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*		Amendment No. 1 to Employment Agreement between NVR, Inc. and Jeffrey D. Martchek dated April 18, 2017.		8-K				10.1		4/18/2017
10.7*		Amendment No. 1 to Employment Agreement between NVR, Inc. and Eugene J. Bredow dated March 1, 2018.		10-Q				10.1		5/1/2018
10.8*		Employment Agreement between NVR, Inc. and Paul W. Praylo dated January 28, 2019. Filed herewith.
10.9*		Profit Sharing Plan of NVR, Inc. and Affiliated Companies.		S-8		333-29241		4.1		6/13/1997
10.10*		Employee Stock Ownership Plan of NVR, Inc.		10-K/A						12/31/1994
10.11*		NVR, Inc. 1998 Management Long-Term Stock Option Plan.		S-8		333-79951		4		6/4/1999
10.12*		NVR, Inc. 2000 Broadly-Based Stock Option Plan.		S-8		333-56732		99.1		3/8/2001

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		File Number		Exhibit Number		Filing Date
10.13*		Amended and Restated NVR, Inc. Nonqualified Deferred Compensation Plan.		10-Q				10.5		11/6/2015
10.14*		First Amendment to NVR, Inc. Nonqualified Deferred Compensation Plan.		10-K				10.36		2/15/2017
10.15*		Description of the Board of Directors’ compensation arrangement. Filed herewith.
10.16*		NVR, Inc. 2018 Equity Incentive Plan		S-8		333-224629		10.1		5/3/2018
10.17*		The Form of Non-Qualified Stock Option Agreement (Management time-based grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.1		5/14/2018
10.18*		The Form of Non-Qualified Stock Option Agreement (Director time-based grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.2		5/14/2018
10.19*		The Form of Non-Qualified Stock Option Agreement (Management performance-based grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.3		5/14/2018
10.20*		The Form of Non-Qualified Stock Option Agreement (Director performance-based grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.4		5/14/2018
10.21*		The Form of Restricted Share Units Agreement (Management grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.5		5/14/2018
10.22*		The Form of Restricted Share Units Agreement (Director grants) under the NVR, Inc. 2018 Equity Incentive Plan.		8-K				10.6		5/14/2018
10.23*		NVR, Inc. 2014 Equity Incentive Plan.		S-8		333-195756		10.1		5/7/2014
10.24*		The Form of Non-Qualified Stock Option Agreement (Management time-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.		10-K				10.2		2/14/2018
10.25*		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
10.26*		The Form of Non-Qualified Stock Option Agreement (Management performance-based grants) under the NVR, Inc. 2014 Equity Incentive Plan.		10-K				10.17		2/14/2018
10.27*		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
10.28*		NVR, Inc. 2010 Equity Incentive Plan.		S-8		333-166512		10.1		5/4/2010
10.29*		The Amended Form of Non-Qualified Stock Option Agreement (Management grants) under the NVR, Inc. 2010 Equity Incentive Plan. Filed herewith.
10.30*		The Form of Non-Qualified Stock Option Agreement (Management performance-based grants) under the NVR, Inc. 2010 Equity Incentive Plan. Filed herewith.
10.31*		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
10.32*		The Form of Restricted Share Units Agreement (Management grants) under the NVR, Inc. 2010 Equity Incentive Plan.		10-Q				10.2		7/30/2013
10.33*		The Form of Restricted Share Units Agreement (Director grants) under the NVR, Inc. 2010 Equity Incentive Plan.		8-K				10.4		5/6/2010

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		File Number		Exhibit Number		Filing Date
10.34*		The Form of Non-Qualified Stock Option Agreement under the NVR, Inc. 2000 Broadly-Based Stock Option Plan.		8-K				10.1		1/7/2008
10.35*		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
10.36*		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
10.37*		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
10.38*		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
10.39*		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
10.40*		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
10.41*		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
10.42*		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
10.43*		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
10.44*		Ninth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 26, 2017, between NVR Mortgage Finance, Inc. and U.S. Bank National Association.		10-Q				10.1		7/28/2017
10.45*		Tenth Amendment to Amended and Restated Master Repurchase Agreement dated as of July 25, 2018 between NVR Mortgage Finance, Inc. and U.S. Bank National Association.		10-Q				10.1		7/30/2018
10.46*		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
10.47*		Summary of 2019 Executive Officer annual incentive compensation plan. Filed herewith.
21		NVR, Inc. Subsidiaries. Filed herewith.
23		Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith.

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		File Number		Exhibit Number		Filing Date
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.

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 13, 2019
Dwight C. Schar
/s/ C. E. Andrews		Director		February 13, 2019
C. E. Andrews
/s/ Timothy M. Donahue		Director		February 13, 2019
Timothy M. Donahue
/s/ Thomas D. Eckert		Director		February 13, 2019
Thomas D. Eckert
/s/ Alfred E. Festa		Director		February 13, 2019
Alfred E. Festa
/s/ Ed Grier		Director		February 13, 2019
Ed Grier
/s/ Manuel H. Johnson		Director		February 13, 2019
Manuel H. Johnson
/s/ Alexandra A. Jung		Director		February 13, 2019
Alexandra A. Jung
/s/ Mel Martinez		Director		February 13, 2019
Mel Martinez
/s/ William A. Moran		Director		February 13, 2019
William A. Moran
/s/ David A. Preiser		Director		February 13, 2019
David A. Preiser
/s/ W. Grady Rosier		Director		February 13, 2019
W. Grady Rosier
/s/ Susan Williamson Ross		Director		February 13, 2019
Susan Williamson Ross
/s/ Paul C. Saville		Principal Executive Officer		February 13, 2019
Paul C. Saville
/s/ Daniel D. Malzahn		Principal Financial Officer		February 13, 2019
Daniel D. Malzahn
/s/ Matthew B. Kelpy		Principal Accounting Officer		February 13, 2019
Matthew B. Kelpy

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

NVR, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of NVR, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, 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 Sates) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 13, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 11 to the consolidated financial statements, the Company has changed its method of accounting for the excess tax benefit from stock option exercises prospectively beginning January 1, 2017, for fiscal years 2017 and 2018, due to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation: Improvements to Employee Shared-Based Payment Accounting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

KPMG LLP

We have served as the Company's auditor since 1987.

McLean, Virginia

February 13, 2019

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

NVR, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited NVR, Inc.’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, 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) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”), and our report dated February 13, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

KPMG LLP

McLean, Virginia

February 13, 2019

NVR, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

	December 31, 2018				December 31, 2017
ASSETS
Homebuilding:
Cash and cash equivalents	$	688,783			$	645,087
Restricted cash	16,982				19,438
Receivables	18,641				20,026
Inventory:
Lots and housing units, covered under sales agreements with customers	1,076,904				1,046,094
Unsold lots and housing units	115,631				148,620
Land under development	38,857				34,212
Building materials and other	21,718				17,273
	1,253,110				1,246,199
Contract land deposits, net	396,177				370,429
Property, plant and equipment, net	42,234				43,191
Reorganization value in excess of amounts allocable to identifiable assets, net	41,580				41,580
Deferred tax assets, net	112,333				111,953
Other assets	71,671				86,977
	2,641,511				2,584,880
Mortgage Banking:
Cash and cash equivalents	23,092				21,707
Restricted cash	3,071				2,256
Mortgage loans held for sale, net	458,324				352,489
Property and equipment, net	6,510				6,327
Reorganization value in excess of amounts allocable to identifiable assets, net	7,347				7,347
Other assets	26,078				14,273
	524,422				404,399
Total assets	$	3,165,933			$	2,989,279
LIABILITIES AND SHAREHOLDERS' EQUITY
Homebuilding:
Accounts payable	$	244,496			$	261,973
Accrued expenses and other liabilities	332,871				341,891
Customer deposits	138,246				150,033
Senior notes	597,681				597,066
	1,313,294				1,350,963
Mortgage Banking:
Accounts payable and other liabilities	44,077				32,824
	44,077				32,824
Total liabilities	1,357,371				1,383,787
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, 2018 and December 31, 2017	206				206
Additional paid-in capital	1,820,223				1,644,197
Deferred compensation trust – 107,340 and 108,640 shares of NVR, Inc. common stock as of December 31, 2018 and December 31, 2017, respectively	(16,937		)		(17,383		)
Deferred compensation liability	16,937				17,383
Retained earnings	7,031,333				6,231,940
Less treasury stock at cost – 16,977,499 and 16,864,324 shares as of December 31, 2018 and December 31, 2017, respectively	(7,043,200		)		(6,270,851		)
Total shareholders' equity	1,808,562				1,605,492
Total liabilities and shareholders' equity	$	3,165,933			$	2,989,279

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Statements of Income

(in thousands, except per share data)

	Year Ended December 31,
	2018				2017				2016
Homebuilding:
Revenues	$	7,004,304			$	6,175,521			$	5,709,223
Other income	11,839				6,536				2,820
Cost of sales	(5,692,127		)		(4,990,378		)		(4,707,861		)
Selling, general and administrative	(428,874		)		(392,272		)		(382,459		)
Operating income	895,142				799,407				621,723
Interest expense	(24,036		)		(23,037		)		(20,621		)
Homebuilding income	871,106				776,370				601,102
Mortgage Banking:
Mortgage banking fees	159,370				130,319				113,321
Interest income	11,593				7,850				7,569
Other income	2,546				2,048				1,652
General and administrative	(83,838		)		(68,528		)		(60,861		)
Interest expense	(1,045		)		(1,148		)		(1,086		)
Mortgage banking income	88,626				70,541				60,595
Income before taxes	959,732				846,911				661,697
Income tax expense	(162,535		)		(309,390		)		(236,435		)
Net income	$	797,197			$	537,521			$	425,262
Basic earnings per share	$	219.58			$	144.00			$	110.53
Diluted earnings per share	$	194.80			$	126.77			$	103.61
Basic weighted average shares outstanding	3,631				3,733				3,847
Diluted weighted average shares outstanding	4,092				4,240				4,104

See notes to consolidated financial statements.

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, 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, net	—				—				—				—				(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
Cumulative-effect adjustment from adoption of ASU 2016-09, net of tax	—				1,566				(957		)		—				—				—				609
Net income	—				—				537,521				—				—				—				537,521
Deferred compensation activity, net	—				—				—				—				(8		)		8				—
Purchase of common stock for treasury	—				—				—				(422,166		)		—				—				(422,166		)
Equity-based compensation	—				44,562				—				—				—				—				44,562
Proceeds from stock options exercised	—				140,525				—				—				—				—				140,525
Treasury stock issued upon option exercise and restricted share vesting	—				(58,284		)		—				58,284				—				—				—
Balance, December 31, 2017	206				1,644,197				6,231,940				(6,270,851		)		(17,383		)		17,383				1,605,492
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax	—				—				2,196				—				—				—				2,196
Net income	—				—				797,197				—				—				—				797,197
Deferred compensation activity, net	—				—				—				—				446				(446		)		—
Purchase of common stock for treasury	—				—				—				(846,134		)		—				—				(846,134		)
Equity-based compensation	—				75,701				—				—				—				—				75,701
Proceeds from stock options exercised	—				174,110				—				—				—				—				174,110
Treasury stock issued upon option exercise and restricted share vesting	—				(73,785		)		—				73,785				—				—				—
Balance, December 31, 2018	$	206			$	1,820,223			$	7,031,333			$	(7,043,200	)		$	(16,937	)		$	16,937			$	1,808,562

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2018				2017				2016
Cash flows from operating activities:
Net income	$	797,197			$	537,521			$	425,262
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,168				22,667				22,269
Equity-based compensation expense	75,701				44,562				43,598
Contract land deposit and other impairments (recoveries), net	11,760				1,238				(4,269		)
Gain on sale of loans, net	(122,755		)		(99,132		)		(85,535		)
Deferred tax expense (benefit)	914				61,290				(10,024		)
Mortgage loans closed	(4,828,615		)		(4,077,372		)		(3,660,269		)
Mortgage loans sold and principal payments on mortgage loans held for sale	4,845,999				4,182,220				3,710,250
Distribution of earnings from unconsolidated joint ventures	4,596				4,788				10,016
Net change in assets and liabilities:
Increase in inventory	(6,911		)		(154,099		)		(85,194		)
(Increase) decrease in contract land deposits	(30,863		)		8,177				(32,280		)
Increase in receivables	(1,008		)		(348		)		(8,779		)
(Decrease) increase in accounts payable and accrued expenses	(30,713		)		10,789				58,532
(Decrease) increase in customer deposits	(11,787		)		27,797				11,271
Other, net	(557		)		256				(1,860		)
Net cash provided by operating activities	723,126				570,354				392,988
Cash flows from investing activities:
Investments in and advances to unconsolidated joint ventures	(284		)		(3,800		)		(653		)
Distribution of capital from unconsolidated joint ventures	10,515				8,029				11,672
Purchase of property, plant and equipment	(19,665		)		(20,269		)		(22,369		)
Proceeds from the sale of property, plant and equipment	1,257				847				1,000
Net cash used in investing activities	(8,177		)		(15,193		)		(10,350		)
Cash flows from financing activities:
Purchase of treasury stock	(846,134		)		(422,166		)		(455,351		)
Distributions to partner in consolidated variable interest entity	(234		)		—				(150		)
Proceeds from the exercise of stock options	174,110				140,525				38,106
Net cash used in financing activities	(672,258		)		(281,641		)		(417,395		)
Net increase (decrease) in cash, restricted cash, and cash equivalents	42,691				273,520				(34,757		)
Cash, restricted cash, and cash equivalents, beginning of the year	689,557				416,037				450,794
Cash, restricted cash, and cash equivalents, end of the year	$	732,248			$	689,557			$	416,037
Supplemental disclosures of cash flow information:
Interest paid during the year, net of interest capitalized	$	24,178			$	23,251			$	20,922
Income taxes paid during the year, net of refunds	$	181,166			$	260,232			$	218,984

See notes to consolidated financial statements.

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.

Homebuilding restricted cash was attributable to customer deposits for certain home sales. Mortgage banking restricted cash included amounts collected from customers for loans in process and closed mortgage loans held for sale.

At December 31, 2018 and 2017, $320 and $1,069, respectively, of cash related to a consolidated variable interest entity is included in homebuilding “Other assets” on the accompanying consolidated balance sheet.

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. 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. 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 conducts a loss contingency analysis 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, if necessary, 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.

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.

NVR, Inc.

Notes to Consolidated Financial Statements

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

For the years ended December 31, 2018 and 2017, the Company incurred net pre-tax charges of $5,115 and $1,238, respectively, related to the impairment of contract land deposits. For the year ended December 31, 2016, the Company recognized net pre-tax recoveries of $4,269 of contract land deposits previously determined to be unrecoverable. The contract land deposit assets on the accompanying consolidated balance sheets are shown net of the allowance for losses of $29,216 and $29,999 at December 31, 2018 and 2017, 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 in an amount by which the carrying amount of the assets exceeds the fair value of such 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. See Notes 4 and 5 for further discussion of land under development and joint venture investments, respectively.

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, 2018 and 2017, finite-lived intangible assets, net of accumulated amortization, totaled $621 and $776, respectively. The remaining finite-lived intangible assets will be amortized on a straight-line basis over 4 years. As of both December 31, 2018 and 2017, the goodwill value was $441. Finite-lived intangible assets and goodwill are included in homebuilding "Other assets" in the accompanying consolidated balance sheets.

Warranty/Product Liability Reserves

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.

Mortgage Repurchase Reserve, Mortgage Loans Held for Sale and 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 closing. 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”), Freddie Mac ("FHLMC"), 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 a reserve 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 reserve is calculated based on an analysis of historical experience and exposure (see Note 15 herein for further information).

NVR, Inc.

Notes to Consolidated Financial Statements

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

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

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, 2018, there were contractual commitments to extend credit to borrowers aggregating $682,152, and open forward delivery sale contracts aggregating $1,089,923, 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, 2018, 2017 and 2016:

		Year Ended December 31,
		2018			2017			2016
Weighted average number of shares outstanding used to calculate basic EPS		3,631			3,733			3,847
Dilutive securities:
Stock options and restricted share units		461			507			257
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS		4,092			4,240			4,104

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 and the amount of compensation cost attributed to future services not yet recognized.

The following stock options issued under equity incentive plans were outstanding during the years ended December 31, 2018, 2017 and 2016, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

		Year Ended December 31,
		2018			2017			2016
Anti-dilutive securities		370			15			87

Revenues – Homebuilding Operations

NVR builds single-family detached homes, townhomes and condominium buildings, which generally are constructed on a pre-sold basis. Revenue is recognized on the settlement date at the contract sales price,when control is transferred to our customers.

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. See Note 11 herein for

NVR, Inc.

Notes to Consolidated Financial Statements

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

discussion of the impact on the Company's deferred tax asset resulting from the enactment of the Tax Cuts and Jobs Act in December 2017.

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 the carrying value approximates the fair value of its financial instruments (see Note 14 herein for further information).

Equity-Based Compensation

The Company recognizes equity-based compensation expense within its income statement for all share-based payment arrangements, which includes non-qualified stock options to purchase shares of NVR common stock ("Options") and restricted share units ("RSUs"). Compensation expense is based on the grant-date fair value of the Options and RSUs granted, and 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). Options and RSUs which are subject to a performance condition are treated as a separate award from the “service-only” Options and RSUs, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved. The Company calculates the fair value of its Options, which are non-publicly traded, using the Black-Scholes option-pricing model. The grant date fair value of the RSUs is the closing price of the Company’s common stock on the day immediately preceding the date of grant. The reversal of compensation expense previously recognized for grants forfeited is recorded in the period in which the forfeiture occurs. The Company’s equity-based compensation plans 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, 2018, 2017 and 2016, 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 the current year's presentation.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.

Revenue Recognition

Consistent with the Company’s previous revenue recognition practice, homebuilding revenue is recognized on the settlement date at the contract sales price, when control is transferred to our customers. Mortgage banking revenue recognition continues to be governed by Accounting Standards Codification ("ASC") Topic 815 - Derivatives and Hedging and ASC Topic 825 - Financial Instruments, and is not subject to Topic 606. See Note 2 for disclosure of revenue by reporting segment.

NVR, Inc.

Notes to Consolidated Financial Statements

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

The Company’s contract liabilities, consisting of deposits received from customers (“Handmoney”) on homes not settled, were $138,246 and $150,033 as of December 31, 2018 and 2017, respectively. For the year ended December 31, 2018, the Company recognized in revenue substantially all of the $150,033 in Handmoney held as of December 31, 2017.

The Company’s prepaid sales compensation totaled approximately $17,000 and $19,500, as of December 31, 2018 and December 31, 2017, respectively. These amounts are included in homebuilding “Other assets” on the accompanying consolidated balance sheets.

Deferred Revenue

Topic 606 no longer requires sellers of real estate to consider the initial and continuing involvement criteria in ASC 360-20, but instead only conclude on the collectibility of the transaction price. On January 1, 2018, the Company recorded a cumulative-effect adjustment, net of tax, of $2,196 to recognize deferred profit on home settlements for which the Company had previously determined that there was significant continuing involvement and believed to be fully collectible. Revenue recognized in 2018 would not have been materially different under prior GAAP.

Practical Expedients and Exemption

At contract inception, the performance obligation to complete and settle the home with a customer has an expected duration of less than one year. As a result, the Company does not disclose the value of unsatisfied performance obligations for contracts.

No other adjustments were made as a result of the adoption of Topic 606.

Other recently adopted accounting pronouncements

The Company adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, effective January 1, 2018. In connection with the adoption of ASU 2016-15, the Company made the election to classify distributions received from unconsolidated joint ventures using the cumulative earnings approach. This election was applied retrospectively, which reclassified a portion of distributions received from the Company's unconsolidated joint ventures between operating and investing activities on the prior year consolidated statement of cash flows. The adoption of this standard did not have a material effect on the Company's consolidated statements of cash flows and related disclosures.

The Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, effective January 1, 2018. 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, the Company's beginning-of-period and end-of-period cash balances presented in the consolidated statements of cash flows were retrospectively adjusted to include restricted cash with cash and cash equivalents. The beginning-of-period and end-of-period cash, restricted cash, and cash equivalent balances presented on the accompanying consolidated statements of cash flows include cash related to a consolidated joint venture, which is included in homebuilding "Other assets" on the Company's consolidated balance sheets. The cash related to this consolidated joint venture as of December 31, 2018, 2017 and 2016 was $320, $1,069 and $1,214, respectively. The adoption of this standard did not have a material effect on the Company's consolidated statements of cash flows and related disclosures.

Recently Issued Accounting Pronouncements

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 was effective for the Company as of January 1, 2019. Based on its current portfolio of leases, the Company expects that the adoption of this standard will result in the recognition of less than $100,000 of right-of-use assets and corresponding liabilities on its balance sheet, predominately related to real estate leases.

Additionally, in July 2018 the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides companies with relief from the costs of implementing certain aspects of the new lease standard. The ASU amends Topic 842 so that entities may elect not to restate their comparative periods during transition. Previously, the new lease standard required that an entity apply the new rules beginning with the earliest comparative period of financial statements presented (the modified retrospective approach). The Company has elected to use the transition relief provided under Topic 842 upon adoption of the standard effective January 1, 2019.

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

NVR, Inc.

Notes to Consolidated Financial Statements

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

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 is effective for the Company as of January 1, 2020. 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 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 the second step 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 thirty-two 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 luxury buyers. NVHomes operates in Delaware and the Washington, D.C., Baltimore, MD and Philadelphia, PA metropolitan areas. Heartland Homes operates in the Pittsburgh, PA metropolitan area. NVR derived approximately 30% and 10% of its 2018 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 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 termination of a Lot Purchase Agreement with the developer, or the restructuring of 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

NVR, Inc.

Notes to Consolidated Financial Statements

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

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,
		2018				2017				2016
Revenues:
Homebuilding Mid Atlantic		$	3,893,358			$	3,543,687			$	3,319,776
Homebuilding North East		580,726				517,141				462,385
Homebuilding Mid East		1,455,834				1,250,165				1,192,472
Homebuilding South East		1,074,386				864,528				734,590
Mortgage Banking		159,370				130,319				113,321
Consolidated revenues		$	7,163,674			$	6,305,840			$	5,822,544

		Year Ended December 31,
		2018				2017				2016
Profit before taxes:
Homebuilding Mid Atlantic		$	462,178			$	398,494			$	301,173
Homebuilding North East		69,789				60,218				21,947
Homebuilding Mid East		175,134				149,639				121,166
Homebuilding South East		118,296				95,826				71,098
Mortgage Banking		93,462				73,959				63,711
Total segment profit		918,859				778,136				579,095
Reconciling items:
Contract land deposit reserve adjustment (1)		783				1,307				10,933
Equity-based compensation expense (2)		(75,701		)		(44,562		)		(43,598		)
Corporate capital allocation (3)		213,903				198,384				189,992
Unallocated corporate overhead		(89,973		)		(89,514		)		(89,376		)
Consolidation adjustments and other		15,829				26,143				35,204
Corporate interest expense		(23,968		)		(22,983		)		(20,553		)
Reconciling items sub-total		40,873				68,775				82,602
Consolidated profit before taxes		$	959,732			$	846,911			$	661,697

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

(2)	The increase in equity-based compensation expense for the year ended December 31, 2018 was primarily attributable to the issuance of Options and RSUs in the second quarter of 2018. See Note 12 for additional discussion of equity-based compensation.

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

NVR, Inc.

Notes to Consolidated Financial Statements

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

		Year Ended December 31,
		2018				2017				2016
Corporate capital allocation charge:
Homebuilding Mid Atlantic		$	123,855			$	123,028			$	119,758
Homebuilding North East		17,893				16,115				18,132
Homebuilding Mid East		35,803				29,663				28,303
Homebuilding South East		36,352				29,578				23,799
Total corporate capital allocation charge		$	213,903			$	198,384			$	189,992

		As of December 31,
		2018				2017
Assets:
Homebuilding Mid Atlantic		$	1,018,953			$	1,079,225
Homebuilding North East		144,412				143,008
Homebuilding Mid East		290,815				263,019
Homebuilding South East		332,468				277,705
Mortgage Banking		517,075				397,052
Total segment assets		2,303,723				2,160,009
Reconciling items:
Cash and cash equivalents		688,783				645,087
Deferred taxes		112,333				111,953
Intangible assets and goodwill		49,989				50,144
Contract land deposit reserve		(29,216		)		(29,999		)
Consolidation adjustments and other		40,321				52,085
Reconciling items sub-total		862,210				829,270
Consolidated assets		$	3,165,933			$	2,989,279

		Year Ended December 31,
		2018				2017				2016
Interest income:
Mortgage Banking		$	11,593			$	7,850			$	7,569
Total segment interest income		11,593				7,850				7,569
Other unallocated interest income		8,588				4,554				1,111
Consolidated interest income		$	20,181			$	12,404			$	8,680

		Year Ended December 31,
		2018				2017				2016
Interest expense:
Homebuilding Mid Atlantic		$	123,908			$	123,075			$	119,808
Homebuilding North East		17,897				16,117				18,141
Homebuilding Mid East		35,804				29,663				28,307
Homebuilding South East		36,362				29,583				23,804
Mortgage Banking		1,045				1,148				1,086
Total segment interest expense		215,016				199,586				191,146
Corporate capital allocation (3)		(213,903		)		(198,384		)		(189,992		)
Senior Notes and other interest		23,968				22,983				20,553
Consolidated interest expense		$	25,081			$	24,185			$	21,707

NVR, Inc.

Notes to Consolidated Financial Statements

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

		Year Ended December 31,
		2018				2017				2016
Depreciation and amortization:
Homebuilding Mid Atlantic		$	7,753			$	8,095			$	8,089
Homebuilding North East		1,600				2,034				2,053
Homebuilding Mid East		3,481				3,590				3,748
Homebuilding South East		2,523				2,531				2,276
Mortgage Banking		1,489				1,297				1,117
Total segment depreciation and amortization		16,846				17,547				17,283
Unallocated corporate		3,322				5,120				4,986
Consolidated depreciation and amortization		$	20,168			$	22,667			$	22,269

		Year Ended December 31,
		2018				2017				2016
Expenditures for property and equipment:
Homebuilding Mid Atlantic		$	6,657			$	9,257			$	8,838
Homebuilding North East		1,074				1,299				3,423
Homebuilding Mid East		4,302				3,117				4,027
Homebuilding South East		2,732				3,313				3,594
Mortgage Banking		1,677				2,723				726
Total segment expenditures for property and equipment		16,442				19,709				20,608
Unallocated corporate		3,223				560				1,761
Consolidated expenditures for property and equipment		$	19,665			$	20,269			$	22,369

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 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

NVR, Inc.

Notes to Consolidated Financial Statements

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

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, 2018, NVR controlled approximately 95,750 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $420,900 and $3,800, 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 7,500 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $4,500 and $150, respectively, as of December 31, 2018, of which approximately $1,700 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, 2018 and 2017 was as follows:

		December 31,
		2018				2017
Contract land deposits		$	425,393			$	400,428
Loss reserve on contract land deposits		(29,216		)		(29,999		)
Contract land deposits, net		396,177				370,429
Contingent obligations in the form of letters of credit		3,923				1,996
Contingent specific performance obligations (1)		1,505				1,505
Total risk of loss		$	401,605			$	373,930

(1)	As of both December 31, 2018 and 2017, 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.

During 2018, the Company recognized an impairment of approximately $7,400, including approximately $760 of capitalized interest, related to one of these JVs. The charge was recorded to homebuilding "Cost of sales" on the accompanying consolidated statements of income. None of the other JVs had any indicators of impairment during 2018.

At December 31, 2018, the Company had an aggregate investment totaling approximately $29,400 in six JVs that are expected to produce approximately 6,800 finished lots, of which approximately 3,450 lots were controlled by the Company and the remaining approximately 3,350 lots were either under contract with unrelated parties or not currently under contract. In addition, NVR had

NVR, Inc.

Notes to Consolidated Financial Statements

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

additional funding commitments in the aggregate totaling $5,000 to three of the JVs at December 31, 2018. 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 $29,400 and $45,200 at December 31, 2018 and 2017, 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, 2018 and 2017 were as follows:

		December 31,
		2018				2017
Assets:
Cash		$	320			$	1,069
Other assets		—				37
Total assets		$	320			$	1,106
Liabilities and equity:
Accrued expenses		$	282			$	487
Equity		38				619
Total liabilities and equity		$	320			$	1,106

At December 31, 2017, the Company had an aggregate investment totaling approximately $45,500 in six JVs that were expected to produce approximately 7,300 finished lots, of which approximately 3,900 lots were controlled by the Company and the remaining approximately 3,400 lots were either under contract with unrelated parties or not currently under contract. In addition, at December 31, 2017, NVR had additional funding commitments in the aggregate totaling $5,300 to three of the JVs.

With the Company's adoption of ASU 2016-15 effective January 1, 2018, the Company made the election to classify distributions received from unconsolidated JVs using the cumulative earnings approach. As a result, distributions received up to the amount of cumulative earnings recognized by the Company are reported as distributions of earnings and those in excess of that amount are reported as a distribution of capital. These distributions are classified within the accompanying consolidated statements of cash flows as cash flows from operating activities and investing activities, respectively. See Note 1 for additional discussion regarding the Company's adoption of ASU 2016-15.

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, 2018, NVR directly owned three separate raw parcels of land with a carrying value of $38,857 that it intends to develop into approximately 500 finished lots primarily for use in its homebuilding operations. The Company also has additional funding commitments of approximately $7,300 under a joint development agreement related to one parcel, a portion of which the Company expects will be offset by development credits of approximately $4,600. None of the raw parcels had any indicators of impairment as of December 31, 2018.

As of December 31, 2017, NVR directly owned four separate raw parcels of land with a carrying value of $34,212, which were expected to produce approximately 500 finished lots.

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, Inc.

Notes to Consolidated Financial Statements

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

NVR’s interest costs incurred, capitalized, expensed and charged to cost of sales during the years ended December 31, 2018, 2017 and 2016 was as follows:

		December 31,
		2018				2017				2016
Interest capitalized, beginning of year		$	5,583			$	5,106			$	4,434
Interest incurred		26,277				26,384				25,951
Interest charged to interest expense		(25,081		)		(24,185		)		(21,707		)
Interest charged to cost of sales		(2,625		)		(1,722		)		(3,572		)
Interest capitalized, end of year		$	4,154			$	5,583			$	5,106

7. Related Party Transactions

During the year ended December 31, 2018, NVR entered into Lot Purchase Agreements to purchase finished building lots for a total purchase price of approximately $121,700 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 2018, 2017 and 2016, NVR purchased developed lots at market prices from Elm Street for approximately $36,100, $37,100 and $44,500, respectively.

The Company also continues to control a parcel of raw land expected to yield approximately 2,300 finished lots through a JV entered into with Elm Street during 2009. NVR did not make any investments in the JV in 2018. During 2017, NVR and Elm Street each made an additional investment of $2,900 in the JV. Further, during 2016, the Company paid Elm Street $143 to manage the development of a property that the Company purchased from Elm Street in 2010. No management fees were paid to Elm Street in 2018 or 2017 related to this property.

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

		December 31,
		2018				2017
Homebuilding:
Office facilities and other		$	37,789			$	35,219
Model home furniture and fixtures		31,593				33,901
Production facilities		64,667				61,348
Gross Homebuilding PP&E		134,049				130,468
Less: accumulated depreciation		(91,815		)		(87,277		)
Net Homebuilding PP&E		$	42,234			$	43,191
Mortgage Banking:
Office facilities and other		$	13,724			$	14,069
Less: accumulated depreciation		(7,214		)		(7,742		)
Net Mortgage Banking PP&E		$	6,510			$	6,327

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 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 and September 15. The Senior Notes have been reflected net of unamortized debt issuance costs of $1,886 and $2,395 as of December 31, 2018 and 2017, 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 $9,000 was outstanding at December 31, 2018, 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, 2018. There was no debt outstanding under the Facility at December 31, 2018.

Repurchase Agreement

On July 25, 2018, NVRM entered into the Tenth 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 nine 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.

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 1.95%. The Pricing Rate at December 31, 2018 was 4.513%. 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, 2018, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. As of both December 31, 2018 and 2017, there was no debt outstanding under the Repurchase Agreement. The Repurchase Agreement expires on July 24, 2019.

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, 2018.

NVR, Inc.

Notes to Consolidated Financial Statements

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

10. Common Stock

There were approximately 3,578 and 3,691 common shares outstanding at December 31, 2018 and 2017, respectively. The Company made the following share repurchases during the years indicated:

		Year Ended December 31,
		2018				2017				2016
Aggregate purchase price		$	846,134			$	422,166			$	455,351
Number of shares repurchased		301				167				280

The Company issues shares from the treasury account for all equity plan activity. The Company issued 188, 165 and 83 such shares during 2018, 2017 and 2016, respectively.

11. Income Taxes

The provision for income taxes consists of the following:

		Year Ended December 31,
		2018				2017				2016
Current:
Federal		$	126,358			$	211,641			$	209,454
State		37,038				37,006				38,095
Deferred:
Federal		138				60,785				(9,230		)
State		(999		)		(42		)		(1,884		)
Income tax expense		$	162,535			$	309,390			$	236,435

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

		December 31,
		2018				2017
Deferred tax assets:
Other accrued expenses and contract land deposit reserve		$	51,316			$	49,063
Deferred compensation		4,693				4,743
Equity-based compensation expense		40,744				36,799
Inventory		9,242				9,393
Unrecognized tax benefit		13,587				14,351
Other		5,113				9,681
Total deferred tax assets		124,695				124,030
Less: Deferred tax liabilities		6,091				4,511
Net deferred tax asset		$	118,604			$	119,519

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.

Management believes that the Company will have sufficient 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 $636,849 for the year ended December 31, 2018, and was $621,587 for the year ended December 31, 2017.

NVR, Inc.

Notes to Consolidated Financial Statements

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

A reconciliation of income taxes computed at the federal statutory rate (21% in 2018 and 35% in 2017 and 2016) to income tax expense is as follows:

		Year Ended December 31,
		2018				2017				2016
Income taxes computed at the federal statutory rate		$	201,544			$	296,419			$	231,595
State income taxes, net of federal income tax benefit (1)		42,944				30,046				23,738
Excess tax benefits from equity-based compensation (2)		(77,478		)		(58,681		)		—
Remeasurement of net deferred tax assets due to enactment of Tax Cut and Jobs Act (3)		(497		)		62,702				—
Other, net (4)		(3,978		)		(21,096		)		(18,898		)
Income tax expense		$	162,535			$	309,390			$	236,435

(1)	Excludes state excess tax benefits from equity-based compensation included in the line below.

(2)	ASU 2016-09 adopted January 1, 2017. Excess tax benefits related to equity-based compensation of $13,661 in 2016 were recorded to shareholders' equity.

(3)	The enactment of the Tax Cuts and Jobs Act in December 2017 required a remeasurement of the Company's net deferred tax assets and resulted in additional income tax expense of $62,702.

(4)

Primarily attributable to tax benefits from certain energy credits for the year ended December 31, 2018. For the years ended December 31, 2017 and 2016, this was primarily attributable to tax benefits from the domestic production activities deduction. The domestic production activities deduction was eliminated effective January 1, 2018, following the enactment of the Tax Cuts and Jobs Act in December 2017.

The Company’s effective tax rate in 2018, 2017 and 2016 was 16.94%, 36.53% and 35.73%, respectively.

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 2015.

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

		Year Ended December 31,
		2018				2017
Balance at beginning of year		$	45,337			$	46,110
Additions based on tax positions related to the current year		4,340				4,793
Reductions for tax positions of prior years		(6,259		)		(5,566		)
Settlements		—				—
Balance at end of year		$	43,418			$	45,337

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (net of the federal tax benefit) is $34,300 as of December 31, 2018.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2018, 2017, and 2016, the Company recognized a net reversal of accrued interest on unrecognized tax benefits in the amount of $1,384, $1,065 and $1,582, respectively. As of December 31, 2018 and 2017, the Company had a total of $17,191 and $18,575, 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, 2018 will be reduced by approximately $11,570 due to statute expiration and effectively settled positions in various state jurisdictions.

NVR, Inc.

Notes to Consolidated Financial Statements

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

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 Options and RSUs to key management employees, including executive officers and members of our Board of Directors ("Directors"), 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. Options are granted for a ten-year term and typically vest in separate tranches over periods of 3 to 6 years. RSUs generally vest in separate tranches over periods of 2 to 6 years. Grants are generally divided such that vesting for 50% of the grant is contingent solely on continued employment or service as a Director, while vesting for the remaining 50% of the grant is contingent upon both continued employment or service as a Director and the achievement of a performance metric based on the Company’s return on capital performance relative to a peer group during a three year period specified on the date of Option grant.

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, 2018:

Equity-Based Compensation Plans		Shares Authorized			Options/RSUs Outstanding			Shares Available to Issue
2000 Broadly-Based Stock Option Plan		2,000			63			—
2010 Equity Incentive Plan (1)		700			160			26
2014 Equity Incentive Plan (2)		950			701			102
2018 Equity Incentive Plan (3)		275			146			129

(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 Directors. Of the 700 aggregate shares available to issue, up to 240 may be granted in the form of RSUs. There were 139 Options and 21 RSUs outstanding as of December 31, 2018. Of the 26 shares available to be issued under the 2010 Plan, 22 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 Directors.

(3)

The Company’s shareholders approved the 2018 Equity Incentive Plan (the "2018 Plan") at the Company’s Annual Meeting of Shareholders held on May 2, 2018. The 2018 Plan authorizes the Company to issue up to an aggregate of 275 shares of the Company’s common stock in the form of Options and RSUs to key management employees, including executive officers and Directors. Of the 275 aggregate shares available to issue, all may be granted in the form of Options and up to 40 may be granted in the form of RSUs.

During 2018, the Company issued 345 Options and 16 RSUs under the 2010 Plan, the 2014 Plan, and the 2018 Plan as follows:

		2010 Plan			2014 Plan			2018 Plan
Options Granted
Options (4)		6			93			73
Performance-based Options (5)		—			100			73
Total Options Granted		6			193			146
RSUs Granted
RSUs (6)		8			—			—
Performance-based RSUs (7)		8			—			—
Total RSUs Granted		16			—			—

(4) Of the 172 service-only Options granted, 34 will generally vest over two years in 50% increments on December 31, 2020 and 2021; the remaining 138 Options will generally vest over four years in 25% increments on December 31, 2020, 2021,

NVR, Inc.

Notes to Consolidated Financial Statements

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

2022, and 2023. Vesting for the Options is contingent solely upon continued employment or continued service as a Director.

(5) Of the 173 performance-based Options granted, 34 will vest over two years in 50% increments on December 31, 2020 and 2021; the remaining 139 performance-based Options will generally vest over four years in 25% increments on December 31, 2020, 2021, 2022, and 2023. Vesting for the performance-based Options is contingent upon both continued employment or continued service as a Director and the Company's return on capital performance during 2018 through 2020.

(6) The service-only RSUs granted will vest over two years in 50% increments on December 31, 2022 and 2023. Vesting for the RSUs is contingent solely upon continued employment.

(7) The performance-based RSUs granted will vest over two years in 50% increments on December 31, 2022 and 2023. Vesting for the performance-based RSUs is contingent upon both continued employment and the Company's return on capital performance during 2018 through 2020.

The following table provides additional information relative to NVR’s equity-based compensation plans for the year ended December 31, 2018:

		Shares			Weighted Avg. Per Share Exercise Price				Weighted Avg. Remaining Contract Life (years)		Aggregate Intrinsic Value
Stock Options
Outstanding at December 31, 2017		916			$	1,119.92
Granted		345			3,013.61
Exercised		(182	)		954.49
Forfeited		(30	)		1,283.48
Outstanding at December 31, 2018		1,049			$	1,766.87			6.5		$	910,014
Exercisable at December 31, 2018		466			$	1,032.44			4.6		$	655,141
RSUs
Outstanding at December 31, 2017		10
Granted		16
Vested		(5	)
Forfeited		—
Outstanding at December 31, 2018		21									$	50,719
Vested, but not issued at December 31, 2018		5									$	11,532

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 2018, 2017 and 2016 was estimated on the grant date using the Pricing Model, based on the following assumptions:

		2018				2017				2016
Estimated option life (years)		5.06				5.26				5.27
Risk free interest rate (range)		2.19%-3.13%				1.53%-2.38%				0.86%-2.21%
Expected volatility (range)		16.57%-20.05%				15.09%-17.95%				15.91%-23.49%
Expected dividend rate		—		%		—		%		—		%
Weighted average grant-date fair value per share of options granted		$	687.81			$	494.17			$	320.21

NVR, Inc.

Notes to Consolidated Financial Statements

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

The weighted-average grant date fair value per share of $3,015.83 for the RSUs was the closing price of the Company’s common stock on the day immediately preceding the date of grant.

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 Options and RSUs which are subject to a performance condition are treated as a separate award from the “service-only” Options and RSUs, 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 stated performance condition will be satisfied at the target level and is recognizing compensation expense related to such Options and RSUs accordingly. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees.

In connection with the adoption of ASU 2016-09 on January 1, 2017, the Company made the election to recognize forfeitures of equity-based awards as a reduction to compensation costs in the period in which they occur. For the year ended December 31, 2016, the Company estimated forfeitures based on its historical forfeiture rate. In 2018, 2017 and 2016, the Company recognized $75,701, $44,562, and $43,598 in equity-based compensation costs, respectively, and approximately $17,200, $17,100, and $17,000 in tax benefit related to equity-based compensation costs, respectively.

As of December 31, 2018, the total unrecognized compensation cost for all outstanding Options and RSUs equaled approximately $302,000. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period with the latest vesting date being December 31, 2024. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 2.6 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, 2018, 2017 and 2016, the Company issued 188, 165 and 83 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,
		2018				2017				2016
Aggregate exercise proceeds		$	174,110			$	140,525			$	38,106
Aggregate intrinsic value on exercise dates		$	355,318			$	206,890			$	96,600

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, 2018, 2017 and 2016 was approximately $19,500, $18,400 and $16,700, respectively. The ESOP purchased approximately 7 and 6 shares of NVR common stock in the open market for the 2018 and 2017 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2018, all shares held by the ESOP had been allocated to participants’ accounts. The 2018 plan year contribution was funded and fully allocated to participants in February 2019.

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 107 and 109 shares of NVR common stock as of December 31, 2018 and 2017, respectively. 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, 2018, 2017 and 2016.

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, 2018 are as follows:

Year Ending December 31,
2019	$	31,564
2020	22,210
2021	17,331
2022	13,667
2023	10,324
Thereafter	12,607
	107,703
Sublease income	(25		)
	$	107,678

Total rent expense incurred under operating leases was approximately $52,900, $49,400 and $45,800 for the years ended December 31, 2018, 2017 and 2016, 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. At December 31, 2018, 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 $193,600. 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, 2018, we had funding commitments totaling approximately $7,300 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 $4,600.

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 $37,600 of contingent obligations under such agreements, including approximately $9,000 for letters of credit issued under the Credit Agreement as of December 31, 2018. 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,
		2018				2017				2016
Warranty reserve, beginning of year		$	94,513			$	93,895			$	87,407
Provision		62,553				44,652				50,787
Payments		(53,366		)		(44,034		)		(44,299		)
Warranty reserve, end of year		$	103,700			$	94,513			$	93,895

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.

NVR, Inc.

Notes to Consolidated Financial Statements

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

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 values of NVR’s Senior Notes as of December 31, 2018 and 2017 were $594,000 and $630,000, respectively. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy. The carrying values at December 31, 2018 and 2017 were $597,681 and $597,066, respectively. 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, 2018, there were contractual commitments to extend credit to borrowers aggregating $682,152 and open forward delivery contracts aggregating $1,089,923, 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 is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes a fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.

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

Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. As of December 31, 2018, the fair value of loans held for sale of $458,324 included on the accompanying consolidated balance sheet has been increased by $10,880 from the aggregate principal balance of $447,444. As of December 31, 2017, the fair value of loans held for sale of $352,489 were increased by $1,931 from the aggregate principal balance of $350,558.

NVR, Inc.

Notes to Consolidated Financial Statements

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

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

		As of December 31,
		2018				2017
Rate lock commitments:
Gross assets		$	13,831			$	5,400
Gross liabilities		345				1,832
Net rate lock commitments		$	13,486			$	3,568
Forward sales contracts:
Gross assets		$	64			$	992
Gross liabilities		10,121				667
Net forward sales contracts		$	(10,057	)		$	325

As of December 31, 2018, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities" on the accompanying consolidated balance sheets. As of December 31, 2017, both the net rate lock commitments and the net forward sales contracts are reported in mortgage banking "Other assets."

The fair value measurement as of December 31, 2018 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		$	682,152			$	1,360			$	4,630			$	7,496			$	—			$	13,486
Forward sales contracts		$	1,089,923			—				—				—				(10,057		)		(10,057		)
Mortgages held for sale		$	447,444			1,267				3,637				5,976				—				10,880
Total fair value measurement						$	2,627			$	8,267			$	13,472			$	(10,057	)		$	14,309

The total fair value measurement as of December 31, 2017 was $5,824. For the years ended December 31, 2018, and 2017, NVRM recorded a fair value adjustment to income of $8,485 and $1,638, respectively. For the year ended December 31, 2016, NVRM recorded a fair value adjustment to expense of $3,147. 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 Repurchase Reserve

During the years ended December 31, 2018, 2017 and 2016, the Company recognized pre-tax charges for loan losses related to mortgage loans sold of approximately $3,200, $2,900 and $2,000, respectively. Included in the Mortgage Banking segment’s “Accounts payable and other liabilities” line item on the accompanying consolidated balance sheets is a mortgage repurchase reserve equal to approximately $15,600 and $14,000 at December 31, 2018 and 2017, respectively.

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, 2018 and 2017.

		Year Ended December 31, 2018
		4th Quarter				3rd Quarter				2nd Quarter				1st Quarter
Revenues – homebuilding operations		$	1,954,403			$	1,809,345			$	1,750,463			$	1,490,093
Gross profit – homebuilding operations		$	363,668			$	336,696			$	333,666			$	278,147
Mortgage banking fees		$	40,145			$	43,062			$	36,842			$	39,321
Net income		$	232,158			$	195,816			$	203,174			$	166,049
Diluted earnings per share		$	58.57			$	48.28			$	49.05			$	39.34
New orders (units)		3,841				4,302				4,964				5,174
Settlements (units)		5,186				4,754				4,611				3,896
Backlog, end of period (units)		8,365				9,710				10,162				9,809
Loans closed		$	1,356,430			$	1,249,199			$	1,214,101			$	1,009,673

		Year Ended December 31, 2017
		4th Quarter				3rd Quarter				2nd Quarter				1st Quarter
Revenues – homebuilding operations		$	1,781,494			$	1,633,726			$	1,512,714			$	1,247,587
Gross profit – homebuilding operations		$	343,187			$	325,755			$	294,631			$	221,570
Mortgage banking fees		$	34,842			$	34,194			$	31,778			$	29,505
Net income		$	124,619			$	162,102			$	147,877			$	102,923
Diluted earnings per share		$	28.88			$	38.02			$	35.19			$	25.12
New orders (units)		4,306				4,200				4,678				4,424
Settlements (units)		4,630				4,158				3,917				3,256
Backlog, end of period (units)		8,531				8,855				8,813				8,052
Loans closed		$	1,229,695			$	1,115,494			$	1,041,613			$	843,341