NVR (NVR) 10-K 2016 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 1-12378

NVR, Inc.

(Exact Name of Registrant as Specified in its Charter)

Virginia	54-1394360
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)
11700 Plaza America Drive, Suite 500
Reston, Virginia	20190
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (703) 956-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock, par value $0.01 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☒    No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a Smaller Reporting Company)	Smaller Reporting Company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐    No  ☒

The aggregate market value of the voting stock held by non-affiliates of NVR, Inc. on June 30, 2016, the last business day of NVR, Inc.’s most recently completed second fiscal quarter, was approximately $6,489,296,000.

As of February 10, 2017 there were 3,704,206 total shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of NVR, Inc. to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to April 30, 2017 are incorporated by reference into Part III of this report.

NVR, Inc.

Form 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	8
Item 3.	Legal Proceedings	9
Item 4.	Mine Safety Disclosures	9
	Executive Officers of the Registrant	9
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	31
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A.	Controls and Procedures	33
Item 9B.	Other Information	33
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	33
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13.	Certain Relationships and Related Transactions, and Director Independence	34
Item 14.	Principal Accountant Fees and Services	34
PART IV
Item 15.	Exhibits and Financial Statement Schedules	35

PART I

Item 1. Business.

General

NVR, Inc., a Virginia corporation, was formed in 1980 as NVHomes, Inc. Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. To more fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We conduct our homebuilding activities directly. Our mortgage banking operations are operated primarily through a wholly owned subsidiary, NVR Mortgage Finance, Inc. (“NVRM”). Unless the context otherwise requires, references to “NVR”, “we”, “us” or “our” include NVR, Inc. and its consolidated subsidiaries.

We are one of the largest homebuilders in the United States. We operate in multiple locations in fourteen states and Washington, D.C., primarily in the eastern part of the United States. During 2016, approximately 23% and 11% of our home settlements occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, respectively, which accounted for approximately 30% and 13%, respectively, of our 2016 homebuilding revenues. Our homebuilding operations include the construction and sale of single-family detached homes, townhomes and condominium buildings under three trade names: Ryan Homes, NVHomes and Heartland Homes. Our Ryan Homes product is marketed primarily to first-time and first-time move-up buyers. Ryan Homes operates in twenty-nine metropolitan areas located in Maryland, Virginia, Washington, D.C., West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Florida, Ohio, New Jersey, Delaware, Indiana, Illinois and Tennessee. Our NVHomes and Heartland Homes products are marketed primarily to move-up and upscale buyers. NVHomes operates in Delaware and the Washington, D.C., Baltimore, MD, Philadelphia, PA and Raleigh, NC metropolitan areas. Heartland Homes operates in the Pittsburgh, PA metropolitan area. In 2016, our average price of a settled unit was approximately $381,200.

We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished building lots at market prices from various third party land developers pursuant to fixed price finished lot purchase agreements (“Lot Purchase Agreements”) that require deposits that may be forfeited if we fail to perform under the Lot Purchase Agreements. The deposits required under the Lot Purchase Agreements are in the form of cash or letters of credit in varying amounts and represent a percentage, typically ranging up to 10%, of the aggregate purchase price of the finished lots.

We believe that our lot acquisition strategy avoids the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of our intent not to acquire the finished lots under contract. Our sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provision contained within the Lot Purchase Agreements. We do not have any financial guarantees or completion obligations and we typically do not guarantee lot purchases on a specific performance basis under these Lot Purchase Agreements. None of the creditors of any of the development entities with which we have entered these Lot Purchase Agreements have recourse to our general credit. We generally seek to maintain control over a supply of lots believed to be suitable to meet our five-year business plan.

In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build. As a result, in certain specific strategic circumstances we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into a Lot Purchase Agreement with the developer to purchase the finished lots or hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all of our finished lot inventory using Lot Purchase Agreements with forfeitable deposits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K for additional discussion of lots controlled.�� In addition, see Notes 3, 4 and 5 in the accompanying consolidated financial statements included herein for additional information regarding Lot Purchase Agreements, JVs and land under development, respectively.

In addition to building and selling homes, we provide a number of mortgage-related services through our mortgage banking operations. Through operations in each of our homebuilding markets, NVRM originates mortgage loans almost exclusively for our homebuyers. NVRM generates revenues primarily from origination fees, gains on sales of loans and title fees. NVRM sells all of the mortgage loans it closes into the secondary markets on a servicing released basis.

1

Segment information for our homebuilding and mortgage banking businesses is included in Note 2 in the accompanying consolidated financial statements.

Current Business Environment

The housing market in 2016 continued the trend experienced in 2015 of steady new home demand. However, new home prices continued to be constrained due to the competitive market environment. The housing market also continues to face challenges from tight mortgage underwriting standards as well as from higher mortgage interest rates, which towards the end of 2016 began to move up from historical lows. We believe that a continuation of the housing market recovery is dependent upon a sustained overall economic recovery, driven by continued improvement in job and wage growth and household formation. For additional information and analysis of recent trends in our operations and financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Homebuilding

Products

We offer single-family detached homes, townhomes and condominium buildings with many different basic home designs. These home designs have a variety of elevations and numerous other options. Our homes combine traditional, transitional, cottage or urban exterior designs with contemporary interior designs and amenities, generally include two to four bedrooms and range from approximately 1,000 to 9,000 finished square feet. During 2016, the prices at which we settled homes ranged from approximately $140,000 to $1.8 million and averaged approximately $381,200. During 2015, our average price of homes settled was approximately $379,900.

Markets

Our four reportable homebuilding segments operate in the following geographic regions:

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

Backlog

Backlog totaled 6,884 units and approximately $2.7 billion at December 31, 2016 compared to backlog of 6,229 units and approximately $2.4 billion at December 31, 2015. Backlog, which represents homes sold but not yet settled with the customer, may be impacted by customer cancellations for various reasons that are beyond our control, such as the customer’s failure to obtain mortgage financing, inability to sell an existing home, job loss or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 16% in 2016 and 15% in both 2015 and 2014. Additionally, during each of 2016, 2015 and 2014, approximately 6% of a reporting quarter’s opening backlog balance cancelled during the quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur in future periods. Other than those units that are cancelled, we expect to settle substantially all of our December 31, 2016 backlog during 2017. See “Risk Factors” in Item 1A and “Seasonality” in Item 7 of this Form 10-K.

Further discussion of settlements, new orders and backlog activity by our homebuilding reportable segment for each of the last three years can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Construction

We utilize independent subcontractors under fixed price contracts to perform construction work on our homes. We use several independent subcontractors in our various markets and we are not dependent on any single subcontractor or on a small number of subcontractors.

Sales and Marketing

Our preferred marketing method is for customers to visit a furnished model home featuring many built-in options and a landscaped lot. The garages of these model homes are usually converted into temporary sales centers where alternative facades and floor plans are displayed and designs for other models are available for review. Sales representatives are compensated predominantly on a commission basis.

2

Regulation

We and our subcontractors must comply with various federal, state and local zoning, building, environmental, advertising and consumer credit statutes, rules and regulations, as well as other regulations and requirements in connection with our construction and sales activities. All of these regulations have increased the cost to produce and market our products, and in some instances, have delayed our developers’ ability to deliver finished lots to us. Counties and cities in which we build homes have at times declared moratoriums on the issuance of building permits and imposed other restrictions in the areas in which sewage treatment facilities and other public facilities do not reach minimum standards. In addition, our homebuilding operations are regulated in certain areas by restrictive zoning and density requirements that limit the number of homes that can be built within the boundaries of a particular area. To date, restrictive zoning laws and the imposition of moratoriums have not had a material adverse effect on our construction activities.

Competition and Market Factors

The housing industry is highly competitive. We compete with numerous homebuilders of varying size, ranging from local to national in scope, some of which have greater financial resources than we do. We also face competition from the home resale market. Our homebuilding operations compete primarily on the basis of price, location, design, quality, service and reputation. Historically, we have been one of the market leaders in each of the markets where we build homes.

The housing industry is cyclical and is affected by consumer confidence levels, prevailing economic conditions and interest rates. Other factors that affect the housing industry and the demand for new homes include: the availability and the cost of land, labor and materials; changes in consumer preferences; demographic trends; and the availability of mortgage finance programs. See “Risk Factors” in Item 1A of this Form 10-K for additional information regarding these risks.

We are dependent upon building material suppliers for a continuous flow of raw materials. Whenever possible, we utilize standard products available from multiple sources. In the past, such raw materials have been generally available to us in adequate supply.

Mortgage Banking

We provide a number of mortgage related services to our homebuilding customers through our mortgage banking operations. Our mortgage banking operations also include separate subsidiaries that broker title insurance and perform title searches in connection with mortgage loan closings for which they receive commissions and fees. Because NVRM originates mortgage loans almost exclusively for our homebuilding customers, NVRM is dependent on our homebuilding segment. In 2016, NVRM closed approximately 12,300 loans with an aggregate principal amount of approximately $4.0 billion as compared to approximately 10,900 loans with an aggregate principal amount of approximately $3.5 billion in 2015.

NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing released basis, typically within 30 days from the loan closing. NVRM is an approved seller/servicer for Fannie Mae (“FNMA”) mortgage loans and an approved seller/issuer of Ginnie Mae (“GNMA”), Freddie Mac (“FHLMC”), Department of Veterans Affairs (“VA”) and Federal Housing Administration (“FHA”) mortgage loans.

Regulation

NVRM is subject to the rules and regulations of FNMA, GNMA, FHLMC, VA and FHA. These rules and regulations restrict certain activities of NVRM. NVRM is currently eligible and expects to remain eligible to participate in such programs. In addition, NVRM is subject to regulation at the state and federal level, including regulations issued by the Consumer Financial Protection Bureau (the “CFPB”) with respect to specific origination, selling and servicing practices.

Competition and Market Factors

NVRM’s main competition comes from national, regional, and local mortgage bankers, mortgage brokers, credit unions and banks in each of these markets. NVRM competes primarily on the basis of customer service, variety of products offered, interest rates offered, prices of ancillary services and relative financing availability and costs.

Pipeline

NVRM’s mortgage loans in process that had not closed at December 31, 2016 and 2015 had an aggregate principal balance of approximately $1.8 billion and $1.6 billion, respectively. NVRM’s cancellation rate was approximately 34%, 29% and 31% in 2016, 2015 and 2014, respectively. We can provide no assurance that our historical loan cancellation rates are indicative of the actual loan cancellation rate that may occur in future periods. See “Risk Factors” in Item 1A in this Form 10-K for additional information about factors that could increase our cancellation rate.

3

Employees

At December 31, 2016, we employed approximately 4,900 full-time persons. None of our employees are subject to a collective bargaining agreement and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. All of the documents we file with the SEC may also be read and copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

Our principal internet website can be found at http://www.nvrinc.com. We make available free of charge on or through our website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC.

Our website also includes a corporate governance section which contains our Corporate Governance Guidelines (which includes our Directors’ Independence Standards), Code of Ethics, Charters for the Audit, Compensation, Corporate Governance and Nominating Committees of our Board of Directors, Policies and Procedures for the Consideration of Board of Director Candidates, and Policies and Procedures Regarding Communications with the NVR, Inc. Board of Directors, the Independent Lead Director and the Non-Management Directors as a Group. Additionally, amendments to and waivers from a provision of the Code of Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions will be disclosed on our website.

Forward-Looking Statements

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

Item 1A. Risk Factors.

Our business is affected by the risks generally incident to the residential construction business, including, but not limited to:

• actual and expected direction of interest rates, which affect our costs, the availability of construction financing, and long-term financing for potential purchasers of homes;

• the availability of mortgage financing;

• the availability of adequate land in desirable locations on favorable terms;

• unexpected changes in customer preferences; and

• changes in the national economy and in the local economies of the markets in which we operate.

All of these risks are discussed in detail below.

4

An economic downturn or decline in economic conditions could adversely affect our business and our results of operations.

Demand for new homes is sensitive to economic changes driven by conditions such as employment levels, job growth, consumer confidence and interest rates.  If the housing industry suffers a downturn, our sales may decline which could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.  

Interest rate movements, inflation and other economic factors can negatively impact our business.

High rates of inflation generally affect the homebuilding industry adversely because of their adverse impact on interest rates. High interest rates not only increase the cost of borrowed funds to homebuilders but also have a significant adverse effect on housing demand and on the affordability of permanent mortgage financing to prospective purchasers. We are also subject to potential volatility in the price of commodities that impact costs of materials used in our homebuilding business. Increases in prevailing interest rates could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Our financial results also are affected by the risks generally incident to our mortgage banking business, including interest rate levels, the impact of government regulation on mortgage loan originations and servicing and the need to issue forward commitments to fund and sell mortgage loans. Our homebuilding customers account for almost all of our mortgage banking business. The volume of our continuing homebuilding operations therefore affects our mortgage banking business.

Our mortgage banking business also is affected by interest rate fluctuations. We also may experience marketing losses resulting from daily increases in interest rates to the extent we are unable to match interest rates and amounts on loans we have committed to originate with forward commitments from third parties to purchase such loans. Increases in interest rates may have a material adverse effect on our mortgage banking revenue, profitability, stock performance, ability to service our debt obligations and future cash flows.

Our operations may also be adversely affected by other economic factors within our markets such as negative changes in employment levels, job growth, wage growth, consumer confidence and household formation and availability of mortgage financing, one or all of which could result in reduced demand or price depression from current levels. Such negative trends could have a material adverse effect on homebuilding operations.

These factors and thus, the homebuilding business, have at times in the past been cyclical in nature. Any downturn in the national economy or the local economies of the markets in which we operate could have a material adverse effect on our sales, profitability, stock performance and ability to service our debt obligations. In particular, during 2016, approximately 23% and 11% of our home settlements occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, respectively, which accounted for approximately 30% and 13%, respectively, of our 2016 homebuilding revenues. Thus, we are dependent to a significant extent on the economy and demand for housing in those areas.

Because almost all of our customers require mortgage financing, the availability of suitable mortgage financing could impair the affordability of our homes, lower demand for our products, and limit our ability to fully deliver our backlog.

Our business and earnings depend on the ability of our potential customers to obtain mortgages for the purchase of our homes. In addition, many of our potential customers must sell their existing homes in order to buy a home from us. The tightening of credit standards and the availability of suitable mortgage financing could prevent customers from buying our homes and could prevent buyers of our customers’ homes from obtaining mortgages they need to complete that purchase, either of which could result in our potential customers’ inability to buy a home from us. If our potential customers or the buyers of our customers’ current homes are not able to obtain suitable financing, the result could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

If our ability to sell mortgages to investors is impaired, we may be required to fund these commitments ourselves, or may not be able to originate loans at all.

Our mortgage banking business sells all of the loans it originates into the secondary market, usually within 30 days from the date of closing, and has up to $150 million available under a repurchase agreement to fund mortgage closings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Item 7 of this Form 10-K for more information about the repurchase agreement. In the event that disruptions to the secondary markets tighten or eliminate the available liquidity within the secondary markets for mortgage loans, or the underwriting requirements by our secondary market investors continue to become more stringent, our ability to sell future mortgages could decline and we could be required, among other things, to fund our commitments to our buyers with our own financial resources, which is limited, or require our home buyers to find another source of financing. The result of such secondary market disruption could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

5

If the market value of our inventory or controlled lot position declines, our profit could decrease and we may incur losses.

Inventory risk can be substantial for homebuilders. The market value of building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. We must continuously seek and make acquisitions of lots for expansion into new markets as well as for replacement and expansion within our current markets, which we generally accomplish by entering into Lot Purchase Agreements and paying forfeitable deposits under the Lot Purchase Agreements to developers for the contractual right to acquire the lots. In the event of adverse changes in economic or market conditions, we may cease further building activities in certain communities or restructure existing Lot Purchase Agreements, resulting in forfeiture of some or all of any remaining land contract deposit paid to the developer. We may also have significant impairments of land under development. The forfeiture of land contract deposits or inventory impairments may result in a loss that could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

If the underwriting quality of our mortgage originations is found to be deficient, our profit could decrease and we may incur losses.

We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market generally within 30 days from the date of closing. All of the loans that we originate are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. In the event that a substantial number of the loans that we have originated fall into default and the investors to whom we sold the loans determine that we did not underwrite the loans in accordance with their requirements, we could be required to repurchase the loans from the investor or indemnify the investor for any losses incurred. Any resulting losses could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

We may be subject to claims on mortgage loans sold to third parties.

Our mortgage banking operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to certain representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the type of collateral, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. The resolution of claims related to alleged breaches of these representations and warranties and repurchase claims could have a material adverse effect on our financial condition, cash flows and results of operations and could result in losses that exceed existing estimates and accruals. Because of the uncertainties inherent in estimating these matters, there can be no assurance that any amounts reserved will be adequate or that any potential inadequacies will not have a material adverse effect on our results of operations.

Our inability to secure and control an adequate inventory of lots could adversely impact our operations.

The results of our homebuilding operations depend upon our continuing ability to control an adequate number of homebuilding lots in desirable locations. There can be no assurance that an adequate supply of building lots will continue to be available to us on terms similar to those available in the past, or that we will not be required to devote a greater amount of capital to controlling building lots than we have historically. An insufficient supply of building lots in one or more of our markets, an inability of our developers to deliver finished lots in a timely fashion due to their inability to secure financing to fund development activities or for other reasons, or our inability to purchase or finance building lots on reasonable terms could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Volatility in the credit and capital markets may impact our ability to access necessary financing.

If we require working capital greater than that provided by our operations and our credit facility, we may be required to seek to increase the amount available under the facility or seek alternative financing, which might not be available on terms that are favorable or acceptable. If we are required to seek financing to fund our working capital requirements, volatility in credit or capital markets may restrict our flexibility to access financing. If we are at any time unsuccessful in obtaining sufficient capital to fund our planned homebuilding expenditures, we may experience a substantial delay in the completion of homes then under construction, or we may be unable to control or purchase finished building lots. Any delay could result in cost increases and could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Our mortgage banking operations depend in part on the availability, cost and other terms of mortgage financing facilities, and may be adversely affected by any shortage or increased cost of such financing. Additional or replacement financing might not be available on terms that are favorable or acceptable. Our mortgage banking operations are also dependent upon the securitization market for mortgage-backed securities, and could be materially adversely affected by any fluctuation or downturn in such market.

6

Our current indebtedness may impact our future operations.

Our existing indebtedness contains restrictive covenants and any future indebtedness may also contain such covenants. These covenants include, or could include, restrictions on our ability to create, incur, assume or guarantee secured debt, enter into sale and leaseback transactions and conditions related to mergers and/or the sale of assets. Substantial losses by us or other action or inaction by us or our subsidiaries could result in the violation of one or more of these covenants, which could result in decreased liquidity or a default on our current or future indebtedness, thereby having a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Government regulations and environmental matters could negatively affect our operations.

We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. These regulations may further increase the cost to produce and market our products. In addition, we have from time to time been subject to, and may also be subject in the future to, periodic delays in our homebuilding projects due to building moratoriums in the areas in which we operate or delays in receiving the necessary governmental approvals. Changes in regulations that restrict homebuilding activities in one or more of our principal markets could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

In addition, new housing developments are often subject to various assessments or impact fees for schools, parks, streets, highways and other public improvements. The cost of these assessments is subject to substantial change and could cause increases in the construction cost of our homes, which, in turn, could reduce our profitability.

We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. We are subject to a variety of environmental conditions that can affect our business and our homebuilding projects. The particular environmental laws that apply to any given homebuilding site vary greatly according to the location and environmental condition of the site and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, cause us to incur substantial compliance and other costs, or prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas, thereby adversely affecting our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Increased regulation of the mortgage industry could harm our future sales and earnings.

The mortgage industry remains under intense scrutiny and continues to face increasing regulation at the federal, state and local level. Potential changes to federal laws and regulations could have the effect of limiting the activities of FNMA and FHLMC, the entities that provide liquidity to the secondary mortgage market, which could lead to increases in mortgage interest rates. Tighter underwriting requirements and fee restrictions and the increasingly complex regulatory environment may negatively impact our mortgage loan origination business in the form of lower demand, decreased revenue and increased operating costs.

We are an approved seller/servicer of FNMA mortgage loans and an approved seller/issuer of GNMA, FHLMC, VA and FHA mortgage loans, and are subject to all of those agencies’ rules and regulations. Any significant impairment of our eligibility to sell/service these loans could have a material adverse impact on our mortgage operations. In addition, we are subject to regulation at the state and federal level with respect to specific origination, selling and servicing practices including the Real Estate Settlement and Protection Act. Adverse changes in governmental regulation may have a negative impact on our mortgage loan origination business.

We face competition in our homebuilding and mortgage banking operations.

The homebuilding industry is highly competitive. We compete with numerous homebuilders of varying size, ranging from local to national in scope, some of whom have greater financial resources than we do. We face competition:

• for suitable and desirable lots at acceptable prices;

• from selling incentives offered by competing builders within and across developments; and

• from the existing home resale market.

Our homebuilding operations compete primarily on the basis of price, location, design, quality, service and reputation.

The mortgage banking industry is also competitive. Our main competition comes from national, regional and local mortgage bankers, credit unions, banks and mortgage brokers in each of these markets. Our mortgage banking operations compete primarily on the basis of customer service, variety of products offered, interest rates offered, prices of ancillary services and relative financing availability and costs.

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We might not be able to continue to compete successfully in our homebuilding or mortgage banking operations. An inability to effectively compete may have an adverse impact on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

A shortage of building materials or labor, or increases in materials or labor costs may adversely impact our operations.

The homebuilding business has from time to time experienced building material and labor shortages, including fluctuating lumber prices and supply. In addition, strong construction market conditions could restrict the labor force available to our subcontractors and us in one or more of our markets. Significant increases in costs resulting from these shortages, or delays in construction of homes, could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

We rely on subcontractors to construct our homes. The failure of our subcontractors to properly construct our homes may be costly.

We engage subcontractors to perform the actual construction of our homes. Despite our quality control efforts, we may discover that our subcontractors have engaged in improper construction practices. The occurrence of such events could require us to repair the homes in accordance with our standards and as required by law. The cost of satisfying our legal obligations in these instances may be significant, and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.

Product liability litigation and warranty claims may adversely impact our operations.

Construction defect and home warranty claims are common and can represent a substantial risk for the homebuilding industry. The cost of insuring against construction defect and product liability claims, as well as the claims themselves, can be high. In addition, insurance companies limit coverage offered to protect against these claims. Further restrictions on coverage availability, or significant increases in premium costs or claims, could have a material adverse effect on our financial results.

We are subject to litigation proceedings that could harm our business if an unfavorable ruling were to occur.

From time to time, we may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. As described in, but not limited to, Item 3, “Legal Proceedings” of this Form 10-K, we are currently subject to certain legal proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. These or other litigation or legal proceedings could materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect us should an unfavorable ruling occur.

Our failure to maintain the security of our electronic and other confidential information could expose us to liability and materially adversely affect our financial condition and results of operations.

Privacy, security, and compliance concerns have continued to increase as technology has evolved. As part of our normal business activities, we collect and store certain confidential information, including personal information of homebuyers/borrowers and information about employees, vendors and suppliers. This information is entitled to protection under a number of federal and state laws. We may share some of this information with vendors who assist us with certain aspects of our business, particularly our mortgage and title businesses. Our failure to maintain the security of the data we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also in deterioration in customers’ confidence in us and other competitive disadvantages, and thus could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Weather-related and other events beyond our control may adversely impact our operations.

Extreme weather or other events, such as significant snowfalls, hurricanes, tornadoes, earthquakes, forest fires, floods, terrorist attacks or war may affect our markets, our operations and our profitability. These events may impact our physical facilities or those of our suppliers or subcontractors, causing us material increases in costs, or delays in construction of homes, which could have a material adverse effect upon our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate offices are located in Reston, Virginia, where we currently lease approximately 61,000 square feet of office space. The current corporate office lease expires in April 2026.

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In connection with the operation of the homebuilding segment, we lease production facilities in the following six locations: Thurmont, Maryland; Burlington County, New Jersey; Farmington, New York; Kings Mountain, North Carolina; Darlington, Pennsylvania; and Portland, Tennessee. These facilities range in size from approximately 40,000 square feet to 400,000 square feet and total approximately one million square feet. Each of these leases contains various options for extensions of the lease and for the purchase of the facility. The Portland, Thurmont and Farmington leases expire in 2019, the Kings Mountain lease expires in 2022, the Burlington County lease expires in 2024 and the Darlington lease expires in 2025. In addition, we own a production facility with approximately 100,000 square feet in Dayton, Ohio. Our plant utilization was 43% and 40% of total capacity in 2016 and 2015, respectively.

In connection with both our homebuilding and mortgage banking businesses, we also lease office space in multiple locations for homebuilding divisional offices and mortgage banking and title services branches under leases expiring at various times through 2025, none of which are individually material to our business. We anticipate that, upon expiration of existing leases, we will be able to renew them or obtain comparable facilities on terms acceptable to us.

Item 3. Legal Proceedings.

In June 2010, we received a Request for Information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request sought information about storm water discharge practices in connection with homebuilding projects completed or underway by us in New York and New Jersey. We cooperated with this request, and provided information to the EPA. We were subsequently informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that we meet with the government to discuss the status of the case. Meetings took place in January 2012, August 2012 and November 2014 with representatives from both the EPA and DOJ. We have continued discussions with the EPA and DOJ and are presently engaged in settlement discussions with them. Any settlement is expected to include injunctive relief and payment of a civil penalty. Although there can be no assurance that a settlement will be reached, in 2015 we recorded a liability and corresponding expense associated with an estimated civil penalty amount.

We are also involved in various other litigation matters arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, these matters are 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 matters are expensed as incurred.

Item 4. Mine Safety Disclosures.

None.

Executive Officers of the Registrant

Name	Age		Positions
Paul C. Saville		61	President and Chief Executive Officer of NVR
Daniel D. Malzahn		47	Senior Vice President, Chief Financial Officer and Treasurer of NVR
Jeffrey D. Martchek		51	President of Homebuilding Operations of NVR
Robert W. Henley		50	President of NVRM
Eugene J. Bredow		47	Vice President, Chief Accounting Officer and Controller of NVR

Paul C. Saville was named President and Chief Executive Officer of NVR effective July 1, 2005. Mr. Saville has been employed by NVR since 1981.

Daniel D. Malzahn was named Senior Vice President in February 2016, and continues to serve as Chief Financial Officer and Treasurer of NVR, roles he has occupied since February 20, 2013. From February 1, 2004 through February 20, 2013, Mr. Malzahn was Vice President of Planning and Investor Relations of NVR.  Mr. Malzahn has been employed by NVR since 1994.

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Jeffrey D. Martchek was named President of Homebuilding Operations of NVR effective January 1, 2016.  From February 2011 through January 1, 2016, Mr. Martchek was Area President for the Maryland and Virginia homebuilding operations. Mr. Martchek was Area President of NVR’s Mid East homebuilding operations from October 2008 until January 2011.  Mr. Martchek has been employed by NVR since 1988.

Robert W. Henley was named President of NVRM effective October 1, 2012. Mr. Henley served as interim acting President of NVRM from June 1, 2012 until October 1, 2012. From July 1, 2005 through June 1, 2012, Mr. Henley served as Vice President and Controller of NVR.  Mr. Henley has been employed by NVR since 1994.

Eugene J. Bredow was named Chief Accounting Officer in February 2016, and continues to serve as Vice President and Controller of NVR, roles he has occupied since June 1, 2012. From January 2008 through June 1, 2012, Mr. Bredow was the Vice President of Internal Audit and Corporate Governance of NVR.  Mr. Bredow has been employed by NVR since 2004.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our shares of common stock are listed and principally traded on the New York Stock Exchange under the ticker symbol “NVR.” The following table sets forth the high and low prices per share for our common stock for each quarter during the years ended December 31, 2016 and 2015:

	High		Low
Prices per share:
2016
Fourth Quarter	$	1,695.41	$	1,478.04
Third Quarter	$	1,845.37	$	1,633.00
Second Quarter	$	1,801.94	$	1,606.75
First Quarter	$	1,820.00	$	1,462.02
2015
Fourth Quarter	$	1,721.95	$	1,500.23
Third Quarter	$	1,610.00	$	1,317.23
Second Quarter	$	1,387.40	$	1,292.11
First Quarter	$	1,377.76	$	1,187.84

As of the close of business on February 10, 2017, there were 278 shareholders of record.

We have never paid a cash dividend on our shares of common stock and have no current intention to do so in the future.

We had two share repurchase authorizations outstanding during the quarter ended December 31, 2016. On November 4, 2015 and November 2, 2016, we publicly announced the Board of Directors’ approval for us to repurchase our outstanding common stock in one or more open market and/or privately negotiated transactions, up to an aggregate of $300 million per authorization. The repurchase authorizations do not have expiration dates. The following table provides information regarding common stock repurchases during the quarter ended December 31, 2016:

Period	TotalNumber ofShares Purchased		Average Price Paid per Share		TotalNumberof SharesPurchased asPartofPublicly AnnouncedPlans orPrograms		MaximumNumber (or Approximate DollarValue)of SharesthatMayYet BePurchasedUnder thePlansor Programs
October 1 - 31, 2016		26,284	$	1,608.69		26,284	$	5,187
November 1 - 30, 2016 (1)		29,930	$	1,565.04		29,930	$	258,344
December 1 - 31, 2016		45,768	$	1,627.41		45,768	$	183,861
Total		101,982	$	1,604.28		101,982

(1) 3,405 outstanding shares were repurchased under the November 4, 2015 share repurchase authorization, which fully utilized the authorization. The remaining 26,525 outstanding shares were repurchased under the November 2, 2016 share repurchase authorization.

On February 15, 2017, the Board of Directors approved a repurchase authorization providing us authorization to repurchase up to an aggregate of $300 million of our common stock in one or more open market and/or privately negotiated transactions.

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STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return to holders of our common stock since December 31, 2011 with the Dow Jones US Home Construction Index and the S&P 500 Index for that same period, assuming that $100 was invested in NVR stock and the indices on December 31, 2011.

	For the Year Ended December 31,
Comparison of 5 Year Cumulative Total Return	2011		2012		2013		2014		2015		2016
NVR, Inc.	$	100	$	134	$	150	$	186	$	240	$	243
S&P 500	$	100	$	116	$	154	$	175	$	177	$	198
Dow Jones US Home Construction	$	100	$	183	$	202	$	218	$	240	$	224

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Item 6. Selected Financial Data.

(in thousands, except per share amounts)

The following tables set forth selected consolidated financial data. The selected income statement and balance sheet data have been derived from our consolidated financial statements for each of the periods presented and are not necessarily indicative of results of future operations. The selected financial data should be read in conjunction with, and are qualified in their entirety by, the accompanying consolidated financial statements and related notes included herein.

	Year Ended December 31,
	2016		2015		2014		2013		2012
Consolidated income statement data:
Homebuilding data:
Revenues	$	5,709,223	$	5,065,200	$	4,375,059	$	4,134,481	$	3,121,244
Gross profit		1,001,362		946,418		806,473		710,277		545,605
Mortgage Banking data:
Mortgage banking fees		113,321		93,808		69,509		76,786		63,406
Interest income		7,569		6,485		4,940		4,983		4,504
Interest expense		1,086		641		549		545		546
Consolidated data:
Net income		425,262		382,927		281,630		266,477		180,588
Earnings per share:
Basic	$	110.53	$	95.21	$	65.83	$	56.25	$	36.04
Diluted	$	103.61	$	89.99	$	63.50	$	54.81	$	35.12
Weighted average number of shares outstanding:
Basic		3,847		4,022		4,278		4,737		5,011
Diluted		4,104		4,255		4,435		4,862		5,142
	December 31,
	2016		2015		2014		2013		2012
Consolidated balance sheet data:
Homebuilding inventory	$	1,092,100	$	1,006,526	$	869,486	$	738,565	$	678,131
Contract land deposits, net		379,844		343,295		294,676		236,885		191,538
Total assets (1)		2,643,943		2,511,718		2,347,413		2,481,718		2,599,903
Notes and loans payable (1) (2)		596,455		595,847		595,244		594,760		594,806
Shareholders’ equity		1,304,441		1,239,165		1,124,255		1,261,352		1,480,477
Cash dividends per share		—		—		—		—		—

(1) In 2016, we adopted Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest, which requires that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.  The balances as of December 31, 2016 reflect the amounts shown on the accompanying consolidated balance sheets following the adoption of the standard. For comparative purposes, the balances as of December 31, 2015, 2014, 2013 and 2012 have been adjusted and present the Notes net of unamortized debt issuance costs of $3,413, $3,922, $4,430 and $4,939, respectively.

(2) Balance does not include non-recourse debt related to the consolidated variable interest entity.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in thousands, except per share data)

Results of Operations for the Years Ended December 31, 2016, 2015 and 2014

Overview

Business

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

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

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

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

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

As of December 31, 2016, we controlled lots as described below.

Lot Purchase Agreements

We controlled approximately 73,200 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $396,200 and $2,400, respectively. Included in the number of controlled lots are approximately 4,000 lots for which we have recorded a contract land deposit impairment reserve of approximately $31,300 as of December 31, 2016.

Joint Venture Limited Liability Corporations (“JVs”)

We had an aggregate investment totaling approximately $49,400 in six JVs, expected to produce approximately 7,400 lots. Of the lots to be produced by the JVs, approximately 4,200 lots were controlled by us and approximately 3,200 lots were either under contract with unrelated parties or currently not under contract.

Land Under Development

We directly owned four separate raw land parcels, zoned for their intended use, with a current cost basis, including development costs, of approximately $47,000 that we intend to develop into approximately 600 finished lots. We had additional funding commitments of approximately $12,000 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $7,100.

See Notes 3, 4 and 5 to the consolidated financial statements included herein for additional information regarding Lot Purchase Agreements, JVs and land under development, respectively.

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Raw Land Purchase Agreements

In addition to the lots we currently control as discussed above, we have certain properties under contract with land owners that are expected to yield approximately 9,600 lots. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with cash deposits totaling approximately $14,900 as of December 31, 2016, of which approximately $1,400 is refundable if we do not perform under the contract. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.

Current Business Environment and Key Financial Results

The housing market in 2016 continued the trend experienced in 2015 of steady new home demand. However, new home prices continued to be constrained due to the competitive market environment. The housing market also faces challenges from tight mortgage underwriting standards as well as from higher mortgage interest rates, which towards the end of 2016 began to move up from historical lows.

Our consolidated revenues for the year ended December 31, 2016 totaled $5,822,544, an increase of 13% from $5,159,008 in 2015. Our net income for 2016 was $425,262, or $103.61 per diluted share, increases of 11% and 15% compared to 2015 net income and diluted earnings per share, respectively. Diluted earnings per share was favorably impacted by our ongoing share repurchase program. Our homebuilding gross profit margin percentage decreased to 17.5% in 2016 from 18.7% in 2015. New orders, net of cancellations (“New Orders”) during 2016 increased 11% from 2015 while our average New Order sales price increased 2% to $386.4 in 2016. Our backlog of homes sold but not yet settled with the customer as of December 31, 2016 increased on a unit basis by 11% to 6,884 units and increased on a dollar basis by 14% to $2,704,277 when compared to December 31, 2015.

We believe that a continuation of the housing market recovery is dependent upon a sustained overall economic recovery, driven by continued improvement in job and wage growth and household formation. We expect to continue to face gross profit margin and pricing pressures due to higher land and construction costs, as well as increased competition associated with the increase in the number of new home communities in our markets. We believe that we are well positioned to take advantage of opportunities that may arise from future economic and homebuilding market volatility due to the strength of our balance sheet.

Homebuilding Operations

The following table summarizes the results of our consolidated homebuilding operations and certain operating activity for each of the last three years:

	Year Ended December 31,
	2016			2015			2014
Financial data:
Revenues	$	5,709,223		$	5,065,200		$	4,375,059
Cost of sales	$	4,707,861		$	4,118,782		$	3,568,586
Gross profit margin percentage		17.5	%		18.7	%		18.4	%
Selling, general and administrative expenses	$	382,459		$	371,127		$	358,851
Operating data:
Settlements (units)		14,928			13,326			11,859
Average settlement price	$	381.2		$	379.9		$	368.5
New orders (units)		15,583			14,080			12,389
Average new order price	$	386.4		$	378.7		$	373.7
Backlog (units)		6,884			6,229			5,475
Average backlog price	$	392.8		$	381.3		$	384.6
New order cancellation rate		15.5	%		14.5	%		14.6	%

Consolidated Homebuilding

2016 versus 2015

Homebuilding revenues increased 13% in 2016 compared to 2015, primarily as a result of a 12% increase in the number of units settled year over year. The increase in the number of units settled was attributable to a 14% higher backlog unit balance entering 2016 compared to backlog entering 2015. In addition, the number of units settled was favorably impacted by a 10% increase in New Orders for the first six months of 2016 compared to the same period in 2015.

The number of New Orders and the average sales price of New Orders increased 11% and 2%, respectively, in 2016 compared to 2015. New Orders and the average sales price of New Orders increased in each of our market segments due to more favorable

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market conditions in 2016 compared to 2015, which led to a higher sales absorption rate year over year. Additionally, New Orders were favorably impacted by a 3% increase in the average number of active communities year over year.

Gross profit margin percentage in 2016 decreased to 17.5% from 18.7% in 2015, due to higher construction and selling related costs year over year. We expect continued gross margin pressure over the next several quarters due to cost pressures.

SG&A expenses in 2016 increased approximately $11,300, or 3% compared to 2015, but as a percentage of revenue decreased to 6.7% from 7.3% year over year. SG&A expenses increased primarily due to an approximate $10,500 increase in marketing costs attributable to the 3% increase in the number of active communities year over year and higher spending levels.

Backlog represents homes sold but not yet settled with the customer. Backlog units and dollars were 6,884 units and $2,704,277, respectively, as of December 31, 2016 compared to 6,229 units and $2,375,182, respectively, as of December 31, 2015. The 11% increase in backlog units was primarily attributable to a 12% increase in New Orders for the six month period ended December 31, 2016 compared to the same period in 2015. The 14% increase in backlog dollars was attributable to the increase in backlog units coupled with a 3% increase in the average New Order sales price for the six month period ended December 31, 2016 compared to the same period in 2015.

Backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons.  In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the beginning backlog for the current period.  Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 16% in 2016 and 15% in both 2015 and 2014. Additionally, during each of 2016, 2015 and 2014, approximately 6% of a reporting quarter’s opening backlog cancelled during the quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur in future years. Other than those units that are cancelled, we expect to settle substantially all of our December 31, 2016 backlog during 2017. See “Risk Factors” in Item 1A of this Form 10-K.

The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity and other external factors over which we do not exercise control.

2015 versus 2014

Homebuilding revenues increased 16% in 2015 compared 2014, as a result of a 12% increase in the number of units settled and a 3% increase in the average settlement price year over year.  Units settled and the average settlement prices were higher in each of our market segments year over year. The increases in the number of units settled and the average settlement price were attributable to an 11% higher backlog unit balance entering 2015 and a 3% higher average price of homes in backlog entering 2015 compared to backlog entering 2014.  In addition, the unit and average settlement price increases were favorably impacted by a 15% increase in New Orders and a 2% increase in the average sales price of New Orders, respectively, for the first six months of 2015 compared to the same period in 2014.

The number of New Orders and the average sales price of New Orders increased 14% and 1%, respectively, in 2015 compared to 2014.  New Orders increased in 2015 despite a 3% decrease in the average number of active communities year over year, due to more favorable market conditions in 2015, which led to a higher sales absorption rate in each of our market segments.

Gross profit margin percentage in 2015 increased to 18.7% from 18.4% in 2014. Gross profit margin was favorably impacted in 2015 by an approximate $11,100, or 22 basis points of revenue, recovery of contract land deposits previously determined to be unrecoverable.  Excluding the contract land deposit impairment recovery, gross profit margin was flat year over year as higher revenues were offset by higher lot and construction costs year over year.

SG&A expenses in 2015 increased approximately $12,300, or 3%, compared to 2014.  SG&A expenses increased primarily due to an approximate $14,900 increase in management incentive compensation attributable to the improved operating results in 2015. SG&A expenses decreased as a percentage of revenue to 7.3% in 2015 from 8.2% in 2014 due to improved leveraging of SG&A expenses.

Backlog units and dollars increased approximately 14% to 6,229 units and 13% to $2,375,182, respectively, as of December 31, 2015 compared to 5,475 units and $2,105,635, respectively, as of December 31, 2014. The increase in backlog units was primarily attributable to a 13% increase in New Orders for the six month period ended December 31, 2015 compared to the same period in 2014. Backlog dollars were favorably impacted by the increase in backlog units.

Reportable Homebuilding Segments

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are

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providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the determination to terminate a Lot Purchase Agreement with the developer or to restructure a Lot Purchase Agreement resulting in the forfeiture of the deposit. For presentation purposes below, the contract land deposit reserve at December 31, 2016 and 2015 has been allocated to the reportable segments for the respective years to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $2,400 and $3,000 at December 31, 2016 and 2015, respectively, of letters of credit issued as deposits in lieu of cash. The following tables summarize certain homebuilding operating activity by reportable segment for each of the last three years:

Selected Segment Financial Data:

	Year Ended December 31,
	2016		2015		2014
Revenues:
Mid Atlantic	$	3,319,776	$	3,022,789	$	2,617,108
North East		462,385		432,145		376,862
Mid East		1,192,472		1,014,920		892,513
South East		734,590		595,346		488,576

	Year Ended December 31,
	2016		2015		2014
Gross profit margin:
Mid Atlantic	$	561,857	$	563,299	$	499,172
North East		68,808		79,588		70,462
Mid East		215,335		178,508		141,146
South East		137,787		113,210		89,544

	Year Ended December 31,
	2016		2015		2014
Segment profit:
Mid Atlantic	$	301,173	$	322,829	$	271,965
North East		21,947		37,914		33,390
Mid East		121,166		86,336		47,538
South East		71,098		57,384		37,525

	Year Ended December 31,
	2016			2015			2014
Gross profit margin percentage:
Mid Atlantic		16.9	%		18.6	%		19.1	%
North East		14.9	%		18.4	%		18.7	%
Mid East		18.1	%		17.6	%		15.8	%
South East		18.8	%		19.0	%		18.3	%

Segment Operating Activity:

	Year Ended December 31,
	2016				2015				2014
	Units		Average Price		Units		Average Price		Units		Average Price
Settlements:
Mid Atlantic		7,512	$	439.6		6,879	$	439.2		6,129	$	426.3
North East		1,246	$	371.1		1,221	$	353.9		1,089	$	346.1
Mid East		3,658	$	325.7		3,137	$	323.5		2,845	$	313.6
South East		2,512	$	292.4		2,089	$	284.9		1,796	$	271.9
Total		14,928	$	381.2		13,326	$	379.9		11,859	$	368.5

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	Year Ended December 31,
	2016				2015				2014
	Units		Average Price		Units		Average Price		Units		Average Price
New orders, net of cancellations:
Mid Atlantic		7,916	$	443.1		7,070	$	439.5		6,365	$	431.4
North East		1,314	$	387.1		1,173	$	365.9		1,182	$	347.8
Mid East		3,659	$	329.2		3,485	$	321.4		2,963	$	320.6
South East		2,694	$	296.9		2,352	$	287.3		1,879	$	278.1
Total		15,583	$	386.4		14,080	$	378.7		12,389	$	373.7

	Year Ended December 31,
	2016				2015				2014
	Units		Average Price		Units		Average Price		Units		Average Price
Backlog:
Mid Atlantic		3,541	$	443.4		3,137	$	435.3		2,946	$	434.2
North East		608	$	408.7		540	$	374.7		588	$	349.1
Mid East		1,499	$	340.1		1,498	$	331.7		1,150	$	340.2
South East		1,236	$	304.1		1,054	$	294.6		791	$	290.7
Total		6,884	$	392.8		6,229	$	381.3		5,475	$	384.6

Operating Data:

	Year Ended December 31,
	2016			2015			2014
New order cancellation rate:
Mid Atlantic		15.7	%		15.2	%		14.9	%
North East		15.1	%		14.3	%		14.8	%
Mid East		14.4	%		13.4	%		12.5	%
South East		16.5	%		14.2	%		16.6	%

	Year Ended December 31,
	2016		2015		2014
Average active communities:
Mid Atlantic		239		233		245
North East		42		38		44
Mid East		128		130		127
South East		76		71		72
Total		485		472		488

Homebuilding Inventory:

	As of December 31,
	2016		2015
Sold inventory:
Mid Atlantic	$	544,840	$	485,481
North East		79,751		72,481
Mid East		141,033		140,745
South East		107,967		90,794
Total (1)	$	873,591	$	789,501

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	As of December 31,
	2016		2015
Unsold lots and housing units inventory:
Mid Atlantic	$	117,920	$	105,720
North East		6,370		19,674
Mid East		7,218		9,857
South East		10,872		11,726
Total (1)	$	142,380	$	146,977

(1) Total segment inventory differs from consolidated inventory due to certain consolidation adjustments necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, which are not allocated to our operating segments.

	Year Ended December 31,
	2016		2015		2014
Sold and unsold inventory impairments:
Mid Atlantic	$	1,127	$	321	$	530
North East		42		25		21
Mid East		—		363		649
South East		252		—		—
Total	$	1,421	$	709	$	1,200

Lots Controlled and Land Deposits:

	As of December 31,
	2016		2015
Total lots controlled:
Mid Atlantic		35,350		35,200
North East		6,200		6,100
Mid East		19,050		18,500
South East		17,400		14,700
Total		78,000		74,500

	As of December 31,
	2016		2015
Lots included in impairment reserve:
Mid Atlantic		1,950		2,800
North East		550		500
Mid East		1,100		2,400
South East		400		400
Total		4,000		6,100

	As of December 31,
	2016		2015
Contract land deposits, net:
Mid Atlantic	$	239,588	$	223,147
North East		27,648		29,805
Mid East		44,394		39,996
South East		70,593		53,299
Total	$	382,223	$	346,247

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	Year Ended December 31,
	2016		2015		2014
Contract land deposit impairments, net:
Mid Atlantic	$	2,240	$	1,840	$	1,098
North East		3,530		279		1,647
Mid East		303		409		149
South East		791		250		493
Total	$	6,864	$	2,778	$	3,387

Mid Atlantic

2016 versus 2015

The Mid Atlantic segment had an approximate $21,700, or 7%, decrease in segment profit in 2016 compared to 2015, despite an increase in segment revenues of approximately $297,000, or 10%, year over year.  Segment revenues increased due primarily to a 9% increase in the number of units settled in 2016 compared to 2015. The number of units settled was favorably impacted by a 6% higher backlog unit balance entering 2016 compared to 2015. In addition, units settled in 2016 were favorably impacted by an 11% increase in New Orders for the first six months of 2016 compared to the same period in 2015. The Mid Atlantic segment’s gross profit margin percentage decreased to 16.9% in 2016 from 18.6% in 2015.  Segment profit and gross profit margin were negatively impacted primarily by higher construction and selling related costs.  

Segment New Orders and the average sales price for New Orders in 2016 increased 12% and 1%, respectively, compared to the same period in 2015. New Orders increased due to favorable market conditions in 2016 compared to 2015, which led to a higher sales absorption rate year over year. Additionally, segment New Orders were favorably impacted by a 3% increase in the average number of active communities year over year.

2015 versus 2014

The Mid Atlantic segment had an approximate $50,900, or 19%, increase in segment profit in 2015 compared to 2014, driven by an increase in segment revenues of approximately $405,700, or 16%, year over year.  The increase in segment revenues is due primarily to a 12% increase in the number of units settled and a 3% increase in the average settlement price in 2015 compared to 2014. The number of units settled and the average settlement price were favorably impacted by a 9% higher backlog unit balance and a 3% higher average price of homes in backlog, respectively, entering 2015 compared to 2014. In addition, the unit and average settlement price increases were favorably impacted by a 13% increase in New Orders and a 3% increase in the average sales price of New Orders, respectively, for the first six months of 2015 compared to the same period in 2014. The Mid Atlantic segment’s gross profit margin percentage decreased to 18.6% in 2015 from 19.1% in 2014, due primarily to higher lot and construction costs year over year.

Segment New Orders and the average sales price for New Orders in 2015 increased 11% and 2%, respectively, compared to the same period in 2014. New Orders increased despite a 5% decrease in the average number of active communities year over year, due to a higher sales absorption rate year over year.  Community sales absorption was impacted by improved market conditions in 2015 compared to 2014.

North East

2016 versus 2015

The North East segment had an approximate $16,000, or 42%, decrease in segment profit in 2016 compared to 2015, despite an increase in segment revenues of approximately $30,200, or 7%, year over year. Segment revenues increased due to a 2% increase in the number of units settled and a 5% increase in the average settlement price. The increase in units settled and average settlement price was primarily attributable to a 4% increase in both segment New Orders and average sales price of New Orders for the first six months of 2016 compared to the same period in 2015. The North East segment’s gross profit margin percentage decreased to 14.9% in 2016 from 18.4% in 2015. Segment profit and gross profit margin were negatively impacted primarily by higher construction costs, service costs and contract land deposit impairments year over year.

Segment New Orders and the average sales price of New Orders in 2016 increased 12% and 6%, respectively, compared to 2015. New Orders were favorably impacted by a 12% increase in the average number of active communities year over year. The increase in the average sales price of New Orders is primarily attributable to a shift in New Orders to higher priced markets in 2016 compared to 2015.

2015 versus 2014

The North East segment had an approximate $4,500, or 14%, increase in segment profit in 2015 compared to 2014. The increase in segment profit was primarily driven by an increase in segment revenues of approximately $55,300, or 15%, year over year due to a

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12% increase in the number of units settled and a 2% increase in the average settlement price. The increase in units settled was attributable to a 19% higher backlog unit balance entering 2015 compared to the backlog unit balance entering 2014, offset partially by a slower backlog turnover rate year over year.  The North East segment’s gross profit margin percentage decreased to 18.4% in 2015 from 18.7% in 2014 due to higher lot costs.

Segment New Orders in 2015 were flat compared to 2014, while the average sales price of New Orders increased 5% year over year. Segment New Orders were negatively impacted by a 12% decrease in the average number of active communities year over year, offset by a higher sales absorption rate. Community sales absorption was impacted by improved market conditions in 2015 compared to 2014.  The increase in the average sales price of New Orders is primarily attributable to a shift in New Orders to our higher priced NVHomes product.

Mid East

2016 versus 2015

The Mid East segment had an approximate $34,800, or 40%, increase in segment profit in 2016 compared to 2015. The increase in segment profit was driven by an increase in segment revenues of approximately $177,600, or 17%, year over year due to a 17% increase in the number of units settled in 2016. The number of units settled was favorably impacted by a 30% higher backlog unit balance entering 2016 compared to 2015. The segment’s gross profit margin percentage increased to 18.1% in 2016 from 17.6% in 2015, due primarily to increased settlement activity, which allowed us to better leverage certain operating costs in 2016.

Segment New Orders and the average sales price of New Orders in 2016 increased 5% and 2%, respectively, compared to 2015.  New Orders were favorably impacted by favorable market conditions in 2016 compared to 2015, which led to a higher sales absorption rate year over year.

2015 versus 2014

The Mid East segment had an approximate $38,800, or 82%, increase in segment profit in 2015 compared to 2014. The increase in segment profit was driven by an increase in segment revenues of approximately $122,400, or 14%, year over year due primarily to a 10% increase in the number of units settled and a 3% increase in the average settlement price. The number of units settled and the average settlement price were favorably impacted by a 11% higher backlog unit balance and a 5% higher average price of homes in backlog, respectively, entering 2015 compared to 2014. In addition, the unit and average settlement price increases were favorably impacted by a 14% increase in New Orders and a 2% increase in the average sales price of New Orders, respectively, for the first six months of 2015 compared to the same period in 2014. The segment’s gross profit margin percentage increased to 17.6% in 2015 from 15.8% in 2014, due primarily to increased settlement activity, which allowed us to better leverage certain operating costs in 2015, offset partially by higher lot costs year over year.

Segment New Orders increased 18%, while the average sales price of New Orders was flat in 2015 compared to 2014.  New Orders were favorably impacted by a 2% increase in the average number of active communities year over year and by a higher sales absorption rate in 2015 compared to 2014 due to improved market conditions year over year.

South East

2016 versus 2015

The South East segment had an approximate $13,700, or 24%, increase in segment profit in 2016 compared to 2015. The increase in segment profit was driven by an increase in segment revenues of approximately $139,200, or 23%, year over year due to a 20% increase in the number of units settled and a 3% increase in the average settlement price. The increase in the number of units settled was attributable to a 33% higher backlog unit balance entering 2016 compared to 2015. In addition, the settlements and the average settlement price increases were favorably impacted by a 16% increase in New Orders and a 4% increase in the average sales price of New Orders, respectively, for the first six months of 2016 compared to the same period in 2015. The South East segment’s gross profit margin percentage decreased to 18.8% in 2016 from 19.0% in 2015, due to higher lot and selling related costs year over year, offset partially by improved leveraging of certain operating costs due to the increase in settlement activity in 2016.

Segment New Orders and the average sales price of New Orders increased 15% and 3%, respectively, in 2016 compared to 2015.  New Orders were favorably impacted by a 7% increase in the average number of active communities year over year, and by more favorable market conditions in 2016, which led to a higher sales absorption rate year over year.

2015 versus 2014

The South East segment had an approximate $19,900, or 53%, increase in segment profit in 2015 compared to 2014. The increase in segment profit was driven by an increase in segment revenues of approximately $106,800, or 22%, year over year due to a 16% increase in the number of units settled and a 5% increase in the average settlement price. The number of units settled and the average settlement price were favorably impacted by a 12% higher backlog unit balance and a 5% higher average price of homes in

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backlog, respectively, entering 2015 compared to 2014. In addition, the unit and average settlement price increases were favorably impacted by a 26% increase in New Orders and a 3% increase in the average sales price of New Orders, respectively, for the first six months of 2015 compared to the same period in 2014. The South East segment’s gross profit margin percentage increased to 19.0% in 2015 from 18.3% in 2014, due to the increased settlement activity, which allowed us to better leverage certain operating costs in 2015.  Segment gross profit margin was also favorably impacted by a market mix shift in settlements to markets with higher average gross profit margins. These favorable gross profit margin impacts were partially offset by higher lot costs year over year.

Segment New Orders and the average sales price of New Orders increased 25% and 3%, respectively, in 2015 compared to 2014.  New Orders increased despite a 2% decrease in the average number of active communities year over year, due to a higher sales absorption rate year over year. Community sales absorption was favorably impacted by improved market conditions in 2015 compared to 2014.

Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense is primarily comprised of interest charges on our 3.95% Senior Notes due 2022 (the “Senior Notes”), and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

	Year Ended December 31,
	2016		2015		2014
Homebuilding consolidated gross profit:
Mid Atlantic	$	561,857	$	563,299	$	499,172
North East		68,808		79,588		70,462
Mid East		215,335		178,508		141,146
South East		137,787		113,210		89,544
Consolidation adjustments and other		17,575		11,813		6,149
Homebuilding consolidated gross profit	$	1,001,362	$	946,418	$	806,473

	Year Ended December 31,
	2016			2015			2014
Homebuilding consolidated profit before taxes:
Mid Atlantic	$	301,173		$	322,829		$	271,965
North East		21,947			37,914			33,390
Mid East		121,166			86,336			47,538
South East		71,098			57,384			37,525
Reconciling items:
Contract land deposit impairment reserve (1)		10,933			13,805			3,612
Equity-based compensation expense		(40,482	)		(50,738	)		(58,501	)
Corporate capital allocation (2)		189,992			171,170			152,140
Unallocated corporate overhead		(89,376	)		(83,124	)		(61,108	)
Consolidation adjustments and other		35,204			22,622			23,867
Corporate interest expense		(20,553	)		(22,869	)		(22,544	)
Reconciling items sub-total		85,718			50,866			37,466
Homebuilding consolidated profit before taxes	$	601,102		$	555,329		$	427,884

(1) This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments.

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

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	Year Ended December 31,
	2016		2015		2014
Corporate capital allocation charge:
Mid Atlantic	$	119,758	$	107,705	$	96,328
North East		18,132		16,987		12,107
Mid East		28,303		27,263		26,299
South East		23,799		19,215		17,406
Total corporate capital allocation charge	$	189,992	$	171,170	$	152,140

Mortgage Banking Segment

We conduct our mortgage banking activity through NVRM, a wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment customer base. The following table summarizes the results of our mortgage banking operations and certain statistical data for each of the last three years:

	Year Ended December 31,
	2016			2015			2014
Loan closing volume:
Total principal	$	3,952,575		$	3,492,342		$	2,833,612
Loan volume mix:
Adjustable rate mortgages		5	%		14	%		17	%
Fixed-rate mortgages		95	%		86	%		83	%
Operating profit:
Segment profit	$	63,711		$	51,236		$	30,388
Equity-based compensation expense		(3,116	)		(3,353	)		(4,726	)
Mortgage banking profit before tax	$	60,595		$	47,883		$	25,662
Capture rate:		88	%		88	%		84	%
Mortgage banking fees:
Net gain on sale of loans	$	85,535		$	67,891		$	47,791
Title services		27,233			25,427			21,292
Servicing fees		553			490			426
	$	113,321		$	93,808		$	69,509

2016 versus 2015

Loan closing volume in 2016 increased by approximately $460,200, or 13%, from 2015.  The increase was primarily attributable to a 13% increase in the number of loans closed year over year due primarily to the aforementioned increase in the homebuilding segment’s number of settlements in 2016 as compared to 2015.

Segment profit in 2016 increased by approximately $12,500, or 24%, from 2015.  The increase in segment profit was primarily attributable to an increase in mortgage banking fees, partially offset by an increase in general and administrative expenses.  Mortgage banking fees increased by approximately $19,500, or 21%, resulting from the aforementioned increase in loan closing volume and an increase in secondary marketing gains on sales of loans. General and administrative expenses increased by approximately $8,200, due primarily to an increase in compensation costs as a result of an increase in average headcount compared to 2015.

2015 versus 2014

Loan closing volume in 2015 increased by approximately $658,700, or 23%, from 2014.  The increase was primarily attributable to a 20% increase in the number of loans closed and a 3% increase in the average loan amount year over year.  The increase in the number of loans closed was primarily due to an increase in the homebuilding segment’s number of settlements in 2015 as compared to 2014 and an increase in the number of loans closed by NVRM for our homebuyers who obtain a mortgage to purchase the home (the “Capture Rate”).  The Capture Rate increased from 84% in 2014 to 88% in 2015. The increase in the average loan amount is consistent with the homebuilding segment’s increase in average settlement price in 2015.

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Segment profit in 2015 increased by approximately $20,800, or 69%, from 2014.  The increase in segment profit was primarily attributable to an increase in mortgage banking fees, partially offset by an increase in general and administrative expenses in 2015 compared to 2014. Mortgage banking fees increased by approximately $24,300, resulting from the increase in loan closing volume and higher rate lock commitments year over year. General and administrative expenses increased by approximately $5,200, resulting primarily from an increase in management incentive compensation attributable to the improved operating results in 2015 compared to 2014.

Mortgage Banking – Other

We sell all of the loans we originate into the secondary mortgage market.  Insofar as we underwrite our originated loans to the standards and specifications of the ultimate investor, we have no further financial obligations from the issuance of loans, except in certain limited instances where early payment default occurs.  Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, VA and FHA.  Because we sell all of our loans and do not service them, there is often a substantial delay between the time that a loan goes into default and the time that the investor requests us to reimburse them for losses incurred because of the default.  We believe that all of the loans that we originate are underwritten to the standards and specifications of the ultimate investor to whom we sell our originated loans.  We employ a quality control department to ensure that our underwriting controls are effective, and further assess the underwriting function as part of our assessment of internal controls over financial reporting.

We maintain an allowance for losses on mortgage loans originated that reflects our judgment of the present loss exposure from the loans that we have originated and sold. The allowance is calculated based on an analysis of historical experience and exposure. At December 31, 2016, we had an allowance for loan losses of approximately $12,700. Although we consider the allowance for loan losses reflected on the December 31, 2016 balance sheet to be adequate, there can be no assurance that this allowance will prove to be adequate to cover losses on loans previously originated.

NVRM is dependent on our homebuilding operation’s customers for business.  If new orders and selling prices of the homebuilding segment decline, NVRM’s operations will also be adversely affected.  In addition, NVRM’s operating results may be adversely affected in future periods due to tightening and volatility of the credit markets, changes in investor funding times, increased regulation of mortgage lending practices and increased competition in the mortgage market.

Seasonality

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

Effective Tax Rate

Our consolidated effective tax rate in 2016, 2015 and 2014 was 35.73%, 36.52% and 37.90%, respectively. During 2014, we recognized income tax expense of approximately $7,000 due to the reversal of certain previously recognized tax deductions. We expect our effective tax rate to be subject to increased volatility in 2017 due to our adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation, resulting from the change in recognition of the excess tax benefit from equity plan activity.  Currently, excess tax benefits from equity plan activity are recorded in equity, whereas under ASU 2016-09, these excess tax benefits will be recorded to income tax expense.  See additional discussion of ASU 2016-09 in “Recent Accounting Pronouncements Pending Adoption” below.  

Recent Accounting Pronouncements Pending Adoption

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB delayed the standard’s effective date for one year.  The standard becomes effective for us on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We do not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.

In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.  The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value.  The amendments in the standard do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The standard became effective for us on January 1, 2017.  The amendments in the standard are to be applied prospectively. We do not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.

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In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on-balance sheet with a liability equal to the present value of lease payments over the lease term and a right-of-use asset for the right to use the underlying asset over the lease term.  Lessees will recognize expenses on their income statements in a manner similar to current GAAP. The standard also requires additional disclosures of key information about leasing arrangements. The standard becomes effective for us on January 1, 2019.  We believe that the adoption of this standard will have a material effect on both assets and liabilities presented on the balance sheet, and we are further evaluating the impact of its adoption.

In March 2016, FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting.  The standard simplifies several aspects of share-based payment accounting, including the recognition of income tax effects, statutory tax withholding requirements and accounting for forfeitures.  The standard became effective for us on January 1, 2017. We believe that the standard will likely have a material effect on net income and earnings per share presented on our consolidated financial statements resulting from the recognition of excess tax benefit from equity plan activity.  Additionally, we have elected to record forfeitures based on actual results which may result in increased volatility in the recognition of compensation expense.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which significantly changes the way impairment of financial assets is recognized.  The standard will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments.  The standard’s provisions will be applied as a cumulative-effect adjustment to beginning retained earnings as of the effective date. The standard becomes effective for us on January 1, 2020.  Early adoption is permitted for annual and interim periods beginning January 1, 2019.  We are currently evaluating the effect that the standard will have on our consolidated financial statements and related disclosures.

In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The objective of the standard is to address the diversity in practice of how certain cash receipts and payments are presented on the statement of cash flows. The standard requires that the guidance be applied retrospectively in the first interim and annual periods in which an entity adopts the guidance. The standard becomes effective for us on January 1, 2018, and early adoption is permitted. We are currently evaluating the effect that the standard will have on our consolidated statements of cash flows and related disclosures.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments in the standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. As a result, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The standard becomes effective for us on January 1, 2018. Early adoption is permitted. We do not believe that the adoption of this standard will have a material effect on our consolidated statements of cash flows and related disclosures.

In January 2017, FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The standard’s objective is to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the standard, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would then be recognized, not to exceed the amount of goodwill allocated to that reporting unit. The standard becomes effective for us on January 1, 2020. Early adoption is permitted. We do not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.

Liquidity and Capital Resources

Lines of Credit and Notes Payable

Senior Notes

Our homebuilding business segment funds its operations from cash flows provided by operating activities, a short-term unsecured working capital revolving credit facility and capital raised in the public debt and equity markets. On September 10, 2012, we completed an offering for $600,000 aggregate principal amount of 3.95% Senior Notes due 2022 under a Shelf Registration Statement filed on September 5, 2012 with the SEC. The Senior Notes were issued at a discount to yield 3.97% and have been reflected net of the unamortized discount in the accompanying consolidated balance sheet. The Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15.

The Senior Notes are senior unsecured obligations and rank equally in right of payment with any of our existing and future unsecured senior indebtedness, will rank senior in right of payment to any of our future indebtedness that is by its terms expressly subordinated to the Senior Notes and will be effectively subordinated to any of our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The indenture governing the Senior Notes does not contain any financial covenants; however, it does contain, among other items, and subject to certain exceptions, covenants that restrict our ability

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to create, incur, assume or guarantee secured debt, enter into sale and leaseback transactions and conditions related to mergers and/or the sale of assets.

Credit Agreement

On July 15, 2016, we entered into an unsecured Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Book Runner, and the other lenders party thereto, which provides for aggregate revolving loan commitments of $200,000 (the “Facility”). Proceeds of the borrowings under the Facility will be used for working capital and general corporate purposes. Under the Credit Agreement, we may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $8,300 outstanding at December 31, 2016, and a $25,000 sublimit for a swing line commitment. Borrowings under the Credit Agreement generally bear interest for Base Rate Loans at a Base Rate equal to the highest of (i) a Federal Funds Rate plus one-half of one percent, (ii) Bank of America’s publicly announced “prime rate,” and (iii) the Eurodollar Rate plus one percent, plus the Applicable Rate which is based on our debt rating, or for Eurodollar Rate Loans, at the Eurodollar Rate equal to LIBOR plus the Applicable Rate.�� 

The Credit Agreement contains various representations and affirmative and negative covenants that are generally customary for credit facilities of this type.  Such covenants include, among others, the following financial maintenance covenants: (i) minimum consolidated tangible net worth, (ii) minimum interest coverage ratio or minimum liquidity and (iii) a maximum leverage ratio. The negative covenants include, among others, certain limitations on liens, investments and fundamental changes.  The Credit Agreement termination date is July 15, 2021. We were in compliance with all covenants under the Credit Agreement at December 31, 2016.  There were no borrowings outstanding under the Credit Agreement as of December 31, 2016.

Repurchase Agreement

Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase facility, which is non-recourse to NVR. On July 27, 2016, NVRM entered into the Eighth Amendment (the “Amendment”) to its Amended and Restated Master Repurchase Agreement dated August 2, 2011 with U.S. Bank National Association (as amended by the Amendment and seven earlier amendments, the “Repurchase Agreement”). The Repurchase Agreement provides borrowing capacity up to $150,000, subject to certain sublimits, and provides for an incremental commitment pursuant to which we may from time to time request increases in the total commitment available under the Repurchase Agreement by up to $50,000 in the aggregate. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement expires on July 26, 2017. Advances under the Repurchase Agreement carry a Pricing Rate based on the LIBOR Rate plus the LIBOR Margin, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 2.25%. The Pricing Rate as of December 31, 2016 was 3.06%. There are several restrictions on purchased loans, including that they cannot be sold to others, they cannot be pledged to anyone other than the agent, and they cannot support any other borrowing or repurchase agreement.

The Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum net income requirement, and (iv) a maximum leverage ratio requirement. We were in compliance with all covenants under the Repurchase Agreement at December 31, 2016. At December 31, 2016, there was no debt outstanding under the Repurchase Agreement and there were no borrowing base limitations.

Equity Repurchases

In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing Plan Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us in accomplishing our primary objective, creating increases in shareholder value. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Item 5 of this Form 10-K for disclosure of amounts repurchased during the fourth quarter of 2016. For the year ended December 31, 2016, we repurchased 280,288 shares of our common stock at an aggregate purchase price of $455,351. As of December 31, 2016, we had $183,861 available under Board approved repurchase authorizations.

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Cash Flows

For the year ended December 31, 2016, cash and cash equivalents decreased by $28,697. Net cash provided by operating activities was $384,465. Cash provided by earnings in 2016 was used to fund the increase in homebuilding inventory of $85,194, as a result of an increase in units under construction at December 31, 2016 compared to December 31, 2015, and the increase of $32,280 in contract land deposits. Cash was favorably impacted by an increase of $58,532 in accounts payable and accrued expenses associated with the increase in homebuilding inventory and net proceeds of $49,981 from mortgage loan activity. Net cash used in investing activities in 2016 of $9,428 primarily included cash used for purchases of property, plant and equipment of $22,369, offset partially by the receipt of capital distributions from our unconsolidated JVs totaling $12,594. Net cash used in financing activities of $403,734, was primarily impacted by our repurchase of 280,288 shares of our common stock for an aggregate purchase price of $455,351 under our ongoing common stock repurchase program as discussed above, offset partially by $38,106 in proceeds from stock option exercises, and $13,661 in realized excess income tax benefits from equity-based compensation plan activity.

For the year ended December 31, 2015, cash and cash equivalents decreased by $120,103. Net cash provided by operating activities was $203,391. Cash provided by earnings in 2015 was used to fund the increase in homebuilding inventory of $134,803, as a result of an increase in units under construction at December 31, 2015 compared to December 31, 2014, and the increase of $37,561in contract land deposits. Cash was favorably impacted by an increase of $55,404 in accounts payable and accrued expenses associated with the increase in homebuilding inventory. Net cash used in investing activities in 2015 of $1,022 included cash used for purchases of property, plant and equipment of $18,277 and investments in our unconsolidated JVs totaling $1,917. These were partially offset by the receipt of capital distributions from our unconsolidated JVs totaling $18,489. Net cash used in financing activities was $322,472, due primarily to our repurchase of 289,687 shares of our common stock for an aggregate purchase price of $431,367, offset partially by $85,948 in proceeds from stock option exercises and $23,311 in realized excess income tax benefits from equity-based compensation plan activity.

For the year ended December 31, 2014, cash and cash equivalents decreased by $320,834. Net cash provided by operating activities was $184,549.  Cash was provided by homebuilding operations and net proceeds of $55,830 from mortgage loan activity.  Cash was used to fund the increase in homebuilding inventory of $127,729, as a result of an increase in the number of units under construction at December 31, 2014 compared to December 31, 2013.  Cash was also used to fund the $57,566 increase in contract land deposits year over year.  Investing activities in 2014 used net cash of $19,082 due primarily to the addition of $31,672 in property, plant and equipment, offset partially by the receipt of $11,569 of capital distributions from unconsolidated JVs. Net cash used in financing activities was $486,301, due primarily to our repurchase of 507,648 shares of our common stock for an aggregate purchase price of $567,544, offset partially by $76,153 in proceeds from stock option exercises.

At December 31, 2016 and 2015, the homebuilding segment had restricted cash of $17,561 and $23,440, respectively. Restricted cash in 2016 was attributable to customer deposits for certain home sales.  Restricted cash in 2015 was attributable to holding requirements related to outstanding letters of credit issued under a letter of credit agreement and customer deposits for certain home sales.

We believe that our current cash holdings, cash generated from operations, and cash available under our short-term unsecured credit agreement, revolving mortgage repurchase facility and the public debt and equity markets will be sufficient to satisfy near and long term cash requirements for working capital and debt service in both our homebuilding and mortgage banking operations.

Off-Balance Sheet Arrangements

Lot Acquisition Strategy

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

We believe that our lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of our intent not to acquire the finished lots under contract. Our sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provision contained in the Lot Purchase Agreements. We do not have any financial guarantees or completion obligations and we typically do not guarantee lot purchases on a specific performance basis under these Lot Purchase Agreements.

At December 31, 2016, we controlled approximately 78,000 lots through Lot Purchase Agreements, JVs and land under development, with an aggregate purchase price of approximately $7,300,000. These lots are controlled by making or committing to make deposits of approximately $493,200 in the form of cash and letters of credit. Our entire risk of loss pertaining to the aggregate purchase price contractual commitment resulting from our non-performance under the contracts is limited to $396,200 in deposits paid and $2,400 in letters of credit issued as of December 31, 2016, plus approximately $94,600 related to deposits to be paid subsequent to

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December 31, 2016 assuming that contractual development milestones are met by the developers and we exercise our option, and approximately $1,500 in specific performance obligations (see Contractual Obligations section below). As of December 31, 2016, we had recorded an impairment valuation allowance of approximately $31,300 related to certain cash deposits currently outstanding. Additionally, as of December 31, 2016, we had funding commitments totaling $6,200 to three of our JVs and approximately $12,000 under a joint development agreement related to our land under development, a portion of which we expect will be offset by development credits of approximately $7,100.

In addition, we have certain properties under contract with land owners that are expected to yield approximately 9,600 lots, which are not included in our number of total lots controlled above.  Some of these properties may require rezoning or other approvals to achieve the expected yield.  These properties are controlled with cash deposits of approximately $14,900 as of December 31, 2016, of which approximately $1,400 is refundable if we do not perform under the contract and the remainder is at risk of loss. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible. Please refer to Note 1 in the accompanying consolidated financial statements for a further discussion of the contract land deposits and Note 3 in the accompanying consolidated financial statements for a description of our lot acquisition strategy in relation to our accounting for variable interest entities.

Bonds and Letters of Credit

We enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize our obligations under various contracts. We had approximately $50,700 of contingent obligations under such agreements as of December 31, 2016, inclusive of the $2,400 of lot acquisition deposits in the form of letters of credit discussed above. We believe we will fulfill our obligations under the related contracts and do not anticipate any material losses under these bonds or letters of credit.

Mortgage Commitments and Forward Sales

In the normal course of business, NVRM enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by us. 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, we enter into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. We do 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 December 31, 2016, we had contractual commitments to extend credit to borrowers aggregating $458,161 and open forward delivery contracts aggregating $738,637, which hedge both the rate lock commitments and closed loans held for sale (see Note 14 in the accompanying consolidated financial statements for a description of our fair value accounting).

Contractual Obligations

Our fixed, non-cancelable obligations as of December 31, 2016, were as follows:

	Payments due by year
	Total		2017		2018 to 2019		2020 to 2021		2022 and Later
Debt (1)	$	600,000	$	—	$	—	$	—	$	600,000
Interest on debt (1)		135,222		23,700		47,400		47,400		16,722
Operating leases (2)		109,191		25,331		36,377		24,723		22,760
Purchase obligations (3)		108,078	*		*		*		*
Uncertain tax positions (4)		29,971	*		*		*		*
Total	$	982,462	$	49,031	$	83,777	$	72,123	$	639,482

(1) See Note 9 in the accompanying consolidated financial statements for additional information regarding the Senior Notes.

(2) See Note 13 in the accompanying consolidated financial statements for additional information regarding operating leases.

(3) Amount represents expected payments of forfeitable deposits with land developers under existing Lot Purchase Agreements assuming that contractual development milestones are met by the developers and we exercise our option, specific performance guarantees and estimated contractual obligations for land development agreements. We expect to make the majority of payments of the deposits with land developers within the next three years, but due to the nature of the contractual development milestones that must be met we are unable to accurately estimate the portion of the deposit obligation that will be made within one year and that portion that will be made within one to three years.

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(4) Due to the nature of the uncertain tax positions, we are unable to make a reasonable estimate as to the period of settlement with the respective taxing authorities.

Critical Accounting Policies

General

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate the estimates we use to prepare the consolidated financial statements and update those estimates as necessary. In general, our estimates are based on historical experience, on information from third party professionals, and other various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management.

Homebuilding Inventory

The carrying value of inventory is stated at the lower of cost or market value. Cost of lots and completed and uncompleted housing units represent the accumulated actual cost of the units. Field construction supervisors’ salaries and related direct overhead expenses are included in inventory costs. Interest costs are not capitalized into inventory, with the exception of land under development. Upon settlement, the cost of the unit is expensed on a specific identification basis. Cost of building materials is determined on a first-in, first-out basis.

Sold inventory is evaluated for impairment based on the contractual selling price compared to the total estimated cost to construct, plus a reasonable profit margin. Unsold inventory is evaluated for impairment by analyzing recent comparable sale prices within the applicable community compared to the costs incurred to date plus the expected costs to complete and a reasonable profit margin. Any calculated impairments are recorded immediately in cost of sales. Beginning in 2017, with our adoption of ASU 2015-11, Inventory: Simplifying the Measurement of Inventory, which standardizes the definition of market value, we will no longer include a reasonable profit margin in our inventory impairment analysis.  

Land Under Development and Contract Land Deposits

Land Under Development

On a limited basis, we directly acquire raw parcels of land 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.

Land under development, including the land under development held by our unconsolidated JVs and the related joint venture investments, is reviewed for potential write-downs when impairment indicators are present. In addition to considering market and economic conditions, we assess land under development impairments on a community-by-community basis, analyzing, as applicable, current sales absorption levels, recent sales’ direct profit, and the dollar differential between the projected fully-developed cost of the lots and the current market price for lots. If indicators of impairment are present for a community, we perform an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if they are, impairment charges are required to be recorded in an amount by which the carrying amount of the assets exceeds the fair value of the assets. Our determination of fair value is primarily based on discounting the estimated future cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

At December 31, 2016, we had approximately $47,000 in land under development in four separate communities. In addition, at December 31, 2016, we had an aggregate investment totaling approximately $49,400 in six separate JVs that controlled land under development. None of the communities classified as land under development nor any of the undeveloped land held by the JVs had any indicators of impairment at December 31, 2016. As such, we do not believe that any of the land under development is impaired at this time. However, there can be no assurance that we will not incur impairment charges in the future due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Contract Land Deposits

We purchase finished lots under Lot Purchase Agreements that require deposits that may be forfeited if we fail to perform under the contract. The deposits are in the form of cash or letters of credit in varying amounts and represent a percentage of the aggregate purchase price of the finished lots.

We maintain an allowance for losses on contract land deposits that reflects our judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, we utilize a loss contingency analysis that is conducted each quarter. In addition to considering market and economic conditions, we assess

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contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ direct profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either us or the developer along with an analysis of the expected outcome of any such default.

Our analysis is focused on whether we can sell houses at an acceptable margin and sales pace in a particular community in the current market with which we are faced. Because we do not own the finished lots on which we had placed a contract land deposit, if the above analysis leads to a determination that we cannot sell homes at an acceptable margin and sales pace at the current contractual lot price, we then determine whether we will elect to default under the contract, forfeit our deposit and terminate the contract, or whether we will attempt to restructure the lot purchase contract, which may require us to forfeit the deposit to obtain contract concessions from a developer. We also assess whether an impairment is present due to collectability issues resulting from a developer’s non-performance because of financial or other conditions.

Although we consider the allowance for losses on contract land deposits reflected on the December 31, 2016 consolidated balance sheet to be adequate (see Note 1 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Warranty/Product Liability Accruals

Warranty and product liability accruals are established to provide for estimated future costs as a result of construction and product defects, product recalls and litigation incidental to our business. Liability estimates are determined based on our judgment considering such factors as historical experience, the likely 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 evaluations by our General Counsel and outside counsel retained to handle specific product liability cases. Although we consider the warranty and product liability accrual reflected on the December 31, 2016 consolidated balance sheet to be adequate (see Note 13 to the accompanying consolidated financial statements included herein), there can be no assurance that this accrual will prove to be adequate over time to cover losses due to increased costs for material and labor, the inability or refusal of manufacturers or subcontractors to financially participate in corrective action, unanticipated adverse legal settlements, or other unanticipated changes to the assumptions used to estimate the warranty and product liability accrual.

Equity-Based Compensation Expense

Compensation costs related to our equity-based compensation plans are recognized within our income statement. The costs recognized are based on the grant-date fair value. Compensation cost for equity-based grants is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). For the recognition of equity-based compensation expense, the Options which are subject to a performance condition are treated as a separate award from the “service-only” Options, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved.

We calculate the fair value of our non-publicly traded employee Options using the Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to calculate the fair value of options, its results are dependent on input variables, two of which, expected term and expected volatility, are significantly dependent on management’s judgment. We have concluded that our historical exercise experience is the best estimate of future exercise patterns to determine an Option’s expected term. To estimate expected volatility, we analyze the historical volatility of our common stock over a period equal to the Option’s expected term. Changes in management’s judgment of the expected term and the expected volatility could have a material effect on the grant-date fair value calculated and expensed within the income statement. In addition, we are required to estimate future grant forfeitures when considering the amount of stock-based compensation costs to record. We have concluded that our historical forfeiture rate is the best measure to base our estimate of future forfeitures of equity-based compensation grants. However, there can be no assurance that our future forfeiture rate will not be materially higher or lower than our historical forfeiture rate, which would affect the aggregate cumulative compensation expense recognized. Beginning in 2017, with our adoption of ASU 2016-09, Compensation - Stock Compensation, we will no longer estimate future grant forfeitures but will instead recognize grant forfeitures in the period in which they occur.

In addition, when recognizing stock based compensation cost related to “performance condition” Option grants, we are required to make a determination as to whether the performance conditions will be met prior to the completion of the actual performance period.  The performance metric is based on our return on capital performance during a specified three year period based on the date of Option grant. While we currently believe that this performance condition will be satisfied at the target level and are recognizing compensation expense related to such Options accordingly, our future expected activity levels could cause us to make a different determination, resulting in a change to the compensation expense to be recognized related to performance condition Option grants that would otherwise have been recognized to date.  

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Although we believe that the compensation costs recognized in 2016 are representative of the cumulative ratable amortization of the grant-date fair value of unvested options outstanding and expected to be exercised, changes to the estimated input values such as expected term and expected volatility and changes to the determination of whether performance condition grants will vest, could produce widely different expense valuations and recognition.

Mortgage Loan Loss Allowance

We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market generally within 30 days from origination. All of the loans that we originate are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, VA and FHA. We employ a quality control department to ensure that our underwriting controls are effectively operating, and further assess the underwriting function as part of our assessment of internal controls over financial reporting. We maintain an allowance for losses on mortgage loans originated that reflects our judgment of the present loss exposure in the loans that we have originated and sold. The allowance is calculated based on an analysis of historical experience and exposure. Although we consider the allowance for loan losses reflected on the December 31, 2016 consolidated balance sheet to be adequate (see Note 15 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated changes to the assumptions used to estimate the mortgage loan loss allowance.

Impact of Inflation, Changing Prices and Economic Conditions

See “Risk Factors” included in Item 1A of this Form 10-K for a description of the impact of inflation, changing prices and economic conditions on our business and our financial results. See also the discussion of the current business environment in the Overview section above.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

(dollars in thousands)

Market risk is the risk of loss arising from adverse changes in market prices and interest rates. Our market risk arises from interest rate risk inherent in our financial instruments and debt obligations. Interest rate risk results from the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitive assets, liabilities and commitments. Lower interest rates tend to increase demand for mortgage loans for home purchasers, while higher interest rates make it more difficult for potential borrowers to purchase residential properties and to qualify for mortgage loans. We have no market rate sensitive instruments held for speculative or trading purposes.

Our homebuilding segment is exposed to interest rate risk as it relates to its debt obligations. In September 2012, we issued $600,000 of Senior Notes. The Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15. Changes to interest rates generally affect the fair value of fixed-rate debt instruments, but not earnings or cash flows. We generally have no obligation to prepay the Senior Notes prior to maturity, and therefore, interest rate fluctuations should not have a significant impact on our fixed-rate debt.

In July 2016, we entered into a Credit Agreement which provides for aggregate revolving loan commitments of $200,000. Under the Credit Agreement, we may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $8,300 outstanding at December 31, 2016, and a $25,000 sublimit for a swing line commitment. Borrowings under the Credit Agreement generally bear interest for Base Rate Loans at a Base Rate equal to the highest of (i) a Federal Funds Rate plus one-half of one percent, (ii) Bank of America’s publicly announced “prime rate,” and (iii) the Eurodollar Rate plus one percent, plus the Applicable Rate which is based on our debt rating, or for Eurodollar Rate Loans, at the Eurodollar Rate equal to LIBOR plus the Applicable Rate.  At December 31, 2016, there was no debt outstanding under the Facility.

Our mortgage banking segment is exposed to interest rate risk as it relates to its lending activities. The mortgage banking segment originates mortgage loans, which are sold through either optional or mandatory forward delivery contracts into the secondary markets. All of the mortgage banking segment’s loan portfolio is held for sale and subject to forward sale commitments. NVRM also sells all of its mortgages held for sale on a servicing released basis.

NVRM has available a mortgage Repurchase Agreement, which as of December 31, 2016 provided for loan repurchases up to $150,000 with an incremental commitment pursuant to which NVRM may from time to time request increases in the total commitment available under the agreement by up to $50,000 in the aggregate. The Repurchase Agreement is used to fund NVRM’s

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mortgage origination activities. Advances under the Repurchase Agreement carry a Pricing Rate based on the LIBOR Rate plus the LIBOR Margin, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 2.25%. At December 31, 2016, there was no debt outstanding under the Repurchase Agreement.

The following table represents the contractual balances of our on-balance sheet financial instruments at the expected maturity dates, as well as the fair values of those on-balance sheet financial instruments at December 31, 2016. The expected maturity categories take into consideration the actual and anticipated amortization of principal and do not take into consideration the reinvestment of cash or the refinancing of existing indebtedness. Because we sell all of the mortgage loans we originate into the secondary markets, we have made the assumption that the portfolio of mortgage loans held for sale will mature in the first year.

	Maturities (000's)
																		Fair
	2017			2018		2019		2020		2021		Thereafter			Total			Value
Mortgage banking segment
Interest rate sensitive assets:
Mortgage loans held for sale	$	357,912			—		—		—		—		—		$	357,912		$	351,958
Average interest rate		3.9	%		—		—		—		—		—			3.9	%
Other:
Forward trades of mortgage-backed securities (a)	$	8,064			—		—		—		—		—		$	8,064		$	8,064
Forward loan commitments (a)	$	2,076			—		—		—		—		—		$	2,076		$	2,076
Homebuilding segment
Interest rate sensitive assets:
Interest-bearing deposits	$	326,873			—		—		—		—		—		$	326,873		$	326,873
Average interest rate		0.5	%		—		—		—		—		—			0.5	%
Interest rate sensitive liabilities:
Fixed rate obligations (b)	$	—			—		—		—		—	$	600,00	0	$	600,000		$	612,000
Average interest rate		—			—		—		—		—		4.0	%		4.0	%

(a) Represents the fair value recorded pursuant to ASC 815, Derivatives and Hedging.

(b) The Senior Notes mature in 2022.

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Item 8. Financial Statements and Supplementary Data.

The financial statements listed in Item 15 are filed as part of this report and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”).

Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of December 31, 2016 were effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2016. There have been no changes in our internal control over financial reporting identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

Item 10 is incorporated herein by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2017. Reference is also made regarding our executive officers to “Executive Officers of the Registrant” following Item 4 of this Form 10-K.

Item 11. Executive Compensation.

Item 11 is incorporated herein by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2017.

33

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 12 is incorporated herein by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2017.

Equity Compensation Plan Information

The table below sets forth information as of December 31, 2016 for (i) all equity compensation plans approved by our shareholders and (ii) all equity compensation plans not approved by our shareholders:

Plan category	Numberofsecuritiestobe issued uponexerciseof outstandingoptions, warrants andrights		Weighted-average exercisepriceof outstandingoptions, warrantsandrights		Numberofsecurities remainingavailablefor futureissuanceunder equitycompensation plans (excluding securitiesreflectedinthe firstcolumn)
Equity compensation plans approved by security holders (1)		974,221	$	1,075.45		312,471
Equity compensation plans not approved by security holders		117,968	$	683.04		—
Total		1,092,189	$	1,033.07		312,471

(1) This category includes the restricted share units (“RSUs”) authorized to be issued under the 2010 Equity Incentive Plan, which was approved by our shareholders at our May 4, 2010 Annual Meeting. At December 31, 2016, there are 15,951 RSUs outstanding, issued at a $0 exercise price. Of the total 312,471 shares remaining available for future issuance under the shareholder approved plans, up to 37,774 may be issued as RSUs. The weighted-average exercise price of outstanding options under security holder approved plans, excluding outstanding RSUs, was $1,093.35.

Equity compensation plans approved by our shareholders include: the 1998 Management Long-Term Stock Option Plan, the 1998 Directors’ Long-Term Stock Option Plan, the 2010 Equity Incentive Plan, and the 2014 Equity Incentive Plan. The only equity compensation plan that was not approved by our shareholders is the 2000 Broadly-Based Stock Option Plan. See Note 12 in the accompanying consolidated financial statements for a description of each of our equity compensation plans.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 13 is incorporated herein by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2017.

Item 14. Principal Accountant Fees and Services.

Item 14 is incorporated herein by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2017.

34

PART IV

Item 15. Exhibits and Financial Statement Schedules.

The following documents are filed as part of this report:

1. Financial Statements

NVR, Inc. - Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2. Exhibits

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit Number	Filing Date
3.1	Restated Articles of Incorporation of NVR, Inc.	10-K		3.1	2/25/2011
3.2	Bylaws, as amended, of NVR, Inc.	8-K		3.1	3/17/2016
4.1	Indenture dated as of April 14, 1998 between NVR, Inc., as issuer and the Bank of New York as trustee.	8-K		4.3	4/23/1998
4.2	Form of Note (included in Indenture).	8-K		4.5	4/23/1998
4.3	Fifth Supplemental Indenture dated September 10, 2012 among NVR, Inc. and U.S. Bank Trust National Association.	8-K		4.1	9/10/2012
4.4	Form of Global Note.	8-K		4.2	9/10/2012
10.1*	Amended and Restated Employment Agreement between NVR, Inc. and Paul C. Saville dated November 4, 2015.	10-Q		10.1	11/6/2015
10.2*	Amended and Restated Employment Agreement between NVR, Inc. and Daniel D. Malzahn dated November 4, 2015.	10-Q		10.2	11/6/2015
10.3*	Amended and Restated Employment Agreement between NVR, Inc. and Robert W. Henley dated November 4, 2015.	10-Q		10.3	11/6/2015
10.4*	Amended and Restated Employment Agreement between NVR, Inc. and Eugene J. Bredow dated November 4, 2015.	10-Q		10.4	11/6/2015
10.5*	Employment Agreement between NVR, Inc. and Jeffrey D. Martchek dated January 1, 2016.	10-K		10.5	2/17/2016
10.6*	Profit Sharing Plan of NVR, Inc. and Affiliated Companies.	S-8	333-29241	4.1	6/13/1997
10.7*	Employee Stock Ownership Plan of NVR, Inc.	10-K/A			12/31/1994
10.8*	NVR, Inc. 1998 Management Long-Term Stock Option Plan.	S-8	333-79951	4	6/4/1999
10.9*	NVR, Inc. 1998 Directors’ Long-Term Stock Option Plan.	S-8	333-79949	4	6/4/1999
10.10*	NVR, Inc. 2000 Broadly-Based Stock Option Plan.	S-8	333-56732	99.1	3/8/2001
10.11*	Amended and Restated NVR, Inc. Nonqualified Deferred Compensation Plan.	10-Q		10.5	11/6/2015
10.12*	Description of the Board of Directors’ compensation arrangement.	10-K		10.27	2/28/2005
10.13*	NVR, Inc. 2014 Equity Incentive Plan.	S-8	333-195756	10.1	5/7/2014

35

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit Number	Filing Date
10.14*	The Form of Non-Qualified Stock Option Agreement (Management time-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.	8-K		10.1	5/7/2014
10.15*	The Form of Non-Qualified Stock Option Agreement (Director time-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.	8-K		10.2	5/7/2014
10.16*	The Form of Non-Qualified Stock Option Agreement (Management performance-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.	8-K		10.3	5/7/2014
10.17*	The Form of Non-Qualified Stock Option Agreement (Director performance-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.	8-K		10.4	5/7/2014
10.18*	NVR, Inc. 2010 Equity Incentive Plan.	S-8	333-166512	10.1	5/4/2010
10.19*	The Form of Non-Qualified Stock Option Agreement (Management grants) under the NVR, Inc. 2010 Equity Incentive Plan.	10-Q		10.1	7/30/2013
10.20*	The Form of Non-Qualified Stock Option Agreement (Director grants) under the NVR, Inc. 2010 Equity Incentive Plan.	8-K		10.2	5/6/2010
10.21*	The Form of Restricted Share Units Agreement (Management grants) under the NVR, Inc. 2010 Equity Incentive Plan.	10-Q		10.2	7/30/2013
10.22*	The Form of Restricted Share Units Agreement (Director grants) under the NVR, Inc. 2010 Equity Incentive Plan.	8-K		10.4	5/6/2010
10.23*	The Form of Non-Qualified Stock Option Agreement under the NVR, Inc. 2000 Broadly-Based Stock Option Plan.	8-K		10.1	1/3/2008
10.24*	The Form of Non-Qualified Stock Option Agreement under the 1998 Directors’ Long-Term Stock Option Plan.	10-K		10.34	2/22/2008
10.25	Amended and Restated Master Repurchase Agreement dated as of August 2, 2011, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.1	1/21/2016
10.26	First Amendment to Amended and Restated Master Repurchase Agreement dated as of August 1, 2012, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.2	1/21/2016
10.27	Second Amendment to Amended and Restated Master Repurchase Agreement dated as of November 13, 2012, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.3	1/21/2016
10.28	Third Amendment to Amended and Restated Master Repurchase Agreement dated as of November 29, 2012, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.4	1/21/2016
10.29	Fourth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 31, 2013, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.5	1/21/2016

36

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit Number	Filing Date
10.30	Fifth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 30, 2014, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.6	1/21/2016
10.31	Sixth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 29, 2015, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.7	1/21/2016
10.32	Seventh Amendment to Amended and Restated Master Repurchase Agreement dated as of January 18, 2016, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	8-K		10.8	1/21/2016
10.33	Eighth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 27, 2016, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.	10-Q		10.2	7/28/2016
10.34	Credit Agreement dated as of July 15, 2016 among NVR, Inc. and the lenders party hereto, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Book Runner.	8-K		10.1	7/18/2016
10.35*	Summary of 2017 Named Executive Officer annual incentive compensation plan. Filed herewith.
10.36*	First Amendment to NVR, Inc. Nonqualified Deferred Compensation Plan. Filed herewith.
21	NVR, Inc. Subsidiaries. Filed herewith.
23	Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith.
31.1	Certification of NVR’s Chief Executive Officer pursuant to Rule 13a-14(a). Filed herewith.
31.2	Certification of NVR’s Chief Financial Officer pursuant to Rule 13a-14(a). Filed herewith.
32	Certification of NVR’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	* Exhibit is a management contract or compensatory plan or arrangement.

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NVR, Inc.
By:	/s/ Paul C. Saville
	Paul C. Saville
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Dwight C. Schar	Chairman	February 15, 2017
Dwight C. Schar
/s/ C. E. Andrews	Director	February 15, 2017
C. E. Andrews
/s/ Timothy M. Donahue	Director	February 15, 2017
Timothy M. Donahue
/s/ Thomas D. Eckert	Director	February 15, 2017
Thomas D. Eckert
/s/ Alfred E. Festa	Director	February 15, 2017
Alfred E. Festa
/s/ Ed Grier	Director	February 15, 2017
Ed Grier
/s/ Manuel H. Johnson	Director	February 15, 2017
Manuel H. Johnson
/s/ Mel Martinez	Director	February 15, 2017
Mel Martinez
/s/ William A. Moran	Director	February 15, 2017
William A. Moran
/s/ David A. Preiser	Director	February 15, 2017
David A. Preiser
/s/ W. Grady Rosier	Director	February 15, 2017
W. Grady Rosier
/s/ Susan W. Ross	Director	February 15, 2017
Susan W. Ross
/s/ Paul W. Whetsell	Director	February 15, 2017
Paul W. Whetsell
/s/ Paul C. Saville	Principal Executive Officer	February 15, 2017
Paul C. Saville
/s/ Daniel D. Malzahn	Principal Financial Officer	February 15, 2017
Daniel D. Malzahn
/s/ Eugene J. Bredow	Principal Accounting Officer	February 15, 2017
Eugene J. Bredow

38

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited the accompanying consolidated balance sheets of NVR, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NVR, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NVR, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 15, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

McLean, Virginia

February 15, 2017

39

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited NVR, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NVR, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, NVR, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NVR, Inc. and subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 15, 2017 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

McLean, Virginia

February 15, 2017

40

NVR, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

	December 31, 2016			December 31, 2015
ASSETS
Homebuilding:
Cash and cash equivalents	$	375,748		$	397,522
Restricted cash		17,561			23,440
Receivables		18,937			11,482
Inventory:
Lots and housing units, covered under sales agreements with customers		883,868			785,982
Unsold lots and housing units		145,065			147,832
Land under development		46,999			60,611
Building materials and other		16,168			12,101
		1,092,100			1,006,526
Assets related to consolidated variable interest entity		1,251			1,749
Contract land deposits, net		379,844			343,295
Property, plant and equipment, net		45,915			44,651
Reorganization value in excess of amounts allocable to identifiable assets, net		41,580			41,580
Goodwill and finite-lived intangible assets, net		2,599			3,982
Deferred tax assets, net		170,652			161,805
Other assets		87,159			96,136
		2,233,346			2,132,168
Mortgage Banking:
Cash and cash equivalents		19,657			26,804
Restricted cash		1,857			2,038
Mortgage loans held for sale, net		351,958			319,553
Property and equipment, net		4,903			5,313
Reorganization value in excess of amounts allocable to identifiable assets, net		7,347			7,347
Other assets		24,875			18,495
		410,597			379,550
Total assets	$	2,643,943		$	2,511,718
LIABILITIES AND SHAREHOLDERS' EQUITY
Homebuilding:
Accounts payable	$	251,212		$	227,437
Accrued expenses and other liabilities		336,318			304,922
Liabilities related to consolidated variable interest entity		882			1,091
Customer deposits		122,236			110,965
Senior notes		596,455			595,847
		1,307,103			1,240,262
Mortgage Banking:
Accounts payable and other liabilities		32,399			32,291
		32,399			32,291
Total liabilities		1,339,502			1,272,553
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of    both December 31, 2016 and December 31, 2015		206			206
Additional paid-in capital		1,515,828			1,447,795
Deferred compensation trust – 108,640 and 108,614 shares of NVR, Inc. common stock as of    December 31, 2016 and December 31, 2015, respectively		(17,375	)		(17,333	)
Deferred compensation liability		17,375			17,333
Retained earnings		5,695,376			5,270,114
Less treasury stock at cost – 16,862,327 and 16,664,342 shares as of December 31, 2016 and   December 31, 2015, respectively		(5,906,969	)		(5,478,950	)
Total shareholders' equity		1,304,441			1,239,165
Total liabilities and shareholders' equity	$	2,643,943		$	2,511,718

See notes to consolidated financial statements.

41

NVR, Inc.

Consolidated Statements of Income

(in thousands, except per share data)

	Year Ended December 31,
	2016			2015			2014
Homebuilding:
Revenues	$	5,709,223		$	5,065,200		$	4,375,059
Other income		2,820			2,956			2,853
Cost of sales		(4,707,861	)		(4,118,782	)		(3,568,586	)
Selling, general and administrative		(382,459	)		(371,127	)		(358,851	)
Operating income		621,723			578,247			450,475
Interest expense		(20,621	)		(22,918	)		(22,591	)
Homebuilding income		601,102			555,329			427,884
Mortgage Banking:
Mortgage banking fees		113,321			93,808			69,509
Interest income		7,569			6,485			4,940
Other income		1,652			1,113			778
General and administrative		(60,861	)		(52,882	)		(49,016	)
Interest expense		(1,086	)		(641	)		(549	)
Mortgage banking income		60,595			47,883			25,662
Income before taxes		661,697			603,212			453,546
Income tax expense		(236,435	)		(220,285	)		(171,916	)
Net income	$	425,262		$	382,927		$	281,630
Basic earnings per share	$	110.53		$	95.21		$	65.83
Diluted earnings per share	$	103.61		$	89.99		$	63.50
Basic weighted average shares outstanding		3,847			4,022			4,278
Diluted weighted average shares outstanding		4,104			4,255			4,435

See notes to consolidated financial statements.

42

NVR, Inc.

Consolidated Statements of Shareholders’ Equity

(in thousands)

	Common Stock		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Deferred Compensation Trust			Deferred Compensation Liability			Total
Balance, December 31, 2013	$	206	$	1,212,050		$	4,605,557	$	(4,556,461	)	$	(17,741	)	$	17,741		$	1,261,352
Net income		—		—			281,630		—			—			—			281,630
Deferred compensation activity		—		—			—		—			408			(408	)		—
Purchase of common stock for treasury		—		—			—		(567,544	)		—			—			(567,544	)
Equity-based compensation		—		63,227			—		—			—			—			63,227
Tax benefit from equity benefit plan activity		—		9,437			—		—			—			—			9,437
Proceeds from stock options exercised		—		76,153			—		—			—			—			76,153
Treasury stock issued upon option exercise and restricted share vesting		—		(35,372	)		—		35,372			—			—			—
Balance, December 31, 2014		206		1,325,495			4,887,187		(5,088,633	)		(17,333	)		17,333			1,124,255
Net income		—		—			382,927		—			—			—			382,927
Purchase of common stock for treasury		—		—			—		(431,367	)		—			—			(431,367	)
Equity-based compensation		—		54,091			—		—			—			—			54,091
Tax benefit from equity benefit plan activity		—		23,311			—		—			—			—			23,311
Proceeds from stock options exercised		—		85,948			—		—			—			—			85,948
Treasury stock issued upon option exercise and restricted share vesting		—		(41,050	)		—		41,050			—			—			—
Balance, December 31, 2015		206		1,447,795			5,270,114		(5,478,950	)		(17,333	)		17,333			1,239,165
Net income		—		—			425,262		—			—			—			425,262
Deferred compensation activity		—		—			—		—			(42	)		42			—
Purchase of common stock for treasury		—		—			—		(455,351	)		—			—			(455,351	)
Equity-based compensation		—		43,598			—		—			—			—			43,598
Tax benefit from equity benefit plan activity		—		13,661			—		—			—			—			13,661
Proceeds from stock options exercised		—		38,106			—		—			—			—			38,106
Treasury stock issued upon option exercise and restricted share vesting		—		(27,332	)		—		27,332			—			—			—
Balance, December 31, 2016	$	206	$	1,515,828		$	5,695,376	$	(5,906,969	)	$	(17,375	)	$	17,375		$	1,304,441

See notes to consolidated financial statements.

43

NVR, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2016			2015			2014
Cash flows from operating activities:
Net income	$	425,262		$	382,927		$	281,630
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,269			21,534			17,614
Excess income tax benefit from equity-based compensation		(13,661	)		(23,311	)		(9,437	)
Equity-based compensation expense		43,598			54,091			63,227
Contract land deposit recoveries, net		(4,269	)		(11,058	)		(225	)
Gain on sale of loans, net		(85,535	)		(67,891	)		(47,791	)
Deferred tax (benefit) expense		(10,024	)		1,902			(4,176	)
Mortgage loans closed		(3,660,269	)		(3,111,413	)		(2,469,876	)
Mortgage loans sold and principal payments on mortgage loans held for sale		3,710,250			3,059,889			2,525,706
Distribution of earnings from unconsolidated joint ventures		9,094			15,511			8,431
Net change in assets and liabilities:
Increase in inventory		(85,194	)		(134,803	)		(127,729	)
Increase in contract land deposits		(32,280	)		(37,561	)		(57,566	)
Increase in receivables		(9,083	)		(1,527	)		(533	)
Increase in accounts payable and accrued expenses		58,532			55,404			60
Increase in customer deposits		11,271			4,210			5,733
Other, net		4,504			(4,513	)		(519	)
Net cash provided by operating activities		384,465			203,391			184,549
Cash flows from investing activities:
Investments in and advances to unconsolidated joint ventures		(653	)		(1,917	)		—
Distribution of capital from unconsolidated joint ventures		12,594			18,489			11,569
Purchase of property, plant and equipment		(22,369	)		(18,277	)		(31,672	)
Proceeds from the sale of property, plant and equipment		1,000			683			1,021
Net cash used in investing activities		(9,428	)		(1,022	)		(19,082	)
Cash flows from financing activities:
Purchase of treasury stock		(455,351	)		(431,367	)		(567,544	)
Net repayments under note payable and credit lines		—			—			(115	)
Repayments under non-recourse debt related to consolidated variable interest entity		—			(64	)		(3,301	)
Distributions to partner in consolidated variable interest entity		(150	)		(300	)		(931	)
Excess income tax benefit from equity-based compensation		13,661			23,311			9,437
Proceeds from the exercise of stock options		38,106			85,948			76,153
Net cash used in financing activities		(403,734	)		(322,472	)		(486,301	)
Net decrease in cash and cash equivalents		(28,697	)		(120,103	)		(320,834	)
Cash and cash equivalents, beginning of the year		425,316			545,419			866,253
Cash and cash equivalents, end of the year	$	396,619		$	425,316		$	545,419
Supplemental disclosures of cash flow information:
Interest paid during the year, net of interest capitalized	$	20,922		$	24,546		$	24,464
Income taxes paid during the year, net of refunds	$	218,984		$	194,670		$	181,840

See notes to consolidated financial statements.

44

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of NVR, Inc. and its subsidiaries (“NVR” or the “Company”) and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 3 and 4 herein for additional information). All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management continually evaluates the estimates used to prepare the consolidated financial statements and updates those estimates as necessary. In general, the Company’s estimates are based on historical experience, on information from third party professionals, and other various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments with original maturities of three months or less. At December 31, 2016 and 2015, $1,214 and $990, respectively, of cash related to a consolidated variable interest entity is included in “Assets related to consolidated variable interest entity” on the accompanying consolidated balance sheet.

The homebuilding segment had restricted cash of $17,561 and $23,440 at December 31, 2016 and 2015, respectively. Restricted cash in 2016 was attributable to customer deposits for certain home sales.  Restricted cash in 2015 was attributable to holding requirements related to outstanding letters of credit issued under the Company’s letter of credit agreement and to customer deposits for certain home sales.

The mortgage banking segment had restricted cash of $1,857 and $2,038 at December 31, 2016 and 2015, respectively, which included amounts collected from customers for loans in process and closed mortgage loans held for sale.

Homebuilding Inventory

The carrying value of inventory is stated at the lower of cost or market value. Cost of lots and completed and uncompleted housing units represent the accumulated actual cost of the units. Field construction supervisors’ salaries and related direct overhead expenses are included in inventory costs. Interest costs are not capitalized into inventory, with the exception of land under development and joint venture investments, as applicable (see below). Upon settlement, the cost of the unit is expensed on a specific identification basis. Cost of building materials is determined on a first-in, first-out basis.

Sold inventory is evaluated for impairment based on the contractual sales price compared to the total estimated cost to construct plus a reasonable profit margin. Unsold inventory is evaluated for impairment by analyzing recent comparable sales prices within the applicable community compared to the costs incurred to date plus the expected costs to complete and a reasonable profit margin. Any calculated impairments are recorded immediately.

Contract Land Deposits

The Company purchases finished lots under fixed price lot purchase agreements (“Lot Purchase Agreements”) that require deposits that may be forfeited if NVR fails to perform under the contract. The deposits are in the form of cash or letters of credit in varying amounts and represent a percentage of the aggregate purchase price of the finished lots.

NVR maintains an allowance for losses on contract land deposits that reflects the Company’s judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, NVR utilizes an Accounting Standards Codification (“ASC”) 450, Contingencies, loss contingency analysis that is conducted each quarter. In addition to considering market and economic conditions, NVR assesses contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ direct profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either the Company or the developer along with an analysis of the expected outcome of any such default.

45

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

NVR’s analysis is focused on whether the Company can sell houses at an acceptable margin and sales pace in a particular community in the current market with which the Company is faced. Because the Company does not own the finished lots on which the Company has placed a contract land deposit, if the above analysis leads to a determination that the Company cannot sell homes at an acceptable margin and sales pace at the current contractual lot price, the Company then determines whether it will elect to default under the contract, forfeit the deposit and terminate the contract, or whether the Company will attempt to restructure the lot purchase contract, which may require it to forfeit the deposit to obtain contract concessions from a developer. The Company also assesses whether impairment is present due to collectability issues resulting from a developer’s non-performance because of financial or other conditions.

For the years ended December 31, 2016, 2015 and 2014, the Company recognized net pre-tax recoveries of $4,269, $11,058 and $225, respectively, of contract land deposits previously determined to be unrecoverable. The contract land deposit assets on the accompanying consolidated balance sheets are shown net of $31,306 and $42,239 impairment valuation allowances at December 31, 2016 and 2015, respectively.

Land Under Development

On a limited basis, NVR directly acquires raw parcels of land 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.

Land under development, including the land under development held by the Company’s unconsolidated joint ventures and the related joint venture investments, is reviewed for potential write-downs when impairment indicators are present. In addition to considering market and economic conditions, the Company assesses land under development impairments on a community-by-community basis, analyzing, as applicable, current sales absorption levels, recent sales’ direct profit, and the dollar differential between the projected fully-developed cost of the lots and the current market price for lots. If indicators of impairment are present for a community, NVR performs an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if so, impairment charges are required to be recorded if the fair value of such assets is less than their carrying amounts. For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company’s determination of fair value is primarily based on discounting the estimated future cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams. NVR does not believe that any of the land under development is impaired at this time.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of the assets using the straight-line method. Model home furniture and fixtures are generally depreciated over a two-year period, office facilities and other equipment are depreciated over a period of three to ten years and production facilities are depreciated over periods of five to forty years.

Intangible Assets

On December 31, 2012, the Company acquired substantially all of the assets of Heartland Homes, Inc., which resulted in the Company recording finite-lived intangible assets and goodwill. The Company completed its annual assessment for impairment of goodwill and management determined that there was no impairment. As of December 31, 2016 and 2015, finite-lived intangible assets attributable to the Heartland Homes, Inc. acquisition, net of accumulated amortization, totaled $2,158 and $3,541, respectively. As of both December 31, 2016 and 2015, the goodwill value was $441. The remaining finite-lived intangible assets will be amortized on a straight-line basis over a weighted average life of 3 years.

Warranty/Product Liability Accruals

The Company establishes warranty and product liability reserves to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s judgment considering such factors as historical experience, the likely 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 the Company’s General Counsel and outside counsel retained to handle specific product liability cases.

46

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

Mortgage Loans Held for Sale, Derivatives and Hedging Activities

NVR originates several different loan products to its customers to finance the purchase of a home through its wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”). NVRM sells all of the loans it originates into the secondary market on a servicing released basis, typically within 30 days from origination. All of the loans that NVRM originates are underwritten to the standards and specifications of the ultimate investor. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by Fannie Mae (“FNMA”), the Department of Veterans Affairs (“VA”) and the Federal Housing Administration (“FHA”). Insofar as NVRM underwrites its originated loans to those standards, NVRM bears no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. NVRM employs a quality control department to ensure that its underwriting controls are effectively operating, and further assesses the underwriting function as part of its assessment of internal controls over financial reporting. NVRM maintains an allowance for losses on mortgage loans originated that reflects NVR’s judgment of the present loss exposure in the loans that NVRM has originated and sold. The allowance is calculated based on an analysis of historical experience and exposure (see Note 15 herein for further information).

Mortgage loans held for sale are carried at the lower of cost or fair value, net of deferred origination costs, until sold.

In the normal course of business, NVRM enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by NVRM. 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 sale 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 December 31, 2016, there were contractual commitments to extend credit to borrowers aggregating $458,161, and open forward delivery sale contracts aggregating $738,637, which hedge both the rate lock loan commitments and closed loans held for sale (see Note 14 herein for a description of the Company’s fair value accounting).

Earnings per Share

The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share for the years ended December 31, 2016, 2015 and 2014:

	Year Ended December 31,
	2016		2015		2014
Weighted average number of shares outstanding used to    calculate basic EPS		3,847		4,022		4,278
Dilutive securities:
Stock options and restricted share units		257		233		157
Weighted average number of shares and share equivalents    outstanding used to calculate diluted EPS		4,104		4,255		4,435

The assumed proceeds used in the treasury method for calculating NVR’s diluted earnings per share includes the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services not yet recognized and the amount of tax benefits that would be credited or charged to additional paid-in capital assuming exercise of the stock option or vesting of the restricted share unit. The assumed amount credited to additional paid-in capital equals the tax benefit from assumed exercise of stock options or the assumed vesting of restricted share units after consideration of the intrinsic value upon assumed exercise or vesting less the actual stock-based compensation expense to be recognized in the income statement.

47

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

The following stock options and restricted share units issued under equity incentive plans were outstanding during the years ended December 31, 2016, 2015 and 2014; however, they were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

	Year Ended December 31,
	2016		2015		2014
Anti-dilutive securities		87		50		757

Revenues – Homebuilding Operations

NVR builds single-family detached homes, townhomes and condominium buildings, which generally are constructed on a pre-sold basis for the ultimate customer. Revenues are recognized at the time the unit is settled and title passes to the customer, adequate cash payment has been received and there is no continuing involvement. In situations where the buyer’s financing is originated by NVRM and the buyer has not made an adequate initial or continuing investment as prescribed by GAAP, the profit on such settlement is deferred until the sale of the related loan to a third-party investor has been completed.

Mortgage Banking Fees

Mortgage banking fees include income earned by NVRM for originating mortgage loans, servicing mortgage loans held on an interim basis, title fees, gains and losses on the sale of mortgage loans and mortgage servicing and other activities incidental to mortgage banking. Mortgage banking fees are generally recognized after the loan has been sold to an unaffiliated, third party investor.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740-10, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite the Company’s belief that its filing position is supportable, the benefit of that tax position is not recognized in the statements of income. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of the taxing authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense. The Company recognizes unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, by expiration of the applicable statute of limitation, or by determination in accordance with certain states’ administrative practices that the uncertain tax position has been effectively settled (see Note 11 herein for further information).

Financial Instruments

Except as otherwise noted herein, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments (see Note 14 herein for further information).

Equity-Based Compensation

The company accounts for its equity-based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires an entity to recognize an expense within its income statement for all share-based payment arrangements, which includes employee stock option and restricted share unit plans. The expense is based on the grant-date fair value of the stock options and restricted share units granted, and is recognized ratably over the requisite service period. Recognition of compensation expense for the stock options which are subject to a performance condition are treated as a separate award from the “service-only” stock options, and expense is recognized when it becomes probable that the stated performance target will be achieved. The Company calculates the

48

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

fair value of its non-publicly traded, employee stock options using the Black-Scholes option-pricing model. The grant date fair value of the restricted share units is the closing price of the Company’s common stock on the day immediately preceding the date of grant. The Company’s equity-based compensation programs are accounted for as equity-classified awards (see Note 12 herein for further discussion of equity-based compensation plans).

Comprehensive Income

For the years ended December 31, 2016, 2015 and 2014, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to 2016 presentation.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs. The standard requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, rather than as an asset.  On January 1, 2016, the Company adopted the standard which on a retrospective basis resulted in the reclassification of the unamortized debt issuance costs related to the Company’s 3.95% Senior Notes due 2022 from the homebuilding “Other assets” line item to the homebuilding “Senior notes” line item in the accompanying condensed consolidated balance sheets.  

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB delayed the standard’s effective date for one year. The standard is effective for the Company as of January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.

In February 2015, FASB issued ASU 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis. The standard changes the manner in which reporting entities evaluate consolidation requirements of certain legal entities. The standard became effective for the Company on January 1, 2016. The adoption of this standard did not have any effect on the Company’s consolidated financial statements and related disclosures.

In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value.  The amendments in the standard do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The standard is effective for the Company as of January 1, 2017. The amendments in the standard are to be applied prospectively. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on-balance sheet with a liability equal to the present value of lease payments over the lease term and a right-of-use asset for the right to use the underlying asset over the lease term. Lessees will recognize expenses on their income statements in a manner similar to current GAAP. The standard also requires additional disclosures of key information about leasing arrangements. The standard is effective for the Company as of January 1, 2019. The Company believes that the adoption of this standard will have a material effect on both assets and liabilities presented on the balance sheet, and is further evaluating the impact of its adoption.

In March 2016, FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting.  The standard simplifies several aspects of share-based payment accounting, including the recognition of income tax effects, statutory tax withholding requirements and accounting for forfeitures. The standard is effective for the Company as of January 1, 2017. The Company believes that the standard will likely have a material effect on net income and earnings per share presented on its consolidated financial statements resulting from the recognition of excess tax benefit from equity plan activity.  Additionally, the Company has elected to record forfeitures based on actual results.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which significantly changes the way impairment of financial assets is recognized. The standard will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. The standard’s provisions will be applied as a cumulative-effect adjustment to

49

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

beginning retained earnings as of the effective date. The standard is effective for the Company as of January 1, 2020. Early adoption is permitted for annual and interim periods beginning January 1, 2019. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The objective of the standard is to address the diversity in practice of how certain cash receipts and payments are presented on the statement of cash flows. The standard requires that the guidance be applied retrospectively in the first interim and annual periods in which an entity adopts the guidance. The standard is effective for the Company as of January 1, 2018, and early adoption is permitted. The Company is currently evaluating the effect that the standard will have on its consolidated statements of cash flows and related disclosures.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments in the standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. As a result, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The standard is effective for the Company as of January 1, 2018, and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its consolidated statements of cash flows and related disclosures.

In January 2017, FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The standard’s objective is to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the standard, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would then be recognized, not to exceed the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on January 1, 2020, and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.

2. Segment Information, Nature of Operations, and Certain Concentrations

NVR’s homebuilding operations primarily construct and sell single-family detached homes, townhomes and condominium buildings under three trade names: Ryan Homes, NVHomes and Heartland Homes. The Ryan Homes product is marketed primarily to first-time and first-time move-up buyers. Ryan Homes operates in twenty-nine metropolitan areas located in Maryland, Virginia, Washington, D.C., West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Florida, Ohio, New Jersey, Delaware, Indiana, Illinois and Tennessee.  The NVHomes and Heartland Homes products are marketed primarily to move-up and upscale buyers. NVHomes operates in Delaware and the Washington, D.C., Baltimore, MD, Philadelphia, PA and Raleigh, NC metropolitan areas. Heartland Homes operates in the Pittsburgh, PA metropolitan area. NVR derived approximately 30% and 13% of its 2016 homebuilding revenues from the Washington, D.C. and Baltimore, MD metropolitan areas, respectively.

NVR’s mortgage banking segment is a regional mortgage banking operation. Substantially all of the mortgage banking segment’s loan closing activity is for NVR’s homebuilding customers. NVR’s mortgage banking business generates revenues primarily from origination fees, gains on sales of loans, and title fees. A substantial portion of the Company’s mortgage operations is conducted in the Washington, D.C. and Baltimore, MD metropolitan areas.

The following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a single reportable segment. The homebuilding 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, Florida and Tennessee

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 the Company’s cost of capital. In addition, certain assets including goodwill and intangible assets, and consolidation adjustments as discussed further below, are not allocated to the operating segments as those assets are neither included in the operating segment’s corporate capital allocation charge, nor in the CODM’s evaluation of the operating

50

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

segment’s performance. The Company records 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 charged to the operating segment upon the determination to terminate a Lot Purchase Agreement with the developer, or to restructure a Lot Purchase Agreement 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. NVR’s overhead functions, such as accounting, treasury and human resources are centrally performed and the costs are not allocated to the Company’s 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 the Company’s operating segments. External corporate interest expense primarily consists of interest charges on the Company’s 3.95% Senior Notes due 2022 (the “Senior Notes”) and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

Following are tables presenting segment revenues, profit before taxes, assets, interest income, interest expense, depreciation and amortization and expenditures for property and equipment, with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

	Year Ended December 31,
	2016		2015		2014
Revenues:
Homebuilding Mid Atlantic	$	3,319,776	$	3,022,789	$	2,617,108
Homebuilding North East		462,385		432,145		376,862
Homebuilding Mid East		1,192,472		1,014,920		892,513
Homebuilding South East		734,590		595,346		488,576
Mortgage Banking		113,321		93,808		69,509
Consolidated revenues	$	5,822,544	$	5,159,008	$	4,444,568

	Year Ended December 31,
	2016			2015			2014
Profit before taxes:
Homebuilding Mid Atlantic	$	301,173		$	322,829		$	271,965
Homebuilding North East		21,947			37,914			33,390
Homebuilding Mid East		121,166			86,336			47,538
Homebuilding South East		71,098			57,384			37,525
Mortgage Banking		63,711			51,236			30,388
Total segment profit		579,095			555,699			420,806
Reconciling items:
Contract land deposit reserve adjustment (1)		10,933			13,805			3,612
Equity-based compensation expense		(43,598	)		(54,091	)		(63,227	)
Corporate capital allocation (2)		189,992			171,170			152,140
Unallocated corporate overhead		(89,376	)		(83,124	)		(61,108	)
Consolidation adjustments and other		35,204			22,622			23,867
Corporate interest expense		(20,553	)		(22,869	)		(22,544	)
Reconciling items sub-total		82,602			47,513			32,740
Consolidated profit before taxes	$	661,697		$	603,212		$	453,546

51

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

	As of December 31,
	2016			2015
Assets:
Homebuilding Mid Atlantic	$	1,054,779		$	994,804
Homebuilding North East		126,720			133,106
Homebuilding Mid East		222,736			220,094
Homebuilding South East		214,225			175,572
Mortgage Banking		403,250			372,203
Total segment assets		2,021,710			1,895,779
Reconciling items:
Consolidated variable interest entity		1,251			1,749
Cash and cash equivalents		375,748			397,522
Deferred taxes		170,652			161,805
Intangible assets and goodwill		51,526			52,909
Contract land deposit reserve		(31,306	)		(42,239	)
Consolidation adjustments and other		54,362			44,193
Reconciling items sub-total		622,233			615,939
Consolidated assets	$	2,643,943		$	2,511,718

	Year Ended December 31,
	2016		2015		2014
Interest income:
Mortgage Banking	$	7,569	$	6,485	$	4,940
Total segment interest income		7,569		6,485		4,940
Other unallocated interest income		1,111		1,211		1,311
Consolidated interest income	$	8,680	$	7,696	$	6,251

	Year Ended December 31,
	2016			2015			2014
Interest expense:
Homebuilding Mid Atlantic	$	119,808		$	107,748		$	96,364
Homebuilding North East		18,141			16,991			12,114
Homebuilding Mid East		28,307			27,263			26,300
Homebuilding South East		23,804			19,217			17,409
Mortgage Banking		1,086			641			549
Total segment interest expense		191,146			171,860			152,736
Corporate capital allocation		(189,992	)		(171,170	)		(152,140	)
Senior Notes and other interest		20,553			22,869			22,544
Consolidated interest expense	$	21,707		$	23,559		$	23,140

	Year Ended December 31,
	2016		2015		2014
Depreciation and amortization:
Homebuilding Mid Atlantic	$	8,089	$	7,876	$	6,489
Homebuilding North East		2,053		1,571		1,208
Homebuilding Mid East		3,748		4,003		3,212
Homebuilding South East		2,276		2,191		1,715
Mortgage Banking		1,117		1,136		1,089
Total segment depreciation and amortization		17,283		16,777		13,713
Unallocated corporate		4,986		4,757		3,901
Consolidated depreciation and amortization	$	22,269	$	21,534	$	17,614

52

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

		Year Ended December 31,
		2016		2015		2014
Expenditures for property and equipment:
Homebuilding Mid Atlantic		$	8,838	$	8,287	$	9,047
Homebuilding North East			3,423		2,220		2,311
Homebuilding Mid East			4,027		3,774		6,982
Homebuilding South East			3,594		1,753		3,472
Mortgage Banking			726		265		2,580
Total segment expenditures for property and equipment			20,608		16,299		24,392
Unallocated corporate	��		1,761		1,978		7,280
Consolidated expenditures for property and equipment		$	22,369	$	18,277	$	31,672

(1) This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments.

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

	Year Ended December 31,
	2016		2015		2014
Corporate capital allocation charge:
Homebuilding Mid Atlantic	$	119,758	$	107,705	$	96,328
Homebuilding North East		18,132		16,987		12,107
Homebuilding Mid East		28,303		27,263		26,299
Homebuilding South East		23,799		19,215		17,406
Total corporate capital allocation charge	$	189,992	$	171,170	$	152,140

3. Variable Interest Entities

Lot Purchase Agreements

NVR generally does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under Lot Purchase Agreements. The Lot Purchase Agreements require deposits that may be forfeited if NVR fails to perform under the Lot Purchase Agreements. The deposits required under the Lot Purchase Agreements 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.

NVR believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. NVR may, at its option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of its intent not to acquire the finished lots under contract. NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the Lot Purchase Agreements. In other words, if NVR does not perform under a Lot Purchase Agreement, NVR loses only its deposit. None of the creditors of any of the development entities with which NVR enters Lot Purchase Agreements have recourse to the general credit of NVR. NVR generally does not have any specific performance obligations to purchase a certain number or any of the lots, nor does NVR guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.

NVR is not involved in the design or creation of the development entities from which the Company purchases lots under Lot Purchase Agreements. The developer’s equity holders have the power to direct 100% of the operating activities of the development entity. NVR has no voting rights in any of the development entities. The sole purpose of the development entity’s activities is to generate positive cash flow returns for the equity holders. Further, NVR does not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the developer’s equity holders.

The deposit placed by NVR pursuant to the Lot Purchase Agreement is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be variable interest entities (“VIE”). Therefore, the development entities with which NVR enters into Lot Purchase Agreements, including the joint venture limited liability corporations, discussed

53

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

below, are evaluated for possible consolidation by NVR. An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE.

NVR believes the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity. Unless and until a development entity completes finished building lots through the development process to be able to sell, the process of which the development entity’s equity investors bear the full risk, the entity does not earn any revenues. The operating development activities are managed solely by the development entity’s equity investors.

The development entities with which NVR contracts to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from NVR, select who will purchase the finished lots and at what price, and manage the completion of the infrastructure improvements, all for the purpose of generating a cash flow return to the development entity’s equity holders and all independent of NVR. The Company possesses no more than limited protective legal rights through the Lot Purchase Agreement in the specific finished lots that it is purchasing, and NVR possesses no participative rights in the development entities. Accordingly, NVR does not have the power to direct the activities of a developer that most significantly impact the developer’s economic performance. For this reason, NVR has concluded that it is not the primary beneficiary of the development entities with which the Company enters into Lot Purchase Agreements, and therefore NVR does not consolidate any of these VIEs.

As of December 31, 2016, NVR controlled approximately 73,200 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $396,200 and $2,400, respectively. As noted above, NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the Lot Purchase Agreements and, in very limited circumstances, specific performance obligations.

In addition, NVR has certain properties under contract with land owners that are expected to yield approximately 9,600 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 $14,900 as of December 31, 2016, of which approximately $1,400 is refundable if NVR does not perform under the contract. NVR generally expects to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.

NVR’s total risk of loss related to contract land deposits as of December 31, 2016 and 2015 was as follows:

	December 31,
	2016			2015
Contract land deposits	$	411,150		$	385,534
Loss reserve on contract land deposits		(31,306	)		(42,239	)
Contract land deposits, net		379,844			343,295
Contingent obligations in the form of letters of credit		2,379			3,302
Contingent specific performance obligations (1)		1,505			1,505
Total risk of loss	$	383,728		$	348,102

(1) As of both December 31, 2016 and 2015, the Company was committed to purchase 10 finished lots under specific performance obligations.

4. Joint Ventures

On a limited basis, NVR obtains finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested, or committed to invest, in addition to any deposits placed under Lot Purchase Agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into a standard Lot Purchase Agreement to purchase lots from these JVs, and as a result has a variable interest in these JVs.

At December 31, 2016, the Company had an aggregate investment totaling approximately $49,400 in six JVs that are expected to produce approximately 7,400 finished lots, of which approximately 4,200 lots were controlled by the Company and the remaining approximately 3,200 lots were either under contract with unrelated parties or not currently not under contract. In addition, NVR had

54

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

additional funding commitments in the aggregate totaling $6,200 to three of the JVs at December 31, 2016. The Company has determined that it is not the primary beneficiary of five of the JVs because NVR and the other JV partner either share power or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $49,000 and $59,800 at December 31, 2016 and 2015, respectively, and is reported in the “Other assets” line item on the accompanying consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV.

The condensed balance sheets of the consolidated JV at December 31, 2016 and 2015 were as follows:

	December 31,
	2016		2015
Assets:
Cash	$	1,214	$	990
Other assets		37		379
Land under development		—		380
Total assets	$	1,251	$	1,749
Liabilities and equity:
Accrued expenses		550		567
Equity		701		1,182
Total liabilities and equity	$	1,251	$	1,749

At December 31, 2015, the Company had an aggregate investment totaling approximately $60,500 in six JVs that were expected to produce approximately 8,000 finished lots, of which approximately 4,700 lots were controlled by the Company and the remaining approximately 3,300 lots were either under contract with unrelated parties or not currently not under contract. In addition, at December 31, 2015, NVR had additional funding commitments in the aggregate totaling $11,500 to three of the JVs.

The Company recognizes income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when homes are settled and is based on expected total profitability and the total number of lots expected to be produced by the respective JVs.  Distributions received from the unconsolidated JVs are allocated between return of capital and distributions of earnings based on the ratio of capital contributed by NVR to the total expected returns for the respective JVs, and are classified within the accompanying consolidated statements of cash flows as cash flows from investing activities and operating activities, respectively.

5. Land Under Development

On a limited basis, NVR directly acquires 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 December 31, 2016, NVR directly owned four separate raw parcels of land with a carrying value of $46,999 that it intends to develop into approximately 600 finished lots primarily for use in its homebuilding operations. The Company also has additional funding commitments of approximately $12,000 under a joint development agreement related to one parcel, a portion of which the Company expects will be offset by development credits of approximately $7,100. None of the raw parcels had any indicators of impairment as of December 31, 2016.

In February 2016, the Company purchased a land parcel which included both land under development and finished lots for approximately $150,000.  In June 2016, the Company sold that land parcel to a developer for an amount which approximated NVR’s net investment in the property as of the sale date. In conjunction with the sale, the Company also entered into Lot Purchase Agreements with the developer for the option to purchase a portion of the finished lots expected to be developed from the parcel. Prior to the sale of the parcel, the Company sold 56 finished lots for approximately $16,800, which were under contract with unrelated parties.

As of December 31, 2015, NVR directly owned four separate raw parcels of land with a carrying value of $60,611 which were expected to produce approximately 980 finished lots.

55

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

6. Capitalized Interest

The Company capitalizes interest costs to land under development during the active development of finished lots. In addition, the Company capitalizes interest costs to its joint venture investments while the investments are considered qualified assets pursuant to ASC 835-20, Interest. Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon the Company’s 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. NVR’s interest costs incurred, capitalized, expensed and charged to cost of sales during the years ended December 31, 2016, 2015 and 2014 was as follows:

	December 31,
	2016			2015			2014
Interest capitalized, beginning of year	$	4,434		$	4,072		$	3,294
Interest incurred		25,951			25,155			24,994
Interest charged to interest expense		(21,707	)		(23,559	)		(23,140	)
Interest charged to cost of sales		(3,572	)		(1,234	)		(1,076	)
Interest capitalized, end of year	$	5,106		$	4,434		$	4,072

7. Related Party Transactions

During the year ended December 31, 2016, NVR entered into Lot Purchase Agreements to purchase finished building lots for a total purchase price of approximately $65,200 with Elm Street Development, Inc. (“Elm Street”), which is controlled by one of the Company’s directors, William Moran. The independent members of the Company’s Board of Directors approved these transactions. During 2016, 2015 and 2014, NVR purchased developed lots at market prices from Elm Street for approximately $44,500, $41,200 and $50,100, respectively. The Company also continues to control a parcel of raw land expected to yield approximately 2,400 finished lots through a joint venture entered into with Elm Street during 2009. NVR did not make any capital contributions to that joint venture in 2016 or 2015. Further, during 2016, 2015 and 2014, the Company paid Elm Street $143 per year to manage the development of a property that the Company purchased from Elm Street in 2010.

8. Property, Plant and Equipment (“PP&E”)

	December 31,
	2016			2015
Homebuilding:
Office facilities and other	$	33,352		$	31,696
Model home furniture and fixtures		34,924			33,041
Production facilities		58,068			51,636
Gross Homebuilding PP&E		126,344			116,373
Less: accumulated depreciation		(80,429	)		(71,722	)
Net Homebuilding PP&E	$	45,915		$	44,651
Mortgage Banking:
Office facilities and other	$	11,379		$	10,629
Less: accumulated depreciation		(6,476	)		(5,316	)
Net Mortgage Banking PP&E	$	4,903		$	5,313

9. Debt

Senior Notes

On September 10, 2012, NVR completed an offering for $600,000 of Senior Notes under a shelf registration statement filed on September 5, 2012 with the Securities and Exchange Commission (the “SEC”). The Senior Notes were issued at a discount to yield 3.97% and have been reflected net of the unamortized discount in the accompanying consolidated balance sheet. The offering of the Senior Notes resulted in aggregate net proceeds of approximately $593,900, after deducting underwriting discounts and other offering expenses. The Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15

56

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

and September 15. Additionally, following the Company’s adoption of ASU 2015-03 as of January 1, 2016, the Senior Notes have been reflected net of unamortized debt issuance costs of $2,904 and $3,413 as of December 31, 2016 and 2015, respectively.

The Senior Notes are senior unsecured obligations and rank equally in right of payment with any of NVR’s existing and future unsecured senior indebtedness, will rank senior in right of payment to any of NVR’s future indebtedness that is by its terms expressly subordinated to the Senior Notes and will be effectively subordinated to any of NVR’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The indenture governing the Senior Notes has, among other items, and subject to certain exceptions, covenants that restrict the Company’s ability to create, incur, assume or guarantee secured debt, enter into sale and leaseback transactions and conditions related to mergers and/or the sale of assets.

Credit Agreement

On July 15, 2016, NVR entered into an unsecured Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Book Runner, and the other lenders party thereto, which provides for aggregate revolving loan commitments of $200,000 (the “Facility”). Proceeds of the borrowings under the Facility will be used for working capital and general corporate purposes. Under the Credit Agreement, the Company 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 $8,300 was outstanding at December 31, 2016, and a $25,000 sublimit for a swing line commitment. Borrowings under the Credit Agreement generally bear interest for Base Rate Loans at a Base Rate equal to the highest of (i) a Federal Funds Rate plus one-half of one percent, (ii) Bank of America’s publicly announced “prime rate,” and (iii) the Eurodollar Rate plus one percent, plus the Applicable Rate which is based on the Company’s debt rating, or for Eurodollar Rate Loans, at the Eurodollar Rate equal to LIBOR plus the Applicable Rate.  

The Credit Agreement contains various representations and affirmative and negative covenants that are generally customary for credit facilities of this type. Such covenants include, among others, the following financial maintenance covenants: (i) minimum consolidated tangible net worth, (ii) minimum interest coverage ratio or minimum liquidity and (iii) a maximum leverage ratio. The negative covenants include, among others, certain limitations on liens, investments and fundamental changes. The Credit Agreement termination date is July 15, 2021. The Company was in compliance with all covenants under the Credit Agreement at December 31, 2016.  There was no debt outstanding under the Facility at December 31, 2016.

Repurchase Agreement

On July 27, 2016, NVRM entered into the Eighth Amendment (the “Amendment”) to its Amended and Restated Master Repurchase Agreement dated August 2, 2011 with U.S. Bank National Association (as amended by the Amendment and seven earlier amendments, the “Repurchase Agreement”). The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement provides for loan purchases up to $150,000, subject to certain sub limits, and provides for an incremental commitment pursuant to which NVRM may from time to time request increases in the total commitment available under the Repurchase Agreement by up to $50,000 in the aggregate. Advances under the Repurchase Agreement carry a Pricing Rate based on the LIBOR Rate plus the LIBOR Margin, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 2.25%. The Pricing Rate at December 31, 2016 was 3.06%. There are several restrictions on purchased loans, including that they cannot be sold to others, they cannot be pledged to anyone other than the agent, and they cannot support any other borrowing or repurchase agreement. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale. At December 31, 2016, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. As of both December 31, 2016 and 2015, there was no debt outstanding under the Repurchase Agreement. The Repurchase Agreement expires on July 26, 2017.

The Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include, among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum net income requirement, and (iv) a maximum leverage ratio requirement. The Company was in compliance with all covenants under the Repurchase Agreement at December 31, 2016.

57

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

10. Common Stock

There were approximately 3,693 and 3,891 common shares outstanding at December 31, 2016 and 2015, respectively. The Company made the following share repurchases during the years indicated:

	Year Ended December 31,
	2016		2015		2014
Aggregate purchase price	$	455,351	$	431,367	$	567,544
Number of shares repurchased		280		290		508

The Company issues shares from the treasury account for all equity plan activity. The Company issued 83, 131 and 123 such shares during 2016, 2015 and 2014, respectively.

11. Income Taxes

The provision for income taxes consists of the following:

	Year Ended December 31,
		2016			2015		2014
Current:
Federal	$	209,454		$	180,895	$	148,221
State		38,095			36,142		28,881
Deferred:
Federal		(9,230	)		2,681		(4,451	)
State		(1,884	)		567		(735	)
	$	236,435		$	220,285	$	171,916

In addition to amounts applicable to income before taxes, the following income tax benefits were recorded in shareholders’ equity:

	Year Ended December 31,
	2016		2015		2014
Income tax benefits arising from compensation expense for    tax purposes in excess of amounts recognized for financial    statement purposes	$	13,661	$	23,311	$	9,437

Deferred income taxes on NVR’s consolidated balance sheets were comprised of the following:

	December 31,
	2016		2015
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	76,498	$	77,781
Deferred compensation		7,075		7,280
Equity-based compensation expense		55,077		45,361
Inventory		13,514		12,722
Unrecognized tax benefit		23,954		24,740
Other		10,106		9,391
Total deferred tax assets		186,224		177,275
Less: deferred tax liabilities		5,414		6,489
Net deferred tax position	$	180,810	$	170,786

Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes and equity-based compensation expense, which are not currently deductible for tax return purposes.

58

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

Management believes that the Company will have sufficient available carry-backs and future taxable income to make it more likely than not that the net deferred tax assets will be realized. Federal taxable income is estimated to be approximately $575,684 for the year ended December 31, 2016, and was $471,512 for the year ended December 31, 2015.

A reconciliation of income tax expense in the accompanying consolidated statements of income to the amount computed by applying the statutory federal income tax rate of 35% to income before taxes is as follows:

	Year Ended December 31,
	2016			2015			2014
Income taxes computed at the federal statutory rate	$	231,595		$	211,124		$	158,741
State income taxes, net of federal income tax benefit		23,738			23,919			18,800
Other, net (1)		(18,898	)		(14,758	)		(5,625	)
	$	236,435		$	220,285		$	171,916

(1) Primarily attributable to tax benefits from the domestic production activities deduction.

The Company’s effective tax rate in 2016, 2015 and 2014 was 35.73%, 36.52% and 37.90%, respectively. During 2014, the Company recognized income tax expense of approximately $7,000 due to the reversal of certain previously recognized tax deductions.

The Company files a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where the Company maintains operations. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Year Ended December 31,
	2016			2015
Balance at beginning of year	$	46,591		$	46,004
Additions based on tax positions related to the current year		4,440			3,897
Reductions for tax positions of prior years		(4,921	)		(3,310	)
Settlements		—			—
Balance at end of year	$	46,110		$	46,591

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (net of the federal tax benefit) is $29,971 as of December 31, 2016.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2016, the Company recognized a net reversal of accrued interest on unrecognized tax benefits in the amount of $1,582. For the year ended December 31, 2015, the Company recognized a net addition of accrued interest on unrecognized tax benefits in the amount of $125. For the year ended December 31, 2014, the Company had a net reversal to accrued interest on unrecognized tax benefits in the amount of $184. As of December 31, 2016 and 2015, the Company had a total of $19,639 and $21,221, respectively, of accrued interest on unrecognized tax benefits which are included in “Accrued expenses and other liabilities” on the accompanying consolidated balance sheets. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense.

The Company believes that within the next 12 months, it is reasonably possible that the unrecognized tax benefits as of December 31, 2016 will be reduced by approximately $10,614 due to statute expiration and effectively settled positions in various state jurisdictions. The Company is currently under audit by the states of New Jersey and North Carolina.

12. Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

Equity-Based Compensation Plans

NVR’s equity-based compensation plans provide for the granting of non-qualified stock options to purchase shares of NVR common stock (“Options”) and restricted share units (“RSUs”) to key management employees, including executive officers and Board

59

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

members, of the Company. The exercise price of Options granted is equal to the closing price of the Company’s common stock on the New York Stock Exchange (the “NYSE”) on the day prior to the date of grant, and RSUs are issued at a $0 exercise price. Options are granted for a ten-year term and typically vest in separate tranches over periods of 3 to 6 years. The vesting for certain Options is contingent solely on continued employment or service as a Director, while vesting for other Options is contingent upon both continued employment or service as a Director and the achievement of a performance metric as discussed further in the summary description of the 2014 Equity Incentive Plan below. RSUs generally vest in separate tranches over periods of 2 to 4 years, based solely on continued employment or continued service as a Director.

The following table provides a summary of each of the Company’s equity-based compensation plans for any plan with grants outstanding at December 31, 2016:

Equity-Based Compensation Plans	Shares Authorized		Options/RSUs Outstanding		Shares Available to Issue
1998 Management Long-Term Stock Option Plan		1,000		6		—
1998 Directors' Long-Term Stock Option Plan		150		5		—
2000 Broadly-Based Stock Option Plan		2,000		118		—
2010 Equity Incentive Plan (1)		700		282		44
2014 Equity Incentive Plan (2)		950		681		269

(1) During 2010, the Company’s shareholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan authorizes the Company to issue Options and RSUs to key management employees, including executive officers and Board members.  Of the 700 aggregate shares available to issue, up to 240 may be granted in the form of RSUs.  There were 266 Options and 16 RSUs outstanding as of December 31, 2016. Of the 44 shares available to be issued under the 2010 Plan, 38 may be granted as RSUs.

(2) During 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes the Company to issue Options to key management employees, including executive officers and Board members. Option grants under the 2014 Plan are generally divided such that vesting for 50% of the Option grant is solely contingent upon continued employment or continued service as a Director, while vesting for the remaining 50% of the Option grant is contingent upon both continued employment or service as a Director and the achievement of a performance metric.  The performance metric is based on the Company’s return on capital performance during a specified three year period based on the date of Option grant, with the initial performance period being 2014 through 2016.  Options granted under the 2014 Plan vest annually over four years in 25% increments beginning on December 31, 2016, or later based on the date of grant.

During 2016, the Company issued 64 Options under the 2014 Plan. Substantially all of the Options granted in 2016 will vest annually over four years in 25% increments beginning on December 31, 2018. Vesting for 37 of the Options granted is contingent both upon continued employment or continued service as a director and the Company’s return on capital performance.  Vesting for the other 27 Options granted under the 2014 Plan is contingent solely upon continued employment or continued service as a director.

The Company also issued 10 Options under the 2010 Plan during 2016.  All of the 2010 Plan Options granted during 2016 will vest annually over four years in 25% increments beginning on December 31, 2018. The vesting for the Options granted under the 2010 Plan is based solely on continued employment.

60

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

The following table provides additional information relative to NVR’s equity-based compensation plans for the year ended December 31, 2016:

	Shares			WeightedAvg. Per Share ExercisePrice		WeightedAvg.Remaining ContractLife(years)		Aggregate IntrinsicValue
Stock Options
Outstanding at December 31, 2015		1,096		$	998.88
Granted		74			1,658.88
Exercised		(50	)		768.06
Forfeited		(44	)		1,154.56
Outstanding at December 31, 2016		1,076		$	1,048.38		6.6	$	667,937
Exercisable at December 31, 2016		423		$	875.22		5.3	$	335,584
RSUs
Outstanding at December 31, 2015		51
Granted		—
Vested		(33	)
Forfeited		(2	)
Outstanding at December 31, 2016		16						$	26,622
Vested, but not issued at December 31, 2016		6						$	9,997

To estimate the grant-date fair value of its Options, the Company uses the Black-Scholes option-pricing model (the “Pricing Model”). The Pricing Model estimates the per share fair value of an option on its date of grant based on the following factors: the option’s exercise price; the price of the underlying stock on the date of grant; the estimated dividend yield; a risk-free interest rate; the estimated option term; and the expected volatility. For the risk-free interest rate, the Company uses U.S. Treasury STRIPS which mature at approximately the same time as the option’s expected holding term. For expected volatility, NVR has concluded that its historical volatility over the option’s expected holding term provides the most reasonable basis for this estimate. The fair value of the Options granted during 2016, 2015 and 2014 was estimated on the grant date using the Pricing Model, based on the following assumptions:

	2016		2015		2014
Estimated option life	5.27 years		5.17 years		5.16 years
Risk free interest rate (range)	0.86%-2.21%		1.04%-2.07%		1.06%-2.49%
Expected volatility (range)	15.91%-23.49%		17.00%-26.79%		18.26%-30.57%
Expected dividend rate		0.00%		0.00%		0.00%
Weighted average grant-date fair value per share of    options granted	$	320.21	$	296.50	$	267.66

In accordance with ASC 718, Compensation – Stock Compensation, the fair value of the RSUs is measured as if they were vested and issued on the grant date. Additionally, under ASC 718, service-only restrictions on vesting of RSUs are not reflected in the fair value calculation at the grant date. As a result, the fair value of the RSUs was the closing price of the Company’s common stock on the day immediately preceding the date of grant. There were no RSUs granted during 2016.

Compensation cost for Options and RSUs is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). For the recognition of equity-based compensation, the RSUs are treated as a separate award from the Options. Additionally, the Options which are subject to a performance condition are treated as a separate award from the “service-only” Options, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved. The Company currently believes that it is probable that the performance condition will be satisfied at the target level and is recognizing compensation expense related to such Options accordingly. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees.

ASC 718 also requires the Company to estimate forfeitures in calculating the expense related to equity-based compensation and requires that the compensation costs of equity-based awards be recognized net of estimated forfeitures. The impact on compensation

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NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

costs due to changes in the expected forfeiture rate will be recognized in the period that they become known. In 2016, 2015 and 2014, the Company recognized $43,598, $54,091, and $63,227 in equity-based compensation costs, respectively, and approximately $17,000, $19,700, and $22,900 in tax benefit related to equity-based compensation costs, respectively.

As of December 31, 2016, the total unrecognized compensation cost for all outstanding Options and RSUs equaled approximately $128,700, net of estimated forfeitures. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period with the latest vesting date being December 31, 2022. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 2.1 years.

The Company settles Option exercises and vesting of RSUs by issuing shares of treasury stock. Shares are relieved from the treasury account based on the weighted average cost of treasury shares acquired. During the years ended December 31, 2016, 2015 and 2014, the Company issued 83, 131 and 123 shares, respectively, from the treasury account for Option exercises and vesting of RSUs. Information with respect to the vested RSUs and exercised Options is as follows:

	Year Ended December 31,
	2016		2015		2014
Aggregate exercise proceeds (1)	$	38,106	$	85,948	$	76,153
Aggregate intrinsic value on exercise dates	$	96,600	$	99,288	$	62,136

(1) Aggregate exercise proceeds include the Option exercise price received in cash or the fair market value of NVR stock surrendered by the optionee in lieu of cash.

Profit Sharing Plans

NVR has a trustee-administered, profit sharing retirement plan (the “Profit Sharing Plan”) and an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees. The Profit Sharing Plan and the ESOP provide for annual discretionary contributions in amounts as determined by the NVR Board of Directors. The combined plan contribution for the years ended December 31, 2016, 2015 and 2014 was approximately $16,700, $17,900 and $17,000, respectively. The ESOP purchased approximately 9 and 11 shares of NVR common stock in the open market for the 2016 and 2015 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2016, all shares held by the ESOP had been allocated to participants’ accounts. The 2016 plan year contribution was funded and fully allocated to participants in February 2017.

Deferred Compensation Plans

The Company has two deferred compensation plans (“Deferred Comp Plans”). The specific purpose of the Deferred Comp Plans is to i) establish a vehicle whereby named executive officers may defer the receipt of salary and bonus that otherwise would be nondeductible for Company tax purposes into a period where the Company would realize a tax deduction for the amounts paid, and ii) to enable certain employees who are subject to the Company’s stock holding requirements to acquire shares of the Company’s common stock on a pre-tax basis in order to more quickly meet, and maintain compliance with those stock holding requirements. Amounts deferred into the Deferred Comp Plans are invested in NVR common stock, held in a rabbi trust account, and are paid out in a fixed number of shares upon expiration of the deferral period.

The rabbi trust account held 109 shares of NVR common stock as of both December 31, 2016 and 2015. Shares held by the Deferred Comp Plans are treated as outstanding shares in the Company’s earnings per share calculation for each of the years ended December 31, 2016, 2015 and 2014.

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NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

13. Commitments and Contingent Liabilities

NVR is committed under multiple non-cancelable operating leases involving office space, model homes, production facilities, automobiles and equipment. Future minimum lease payments under these operating leases as of December 31, 2016 are as follows:

Year Ending December 31,
2017	$	25,331
2018		19,544
2019		16,833
2020		13,785
2021		10,938
Thereafter		22,760
		109,191
Sublease income		(53	)
	$	109,138

Total rent expense incurred under operating leases was $45,843, $48,056 and $45,508 for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company generally does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under Lot Purchase Agreements. The Lot Purchase Agreements require deposits that may be forfeited if the Company fails to perform under the agreement. The deposits required under the Lot Purchase Agreements 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 Company believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. The Company generally seeks to maintain control over a supply of lots believed to be suitable to meet its five-year business plan. At December 31, 2016, assuming that contractual development milestones are met and the Company exercises its option, the Company expects to place additional forfeitable deposits with land developers under existing Lot Purchase Agreements of approximately $94,600. The Company also has one specific performance contract pursuant to which the Company is committed to purchase 10 finished lots at an aggregate purchase price of approximately $1,505. Additionally, as of December 31, 2016, we had funding commitments totaling approximately $12,000 under a joint development agreement related to our land under development, a portion of which we expect will be offset by development credits of approximately $7,100.

During the ordinary course of operating the homebuilding and mortgage banking businesses, the Company is required to enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize its obligations under various contracts. The Company had approximately $50,700 of contingent obligations under such agreements, including approximately $8,300 for letters of credit issued under the Credit Agreement as of December 31, 2016. The Company believes it will fulfill its obligations under the related contracts and does not anticipate any material losses under these bonds or letters of credit.

The following table reflects the changes in the Company’s warranty reserve (see Note 1 herein for further discussion of warranty/product liability reserves):

	Year Ended December 31,
	2016			2015			2014
Warranty reserve, beginning of year	$	87,407		$	94,060		$	101,507
Provision		50,787			47,003			51,668
Payments		(44,299	)		(53,656	)		(59,115	)
Warranty reserve, end of year	$	93,895		$	87,407		$	94,060

In June 2010, the Company received a Request for Information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request sought information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company in New York and New Jersey. The Company cooperated with this request, and provided information to the EPA. The Company was subsequently informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that the Company meet with the government to discuss the status of the case. Meetings took place in January 2012, August 2012 and November 2014 with representatives from both the EPA and DOJ. The Company has continued discussions with the EPA and DOJ

63

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

and is presently engaged in settlement discussions with them. Any settlement is expected to include injunctive relief and payment of a civil penalty. Although there can be no assurance that a settlement will be reached, in 2015 the Company recorded a liability and corresponding expense associated with an estimated civil penalty amount.

The Company and its subsidiaries are also involved in various other 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 the financial position, results of operations or cash flows of the Company. Legal costs incurred in connection with outstanding litigation are expensed as incurred.

14. 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 value of NVR’s Senior Notes as of December 31, 2016 was $612,000. 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 value was $596,455 at December 31, 2016. Except as otherwise noted below, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments, which consists primarily of cash equivalents, due to their short term nature.

Derivative Instruments and Mortgage Loans Held for Sale

In the normal course of business, NVRM, enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by NVRM. 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 sales 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 December 31, 2016, there were contractual commitments to extend credit to borrowers aggregating $458,161 and open forward delivery contracts aggregating $738,637, which hedge both the rate lock loan commitments and closed loans held for sale.

The fair value of the Company’s rate lock commitments to borrowers and the related input levels includes, 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, which averaged 106 basis points of the loan amount as of December 31, 2016, is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes an approximate 13% 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.

64

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

Mortgage loans held for sale are recorded at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. The fair value of loans held for sale of $351,958 included on the accompanying consolidated balance sheet has been decreased by $5,954 from the aggregate principal balance of $357,912.

The undesignated derivative instruments are included on the accompanying consolidated balance sheet, as of December 31, 2016, as follows:

	Fair Value		Balance Sheet Location
Rate lock commitments:
Gross assets	$	5,403
Gross liabilities		3,327
Net rate lock commitments	$	2,076	NVRM - Other assets
Forward sales contracts:
Gross assets	$	9,148
Gross liabilities		1,084
Net forward sales contracts	$	8,064	NVRM - Other assets

The fair value measurement as of December 31, 2016 was as follows:

	Notional or Principal Amount		Assumed Gain/(Loss) From Loan Sale			Interest Rate Movement Effect			Servicing Rights Value		Security Price Change		Total Fair Value Measurement Gain/(Loss)
Rate lock commitments	$	458,161	$	(339	)	$	(1,682	)	$	4,097	$	—	$	2,076
Forward sales contracts	$	738,637		—			—			—		8,064		8,064
Mortgages held for sale	$	357,912		62			(9,962	)		3,946		—		(5,954	)
Total fair value measurement			$	(277	)	$	(11,644	)	$	8,043	$	8,064	$	4,186

For the year ended December 31, 2016, NVRM recorded a fair value adjustment to expense of $3,147. For the years ended December 31, 2015 and 2014, NVRM recorded a fair value adjustment to income of $3,508 and $3,305, 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 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.

15. Mortgage Loan Loss Allowance

During the years ended December 31, 2016, 2015 and 2014, the Company recognized pre-tax charges for loan losses related to mortgage loans sold of approximately $2,000, $2,700 and $2,400, respectively. Included in the Mortgage Banking segment’s “Accounts payable and other liabilities” line item on the accompanying consolidated balance sheets is a mortgage loan loss allowance equal to approximately $12,700 and $12,300 at December 31, 2016 and 2015, respectively.

65

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

16. Quarterly Results (unaudited)

The following table sets forth unaudited selected financial data and operating information on a quarterly basis for the years ended December 31, 2016 and 2015.

	Year Ended December 31, 2016
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
Revenues – homebuilding operations	$	1,718,527	$	1,507,451	$	1,361,741	$	1,121,504
Gross profit – homebuilding operations	$	305,087	$	265,159	$	235,372	$	195,744
Mortgage banking fees	$	34,239	$	30,118	$	26,442	$	22,522
Net income	$	150,891	$	117,392	$	91,676	$	65,303
Diluted earnings per share	$	37.80	$	28.46	$	22.01	$	15.79
New orders (units)		3,645		3,477		4,324		4,137
Settlements (units)		4,419		3,922		3,581		3,006
Backlog, end of period (units)		6,884		7,658		8,103		7,360
Loans closed	$	1,201,164	$	1,055,163	$	942,407	$	753,840

	Year Ended December 31, 2015
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
Revenues – homebuilding operations	$	1,528,084	$	1,374,467	$	1,221,111	$	941,538
Gross profit – homebuilding operations	$	289,496	$	262,795	$	234,257	$	159,870
Mortgage banking fees	$	27,191	$	27,884	$	22,522	$	16,211
Net income	$	134,004	$	116,470	$	93,395	$	39,058
Diluted earnings per share	$	31.92	$	27.11	$	21.91	$	9.22
New orders (units)		3,100		3,258		3,796		3,926
Settlements (units)		4,010		3,607		3,175		2,534
Backlog, end of period (units)		6,229		7,139		7,488		6,867
Loans closed	$	1,042,440	$	951,872	$	859,403	$	638,627

66