(dollars in thousands, except per share data) Forward-Looking Statements Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other comparable terminology. All statements other than of historical facts are forward-looking statements. Forward-looking statements contained in this document may include those regarding market trends, our financial position and financial results, business strategy, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or performance to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: the impact of COVID-19 on us and the economy generally; general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by us and our customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; competition; the availability and cost of land and other raw materials used by us in our homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which we have little or no control. We undertake no obligation to update such forward-looking statements except as required by law. For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of NVR's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Unless the context otherwise requires, references to "NVR," "we," "us," or "our" include NVR and its consolidated subsidiaries. Results of Operations for the Three Months EndedMarch 31, 2020 and 2019 Overview Impact of COVID-19 As the global spread of COVID-19 continues, the pandemic has significantly adversely impacted and may continue to significantly adversely impact our business. Our primary focus as we face this challenge is to do everything we can to ensure the safety and well-being of our employees, customers and trade partners. Residential construction has been deemed an essential business in each of our markets throughout the pandemic, exceptPennsylvania andNew York . In addition, state and/or local governments in each of our markets have instituted social distancing and other restrictions, which have resulted in significant changes to the way we conduct business. In all markets where we are permitted to operate, we are operating in accordance with the guidelines issued by theCenters for Disease Control and Prevention as well as state and local guidelines. We experienced increased sales cancellations and decreased new orders in late March as compared to the period immediately prior to the widespread outbreak of COVID-19 in theU.S. During the month of April, we have continued to experience a significant decline in new orders and an elevated level of cancellations. The additional uncertainty in the marketplace as a result of the pandemic could continue to lead to additional cancellations and decreased orders going forward. The COVID-19 pandemic also had an impact on our backlog of homes sold but not yet delivered. Due to governors' orders inPennsylvania andNew York , the inability to continue residential construction activities in March and April has impacted our ability to complete construction and settle houses sold. As ofMay 1, 2020 , we were able to resume residential construction activities inPennsylvania . 19 -------------------------------------------------------------------------------- Table of Contents Our mortgage banking operations continued to conduct loan closings throughout the first quarter. During the last few weeks of March, there was significant disruption in the mortgage market as investors tightened their credit standards or exited the market, which resulted in significantly lower values for mortgage servicing rights and fewer customers able to qualify for a mortgage. There is uncertainty regarding the extent and timing of disruption to our business that may result from COVID-19 and related governmental actions. There is also uncertainty as to the effects of the pandemic and related economic relief efforts on theU.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of COVID-19, corresponding governmental actions, and the impact of such on our employees, customers and trade partners. Business Our primary business is the construction and sale of single-family detached homes, townhomes and condominiums, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions: Mid Atlantic: Maryland, Virginia, West Virginia, Delaware and Washington, D.C. North East: New Jersey and Eastern Pennsylvania Mid East: New York, Ohio, Western Pennsylvania, Indiana and Illinois South East: North Carolina, South Carolina, Florida and Tennessee Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished lots at market prices from various third party land developers pursuant to fixed price finished lot purchase agreements ("Lot Purchase Agreements"). These Lot Purchase Agreements require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the Lot Purchase Agreement. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital. In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build. In certain specific strategic circumstances, we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into a Lot Purchase Agreement with the developer to purchase the finished lots or to hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all our finished lot inventory using Lot Purchase Agreements with forfeitable deposits. As ofMarch 31, 2020 , we controlled approximately 103,600 lots as described below. Lot Purchase Agreements We controlled approximately 100,150 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately$431,200 and$6,600 , respectively. Included in the number of 20 -------------------------------------------------------------------------------- Table of Contents controlled lots are approximately 9,500 lots for which we have recorded a contract land deposit impairment reserve of approximately$63,200 as ofMarch 31, 2020 . Joint Venture Limited Liability Corporations ("JVs") We had an aggregate investment totaling approximately$27,800 in four JVs, expected to produce approximately 6,200 lots. Of the lots to be produced by the JVs, approximately 2,850 lots were controlled by us and approximately 3,350 were either under contract with unrelated parties or currently not under contract. We had additional funding commitments totaling approximately$4,200 in the aggregate to one of the JVs atMarch 31, 2020 .Land Under Development We directly owned five separate raw land parcels, zoned for their intended use, with a cost basis, including development costs, of approximately$68,100 that we intend to develop into approximately 600 finished lots. We had additional funding commitments of approximately$5,900 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately$2,700 . See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding Lot Purchase Agreements, JVs and land under development, respectively. Raw Land Purchase Agreements In addition, we have certain properties under contract with land owners that are expected to yield approximately 7,200 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$1,200 and$100 , respectively, as ofMarch 31, 2020 , of which approximately$800 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible. Key Financial Results Our consolidated revenues for the first quarter of 2020 totaled$1,582,528 , a 6% decrease from the first quarter of 2019. Net income for the first quarter endedMarch 31, 2020 was$175,703 , or$44.96 per diluted share, decreases of 7% and 6% when compared to net income and diluted earnings per share in the first quarter of 2019, respectively. Our homebuilding gross profit margin percentage decreased to 16.8% in the first quarter of 2020 from 18.5% in the first quarter of 2019. New orders, net of cancellations ("New Orders") decreased by 2% in the first quarter of 2020 compared to the first quarter of 2019. The average sales price for New Orders in the first quarter of 2020 increased by 1% to$372.3 compared to the first quarter of 2019. 21 -------------------------------------------------------------------------------- Table of Contents Homebuilding Operations The following table summarizes the results of operations and other data for the consolidated homebuilding operations: Three Months Ended March 31, 2020 2019 Financial Data: Revenues$ 1,555,707 $ 1,643,206 Cost of sales$ 1,294,743 $ 1,338,806 Gross profit margin percentage 16.8 % 18.5 % Selling, general and administrative expenses$ 110,167 $ 115,734 Operating Data: New orders (units) 5,015 5,139 Average new order price$ 372.3 $ 367.0 Settlements (units) 4,230 4,493 Average settlement price$ 367.8 $ 365.7 Backlog (units) 9,018 9,011 Average backlog price$ 381.6 $ 376.8 New order cancellation rate 20.8 % 14.1 % Consolidated Homebuilding - Three Months EndedMarch 31, 2020 and 2019 Homebuilding revenues decreased 5% in the first quarter of 2020 compared to the same period in 2019, as a result of a 6% decrease in the number of units settled. The number of units settled was lower primarily due to a 2% lower backlog unit balance entering 2020 compared to the backlog unit balance entering 2019. Additionally, March settlement activity was negatively impacted by the COVID-19 pandemic. Gross profit margin percentage in the first quarter of 2020 decreased to 16.8%, from 18.5% in the first quarter of 2019. Gross profit margin in the first quarter of 2020 was negatively impacted by contract land deposit impairment charges of approximately$36,400 , or 234 basis points of revenue. The number of New Orders decreased 2% while the average sales price of New Orders increased 1% in the first quarter of 2020 compared to the first quarter of 2019. The decrease in New Orders was attributable primarily to a decrease in New Orders in our Mid Atlantic market segments, partially driven by a decrease in the average number of active communities in the market segment. Additionally, in March, we experienced an increase in sale cancellations and a decrease in New Orders due to the impact of the COVID-19 pandemic on consumer demand. Our cancellation rate in the first quarter of 2020 increased to 21% compared to 14% in the same period of 2019. Selling, general and administrative ("SG&A") expense in the first quarter of 2020 decreased by approximately$5,600 , and as a percentage of revenue was essentially flat quarter over quarter. SG&A expense was favorably impacted by a decrease in stock based compensation expense of approximately$12,700 due to the reversal of approximately$6,500 in stock based compensation related to forfeited stock options in the first quarter of 2020, coupled with the stock options issued in 2014 under the 2014 Equity Incentive Plan becoming fully vestedDecember 31, 2019 . This decrease was partially offset by higher personnel costs quarter over quarter. Our backlog represents homes sold but not yet settled with our customers. Backlog units and dollars of 9,018 units and$3,441,151 , respectively, as ofMarch 31, 2020 were relatively flat compared to 9,011 units and$3,395,132 , respectively, as ofMarch 31, 2019 . As previously discussed, state and local governments inPennsylvania andNew York issued various orders in March that prohibited residential construction. Our backlog as ofMarch 31, 2020 included 1,178 units and$482,530 inPennsylvania andNew York , of which 510 units and$203,249 had not started construction on that date. The remaining 668 units are in various stages of construction. As ofMay 1, 2020 , we were able to resume residential construction activities inPennsylvania , subject to certain restrictions, whileNew York's prohibition on residential construction continued. Once we are able to continue 22 -------------------------------------------------------------------------------- Table of Contents residential construction, we expect to complete construction of these homes and deliver them to the buyers with whom we are currently under contract. However, in light of the current economic conditions, we expect this backlog may experience a higher level of cancellations than the rest of our backlog due to uncertainty as to how these states will respond to re-opening and our ability to promise a delivery date on these units. In addition to the potential impact of the COVID-19 pandemic, our backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 21% and 14% in the first three months of 2020 and 2019, respectively. During the most recent four quarters, approximately 6% of a reporting quarter's opening backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur during the remainder of 2020 or future years. Other than those units that are cancelled, and subject to potential construction delays resulting from COVID-19 related restrictions, we expect to settle substantially all of ourMarch 31, 2020 backlog within the next twelve months. The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity and other external factors over which we do not exercise control, such as the impact of governmental orders to cease or limit construction activities as a result of COVID-19. Reportable Segments Homebuilding segment profit includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined by corporate management. The corporate capital allocation charge eliminates in consolidation and is based on the segment's average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment is providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of a Lot Purchase Agreement with the developer, or the restructuring of a Lot Purchase Agreement resulting in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For presentation purposes below, the contract land deposit reserve atMarch 31, 2020 andDecember 31, 2019 has been allocated to the respective year's reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately$6,600 and$5,500 atMarch 31, 2020 andDecember 31, 2019 , respectively, of letters of credit issued as deposits in lieu of cash. The following tables summarize certain homebuilding operating activity by reportable segment for the three months endedMarch 31, 2020 and 2019. Selected Segment Financial Data: Three Months Ended March 31, 2020 2019 Revenues: Mid Atlantic$ 774,057 $ 881,324 North East 106,136 122,627 Mid East 320,695 338,549 South East 354,818 300,706 23
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Table of Contents Three Months Ended March 31, 2020 2019 Gross profit margin: Mid Atlantic$ 144,328 $ 162,733 North East 22,743 22,839 Mid East 58,288 61,349 South East 74,975 59,578 Three Months Ended March 31, 2020 2019 Gross profit margin percentage: Mid Atlantic 18.6 % 18.5 % North East 21.4 % 18.6 % Mid East 18.2 % 18.1 % South East 21.1 % 19.8 % Three Months Ended March 31, 2020 2019 Segment profit: Mid Atlantic$ 81,673 $ 99,364 North East 10,151 11,460 Mid East 31,164 35,475 South East 47,144 35,036 Operating Activity: Three Months Ended March 31, 2020 2019 Average Average Units Price Units Price New orders, net of cancellations: Mid Atlantic 2,061$ 442.2 2,444$ 419.1 North East 358$ 382.2 313$ 381.4 Mid East 1,225$ 326.2 1,214$ 320.3 South East 1,371$ 305.6 1,168$ 302.5 Total 5,015$ 372.3 5,139$ 367.0 Three Months Ended March 31, 2020 2019 Average Average Units Price Units Price Settlements: Mid Atlantic 1,795$ 431.2 2,143$ 411.2 North East 281$ 377.7 303$ 404.7 Mid East 985$ 325.6 1,030$ 328.7 South East 1,169$ 303.5 1,017$ 295.7 Total 4,230$ 367.8 4,493$ 365.7 24
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Table of Contents As of March 31, 2020 2019 Average Average Units Price Units Price Backlog: Mid Atlantic 3,878$ 445.3 4,449$ 426.9 North East 664$ 407.6 573$ 391.3 Mid East 2,053$ 331.5 1,990$ 330.3 South East 2,423$ 314.9 1,999$ 307.3 Total 9,018$ 381.6 9,011$ 376.8 Three Months Ended March 31, 2020 2019 New order cancellation rate: Mid Atlantic 21.8 % 14.8 % North East 21.7 % 12.1 % Mid East 20.8 % 12.8 % South East 19.1 % 14.2 % Three Months Ended March 31, 2020 2019 Average active communities: Mid Atlantic 189 211 North East 40 29 Mid East 138 125 South East 108 84 Total 475 449 Homebuilding Inventory:
March 31, 2020 December 31, 2019 Sold inventory: Mid Atlantic$ 654,219 $ 575,216 North East 106,389 77,965 Mid East 207,435 190,700 South East 240,423 230,640 Total (1)$ 1,208,466 $ 1,074,521 25
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March 31, 2020 December 31, 2019 Unsold lots and housing units inventory: Mid Atlantic$ 118,882 $ 104,459 North East 24,027 28,331 Mid East 22,701 15,333 South East 43,208 35,420 Total (1)$ 208,818 $ 183,543 (1) The reconciling items between segment inventory and consolidated inventory include certain consolidation adjustments necessary to convert the reportable segments' results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes. These consolidation adjustments are not allocated to our operating segments. Lots Controlled and Land Deposits: March 31, 2020 December 31, 2019 Total lots controlled: Mid Atlantic 41,900 42,400 North East 9,600 9,900 Mid East 22,900 24,200 South East 29,200 28,400 Total 103,600 104,900 March 31, 2020 December 31, 2019 Contract land deposits, net: Mid Atlantic$ 187,753 $ 205,433 North East 41,290 50,348 Mid East 53,924 57,053 South East 92,930 106,523 Total$ 375,897 $ 419,357 Three Months Ended March 31, 2020 2019 Contract land deposit impairments (recoveries), net: Mid Atlantic $ - $ 289 North East - 1,250 Mid East 266 - South East 454 - Total $ 720$ 1,539 Mid Atlantic Three Months EndedMarch 31, 2020 and 2019 The Mid Atlantic segment had an approximate$17,700 , or 18%, decrease in segment profit in the first quarter of 2020 compared to the first quarter of 2019. The decrease in segment profit was driven by a decrease in segment revenues of approximately$107,300 , or 12%, quarter over quarter. Segment revenues decreased due to a 16% 26 -------------------------------------------------------------------------------- Table of Contents decrease in the number of units settled, offset partially by a 5% increase in the average settlement price quarter over quarter. The decrease in the number of units settled was impacted by a 13% lower backlog unit balance entering 2020 compared to the backlog unit balance entering 2019. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2020 compared to backlog entering 2019. The MidAtlantic segment's gross profit margin percentage remained relatively flat in the first quarter of 2020 compared to the first quarter of 2019. Segment New Orders decreased 16%, while the average sales price of New Orders increased 6% in the first quarter of 2020 compared to the first quarter of 2019. New Orders decreased primarily due to a 10% decrease in the average number of active communities quarter over quarter, coupled with an increase in the cancellation rate quarter over quarter as a result of the COVID-19 pandemic.North East Three Months EndedMarch 31, 2020 and 2019 TheNorth East segment had an approximate$1,300 , or 11%, decrease in segment profit in the first quarter of 2020 compared to the first quarter of 2019 due primarily to a decrease in segment revenues of approximately$16,500 , or 13%, quarter over quarter. The decrease in segment revenues was attributable to a 7% decrease in both the number of units settled and the average settlement price quarter over quarter. The decrease in units settled was primarily attributable to a decrease in settlements in ourEastern Pennsylvania markets. As discussed above, the state and local governments inPennsylvania issued various orders that prohibited residential construction in March. The decrease in the average settlement price was attributable to a relative shift in settlements to lower priced markets. The segment's gross profit margin percentage increased to 21.4% in the first quarter of 2020 from 18.6% in the first quarter of 2019, primarily due to a product mix shift. Segment New Orders increased 14%, while the average sales price of New Orders remained flat, in the first quarter of 2020 compared to the first quarter of 2019. The increase in New Orders was primarily attributable to a 38% increase in the average number of active communities quarter over quarter, offset partially by an increase in the cancellation rate quarter over quarter as a result of the COVID-19 pandemic. Mid East Three Months EndedMarch 31, 2020 and 2019 The Mid East segment had an approximate$4,300 , or 12%, decrease in segment profit in the first quarter of 2020 compared to the first quarter of 2019, due primarily to a decrease in segment revenues of approximately$17,900 , or 5%, quarter over quarter. Segment revenues decreased primarily due to a 4% decrease in the number of units settled and a 1% decrease in the average settlement price quarter over quarter. The decrease in units settled was in part attributable to a decrease in settlements in ourWestern Pennsylvania markets. As discussed above, the state and local governments inPennsylvania issued various orders that prohibited residential construction in March. The segment's gross profit margin percentage was essentially flat quarter over quarter. Segment New Orders and the average sales price of New Orders increased 1% and 2%, respectively, in the first quarter of 2020 compared to the first quarter of 2019. New Orders increased primarily due to an 11% increase in the average number of active communities quarter over quarter, offset partially by an increase in the cancellation rate as a result of the COVID-19 pandemic. The increase in the average sales price of New Orders is attributable to a shift in New Orders to higher priced markets. South East Three Months EndedMarch 31, 2020 and 2019 The South East segment had an approximate$12,100 , or 35%, increase in segment profit in the first quarter of 2020 compared to the first quarter of 2019. The increase in segment profit was primarily driven by an increase in segment revenues of approximately$54,100 , or 18%, coupled with improved gross profit margins quarter over quarter. The increase in revenues is attributable to a 15% increase in the number of units settled and a 3% increase in the average settlement price quarter over quarter. The number of units settled and the average settlement price were favorably impacted by a 20% higher backlog unit balance and 3% higher average sales price of units in 27 -------------------------------------------------------------------------------- Table of Contents backlog entering 2020 compared to the same period in 2019. The segment's gross profit margin percentage increased to 21.1% in the first quarter of 2020 from 19.8% in the first quarter of 2019, due primarily to lower construction costs, offset partially by higher lot costs as a percentage of revenue. Segment New Orders and the average sales price of New Orders increased 17% and 1%, respectively, in the first quarter of 2020 compared to the first quarter of 2019. New Orders were favorably impacted by a 28% increase in the average number of active communities, offset partially by an increase in the cancellation rate quarter over quarter as a result of the COVID-19 pandemic. Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated income before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments' results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our 3.95% Senior Notes due 2022, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above. Three Months Ended March 31, 2020 2019 Homebuilding consolidated gross profit: Mid Atlantic$ 144,328 $ 162,733 North East 22,743 22,839 Mid East 58,288 61,349 South East 74,975 59,578 Consolidation adjustments and other (39,370) (2,099) Homebuilding consolidated gross profit$ 260,964 $ 304,400 Three Months Ended March 31, 2020 2019 Homebuilding consolidated income before taxes: Mid Atlantic$ 81,673 $ 99,364 North East 10,151 11,460 Mid East 31,164 35,475 South East 47,144 35,036 Reconciling items: Contract land deposit impairment reserve (1) (35,615) 950 Equity-based compensation expense (2) (7,069) (19,972) Corporate capital allocation (3) 56,650 54,559 Unallocated corporate overhead (37,639) (31,735) Consolidation adjustments and other 9,654 9,247 Corporate interest expense (6,194) (5,974) Reconciling items sub-total (20,213) 7,075 Homebuilding consolidated income before taxes$ 149,919 $ 188,410 28 -------------------------------------------------------------------------------- Table of Contents (1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2 in the accompanying condensed consolidated financial statements. (2)The decrease in equity-based compensation expense for the three-month period endedMarch 31, 2020 was primarily attributable to the reversal of approximately$6,500 in equity-based compensation related to forfeited stock options during the quarter, coupled with the stock options issued in 2014 under the 2014 Equity Incentive Plan becoming fully vestedDecember 31, 2019 . (3)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment's monthly average asset balance, and is as follows for the periods presented: Three Months
Ended
2020 2019 Corporate capital allocation charge: Mid Atlantic$ 29,755 $ 30,417 North East 5,558 4,727 Mid East 9,363 9,015 South East 11,974 10,400 Total$ 56,650 $ 54,559 Mortgage Banking Segment Three Months EndedMarch 31, 2020 and 2019 We conduct our mortgage banking activity throughNVR Mortgage Finance, Inc. ("NVRM"), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment customer base. NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing-released basis, typically within 30 days from the loan closing. The following table summarizes the results of our mortgage banking operations and certain statistical data for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Loan closing volume: Total principal$ 1,132,104 $ 1,140,999 Loan volume mix: Adjustable rate mortgages 2 % 11 % Fixed-rate mortgages 98 % 89 % Operating profit: Segment profit$ 11,879 $ 29,558 Equity-based compensation expense (423)
639
Mortgage banking income before tax$ 11,456 $ 30,197 Capture rate: 91 % 88 % Mortgage banking fees: Net gain on sale of loans$ 18,400 $ 34,957 Title services 8,253 8,700 Servicing fees 168 148$ 26,821 $ 43,805 29
-------------------------------------------------------------------------------- Table of Contents Loan closing volume for the three months endedMarch 31, 2020 decreased by approximately$8,900 , or 1%, from the same period in 2019. The decrease in loan closing volume during the three months endedMarch 31, 2020 was primarily attributable to the 6% decrease in the homebuilding segment's number of units settled during the three months endedMarch 31, 2020 , compared to the same period in 2019, offset partially by an increase in the capture rate, quarter over quarter. Segment profit for the three months endedMarch 31, 2020 decreased by approximately$17,700 , or 60%, from the same period in 2019. This decrease was primarily attributable to a decrease of approximately$17,000 , or 39%, in mortgage banking fees, primarily due to the reduction in fair value of mortgage servicing rights as a result of the disruptions in the mortgage market related to the COVID-19 pandemic. Effective Tax Rate Our effective tax rate during the three months endedMarch 31, 2020 was a benefit of 8.9% as compared to an expense of 13.8% for the three months endedMarch 31, 2019 . Our effective tax rate was favorably impacted by the recognition of an income tax benefit related to excess tax benefits from stock option exercises totaling$55,655 for the three months endedMarch 31, 2020 , and$28,478 for the three months endedMarch 31, 2019 . We expect to experience volatility in our effective tax rate in future quarters as the amount of the excess tax benefit from equity-based awards is dependent on our stock price when awards are exercised as well as on the timing of exercises, which historically has varied from quarter to quarter. Liquidity and Capital Resources Overview We have a very strong liquidity position as ofMarch 31, 2020 , with$1,091,996 in cash and cash equivalents,$188,600 in unused committed capacity under our revolving credit facility and$150,000 in unused committed capacity under our revolving mortgage repurchase facility. In addition, onMay 4, 2020 , we completed the offering of$600,000 aggregate principal amount of 3.000% Senior Notes. See Note 15 for additional discussion of the senior note offering. Lines of Credit and Notes Payable Our homebuilding business segment funds its operations from cash flows provided by operating activities, a short-term unsecured working capital revolving credit facility and capital raised in the public debt and equity markets. Our unsecured Credit Agreement (the "Credit Agreement") provides for aggregate revolving loan commitments of$200,000 . Under the Credit Agreement, we may request increases of up to$300,000 to the facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a$100,000 sublimit for the issuance of letters of credit of which there was approximately$11,400 outstanding atMarch 31, 2020 , and a$25,000 sublimit for a swing line commitment. The Credit Agreement termination date isJuly 15, 2021 . There was no debt outstanding under the Credit Agreement atMarch 31, 2020 . Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a$150,000 revolving mortgage repurchase facility (the "Repurchase Agreement"), which is non-recourse to NVR. The Repurchase Agreement expires onJuly 22, 2020 . AtMarch 31, 2020 , there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement atMarch 31, 2020 . There have been no material changes in our lines of credit and notes payable during the three months endedMarch 31, 2020 . For additional information regarding lines of credit and notes payable, see Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Cash Flows For the three months endedMarch 31, 2020 , cash, restricted cash, and cash equivalents decreased by$42,537 . Cash provided by operating activities was$68,441 . Cash was provided by earnings for the three months 30
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Table of Contents endedMarch 31, 2020 and net proceeds of$94,742 from mortgage loan activity. Cash was primarily used to fund the increase in homebuilding inventory of$168,352 , due to an increase in the number of units under construction atMarch 31, 2020 compared toDecember 31, 2019 . Net cash used in investing activities for the three months endedMarch 31, 2020 of$3,258 included cash used for purchases of property, plant and equipment of$3,510 , partially offset by the proceeds from the sale of property, plant and equipment totaling$252 . Net cash used in financing activities was$107,720 for the three months endedMarch 31, 2020 . Cash was used to repurchase 57,611 shares of our common stock at an aggregate purchase price of$216,582 under our ongoing common stock repurchase program, discussed below. Cash was provided from stock option exercise proceeds totaling$109,062 . Equity Repurchases In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Exchange Act. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing/401(k)Plan Trust orEmployee Stock Ownership Plan Trust . The repurchase program assists us in accomplishing our primary objective of creating increases in shareholder value. See Part II, Item 2, Unregistered Sales ofEquity Securities and Use of Proceeds, of this Quarterly Report on Form 10-Q for further discussion of repurchase activity during the first quarter of 2020. Critical Accounting Policies There have been no material changes to our critical accounting policies as previously disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Item 3. Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in our market risks during the three months endedMarch 31, 2020 . For additional information regarding our market risks, see Part II, Item 7A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no changes in our internal control over financial reporting in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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