NVR, INC. (dollars in thousands, except per share data) Results of Operations This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . Overview Business Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions: MidAtlantic :Maryland ,Virginia ,West Virginia ,Delaware andWashington, D.C. North East :New Jersey andEastern Pennsylvania Mid East: NewYork, Ohio ,Western Pennsylvania ,Indiana andIllinois South East:North Carolina ,South Carolina ,Florida andTennessee Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished lots at market prices from various third party land developers pursuant to Lot Purchase Agreements. These Lot Purchase Agreements require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the Lot Purchase Agreement. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital. In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build. In limited specific strategic circumstances, we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into a Lot Purchase Agreement with the developer to purchase the finished lots or to hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all of our finished lot inventory using Lot Purchase Agreements with forfeitable deposits. As ofDecember 31, 2019 , we controlled lots as described below. Lot Purchase Agreements We controlled approximately 101,300 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately$439,500 and$5,500 , respectively. Included in the number of controlled lots are approximately 4,600 lots for which we have recorded a contract land deposit impairment reserve of approximately$27,600 as ofDecember 31, 2019 . Joint Venture Limited Liability Corporations ("JVs") We had an aggregate investment totaling approximately$26,700 in five JVs, expected to produce approximately 6,300 lots. Of the lots to be produced by the JVs, approximately 2,950 lots were controlled by us and approximately 3,350 lots were either under contract with unrelated parties or currently not under contract.Land Under Development We directly owned five separate raw land parcels, zoned for their intended use, with a current cost basis, including development costs, of approximately$69,200 that we intend to develop into approximately 650 finished lots. We had additional funding 12
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commitments of approximately$6,100 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately$2,800 . See Notes 3, 4 and 5 to the consolidated financial statements included herein for additional information regarding Lot Purchase Agreements, JVs and land under development, respectively. Raw Land Purchase Agreements In addition to the lots we currently control as discussed above, we have certain properties under contract with land owners that are expected to yield approximately 7,000 lots. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with cash deposits and letters of credit totaling approximately$1,900 and$100 , respectively, as ofDecember 31, 2019 , of which approximately$900 is refundable if we do not perform under the contract. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible. Current Business Environment and Key Financial Results During 2019, general market conditions were favorably impacted by low unemployment and strong consumer confidence. Additionally, affordability issues which had slowed demand for new homes during the second half of 2018, were favorably impacted by a pull back in interest rates throughout 2019, which contributed to improved demand. Our consolidated revenues for the year endedDecember 31, 2019 totaled$7,388,664 , an increase of 3% from$7,163,674 in 2018. Our net income for 2019 was$878,539 , or$221.13 per diluted share, increases of 10% and 14% compared to 2018 net income and diluted earnings per share, respectively. Our homebuilding gross profit margin percentage increased to 19.0% in 2019 from 18.7% in 2018. New orders, net of cancellations ("New Orders") during 2019 were 19,536, an increase of 7% from 2018 while our average New Order sales price decreased 2% to$368.4 in 2019. Our backlog of homes sold but not yet settled with the customer as ofDecember 31, 2019 decreased on a unit basis by 2% to 8,233 units and decreased on a dollar basis by 1% to$3,130,282 when compared toDecember 31, 2018 . We believe that the strength in demand for new homes is dependent upon sustained economic growth, driven by favorable unemployment levels and continued improvements in wage growth and household formation. Demand is also impacted by homebuyer affordability concerns, which are driven by both home prices and interest rate movements. We expect to continue to face gross profit margin pressure which will be impacted by modest pricing power and our ability to manage land and construction costs. We also expect to face pressure on mortgage banking profit due to the competitive pricing pressures in the mortgage market. We believe that we are well positioned to take advantage of opportunities that may arise from future economic and homebuilding market volatility due to the strength of our balance sheet. Homebuilding Operations The following table summarizes the results of our consolidated homebuilding operations and certain operating activity for each of the last three years: Year Ended December 31, 2019 2018 2017 Financial data: Revenues$ 7,220,844 $ 7,004,304 $ 6,175,521 Cost of sales$ 5,849,862 $ 5,692,127 $ 4,990,378 Gross profit margin percentage 19.0 % 18.7 % 19.2 % Selling, general and administrative expenses$ 447,547 $ 428,874 $ 392,272 Operating data: New orders (units) 19,536 18,281 17,608 Average new order price$ 368.4 $ 376.3 $ 383.2 Settlements (units) 19,668 18,447 15,961 Average settlement price$ 367.1 $ 379.7 $ 386.9 Backlog (units) 8,233 8,365 8,531 Average backlog price$ 380.2 $ 376.9 $ 384.2 New order cancellation rate 14.6 % 14.5 % 14.0 % 13
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Consolidated Homebuilding
Homebuilding revenues increased 3% in 2019 compared to 2018, as a result of a 7%
increase in the number of units settled, offset by a 3% decrease in the average
settlement price year over year. The increase in the number of units settled was
primarily attributable to a higher backlog turnover rate year over year. The
decrease in the average settlement price was attributable to a 2% lower average
price of units in backlog entering 2019 compared to the same period in 2018 and
to a shift in settlements to smaller, lower priced products and to lower priced
markets in 2019. Gross profit margin percentage in 2019 increased slightly, to
19.0% from 18.7% in 2018.
The number of New Orders increased 7% while the average sales price of New
Orders decreased 2% in 2019 when compared to 2018. The increase in New Orders
was attributable primarily to an increase in New Orders in our Mid East and
South East market segments, partially driven by an increase in the average
number of active communities in each of these segments. Additionally, more
favorable market conditions in 2019 led to a higher community absorption rate
year over year. The decrease in the average sales price of New Orders was
attributable to a shift to markets with lower average sales prices, as well as a
continued shift to smaller, lower priced products.
Selling, general and administrative ("SG&A") expenses in 2019 increased by 4%
compared to 2018, and as a percentage of revenue increased slightly to 6.2% in
2019 from 6.1% in 2018. SG&A expenses were higher primarily due to an
approximate $12,100 increase in personnel costs and an increase in equity-based
compensation attributable to incurring a full year of expense for the equity
awards granted in the second quarter of 2018.
Backlog units and dollars were 8,233 units and $3,130,282 , respectively, as of
December 31, 2019 compared to 8,365 units and $3,152,873 , respectively, as of
December 31, 2018 . The 2% decrease in backlog units is attributable primarily to
a higher backlog turnover rate year over year. The decrease in backlog dollars
was primarily attributable to the decrease in backlog units.
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 Orders that
occurred during the same period, and a portion are related to New Orders that
occurred in prior periods and therefore appeared in the beginning backlog for
the current period. Expressed as the total of all cancellations during the
period as a percentage of gross New Orders during the period, our cancellation
rate was 14.6%, 14.5% and 14.0% in 2019, 2018, and 2017, respectively.
Additionally, approximately 6% in 2019, 5% in 2018 and 6% in 2017, of a
reporting quarter's opening backlog cancelled during the quarter. We can provide
no assurance that our historical cancellation rates are indicative of the actual
cancellation rate that may occur in future years. Other than those units that
are cancelled, we expect to settle substantially all of our December 31, 2019
backlog during 2020. See "Risk Factors" in Item 1A of this Form 10-K.
The backlog turnover rate is impacted by various factors, including, but not
limited to, changes in New Order activity, internal production capacity,
external subcontractor capacity and other external factors over which we do not
exercise control.
Reportable Homebuilding Segments
Homebuilding segment profit before tax includes all revenues and income
generated from the sale of homes, less the cost of homes sold, SG&A expenses,
and a corporate capital allocation charge determined 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 at December 31, 2019 and 2018 has been allocated
to the reportable segments for the respective years to show contract land
deposits on a net basis. The net contract land deposit balances below also
include approximately $5,500 and $3,900 at December 31, 2019 and 2018,
respectively, of letters of credit issued as deposits in lieu of cash.
The following tables summarize certain homebuilding operating activity by
reportable segment for each of the last three years:
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Selected Segment Financial Data:
Year Ended December 31,
2019 2018 2017
Revenues:
Mid Atlantic $ 3,901,573 $ 3,893,358 $ 3,543,687
North East 514,804 580,726 517,141
Mid East 1,501,139 1,455,834 1,250,165
South East 1,303,328 1,074,386 864,528
Year Ended December 31,
2019 2018 2017
Gross profit margin:
Mid Atlantic $ 734,017 $ 726,655 $ 663,650
North East 100,520 115,169 104,501
Mid East 285,091 279,050 244,832
South East 260,804 211,870 173,961
Year Ended December 31,
2019 2018 2017
Gross profit margin percentage:
Mid Atlantic 18.8 % 18.7 % 18.7 %
North East 19.5 % 19.8 % 20.2 %
Mid East 19.0 % 19.2 % 19.6 %
South East 20.0 % 19.7 % 20.1 %
Year Ended December 31,
2019 2018 2017
Segment profit:
Mid Atlantic $ 478,537 $ 462,178 $ 398,494
North East 51,728 69,789 60,218
Mid East 173,374 175,134 149,639
South East 155,144 118,296 95,826
Segment Operating Activity:
Year Ended December 31,
2019 2018 2017
Average Average Average
Units Price Units Price Units Price
New orders, net of cancellations:
Mid Atlantic 8,799 $ 424.4 8,906 $ 429.4 8,654 $ 438.9
North East 1,349 $ 390.8 1,296 $ 400.4 1,362 $ 409.7
Mid East 4,628 $ 323.2 4,314 $ 328.0 4,171 $ 332.7
South East 4,760 $ 302.6 3,765 $ 297.7 3,421 $ 293.5
Total 19,536 $ 368.4 18,281 $ 376.3 17,608 $ 383.2
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Year Ended December 31,
2019 2018 2017
Average Average Average
Units Price Units Price Units Price
Settlements:
Mid Atlantic 9,335 $ 417.9 8,982 $ 433.4 7,971 $ 444.5
North East 1,325 $ 388.5 1,415 $ 410.4 1,288 $ 401.5
Mid East 4,621 $ 324.8 4,406 $ 330.4 3,772 $ 331.4
South East 4,387 $ 297.1 3,644 $ 294.8 2,930 $ 295.1
Total 19,668 $ 367.1 18,447 $ 379.7 15,961 $ 386.9
Year Ended December 31,
2019 2018 2017
Average Average Average
Units Price Units Price Units Price
Backlog:
Mid Atlantic 3,612 $ 440.1 4,148 $ 423.4 4,224 $ 432.2
North East 587 $ 408.8 563 $ 404.1 682 $ 424.3
Mid East 1,813 $ 332.0 1,806 $ 336.2 1,898 $ 341.2
South East 2,221 $ 314.6 1,848 $ 304.1 1,727 $ 298.4
Total 8,233 $ 380.2 8,365 $ 376.9 8,531 $ 384.2
Operating Data:
Year Ended December 31,
2019 2018 2017
New order cancellation rate:
Mid Atlantic 15.0 % 15.2 % 15.2 %
North East 13.0 % 12.5 % 13.3 %
Mid East 14.1 % 12.9 % 11.5 %
South East 14.9 % 15.5 % 14.3 %
Year Ended December 31,
2019 2018 2017
Average active communities:
Mid Atlantic 206 234 238
North East 33 36 42
Mid East 134 119 121
South East 97 88 84
Total 470 477 485
Homebuilding Inventory:
As of December 31,
2019 2018
Sold inventory:
Mid Atlantic $ 575,216 $ 622,997
North East 77,965 79,530
Mid East 190,700 195,149
South East 230,640 182,458
Total (1) $ 1,074,521 $ 1,080,134
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As of December 31,
2019 2018
Unsold lots and housing units inventory:
Mid Atlantic $ 104,459 $ 74,689
North East 28,331 11,088
Mid East 15,333 9,045
South East 35,420 20,611
Total (1) $ 183,543 $ 115,433
(1) Total segment inventory differs from consolidated inventory due to
certain consolidation adjustments necessary to convert the reportable
segments' results, which are predominantly maintained on a cash basis,
to a full accrual basis for external financial statement presentation
purposes. These consolidation adjustments are not allocated to our
operating segments.
Lots Controlled and Land Deposits:
As of December 31,
2019 2018
Total lots controlled:
Mid Atlantic 42,400 40,350
North East 9,900 8,950
Mid East 24,200 24,350
South East 28,400 26,050
Total 104,900 99,700
As of December 31,
2019 2018
Contract land deposits, net:
Mid Atlantic $ 205,433 $ 199,917
North East 50,348 42,591
Mid East 57,053 52,899
South East 106,523 104,693
Total $ 419,357 $ 400,100
Year Ended December 31,
2019 2018 2017
Contract land deposit impairments (recoveries), net:
Mid Atlantic $ (141 ) $ 2,743 $ 2,945
North East 1,050 1,033 290
Mid East 175 211 11
South East 21 1,911 99
Total $ 1,105 $ 5,898 $ 3,345
Mid Atlantic
The Mid Atlantic segment had an approximate $16,400 , or 4%, increase in segment
profit in 2019 compared to 2018, driven primarily by improved margins year over
year and reduced marketing costs attributable to a 12% decrease in the average
number of active communities year over year. Segment revenues were relatively
flat year over year as the 4% increase in the number of units settled was offset
by a 4% decrease in the average settlement price year over year. The increase in
the number of units settled is attributable primarily to a higher backlog
turnover rate year over year. The average settlement price in the current year
was negatively impacted by a shift in settlements to lower priced products and
lower priced markets within the segment. The Mid Atlantic segment's gross profit
margin percentage was essentially flat, increasing to 18.8% in 2019 from 18.7%
in 2018.
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Segment New Orders and the average sales price of New Orders each decreased 1% in 2019 compared to 2018. The decrease in New Orders was due primarily to a 12% decrease in the average number of active communities year over year, offset by a higher community absorption rate year over year. The decrease in the average sales price of New Orders is attributable to a relative shift in New Orders to lower priced products and a shift to markets with lower average sales prices within the segment.North East TheNorth East segment had an approximate$18,100 , or 26%, decrease in segment profit in 2019 compared to 2018, driven primarily by a decrease in segment revenues of approximately$65,900 , or 11%, year over year. The decrease in segment revenues was attributable to decreases in the number of units settled and the average settlement price of 6% and 5%, respectively, due primarily to a 17% lower backlog unit balance and a 5% lower average sales price of units in backlog entering 2019 compared to the backlog entering 2018. Additionally, the average settlement price was negatively impacted by a shift in settlements to lower priced products. TheNorth East segment's gross profit margin percentage decreased to 19.5% in 2019 from 19.8% in 2018, due primarily to higher construction costs, offset partially by lower lot costs as a percentage of revenue. Segment New Orders increased 4%, while the average sales price of New Orders decreased 2% in 2019 compared to 2018. New Orders increased primarily due to a 7% increase in the average number of active communities in the fourth quarter of 2019 compared to the same period in 2018, coupled with favorable market conditions which led to a higher segment absorption rate year over year. The average sales price of New Orders was negatively impacted primarily by a relative shift in New Orders to lower priced products. Mid East The Mid East segment had an approximate$1,800 , or 1%, decrease in segment profit in 2019 compared to 2018. Segment profit was lower despite an increase in segment revenues of approximately$45,300 , or 3%, year over year. Segment revenues increased due to a 5% increase in the number of units settled, offset partially by a 2% decrease in the average settlement price year over year. The increase in the number of units settled is attributable to a higher backlog turnover rate year over year. The average settlement price was negatively impacted by a shift in settlements to lower priced products and to lower priced markets within the segment. The segment's gross profit margin percentage decreased slightly, to 19.0% in 2019 from 19.2% in 2018. Segment New Orders increased 7%, while the average sales price of New Orders decreased 2%, in 2019 compared to 2018. New Orders increased primarily due to a 12% increase in the average number of active communities in 2019 compared to 2018. The average sales price of New Orders was negatively impacted by a relative shift to lower priced products and a shift to markets with lower average sales prices within the segment. South East The South East segment had an approximate$36,800 , or 31%, increase in segment profit in 2019 compared to 2018. The increase in segment profit was driven primarily by an increase in segment revenues of approximately$228,900 , or 21%, year over year, due primarily to a 20% increase in the number of units settled. The increase in settlements was primarily attributable to a 7% higher backlog unit balance entering 2019 compared to the backlog unit balance entering 2018, coupled with a 19% increase in New Orders for the first six months of 2019 compared to the same period in 2018. The South East segment's gross profit margin percentage increased to 20.0% in 2019 from 19.7% in 2018 primarily due to lower lumber costs, offset partially by higher lot costs as a percentage of revenue year over year. Segment New Orders and the average sales price of New Orders increased 26% and 2%, respectively, in 2019 compared to 2018. New Orders increased primarily due to an 11% increase in the average number of active communities and by favorable market conditions which led to a higher segment absorption rate year over year. The average sales price of New Orders was favorably impacted by a relative shift to markets within the segment with higher average sales prices. Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments' results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense is primarily comprised of interest charges on our 3.95% Senior Notes due 2022 (the "Senior Notes"), and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above. 18
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Year Ended December 31,
2019 2018 2017
Homebuilding consolidated gross profit:
Mid Atlantic $ 734,017 $ 726,655 $ 663,650
North East 100,520 115,169 104,501
Mid East 285,091 279,050 244,832
South East 260,804 211,870 173,961
Consolidation adjustments and other (9,450 ) (20,567 ) (1,801 )
Homebuilding consolidated gross profit $ 1,370,982 $ 1,312,177 $ 1,185,143
Year Ended December 31,
2019 2018 2017
Homebuilding consolidated profit before taxes:
Mid Atlantic $ 478,537 $ 462,178 $ 398,494
North East 51,728 69,789 60,218
Mid East 173,374 175,134 149,639
South East 155,144 118,296 95,826
Reconciling items:
Equity-based compensation expense (1) (75,156 ) (70,865 ) (41,144 )
Corporate capital allocation (2) 224,468 213,903 198,384
Unallocated corporate overhead (105,125 ) (89,973 ) (89,514 ) Consolidation adjustments and other 45,130 16,612 27,450 Corporate interest expense (24,221 ) (23,968 ) (22,983 ) Reconciling items sub-total 65,096 45,709 72,193
Homebuilding consolidated profit before taxes
(1) The increase in equity-based compensation expense for the year ended
quarter of 2018. See Note 12 in the accompanying consolidated financial
statements for additional discussion of equity-based compensation.
(2) This item represents the elimination of the corporate capital allocation
charge included in the respective homebuilding reportable segments. The
corporate capital allocation charge is based on the segment's monthly
average asset balance and is as follows for the years presented:
Year Ended December 31,
2019 2018 2017
Corporate capital allocation charge:
Mid Atlantic $ 123,130 $ 123,855 $ 123,028
North East 19,755 17,893 16,115
Mid East 37,263 35,803 29,663
South East 44,320 36,352 29,578
Total corporate capital allocation charge
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Mortgage Banking Segment
We conduct our mortgage banking activity through NVRM, a wholly owned
subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment
customer base. The following table summarizes the results of our mortgage
banking operations and certain statistical data for each of the last three
years:
Year Ended December 31,
2019 2018 2017
Loan closing volume:
Total principal $ 5,164,725 $ 4,829,406 $ 4,229,507
Loan volume mix:
Adjustable rate mortgages 8 % 10 % 9 %
Fixed-rate mortgages 92 % 90 % 91 %
Operating profit:
Segment profit $ 105,292 $ 93,462 $ 73,959
Equity-based compensation expense (3,376 ) (4,836 ) (3,418 )
Mortgage banking income $ 101,916 $ 88,626 $ 70,541
Capture rate: 90 % 88 % 88 %
Mortgage banking fees:
Net gain on sale of loans $ 128,642 $ 122,755 $ 99,132
Title services 38,537 36,001 30,626
Servicing fees 641 614 561
$ 167,820 $ 159,370 $ 130,319
Loan closing volume in 2019 increased by approximately $335,300 , or 7%, from
2018. The increase was primarily attributable to a 10% increase in the number of
loans closed year over year due primarily to the aforementioned increase in the
homebuilding segment's number of settlements in 2019 as compared to 2018 and was
partially offset by a 2% decrease in the average loan amount in 2019 as compared
to 2018.
Segment profit in 2019 increased by approximately $11,800 , or 13%, from
2018. The increase in segment profit was primarily attributable to an increase
in mortgage banking fees. Mortgage banking fees increased by approximately
$8,500 , or 5%, resulting from the aforementioned increase in loan closing
volume.
Mortgage Banking - Other
We sell all of the loans we originate into the secondary mortgage
market. Insofar as we underwrite our originated loans to the standards and
specifications of the ultimate investor, we have no further financial
obligations from the issuance of loans, except in certain limited instances
where repurchases or early payment default occur. Those underwriting standards
are typically equal to or more stringent than the underwriting standards
required by FNMA , GNMA, FHLMC, VA and FHA. Because we sell all of our loans and
do not service them, there is often a substantial delay between the time that a
loan goes into default and the time that the investor requests us to reimburse
them for losses incurred because of the default. We believe that all of the
loans that we originate are underwritten to the standards and specifications of
the ultimate investor to whom we sell our originated loans. We employ a quality
control department to ensure that our underwriting controls are effective, and
further assess the underwriting function as part of our assessment of internal
controls over financial reporting.
We maintain a reserve for losses on mortgage loans originated that reflects our
judgment of the present loss exposure from the loans that we have originated and
sold. At December 31, 2019 , we had a repurchase reserve of approximately
$18,500 .
NVRM is dependent on our homebuilding operation's customers for business. If new
orders and selling prices of the homebuilding segment decline, NVRM's operations
will also be adversely affected. In addition, NVRM's operating results may be
adversely affected in future periods due to tightening and volatility of the
credit markets, changes in investor funding times, increased regulation of
mortgage lending practices and increased competition in the mortgage market.
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Seasonality
We generally have higher New Order activity in the first half of the year and higher home settlements, revenues and net income in the second half of the year. Effective Tax Rate Our consolidated effective tax rate in 2019, 2018 and 2017 was 14.36%, 16.94% and 36.53%, respectively. The lower effective tax rate in 2019 compared to 2018 is attributable primarily to the retroactive reinstatement of certain expired energy tax credits under The Further Consolidated Appropriations Act, which resulted in the recognition of a tax benefit of approximately$15,100 in 2019 related to homes settled in 2018 and 2019. The lower effective tax rate in 2018 compared to 2017 resulted primarily from the enactment of the Tax Cuts and Jobs Act (the "Act") inDecember 2017 , which had the following impacts on comparability between periods: • reduction in our federal statutory rate from 35% to 21% in 2018, and
• remeasurement of our net deferred tax assets in the fourth quarter of
2017, which resulted in a charge to income tax expense of $62,702 in
2017.
Excluding the charge related to the net deferred tax asset remeasurement, our
effective tax rate in 2017 would have been 29.13%.
Additionally, our effective tax rates in 2019, 2018 and 2017 were favorably
impacted by the recognition of an income tax benefit related to excess tax
benefits from stock option exercises of $101,466 , $77,478 and $58,681 ,
respectively. We expect continued rate volatility in future years attributable
to the recognition of excess tax benefits from equity plan activity and
distributions from the deferred compensation plans.
The Act eliminated the "performance-based compensation" exception from Section
162(m). The Act included a grandfathering provision for compensation pursuant to
a written binding contract which was in effect on November 2, 2017 , and which
was not modified in any material respect after such date. We believe that our
outstanding equity grants and amounts in the deferred compensation plans as of
December 31, 2017 are in compliance with the grandfathering provision of the
Act, and thus, will remain deductible to the extent they are considered
"performance-based compensation."
Recent Accounting Pronouncements Pending Adoption
See Note 1 to the accompanying consolidated financial statements for discussion
of recently issued accounting pronouncements applicable to us.
Liquidity and Capital Resources
Lines of Credit and Notes Payable
Senior Notes
Our homebuilding segment funds its operations from cash flows provided by
operating activities, a short-term unsecured working capital revolving credit
facility and capital raised in the public debt and equity markets. On
September 10, 2012 , we completed an offering for $600,000 aggregate principal
amount of 3.95% Senior Notes due 2022 under a Shelf Registration Statement filed
on September 5, 2012 with the SEC . The Senior Notes were issued at a discount to
yield 3.97% and have been reflected net of the unamortized discount in the
accompanying consolidated balance sheet. The Senior Notes mature on
September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears
on March 15 and September 15 .
The Senior Notes are senior unsecured obligations and rank equally in right of
payment with any of our existing and future unsecured senior indebtedness, will
rank senior in right of payment to any of our future indebtedness that is by its
terms expressly subordinated to the Senior Notes and will be effectively
subordinated to any of our existing and future secured indebtedness to the
extent of the value of the collateral securing such indebtedness. The indenture
governing the Senior Notes does not contain any financial covenants; however, it
does contain, among other items, and subject to certain exceptions, covenants
that restrict our ability 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. We were in compliance with all covenants under the
Senior Notes at December 31, 2019 .
Credit Agreement
On July 15, 2016 , we entered into an unsecured Credit Agreement (the "Credit
Agreement") with Bank of America, N.A ., as Administrative Agent, Swing Line
Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated as
Sole Lead Arranger and Sole Book Runner, and the other lenders party thereto,
which provides for aggregate revolving loan commitments of $200,000 (the
"Facility"). Proceeds of the borrowings under the Facility will be used for
working capital and general corporate purposes. Under the Credit Agreement, we
may request increases of up to $300,000 to the Facility in the form of revolving
loan commitments or term loans to the extent that new or existing lenders agree
to provide additional revolving loan or term loan commitments.
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The Credit Agreement provides for a$100,000 sublimit for the issuance of letters of credit of which there was approximately$9,700 outstanding atDecember 31, 2019 , and a$25,000 sublimit for a swing line commitment. Borrowings under the Credit Agreement generally bear interest for Base Rate Loans at a Base Rate equal to the highest of (i) a Federal Funds Rate plus one-half of one percent, (ii)Bank of America's publicly announced "prime rate," and (iii) the Eurodollar Rate plus one percent, plus the Applicable Rate which is based on our debt rating, or for Eurodollar Rate Loans, at the Eurodollar Rate equal to LIBOR plus the Applicable Rate. The Credit Agreement contains various representations and affirmative and negative covenants that are generally customary for credit facilities of this type. Such covenants include, among others, the following financial maintenance covenants: (i) minimum consolidated tangible net worth, (ii) minimum interest coverage ratio or minimum liquidity and (iii) a maximum leverage ratio. The negative covenants include, among others, certain limitations on liens, investments and fundamental changes. The Credit Agreement termination date isJuly 15, 2021 . We were in compliance with all covenants under the Credit Agreement atDecember 31, 2019 . There were no borrowings outstanding under the Credit Agreement as ofDecember 31, 2019 . Repurchase Agreement Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase facility, which is non-recourse to NVR. OnJuly 24, 2019 , NVRM entered into the Eleventh Amendment (the "Amendment") to its Amended and Restated Master Repurchase Agreement datedAugust 2, 2011 withU.S. Bank National Association (as amended by the Amendment and ten earlier amendments, the "Repurchase Agreement"). The Repurchase Agreement provides borrowing capacity up to$150,000 , subject to certain sublimits. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement expires onJuly 22, 2020 . 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 1.85%. There are several restrictions on purchased loans, including that they cannot be sold to others, they cannot be pledged to anyone other than the agent, and they cannot support any other borrowing or repurchase agreement. The Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum net income requirement, and (iv) a maximum leverage ratio requirement. NVRM was in compliance with all covenants under the Repurchase Agreement atDecember 31, 2019 . AtDecember 31, 2019 , there was no debt outstanding under the Repurchase Agreement and there were no borrowing base limitations. Equity Repurchases In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors,Profit Sharing Plan Trust orEmployee Stock Ownership Plan Trust . The repurchase program assists us in accomplishing our primary objective, creating increases in shareholder value. See "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " in Item 5 of this Form 10-K for disclosure of amounts repurchased during the fourth quarter of 2019. For the year endedDecember 31, 2019 , we repurchased 220,965 shares of our common stock at an aggregate purchase price of$698,417 . As ofDecember 31, 2019 , we had$317,141 available under Board approved repurchase authorizations. Cash Flows For the year endedDecember 31, 2019 , cash, restricted cash and cash equivalents increased by$428,556 . Net cash provided by operating activities was$866,535 , due primarily to cash provided by earnings in 2019 and net proceeds of$91,178 from mortgage loan activity. Cash was primarily used to fund the increase in inventory of$94,178 , attributable to an increase in units under construction atDecember 31, 2019 compared toDecember 31, 2018 . Net cash used in investing activities in 2019 of$13,284 was attributable primarily to cash used for purchases of property, plant and equipment of$22,699 , offset partially by the receipt of capital distributions from our unconsolidated JVs totaling$8,247 . Net cash used in financing activities of$424,695 , resulted primarily from our repurchase of 220,965 shares of our common stock for an aggregate purchase price of$698,417 under our ongoing common stock repurchase program as discussed above, offset partially by$274,028 in proceeds from stock option exercises. For the year endedDecember 31, 2018 , cash and cash equivalents increased by$42,691 . Net cash provided by operating activities was$723,126 , due primarily to cash provided by earnings and net proceeds of$17,384 from mortgage loan activity. Cash was primarily used to fund the increase in contract land deposits of$30,863 and the decrease in accounts payable and accrued expenses of$30,713 . Net cash used in investing activities in 2018 of$8,177 was attributable primarily to cash used for purchases of property, plant and equipment of$19,665 , offset partially by the receipt of capital distributions from our unconsolidated JVs totaling 22
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$10,515 . Net cash used in financing activities of$672,258 , resulted primarily from our repurchase of 300,815 shares of our common stock for an aggregate purchase price of$846,134 , offset partially by$174,110 in proceeds from stock option exercises. AtDecember 31, 2019 and 2018, the homebuilding segment had restricted cash of$17,943 and$16,982 , respectively. Restricted cash in each year was attributable to customer deposits for certain home sales. We believe that our current cash holdings, cash generated from operations, and cash available under our short-term unsecured credit agreement, revolving mortgage repurchase facility and the public debt and equity markets will be sufficient to satisfy near and long term cash requirements for working capital and debt service in both our homebuilding and mortgage banking operations. Off-Balance Sheet Arrangements Lot Acquisition Strategy We generally do not engage in land development. Instead, we typically acquire finished building lots at market prices from various land developers under Lot Purchase Agreements that require deposits that may be forfeited if we fail to perform under the agreement. The deposits required under the Lot Purchase Agreements are in the form of cash or letters of credit in varying amounts and represent a percentage, typically ranging up to 10%, of the aggregate purchase price of the finished lots. We believe that our lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of our intent not to acquire the finished lots under contract. Our sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provision contained in the Lot Purchase Agreements. We do not have any financial guarantees or completion obligations and we typically do not guarantee lot purchases on a specific performance basis under these Lot Purchase Agreements. AtDecember 31, 2019 , we controlled approximately 104,900 lots through Lot Purchase Agreements, JVs and land under development, with an aggregate purchase price of approximately$10,000,000 . These lots are controlled by making or committing to make deposits of approximately$656,500 in the form of cash and letters of credit. Our entire risk of loss pertaining to the aggregate purchase price contractual commitment resulting from our non-performance under the contracts is limited to$439,500 in deposits paid and$5,500 in letters of credit issued as ofDecember 31, 2019 , plus approximately$211,500 related to deposits to be paid subsequent toDecember 31, 2019 assuming that contractual development milestones are met by the developers and we exercise our option. As ofDecember 31, 2019 , we had recorded an impairment valuation allowance of approximately$27,600 related to certain cash deposits currently outstanding. Additionally, as ofDecember 31, 2019 , we had funding commitments totaling$4,300 to two of our JVs and approximately$6,100 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$2,800 . In addition, we have certain properties under contract with land owners that are expected to yield approximately 7,000 lots, which are not included in our number of total lots controlled above. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with cash deposits and letters of credit of approximately$1,900 and$100 , respectively, as ofDecember 31, 2019 , of which approximately$900 is refundable if we do not perform under the contract and the remainder is at risk of loss. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible. Please refer to Note 1 in the accompanying consolidated financial statements for a further discussion of the contract land deposits and Note 3 in the accompanying consolidated financial statements for a description of our lot acquisition strategy in relation to our accounting for variable interest entities. Bonds and Letters of Credit We enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize our obligations under various contracts. We had approximately$40,600 of contingent obligations under such agreements as ofDecember 31, 2019 , inclusive of the$5,500 of lot acquisition deposits in the form of letters of credit discussed above. We believe we will fulfill our obligations under the related contracts and do not anticipate any material losses under these bonds or letters of credit. Mortgage Commitments and Forward Sales In the normal course of business, NVRM enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by us. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, we enter into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. We do not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives, and, accordingly, are marked to fair value through earnings. AtDecember 31, 2019 , we had 23
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contractual commitments to extend credit to borrowers aggregating$581,065 and open forward delivery contracts aggregating$986,041 , which hedge both the rate lock commitments and closed loans held for sale (see Note 15 in the accompanying consolidated financial statements for a description of our fair value accounting). Contractual Obligations Our fixed, non-cancelable obligations as ofDecember 31, 2019 , were as follows: Payments due by year Total 2020 2021 to 2022 2023 to 2024 2025 and Later Debt (1)$ 600,000 $ -$ 600,000 $ - $ - Interest on debt (1) 64,122 23,700 40,422 - - Finance leases (2) 7,919 996 1,993 1,994 2,936 Operating leases (2) 99,184 30,670 37,505 21,098 9,911 Purchase obligations (3) 217,649 * * * * Uncertain tax positions (4) 31,090 * * * * Total$ 1,019,964 $ 55,366 $ 679,920 $ 23,092 $ 12,847
(1) See Note 9 in the accompanying consolidated financial statements for
additional information regarding the Senior Notes.
(2) See Note 13 in the accompanying consolidated financial statements for
additional information regarding our finance and operating leases.
(3) Amount represents expected payments of forfeitable deposits with land
developers under existing Lot Purchase Agreements assuming that contractual
development milestones are met by the developers and we exercise our
option, and estimated contractual obligations for land development
agreements. We expect to make the majority of payments of the deposits with
land developers within the next three years, but due to the nature of the
contractual development milestones that must be met we are unable to
accurately estimate the portion of the deposit obligation that will be made
within one year and that portion that will be made within one to three
years.
(4) Due to the nature of the uncertain tax positions, we are unable to make a
reasonable estimate as to the period of settlement with the respective
taxing authorities.
Critical Accounting Policies
General
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. We continually evaluate the estimates we use to
prepare the consolidated financial statements and update those estimates as
necessary. In general, our estimates are based on historical experience, on
information from third party professionals, and other various assumptions that
are believed to be reasonable under the facts and circumstances. Actual results
could differ materially from those estimates made by management.
Homebuilding Inventory
The carrying value of inventory is stated at the lower of cost or market value.
Cost of lots and completed and uncompleted housing units represent the
accumulated actual cost of the units. Field construction supervisors' salaries
and related direct overhead expenses are included in inventory costs. Interest
costs are not capitalized into inventory, with the exception of land under
development 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 selling
price compared to the total estimated cost to construct. Unsold inventory is
evaluated for impairment by analyzing recent comparable sale prices within the
applicable community compared to the costs incurred to date plus the expected
costs to complete. Any calculated impairments are recorded immediately in cost
of sales.
Contract Land Deposits and Land Under Development
Contract Land Deposits
We purchase finished lots under Lot Purchase Agreements that require deposits
that may be forfeited if we fail to perform under the contract. The deposits are
in the form of cash or letters of credit in varying amounts and represent a
percentage of the aggregate purchase price of the finished lots.
We maintain an allowance for losses on contract land deposits that reflects our
judgment of the present loss exposure in the existing contract land deposit
portfolio at the end of the reporting period. To analyze contract land deposit
impairments, we conduct a
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loss contingency analysis each quarter. In addition to considering market and economic conditions, we assess 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 performance, 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 us or the developer along with an analysis of the expected outcome of any such default. Our analysis is focused on whether we can sell houses at an acceptable margin and sales pace in a particular community in the current market with which we are faced. Because we do not own the finished lots on which we had placed a contract land deposit, if the above analysis leads to a determination that we cannot sell homes at an acceptable margin and sales pace at the current contractual lot price, we then determine whether we will elect to default under the contract, forfeit our deposit and terminate the contract, or whether we will attempt to restructure the lot purchase contract, which may require us to forfeit the deposit to obtain contract concessions from a developer. We also assess whether an impairment is present due to collectability issues resulting from a developer's non-performance because of financial or other conditions. Although we consider the allowance for losses on contract land deposits reflected on theDecember 31, 2019 consolidated balance sheet to be adequate (see Note 1 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.Land Under Development On a limited basis, we directly acquire raw parcels of land already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes. Land under development, including the land under development held by our unconsolidated JVs and the related joint venture investments, is reviewed for potential write-downs when impairment indicators are present. In addition to considering market and economic conditions, we assess land under development impairments on a community-by-community basis, analyzing, as applicable, current sales absorption levels, recent sales' direct profit, and the dollar differential between the projected fully-developed cost of the lots and the current market price for lots. If indicators of impairment are present for a community, we perform an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if 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. Our determination of fair value is primarily based on discounting the estimated future cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams. AtDecember 31, 2019 , we had approximately$69,200 in land under development in five separate communities. In addition, atDecember 31, 2019 , we had an aggregate investment totaling approximately$26,700 in five separate JVs that controlled land under development. None of the communities classified as land under development nor any of the undeveloped land held by the JVs had any indicators of impairment atDecember 31, 2019 . As such, we do not believe that any of the land under development is impaired at this time. However, there can be no assurance that we will not incur impairment charges in the future due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry. Warranty/Product Liability Accruals We establish 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 our homebuilding business. Liability estimates are determined based on our judgment considering such factors as historical experience, the likely current cost of corrective action, manufacturers' and subcontractors' participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our General Counsel and outside counsel retained to handle specific product liability cases. Although we consider the warranty and product liability accrual reflected on theDecember 31, 2019 consolidated balance sheet to be adequate (see Note 14 to the accompanying consolidated financial statements included herein), there can be no assurance that this accrual will prove to be adequate over time to cover losses due to increased costs for material and labor, the inability or refusal of manufacturers or subcontractors to financially participate in corrective action, unanticipated adverse legal settlements, or other unanticipated changes to the assumptions used to estimate the warranty and product liability accrual. Equity-Based Compensation Expense We recognize equity-based compensation expense within our income statement for all share-based payment arrangements, which include 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. We calculate the fair value of our Options, which are non-publicly traded, using the Black-Scholes option- 25
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pricing model. The grant date fair value of the RSUs is the closing price of our 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. As noted above, we calculate the fair value of our Options, which are non-publicly traded, using the Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to calculate the fair value of options, its results are dependent on input variables, two of which, expected term and expected volatility, are significantly dependent on management's judgment. We have concluded that our historical exercise experience is the best estimate of future exercise patterns to determine an Option's expected term. To estimate expected volatility, we analyze the historical volatility of our common stock over a period equal to the Option's expected term. Changes in management's judgment of the expected term and the expected volatility could have a material effect on the grant-date fair value calculated and expensed within the income statement. In addition, when recognizing equity-based compensation cost related to "performance condition" Option and RSU grants, we are required to make a determination as to whether the performance conditions will be met prior to the completion of the actual performance period. The performance metric is based on our return on capital performance during a specified three year period based on the date of Option grant. While we currently believe that this performance condition will be satisfied at the target level and are recognizing compensation expense related to such Options and RSUs accordingly, our future expected activity levels could cause us to make a different determination, resulting in a change to the compensation expense to be recognized related to performance condition Option and RSU grants that would otherwise have been recognized to date. Although we believe that the compensation costs recognized in 2019 are representative of the cumulative ratable amortization of the grant-date fair value of unvested Options and RSUs outstanding, changes to the estimated input values such as expected term and expected volatility and changes to the determination of whether performance condition grants will vest, could produce widely different expense valuations and recognition. Mortgage Repurchase Reserve We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market, on a servicing released basis, typically within 30 days from closing. All of the loans that we originate 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 byFNMA , GNMA, FHLMC,VA and FHA. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where repurchases or early payment default occur. We employ a quality control department to ensure that our underwriting controls are effectively operating, and further assess the underwriting function as part of our assessment of internal controls over financial reporting. We maintain a reserve for losses on mortgage loans originated that reflects our judgment of the present loss exposure in the loans that we have originated and sold. The reserve is calculated based on an analysis of historical experience and exposure. Although we consider the mortgage repurchase reserve reflected on theDecember 31, 2019 consolidated balance sheet to be adequate (see Note 16 to the accompanying consolidated financial statements included herein), there can be no assurance that this reserve will prove to be adequate over time to cover losses due to unanticipated changes to the assumptions used to estimate the mortgage repurchase reserve. Impact of Inflation, Changing Prices and Economic Conditions See "Risk Factors" included in Item 1A of this Form 10-K for a description of the impact of inflation, changing prices and economic conditions on our business and our financial results. See also the discussion of the current business environment in the Overview section above.
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