Item 1. Financial Statements

NVR, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
						March 31, 2023						December 31, 2022
ASSETS
Homebuilding:
Cash and cash equivalents						$	2,786,503					$	2,503,424
Restricted cash						47,995						48,455
Receivables						23,307						20,842
Inventory:
Lots and housing units, covered under sales agreements with customers						1,630,861						1,554,955
Unsold lots and housing units						181,900						181,952
Land under development						28,814						27,100
Building materials and other						23,967						24,268
						1,865,542						1,788,275
Contract land deposits, net						501,667						496,080
Property, plant and equipment, net						56,533						57,950
Operating lease right-of-use assets						71,593						71,081
Reorganization value in excess of amounts allocable to identifiable assets, net						41,580						41,580
Other assets						237,032						219,483
						5,631,752						5,247,170
Mortgage Banking:
Cash and cash equivalents						14,259						19,415
Restricted cash						9,836						2,974
Mortgage loans held for sale, net						319,248						316,806
Property and equipment, net						3,347						3,559
Operating lease right-of-use assets						21,714						16,011
Reorganization value in excess of amounts allocable to identifiable assets, net						7,347						7,347
Other assets						68,402						47,691
						444,153						413,803
Total assets						$	6,075,905					$	5,660,973

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)
(unaudited)
						March 31, 2023						December 31, 2022
LIABILITIES AND SHAREHOLDERS' EQUITY
Homebuilding:
Accounts payable						$	353,141					$	334,016
Accrued expenses and other liabilities						459,335						437,234
Customer deposits						335,230						313,804
Operating lease liabilities						76,547						75,818
Senior notes						914,427						914,888
						2,138,680						2,075,760
Mortgage Banking:
Accounts payable and other liabilities						68,969						61,396
Operating lease liabilities						22,910						16,968
						91,879						78,364
Total liabilities						2,230,559						2,154,124
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of both March 31, 2023 and December 31, 2022						206						206
Additional paid-in capital						2,676,641						2,600,014
Deferred compensation trust – 106,697 shares of NVR, Inc. common stock as of both March 31, 2023 and December 31, 2022						(16,710)						(16,710)
Deferred compensation liability						16,710						16,710
Retained earnings						12,117,766						11,773,414
Less treasury stock at cost – 17,313,580 and 17,336,397 shares as of March 31, 2023 and December 31, 2022, respectively						(10,949,267)						(10,866,785)
Total shareholders' equity						3,845,346						3,506,849
Total liabilities and shareholders' equity						$	6,075,905					$	5,660,973

See notes to condensed consolidated financial statements.

NVR, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

												Three Months Ended March 31,
																		2023						2022
Homebuilding:
Revenues																		$	2,131,333					$	2,309,227
Other income																		32,946						1,339
Cost of sales																		(1,607,910)						(1,651,365)
Selling, general and administrative																		(143,618)						(129,510)
Operating income																		412,751						529,691
Interest expense																		(7,001)						(12,804)
Homebuilding income																		405,750						516,887
Mortgage Banking:
Mortgage banking fees																		46,944						69,182
Interest income																		3,018						2,074
Other income																		989						1,072
General and administrative																		(22,634)						(22,908)
Interest expense																		(257)						(362)
Mortgage banking income																		28,060						49,058
Income before taxes																		433,810						565,945
Income tax expense																		(89,458)						(139,845)
Net income																		$	344,352					$	426,100
Basic earnings per share																		$	106.31					$	125.87
Diluted earnings per share																		$	99.89					$	116.56
Basic weighted average shares outstanding																		3,239						3,385
Diluted weighted average shares outstanding																		3,447						3,656

See notes to condensed consolidated financial statements.

NVR, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

						Three Months Ended March 31,
						2023						2022
Cash flows from operating activities:
Net income						$	344,352					$	426,100
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization						4,188						4,460
Equity-based compensation expense						22,277						11,668
Contract land deposit recoveries, net						(3,072)						(5,924)
Gain on sale of loans, net						(37,268)						(57,978)
Mortgage loans closed						(1,237,589)						(1,484,771)
Mortgage loans sold and principal payments on mortgage loans held for sale						1,238,337						1,511,850
Distribution of earnings from unconsolidated joint ventures						1,000						2,000
Net change in assets and liabilities:
Increase in inventory						(77,267)						(246,273)
Increase in contract land deposits						(2,515)						(8,979)
Decrease (increase) in receivables						9,801						(13,782)
Increase in accounts payable and accrued expenses						50,607						127,083
Increase in customer deposits						21,426						35,715
Other, net						(18,755)						8,157
Net cash provided by operating activities						315,522						309,326
Cash flows from investing activities:
Investments in and advances to unconsolidated joint ventures						(565)						(472)
Distribution of capital from unconsolidated joint ventures						180						—
Purchase of property, plant and equipment						(2,714)						(4,056)
Proceeds from the sale of property, plant and equipment						184						210
Net cash used in investing activities						(2,915)						(4,318)
Cash flows from financing activities:
Purchase of treasury stock						(110,048)						(748,788)
Principal payments on finance lease liabilities						(400)						(356)
Proceeds from the exercise of stock options						81,916						34,241
Net cash used in financing activities						(28,532)						(714,903)
Net increase (decrease) in cash, restricted cash, and cash equivalents						284,075						(409,895)
Cash, restricted cash, and cash equivalents, beginning of the period						2,574,518						2,636,984
Cash, restricted cash, and cash equivalents, end of the period						$	2,858,593					$	2,227,089
Supplemental disclosures of cash flow information:
Interest paid during the period, net of interest capitalized						$	859					$	12,521
Income taxes paid during the period, net of refunds						$	5,423					$	2,536

See notes to condensed consolidated financial statements.

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. and its subsidiaries (“NVR”, the “Company”, "we", "us" or "our") and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

For the three months ended March 31, 2023 and 2022, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

Revenue Recognition

Homebuilding revenue is recognized on the settlement date at the contract sales price, when control is transferred to our customers. Our contract liabilities, which consist of deposits received from customers on homes not settled, were $335,230 and $313,804 as of March 31, 2023 and December 31, 2022, respectively. We expect that substantially all of the customer deposits held at December 31, 2022 will be recognized in revenue in 2023. Our contract assets consist of prepaid sales compensation and totaled approximately $17,500 and $15,300, as of March 31, 2023 and December 31, 2022, respectively. Prepaid sales compensation is included in homebuilding “Other assets” on the accompanying condensed consolidated balance sheets.

2. Variable Interest Entities ("VIEs")

Fixed Price Finished Lot Purchase Agreements (“LPAs”)

We generally do not engage in the land development business. Instead, we typically acquire finished building lots at market prices from various development entities under LPAs. The LPAs require deposits that may be forfeited if we fail to perform under the LPAs. The deposits required under the LPAs are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots.

The deposit placed by us pursuant to the LPA is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be VIEs. Therefore, the development entities with which we enter into LPAs, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by us. We have concluded that we are not the primary beneficiary of the development entities with which we enter into LPAs, and therefore, we do not consolidate any of these VIEs.

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

As of March 31, 2023, we controlled approximately 123,100 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $543,900 and $7,900, respectively. Our sole legal obligation and economic loss for failure to perform under these LPAs is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the LPAs and, in very limited circumstances, specific performance obligations. For the three months ended March 31, 2023 and 2022, we recorded a net expense reversal of approximately $3,100 and $5,900, respectively, primarily related to previously impaired lot deposits based on market conditions. Our contract land deposit asset is shown net of a $53,469 and $57,060 impairment reserve at March 31, 2023 and December 31, 2022, respectively.

In addition, we have certain properties under contract with land owners that are expected to yield approximately 19,400 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 totaling approximately $11,300 as of March 31, 2023, of which approximately $4,200 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.

Our total risk of loss related to contract land deposits is limited to the amount of the deposits pursuant to the liquidated damages provision of the LPAs. As of March 31, 2023 and December 31, 2022, our total risk of loss was as follows:

						March 31, 2023						December 31, 2022
Contract land deposits						$	555,136					$	553,140
Loss reserve on contract land deposits						(53,469)						(57,060)
Contract land deposits, net						501,667						496,080
Contingent obligations in the form of letters of credit						7,929						6,896
Total risk of loss						$	509,596					$	502,976

3. Joint Ventures

On a limited basis, we obtain finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that we are a non-controlling member and are at risk only for the amount we have invested, or have committed to invest, in addition to any deposits placed under LPAs with the joint venture. We are not a borrower, guarantor or obligor on any debt of the JVs, as applicable. We enter into LPAs to purchase lots from these JVs, and as a result have a variable interest in these JVs. We determined that we are not the primary beneficiary in any of the JVs because we and the other JV partner either share power or the other JV partner has the controlling financial interest.

At March 31, 2023, we had an aggregate investment totaling approximately $26,800 in four JVs that are expected to produce approximately 5,300 finished lots, of which approximately 4,900 lots were controlled by us and the remaining approximately 400 lots were either under contract with unrelated parties or not currently under contract. We had additional funding commitments totaling approximately $12,400 to one of the JVs at March 31, 2023. At December 31, 2022, our aggregate investment in JVs totaled approximately $27,200. Investments in JVs for the respective periods are reported in the homebuilding “Other assets” line item on the accompanying condensed consolidated balance sheets. None of the JVs had any indicators of impairment as of March 31, 2023.

We recognize income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled, based on the expected total profitability and the total number of lots expected to be produced by the respective JVs.

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

We classify distributions received from unconsolidated JVs using the cumulative earnings approach. As a result, distributions received up to the amount of cumulative earnings recognized by us are reported as distributions of earnings and those in excess of that amount are reported as a distribution of capital. These distributions are classified within the accompanying condensed consolidated statements of cash flows as cash flows from operating activities and investing activities, respectively.

4. Land Under Development

On a limited basis, we directly acquire raw land parcels already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes.

As of March 31, 2023, we owned land with a carrying value of $28,814 that we intend to develop into approximately 1,900 finished lots. We have additional funding commitments of approximately $1,900 under a joint development agreement related to one project, a portion of which we expect will be offset by development credits of approximately $900. As of December 31, 2022, the carrying value of land under development was $27,100. None of our land under development projects had any indicators of impairment as of March 31, 2023.

5. Capitalized Interest

We capitalize interest costs to land under development during the active development of finished lots. In addition, we capitalize interest costs to our joint venture investments while the investments are considered qualified assets pursuant to ASC Topic 835-20 - Interest. Capitalized interest is transferred to inventory as the development of finished lots is completed, then charged to cost of sales upon our settlement of homes and the respective lots. Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred.

The following table reflects the changes in our capitalized interest during the three months ended March 31, 2023 and 2022:

												Three Months Ended March 31,
																		2023						2022
Interest capitalized, beginning of period																		$	570					$	593
Interest incurred																		7,004						13,254
Interest charged to interest expense																		(7,258)						(13,166)
Interest charged to cost of sales																		(111)						(41)
Interest capitalized, end of period																		$	205					$	640

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

6. Earnings per Share

The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share ("EPS") for the three months ended March 31, 2023 and 2022:

												Three Months Ended March 31,
																		2023						2022
Weighted average number of shares outstanding used to calculate basic EPS																		3,239,263						3,385,259
Dilutive securities:
Stock options and restricted share units																		208,211						270,258
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS																		3,447,474						3,655,517

The following non-qualified stock options ("Options") and restricted share units ("RSUs") issued under equity incentive plans were outstanding during the three months ended March 31, 2023 and 2022, but were not included in the computation of diluted EPS because the effect would have been anti-dilutive.

												Three Months Ended March 31,
																		2023						2022
Anti-dilutive securities																		184,114						21,032

7. Shareholders’ Equity

A summary of changes in shareholders’ equity for the three months ended March 31, 2023 is presented below:

						Common Stock						Additional Paid-In Capital						Retained Earnings						Treasury Stock						Deferred Compensation Trust						Deferred Compensation Liability						Total
Balance, December 31, 2022						$	206					$	2,600,014					$	11,773,414					$	(10,866,785)					$	(16,710)					$	16,710					$	3,506,849
Net income						—						—						344,352						—						—						—						344,352
Purchase of common stock for treasury						—						—						—						(110,048)						—						—						(110,048)
Equity-based compensation						—						22,277						—						—						—						—						22,277
Proceeds from Options exercised						—						81,916						—						—						—						—						81,916
Treasury stock issued upon Option exercise and RSU vesting						—						(27,566)						—						27,566						—						—						—
Balance, March 31, 2023						$	206					$	2,676,641					$	12,117,766					$	(10,949,267)					$	(16,710)					$	16,710					$	3,845,346

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

A summary of changes in shareholders’ equity for the three months ended March 31, 2022 is presented below:

						Common Stock						Additional Paid-In Capital						Retained Earnings						Treasury Stock						Deferred Compensation Trust						Deferred Compensation Liability						Total
Balance, December 31, 2021						$	206					$	2,378,191					$	10,047,839					$	(9,423,858)					$	(16,710)					$	16,710					$	3,002,378
Net income						—						—						426,100						—						—						—						426,100
Purchase of common stock for treasury						—						—						—						(748,788)						—						—						(748,788)
Equity-based compensation						—						11,668						—						—						—						—						11,668
Proceeds from Options exercised						—						34,241						—						—						—						—						34,241
Treasury stock issued upon Option exercise and RSU vesting						—						(7,440)						—						7,440						—						—						—
Balance, March 31, 2022						$	206					$	2,416,660					$	10,473,939					$	(10,165,206)					$	(16,710)					$	16,710					$	2,725,599

We repurchased 21,174 and 146,054 shares of our outstanding common stock during the three months ended March 31, 2023 and 2022, respectively. We settle Option exercises and vesting of RSUs by issuing shares of treasury stock. We issued 43,941 and 13,323 shares from the treasury account during the three months ended March 31, 2023 and 2022, respectively, in settlement of Option exercises and vesting of RSUs. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares.

8. Product Warranties

We establish warranty and product liability reserves (“Warranty Reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to our homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the estimated current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our general counsel and outside counsel retained to handle specific product liability cases.

The following table reflects the changes in our Warranty Reserve during the three months ended March 31, 2023 and 2022:

												Three Months Ended March 31,
																		2023						2022
Warranty reserve, beginning of period																		$	144,006					$	134,859
Provision																		21,270						17,967
Payments																		(20,845)						(17,485)
Warranty reserve, end of period																		$	144,431					$	135,341

9. Segment Disclosures

We disclose four homebuilding reportable segments that aggregate geographically our homebuilding operating segments, and we present our mortgage banking operations as one reportable segment. The homebuilding

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

reportable segments are comprised of operating divisions in the following geographic areas:

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, Tennessee, Florida and Georgia

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses and a corporate capital allocation charge. The corporate capital allocation charge is eliminated 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 (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital.

Assets not allocated to the operating segments are not included in either the operating segment’s corporate capital allocation charge or the CODM’s evaluation of the operating segment’s performance. We record charges on contract land deposits when it is determined 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. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a corporate capital allocation charge.

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including 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 these costs are not allocated to our operating segments. Consolidation adjustments consist of such items 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, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our 3.00% Senior Notes due 2030 (the “Senior Notes”), which are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

The following tables present segment revenues, profit and assets with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

												Three Months Ended March 31,
																		2023						2022
Revenues:
Homebuilding Mid Atlantic																		$	941,148					$	1,141,708
Homebuilding North East																		183,430						175,551
Homebuilding Mid East																		402,397						461,405
Homebuilding South East																		604,358						530,563
Mortgage Banking																		46,944						69,182
Total consolidated revenues																		$	2,178,277					$	2,378,409

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

												Three Months Ended March 31,
																		2023						2022
Income before taxes:
Homebuilding Mid Atlantic																		$	159,038					$	249,781
Homebuilding North East																		32,060						25,928
Homebuilding Mid East																		56,468						71,183
Homebuilding South East																		125,409						113,454
Mortgage Banking																		29,427						50,106
Total segment profit before taxes																		402,402						510,452
Reconciling items:
Contract land deposit reserve adjustment (1)																		3,591						5,926
Equity-based compensation expense (2)																		(22,277)						(11,668)
Corporate capital allocation (3)																		69,074						69,744
Unallocated corporate overhead																		(45,965)						(45,261)
Consolidation adjustments and other (4)																		4,000						48,760
Corporate interest expense																		(6,954)						(12,755)
Corporate interest income																		29,939						747
Reconciling items sub-total																		31,408						55,493
Consolidated income before taxes																		$	433,810					$	565,945

(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.

(2)The increase in equity-based compensation expense for the three-month period ended March 31, 2023 was primarily attributable to the issuance of a four year block grant of Options and RSUs in the second quarter of 2022.

(3)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 was as follows for the periods presented:

												Three Months Ended March 31,
																		2023						2022
Corporate capital allocation charge:
Homebuilding Mid Atlantic																		$	33,179					$	34,087
Homebuilding North East																		7,325						7,087
Homebuilding Mid East																		9,660						11,417
Homebuilding South East																		18,910						17,153
Total																		$	69,074					$	69,744

(4)The consolidation adjustments and other in each period are primarily driven by changes in units under construction as well as significant fluctuations in lumber prices year over year. Our reportable segments' results include the intercompany profits of our production facilities for home packages delivered to our homebuilding divisions. Costs related to homes not yet settled are reversed through the consolidation adjustment and recorded in inventory. These costs are subsequently recorded through the consolidation adjustment when the respective homes are settled. In the first quarter of 2023, the consolidation adjustment was negatively impacted by the recognition of previously deferred home package costs that included higher priced lumber. This impact was offset partially by a reduction in the number of units under construction year over year, resulting in a decrease in intercompany profits deferred, as compared to the first quarter of 2022.

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

						March 31, 2023						December 31, 2022
Assets:
Homebuilding Mid Atlantic						$	1,219,228					$	1,152,564
Homebuilding North East						277,044						250,001
Homebuilding Mid East						364,849						378,833
Homebuilding South East						689,953						697,923
Mortgage Banking						436,806						406,456
Total segment assets						2,987,880						2,885,777
Reconciling items:
Cash and cash equivalents						2,786,503						2,503,424
Deferred taxes						147,363						143,585
Intangible assets and goodwill						49,368						49,368
Operating lease right-of-use assets						71,593						71,081
Finance lease right-of-use assets						13,492						13,745
Contract land deposit reserve						(53,469)						(57,060)
Consolidation adjustments and other						73,175						51,053
Reconciling items sub-total						3,088,025						2,775,196
Consolidated assets						$	6,075,905					$	5,660,973

10. Fair Value

GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs.

Financial Instruments

The estimated fair values of our Senior Notes as of March 31, 2023 and December 31, 2022 were $787,419 and $788,166, respectively. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy. The carrying values at March 31, 2023 and December 31, 2022 were $914,427 and $914,888, respectively. Except as otherwise noted below, we believe that insignificant differences exist between the carrying value and the fair value of our financial instruments, which consist primarily of cash equivalents, due to their short term nature.

Derivative Instruments and Mortgage Loans Held for Sale

In the normal course of business, our wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM, and some of these commitments include a prepaid float down option. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVRM does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At March 31, 2023, there were rate lock

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

commitments to extend credit to borrowers aggregating $2,263,642 and open forward delivery contracts aggregating $2,227,677, which hedge both the rate lock commitments and closed loans held for sale.

The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:

i)the assumed gain/loss of the expected resultant loan sale (Level 2);

ii)the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and

iii)the value of the servicing rights associated with the loan (Level 2).

The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes a fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.

The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. As of March 31, 2023, the fair value of loans held for sale of $319,248 included on the accompanying condensed consolidated balance sheet was increased by $5,435 from the aggregate principal balance of $313,813. As of December 31, 2022, the fair value of loans held for sale of $316,806 was decreased by $2,675 from the aggregate principal balance of $319,481.

The fair value measurement of NVRM's undesignated derivative instruments was as follows:

						March 31, 2023						December 31, 2022
Rate lock commitments:
Gross assets						$	46,992					$	32,246
Gross liabilities						3,499						20,946
Net rate lock commitments						$	43,493					$	11,300
Forward sales contracts:
Gross assets						$	912					$	4,843
Gross liabilities						15,087						20,903
Net forward sales contracts						$	(14,175)					$	(16,060)

As of both March 31, 2023 and December 31, 2022, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities".

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

The fair value measurement as of March 31, 2023 was as follows:

						Notional or Principal Amount						Assumed Gain From Loan Sale						Interest Rate Movement Effect						Servicing Rights Value						Security Price Change						Total Fair Value Measurement Gain/(Loss)
Rate lock commitments						$	2,263,642					$	4,000					$	12,007					$	27,486					$	—					$	43,493
Forward sales contracts						$	2,227,677					—						—						—						(14,175)						(14,175)
Mortgages held for sale						$	313,813					757						554						4,124						—						5,435
Total fair value measurement												$	4,757					$	12,561					$	31,610					$	(14,175)					$	34,753

The total fair value measurement as of December 31, 2022 was a net loss of $7,435. NVRM recorded fair value adjustments to income of $42,188 and $10,109 for the three months ended March 31, 2023 and March 31, 2022, respectively. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.

11. Debt

As of March 31, 2023, we had the following debt instruments outstanding:

Senior Notes

As of March 31, 2023, we had Senior Notes with an aggregate principal balance of $900,000. The Senior Notes mature on May 15, 2030 and bear interest at 3.00%, payable semi-annually in arrears on May 15 and November 15. The Senior Notes were issued in three separate issuances, $600,000 issued at a discount to yield 3.02%, and the two additional issuances totaling $300,000 issued at a premium to yield 2.00%. The Senior Notes have been reflected net of the unamortized discount or premium, as applicable, and the unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.

Credit Agreement

We have an unsecured Credit Agreement (the “Credit Agreement”), which provides for aggregate revolving loan commitments of $300,000 (the “Facility”). 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 approximately $13,300 was outstanding at March 31, 2023. The Credit Agreement termination date is February 12, 2026. There were no borrowings outstanding under the Facility at March 31, 2023.

Repurchase Agreement

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 agreement (the “Repurchase Agreement”), which is non-recourse to NVR. The Repurchase Agreement provides for loan purchases up to $150,000, subject to certain sub-limits. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale.

The Repurchase Agreement expires on July 19, 2023. At March 31, 2023, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement and there were no borrowings outstanding.

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

12. Commitments and Contingencies

We are involved in various litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Legal costs incurred in connection with outstanding litigation are expensed as incurred.

13. Leases

We have operating leases for our corporate and division offices, production facilities, model homes, and certain office and production equipment. Additionally, we have finance leases for certain plant equipment and one of our production facilities which are recorded in homebuilding "Property, plant and equipment, net" and "Accrued expenses and other liabilities" on the accompanying condensed consolidated balance sheets. Our finance lease ROU assets and finance lease liabilities were $13,492 and $14,851, respectively, as of March 31, 2023, and $13,745 and $15,002, respectively, as of December 31, 2022. Our leases have remaining lease terms of up to 17.4 years, some of which include options to extend the lease for up to 20 years, and some of which include options to terminate the lease.

We recognize operating lease expense on a straight-line basis over the lease term. We have elected to use the portfolio approach for certain equipment leases which have similar lease terms and payment schedules. Additionally, for certain equipment we account for the lease and non-lease components as a single lease component. Our sublease income is de minimis.

We have certain leases, primarily the leases of model homes, which have initial lease terms of twelve months or less ("Short-term leases"). We elected to exclude these leases from the recognition requirements under Topic 842, and these leases have not been included in our recognized ROU assets and lease liabilities.

The components of lease expense were as follows:

						Three Months Ended March 31,
						2023						2022
Lease expense
Operating lease expense						$	9,140					$	8,101
Finance lease expense:
Amortization of ROU assets						502						464
Interest on lease liabilities						105						104
Short-term lease expense						7,492						6,332
Total lease expense						$	17,239					$	15,001

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

Other information related to leases was as follows:

						Three Months Ended March 31,
						2023						2022
Supplemental Cash Flows Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases						$	7,316					$	7,169
Operating cash flows from finance leases						105						104
Financing cash flows from finance leases						400						356
ROU assets obtained in exchange for lease obligations:
Operating leases						$	13,247					$	5,813
Finance leases						$	249					$	272
						March 31, 2023						December 31, 2022
Weighted-average remaining lease term (in years):
Operating leases						6.0						6.0
Finance leases						10.6						10.8
Weighted-average discount rate:
Operating leases						3.8		%				3.6		%
Finance leases						2.9		%				2.9		%

14. Income Taxes

Our effective tax rate for the three months ended March 31, 2023 was 20.6% compared to 24.7% for the three months ended March 31, 2022. The decrease in the effective tax rate quarter over quarter is primarily attributable to recognizing a higher income tax benefit related to excess tax benefits from stock option exercises in the first quarter of 2023. For the three months ended March 31, 2023 and 2022, we recognized $23,245 and $8,446, respectively, in such income tax benefits.