2013. 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 $1.5 million, from $6.8 million in the second quarter of 2013 to $8.3 million in the second quarter of 2014. The increase was primarily due to share based and variable incentive compensation associated with our improved financial performance.
Interest Expense - Net. Interest expense for the Company decreased by $1.7 million, from $4.4 million in the three months ended June 30, 2013 to $2.7 million in the three months ended June 30, 2014. This decrease was primarily the result of a decline in our weighted average borrowing rate from 7.43% in the second quarter of 2013 to 7.28% for second quarter of 2014 related to increased capitalized interest as a result of our increased land development during the second quarter of 2014 compared to prior year. We also experienced a decrease in our weighted average borrowings from $415.9 million in 2013's second quarter to $406.7 million in 2014's second quarter related to a decrease in bank borrowings during the quarter compared to 2013's second quarter.
Income Taxes. Our overall effective tax rate was 11.4% for the three months ended June 30, 2014 and 1.8% for the same period in 2013. Our 2014 effective tax rate primarily reflects tax expense of $5.7 million, offset by the reversal of $4.0 million of our
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state deferred tax asset valuation allowance, as we now estimate that we will utilize all of our state tax NOLs based on our current pre-tax operating results. The effective rate is not reflective of our historical tax rate or our effective tax rate in future periods due to our state deferred tax asset valuation allowance. We expect our effective combined federal and state tax rate for the remainder of 2014 will be approximately 39.2% barring any changes in tax status and change in ability to recover remaining state tax loss carryforwards that did not meet the “more likely than not criteria”.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Midwest Region. Our Midwest region had operating income of $14.0 million for the six months ended June 30, 2014, a $7.4 million increase from our operating income of $6.6 million for the six months ended June 30, 2013. The increase in operating income was primarily the result of a $25.0 million improvement in our homebuilding revenue, offset, in part, by a $2.6 million increase in selling, general, and administrative expense.
For the first half of 2014, homebuilding revenue in our Midwest region increased $25.0 million, from $140.2 million for the first six months of 2013 to $165.2 million for the first six months of 2014. This 18% increase in homebuilding revenue was the result of a 14% increase in the average sales price of homes delivered ($35,000 per home delivered) and a 4% increase in the number of homes delivered (20 units), as well as an increase of $0.5 million in land sale revenue. Our homebuilding gross margin improved $10.0 million and yielded a gross margin percentage of 19.2% for the second half of 2014, a 370 basis point improvement when compared to the same period in 2013. This gross margin percentage improvement resulted primarily from the improvements described above as well as a $1.3 million decrease in asset impairment charges taken in the first six months of 2014 compared to the same period in 2013, partially offset by higher lot and construction costs related to both the mix of homes delivered and cost increases in labor and materials associated with housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $2.6 million from $15.2 million for the six months ended June 30, 2013 to $17.8 million for the six months ended June 30, 2014 and remained flat as a percentage of revenue, ending at 10.8% for both the first half of 2014 and 2013. The increase in selling, general and administrative expense was attributable, in part, to a $2.2 million increase in selling expense, which was primarily due to (1) a $1.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and number of homes delivered and (2) a $1.1 million increase in expenses primarily related to our design centers and sales offices as a result of our increased average community count. The increase in selling, general and administrative expense was also attributable to an increase in general and administrative expense, which was primarily due to a $0.7 million increase in compensation expense resulting primarily from the increase in employee count related to our average community count and backlog growth, offset partially by a $0.3 million decrease in professional fees and other miscellaneous expenses.
During the six months ended June 30, 2014, we experienced a 3% increase in new contracts in our Midwest region, from 744 in the first half of 2013 to 768 for the first half of 2014. Backlog increased 21% from 632 homes at June 30, 2013 to 763 homes at June 30, 2014, with an average sales price in backlog of $324,000 at June 30, 2014 compared to $282,000 at June 30, 2013. Despite the impact of harsh winter weather conditions and a moderation in the overall housing market when compared to 2013's same period, we were able to achieve positive operating results in our Midwest region compared to prior year's first half due to higher-end product offerings, improving sub-market conditions and more attractive community locations. During the first half of 2014, we opened six new communities in our Midwest region compared to 10 during 2013's first half. Our monthly absorption rate in our Midwest region declined slightly from 2.0 per community in the first half of 2013 to 1.9 per community in the first half of 2014.
Southern Region. Our Southern region had operating income of $14.5 million for the six months ended June 30, 2014, a $7.6 million increase from our operating income of $6.9 million for the six months ended June 30, 2013. The increase in operating income was primarily the result of a $61.4 million improvement in our homebuilding revenue, offset, in part, by a $5.8 million increase in selling, general, and administrative expense.
During the six months ended June 30, 2014, homebuilding revenue in our Southern region increased $61.4 million, from $119.9 million in the first half of 2013 to $181.3 million in the first half of 2014. This 51% increase in homebuilding revenue was the result of a 38% increase in the number of homes delivered (165 units) and a 10% increase in the average sales price of homes delivered ($27,000 per home delivered) as well as an increase of $0.5 million in land sale revenue. Our homebuilding gross margin increased $13.3 million and yielded a gross margin percentage of 19.5% for the first half of 2014 compared to 18.4% for the first half of 2013. The improvement in our gross margin percentage is primarily reflective of the improvements in the average sales price of homes delivered and the number of homes delivered described above, offset partially by a $0.9 million decrease in profit from the sale of land, compared to the first six months of 2013, as well as higher construction and lot costs related to both the mix
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of homes delivered and cost increases in labor and materials associated with housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $5.8 million from $15.1 million in the first six months of 2013 to $20.9 million in the first six months of 2014 but declined as a percentage of revenue to 11.5% for the first half of 2014 from 12.6% for the first half of 2013. The increase in selling, general and administrative expense was attributable, in part, to a $4.1 million increase in selling expense, which was due to (1) a $3.1 million increase in variable selling expenses, which resulted from increases in sales commissions due to the higher average sales price of homes delivered and number of homes delivered and (2) a $1.0 million increase in expenses related to our design centers and sales offices. The increase in selling, general and administrative expense was also attributable to a $1.7 million increase in general and administrative expense, which was primarily due to a $0.2 million increase in compensation expense resulting primarily from the increase in employee count related to our average community count growth, a $0.4 million increase in land-related expenses, a $0.3 million increase in other miscellaneous expenses and an increase in payroll-related and other miscellaneous expenses associated with our new Austin and Dallas/Fort Worth divisions.
Average sales price in backlog increased to $336,000 at June 30, 2014 from $275,000 at June 30, 2013 due to product and market mix. However, during the six months ended June 30, 2014, we experienced a 7% decrease in new contracts in our Southern region, from 754 in the first half of 2013 to 699 for the first half of 2014. Backlog also decreased 17% from 655 homes at June 30, 2013 to 543 homes at June 30, 2014. We believe the declines in new contracts and backlog were attributable to increased competition and the opening of certain of new communities later in the quarter than we anticipated. Additionally, comparing new contracts levels in the first half of 2014 with the first half of 2013 was challenging as a result of our strong level of new contracts in the first half of 2013, which represented a 56% increase compared to the first half of 2012. During the six months ended June 30, 2014, we opened eight new communities in our Southern region compared to 12 during 2013's first half. Our monthly absorption rate in our Southern region declined from 3.2 per community in the first half of 2013 to 2.3 per community in the first half of 2014 due to an increase in the number of average communities during the first half of 2014 compared to 2013's first half as well as due to the decline in new contracts discussed above.
Mid-Atlantic Region. Our Mid-Atlantic region had operating income of $12.4 million for the six months ended June 30, 2014, a $1.9 million increase from our operating income of $10.5 million in the first six months of 2013. The increase in operating income
was primarily the result of a $6.1 million improvement in our homebuilding revenue offset partially by a $2.1 million increase in selling, general and administrative expense.
For the six month period ended June 30, 2014, homebuilding revenue in our Mid-Atlantic region increased $6.1 million from $149.5 million in the first half of 2013 to $155.6 million in the first half of 2014. This 4% increase in revenue was attributable to a 7% increase in the number of homes delivered (31 units), offset, in part, by a $3.1 million decrease in land sale revenue (as our homebuilding operations occasionally generate revenue from the sale of land and lots in addition to home sales). Average sales price of homes delivered remained flat compared to the same period a year ago which is related to a change in product and market mix. Homebuilding gross margin increased $3.9 million compared to the first half of 2013 and yielded a gross margin percentage of 18.6%, which represents an 190 basis point improvement when compared to 16.7% for the six months ended June 30, 2013. This improvement in gross margin percentage resulted from gains due to a shift in product and market mix partially offset by higher construction costs related to both the mix of homes delivered and cost increases in labor and materials associated with improving housing market conditions and normal supply and demand dynamics.
Selling, general and administrative expense increased $2.1 million from $14.5 million in the first half of 2013 to $16.6 million in the first half of 2014 and increased as a percentage of revenue from 9.7% to 10.7%. The increase in selling, general and administrative expense was attributable, in part, to a $0.5 million increase in selling expense, which was due to (1) a $0.2 million increase in variable selling expenses resulting from increases in sales commissions from the higher average sales price of homes delivered, and (2) a $0.3 million increase in expenses related to our design centers and sales offices related to our increased average community count. The increase in selling, general and administrative expense was attributable, in part, to a $1.6 million increase in general and administrative expense, which was primarily due to a $0.4 million increase in compensation expenses resulting primarily from the increase in employee count related to our average community count, a $0.4 million increase related to higher incentive compensation due to improved operating results, a $0.3 million increase in land-related expenses, a $0.2 million increase in architectural expenses, and a $0.3 million increase in other miscellaneous increases.
During the six months ended June 30, 2014, we experienced a 15% decrease in new contracts in our Mid-Atlantic region, from 627 in the first half of 2013 to 531 in the first half of 2014 as well as a 12% decrease in the number of homes in backlog from 388 homes at June 30, 2013 to 341 homes at June 30, 2014. These declines were primarily attributable to delayed openings of certain new communities resulting from harsh weather conditions in the first quarter that impacted our new contract results and a change in product mix. Average sales price of homes in backlog increased, however, from $340,000 at June 30, 2013 to $343,000 at
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June 30, 2014. During the six months ended June 30, 2014, we opened eight new communities in our Mid-Atlantic region compared to the same amount during 2013's first half. Our monthly absorption rate in our Mid-Atlantic region declined to 2.4 per community in the first six months of 2014 from 3.0 per community in the same period in 2013 due to the decrease in new contracts described above as well as the increase in our average community count compared to prior year.
Financial Services. Loan originations of our mortgage and title operations increase d 1% from 1,094 in the first half of 2013 to 1,100 in the first half of 2014, and we experienced a 6% increase in the average loan amount from $239,000 in the six months ended June 30, 2013 to $253,000 in the six months ended June 30, 2014. Despite these increases, our revenue from our mortgage and title operations decreased $1.4 million (8%) from $15.7 million in the first half of 2013 to $14.3 million in the first half of 2014. This decline in revenue was primarily attributable to lower margins on the loans sold compared to 2013's first half. In the first half of 2013, we experienced higher profit margins on our loan sales and servicing retained transactions as supply and demand factors were favorable during that time, and we also benefited from a strong refinance market. Additionally, the product mix of our loans sold continued to shift from government to conventional financing, which generally yields lower margins on sale. Competition in the industry has also recently increased, partially as the result of the mortgage industry's lower refinancing volume. We expect this increased level of competition, and a more challenging pricing environment, to continue for the foreseeable future.
We ended the first half of 2014 with a $1.2 million decrease in operating income in our mortgage and title operations compared to the first half of 2013, which was due to the decrease in revenue discussed above. Selling, general, and administrative expense for our mortgage and title operations decreased $0.1 million for the six months ended June 30, 2014 compared to the same period in 2013.
At June 30, 2014, M/I Financial provided financing services in all of our markets. Approximately 77% of our homes delivered during the first half of 2014 were financed through M/I Financial which was the same rate as in the first half of 2013. Capture rate is influenced by financing availability and can fluctuate up or down from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $1.9 million, from $12.7 million in the six months ended June 30, 2013 to $14.6 million in the six months ended June 30, 2014. The increase was primarily due to a $1.5 million increase in share based and variable incentive compensation associated with our improved financial performance and a $0.4 million increase in professional fees.
Interest Expense - Net. Interest expense for the Company decreased $1.8 million, from $8.7 million for the six months ended June 30, 2013 to $6.9 million for the six months ended June 30, 2014. This decrease was primarily the result of a decline in our weighted average borrowing rate from 7.76% in the first half of 2013 to 7.33% for 2014's first half, related to the addition of our 2018 Convertible Senior Subordinated Notes issuance, which has a significantly lower interest rate compared to our other debt outstanding in 2013's first half, as well as an increase in capitalized interest related to our increased land development in the first half of 2014 compared to prior year. Partially offsetting this decrease was an increase in our weighted average borrowings from $382.4 million in the first half of 2013 to $403.9 million in first half of 2014 related to the issuance of $86.3 million aggregate principal amount of 2018 Convertible Senior Subordinated Notes in the first quarter of 2013.
Income Taxes. Our overall effective tax rate was 5.8% for the six months ended June 30, 2014 and 3.5% for the same period in 2013. Our 2014 effective tax rate primarily reflects tax expense of $10.9 million, offset by the reversal of $9.3 million of our state deferred tax asset valuation allowance, as we now estimate that we will utilize all of our state tax NOLs based on our current pre-tax operating results. The effective rate is not reflective of our historical tax rate or our effective tax rate in future periods due to our state deferred tax asset valuation allowance. We expect our effective combined federal and state tax rate for the remainder of 2014 will be approximately 39.2% barring any changes in tax status and change in ability to recover remaining state tax loss carryforwards that did not meet the “more likely than not criteria”.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At June 30, 2014, we had $43.7 million of cash, cash equivalents and restricted cash, with $33.6 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $95.1 million decrease from December 31, 2013. This decrease was primarily a result of our increased investment in inventory during the first half of 2014. Our principal uses of cash for the six months ended June 30, 2014 were investment in land and land development, construction of homes, investment in joint ventures, operating expenses, and short-term working capital and debt service requirements, including the repayment of amounts outstanding under our credit lines. In order to fund these uses of cash, we used proceeds from home deliveries and the sale of mortgage loans, as well as excess cash balances and other sources of liquidity.
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We are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active community count. We expect to continue to expand our business based on the demand for new homes improving further or remaining at current levels. Accordingly, we expect our cash outlays for land purchases, land development, home construction and operating expenses to continue to exceed our cash generated by operations in 2014 and therefore expect to utilize our revolving credit facility.
During the first half of 2014, we delivered 1,631 homes, started 2,135 homes, and spent $124.9 million on land purchases and $51.9 million on land development. Based upon our business activity levels, liquidity, leverage, market conditions, and opportunities for land in our markets, we currently estimate that we will spend approximately $425 million to $475 million on land purchases and land development during 2014, including the $176.8 million spent during the first six months of 2014. 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 these land option agreements, we have right to purchase $441.4 million of land and lots during 2014 through 2019.
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 2014 compared to 2013 is driven primarily by our growth objectives as we expand our business. In addition, we expect that a larger portion of our land investment will continue to shift from developed lot purchases to land acquisition and development, which will result in increased inventory levels.
Operating Cash Flow Activities. During the six month period ended June 30, 2014, we used $66.7 million of cash in our operating activities, compared to using $25.2 million of cash from our operating activities during the first half of 2013. The increase in cash used in operating activities was primarily due to a $44.4 million increase in the change in inventory compared with the six months ended June 30, 2013.
Investing Cash Flow Activities. During the first half of 2014, we used $9.2 million of cash in investing activities, compared to using $23.2 million of cash in investing activities during the first half of 2013. The $14.0 million decrease was partially due to the change in restricted cash, which decreased $7.7 million from the six months ended June 30, 2013, as the Company pledged less cash as collateral in accordance with our secured Letter of Credit Facilities. In addition, we invested $4.8 million more in our unconsolidated joint ventures during the six months ended June 30, 2013 compared to the six months ended June 30, 2014 primarily due to our entry into joint investments with other builders in two separate land developments in our Southern region in 2013's first half.
Financing Cash Flow Activities. During the six months ended June 30, 2014, we used $19.2 million of cash from our financing activities, compared to generating $69.1 million of cash during the first six months of 2013. The change in cash from financing activities was primarily due to the absence of any debt and equity capital financing transactions or preferred share redemptions in 2014, all of which occurred in the first half of 2013.
At June 30, 2014 and December 31, 2013, our ratio of net debt to net capital was 43% and 39%, respectively, calculated as total debt minus total cash, cash equivalents and restricted cash, divided by the sum of total debt minus total cash, cash equivalents and restricted cash plus shareholders' equity. We believe that this ratio provides useful information regarding our financial position and in understanding the leverage employed in our operations and comparing us with other homebuilders.
We fund our operations with cash flows from operating activities, including proceeds from home closings and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowing 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. However, we routinely monitor current operational 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 as management deems necessary. 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 $200 million unsecured revolving credit facility dated July 18, 2013, with M/I Homes, Inc. as borrower and guaranteed by the Company's wholly owned homebuilding subsidiaries (the “Credit Facility”); (2) a $110 million secured mortgage warehousing agreement, with M/I Financial as borrower, amended on March 28, 2014 (the “MIF Mortgage Warehousing Agreement”); and (3) a $15 million mortgage repurchase agreement, with M/I Financial
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as borrower, amended on November 6, 2013 (the “MIF Mortgage Repurchase Facility”). Included in the table below is a summary of our available sources of cash from these financing sources as of June 30, 2014:

(In thousands) | Expiration Date | Outstanding Balance | Available Amount
Notes payable – homebuilding (a) | 7/18/2016 | $ | — |  | $ | 182,784 |
Notes payable – financial services (b) | (b) | $ | 61,914 |  | $ | 777 |

(a) | The available amount under the Credit Facility is computed in accordance with the borrowing base calculation, which totaled $326.4 million of availability at June 30, 2014, such that the full $200 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings and $17.2 million of letters of credit outstanding at June 30, 2014, leaving $182.8 million available.

(b) | The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral. The maximum aggregate commitment amount of M/I Financial's warehousing agreements is $125 million. The MIF Mortgage Warehousing Agreement has an expiration date of March 27, 2015 and the MIF Mortgage Repurchase Facility has an expiration date of November 5, 2014.

Notes Payable - Homebuilding.
Homebuilding Credit Facility. On July 18, 2013, the Company entered into the Credit Facility which provides for an aggregate commitment amount of $200 million, including a $100 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 of the Credit Facility up to $225 million, subject to certain conditions, including obtaining additional commitments from existing or new lenders. The Credit Facility matures on July 18, 2016. Borrowings under the Credit Facility are at the Alternate Base Rate plus 2.25% or at the Eurodollar Rate plus 3.25%.
Borrowings under the Credit Facility are unsecured and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. As of June 30, 2014, borrowing availability under the Credit Facility is shown in the table above. The Credit Facility contains various representations, warranties and affirmative, negative and financial covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth, (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 liquidity amount. In addition, the Credit Facility contains covenants that limit the amount of the Company's unsold owned land, secured indebtedness, and the number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures. As of June 30, 2014, the Company was in compliance with all covenants of the Credit Facility. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of June 30, 2014:

Financial Covenant |  | Covenant Requirement |  | Actual
|  | (Dollars in millions)
Consolidated Tangible Net Worth | ≥ | $ | 316.2 |  |  | $ | 492.1 |
Leverage Ratio | ≤ | 60 | % |  | 44 | %
Interest Coverage Ratio | ≥ | 1.5 to 1.0 |  |  | 3.9 to 1.0 |
Investments in Unrestricted Subsidiaries and Joint Ventures | ≤ | $ | 147.6 |  |  | $ | 21.2 |
Unsold Housing Units and Model Homes | ≤ | 1,291 |  |  | 756 |

Homebuilding Letter of Credit Facilities. The Company is party to three secured credit agreements for the issuance of letters of credit outside of the Credit Facility (collectively, the “Letter of Credit Facilities”), with maturity dates ranging from August 31, 2014 to June 1, 2015. Under the terms of the Letter of Credit Facilities, letters of credit can be issued for maximum terms ranging from one year up to three years. The Letter of Credit Facilities contain cash collateral requirements ranging from 101% to 105%. Upon maturity or the earlier termination of the Letter of Credit Facilities, letters of credit that have been issued under the Letter of Credit Facilities remain outstanding with cash collateral in place through the respective expiration dates.
The agreements governing the Letter of Credit Facilities contain limits for the issuance of letters of credit ranging from $5.0 million to $10.0 million, for a combined letter of credit capacity of $20.0 million, of which $2.2 million was uncommitted at June 30, 2014 and could be withdrawn at any time. As of June 30, 2014, there was a total of $9.7 million of letters of credit issued under the Letter of Credit Facilities, which was collateralized with $9.9 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 Agreement provides a maximum borrowing availability of $110.0 million and
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an accordion feature which allows for an increase of the maximum borrowing availability of up to an additional $20.0 million (subject to certain conditions, including obtaining additional commitments from existing or new lenders). The MIF Mortgage Warehousing Agreement has an expiration date of March 27, 2015. The maximum principal amount permitted to be outstanding at any one time in aggregate under all warehouse credit lines is $150.0 million. Effective with the quarter ending September 30, 2014, the minimum required tangible net worth requirement applicable to M/I Financial increases from $10.0 million to $11.0 million and the minimum required liquidity requirement applicable to M/I Financial increases from $5.0 million to $5.5 million. M/I Financial pays interest on each advance under the MIF Mortgage Warehousing Agreement at a per annum rate equal to the greater of (1) the floating LIBOR rate plus 275 basis points and (2) 3.0%.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial and 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 its subsidiaries as guarantors.
As of June 30, 2014, there was $49.3 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants. 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, 2014:

Financial Covenant |  | Covenant Requirement |  | Actual
|  | (Dollars in millions)
Leverage Ratio | ≤ | 10.0 to 1.0 |  |  | 5.35 to 1.0 |
Liquidity | ≥ | $ | 5.0 |  |  | $ | 11.7 |
Adjusted Net Income | > | $ | 0.0 |  |  | $ | 5.8 |
Tangible Net Worth | ≥ | $ | 10.0 |  |  | $ | 13.0 |

MIF Mortgage Repurchase Facility. In November 2012, M/I Financial entered into the MIF Mortgage Repurchase Facility, an additional mortgage financing agreement structured as a mortgage repurchase facility with a maximum borrowing availability of $15.0 million, to provide the Company with additional financing capacity.
The MIF Mortgage Repurchase Facility, as amended on November 6, 2013, has an expiration date of November 5, 2014 and is used to finance eligible residential mortgage loans originated by M/I Financial. 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 275 or 300 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 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, 2014, there was $12.7 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all covenants as of June 30, 2014.
Senior Notes and Convertible Senior Subordinated Notes.
8.625% Senior Notes. In November 2010, the Company issued $200 million aggregate principal amount of 8.625% senior notes due 2018. In May 2012, we issued an additional $30 million of 2018 Senior Notes under our 2018 Senior Notes indenture for a total outstanding balance of $230 million. The Company may redeem all or any portion of the 2018 Senior Notes on or after November 15, 2014 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 104.313% of the principal amount outstanding, but will decline to 102.156% of the principal amount outstanding if redeemed during the 12-month period beginning on November 15, 2015, and will further decline to 100.000% of the principal amount outstanding if redeemed on or after November 15, 2016, but prior to maturity. See Note 7 to the Condensed Consolidated Financial Statements for more information regarding the 2018 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. See Note 7 to the Condensed Consolidated Financial Statements 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
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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. See Note 7 to the Condensed Consolidated Financial Statements for more information regarding the 2017 Convertible Senior Subordinated Notes.
Weighted Average Borrowings. For the three months ended June 30, 2014 and 2013, our weighted average borrowings outstanding were $406.7 million and $415.9 million, respectively, with a weighted average interest rate of 7.28% and 7.43%, respectively. The decline in our weighted average borrowing rate was attributable to increased capitalized interest related to our increased land development during the second quarter of 2014 compared to prior year. The decrease in our weighted average borrowings related to a decrease in bank borrowings during the quarter compared to 2013's second quarter.
At June 30, 2014, we had no outstanding borrowings under the Credit Facility. During the six months ended June 30, 2014, the average daily amount outstanding under the Credit Facility was $0.2 million and the maximum amount outstanding under the Credit Facility was $2.0 million. Based on our current anticipated spending on land acquisition and development in 2014, and associated increases in our investment in inventory, including land and houses under construction, we expect to borrow under the Credit Facility during 2014, with the estimated peak amount outstanding not anticipated to exceed $100 million. The actual amount borrowed in 2014 (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 closings, other cash receipts and payments, any capital markets transactions or other additional financings by the Company and any repayments or redemptions of outstanding debt. 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 $17.2 million of letters of credit issued and outstanding under the Credit Facility at June 30, 2014. During the six months ended June 30, 2014, the average daily amount of letters of credit outstanding under the Credit Facility was $15.0 million and the maximum amount of letters of credit outstanding under the Credit Facility was $17.5 million.
At June 30, 2014, M/I Financial had $49.3 million outstanding under the MIF Mortgage Warehousing Agreement. During the six months ended June 30, 2014, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $19.1 million and the maximum amount outstanding was $68.2 million.
At June 30, 2014, M/I Financial had $12.7 million outstanding under the MIF Mortgage Repurchase Facility. During the six months ended June 30, 2014, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $4.2 million and the maximum amount outstanding was $14.9 million.
Preferred Shares. On March 15, 2007, we issued 4,000,000 depositary shares, each representing 1/1000 th of a Series A Preferred Share, or 4,000 Series A Preferred Shares in the aggregate, for net proceeds of $96.3 million. 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 2018 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 $141.2 million at June 30, 2014. 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 second quarter of 2014 for $1.2 million and have paid $2.4 million for the six months ended June 30, 2014. The determination to pay future dividends
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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 2013, the Company filed a $400 million universal shelf registration statement with the SEC, which registration statement became effective on December 20, 2013. 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, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
Reference is made to Notes 2, 3, 5, and 6 in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q. These Notes 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 unconsolidated joint ventures, 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 issue 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 agreements in order to secure land for the construction of homes in the future. Pursuant to these land option agreements, the Company typically provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Because the entities holding the land under the option agreement may meet the criteria for VIEs, the Company evaluates all land option agreements to determine if it is necessary to consolidate any of these entities.
At June 30, 2014, “Consolidated Inventory Not Owned” was $1.3 million, all of which related to specific performance obligations. At June 30, 2014, the corresponding liability of $1.3 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, 2014 related to its land option agreements is equal to the amount of the Company's outstanding deposits and prepaid acquisition costs, which totaled $28.8 million, including cash deposits of $16.5 million, prepaid acquisition costs of $4.3 million and letters of credit of $8.0 million.
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, 2014, the Company had outstanding $110.2 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 July 2019. Included in this total are: (1) $76.7 million of performance bonds and $13.0 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $13.8 million of financial letters of credit; and (3) $6.6 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.
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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 to Note 5 of our Unaudited Condensed Consolidated Financial Statements for additional details relating to our guarantees and indemnities.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. The impact of increased rates can be offset, in part, by offering variable rate loans with lower interest rates. In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through borrowings under our revolving credit and mortgage repurchase facilities, consisting of the Credit Facility, the MIF Mortgage Warehousing Agreement, and the MIF Mortgage Repurchase Facility which permit borrowings of up to $325 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-buying 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 intervening 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-efforts 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, 2014 and December 31, 2013:

| June 30, |  | December 31,
Description of Financial Instrument (in thousands) | 2014 |  | 2013
Best-effort contracts and related committed IRLCs | $ | 3,456 |  |  | $ | 2,494 |
Uncommitted IRLCs | 62,151 |  |  | 49,710 |
FMBSs related to uncommitted IRLCs | 63,000 |  |  | 48,000 |
Best-effort contracts and related mortgage loans held for sale | 24,934 |  |  | 63,386 |
FMBSs related to mortgage loans held for sale | 38,000 |  |  | 20,000 |
Mortgage loans held for sale covered by FMBSs | 38,180 |  |  | 19,884 |

The table below shows the measurement of assets and liabilities at June 30, 2014 and December 31, 2013:

| June 30, |  | December 31,
Description of Financial Instrument (in thousands) | 2014 |  | 2013
Mortgage loans held for sale | $ | 64,782 |  |  | $ | 81,810 |
Forward sales of mortgage-backed securities | (439 | ) |  | 745 |
Interest rate lock commitments | 578 |  |  | (319 | )
Best-efforts contracts | (113 | ) |  | 479 |
Total | $ | 64,808 |  |  | $ | 82,715 |

The following table sets forth the amount of gain (loss) recognized on assets and liabilities for the three months ended June 30, 2014 and 2013:

| Three Months Ended June 30,
Description (in thousands) | 2014 |  | 2013
Mortgage loans held for sale | $ | 727 |  |  | $ | (2,508 | )
Forward sales of mortgage-backed securities | (619 | ) |  | 3,368 |
Interest rate lock commitments | 176 |  |  | (929 | )
Best-efforts contracts | (179 | ) |  | 140 |
Total gain recognized | $ | 105 |  |  | $ | 71 |

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The following table provides the expected future cash flows and current fair values of mortgage loans held for sale, borrowings under our credit facilities and other borrowings that are subject to market risk as interest rates fluctuate, as of June 30, 2014:

| Expected Cash Flows by Period |  | Fair Value
(Dollars in thousands) | 2014 |  | 2015 |  | 2016 |  | 2017 |  | 2018 |  | Thereafter |  | Total |  | 6/30/2014
ASSETS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage loans held for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed rate | $ | 62,330 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 62,330 |  |  | $ | 61,685 |
Weighted average interest rate | 4.09 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 4.09 | % |  |
Variable rate | $ | 3,109 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 3,109 |  |  | $ | 3,097 |
Weighted average interest rate | 3.23 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 3.23 | % |  |
LIABILITIES: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term debt — fixed rate | $ | 152 |  |  | $ | 182 |  |  | $ | 242 |  |  | $ | 57,803 |  |  | $ | 316,614 |  |  | $ | 887 |  |  | $ | 375,880 |  |  | $ | 410,516 |
Weighted average interest rate | 3.37 | % |  | 3.37 | % |  | 3.37 | % |  | 3.25 | % |  | 7.07 | % |  | 3.37 | % |  | 6.48 | % |  |
Short-term debt — variable rate | $ | 61,914 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 61,914 |  |  | $ | 61,914 |
Weighted average interest rate | 2.98 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 2.98 | % |  |

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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, 2014 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 been named as defendants in certain claims, complaints and legal actions which are incidental to our business. Certain of the liabilities resulting from these matters are covered by insurance. While management currently believes that the ultimate resolution of these matters, individually and in the aggregate, will not have a material effect on the Company's financial position, results of operations and cash flows, such matters 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 matters. However, there exists the possibility that the costs to resolve these could differ from the recorded estimates and, therefore, have a material effect on the Company's net income for the periods in which the matters are resolved.
Item 1A. Risk Factors
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, 2013.
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, 2014.
See Note 7 to our Unaudited Condensed Consolidated Financial Statements and the “Liquidity and Capital Resources” section above for more information regarding the limit imposed by the indenture governing our 2018 Senior Notes on 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.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Mine Safety Disclosures - None.
Item 5. Other Information - None.
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Item 6. Exhibits
The exhibits required to be filed herewith are set forth below.

Exhibit Number |  | Description
3.1 |  | Articles of Incorporation of M/I Homes, Inc. (reflecting amendments through May 6, 2014) [for SEC reporting compliance purposes only - not filed with Ohio Secretary of State] (Filed herewith.)
31.1 |  | Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 |  | Certification by Phillip G. Creek, Chief Financial Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 |  | Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 |  | Certification by Phillip G. Creek, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101.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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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 25, 2014 |  | By: | /s/ Robert H. Schottenstein
|  |  |  |  | Robert H. Schottenstein
|  |  |  |  | Chairman, Chief Executive Officer and
|  |  |  |  | President
|  |  |  |  | (Principal Executive Officer)
Date: |  | July 25, 2014 |  | By: | /s/ Ann Marie W. Hunker
|  |  |  |  | Ann Marie W. Hunker
|  |  |  |  | Vice President, Corporate Controller
|  |  |  |  | (Principal Accounting Officer)

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EXHIBIT INDEX
Exhibit Number |  | Description
3.1 |  | Articles of Incorporation of M/I Homes, Inc. (reflecting amendments through May 6, 2014) [for SEC reporting compliance purposes only - not filed with Ohio Secretary of State] (Filed herewith.)
31.1 |  | Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 |  | Certification by Phillip G. Creek, Chief Financial Officer, pursuant to Item 601 of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 |  | Certification by Robert H. Schottenstein, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 |  | Certification by Phillip G. Creek, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101.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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