Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands, except per share data)

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” "intends" or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward-looking statements. Forward-looking statements contained in this document may include those regarding market trends, our financial position and financial results, business strategy, the impact of the COVID-19 pandemic on our business and customers, supply chain disruptions, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or performance to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: the impact of COVID-19 on us and the economy generally; general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by us and our customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; competition; the availability and cost of land and other raw materials used by us in our homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which we have little or no control. We undertake no obligation to update such forward-looking statements except as required by law. For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of NVR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Unless the context otherwise requires, references to “NVR,” “we,” “us,” or “our” include NVR and its consolidated subsidiaries.

Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

Overview

Impact of COVID-19

The COVID-19 pandemic has had a significant impact on all facets of our business. Our primary focus as we face this challenge is to do everything we can to ensure the safety and well-being of our employees, customers and trade partners. In each of our markets, we continue to operate in accordance with the guidelines issued by the Centers for Disease Control and Prevention as well as state and local guidelines, which have resulted in significant changes to the way we conduct business.

Although current demand for new homes is strong, there remains uncertainty regarding the extent and timing of disruption to our business that may result from COVID-19 and related governmental actions. There is also uncertainty as to the effects of economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of COVID-19, corresponding governmental actions, and the impact of such on our employees, customers and trade partners.

Outlook

Demand for new homes remained strong in the third quarter of 2021, driven by historically low mortgage interest rates and limited housing supply. This has resulted in strong sales absorptions and rising home prices. Additionally, the strong demand has led to increased construction activity and demand for building materials, which, along with the impacts of COVID-19, has resulted in some supply chain disruptions. We expect these issues to continue over the next several quarters as suppliers continue to work through the disruptions to meet the increased demand.

Business

Our primary business is the construction and sale of single-family detached homes, townhomes and condominiums, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions:


Mid Atlantic:						Maryland, Virginia, West Virginia, Delaware and Washington, D.C.
North East:						New Jersey and Eastern Pennsylvania
Mid East:						New York, Ohio, Western Pennsylvania, Indiana and Illinois
South East:						North Carolina, South Carolina, Florida and Tennessee

Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished building lots from various third party land developers pursuant to fixed price finished lot purchase agreements (“LPAs”). These LPAs require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the LPA. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital.

In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build.

In certain specific strategic circumstances, we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into an LPA with the developer to purchase the finished lots or to hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all our finished lot inventory using LPAs with forfeitable deposits.

As of September 30, 2021, we controlled approximately 118,600 lots as described below.

Lot Purchase Agreements

We controlled approximately 116,550 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $483,600 and $10,700, respectively. Included in the number of controlled lots are approximately 5,700 lots for which we have recorded a contract land deposit impairment reserve of approximately $34,700 as of September 30, 2021.

Joint Venture Limited Liability Corporations (“JVs”)

We had an aggregate investment totaling approximately $20,800 in four JVs, expected to produce approximately 2,300 lots. Of the lots to be produced by the JVs, approximately 1,950 lots were controlled by us and approximately 350 were either under contract with unrelated parties or currently not under contract. We had additional funding commitments totaling approximately $2,900 to one of the JVs at September 30, 2021.

Land Under Development

We directly owned two separate raw land parcels, zoned for their intended use, with a cost basis, including development costs, of approximately $8,200 that we intend to develop into approximately 100 finished lots. We had additional funding commitments of approximately $2,700 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $800.

See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding LPAs, JVs and land under development, respectively.

Raw Land Purchase Agreements

In addition, we have certain properties under contract with land owners that are expected to yield approximately 12,500 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $4,400 and $100, respectively, as of September 30, 2021, of which approximately $3,300 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.

Key Financial Results

Our consolidated revenues for the third quarter of 2021 totaled $2,395,640, a 20% increase from the third quarter of 2020. Net income for the third quarter ended September 30, 2021 was $332,081, or $86.44 per diluted share, increases of 29% and 33% when compared to net income and diluted earnings per share in the third quarter of 2020, respectively. Our homebuilding gross profit margin percentage increased to 22.2% in the third quarter of 2021 from 20.0% in the third quarter of 2020. New orders, net of cancellations (“New Orders”) decreased by 22% to 5,201 units in the third quarter of 2021 compared to the third quarter of 2020. The average sales price for New Orders in the third quarter of 2021 increased by 15% to $442.0 compared to the third quarter of 2020.

Homebuilding Operations

The following table summarizes the results of operations and other data for the consolidated homebuilding operations:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Financial Data:
Revenues	$	2,336,615		$	1,920,751		$	6,524,886		$	5,065,216
Gross Profit Margin	518,676			384,707			1,407,821			949,936
Gross profit margin percentage	22.2		%	20.0		%	21.6		%	18.8		%
Selling, general and administrative expenses	$	112,226		$	105,741		$	347,051		$	318,610
Operating Data:
New orders (units)	5,201			6,681			17,036			17,597
Average new order price	$	442.0		$	384.2		$	429.8		$	374.5
Settlements (units)	5,683			5,180			16,440			13,706
Average settlement price	$	411.1		$	370.8		$	396.9		$	369.5
Backlog (units)							12,145			12,124
Average backlog price							$	442.4		$	384.0
New order cancellation rate	9.2		%	11.8		%	9.1		%	15.8		%
Average active communities	414			465			426			475

Consolidated Homebuilding - Three Months Ended September 30, 2021 and 2020

Homebuilding revenues increased 22% in the third quarter of 2021 compared to the same period in 2020, as a result of a 10% increase in the number of units settled and an 11% increase in the average settlement price. The increase in the number of units settled was attributable to a 19% higher backlog unit balance entering the third quarter of 2021 compared to the same period in 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 14% higher average sales price of units in backlog entering the third quarter of 2021 compared to the same period in 2020.

Gross profit margin percentage in the third quarter of 2021 increased to 22.2%, from 20.0% in the third quarter of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor quarter over quarter.

The number of New Orders decreased 22% while the average sales price of New Orders increased 15% in the third quarter of 2021 compared to the third quarter of 2020. New Orders were lower due primarily to an 11% decrease in the average number of active communities in the third quarter of 2021 compared to the same period in 2020. The increase in the average sales price of New Orders quarter over quarter was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and has provided us sustained pricing power since the second half of 2020.

Selling, general and administrative (“SG&A”) expense in the third quarter of 2021 increased by approximately $6,500 compared to the third quarter of 2020, but as a percentage of revenue decreased to 4.8% from 5.5% quarter over quarter due to improved leveraging of SG&A costs. The increase in SG&A expense quarter over quarter was attributable primarily to increased personnel costs due to increased headcount.

Consolidated Homebuilding - Nine Months Ended September 30, 2021 and 2020

Homebuilding revenues increased 29% in the first nine months of 2021 compared to the same period in 2020, as a result of a 20% increase in the number of units settled and a 7% increase in the average settlement price. The increase in the number of units settled was attributable to a 40% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year.

The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020 coupled with a 15% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020.

Gross profit margin percentage in the first nine months of 2021 increased to 21.6% from 18.8% in the first nine months of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year. Additionally, the increase in gross profit margin year over year was attributable to gross profit margin in 2020 being negatively impacted by contract land deposit impairment charges of approximately $32,500, or 65 basis points.

The number of New Orders decreased 3% while the average sales price of New Orders increased 15% in the first nine months of 2021 compared to the same period in 2020. The number of New Orders in the current year were lower due primarily to a 10% decrease in the average number of active communities year over year. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

SG&A expense in the first nine months of 2021 increased by approximately $28,400, but as a percentage of revenue decreased to 5.3% from 6.3% year over year due to improved leveraging of SG&A costs. The increase in SG&A expense year over year was attributable primarily to increased incentive compensation attributable to stronger performance year over year, as well as increased personnel costs due to increased headcount.

Our backlog represents homes sold but not yet settled with our customers. As of September 30, 2021, our backlog was flat on a unit basis at 12,145 units and increased on a dollar basis by 15% to $5,372,859 when compared to 12,124 units and $4,655,510, respectively, as of September 30, 2020. Backlog units were flat year over year primarily due to a 15% decrease in New Orders during the six-month period ended September 30, 2021 compared to the same period in 2020, offset partially by a lower backlog turnover rate period over period. Our backlog turnover rate was negatively impacted by a longer production cycle attributable to subcontractor capacity constraints as we work to expand production to meet our increased sales pace. Backlog dollars were higher due to an 18% increase in the average sales price of New Orders during the six-month period ended September 30, 2021 compared to the same period in 2020.

In addition to the potential impact of the ongoing COVID-19 pandemic, our backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Calculated as the total of all cancellations during the period as a percentage of gross sales during that same period, our cancellation rate was approximately 9% and 16% in the first nine months of 2021 and 2020, respectively. During the most recent four quarters, approximately 3% of a reporting quarter’s opening backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur during the remainder of 2021 or future years. Other than those units that are cancelled, and subject to potential construction delays resulting from COVID-19 related restrictions, we expect to settle substantially all of our September 30, 2021 backlog within the next twelve months.

The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity, building material supply chain disruptions and other external factors over which we do not exercise control, such as the impact of governmental orders to limit construction activities as a result of COVID-19.

Reportable Segments

Homebuilding segment profit includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined by corporate management. The corporate capital allocation charge eliminates in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment is providing the desired rate of return after covering our cost of capital.

We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of an LPA with the developer, or the restructuring of an LPA resulting in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For presentation purposes below, the contract land deposit reserve at September 30, 2021 and December 31, 2020 has been allocated to the respective year’s reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $10,700 and $8,100 at September 30, 2021 and December 31, 2020, respectively, of letters of credit issued as deposits in lieu of cash.

The following tables summarize certain homebuilding operating activity by reportable segment for the three and nine months ended September 30, 2021 and 2020.

Selected Segment Financial Data:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Mid Atlantic	$	1,082,710	$	949,472	$	3,067,267	$	2,563,375
North East	213,087		157,973		568,524		362,328
Mid East	503,232		404,992		1,406,364		1,025,642
South East	537,586		408,314		1,482,731		1,113,871


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Gross profit margin:
Mid Atlantic	$	285,563	$	167,314	$	712,809	$	471,839
North East	48,904		27,265		113,940		69,512
Mid East	111,465		73,630		278,672		187,181
South East	135,577		83,520		338,166		231,594


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Gross profit margin percentage:
Mid Atlantic	26.4	%	17.6	%	23.2	%	18.4	%
North East	23.0	%	17.3	%	20.0	%	19.2	%
Mid East	22.2	%	18.2	%	19.8	%	18.3	%
South East	25.2	%	20.5	%	22.8	%	20.8	%


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Segment profit:
Mid Atlantic	$	222,504	$	104,700	$	526,052	$	284,440
North East	33,885		14,272		70,622		31,081
Mid East	81,021		45,109		189,849		103,575
South East	100,688		52,554		236,272		142,463

Operating Activity:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	Units	Average Price		Units	Average Price		Units	Average Price		Units	Average Price
New orders, net of cancellations:
Mid Atlantic	2,024	$	523.7	2,592	$	455.5	6,405	$	519.8	7,034	$	447.4
North East	403	$	496.7	542	$	441.1	1,237	$	489.7	1,269	$	405.4
Mid East	1,190	$	376.8	1,644	$	335.5	4,305	$	365.4	4,405	$	326.0
South East	1,584	$	372.9	1,903	$	313.0	5,089	$	356.2	4,889	$	305.3
Total	5,201	$	442.0	6,681	$	384.2	17,036	$	429.8	17,597	$	374.5


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	Units	Average Price		Units	Average Price		Units	Average Price		Units	Average Price
Settlements:
Mid Atlantic	2,177	$	497.3	2,172	$	437.1	6,411	$	478.4	5,898	$	434.6
North East	455	$	468.3	396	$	398.9	1,260	$	451.2	939	$	385.9
Mid East	1,430	$	351.8	1,250	$	324.0	4,097	$	343.2	3,180	$	322.5
South East	1,621	$	331.6	1,362	$	299.8	4,672	$	317.3	3,689	$	301.9
Total	5,683	$	411.1	5,180	$	370.8	16,440	$	396.9	13,706	$	369.5


	As of September 30,
	2021			2020
	Units	Average Price		Units	Average Price
Backlog:
Mid Atlantic	4,473	$	530.3	4,748	$	457.7
North East	927	$	499.0	917	$	427.8
Mid East	3,082	$	375.4	3,038	$	333.2
South East	3,663	$	377.0	3,421	$	315.1
Total	12,145	$	442.4	12,124	$	384.0


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
New order cancellation rate:
Mid Atlantic	9.3	%	11.3	%	8.9	%	16.1	%
North East	7.6	%	8.1	%	8.4	%	14.5	%
Mid East	11.7	%	11.5	%	9.9	%	15.3	%
South East	7.6	%	13.7	%	8.7	%	16.3	%


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Average active communities:
Mid Atlantic	151	170	154	183
North East	34	41	34	41
Mid East	125	135	130	138
South East	104	119	108	113
Total	414	465	426	475

Homebuilding Inventory:


	September 30, 2021		December 31, 2020
Sold inventory:
Mid Atlantic	$	758,804	$	704,595
North East	160,800		140,461
Mid East	339,963		278,510
South East	418,756		336,902
Total (1)	$	1,678,323	$	1,460,468


	September 30, 2021		December 31, 2020
Unsold lots and housing units inventory:
Mid Atlantic	$	94,841	$	76,690
North East	12,471		7,941
Mid East	9,228		13,252
South East	13,085		23,220
Total (1)	$	129,625	$	121,103

(1) The reconciling items between segment inventory and consolidated inventory include certain consolidation adjustments necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes. These consolidation adjustments are not allocated to our operating segments.

Lots Controlled and Land Deposits:


	September 30, 2021	December 31, 2020
Total lots controlled:
Mid Atlantic	46,900	42,100
North East	11,200	10,500
Mid East	22,800	22,000
South East	37,700	31,100
Total	118,600	105,700


	September 30, 2021		December 31, 2020
Contract land deposits, net:
Mid Atlantic	$	248,306	$	212,742
North East	41,485		32,949
Mid East	51,776		49,222
South East	122,343		100,864
Total	$	463,910	$	395,777


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Contract land deposit impairments (recoveries), net:
Mid Atlantic	$	8	$	114	$	16	$	114
North East	—		56		—		60
Mid East	—		(1)		11		293
South East	—		25		—		927
Total	$	8	$	194	$	27	$	1,394

Mid Atlantic

Three Months Ended September 30, 2021 and 2020

The Mid Atlantic segment had an approximate $117,800, or 113%, increase in segment profit in the third quarter of 2021 compared to the third quarter of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $133,200, or 14%, quarter over quarter. Segment revenues increased primarily due to a 14% increase in the average settlement price quarter over quarter. The increase in the average settlement price was primarily attributable to a 15% higher average sales price of units in backlog entering the third quarter of 2021 compared to the same period in 2020. The Mid Atlantic segment’s gross profit margin percentage increased to 26.4% in the third quarter of 2021 from 17.6% in the third quarter of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for certain commodities and labor quarter over quarter.

Segment New Orders decreased 22% while the average sales price of New Orders increased 15% in the third quarter of 2021 compared to the third quarter of 2020. New Orders were lower due primarily to a 12% decrease in the average number of active communities in the third quarter of 2021 compared to the same period in 2020, coupled with a decline in absorption rates quarter over quarter. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Nine Months Ended September 30, 2021 and 2020

The Mid Atlantic segment had an approximate $241,600, or 85%, increase in segment profit in the first nine months of 2021 compared to the first nine months of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $503,900, or 20%, year over year. Segment revenues increased due to increases in the number of units settled and the average settlement price of 9% and 10%, respectively, year over year. The increase in the number of units settled was attributable to a 24% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 7% higher average sales price of units in backlog entering 2021 compared to the same period in 2020, coupled with a 17% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The Mid Atlantic segment’s gross profit margin percentage increased to 23.2% in the first nine months of 2021 from 18.4% in the first nine months of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders decreased 9% while the average sales price of New Orders increased 16% in the first nine months of 2021 compared to the first nine months of 2020. New Orders were negatively impacted primarily by a 16% decrease in the average number of active communities in the first nine months of 2021 compared to the same period in 2020. The increase in the average sales price of New Orders year over year was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and have provided us sustained pricing power since the second half of 2020.

North East

Three Months Ended September 30, 2021 and 2020

The North East segment had an approximate $19,600, or 137%, increase in segment profit in the third quarter of 2021 compared to the third quarter of 2020, due primarily to an increase in segment revenues of approximately $55,100, or 35%, quarter over quarter. Segment revenues increased due to increases in the number of units settled and the average settlement price of 15% and 17%, respectively, quarter over quarter. The increase in the number of units settled and the average settlement price were attributable to a 27% higher backlog unit balance and 20% higher average sales price of units in backlog entering the third quarter of 2021, respectively, compared to the backlog unit balance and average sales price of units in backlog entering the third quarter of 2020. The segment’s gross profit margin percentage increased to 23.0% in the third quarter of 2021 from 17.3% in the third quarter of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increased settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for certain commodities and labor quarter over quarter.

Segment New Orders decreased 26% while the average sales price of New Orders increased 13% in the third quarter of 2021 compared to the third quarter of 2020. New Orders were lower due primarily to a 16% decrease in the average number of active communities in the third quarter of 2021 compared to the same period in 2020, coupled with a decline in absorption rates quarter over quarter. The increase in the average sales price of New Orders quarter over quarter was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Nine Months Ended September 30, 2021 and 2020

The North East segment had an approximate $39,500, or 127%, increase in segment profit in the first nine months of 2021 compared to the first nine months of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $206,200, or 57%, year over year. Segment revenues increased due to increases in the number of units settled and the average settlement price of 34% and 17%, respectively, year over year. The increase in the number of units settled was attributable to a 62% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 10% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020, coupled with a 28% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 20.0% in the first nine months of 2021 from 19.2% in the same period in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders decreased 3% while the average sales price of New Orders increased 21% in the first nine months of 2021 compared to the first nine months of 2020. New Orders were negatively impacted primarily by a 17% decrease in the average number of active communities in the first nine months of 2021 compared to the same period in 2020. The increase in the average sales price of New Orders year over year was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Mid East

Three Months Ended September 30, 2021 and 2020

The Mid East segment had an approximate $35,900, or 80%, increase in segment profit in the third quarter of 2021 compared to the third quarter of 2020, due primarily to an increase in segment revenues of approximately $98,200, or 24%, quarter over quarter. Segment revenues increased primarily due to a 14% increase in the number of units settled and a 9% increase in the average settlement price quarter over quarter. The increase in the number of units settled was attributable to a 26% higher backlog unit balance entering the third quarter of 2021 compared to the backlog unit balance entering the third quarter of 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to an 11% higher average sales price of units in backlog entering the third quarter of 2021 compared to same period in 2020. The segment's gross profit margin percentage increased to 22.2% in the third quarter of 2021 from 18.2% in the third quarter of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increased settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for certain commodities and labor quarter over quarter.

Segment New Orders decreased 28% while the average sales price of New Orders increased 12% in the third quarter of 2021 compared to the third quarter of 2020. New Orders were negatively impacted by an 8% decrease in the average number of active communities coupled with a decline in absorption rates quarter over quarter. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Nine Months Ended September 30, 2021 and 2020

The Mid East segment had an approximate $86,300, or 83%, increase in segment profit in the first nine months of 2021 compared to the first nine months of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $380,700, or 37%, year over year. Segment revenues increased due to increases in the number of units settled and the average settlement price of 29% and 6%, respectively, year over year. The increase in the number of units settled was attributable to a 9% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020, coupled with a 13% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment's gross profit margin percentage increased to 19.8% in the first nine months of 2021 from 18.3% in the same period in 2020. Gross profit margins were favorably impacted by improved leveraging of certain operating costs attributable to the increase in settlement activity year over year, offset partially by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders decreased 2% while the average sales price of New Orders increased 12% in the first nine months of 2021 compared to the first nine months of 2020. New Orders were negatively impacted primarily by a 6% decrease in the average number of active communities in the first nine months of 2021 compared to the same period in 2020. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

South East

Three Months Ended September 30, 2021 and 2020

The South East segment had an approximate $48,100, or 92%, increase in segment profit in the third quarter of 2021 compared to the third quarter of 2020. The increase in segment profit was primarily driven by an increase in segment revenues of approximately $129,300, or 32%, quarter over quarter. The increase in revenues is attributable to a 19% increase in the number of units settled and an 11% increase in the average settlement price quarter over quarter. The increase in the number of units settled was attributable to a 28% higher backlog unit balance entering the third quarter 2021 compared to the backlog unit balance entering the third quarter of 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 16% higher average sales price of units in backlog entering the third quarter of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 25.2% in the third quarter of 2021 from 20.5% in the third quarter of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for certain commodities and labor quarter over quarter.

Segment New Orders decreased 17% while the average sales price of New Orders increased 19% in the third quarter of 2021 compared to the third quarter of 2020. New Orders were negatively impacted primarily by a 12% decrease in the average number of active communities in the first nine months of 2021 compared to the same period in 2020, coupled with a decline in absorption rates quarter over quarter. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Nine Months Ended September 30, 2021 and 2020

The South East segment had an approximate $93,800, or 66%, increase in segment profit in the first nine months of 2021 compared to the first nine months of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $368,900, or 33%, year over year. Segment revenues increased due to increases in the number of units settled and the average settlement price of 27% and 5%, respectively, year over year. The increase in the number of units settled was attributable to a 46% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 3% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020, coupled with a 16% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 22.8% in the first nine months of 2021 from 20.8% in the first nine months of 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders and the average sales price of New Orders increased 4% and 17%, respectively, in the first nine months of 2021 compared to the first nine months of 2020. New Orders and the average sales price of New Orders were higher due to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated income before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily

consists of interest charges on our Senior Notes, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Homebuilding consolidated gross profit:
Mid Atlantic	$	285,563	$	167,314	$	712,809	$	471,839
North East	48,904		27,265		113,940		69,512
Mid East	111,465		73,630		278,672		187,181
South East	135,577		83,520		338,166		231,594
Consolidation adjustments and other	(62,833)		32,978		(35,766)		(10,190)
Homebuilding consolidated gross profit	$	518,676	$	384,707	$	1,407,821	$	949,936


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Homebuilding consolidated income before taxes:
Mid Atlantic	$	222,504	$	104,700	$	526,052	$	284,440
North East	33,885		14,272		70,622		31,081
Mid East	81,021		45,109		189,849		103,575
South East	100,688		52,554		236,272		142,463
Reconciling items:
Contract land deposit recoveries (impairments) (1)	4,126		4,867		17,500		(31,208)
Equity-based compensation expense	(13,779)		(12,561)		(39,484)		(33,398)
Corporate capital allocation (2)	64,055		60,662		188,638		177,184
Unallocated corporate overhead	(27,801)		(26,915)		(101,605)		(87,912)
Consolidation adjustments and other (3)	(56,786)		38,244		(22,456)		54,769
Corporate interest expense	(12,805)		(11,287)		(38,598)		(26,625)
Reconciling items sub-total	(42,990)		53,010		3,995		52,810
Homebuilding consolidated income before taxes	$	395,108	$	269,645	$	1,026,790	$	614,369

(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2 in the accompanying condensed consolidated financial statements.

(2)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Corporate capital allocation charge:
Mid Atlantic	$	31,057	$	31,383	$	92,788	$	92,720
North East	6,719		5,793		19,214		17,142
Mid East	11,114		10,386		32,804		29,436
South East	15,165		13,100		43,832		37,886
Total	$	64,055	$	60,662	$	188,638	$	177,184

(3)The decrease in consolidation adjustments and other for the three and nine month periods of 2021 compared to the respective 2020 periods is driven by changes in lumber prices in 2021. Our reportable segments' results include the intercompany profits of our production facilities for home packages delivered to our homebuilding divisions. For homes not yet settled, these intercompany profits are reversed through the consolidation adjustments. Due to the significantly higher lumber prices in the first half of 2021, the previously reversed intercompany profits were recognized in the third quarter through the consolidation adjustment as homes were settled, and our consolidated homebuilding margins were negatively impacted by the higher lumber costs.

Mortgage Banking Segment

Three and Nine Months Ended September 30, 2021 and 2020

We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment customer base. NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing-released basis, typically within 30 days from the loan closing. The following table summarizes the results of our mortgage banking operations and certain statistical data for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Loan closing volume:
Total principal	$	1,615,880		$	1,382,060		$	4,593,854		$	3,658,591

Loan volume mix:
Adjustable rate mortgages	4		%	2		%	3		%	2		%
Fixed-rate mortgages	96		%	98		%	97		%	98		%

Operating profit:
Segment profit	$	40,249		$	52,890		$	140,183		$	80,461
Equity-based compensation expense	(1,230)			(1,078)			(3,375)			(2,167)
Mortgage banking income before tax	$	39,019		$	51,812		$	136,808		$	78,294

Capture rate:	88		%	89		%	89		%	90		%

Mortgage banking fees:
Net gain on sale of loans	$	47,577		$	58,774		$	162,729		$	100,348
Title services	11,246			10,237			32,478			26,755
Servicing fees	202			250			591			589
	$	59,025		$	69,261		$	195,798		$	127,692

Loan closing volume for the three and nine months ended September 30, 2021 increased by approximately $233,800, or 17%, and $935,300, or 26%, from the same periods in 2020, respectively. The increase in loan closing volume during the three and nine months ended September 30, 2021 was primarily attributable to the 10% and 20% increases in the homebuilding segment’s number of units settled during the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Segment profit for the three months ended September 30, 2021 decreased by approximately $12,600, or 24% from the same period in 2020. This decrease was primarily attributable to a decrease in mortgage banking fees of approximately $10,200 primarily due to a decrease in secondary marketing gains on sales of loans quarter over quarter.

Segment profit for the nine months ended September 30, 2021 increased by approximately $59,700, or 74%, from the same period in 2020. This increase was primarily attributable to an increase in mortgage banking fees of approximately $68,100, primarily due to increased mortgage volume in 2021, coupled with 2020 results being negatively impacted by disruptions in the mortgage markets related to the COVID-19 pandemic.

Seasonality

We generally have higher New Order activity in the first half of the year and higher home settlements, revenue and net income in the second half of the year.

Effective Tax Rate

Our effective tax rate for the three and nine months ended September 30, 2021 was 23.5% and 22.5%, respectively, compared to 20.2% and 13.9% for the three and nine months ended September 30, 2020, respectively. The increase in the effective tax rate in the three and nine month periods of 2021 compared to the same periods in 2020 is primarily attributable to the impact of the income tax benefit recognized related to excess tax benefits from stock option exercises totaling $9,244 and $37,834 for the three and nine months ended September 30, 2021, respectively, and $17,834 and $80,343 for the three and nine months ended September 30, 2020, respectively.

We expect to experience volatility in our effective tax rate in future quarters as the amount of the excess tax benefit from equity-based awards is dependent on our stock price when awards are exercised as well as on the timing of exercises, which historically has varied from quarter to quarter.

Liquidity and Capital Resources

Overview

We had a very strong liquidity position as of September 30, 2021, with approximately $2,700,000 in cash and cash equivalents, approximately $284,400 in unused committed capacity under our revolving credit facility and $150,000 in unused committed capacity under our revolving mortgage repurchase facility.

Our homebuilding business segment funds its operations from cash flows provided by operating activities, a short-term unsecured working capital revolving credit facility and capital raised in the public debt and equity markets. Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase facility.

Credit Agreement

Our unsecured Credit Agreement (the “Credit Agreement”) provides for aggregate revolving loan commitments of $300,000. Under the Credit Agreement, we may request increases of up to $300,000 to the facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $15,600 outstanding at September 30, 2021. The Credit Agreement termination date is February 12, 2026. There was no debt outstanding under the Credit Agreement at September 30, 2021.

Repurchase Agreement

NVRM's revolving mortgage repurchase facility (the “Repurchase Agreement”) provides for aggregate borrowings up to $150,000 and is non-recourse to NVR. In July 2021, NVRM entered into the Thirteenth Amendment to the Repurchase Agreement, which extended the term of the Repurchase Agreement through July 20, 2022. All other terms and conditions under the amended Repurchase Agreement remained materially consistent. At September 30, 2021, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at September 30, 2021.

For additional information regarding lines of credit and notes payable, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Cash Flows

For the nine months ended September 30, 2021, cash, restricted cash, and cash equivalents decreased by $61,722. Cash provided by operating activities was $982,292. Cash was provided by earnings for the nine months ended September 30, 2021, net proceeds of $319,140 from mortgage loan activity and a $140,836 increase in customer deposits due to an increase in backlog value coupled with an increase in the average deposit collected per

home in backlog at September 31, 2021 compared to December 31, 2020. Cash was primarily used to fund the increase in homebuilding inventory of $154,443 due to an increase in the number of units under construction at September 30, 2021 compared to December 31, 2020.

Net cash used in investing activities for the nine months ended September 30, 2021 was $11,986, attributable primarily to cash used for purchases of property, plant and equipment of $11,946.

Net cash used in financing activities was $1,032,028 for the nine months ended September 30, 2021. Cash was used to repurchase 244,595 shares of our common stock at an aggregate purchase price of $1,152,855 under our ongoing common stock repurchase program, discussed below. Cash was provided from stock option exercise proceeds totaling $121,835.

Equity Repurchases

In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Exchange Act. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing/401(k) Plan Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us in accomplishing our primary objective of creating increases in shareholder value. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this Quarterly Report on Form 10-Q for further discussion of repurchase activity during the third quarter of 2021.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2020.

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