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

We continue to experience strong demand for our products as new orders increased 12% over the prior year for the nine months ended September 30, 2021. While new orders were 17% lower than the prior year for the three months ended September 30, 2021, the decrease was driven primarily by a 14% reduction in community count in combination with Company actions to strategically manage the pace of sales to better align with current production levels. The favorable demand for new housing has been driven by mortgage interest rates near historical lows, a limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers or to relocate from higher cost geographical regions. As a result, our order backlog increased 33% in units and 56% in dollars as of September 30, 2021 over the prior year.

Home closings increased 9% and 14% in the three and nine months ended September 30, 2021, respectively, compared with the prior year periods. The higher closing volume is despite significant disruption in the homebuilding supply chain, including the availability of certain materials and construction labor combined with delays in municipal approvals and inspections, which has elongated the production cycle of the homes we are constructing. While we are working with our supply partners, have increased our speculative housing starts, and have hired additional construction and customer service employees, our production cycle times have extended in the majority of our markets due to the challenges referenced above. Due to these supply chain challenges, we are moderating lot releases and the pace of new orders in the majority of our communities in order to balance sales volume and production capacity to reduce backlog durations. We believe these conditions will continue to impact our industry for at least the next few quarters.

We are also facing cost pressures related to labor and materials, due in large part to a shortage of workers and supply chain challenges resulting from ongoing effects of the COVID-19 pandemic and other macroeconomic factors. Specifically, the cost of lumber more than quadrupled from mid-2020 to mid-2021. While the cost of lumber has declined significantly since peaking in May 2021, it remains elevated compared to historical norms, and the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged. We also continue to experience significant challenges with the cost and availability of windows, siding, and appliances, among other supply categories. To date, we have been, and believe we will continue to be, able to increase pricing to offset the majority of such cost increases due to ongoing high consumer demand.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, or its related impacts on overall economic conditions or the global supply chain, will last. As a result, the unpredictability of the current economic and public health conditions will continue to evolve. However, all of our operations continue to function at effectively full capacity subject to health and safety protocols, and we remain optimistic about future housing demand and our ability to continue expanding our business. Due to the higher demand and long municipal entitlement timelines, the number of our active communities continues to decrease as we close communities at a pace faster than we are opening new ones. While we have increased our investments in land acquisition and development, we expect that the number of our active communities will not begin to increase meaningfully until 2022.

Consolidated Operations

The following is a summary of our operating results by line of business ($000's omitted, except per share data):

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2021						2020						2021						2020
Income before income taxes:
Homebuilding			$	571,763					$	420,103					$	1,487,486					$	1,060,906
Financial Services			48,639						64,064						166,442						144,038
Income before income taxes			620,402						484,167						1,653,928						1,204,944
Income tax expense			(144,853)						(67,769)						(370,873)						(236,216)
Net income			$	475,549					$	416,398					$	1,283,055					$	968,728
Per share data - assuming dilution:
Net income			$	1.82					$	1.54					$	4.85					$	3.56

*•*Homebuilding income before income taxes for the three and nine months ended September 30, 2021 increased 36% and 40%, respectively, compared with the same periods in 2020, respectively. The results are primarily the result of increased closings, higher gross margins, and improved overhead leverage in 2021. The results also include

insurance adjustments of $53.7 million for the nine months ended September 30, 2021, compared to $59.4 million for the nine months ended September 30, 2020 (see Note 8). This benefit in 2020 was partially offset by severance expense of $10.4 million for the nine months ended September 30, 2020, and a goodwill impairment charge totaling $20.2 million (see Note 1) in the nine months ended September 30, 2020. Results for the nine months ended September 30, 2021 also include a loss on debt retirement of $61.5 million (see Note 4).

• Financial Services income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of increased competition in 2021 resulting in lower revenue per loan. For the nine months ended September 30, 2021, Financial Services income before income taxes increased 16% compared with the same period in 2020 as a result of higher volumes, which largely resulted from increased homebuilding volumes, partially offset by the lower revenue per loan.

*•*Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020. Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense and benefits associated with federal energy efficient home credits. Income tax expense in the three and nine months ended September 30, 2020 includes benefits of $53.2 million and $58.0 million, respectively, associated with the extension of federal energy efficient homes tax credits, including to homes closed in prior open tax years. The effective tax rate for the nine months ended September 30, 2021 also reflects a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

Homebuilding Operations

The following presents selected financial information for our Homebuilding operations ($000’s omitted):

			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2021						2021 vs. 2020						2020						2021						2021 vs. 2020						2020
Home sale revenues			$	3,324,483					18		%				$	2,823,921					$	9,156,371					22		%				$	7,517,453
Land sale and other revenues			63,085						161		%				24,165						123,321						76		%				70,042
Total Homebuilding revenues			3,387,568						19		%				2,848,086						9,279,692						22		%				7,587,495
Home sale cost of revenues (a)			(2,443,074)						15		%				(2,131,741)						(6,754,204)						18		%				(5,706,814)
Land sale and other cost of revenues			(47,483)						132		%				(20,502)						(103,313)						86		%				(55,558)
Selling, general, and administrative expenses ("SG&A") (b)			(320,506)						18		%				(271,257)						(864,478)						18		%				(731,785)
Loss on debt retirement			—						(c)						—						(61,469)						(c)						—
Goodwill impairment			—						(c)						—						—						(c)						(20,190)
Other expense, net			(4,742)						6		%				(4,483)						(8,742)						(29)		%				(12,242)
Income before income taxes			$	571,763					36		%				$	420,103					$	1,487,486					40		%				$	1,060,906
Supplemental data:
Gross margin from home sales			26.5		%				200 bps						24.5		%				26.2		%				210 bps						24.1		%
SG&A as a percentage of home sale revenues			9.6		%				—						9.6		%				9.4		%				(30) bps						9.7		%
Closings (units)			7,007						9		%				6,454						20,283						14		%				17,764
Average selling price			$	474					8		%				$	438					$	451					7		%				$	423
Net new orders (d):
Units			6,796						(17)		%				8,202						24,970						12		%				22,219
Dollars			$	3,780,354					4		%				$	3,634,158					$	12,668,805					32		%				$	9,579,982
Cancellation rate			10		%										12		%				8		%										15		%
Average active communities			768						(14)		%				892						804						(9)		%				884
Backlog at September:
Units																					19,845						33		%				14,962
Dollars																					$	10,305,614					56		%				$	6,598,334

*(a)*Includes the amortization of capitalized interest.

*(b)*Includes insurance adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8**), and severance expense of $10.4 million in the nine months ended September 30, 2020.

*(c)*Percentage not meaningful.

*(d)*Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

Home sale revenues

Home sale revenues for the three and nine months ended September 30, 2021 were higher than the prior year periods by $500.6 million and $1.6 billion, respectively. For the three months ended September 30, 2021, the 18% increase was attributable to a 9% increase in closings combined with an 8% increase in average selling price. For the nine months ended September 30, 2021, the 22% increase was attributable to a 14% increase in closings combined with a 7% increase in average selling price. The increase in closings was primarily the result of favorable demand conditions, including a large backlog of orders. Beginning in March 2020, the COVID-19 pandemic began to unfavorably impact the demand environment. However, demand improved significantly beginning in June 2020 and has remained favorable. The higher average selling price reflects the impact

of pricing actions taken in response to the higher demand as well as increased input costs, partially offset by a small increase in the mix of first-time buyer homes, which typically carry a lower sales price.

Home sale gross margins

Home sale gross margins were 26.5% and 26.2% for the three and nine months ended September 30, 2021, respectively, compared to 24.5% and 24.1% for the three and nine months ended September 30, 2020, respectively. Gross margins for the three and nine months ended September 30, 2021 remained higher than prior year levels and reflect a combination of factors, including: strong consumer demand, the low mortgage interest rate environment, and limited supplies of new and existing housing inventory. As a result, the pricing environment remains strong, which has allowed us to effectively manage pressure in house and land costs through pricing actions. While costs remain elevated, we have been able to more than offset these cost increases through price increases. Additionally, while speculative home sales (homes started prior to receipt of a customer order) remain the minority of our operations, the current environment is providing opportunities for additional pricing and relative margin gains related to such homes.

Land sale and other revenues

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale and other revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales and other revenues contributed income of $15.6 million and $20.0 million for the three and nine months ended September 30, 2021, respectively, compared to $3.7 million and $14.5 million for the three and nine months ended September 30, 2020, respectively. Income in the three and nine months ended September 30, 2021 included a gain of $12.9 million related to a land sale transaction in California that had been in the entitlement process for a number of years.

SG&A

SG&A as a percentage of home sale revenues was 9.6% and 9.4% for the three and nine months ended September 30, 2021, respectively, compared with 9.6% and 9.7% for the three and nine months ended September 30, 2020, respectively. The gross dollar amount of our SG&A increased $49.2 million, or 18%, for the three months ended September 30, 2021 compared to September 30, 2020, and increased $132.7 million, or 18%, for the nine months ended September 30, 2021 compared to September 30, 2020. The change in gross dollars in 2021 resulted from the higher production volume primarily as the result of higher sales commissions expense. The improvement in year-to-date SG&A as a percentage of home sale revenues is primarily attributable to leverage gained from the higher revenues. This overhead leverage was partially offset in 2021 by higher headcount to support the increased production volume as well as higher incentive compensation accruals due to the Company's strong operating performance. The nine months ended September 30, 2020 also included severance expense of $10.3 million as we took actions in the second quarter of 2020 to reduce overhead expenses due to the disruption caused by the early stages of the COVID-19 pandemic.

Other expense, net

Other expense, net includes the following ($000’s omitted):

			Three Months Ended												Nine Months Ended
September 30,												September 30,
2021						2020						2021						2020
Write-offs of deposits and pre-acquisition costs			$	(3,567)					$	(1,692)					$	(6,801)					$	(8,335)
Amortization of intangible assets			(3,612)						(5,041)						(13,571)						(14,643)
Interest income			436						891						1,541						6,024
Interest expense			(115)						(225)						(387)						(4,022)
Equity in earnings of unconsolidated entities			604						336						5,620						1,238
Miscellaneous, net			1,512						1,248						4,856						7,496
Total other expense, net			$	(4,742)					$	(4,483)					$	(8,742)					$	(12,242)

Net new orders

Net new orders in units decreased 17% while net new orders in dollars increased 4% for the three months ended September 30, 2021 as compared with the prior year period. Net new orders in units increased 12% while net new orders in dollars increased 32% for the nine months ended September 30, 2021 as compared with the prior year period. The net new order volume in 2021 reflects favorable demand conditions partially offset by a lower community count, as more fully discussed above. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 10% and 8% for the three and nine months ended September 30, 2021, respectively, and 12% and 15% for the same periods in 2020. Ending backlog dollars, which represents orders for homes that have not yet closed, increased 56% at September 30, 2021 compared with September 30, 2020.

Homes in production

The following is a summary of our homes in production:

			September 30, 2021						September 30, 2020
Sold			15,676						9,696
Unsold
Under construction			3,017						1,405
Completed			109						350
			3,126						1,755
Models			1,212						1,277
Total			20,014						12,728

The number of homes in production at September 30, 2021 was 57% higher than at September 30, 2020. The increase in homes under production is the result of the significant increase in demand, coupled with elongated cycle times due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities. The higher level of unsold homes, or speculative homes, under construction reflects a conscious decision to increase our housing starts of speculative units in response to the noted supply chain challenges and to meet demand. The lower unsold completed inventory reflects our ability to sell these speculative units given the strong demand environment.

Controlled lots

The following is a summary of our lots under control at September 30, 2021 and December 31, 2020:

			September 30, 2021																		December 31, 2020
			Owned						Optioned						Controlled						Owned						Optioned						Controlled
Northeast			4,739						7,305						12,044						4,956						4,001						8,957
Southeast			15,621						25,803						41,424						15,051						18,248						33,299
Florida			23,135						34,813						57,948						20,737						24,396						45,133
Midwest			12,186						17,294						29,480						9,728						14,734						24,462
Texas			19,267						20,606						39,873						15,923						17,841						33,764
West			27,882						13,973						41,855						24,968						9,769						34,737
Total			102,830						119,794						222,624						91,363						88,989						180,352
Developed (%)			38		%				14		%				25		%				43		%				16		%				30		%

While competition for well-positioned land is robust, we continue to pursue land investments that we believe can achieve appropriate risk-adjusted returns on invested capital and have increased our controlled lot count as the result of the strong demand environment. Additionally, we continue to seek to increase the percentage of our lots that are controlled via land option agreement. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. The remaining purchase price under our land option agreements totaled $5.3 billion at September 30, 2021.

These land option agreements generally may be canceled at our discretion and in certain cases extend over several years. Our maximum exposure related to these land option agreements is generally limited to our deposits and pre-acquisition costs, which totaled $354.3 million, of which $19.4 million is refundable, at September 30, 2021.

Homebuilding Segment Operations

As of September 30, 2021, we conducted our operations in 40 markets located throughout 23 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

Northeast:						Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia
Southeast:						Georgia, North Carolina, South Carolina, Tennessee
Florida:						Florida
Midwest:						Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio
Texas:						Texas
West:						Arizona, California, Nevada, New Mexico, Washington

The following tables present selected financial information for our reportable Homebuilding segments:

			Operating Data by Segment ($000's omitted)
			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2021						2021 vs. 2020						2020						2021						2021 vs. 2020						2020
Home sale revenues:
Northeast			$	273,206					13		%				$	242,758					$	735,418					35		%				$	546,437
Southeast			587,292						36		%				432,072						1,539,928						21		%				1,271,001
Florida			707,990						17		%				605,731						2,072,344						25		%				1,655,034
Midwest			504,273						23		%				410,384						1,332,407						28		%				1,039,114
Texas			412,201						15		%				358,177						1,255,377						18		%				1,067,681
West			839,521						8		%				774,799						2,220,897						15		%				1,938,186
			$	3,324,483					18		%				$	2,823,921					$	9,156,371					22		%				$	7,517,453
Income (loss) before income taxes (a)****:
Northeast			$	53,410					35		%				$	39,442					$	132,604					72		%				$	76,995
Southeast			109,407						58		%				69,275						274,174						39		%				196,798
Florida (b)			133,642						26		%				106,394						382,682						48		%				258,991
Midwest			72,537						16		%				62,638						196,205						42		%				137,707
Texas			71,062						10		%				64,646						221,099						24		%				178,150
West			173,137						42		%				121,974						403,039						44		%				279,393
Other homebuilding (c)			(41,432)						(6)		%				(44,266)						(122,317)						(82)		%				(67,128)
			$	571,763					36		%				$	420,103					$	1,487,486					40		%				$	1,060,906

*(a)*Includes land-related charges as summarized in the table below.

(b) Includes goodwill impairment charge totaling $20.2 million in the nine months ended September 30, 2020.

(c) Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments. Other homebuilding also includes insurance adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8**). Other homebuilding also includes a loss on debt retirement of $61.5 million in the nine months ended September 30, 2021 (see Note 4**).

			Operating Data by Segment ($000's omitted)
			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2021						2021 vs. 2020						2020						2021						2021 vs. 2020						2020
Closings (units):
Northeast			472						10		%				428						1,286						29		%				998
Southeast			1,278						21		%				1,057						3,507						14		%				3,089
Florida			1,502						5		%				1,427						4,614						15		%				4,017
Midwest			1,123						18		%				950						3,004						22		%				2,466
Texas			1,276						10		%				1,162						4,020						15		%				3,484
West			1,356						(5)		%				1,430						3,852						4		%				3,710
			7,007						9		%				6,454						20,283						14		%				17,764
Average selling price:
Northeast			$	579					2		%				$	567					$	572					4		%				$	548
Southeast			460						12		%				409						439						7		%				411
Florida			471						11		%				424						449						9		%				412
Midwest			449						4		%				432						444						5		%				421
Texas			323						5		%				308						312						2		%				306
West			619						14		%				542						577						10		%				522
			$	474					8		%				$	438					$	451					7		%				$	423
Net new orders - units:
Northeast			368						(38)		%				591						1,451						2		%				1,422
Southeast			1,085						(14)		%				1,255						4,010						15		%				3,491
Florida			1,844						(1)		%				1,868						6,451						28		%				5,041
Midwest			1,075						(14)		%				1,243						3,936						25		%				3,158
Texas			1,117						(33)		%				1,673						4,468						(3)		%				4,613
West			1,307						(17)		%				1,572						4,654						4		%				4,494
			6,796						(17)		%				8,202						24,970						12		%				22,219
Net new orders - dollars:
Northeast			$	221,016					(34)		%				$	336,514					$	864,079					9		%				$	796,058
Southeast			588,400						11		%				529,037						1,966,434						35		%				1,452,429
Florida			1,043,871						30		%				803,858						3,308,173						58		%				2,093,957
Midwest			538,621						(2)		%				550,500						1,856,704						36		%				1,370,247
Texas			463,727						(10)		%				515,721						1,655,023						19		%				1,389,186
West			924,719						3		%				898,528						3,018,392						22		%				2,478,105
			$	3,780,354					4		%				$	3,634,158					$	12,668,805					32		%				$	9,579,982

			Operating Data by Segment ($000's omitted)
			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2021						2021 vs. 2020						2020						2021						2021 vs. 2020						2020
Cancellation rates:
Northeast			9		%										7		%				7		%										10		%
Southeast			6		%										7		%				6		%										11		%
Florida			8		%										12		%				7		%										14		%
Midwest			7		%										8		%				6		%										11		%
Texas			16		%										15		%				12		%										18		%
West			13		%										18		%				11		%										19		%
			10		%										12		%				8		%										15		%
Unit backlog:
Northeast																					1,118						10		%				1,013
Southeast																					2,843						25		%				2,267
Florida																					5,491						65		%				3,330
Midwest																					3,131						40		%				2,232
Texas																					3,501						18		%				2,979
West																					3,761						20		%				3,141
																					19,845						33		%				14,962
Backlog dollars:
Northeast																					$	689,984					16		%				$	597,318
Southeast																					1,457,415						51		%				964,896
Florida																					2,863,695						102		%				1,417,185
Midwest																					1,514,932						54		%				983,110
Texas																					1,380,737						51		%				912,372
West																					2,398,851						39		%				1,723,453
																					$	10,305,614					56		%				$	6,598,334

			Operating Data by Segment ($000’s omitted)
			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2021						2020						2021						2020
Land-related charges (a)****:
Northeast			$	223					$	419					$	357					$	5,264
Southeast			1,915						725						3,253						2,401
Florida			209						108						642						1,089
Midwest			477						190						969						1,466
Texas			141						82						932						1,068
West			602						170						667						1,844
Other homebuilding			—						54						—						798
			$	3,567					$	1,748					$	6,820					$	13,930

(a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.

Northeast

For the third quarter of 2021, Northeast home sale revenues increased by 13% when compared with the prior year period due to a 10% increase in closings combined with a 2% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price was mixed among markets. Income before income taxes increased 35% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across the majority of markets. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Northeast home sale revenues increased by 35% when compared with the prior year period due to a 29% increase in closings combined with a 4% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 72% primarily due to increased revenues, as well as improved gross margins which occurred across all markets and improved overhead management which occurred across the majority of markets. Net new orders increased across the majority of markets.

Southeast

For the third quarter of 2021, Southeast home sale revenues increased 36% compared with the prior year period as the result of a 21% increase in closings combined with a 12% increase in average selling price. The increase in closings occurred across the majority of markets, while the increase in average selling price occurred across all markets. Income before income taxes increased 58% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Southeast home sale revenues increased 21% compared with the prior year period as the result of a 14% increase in closings combined with a 7% increase in average selling price. The increase in closings and average selling price occurred across all markets. Income before income taxes increased 39% primarily due to increased revenues, as well as improved gross margins which occurred across the majority of markets. Net new orders increased across all markets.

Florida

For the third quarter of 2021, Florida home sale revenues increased 17% compared with the prior year period due to a 5% increase in closings combined with an 11% increase in the average selling price. The increase in closings occurred across the majority of markets, while the increase in average selling price occurred across all markets. Income before income taxes increased 26% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets except North Florida.

For the nine months ended September 30, 2021, Florida home sale revenues increased 25% compared with the prior year period due to a 15% increase in closings combined with an 9% increase in the average selling price. The increase in closings and average selling price occurred across all markets. Income before income taxes increased 48% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets, combined with the impact of a goodwill impairment charge of $20.2 million in the nine months ended September 30, 2020 (see Note 1). Net new orders increased across all markets.

Midwest

For the third quarter of 2021, Midwest home sale revenues increased 23% compared with the prior year period due to a 18% increase in closings combined with a 4% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 16% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Midwest home sale revenues increased 28% compared with the prior year period due to a 22% increase in closings combined with a 5% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 42% primarily due to increased revenues as well as improved gross margins which occurred the majority of markets. Net new orders increased across all markets.

Texas

For the third quarter of 2021, Texas home sale revenues increased 15% compared with the prior year period due to a 10% increase in closings combined with a 5% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 10% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Texas home sale revenues increased 18% compared with the prior year period due to a 15% increase in closings combined with a 2% increase in the average selling price. The increase in closings occurred across the majority of markets, while the increase in average selling price occurred in all markets. Income before income taxes increased 24% primarily due to increased revenues, as well as improved gross margins and improved overhead management, which occurred across the majority of markets. Net new orders decreased across all markets except Dallas and Austin.

West

For the third quarter of 2021, West home sale revenues increased 8% compared with the prior year period due to a 14% increase in average selling price partially offset by a 5% decrease in closings. The decrease in closings occurred across the majority of markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 42% primarily due to increased revenues, improved overhead management and gross margins across the majority of markets, and gains of $12.9 million related to a land sale transaction in California*.* Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, West home sale revenues increased 15% compared with the prior year period due to a 4% increase in closings combined with an 10% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 44% primarily due to increased revenues, improved overhead management and gross margins across all markets, and gains of $12.9 million related to a land sale transaction in California. Net new orders increased across the majority of markets.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage LLC ("Pulte Mortgage") and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to support our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding as Homebuilding customers continue to account for substantially all of its business. We believe that our mortgage capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities, excluding cash closings, from our Homebuilding operations is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000's omitted):

			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2021						2021 vs. 2020						2020						2021						2021 vs. 2020						2020
Mortgage revenues			$	71,238					(20)		%				$	88,819					$	230,505					11		%				$	206,964
Title services revenues			16,818						13		%				14,940						48,565						17		%				41,465
Insurance brokerage commissions			3,426						10		%				3,112						9,562						23		%				7,794
Total Financial Services revenues			91,482						(14)		%				106,871						288,632						13		%				256,223
Expenses			(42,835)						—		%				(42,807)						(122,921)						10		%				(112,135)
Other income (expense), net			(8)						(a)						—						731						(a)						(50)
Income before income taxes			$	48,639					(24)		%				$	64,064					$	166,442					16		%				$	144,038
Total originations:
Loans			5,078						5		%				4,858						15,082						14		%				13,202
Principal			$	1,810,722					11		%				$	1,625,250					$	5,186,913					21		%				$	4,274,619

*(a)*Percentage not meaningful

			Nine Months Ended
			September 30,
			2021						2020
Supplemental data:
Capture rate			86.1		%				86.5		%
Average FICO score			751						751
Funded origination breakdown:
Government (FHA, VA, USDA)			20		%				21		%
Other agency			73		%				71		%
Total agency			93		%				92		%
Non-agency			7		%				8		%
Total funded originations			100		%				100		%

Revenues

Mortgage interest rates have been at or near historically low levels through 2020 and the first nine months of 2021. In the three and nine months ended September 30, 2021, loan margins are lower than the prior year periods due to competition driven by a reduction in refinance volume within the mortgage industry, which has lowered gains from the sale of mortgages in the secondary market. Total Financial Services revenues for the three months ended September 30, 2021 decreased 14% compared with the same period in 2020 primarily as a result of lower revenue per loan due to this increased competition, partially offset by higher loan origination volume resulting from Homebuilder volume growth. Financial Services revenues for the nine months ended September 30, 2021 increased 13% compared with the same period in 2020 primarily as a result of higher loan origination volume due to Homebuilder volume growth, partially offset by lower revenue per loan.

Income before income taxes

Income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of lower revenue per loan, partially offset by higher volume. For the nine months ended September 30, 2021, income before income taxes increased 16% compared with the same period in 2020 as the result of higher volume, partially offset by lower revenue per loan.

Income Taxes

Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020. The 2020 effective tax rates are lower than the 2021 effective tax rates for the same periods primarily due to federal energy efficient home credits.

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing other available financing sources, including revolving bank credit and securities offerings.

At September 30, 2021, we had unrestricted cash and equivalents of $1.6 billion, restricted cash balances of $56.3 million, and $717.7 million available under our Revolving Credit Facility. We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments. Given the financial resources available to us, we believe that we have adequate liquidity to continue funding our operations for the foreseeable future.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 22.4% at September 30, 2021, as compared with 29.5% at December 31, 2020.

Unsecured senior notes

We had $2.0 billion and $2.7 billion of unsecured senior notes outstanding at September 30, 2021 and December 31, 2020, respectively, with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.

In the nine months ended September 30, 2021, we accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer. The retirement resulted in a loss of $61.5 million, which includes the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees. We also retired $426.0 million of senior notes at their scheduled maturity date.

Other notes payable

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $71.4 million and $40.1 million at September 30, 2021 and December 31, 2020, respectively. These notes have maturities ranging up to four years, are secured by the applicable land positions to which they relate, and generally have no recourse to other assets. The stated interest rates on these notes range up to 6%.

Revolving credit facility

We maintain a revolving credit facility (the "Revolving Credit Facility") maturing in June 2023 that has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, with a sublimit of $500.0 million at September 30, 2021. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein. As a precautionary measure during the initial phase of the COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. In June 2020, we repaid the full outstanding balance of $700.0 million. We had no borrowings outstanding at either September 30, 2021 or December 31, 2020, and $282.3 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at September 30, 2021 and December 31, 2020, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2021, we were in compliance with all covenants. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $717.7 million and $750.3 million at September 30, 2021 and December 31, 2020, respectively.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement with third party lenders (as amended, the "Repurchase Agreement") that matures on July 28, 2022. The maximum aggregate commitment was $580.0 million at September 30, 2021, which will increase to $650.0 million during the seasonally high borrowing period from December 27, 2021 through January 13, 2022. At all other times, the maximum aggregate commitment ranges from $460.0 million to $550.0 million. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $476.5 million and $411.8 million outstanding under the Repurchase Agreement at September 30, 2021 and December 31, 2020, respectively, and was in compliance with all of its covenants and requirements as of such dates.

Dividends and share repurchase program

In the nine months ended September 30, 2021, we declared cash dividends totaling $110.3 million and repurchased 12.0 million shares under our repurchase authorization for $614.3 million. On April 26, 2021, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At September 30, 2021, we had remaining authorization to repurchase $740.6 million of common shares.

Cash flows

Operating activities

Net cash provided by operating activities for the nine months ended September 30, 2021 was $548.2 million. Generally, the primary drivers of our cash flow from operations are profitability and changes in the levels of inventory and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. The positive cash flow from operations for the nine months ended September 30, 2021 was primarily due to our net income of $1.3 billion, which included various non-cash items including a loss on debt retirement of $61.5 million, partially offset by a net increase in inventories of $1.1 billion, which was primarily attributable to higher house inventory in production resulting from higher sales activity and extended production cycle times combined with higher investment in land inventory to support future growth.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $1.3 billion. The positive cash flow from operations for the nine months ended September 30, 2020 was primarily due to our net income of $968.7 million, which included various non-cash items, a seasonal $108.2 million decrease in residential mortgage loans available-for-sale, and a net decrease in inventories of $84.3 million. The decrease in inventories resulted from our deliberate efforts to reduce inventory spend, especially land acquisition and development spend, during the second quarter of 2020 in response to the COVID-19 pandemic. While a seasonal increase in house inventory partially offset the reduced land expenditures, the size of the seasonal increase was lower as we tightly managed production levels during the second quarter of 2020.

Investing activities

Net cash used in investing activities for the nine months ended September 30, 2021 was $86.5 million. These cash outflows primarily reflected a $10.4 million deferred payment related to the acquisition of Innovative Construction Group ("ICG"), $35.8 million of investments in unconsolidated entities, as well as capital expenditures of $52.1 million related to our ongoing investments in new communities and certain information technology applications. These outflows were partially offset by distributions from unconsolidated entities of $11.5 million.

Net cash used in investing activities for the nine months ended September 30, 2020 was $107.2 million. These cash outflows primarily reflected our acquisition of ICG in January 2020 for $83.3 million, as well as capital expenditures of $46.9 million related to our ongoing investments in new communities and certain information technology applications. These outflows were partially offset by distributions from unconsolidated entities of $19.9 million.

Financing activities

Net cash used in financing activities for the nine months ended September 30, 2021 totaled $1.5 billion. These cash outflows resulted primarily from the repurchase of 12.0 million common shares for $614.3 million under our share repurchase authorization, repayments of debt totaling $797.4 million, and payments of $111.7 million in cash dividends. These outflows were partially offset by net borrowings of $64.7 million under the Repurchase Agreement to support higher loan originations resulting from growth in home closing volume.

Net cash used in financing activities for the nine months ended September 30, 2020 totaled $296.7 million. These cash outflows resulted primarily from the repurchase of 2.8 million common shares for $95.7 million under our share repurchase authorization, repayments of debt totaling $11.0 million, payments of $97.8 million in cash dividends, and net repayments of $77.5 million for borrowings under the Repurchase Agreement.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers. While we attempt to pass on increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

Seasonality

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations in the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our quarterly results for 2021 and 2020 are not necessarily indicative of results that may be achieved in the future.

Contractual Obligations and Commercial Commitments

There have been no material changes to our contractual obligations from those disclosed in our "Contractual Obligations and Commercial Commitments" contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of the retirement of $426 million, $200 million, and $100 million of unsecured senior notes previously scheduled to mature in March 2021, March 2026, and January 2027, respectively.

Supplemental Guarantor Financial Information

As of September 30, 2021, PulteGroup, Inc. had outstanding $2.0 billion principal amount of unsecured senior notes due at dates from March 2026 through February 2035 and no amounts outstanding on its Revolving Credit Facility.

All of our unsecured senior notes and the Revolving Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of PulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc. Our subsidiaries associated with our financial services operations and certain other subsidiaries do not guarantee the unsecured senior notes or the Revolving Credit Facility (collectively, "Non-Guarantor Subsidiaries"). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt.

A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that such Guarantor:

(a) incurred the guarantee with the intent of hindering, delaying or defrauding creditors; or

(b) received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of any one of the following is also true at the time thereof:

• such Guarantor was insolvent or rendered insolvent by reason of the issuance of the incurrence of the guarantee;

• the incurrence of the guarantee left such Guarantor with an unreasonably small amount of capital or assets to carry on its business;

• such Guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature;

• such Guarantor was a defendant in an action for money damages, or had a judgment for money damages docketed against it, if the judgment is unsatisfied after final judgment.

The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. However, in general, a court would deem a company insolvent if:

• the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair salable value of all of its assets;

• the present fair salable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

• it could not pay its debts as they became due.

The guarantees of the senior notes contain a provision to limit each Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. However, under recent case law, this provision may not be effective to protect such guarantee from being voided under fraudulent transfer law or otherwise determined to be unenforceable. If a court were to find that the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under that guarantee, could subordinate that guarantee to presently existing and future indebtedness of the Guarantor or could require the holders of the senior notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the senior notes.

Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the guarantees to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of senior notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of senior notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

The following tables present summarized financial information for PulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among PulteGroup, Inc. and the Guarantor Subsidiaries, as well as their investment in and equity in earnings from the Non-Guarantor Subsidiaries ($000’s omitted):

PulteGroup, Inc. and Guarantor Subsidiaries
Summarized Balance Sheet Data
ASSETS			September 30, 2021						December 31, 2020
Cash, cash equivalents, and restricted cash			$1,539,275						$2,429,639
House and land inventory			8,748,663						7,600,542
Total assets			11,369,170						11,028,911
LIABILITIES
Accounts payable, customer deposits, accrued and other liabilities			$2,528,501						$2,101,427
Notes payable			2,059,923						2,752,302
Amount due to Non-Guarantor Subsidiaries			55,142						12,208
Total liabilities			4,713,444						4,948,275

			Nine Months Ended
			September 30,
Summarized Statement of Operations Data			2021						2020
Revenues			$9,035,505						$7,424,736
Cost of revenues			6,664,370						5,631,840
Selling, general, and administrative expenses			852,397						713,360
Income before income taxes			1,427,182						1,040,803

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At September 30, 2021, we had outstanding letters of credit totaling $282.3 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.8 billion at September 30, 2021, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At September 30, 2021, these agreements had an aggregate remaining purchase price of $5.3 billion. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates in the nine months ended September 30, 2021 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.