What changed in this filing

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Item 1. Financial Statements

2020-07-30 compared with 2020-04-29 · 207 added, 164 removed, 794 unchanged (32% of the section changed)

14 unchanged sentences

Deferred income taxes, net of valuation allowance of $ 13.6 million and $ 18.7 million

at March 31, 2020 and September 30, 2019, respectively 149.5 163.1

at June 30, 2020 and September 30, 2019, respectively

Property and equipment, net 631.9 499.2

9 unchanged sentences

Common stock, $ .01 par value, 1,000,000,000 shares authorized, 394,374,575 shares issued

and 363,537,810 shares outstanding at March 31, 2020 and 392,172,821 shares issued

and 363,633,208 shares outstanding at June 30, 2020 and 392,172,821 shares issued

and 368,431,454 shares outstanding at September 30, 2019

1 unchanged sentence

Retained earnings 8,992.5 7,640.1

Treasury stock, 30,741,367 shares and 23,741,367 shares at March 31, 2020

Treasury stock, 30,741,367 shares and 23,741,367 shares at June 30, 2020

and September 30, 2019, respectively, at cost

( 1,162.6 ) ( 802.2 )

Stockholders’ equity 11,048.0 10,020.9

6 unchanged sentences

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

8 unchanged sentences

Net income 632.9 473.6 1,549.3 1,114.7

Net income attributable to noncontrolling interests 1.3 3.1 2.4 2.7

Net income (loss) attributable to noncontrolling interests 2.2 ( 1.2 ) 4.6 1.5

Net income attributable to D.R.

16 unchanged sentences

Balances at September 30, 2019 ( 368,431,454 shares)

$ 3.9 $ 3,179.1 $ 7,640.1 $ ( 802.2 ) $ 274.2 $ 10,295.1

Net income — — 431.3 — 1.2 432.5

Exercise of stock options ( 258,800 shares)

— 4.1 — — — 4.1

Stock issued under employee benefit plans ( 582,936 shares)

2 unchanged sentences

Cash dividends declared ($ 0.175 per share)

— — ( 64.6 ) — — ( 64.6 )

Repurchases of common stock ( 3,000,000 shares)

— — — ( 163.1 ) — ( 163.1 )

Distributions to noncontrolling interests — — — — ( 0.4 ) ( 0.4 )

2 unchanged sentences

Balances at December 31, 2019 ( 366,273,190 shares)

$ 3.9 $ 3,182.0 $ 8,006.8 $ ( 965.3 ) $ 275.5 $ 10,502.9

Net income — — 482.7 — 1.3 484.0

Exercise of stock options ( 310,032 shares)

— 6.2 — — — 6.2

Stock issued under employee benefit plans ( 954,588 shares)

— 2.6 — — — 2.6

Cash paid for shares withheld for taxes — ( 20.8 ) — — — ( 20.8 )

1 unchanged sentence

Cash dividends declared ($ 0.175 per share)

— — ( 64.1 ) — — ( 64.1 )

Repurchases of common stock ( 4,000,000 shares)

— — — ( 197.3 ) — ( 197.3 )

Balances at March 31, 2020 ( 363,537,810 shares)

$ 3.9 $ 3,191.3 $ 8,425.4 $ ( 1,162.6 ) $ 276.8 $ 10,734.8

Net income — — 630.7 — 2.2 632.9

Exercise of stock options ( 93,491 shares)

— 2.1 — — — 2.1

Stock issued under employee benefit plans ( 1,907 shares)

Cash paid for shares withheld for taxes — ( 0.1 ) — — — ( 0.1 )

Stock-based compensation expense — 21.3 — — — 21.3

Cash dividends declared ($ 0.175 per share)

— — ( 63.6 ) — — ( 63.6 )

Distributions to noncontrolling interests — — — — ( 0.3 ) ( 0.3 )

Change of ownership interest in Forestar — ( 0.4 ) — — 0.4 —

Balances at June 30, 2020 ( 363,633,208 shares)

$ 3.9 $ 3,214.2 $ 8,992.5 $ ( 1,162.6 ) $ 279.1 $ 11,327.1

See accompanying notes to consolidated financial statements.

8 unchanged sentences

Balances at September 30, 2018 ( 376,261,635 shares)

$ 3.9 $ 3,085.0 $ 6,217.9 $ ( 322.4 ) $ 174.5 $ 9,158.9

Cumulative effect of adoption of ASC 606 — — 27.1 — — 27.1

1 unchanged sentence

Exercise of stock options ( 806,817 shares)

— 8.6 — — — 8.6

Stock issued under employee benefit plans ( 273,608 shares)

2 unchanged sentences

Cash dividends declared ($ 0.15 per share)

— — ( 56.0 ) — — ( 56.0 )

Repurchases of common stock ( 4,100,000 shares)

— — — ( 140.6 ) — ( 140.6 )

Distributions to noncontrolling interests — — — — ( 0.5 ) ( 0.5 )

Balances at December 31, 2018 ( 373,242,060 shares)

$ 3.9 $ 3,107.6 $ 6,476.2 $ ( 463.0 ) $ 173.5 $ 9,298.2

Net income — — 351.3 — 3.1 354.4

Exercise of stock options ( 831,489 shares)

— 11.4 — — — 11.4

Stock issued under employee benefit plans ( 1,059,415 shares)

— 2.0 — — 0.3 2.3

Cash paid for shares withheld for taxes — ( 15.4 ) — — — ( 15.4 )

1 unchanged sentence

Cash dividends declared ($ 0.15 per share)

— — ( 55.9 ) — — ( 55.9 )

Repurchases of common stock ( 2,000,000 shares)

— — — ( 75.6 ) — ( 75.6 )

Distributions to noncontrolling interests — — — — ( 3.2 ) ( 3.2 )

Balances at March 31, 2019 ( 373,132,964 shares)

$ 3.9 $ 3,123.4 $ 6,771.6 $ ( 538.6 ) $ 173.7 $ 9,534.0

Net income (loss) — — 474.8 — ( 1.2 ) 473.6

Exercise of stock options ( 271,186 shares)

— 4.6 — — — 4.6

Stock issued under employee benefit plans ( 2,524 shares)

Stock-based compensation expense — 18.0 — — — 18.0

Cash dividends declared ($ 0.15 per share)

— — ( 56.0 ) — — ( 56.0 )

Repurchases of common stock ( 3,658,462 shares)

— — — ( 159.3 ) — ( 159.3 )

Distributions to noncontrolling interests — — — — ( 0.2 ) ( 0.2 )

Balances at June 30, 2019 ( 369,748,212 shares)

$ 3.9 $ 3,146.0 $ 7,190.4 $ ( 697.9 ) $ 172.3 $ 9,814.7

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

(In millions)

1 unchanged sentence

Net income $ 1,549.3 $ 1,114.7

Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 57.4 52.4

14 unchanged sentences

Increase in accounts payable, accrued expenses and other liabilities 413.6 148.6

Net cash used in operating activities ( 395.1 ) ( 461.7 )

Net cash provided by operating activities 588.9 80.7

INVESTING ACTIVITIES

18 unchanged sentences

Other financing activities

Net cash provided by financing activities 453.0 8.0

Net cash provided by (used in) financing activities 370.2 ( 375.1 )

Net increase (decrease) in cash, cash equivalents and restricted cash 858.7 ( 620.7 )

6 unchanged sentences

Accrual for holdback payment related to acquisition $ 1.9 $ 15.0

Repurchase of common stock not settled $ — $ 14.0

See accompanying notes to consolidated financial statements.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2020

June 30, 2020

NOTE A – BASIS OF PRESENTATION

19 unchanged sentences

Historically, the homebuilding industry has experienced seasonal fluctuations;

therefore, the operating results for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020 or subsequent periods.

therefore, the operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020 or subsequent periods.

Adoption of New Accounting Standards

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X.

12 unchanged sentences

The guidance is effective for the Company beginning October 1, 2021, although early adoption is permitted.

The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations and cash flows.

The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued.

The guidance was effective beginning March 12, 2020 and the Company may elect to apply the amendments prospectively through December 31, 2022.

This guidance has not and is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022.

The Company will adopt this standard when LIBOR is discontinued, and does not expect it to have a material impact on its consolidated financial statements or related disclosures.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE B – SEGMENT INFORMATION

21 unchanged sentences

The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.

In addition to its homebuilding, Forestar and financial services operations, the Company has subsidiaries that engage in other business activities.

1 unchanged sentence

The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other.

One of these subsidiaries, DHI Communities, constructs multi-family rental properties and has three projects under active construction and one project that was substantially complete at March 31, 2020.

In November 2019, DHI Communities sold a multi-family rental property for $ 61.5 million and recorded a gain on the sale of $ 31.2 million.

In February 2020, DHI Communities sold a multi-family rental property for $ 67.0 million and recorded a gain on the sale of $ 28.2 million.

At March 31, 2020 and September 30, 2019, the consolidated balance sheets included $ 202.8 million and $ 204.0 million, respectively, of assets owned by DHI Communities.

One of these subsidiaries, DHI Communities, constructs multi-family rental properties and had four projects under active construction and one project that was substantially complete at June 30, 2020.

DHI Communities sold two multi-family rental properties during the current fiscal year, one in November 2019 and another in February 2020, for a total of $ 128.5 million and recorded gains on sale totaling $ 59.4 million.

At June 30, 2020 and September 30, 2019, the consolidated balance sheets included $ 224.8 million and $ 204.0 million, respectively, of assets owned by DHI Communities.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

The accounting policies of the reporting segments are described throughout Note A included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2019.

Financial information relating to the Company’s reporting segments is as follows:

March 31, 2020

June 30, 2020

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

37 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

September 30, 2019

38 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

Three Months Ended March 31, 2020

June 30, 2020

Three Months Ended June 30, 2020

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

16 unchanged sentences

415.1 11.2 93.9 7.1 — 0.2 527.5

Gain on sale of assets

— ( 0.3 ) — ( 28.2 ) — — ( 28.5 )

Other (income) expense ( 0.2 ) ( 0.7 ) ( 6.1 ) 2.4 — — ( 4.6 )

Income before income taxes $ 565.5 $ 13.7 $ 24.7 $ 28.0 $ ( 10.5 ) $ ( 0.1 ) $ 621.3

Income (loss) before income taxes $ 709.8 $ 10.3 $ 68.8 $ ( 0.6 ) $ ( 6.0 ) $ 0.1 $ 782.4

______________

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

Six Months Ended March 31, 2020

June 30, 2020

Nine Months Ended June 30, 2020

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

35 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

Three Months Ended March 31, 2019

June 30, 2020

Three Months Ended June 30, 2019

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

30 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

Six Months Ended March 31, 2019

June 30, 2020

Nine Months Ended June 30, 2019

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

23 unchanged sentences

$ 46.4 $ 0.2 $ 1.1 $ 4.3 $ — $ 0.4 $ 52.4

Cash (used in) provided by operating activities

Cash provided by (used in) operating activities

$ 605.7 $ ( 450.1 ) $ ( 65.5 ) $ ( 2.5 ) $ ( 2.5 ) $ ( 4.4 ) $ 80.7

9 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

Homebuilding Inventories by Reporting Segment (1)

13 unchanged sentences

Homebuilding Results by Reporting Segment Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

28 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE C – INVENTORIES

At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary.

At March 31, 2020, the Company performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $ 47.6 million and recorded impairment charges of $ 1.7 million during the three months ended March 31, 2020 to reduce the carrying value of impaired land to fair value.

During the six months ended March 31, 2020, impairment charges totaled $ 1.7 million.

There were $ 7.7 million and $ 11.9 million of impairment charges recorded in the three and six months ended March 31, 2019, respectively.

As of June 30, 2020, the Company performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $ 52.1 million and determined that no communities or land inventories were impaired.

Accordingly, no impairment charges were recorded during the three months ended June 30, 2020 compared to $ 6.8 million of impairment charges recorded in the prior year period.

During the nine months ended June 30, 2020 and 2019, impairment charges totaled $ 1.7 million and $ 18.6 million, respectively.

Inventory impairments and the land option charges discussed below are included in cost of sales in the consolidated statements of operations.

As the Company manages its inventory investments across its operating markets to optimize returns and cash flows, it may modify its pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment.

During the latter part of March and into April, the impacts of the COVID-19 pandemic and the related widespread reductions in economic activity began to adversely affect the Company’s business operations and the demand for its homes.

There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt the U.S.

During the latter part of March and into April, the impacts of the COVID-19 (C-19) pandemic and the related widespread reductions in economic activity began to adversely affect the Company’s business operations and the demand for its homes.

Although demand for the Company’s homes was strong in May and June, there is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S.

economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for the Company’s homes and availability of mortgage loans to homebuyers.

The extent to which this impacts the Company’s operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on its customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

If the housing market or economic conditions are adversely affected for a prolonged period due to COVID-19 or otherwise, the Company may be required to evaluate additional communities for potential impairment.

The extent to which this impacts the Company’s operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on its customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, the Company may be required to evaluate additional communities for potential impairment.

These evaluations could result in additional impairment charges which could be significant.

During the three and six months ended March 31, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 7.2 million and $ 11.1 million, respectively, compared to $ 6.1 million and $ 9.9 million in the same periods of fiscal 2019.

During the three and nine months ended June 30, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 5.0 million and $ 16.1 million, respectively, compared to $ 12.4 million and $ 22.4 million in the same periods of fiscal 2019.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE D – NOTES PAYABLE

4 unchanged sentences

Revolving credit facility $ — $ —

364-day revolving credit facility — —

4.0 % senior notes due 2020 (1)

4 unchanged sentences

2.5 % senior notes due 2024 (1)

2.6 % senior notes due 2025 (1)

Other secured notes (2)

8 unchanged sentences

____________________________

(1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 7.7 million and $ 5.4 million at March 31, 2020 and September 30, 2019, respectively.

(1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 11.7 million and $ 5.4 million at June 30, 2020 and September 30, 2019, respectively.

(2) Homebuilding other secured notes at June 30, 2020 excludes $ 6.5 million of earnest money notes payable due to Forestar.

These intercompany notes are eliminated in consolidation.

(3) Forestar’s 3.75 % convertible senior notes due March 2020 included an unamortized fair value adjustment of $ 2.4 million at September 30, 2019.

(3) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 9.9 million and $ 6.2 million at March 31, 2020 and September 30, 2019, respectively.

(4) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 9.4 million and $ 6.2 million at June 30, 2020 and September 30, 2019, respectively.

Homebuilding:

4 unchanged sentences

The maturity date of the facility is October 2, 2024.

Borrowings and repayments under the facility were $ 800 million and $ 300 million, respectively, during the six months ended March 31, 2020.

At March 31, 2020, there were $ 500 million of borrowings outstanding at a 1.7 % annual interest rate and $ 116.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $ 973.7 million.

Borrowings and repayments under the facility were $ 1.06 billion each during the nine months ended June 30, 2020.

At June 30, 2020, there were no borrowings outstanding and $ 127.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $ 1.46 billion.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

The Company’s homebuilding revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the leverage ratio exceeds a certain level.

These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly.

A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity.

The credit agreement governing the facility and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens.

At March 31, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facility and public debt obligations.

June 30, 2020

In May 2020, the Company entered into a credit agreement providing for a $ 375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 550 million, subject to certain conditions and availability of additional bank commitments.

The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility.

The maturity date of the facility is May 27, 2021.

There were no borrowings under the facility for the period from its inception through June 30, 2020.

The Company’s homebuilding revolving credit facilities impose restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the leverage ratio exceeds a certain level.

Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants.

These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly.

A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity.

The credit agreements governing the facilities and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens.

At June 30, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facilities and public debt obligations.

Horton has an automatically effective universal shelf registration statement filed with the SEC in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

2 unchanged sentences

In February 2020, the Company repaid $ 500 million principal amount of its 4.0 % senior notes at maturity.

In May 2020, the Company issued $ 500 million principal amount of 2.6 % senior notes due October 15, 2025 with interest payable semi-annually.

The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8 %.

Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 500 million of the Company’s debt securities.

The authorization has no expiration date.

All of the $ 500 million authorization was remaining at March 31, 2020.

All of the $ 500 million authorization was remaining at June 30, 2020.

Forestar has a $ 380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 570 million, subject to certain conditions and availability of additional bank commitments.

2 unchanged sentences

Letters of credit issued under the facility reduce the available borrowing capacity.

At March 31, 2020, there were no borrowings outstanding and $ 31.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 349.0 million.

At June 30, 2020, there were no borrowings outstanding and $ 31.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 348.4 million.

The maturity date of the facility is October 2, 2022, which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

3 unchanged sentences

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

June 30, 2020

In February 2020, Forestar issued $ 300 million principal amount of 5.0 % senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

4 unchanged sentences

In March 2020, Forestar repaid $ 118.9 million principal amount of its 3.75 % convertible senior notes in cash at maturity.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

Forestar’s revolving credit facility and its senior notes are not guaranteed by D.R.

or any of the subsidiaries that guarantee the Company’s homebuilding debt.

At March 31, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

At June 30, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

Financial Services:

1 unchanged sentence

DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 60 days in accordance with the terms of the mortgage repurchase facility.

In February 2020, the mortgage repurchase facility was amended to extend its maturity date to February 19, 2021.

The total capacity of the facility is $ 1.2 billion;

however, the capacity increases without requiring additional commitments to $ 1.4 billion for approximately 30 days at each quarter end and 45 days at fiscal year end.

In May 2020, the mortgage repurchase facility was amended to increase its total capacity to $ 1.35 billion;

however, the capacity increases without requiring additional commitments to $ 1.575 billion for approximately 30 days at the end of the third quarter of fiscal 2020 and first quarter of fiscal 2021 and for approximately 45 days at the end of fiscal 2020.

The capacity of the facility can also be increased to $ 1.8 billion subject to the availability of additional commitments.

Through additional commitments, the capacity of the facility was temporarily increased to $ 1.5 billion effective March 26, 2020 through April 23, 2020.

As of March 31, 2020, $ 1.3 billion of mortgage loans held for sale with a collateral value of $ 1.2 billion were pledged under the mortgage repurchase facility.

DHI Mortgage had an obligation of $ 1.2 billion outstanding under the mortgage repurchase facility at March 31, 2020 at a 2.6 % annual interest rate.

The maturity date of the facility is February 19, 2021.

As of June 30, 2020, $ 1.39 billion of mortgage loans held for sale with a collateral value of $ 1.36 billion were pledged under the mortgage repurchase facility.

DHI Mortgage had an obligation of $ 1.2 billion outstanding under the mortgage repurchase facility at June 30, 2020 at a 2.4 % annual interest rate.

The mortgage repurchase facility is not guaranteed by D.R.

2 unchanged sentences

These covenants are measured and reported to the lenders monthly.

At March 31, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At June 30, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

June 30, 2020

NOTE E – CAPITALIZED INTEREST

2 unchanged sentences

During periods in which the Company’s active inventory is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred.

During the first six months of fiscal 2020 and fiscal 2019, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory.

The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and six months ended March 31, 2020 and 2019:

During the first nine months of fiscal 2020 and fiscal 2019, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory.

The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and nine months ended June 30, 2020 and 2019:

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

5 unchanged sentences

_______________

(1) Interest incurred included interest on the Company's mortgage repurchase facility of $ 5.0 million and $ 9.7 million in the three and six months ended March 31, 2020, respectively, and $ 3.0 million and $ 6.3 million in the same periods of fiscal 2019.

Also included in interest incurred is Forestar interest of $ 9.7 million and $ 18.4 million in the three and six months ended March 31, 2020, respectively, and $ 1.5 million and $ 2.8 million in the same periods of fiscal 2019.

(1) Interest incurred included interest on the Company's mortgage repurchase facility of $ 4.3 million and $ 14.0 million in the three and nine months ended June 30, 2020, respectively, and $ 4.5 million and $ 10.8 million in the same periods of fiscal 2019.

Also included in interest incurred is Forestar interest of $ 11.4 million and $ 29.8 million in the three and nine months ended June 30, 2020, respectively, and $ 7.9 million and $ 10.7 million in the same periods of fiscal 2019.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE F – PROPERTY AND EQUIPMENT

The Company’s property and equipment balances and the related accumulated depreciation at March 31, 2020 and September 30, 2019 are summarized below.

The Company’s property and equipment balances and the related accumulated depreciation at June 30, 2020 and September 30, 2019 are summarized below.

These balances include properties related to the operations of DHI Communities, which develops, constructs and owns multi-family residential properties that produce rental income.

DHI Communities has three projects under active construction and one project that was substantially complete at March 31, 2020.

DHI Communities had four projects under active construction and one project that was substantially complete at June 30, 2020.

2020 September 30,

12 unchanged sentences

_____________

(1) At March 31, 2020, buildings and improvements included $ 53.1 million related to completed multi-family rental properties and $ 63.6 million related to the Company’s oil and gas related assets.

Additionally, at March 31, 2020, land included $ 55.1 million related to the Company’s multi-family rental operations.

(1) At June 30, 2020, buildings and improvements included $ 63.5 million related to completed multi-family rental properties and $ 65.1 million related to the Company’s oil and gas related assets.

Additionally, at June 30, 2020, land included $ 60.0 million related to the Company’s multi-family rental operations.

(2) At September 30, 2019, buildings and improvements included $ 50.7 million related to completed multi-family rental properties and $ 56.9 million related to the Company’s oil and gas related assets.

Additionally, at September 30, 2019, land included $ 38.0 million related to the Company’s multi-family rental operations.

Depreciation expense was $ 17.3 million and $ 34.5 million during the three and six months ended March 31, 2020, respectively, compared to $ 15.9 million and $ 31.7 million in the same periods of fiscal 2019.

Depreciation expense was $ 17.1 million and $ 51.6 million during the three and nine months ended June 30, 2020, respectively, compared to $ 16.7 million and $ 48.4 million in the same periods of fiscal 2019.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE G – MORTGAGE LOANS

Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property.

At March 31, 2020, mortgage loans held for sale had an aggregate carrying value of $ 1.4 billion and an aggregate outstanding principal balance of $ 1.3 billion.

At June 30, 2020, mortgage loans held for sale had an aggregate carrying value of $ 1.5 billion and an aggregate outstanding principal balance of $ 1.4 billion.

At September 30, 2019, mortgage loans held for sale had an aggregate carrying value of $ 1.1 billion and an aggregate outstanding principal balance of $ 1.0 billion.

During the six months ended March 31, 2020 and 2019, mortgage loans originated totaled $ 4.9 billion and $ 3.6 billion, respectively, and mortgage loans sold totaled $ 4.6 billion and $ 3.6 billion, respectively.

The Company had gains on sales of loans and servicing rights of $ 73.3 million and $ 147.0 million during the three and six months ended March 31, 2020, respectively, compared to $ 73.1 million and $ 132.9 million in the prior year periods.

During the nine months ended June 30, 2020 and 2019, mortgage loans originated totaled $ 8.4 billion and $ 6.0 billion, respectively, and mortgage loans sold totaled $ 8.0 billion and $ 5.8 billion, respectively.

The Company had gains on sales of loans and servicing rights of $ 116.7 million and $ 263.7 million during the three and nine months ended June 30, 2020, respectively, compared to $ 85.4 million and $ 218.3 million in the prior year periods.

Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations.

Approximately 90 % of the mortgage loans sold by DHI Mortgage during the six months ended March 31, 2020 were sold to four major financial entities, of which one entity purchased 33 %.

To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using derivative instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion.

The Company does not enter into or hold derivatives for trading or speculative purposes.

Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value.

Hedged loans are committed to third-party purchasers typically within three days after origination.

The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.

In response to COVID-19, the U.S.

Approximately 93 % of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2020 were sold to four major financial entities, of which one entity purchased 36 %.

In response to C-19, the U.S.

government has taken various actions to support the economy and the continued functioning of the financial markets.

1 unchanged sentence

Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March.

This resulted in lower net gains on loan originations during the three months ended March 31, 2020 compared to the prior year period.

Additionally, in March 2020 the Federal Reserve announced its commitment to purchase U.S.

Treasury securities, MBS, municipal bonds and other assets.

This led to a significant increase in the price of MBS, which increased the change in the fair market value of the Company’s IRLCs and mortgage loans held for sale and decreased the fair market value of its hedging instruments.

The net fair value change for the three and six months ended March 31, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.

The Company began retaining the servicing rights on some of its loan originations during the three months ended June 30, 2020.

At June 30, 2020, the fair value of mortgage servicing rights was $ 10.0 million and is included in other assets in the consolidated balance sheet.

The Company also occasionally uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers in certain markets.

At March 31, 2020, the Company had MBS totaling $ 383.4 million that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 4.9 million for the fair value of such MBS position.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

At June 30, 2020, the Company had mortgage-backed securities (MBS) totaling $ 1.3 billion that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 11.7 million for the fair value of such MBS position.

NOTE H – INCOME TAXES

The Company’s income tax expense for the three and six months ended March 31, 2020 was $ 137.3 million and $ 228.1 million, respectively, compared to $ 108.4 million and $ 197.4 million in the prior year periods.

The effective tax rate was 22.1 % and 19.9 % for the three and six months ended March 31, 2020, respectively, compared to 23.4 % and 23.5 % in the prior year periods.

The effective tax rate for the three and six months ended March 31, 2020 includes a tax benefit of $ 6.6 million and $ 39.5 million, respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act).

The Company’s income tax expense for the three and nine months ended June 30, 2020 was $ 149.5 million and $ 377.6 million, respectively, compared to $ 153.1 million and $ 350.5 million in the prior year periods.

The effective tax rate was 19.1 % and 19.6 % for the three and nine months ended June 30, 2020, respectively, compared to 24.4 % and 23.9 % in the prior year periods.

The effective tax rate for the three and nine months ended June 30, 2020 includes a tax benefit of $ 38.1 million and $ 77.6 million, respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act).

The Act retroactively reinstated the federal energy efficient homes tax credit that expired on December 31, 2017 to homes closed from January 1, 2018 to December 31, 2020.

The effective tax rates for all periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.

The Company’s deferred tax assets, net of deferred tax liabilities, were $ 167.3 million at March 31, 2020 compared to $ 181.8 million at September 30, 2019.

The Company has a valuation allowance of $ 17.8 million at March 31, 2020 and $ 18.7 million at September 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

The Company’s deferred tax assets, net of deferred tax liabilities, were $ 172.2 million at June 30, 2020 compared to $ 181.8 million at September 30, 2019.

The Company has a valuation allowance of $ 13.6 million at June 30, 2020 and $ 18.7 million at September 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL carryforwards.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE I – EARNINGS PER SHARE

1 unchanged sentence

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

17 unchanged sentences

The authorization has no expiration date.

During the six months ended March 31, 2020, the Company repurchased 7.0 million shares of its common stock for $ 360.4 million.

The Company’s remaining authorization at March 31, 2020 was $ 535.3 million.

During each of the first two quarters of fiscal 2020, the Board of Directors approved and paid quarterly cash dividends of $ 0.175 per common share, the most recent of which was paid on February 24, 2020 to stockholders of record on February 10, 2020.

In April 2020, the Board of Directors approved a quarterly cash dividend of $ 0.175 per common share, payable on May 21, 2020 to stockholders of record on May 11, 2020.

During the nine months ended June 30, 2020, the Company repurchased 7.0 million shares of its common stock for $ 360.4 million, none of which were purchased in the three months ended June 30, 2020.

The Company’s remaining authorization at June 30, 2020 was $ 535.3 million.

During each of the first three quarters of fiscal 2020, the Board of Directors approved and paid quarterly cash dividends of $ 0.175 per common share, the most recent of which was paid on May 21, 2020 to stockholders of record on May 11, 2020.

In July 2020, the Board of Directors approved a quarterly cash dividend of $ 0.175 per common share, payable on August 24, 2020 to stockholders of record on August 12, 2020.

Cash dividends of $ 0.15 per common share were approved and paid in each quarter of fiscal 2019.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE K – EMPLOYEE BENEFIT PLANS

12 unchanged sentences

The grant date fair value of these equity awards was $ 52.54 per unit.

Compensation expense related to this grant was $ 2.3 million and $ 4.5 million in the three and six months ended March 31, 2020, respectively, based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.

During the six months ended March 31, 2020, a total of 1.7 million time-based RSUs were granted to approximately 960 recipients, including the Company’s executive officers, other key employees and non-management directors.

Compensation expense related to this grant was $ 2.5 million and $ 7.0 million in the three and nine months ended June 30, 2020, respectively, based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.

During the nine months ended June 30, 2020, a total of 1.7 million time-based RSUs were granted to approximately 960 recipients, including the Company’s executive officers, other key employees and non-management directors.

The weighted average grant date fair value of these equity awards was $ 35.98 per unit, and they vest annually in equal installments over periods of three to five years.

Compensation expense related to these grants was $ 4.1 million in both the three and six months ended March 31, 2020, of which $ 3.5 million related to expense recognized for employees that were retirement eligible on the date of grant.

Total stock-based compensation expense related to the Company’s restricted stock units during the three and six months ended March 31, 2020 was $ 20.3 million and $ 36.2 million, respectively, compared to $ 17.2 million and $ 34.4 million during the three and six months ended March 31, 2019, respectively.

Compensation expense related to these grants was $ 3.4 million and $ 7.5 million in the three and nine months ended June 30, 2020, respectively, of which $ 3.5 million related to expense recognized for employees that were retirement eligible on the date of grant.

Total stock-based compensation expense related to the Company’s restricted stock units during the three and nine months ended June 30, 2020 was $ 20.4 million and $ 56.6 million, respectively, compared to $ 16.8 million and $ 51.1 million during the three and nine months ended June 30, 2019, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE L – COMMITMENTS AND CONTINGENCIES

2 unchanged sentences

The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

Changes in the Company’s warranty liability during the three and six months ended March 31, 2020 and 2019 were as follows:

Changes in the Company’s warranty liability during the three and nine months ended June 30, 2020 and 2019 were as follows:

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

9 unchanged sentences

The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes.

The estimated liabilities for these contingencies were $ 442.2 million and $ 434.7 million at March 31, 2020 and September 30, 2019, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets.

Approximately 99 % of these reserves related to construction defect matters at both March 31, 2020 and September 30, 2019.

Expenses related to the Company’s legal contingencies were $ 26.6 million and $ 14.6 million in the six months ended March 31, 2020 and 2019, respectively.

The Company’s reserves for legal claims were $ 442.2 million at March 31, 2020 compared to $ 434.7 million at September 30, 2019.

Changes in the Company’s legal claims reserves during the six months ended March 31, 2020 and 2019 were as follows:

Six Months Ended

The estimated liabilities for these contingencies were $ 461.3 million and $ 434.7 million at June 30, 2020 and September 30, 2019, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets.

Approximately 99 % of these reserves related to construction defect matters at both June 30, 2020 and September 30, 2019.

Expenses related to the Company’s legal contingencies were $ 41.1 million and $ 19.9 million in the nine months ended June 30, 2020 and 2019, respectively.

Changes in the Company’s legal claims reserves during the nine months ended June 30, 2020 and 2019 were as follows:

Nine Months Ended

(In millions)

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

The Company estimates and records receivables under its applicable insurance policies related to its estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable.

Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies.

The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 76.6 million, $ 75.1 million and $ 56.9 million at March 31, 2020, September 30, 2019 and March 31, 2019, respectively, and are included in other assets in the consolidated balance sheets.

The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 82.4 million, $ 75.1 million and $ 69.8 million at June 30, 2020, September 30, 2019 and June 30, 2019, respectively, and are included in other assets in the consolidated balance sheets.

The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others.

5 unchanged sentences

Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.

At March 31, 2020, the Company’s homebuilding segment had total deposits of $ 566.5 million, consisting of cash deposits of $ 534.9 million and promissory notes of $ 31.6 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 8.1 billion.

At June 30, 2020, the Company’s homebuilding segment had total deposits of $ 561.9 million, consisting of cash deposits of $ 517.4 million and promissory notes of $ 44.5 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 8.5 billion.

The majority of land and lots under contract are currently expected to be purchased within three years.

Of these amounts, $ 97.9 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $ 1.0 billion.

A limited number of the homebuilding land and lot purchase contracts at March 31, 2020, representing $ 70.7 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

A limited number of the homebuilding land and lot purchase contracts at June 30, 2020, representing $ 50.8 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

Of the $ 50.8 million remaining purchase price subject to specific performance provisions, $ 11.5 million related to contracts between the homebuilding segment and Forestar.

During the three and six months ended March 31, 2020, Forestar reimbursed the homebuilding segment $ 5.5 million and $ 16.2 million, respectively, for previously paid earnest money and $ 8.2 million and $ 13.3 million, respectively, for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar.

During the three and six months ended March 31, 2019, Forestar reimbursed the homebuilding segment $ 4.7 million and $ 16.8 million, respectively, for previously paid earnest money and $ 0.7 million and $ 3.7 million, respectively, for pre-acquisition and other due diligence costs.

During the three and nine months ended June 30, 2020, Forestar reimbursed the homebuilding segment $ 7.0 million and $ 23.2 million, respectively, for previously paid earnest money and $ 12.9 million and $ 26.2 million, respectively, for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar.

During the three and nine months ended June 30, 2019, Forestar reimbursed the homebuilding segment $ 10.8 million and $ 27.6 million, respectively, for previously paid earnest money and $ 4.7 million and $ 8.4 million, respectively, for pre-acquisition and other due diligence costs.

Other Commitments

At March 31, 2020, the Company had outstanding surety bonds of $ 1.8 billion and letters of credit of $ 147.3 million to secure performance under various contracts.

At June 30, 2020, the Company had outstanding surety bonds of $ 1.7 billion and letters of credit of $ 159.4 million to secure performance under various contracts.

Of the total letters of credit, $ 127.8 million were issued under the homebuilding revolving credit facility and $ 31.6 million were issued under Forestar’s revolving credit facility.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE M – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES

The Company’s other assets at March 31, 2020 and September 30, 2019 were as follows:

March 31, 2020 September 30, 2019

The Company’s other assets at June 30, 2020 and September 30, 2019 were as follows:

2020 September 30,

(In millions)

3 unchanged sentences

Prepaid assets 35.0 49.6

Interest rate lock commitments 28.9 19.2

Margin deposits 29.2 19.6

2 unchanged sentences

Lease right of use assets 35.5 —

Mortgage servicing rights 10.0 —

Other 49.7 37.5

$ 1,005.9 $ 912.8

The Company’s accrued expenses and other liabilities at March 31, 2020 and September 30, 2019 were as follows:

March 31, 2020 September 30, 2019

The Company’s accrued expenses and other liabilities at June 30, 2020 and September 30, 2019 were as follows:

2020 September 30,

(In millions)

13 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE N – FAIR VALUE MEASUREMENTS

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and September 30, 2019.

Changes in the fair value of the Level 3 assets during the six months ended March 31, 2020 and 2019 were not material.

Fair Value at March 31, 2020

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and September 30, 2019.

Changes in the fair value of the Level 3 assets during the nine months ended June 30, 2020 and 2019 were not material.

Fair Value at June 30, 2020

Balance Sheet Location Level 1 Level 2 Level 3 Total

2 unchanged sentences

Mortgage loans held for sale (a) Mortgage loans held for sale — 1,474.8 17.7 1,492.5

Derivatives not designated as hedging instruments (b):

Mortgage servicing rights (b) Other assets — — 10.0 10.0

Derivatives not designated as hedging instruments (c):

Interest rate lock commitments Other assets — 28.9 — 28.9

6 unchanged sentences

Mortgage loans held for sale (a) Mortgage loans held for sale — 1,055.3 9.8 1,065.1

Derivatives not designated as hedging instruments (b):

Derivatives not designated as hedging instruments (c):

Interest rate lock commitments Other assets — 19.2 — 19.2

4 unchanged sentences

Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in other income.

Mortgage loans held for sale valued using Level 3 inputs at March 31, 2020 and September 30, 2019 include $ 14.1 million and $ 9.8 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market.

Mortgage loans held for sale valued using Level 3 inputs at June 30, 2020 and September 30, 2019 include $ 17.7 million and $ 9.8 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market.

The fair value of these mortgage loans held for sale is generally calculated considering pricing in the secondary market and adjusted for the value of the underlying collateral, including interest rate risk, liquidity risk and prepayment risk.

The Company plans to sell these loans as market conditions permit.

(b) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities.

(b) Although the majority of the Company’s mortgage loans are sold on a servicing-released basis, when the servicing rights are retained, the Company records them at fair value using third-party valuations.

The key assumptions used in the valuation, which are generally unobservable inputs, are mortgage prepayment rates, discount rates and delinquency rates, which were 13 %, 11 % and 5 %, respectively, for the three months ended June 30, 2020.

(c) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities.

Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations.

In March 2020, the Federal Reserve announced its commitment to purchase U.S.

Treasury securities, MBS, municipal bonds and other assets.

This led to a significant increase in the price of MBS which increased the change in fair market value of the Company’s IRLCs and mortgage loans held for sale and decreased the fair market value of its hedging instruments.

The net fair value change for the three and six months ended March 31, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.

The net fair value change for the three and nine months ended June 30, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at March 31, 2020 and September 30, 2019:

June 30, 2020

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at June 30, 2020 and September 30, 2019:

Fair Value at

March 31, 2020 Fair Value at

June 30, 2020 Fair Value at

September 30, 2019

2 unchanged sentences

Inventory held and used (a) (b) Inventories $ — $ — $ — $ 4.5

Inventory available for sale (a) (c) Inventories — 12.3 — —

Mortgage loans held for sale (a) (d) Mortgage loans held for sale — 1.3 — 2.7

Other mortgage loans (a) (e) Other assets — 1.1 — 1.8

Mortgage loans held for sale (a) (c) Mortgage loans held for sale — 4.2 — 2.7

Other mortgage loans (a) (d) Other assets — 2.8 — 1.8

___________________

1 unchanged sentence

(b) In performing its impairment analysis of communities, discount rates ranging from 16 % to 18 % were used in the periods presented.

(c) The fair value of inventory available for sale was determined based on recent offers received from outside third parties, comparable sales or actual contracts.

(d) These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value.

(c) These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value.

When available, quoted prices in the secondary market are used to determine fair value (Level 2);

otherwise, a cash flow valuation model is used to determine fair value (Level 3).

(e) The fair values of other mortgage loans was determined based on the value of the underlying collateral.

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at March 31, 2020 and September 30, 2019:

Carrying Value Fair Value at March 31, 2020

(d) The fair values of other mortgage loans was determined based on the value of the underlying collateral.

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at June 30, 2020 and September 30, 2019:

Carrying Value Fair Value at June 30, 2020

Level 1 Level 2 Level 3 Total

15 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2020

June 30, 2020

NOTE O – RELATED PARTY TRANSACTIONS

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements