# Performance Share Unit Awards

On February 8, 2017, February 16, 2016 and February 17, 2015, the Company awarded its executive officers (in the aggregate) a target number of performance share units (“PSU’s”) equal to 57,110, 79,108 and 56,389 PSU’s, respectively. Each PSU represents a contingent right to receive one common share of the Company if vesting is satisfied at the end of a three­year performance period (the “Performance Period”). The ultimate number of PSU’s that will vest and be earned, if any, after the completion of the Performance Period, is based on (1) (a) the Company’s cumulative pre­tax income from operations, excluding extraordinary items as defined in the underlying award agreements with the executive officers, over the Performance Period (weighted 80%) (the “Performance Condition”), and (b) the Company’s relative total shareholder return over the Performance Period compared to the total shareholder return of a peer group of other publicly­traded homebuilders (weighted 20%) (the “Market Condition”) and (2) the participant’s continued employment through the end of the Performance Period, except in the case of termination due to death, disability or retirement or involuntary termination without cause by the Company. The number of PSU’s that vest may increase by up to 50% from the target number based on levels of achievement of the above criteria as set forth in the applicable award agreements and decrease to zero if the Company fails to meet the minimum performance levels for both of the above criteria. If the Company achieves the minimum performance levels for both of the above criteria, 50% of the target number of PSU’s will vest and be earned. Any portion of PSU’s that does not vest at the end of the Performance Period will be forfeited. Additionally, the PSU’s have no dividend or voting rights during the Performance Period.

The grant date fair value of the portion of the PSU’s subject to the Performance Condition and the Market Condition component was\$23.34 and \$19.69, respectively, for the 2017 PSU’s \$16.85 and \$15.75, respectively, for the 2016 PSU’s and \$21.28 and \$18.92, respectively, for the 2015 PSU’s. In accordance with ASC 718, for the portion of the PSU’s subject to a Market Condition, stock­based compensation expense is derived using the Monte Carlo simulation methodology and is recognized ratably over the service period regardless of whether or not the attainment of the Market Condition is probable. Therefore, the Company recognized \$0.3 million in stock­based compensation expense during 2017 related to the Market Condition portion of the 2017, 2016 and 2015 PSU awards. There was a total of \$0.2 million of unrecognized stock­based compensation expense related to the Market Condition portion of the 2017 and 2016 PSU awards as of December 31, 2017. At December 31, 2017, the Market Condition for the 2015 PSU awards was met, and the company recorded \$0.2 million of stock­based compensation expense. Based on these results and board approval, 11,503 PSU’s vested during the first quarter of 2018 with respect to the portion of the 2015 PSU’s subject to the Market Condition.

For the portion of the PSU’s subject to a Performance Condition, we recognize stock­based compensation expense on a straight­line basis over the Performance Period based on the probable outcome of the related Performance Condition. Otherwise, stock­based compensation expense recognition is deferred until probability is attained and a cumulative stock­based compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reassesses the probability of the satisfaction of the Performance Condition on a quarterly basis, and stock­based compensation expense is adjusted based on the portion of the requisite service period that has passed. As of December 31, 2017, the Company had not recognized any stock­based compensation expense related to the Performance Condition portion of the 2017 PSU awards. If the Company achieves the minimum performance levels for the Performance Condition to be met for the 2017 awards, the Company would record unrecognized stock­based compensation expense of \$0.5 million as of December 31, 2017, for which \$0.2 million would be immediately recognized had attainment been probable at December 31, 2017. The Company recognized \$0.4 million of stock­based compensation expense related to the Performance Condition portion of the 2016 PSU awards during 2017 based on the probability of attaining the performance condition. The Company has \$0.2 million of unrecognized stock­based compensation expense for the 2016 PSU awards at December 31, 2017. The Company recognized \$1.1 million of stock-based compensation expense for the 2015 PSU awards as of December 31, 2017 which met the maximum performance level at December 31, 2017. Based on these results and board approval, 67,668 PSU’s vested during the first quarter of 2018 with respect to the portion of the 2015 PSU’s subject to the Performance Condition.

# Deferred Compensation Plans

The purpose of the Company’s Amended and Restated Executives’ Deferred Compensation Plan (the “Executive Plan”), a non­qualified deferred compensation plan, is to provide an opportunity for certain eligible employees of the Company to defer a portion of their compensation and to invest in the Company’s common shares. The purpose of the Company’s Amended and Restated Director Deferred Compensation Plan (the “Director Plan”) is to provide its directors with an opportunity to defer their director compensation and to invest in the Company’s common shares.

Compensation expense deferred into the Executive Plan and the Director Plan (together the “Plans”) totaled \$0.4 million, \$0.1 million and \$0.3 million for the years ended December 31, 2017, 2016 and 2015. The portion of cash compensation deferred by employees and directors under the Plans is invested in fully­vested equity units in the Plans. One equity unit is the equivalent of one common share. Equity units and the related dividends will be converted and distributed to the employee or director in the

form of common shares at the earlier of his or her elected distribution date or termination of service as an employee or director of the Company. Distributions from the Plans totaled \$0.2 million during the years ended December 31, 2017 and 2016, and less than \$0.1 million during the year ended December 31, 2015. As of December 31, 2017, there were a total of 51,787 equity units with a value of\$1.2 million outstanding under the Plans. The aggregate fair market value of these units at December 31, 2017, based on the closing price of the underlying common shares, was approximately \$2.4 million, and the associated deferred tax benefit the Company would recognize if the outstanding units were distributed was \$1.3 million as of December 31, 2017. Common shares are issued from treasury shares upon distribution of equity units from the Plans.

# Profit Sharing and Retirement Plan

The Company has a profit­sharing and retirement plan that covers substantially all Company employees and permits participants to make contributions to the plan on a pre­tax basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended. Company contributions to the plan are also made at the discretion of the Company’s board of directors based on the Company’s profitability and resulted in a \$1.8 million, \$1.4 million and \$1.2 million expense for the years ended December 31, 2017, 2016 and 2015, respectively.

# NOTE 3. 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

To meet financing needs of our home­buying customers, M/I Financial is party to interest rate lock commitments (“IRLCs”), which are extended to customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. These IRLCs are considered derivative financial instruments. M/I Financial manages interest rate risk related to its IRLCs and mortgage loans held for sale through the use of forward sales of mortgage­backed securities (“FMBSs”), the use of best­efforts whole loan delivery commitments, and the occasional purchase of options on FMBSs in accordance with Company policy. These FMBSs, options on FMBSs, and IRLCs covered by FMBSs are considered non­designated derivatives. These amounts are either recorded in Other Assets or Other Liabilities on the Consolidated Balance Sheets (depending on the respective balance for that year ended December 31).

The Company measures both mortgage loans held for sale and 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 “lock­in” a specified interest rate within established time frames. Market risk arises if interest rates move adversely between the time of the “lock­in” 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 mortgage­backed 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 or trading 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 Consolidated Statements of Income.

The fair value of mortgage loans held for sale is estimated based primarily on published prices for mortgage­backed securities with similar characteristics. To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage­backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. The Company sells loans on a servicing released or servicing retained basis, and receives servicing compensation. Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors and depends on the loan type. The Company applies a fallout rate to IRLCs when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on management’s judgment and company experience.