Century Communities, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. Century Communities, Inc. Condensed Consolidated Balance Sheets As of September 30, 2020 and December 31, 2019 (in thousands, except share amounts) September 30, December 31, 2020 2019 Assets (unaudited) (audited) Cash and cash equivalents $ 288,341 $ 55,436 Cash held in escrow 26,275 35,308 Accounts receivable 28,855 27,438 Inventories 1,872,337 1,995,549 Mortgage loans held for sale 187,494 185,246 Prepaid expenses and other assets 113,339 124,008 Property and equipment, net 31,550 35,998 Deferred tax assets, net 12,775 10,589 Goodwill 30,395 30,395 Total assets $ 2,591,361 $ 2,499,967 Liabilities and stockholders' equity Liabilities: Accounts payable $ 48,448 $ 84,794 Accrued expenses and other liabilities 288,674 213,975 Notes payable 895,867 896,704 Revolving line of credit — 68,700 Mortgage repurchase facilities 173,415 174,095 Total liabilities 1,406,404 1,438,268 Stockholders' equity: Preferred stock, $ 0.01 par value, 50,000,000 shares authorized, none outstanding — — Common stock, $ 0.01 par value, 100,000,000 shares authorized, 33,350,633 and 33,067,375 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 334 331 Additional paid-in capital 693,269 684,354 Retained earnings 491,354 377,014 Total stockholders' equity 1,184,957 1,061,699 Total liabilities and stockholders' equity $ 2,591,361 $ 2,499,967 See Notes to Unaudited Condensed Consolidated Financial Statements 3 Table of Contents Century Communities, Inc. Unaudited Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2020 and 2019 (in thousands, except share and per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues Homebuilding revenues Home sales revenues $ 760,239 $ 573,860 $ 2,080,364 $ 1,705,798 Land sales and other revenues 2,105 6,083 25,516 8,837 Total homebuilding revenues 762,344 579,943 2,105,880 1,714,635 Financial services revenues 32,017 10,419 67,534 28,734 Total revenues 794,361 590,362 2,173,414 1,743,369 Homebuilding cost of revenues Cost of home sales revenues ( 627,364 ) ( 469,834 ) ( 1,718,545 ) ( 1,407,519 ) Cost of land sales and other revenues ( 2,046 ) ( 4,624 ) ( 18,597 ) ( 6,115 ) Total homebuilding cost of revenues ( 629,410 ) ( 474,458 ) ( 1,737,142 ) ( 1,413,634 ) Financial services costs ( 14,511 ) ( 8,174 ) ( 36,841 ) ( 22,750 ) Selling, general and administrative ( 85,806 ) ( 72,834 ) ( 246,131 ) ( 216,987 ) Loss on debt extinguishment — — — ( 10,832 ) Inventory impairment and other — — ( 1,691 ) — Other income (expense) 251 ( 56 ) ( 2,533 ) ( 499 ) Income before income tax expense 64,885 34,840 149,076 78,667 Income tax expense ( 15,121 ) ( 7,816 ) ( 34,736 ) ( 19,031 ) Net income $ 49,764 $ 27,024 $ 114,340 $ 59,636 Earnings per share: Basic $ 1.49 $ 0.88 $ 3.43 $ 1.96 Diluted $ 1.48 $ 0.87 $ 3.41 $ 1.95 Weighted average common shares outstanding: Basic 33,350,633 30,587,487 33,299,768 30,378,860 Diluted 33,731,252 30,906,235 33,556,650 30,641,194 See Notes to Unaudited Condensed Consolidated Financial Statements 4 Table of Contents Century Communities, Inc. Unaudited Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2020 and 2019 ( in thousands ) Nine Months Ended September 30, 2020 2019 Operating activities Net income $ 114,340 $ 59,636 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,088 9,793 Stock-based compensation expense 14,374 11,391 Fair value of loans held for sale and other ( 9,346 ) ( 87 ) Loss on debt extinguishment — 10,832 Inventory impairment and other 1,691 — Deferred income taxes ( 2,186 ) ( 514 ) Loss on disposition of assets 1,213 846 Changes in assets and liabilities: Cash held in escrow 9,033 ( 6,018 ) Accounts receivable ( 1,417 ) ( 4,465 ) Inventories 160,877 ( 215,771 ) Mortgage loans held for sale ( 594 ) 17,073 Prepaid expenses and other assets 18,090 32,386 Accounts payable ( 36,346 ) ( 11,212 ) Accrued expenses and other liabilities 35,989 ( 52,854 ) Net cash provided by (used in) operating activities 315,806 ( 148,964 ) Investing activities Purchases of property and equipment ( 6,706 ) ( 11,633 ) Other investing activities 79 78 Net cash used in investing activities ( 6,627 ) ( 11,555 ) Financing activities Borrowings under revolving credit facilities 678,000 1,184,800 Payments on revolving credit facilities ( 746,700 ) ( 1,108,500 ) Proceeds from issuance of senior notes due 2027 — 500,000 Extinguishment of senior notes due 2022 — ( 391,942 ) Proceeds from issuance of insurance premium notes and other 5,469 12,629 Principal payments on insurance notes payable ( 7,259 ) ( 19,275 ) Debt issuance costs — ( 6,075 ) Net payments on mortgage repurchase facilities ( 680 ) ( 26,757 ) Net proceeds from issuances of common stock — 25,817 Withholding of common stock upon vesting of restricted stock units ( 5,145 ) ( 3,588 ) Repurchases of common stock under stock repurchase program — ( 1,439 ) Other ( 495 ) — Net cash (used in) provided by financing activities ( 76,810 ) 165,670 Net increase $ 232,369 $ 5,151 Cash and cash equivalents and Restricted cash Beginning of period 58,521 36,441 End of period $ 290,890 $ 41,592 Supplemental cash flow disclosure Cash paid for income taxes $ 30,998 $ 20,722 Cash and cash equivalents and Restricted cash Cash and cash equivalents $ 288,341 $ 38,508 Restricted cash (Note 5) 2,549 3,084 Cash and cash equivalents and Restricted cash $ 290,890 $ 41,592 See Notes to Unaudited Condensed Consolidated Financial Statements 5 Table of Contents Century Communities, Inc. Unaudited Condensed Consolidated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 ( in thousands ) Three Months Ended September 30, 2020 and 2019 Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Total Stockholders' Equity Balance at June 30, 2020 33,351 $ 334 $ 687,564 $ 441,590 $ 1,129,488 Other — — ( 81 ) — ( 81 ) Stock-based compensation expense — — 5,786 — 5,786 Net income — — — 49,764 49,764 Balance at September 30, 2020 33,351 $ 334 $ 693,269 $ 491,354 $ 1,184,957 Balance at June 30, 2019 30,439 $ 304 $ 600,293 $ 296,632 $ 897,229 Issuance of common stock 799 8 23,146 — 23,154 Vesting of restricted stock units 17 — — — — Withholding of common stock upon vesting of restricted stock units ( 6 ) — ( 151 ) — ( 151 ) Stock-based compensation expense — — 3,923 — 3,923 Net income — — — 27,024 27,024 Balance at September 30, 2019 31,249 $ 312 $ 627,211 $ 323,656 $ 951,179 Nine Months Ended September 30, 2020 and 2019 Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Total Stockholders' Equity Balance at December 31, 2019 33,067 $ 331 $ 684,354 $ 377,014 $ 1,061,699 Other — — ( 311 ) — ( 311 ) Vesting of restricted stock units 454 5 ( 5 ) — — Withholding of common stock upon vesting of restricted stock units ( 170 ) ( 2 ) ( 5,143 ) — ( 5,145 ) Stock-based compensation expense — — 14,374 — 14,374 Net income — — — 114,340 114,340 Balance at September 30, 2020 33,351 $ 334 $ 693,269 $ 491,354 $ 1,184,957 Balance at December 31, 2018 30,155 $ 302 $ 595,037 $ 264,020 $ 859,359 Issuance of common stock 899 9 25,808 — 25,817 Repurchase of common stock ( 83 ) ( 1 ) ( 1,438 ) — ( 1,439 ) Vesting of restricted stock units 430 4 ( 4 ) — — Withholding of common stock upon vesting of restricted stock units ( 152 ) ( 2 ) ( 3,583 ) — ( 3,585 ) Stock-based compensation expense — — 11,391 — 11,391 Net income — — — 59,636 59,636 Balance at September 30, 2019 31,249 $ 312 $ 627,211 $ 323,656 $ 951,179 See Notes to Unaudited Condensed Consolidated Financial Statements ‎ 6 Table of Contents Century Communities, Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 1. Basis of Presentation Century Communities, Inc. (which we refer to as “we,” “CCS,” or the “Company”), together with its subsidiaries, is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. Additionally, our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers, have been identified as our Financial Services segment. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year, particularly in light of the novel coronavirus (COVID-19) pandemic and measures intended to mitigate the spread. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that was filed with the SEC on February 7, 2020. The COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and initially created uncertainty regarding potential impacts to our operations and customer demand. Commencing in March 2020, numerous state and local municipalities issued public health orders with varying expiration dates requiring the closure of nonessential businesses, as well as ordering individuals to stay at home and/or shelter in place whenever possible. These public health orders generally exempted the sale and construction of new homes, other than a small portion of our operations, which had to cease operations in early April. During the latter half of the second quarter of 2020, state and local municipalities in the majority of our markets began to lift the most stringent of the public health restrictions and numerous nonessential businesses were allowed to reopen. As of the date of this filing and throughout the third quarter of 2020, we are and were able to build and sell homes in all of our markets . Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest, and variable interest entities for which the Company is deemed to be the primary beneficiary. We currently do not have any variable interest entities in which we are deemed the primary beneficiary. All intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, particularly given the uncertainties associated with the ongoing COVID-19 pandemic. Recently Adopted Accounting Standards Financial Instruments - Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) . The standard changes the accounting for credit losses for most financial assets and certain other instruments. Credit losses that have historically been accounted for on an incurred loss basis are now accounted for using an 7 Table of Contents estimate of lifetime expected credit losses. This generally results in earlier recognition of allowances for credit losses. We adopted this standard on January 1, 2020 with no material effect on the consolidated financial statements and related disclosures. Internal-Use Software In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) . This update is intended to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement includes a software license. We adopted this standard on January 1, 2020 with no material effect on the consolidated financial statements and related disclosures. Recently Issued Accounting Standards In December 2019, the FASB issued ASU No. 2019-12, “ Income Taxes (Topic 740) : Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The standard simplifies the accounting for income taxes, eliminates certain exceptions, and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for us beginning January 1, 2021. We do not expect this standard to have a material effect on the consolidated financial statements and related disclosures. 2. Reporting Segments Our homebuilding operations are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 17 states. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand is managed by geographic location, and each of our four geographic regions targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Each of our four geographic regions is considered a separate operating segment. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our Century Complete brand currently has operations in 11 states and is managed separately from our four geographic regions. Accordingly, it is considered a separate operating segment. The management of our four geographic regions and Century Complete reports to our chief operating decision makers (which we refer to as “CODMs”), the Co-Chief Executive Officers of our Company. The CODMs review the results of our operations, including total revenue and income before income tax expense to determine profitability and to allocate resources. Accordingly, we have presented our homebuilding operations as the following five reportable segments:  West (California and Washington)  Mountain (Arizona, Colorado, Nevada, and Utah)  Texas  Southeast (Georgia, North Carolina, South Carolina and Tennessee)  Century Complete (Alabama, Arizona, Florida, Georgia, Indiana, Iowa, Michigan, North Carolina, Ohio, South Carolina, and Texas) We have also identified our Financial Services operations, which provide mortgage, title, and insurance services to our homebuyers, as a sixth reportable segment. Our Corporate operations are a non-operating segment, as they serve to support our homebuilding, and to a lesser extent our financial services operations, through functions, such as our executive, finance, treasury, human resources, accounting and legal departments. The following table summarizes total revenue and income before income tax expense by segment (in thousands ): ‎ 8 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue: West $ 188,495 $ 116,874 $ 486,507 $ 364,220 Mountain 222,262 171,617 570,983 510,693 Texas 76,776 68,812 235,618 180,820 Southeast 152,858 118,610 458,986 356,236 Century Complete 121,953 104,030 353,786 302,666 Financial Services 32,017 10,419 67,534 28,734 Corporate — — — — Total revenue $ 794,361 $ 590,362 $ 2,173,414 $ 1,743,369 Income (loss) before income tax expense: West $ 13,627 $ 9,013 $ 42,716 $ 27,634 Mountain 28,695 20,552 67,789 62,386 Texas 6,904 8,290 22,012 17,626 Southeast 13,414 7,079 33,743 17,467 Century Complete 7,826 6,032 17,159 18,323 Financial Services 17,506 2,245 30,693 5,984 Corporate ( 23,087 ) ( 18,371 ) ( 65,036 ) ( 70,753 ) Total income before income tax expense $ 64,885 $ 34,840 $ 149,076 $ 78,667 The following table summarizes total assets by operating segment (in thousands): September 30, December 31, 2020 2019 West $ 542,622 $ 610,248 Mountain 708,076 635,201 Texas 202,177 232,887 Southeast 360,424 441,818 Century Complete 170,126 244,827 Financial Services 299,887 254,282 Corporate 308,049 80,704 Total assets $ 2,591,361 $ 2,499,967 Corporate assets primarily include certain cash and cash equivalents, certain property and equipment, prepaid insurance, and deferred financing costs on our revolving line of credit. 3. Inventories Inventories included the following (in thousands): September 30, December 31, 2020 2019 Homes under construction $ 980,232 $ 1,091,576 Land and land development 825,779 836,904 Capitalized interest 66,326 67,069 Total inventories $ 1,872,337 $ 1,995,549 4. Financial Services Our Financial Services are principally comprised of our mortgage lending operations, Inspire Home Loans, Inc. (which we refer to as “Inspire”). Inspire is a full-service mortgage lender and primarily originates mortgage loans for our homebuyers. Inspire sells substantially all of the loans it originates either as whole loans, or with servicing retained, in the secondary mortgage market within a short period of time after origination, generally within 30 days. Inspire primarily finances these loans using its mortgage repurchase facilities. Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $ 193.1 million and $ 37.6 million at September 30, 2020 and December 31, 2019, respectively, and carried a weighted average interest rate of approximately 9 Table of Contents 2.9 % and 3.9 %, respectively. As of September 30, 2020 and December 31, 2019, Inspire had mortgage loans held for sale with an aggregate fair value of $ 187.5 million and $ 185.2 million, respectively, and an aggregate outstanding principal balance of $ 179.9 million and $ 179.3 million, respectively. Mortgage loans held-for-sale, including the rights to service the mortgage loans, as well as the derivative instrument used to economically hedge our interest rate risk, which are typically forward commitments on mortgage backed securities, are carried at fair value and changes in fair value are reflected in financial services revenue on the condensed consolidated statements of operations. Management believes carrying loans held-for-sale and the derivative instruments used to economically hedge them at fair value improves financial reporting by more accurately reflecting the underlying transaction. Refer to Note 11 – Fair Value Disclosures for further information regarding our derivative instruments . 5. Prepaid Expenses and Other Assets Prepaid expenses and other assets included the following (in thousands): September 30, December 31, 2020 2019 Prepaid insurance $ 21,537 $ 26,175 Lot option and escrow deposits 36,828 48,810 Deferred financing costs on revolving line of credit, net 3,550 4,574 Restricted cash (1) 2,549 3,085 Secured note receivable 2,460 2,602 Right of use assets 16,697 18,854 Other assets and prepaid expenses 22,308 18,525 Derivative assets 7,410 1,383 Total prepaid expenses and other assets $ 113,339 $ 124,008 (1) Restricted cash consists of earnest money deposits for home sale contracts held by third parties as required by various jurisdictions, and certain pledge balances associated with our mortgage repurchase facilities. 6. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities included the following (in thousands): September 30, December 31, 2020 2019 Earnest money deposits $ 25,721 $ 10,592 Warranty reserve 12,890 9,731 Accrued compensation costs 39,713 30,888 Land development and home construction accruals 149,842 110,284 Accrued interest 16,211 19,306 Lease liabilities - operating leases 17,155 14,562 Income taxes payable — 329 Other accrued liabilities 27,142 18,283 Total accrued expenses and other liabilities $ 288,674 $ 213,975 7. Warranties Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal model that incorporates historical payment trends and adjust the amounts recorded, if necessary. Based on warranty payment trends relative to our estimates at the time of home closing, we did no t reduce our warranty reserve during the three months ended September 30, 2020, and reduced our warranty reserve by $ 0.6 million during the three months ended September 30, 2019. We reduced our warranty reserve by $ 1.3 million and $ 0.4 million during the nine months ended September 30, 2020 and 2019, respectively. 10 Table of Contents These adjustments are included in cost of home sales revenues on our consolidated statements of operations. Changes in our warranty accrual for the three and nine months ended September 30, 2020 and 2019 are detailed in the table below (in thousands) : Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Beginning balance $ 11,221 $ 9,768 $ 9,731 $ 7,970 Warranty expense provisions 2,293 1,665 6,345 5,433 Payments ( 624 ) ( 870 ) ( 1,925 ) ( 3,063 ) Warranty adjustment — ( 573 ) ( 1,261 ) ( 350 ) Ending balance $ 12,890 $ 9,990 $ 12,890 $ 9,990 8. Debt Our outstanding debt obligations included the following as of September 30, 2020 and December 31, 2019 (in thousands): September 30, December 31, 2020 2019 6.750 % senior notes, due May 2027 (1) $ 494,736 $ 494,307 5.875 % senior notes, due July 2025 (1) 396,644 396,120 Other financing obligations 4,487 6,277 Notes payable 895,867 896,704 Revolving line of credit, due April 2023 — 68,700 Mortgage repurchase facilities 173,415 174,095 Total debt $ 1,069,282 $ 1,139,499 (1) The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest expense over the respective terms of the senior notes. Revolving Line of Credit We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries (which we refer to as the “Amended and Restated Credit Agreement”), which, as amended most recently on December 13, 2019, provides us with a revolving line of credit of up to $ 640.0 million, and unless terminated earlier, will mature on April 30, 2023 . Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60 % and 3.10 % per annum, or, at the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60 % and 2.10 % per annum. As of September 30, 2020 and December 31, 2019, we had no amounts and $ 68.7 million outstanding under the credit facility, respectively, and were in compliance with all covenants. Mortgage Repurchase Facilities – Financial Services On May 4, 2018, September 14, 2018, and August 1, 2019, Inspire entered into mortgage warehouse facilities, with Comerica Bank, J.P. Morgan, and Wells Fargo, respectively. The mortgage warehouse lines of credit (which we refer to as the “repurchase facilities”) provide Inspire with uncommitted repurchase facilities of up to an aggregate of $ 275 million, secured by the mortgage loans financed thereunder. Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2020 and December 31, 2019, we had $ 173.4 million and $ 174.1 million outstanding under these repurchase facilities, respectively, and were in compliance with all covenants thereunder. During the three months ended September 30, 2020 and 2019, we incurred interest expense on the repurchase facilities of $ 0.8 million and $ 0.6 million, respectively, which are included in financial services costs on our condensed consolidated statements of operations. During the nine months ended September 30, 2020 and 2019, we incurred interest expense on the repurchase facilities of $ 2.0 million and $ 2.1 million, respectively. 11 Table of Contents 9. Interest Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. As our qualifying assets exceeded our outstanding debt during the three and nine months ended September 30, 2020 and 2019, we capitalized all interest costs incurred during these periods, except for interest incurred on our mortgage repurchase facilities. Our interest costs are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest capitalized beginning of period $ 70,311 $ 63,068 $ 67,069 $ 53,842 Interest capitalized during period 15,065 19,325 50,686 55,792 Less: capitalized interest in cost of sales ( 19,050 ) ( 14,258 ) ( 51,429 ) ( 41,499 ) Interest capitalized end of period $ 66,326 $ 68,135 $ 66,326 $ 68,135 10 . Income Taxes At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2020 estimated annual effective tax rate of 23.4 % is driven by our blended federal and state statutory rate of 25.1 %, and certain other permanent differences between GAAP and tax which decreased our rate by 1.7 %. For the nine months ended September 30, 2020, our estimated annual rate of 23.4 % was impacted by discrete items which had a net impact of decreasing our rate by 0.1 %, including excess tax benefits for vested stock-based compensation . For the three months ended September 30, 2020 and 2019, we recorded income tax expense of $ 15.1 million and $ 7.8 million, respectively. For the nine months ended September 30, 2020 and 2019, we recorded income tax expense of $ 34.7 million and $ 19.0 million, respectively . 11. Fair Value Disclosures Accounting Standards Codification Topic 820, Fair Value Measurement , defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date. Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date. ‎ 12 Table of Contents The following table presents carrying values and estimated fair values of financial instruments (in thousands): September 30, 2020 December 31, 2019 Hierarchy Carrying Fair Value Carrying Fair Value Secured notes receivable (1) Level 2 $ 2,460 $ 2,491 $ 2,602 $ 2,545 Mortgage loans held for sale (2) Level 2 $ 187,494 $ 187,494 $ 185,246 $ 185,246 Derivative assets (3) Level 2 $ 7,410 $ 7,410 $ 1,382 $ 1,382 5.875 % senior notes (4)(5) Level 2 $ 396,644 $ 411,000 $ 396,120 $ 415,680 6.750 % senior notes (4)(5) Level 2 $ 494,736 $ 535,000 $ 494,307 $ 537,500 Revolving line of credit (6) Level 2 $ — $ — $ 68,700 $ 68,700 Other financing obligations (6)(7) Level 2 $ 4,487 $ 4,487 $ 6,277 $ 6,277 Derivative liabilities (3) Level 2 $ 282 $ 282 $ 147 $ 147 Mortgage repurchase facilities (6) Level 2 $ 173,415 $ 173,415 $ 174,095 $ 174,095 (1) Estimated fair value of the secured notes receivable was based on cash flow models discounted at market interest rates which considered the underlying risks of the note. In May 2020, the maturity of the secured note receivable was extended by one year to May of 2021. (2) The mortgage loans held for sale are carried at fair value, which is based on quoted market prices for committed mortgage loans. (3) Derivative instruments are carried at fair value and based on market prices for similar instruments and are related to our financial services segment. Changes in fair value are reflected in financial services revenue on the condensed consolidated statements of operations. Derivative assets are presented within prepaid expenses and other assets on the condensed consolidated balance sheets. Derivative liabilities are presented within accrued expenses and other liabilities on the condensed consolidated balance sheets. (4) Estimated fair value of the senior notes is based on recent trading activity in inactive markets. (5) Carrying amounts include any associated unamortized deferred financing costs, premiums and discounts. As of September 30, 2020, these amounts totaled $ 5.3 million and $ 3.4 million for the 6.750 % senior notes and 5.875 % senior notes, respectively. As of December 31, 2019, these amounts totaled $ 5.7 million and $ 3.9 million for the 6.750 % senior notes and 5.875 % senior notes, respectively. (6) Carrying amount approximates fair value due to short-term nature and interest rate terms. (7) Insurance premium notes included in in other financing obligations bore interest rates ranging from 3.278 % to 3.240 % during the periods ending September 30, 2020 and December 31, 2019, respectively, which approximated prevailing market rates for similar obligations at each period. During the nine months ended September 30, 2020, total impairment charges of $ 1.7 million were recorded, which includes $ 0.8 million of impairment charges related to one community in our Century Complete segment which was recorded during the three months ended March 31, 2020, and $ 0.9 million of impairment charges related to one community in our Texas segment which was recorded during the three months ended June 30, 2020. No impairment charges were recorded in the three months ended September 30, 2020. The estimated fair value of communities are determined through a discounted cash flow approach utilizing Level 3 inputs. Changes in our cash flow projections in future periods related to these communities may change our conclusions on the recoverability of inventory in the future. The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities include items such as inventory and property and equipment that are measured at fair value when acquired and as a result of impairments, if deemed necessary. 12. Stock-Based Compensation During the three months ended September 30, 2020 and 2019, we did no t grant any restricted stock units (which we refer to as “RSUs”) or performance share units (which we refer to as “PSUs”). During the nine months ended September 30, 2020 and 2019, we granted RSUs covering 0.4 million and 0.6 million shares of common stock, respectively, with a grant date fair value of $ 30.43 per share and $ 23.85 per share, respectively, that vest over a three year period. During the nine months ended September 30, 2020 and 2019, we also granted PSUs covering up to 0.3 million and 0.3 million shares of common stock, respectively, assuming maximum level of performance, with a grant date fair value of $ 26.38 per share and $ 22.01 per share, respectively. Granted PSUs are subject to both service and performance vesting conditions. The quantity of shares that will ultimately vest for the PSUs ranges from 0 % to 250 % of a targeted number of shares for each participant and will be determined based on an achievement of a three year pre-tax income performance goal. 13 Table of Contents A summary of our outstanding RSUs and PSUs, assuming current estimated level of performance achievement, are as follows (in thousands, except years): As of September 30, 2020 Unvested units 1,463 Unrecognized compensation cost $ 17,335 Remaining period to recognize compensation cost 1.81 years During the three months ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $ 5.8 million and $ 3.9 million, respectively. During the nine months ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $ 14.4 million and $ 11.4 million, respectively. Stock-based compensation expense is included in selling, general, and administrative expense on our condensed consolidated statements of operations. During the three months ended September 30, 2020, we updated our recognition of stock-based compensation expense associated with previously granted PSU awards to reflect probable financial results as they relate to the performance goals of the awards. Accordingly, our estimate of the number of shares which will ultimately vest under our PSU awards increased by 30 thousand, and we recorded a cumulative catch-up adjustment to increase stock-based compensation expense of $ 0.6 million ($ 0.4 million net of tax), or $ 0.02 per basic share and $ 0.01 per diluted share for the three and nine months ended September 30, 2020, respectively. 13. Stockholders’ Equity Our authorized capital stock consists of 100.0 million shares of common stock, par value $ 0.01 per share, and 50.0 million shares of preferred stock, par value $ 0.01 per share. As of September 30, 2020, and December 31, 2019, there were 33.4 million and 33.1 million shares of common stock issued and outstanding, respectively. On May 10, 2017, our stockholders approved the adoption of the Century Communities, Inc. 2017 Omnibus Incentive Plan (which we refer to as our “2017 Incentive Plan”), which replaced our First Amended & Restated 2013 Long-Term Incentive Plan. We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which approximately 0.6 million shares rolled over into the 2017 Incentive Plan when it became effective. On May 8, 2019, our stockholders approved the Century Communities, Inc. Amended and Restated 2017 Omnibus Incentive Plan (which we refer to as our “Amended 2017 Incentive Plan”), which increased the number of shares of our common stock authorized for issuance under the 2017 Incentive Plan by an additional 1.631 million shares. We issued 0.5 million and 0.3 million shares of common stock related to the vesting of RSUs during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, approximately 1.0 million shares of common stock remained available for issuance under the Amended 2017 Incentive Plan. On November 27, 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc. (which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $ 100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement. This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, had all $ 100.0 million available for sale as of September 30, 2020. We did no t sell or issue any shares of our common stock during the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million and 0.9 million shares, respectively, of our common stock under the previous distribution agreement, which provided gross proceeds of $ 23.7 million and $ 26.5 million, respectively, and in connection with such sales, paid total commissions and fees to the sales agents of $ 0.6 million and $ 0.7 million, respectively . The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement . On November 6, 2018, we authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock. During the three and nine months ended September 30, 2020, we did no t repurchase any shares of common stock. During the three and nine months ended September 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $ 1.4 million. 14. Earnings Per Share We use the treasury stock method to calculate earnings per share as our currently issued non-vested RSUs and PSUs do not have participating rights. 14 Table of Contents The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2020 and 2019 (in thousands, except share and per share information): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Numerator Net income $ 49,764 $ 27,024 $ 114,340 $ 59,636 Denominator Weighted average common shares outstanding - basic 33,350,633 30,587,487 33,299,768 30,378,860 Dilutive effect of restricted stock units 380,619 318,748 256,882 262,334 Weighted average common shares outstanding - diluted 33,731,252 30,906,235 33,556,650 30,641,194 Earnings per share: Basic $ 1.49 $ 0.88 $ 3.43 $ 1.96 Diluted $ 1.48 $ 0.87 $ 3.41 $ 1.95 Stock-based awards are excluded from the calculation of diluted EPS in the event they are subject to unsatisfied performance conditions or are antidilutive. We excluded 0.8 million and 0.6 million common unit equivalents from diluted earnings per share during the three and nine months ended September 30, 2020 and 2019, respectively, related to the PSUs for which performance conditions remain unsatisfied. 15. Commitments and Contingencies Letters of Credit and Performance Bonds In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 2020, and December 31, 2019, we had $ 360.1 million and $ 344.1 million, respectively, in letters of credit and performance bonds issued and outstanding. Litigation We are subject to claims and lawsuits that arise primarily in the ordinary course of business, which consist primarily of construction defect claims. It is the opinion of our management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and the eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative expense on our condensed consolidated statements of operations for our estimated loss. Under various insurance policies, we have the ability to recoup costs in excess of applicable self-insured retentions. Estimates of such amounts are recorded in other assets when recovery is probable. We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flows. ‎ 15 Table of Contents