Segment Information, Nature of Operations, and Certain Concentrations

NVR’s homebuilding operations primarily construct and sell single-family detached homes, townhomes and condominium buildings under three trade names: Ryan Homes, NVHomes and Heartland Homes. The Ryan Homes product is marketed primarily to first-time and first-time move-up buyers. Ryan Homes operates in thirty-two metropolitan areas located in Maryland, Virginia, Washington, D.C., West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Florida, Ohio, New Jersey, Delaware, Indiana, Illinois and Tennessee. The NVHomes and Heartland Homes products are marketed primarily to move-up and luxury buyers. NVHomes operates in Delaware and the Washington, D.C., Baltimore, MD and Philadelphia, PA metropolitan areas. Heartland Homes operates in the Pittsburgh, PA metropolitan area. NVR derived approximately 30% and 10% of its 2018 homebuilding revenues from the Washington, D.C. and Baltimore, MD metropolitan areas, respectively.

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

The following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a single reportable segment. The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:



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

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate capital allocation charge. The corporate capital allocation charge is eliminated in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital. In addition, certain assets including goodwill and intangible assets, and consolidation adjustments as discussed further below, are not allocated to the operating segments as those assets are neither included in the operating segment’s corporate capital allocation charge, nor in the CODM’s evaluation of the operating segment’s performance. The Company records charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the termination of a Lot Purchase Agreement with the developer, or the restructuring of a Lot Purchase Agreement resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a corporate capital allocation charge.

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

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



	Year Ended December 31,
	2018		2017		2016
Revenues:
Homebuilding Mid Atlantic	$	3,893,358	$	3,543,687	$	3,319,776
Homebuilding North East	580,726		517,141		462,385
Homebuilding Mid East	1,455,834		1,250,165		1,192,472
Homebuilding South East	1,074,386		864,528		734,590
Mortgage Banking	159,370		130,319		113,321
Consolidated revenues	$	7,163,674	$	6,305,840	$	5,822,544



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


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


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


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



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



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



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



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



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



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