NVR INC - Quarter Report: 2010 September (Form 10-Q)

NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)

		September 30, 2010				December 31, 2009
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable		$	145,268			$	120,464
Accrued expenses and other liabilities			215,507				221,352
Liabilities related to consolidated variable interest entities			—				65,915
Non-recourse debt related to consolidated variable interest entities			7,944				—
Customer deposits			70,462				63,591
Other term debt			1,895				2,166
Senior notes			—				133,370
			441,076				606,858
Mortgage Banking:
Accounts payable and other liabilities			22,824				19,306
Note payable			99,241				12,344
			122,065				31,650
Total liabilities			563,141				638,508
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,559,671 shares issued as of both September 30, 2010 and December 31, 2009			206				206
Additional paid-in-capital			937,623				830,531
Deferred compensation trust – 158,894 and 265,278 shares of NVR, Inc. common stock as of September 30, 2010 and December 31, 2009, respectively			(27,582	)			(40,799	)
Deferred compensation liability			27,582				40,799
Retained earnings			3,970,374				3,823,067
Less treasury stock at cost – 14,928,791 and 14,609,560 shares at September 30, 2010 and December 31, 2009, respectively			(3,221,525	)			(2,896,542	)
Total shareholders’ equity			1,686,678				1,757,262
Total liabilities and shareholders’ equity		$	2,249,819			$	2,395,770

See notes to condensed consolidated financial statements.

NVR, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Homebuilding:
Revenues		$	661,935			$	792,510			$	2,186,288			$	1,953,327
Other income			3,298				2,222				7,777				6,511
Cost of sales			(540,783	)			(636,642	)			(1,783,327	)			(1,593,512	)
Selling, general and administrative			(65,534	)			(56,662	)			(195,412	)			(171,020	)
Operating income			58,916				101,428				215,326				195,306
Interest expense			(497	)			(2,802	)			(4,565	)			(8,038	)
Homebuilding income			58,419				98,626				210,761				187,268
Mortgage Banking:
Mortgage banking fees			14,234				21,506				44,599				44,719
Interest income			1,555				887				3,803				2,082
Other income			166				215				565				458
General and administrative			(9,203	)			(7,486	)			(23,007	)			(19,719	)
Interest expense			(281	)			(308	)			(841	)			(921	)
Mortgage banking income			6,471				14,814				25,119				26,619
Income before taxes			64,890				113,440				235,880				213,887
Income tax expense			(20,946	)			(41,313	)			(88,573	)			(82,346	)
Net income		$	43,944			$	72,127			$	147,307			$	131,541
Basic earnings per share		$	7.65			$	12.29			$	24.64			$	22.83
Diluted earnings per share		$	7.31			$	11.59			$	23.49			$	21.57
Basic average shares outstanding			5,748				5,866				5,978				5,762
Diluted average shares outstanding			6,011				6,223				6,271				6,098

See notes to condensed consolidated financial statements.

NVR, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

		Nine Months Ended September 30,
		2010				2009
Cash flows from operating activities:
Net income		$	147,307			$	131,541
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			5,548				7,696
Excess income tax benefit from exercise of stock options			(61,659	)			(58,656	)
Equity-based compensation expense			40,750				34,848
Contract land deposit recoveries			(651	)			(5,705	)
Gain on sale of loans			(33,772	)			(35,000	)
Mortgage loans closed			(1,544,422	)			(1,427,100	)
Proceeds from sales of mortgage loans			1,446,470				1,420,515
Principal payments on mortgage loans held for sale			1,558				1,568
Net change in assets and liabilities:
Increase in inventories			(140,278	)			(78,269	)
(Increase) decrease in contract land deposits			(39,170	)			2,665
(Increase) decrease in receivables			(1,899	)			2,553
Increase in accounts payable, accrued expenses and customer deposits			89,188				88,283
Other, net			5,431				32,997
Net cash (used in) provided by operating activities			(85,599	)			117,936
Cash flows from investing activities:
Purchase of marketable securities			(150,000	)			(808,362	)
Redemption of marketable securities at maturity			344,535				548,956
Investments in unconsolidated joint ventures			(2,000	)			(22,000	)
Purchase of property, plant and equipment			(4,308	)			(1,546	)
Proceeds from the sale of property, plant and equipment			506				753
Net cash provided by (used in) investing activities			188,733				(282,199	)
Cash flows from financing activities:
Net borrowings under notes payable and credit lines			86,626				30,832
Net borrowings under non-recourse debt related to consolidated variable interest entities			7,944				—
Redemption of senior notes			(133,370	)			(29,950	)
Purchase of treasury stock			(377,293	)			—
Excess income tax benefit from exercise of stock options			61,659				58,656
Exercise of stock options			56,993				72,753
Net cash (used in) provided by financing activities			(297,441	)			132,291
Net decrease in cash and cash equivalents			(194,307	)			(31,972	)
Cash and cash equivalents, beginning of period			1,250,150				1,147,643
Cash and cash equivalents, end of period		$	1,055,843			$	1,115,671
Supplemental disclosures of cash flow information:
Interest paid during the period		$	5,154			$	6,017
Income taxes paid, net of refunds		$	17,424			$	(33,584	)
Supplemental disclosures of non-cash activities:
Investment in newly formed consolidated joint venture		$	(25,214	)		$	—
Change in net consolidated variable interest entities		$	—			$	(926	)

See notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

1. Basis of Presentation

     The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Note 2 to the accompanying condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or thereafter.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     For the three and nine-month periods ended September 30, 2010 and 2009, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying financial statements.

2. Consolidation of Variable Interest Entities, Joint Ventures and Land Under Development

     Effective January 1, 2010, NVR adopted Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), as codified in Accounting Standards Codification (“ASC”) 810, Consolidation, through Accounting Standards Update 2009-17 (“ASC 810”). This statement amends FASB Interpretation 46R related to the consolidation of variable interest entities (“VIEs”), revises the approach to determining the primary beneficiary of a VIE to be more qualitative in nature, and requires companies to more frequently reassess whether they must consolidate a VIE.

     Fixed Price Purchase Agreements

     NVR generally does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under fixed price purchase agreements. The purchase agreements require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots.

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

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.

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

     The deposit placed by NVR pursuant to the fixed price purchase agreement is deemed to be a variable interest in the respective development entities. Therefore, the development entities with which NVR enters fixed price purchase agreements, including the joint venture limited liability corporations, as discussed below, are evaluated for possible consolidation by NVR. An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE.

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

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

     As of September 30, 2010, NVR controlled approximately 49,600 lots with deposits in cash and letters of credit totaling approximately $171,800 and $4,900, respectively. As noted above, NVR’s 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 provisions contained within the purchase agreements and in very limited circumstances, specific performance obligations, as follows:

		September 30, 2010
Contract land deposits		$	171,792
Loss reserve on contract land deposits			(80,787	)
Contract land deposits, net			91,005
Contingent obligations in the form of letters of credit			4,882
Contingent specific performance obligations (1)			2,457
Total risk of loss		$	98,344

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Upon adoption of ASC 810, all of the assets and liabilities of consolidated VIEs at December 31, 2009 were deconsolidated, and there was no resultant gain or loss.

     Joint Ventures

     On a limited basis, NVR also obtains finished lots using joint venture limited liability corporations (“JVs”). All JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested. NVR is not a borrower, guarantor or obligor on any debt of the JVs. The Company enters into a standard fixed price purchase agreement to purchase lots from these JVs, and as a result has a variable interest in these JVs.

     At September 30, 2010, the Company had an aggregate investment totaling approximately $39,000 in three JVs that are expected to produce approximately 1,100 finished lots. At September 30, 2010, NVR had additional funding commitments in the aggregate totaling $7,000 to two of the three JVs. The Company has determined that it is not the primary beneficiary of two of the JVs because NVR and the respective JV partner share power. NVR has concluded that it is the primary beneficiary of the remaining JV because the Company has the controlling financial interest in the JV. The condensed balance sheet at September 30, 2010 of the consolidated JV is as follows:

		September 30, 2010
Cash		$	374
Restricted cash			500
Land under development			21,897
Total assets			22,771
Debt			7,944
Equity			14,827
Total liabilities and equity		$	22,771

     Land Under Development

     During 2010, NVR directly acquired four separate raw parcels of land zoned for their intended use for approximately $73,000 that it intends to develop into approximately 840 finished lots for use in its homebuilding operations. All of the raw parcels are located in the Washington, D.C. metropolitan area. One of the parcels, with a cost basis of approximately $51,000 at September 30, 2010, was acquired from an entity controlled by Elm Street Development, Inc., which is controlled by one of our directors, William A. Moran. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes. Based on current market conditions, NVR may, on a very limited basis, directly acquire additional raw parcels to develop into finished lots. See the Overview section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein for additional discussion.

3. Contract Land Deposits

     During the three-month period ended September 30, 2010, the Company incurred pre-tax impairment charges on contract land deposits of approximately $300. For the nine-month period ended September 30,

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

2010, the Company recognized a net pre-tax recovery of approximately $650 of contract land deposits previously determined to be uncollectible. During the three and nine-month periods ended September 30, 2009, the Company recognized a pre-tax recovery of approximately $1,000 and $5,700, respectively, of contract land deposits previously determined to be uncollectible. The contract land deposit asset is shown net of an approximate $80,800 and $89,500 impairment valuation allowance at September 30, 2010 and December 31, 2009, respectively.

4. Earnings per Share

     The following weighted average shares and share equivalents are used to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Weighted average number of shares outstanding used to calculate basic EPS			5,748,000				5,866,000				5,978,000				5,762,000
Dilutive Securities:
Stock options and restricted share units			263,000				357,000				293,000				336,000
Weighted average number of shares and share equivalents used to calculate diluted EPS			6,011,000				6,223,000				6,271,000				6,098,000

     The assumed proceeds used in the treasury method for calculating NVR’s diluted earnings per share includes the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits that would be credited or charged to additional paid-in capital assuming exercise of the option or vesting of the restricted share unit. The assumed amount credited to additional paid-in capital equals the tax benefit from the assumed exercise of stock options or the assumed vesting of restricted share units after consideration of the intrinsic value upon assumed exercise or vesting less the actual stock-based compensation expense to be recognized in the income statement from 2006 and future periods.

     Options issued under equity benefit plans to purchase 441,252 and 440,202 shares of common stock during the three and nine months ended September 30, 2010, and options issued under equity benefit plans to purchase 45,053 and 317,322 shares of common stock during the three and nine months ended September 30, 2009, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

5. Stock-Based Compensation Expense

     The Company’s Shareholders approved the 2010 Equity Incentive Plan (“2010 Equity Plan”) at the May 4, 2010 Annual Meeting. The 2010 Equity Plan authorizes the Company to issue non-qualified stock options (“Options”) and restricted share units (“RSUs”) to key management employees, including executive officers and Board members, to acquire up to an aggregate 700,000 shares of the Company’s common stock. Of the 700,000 aggregate shares available to issue, up to 240,000 may be granted in the form of RSUs.

     During 2010, the Company issued 150,104 RSUs and 282,143 Options from the 2010 Equity Plan, and 148,092 Options from the 2000 Broadly-Based Stock Option Plan. The RSUs vest as to 50% of the underlying shares on each of December 31, 2011 and 2012, based on continued employment or continued service as a Director, as applicable. The Options were granted at an exercise price equal to the closing price of the

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The majority of the Options granted during the current year vest 50% on each of December 31, 2013 and 2014, and vesting is based solely on continued employment or continued service as a Director, as applicable. The Options expire 10 years from the date of grant.

     To estimate the grant-date fair value of its stock options, the Company uses the Black-Scholes option-pricing model. The Black-Scholes model estimates the per share fair value of an option on its date of grant based on the following factors: the option’s exercise price; the price of the underlying stock on the date of grant; the estimated dividend yield; a “risk-free” interest rate; the estimated option term; and the expected volatility. For the “risk-free” interest rate, the Company uses a U.S. Treasury Strip due in a number of years equal to the option’s expected term. NVR has concluded that its historical exercise experience is the best estimate of future exercise patterns to determine an option’s expected term. To estimate expected volatility, NVR analyzed the historic volatility of its common stock over a period equal to the option’s expected term. The fair value of the Options granted during 2010 was estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:

		Options
Estimated option life		5.03 years
Risk free interest rate (range)			0.99% - 2.84%
Expected volatility (range)			36.03% - 41.12%
Expected dividend rate			0.00%
Weighted average grant-date fair value per share of options granted		$	256.82

     In accordance with ASC Topic 718, Compensation-Stock Compensation, the fair value of the RSUs is measured as if they were vested and issued on the grant date. Additionally, under ASC 718, service only restrictions on vesting of RSUs are not reflected in the fair value calculation at the grant date. As a result, the fair value of the RSUs was the closing price of the Company’s common stock on the day immediately preceding the date of grant. The weighted average fair value of the RSUs granted in the current year was $702.94 per share.

     Compensation cost for Options and RSUs is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). For the recognition of equity-based compensation, the RSUs are treated as a separate award from the Options. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees. ASC 718 also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation and requires that the compensation costs of stock-based awards be recognized net of estimated forfeitures. Total stock based compensation expense, net of forfeitures, recognized during the three months ended September 30, 2010 and 2009 was $19,924 and $11,446, respectively, and for the nine months ended September 30, 2010 and 2009 was $40,750 and $34,848, respectively.

     As of September 30, 2010, the total unrecognized compensation cost for all outstanding Options and RSUs equals approximately $185,400, net of estimated forfeitures. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period with the latest vesting date being December 31, 2015. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 2.07 years.

     The following table provides additional information relative to NVR’s stock-based compensation plans for the period ended September 30, 2010:

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

						Weighted
						Average
						Exercise
		Options				Price - Options				RSUs		(1)
Stock Options
Outstanding as of January 1, 2010			999,142			$	342.08				—
Granted			430,235				702.32				150,104
Exercised			(261,815	)			217.68				—
Forfeited			(18,464	)			514.93				(324	)
Expired			(62	)			759.00				—
Outstanding as of September 30, 2010			1,149,036				502.50				149,780
Exercisable as of September 30, 2010			410,585				289.60				—

6. Marketable Securities

     As of September 30, 2010 the Company held marketable securities totaling $25,000. These securities, which are debt securities issued by U.S. government agencies, are classified by the Company as held to maturity, are measured at amortized cost and mature within one year.

7. Excess Reorganization Value

     Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite life intangible asset that was created upon NVR’s emergence from bankruptcy on September 30, 1993. Based on the allocation of the reorganization value, the portion of the reorganization value which was not attributed to specific tangible or intangible assets has been reported as excess reorganization value, which is treated similarly to goodwill. Excess reorganization value is not subject to amortization. Rather, excess reorganization value is subject to an impairment assessment on an annual basis or more frequently if changes in events or circumstances indicate that impairment may have occurred. Because excess reorganization value was based on the reorganization value of NVR’s entire enterprise upon bankruptcy emergence, the impairment assessment is conducted on an enterprise basis based on the comparison of NVR’s total equity compared to the market value of NVR’s outstanding publicly-traded common stock. The Company completed the annual assessment of impairment during the first quarter of 2010 and determined that there was no impairment of excess reorganization value.

8. Income Taxes

     As of January 1, 2010, the Company had approximately $31,636 (on a net basis) of unrecognized tax benefits, which would decrease income tax expense if recognized. The Company recognizes interest related to unrecognized tax benefits in the income tax expense line. As of January 1, 2010, the Company had a total of $22,149 of accrued interest for unrecognized tax benefits on its balance sheet. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions the Company has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense. With few exceptions, the Company is no longer subject to income tax examinations for years prior to 2007.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

9. Shareholders’ Equity

     A summary of changes in shareholders’ equity is presented below:

						Additional												Deferred				Deferred
		Common				Paid-In				Retained				Treasury				Comp.				Comp.
		Stock				Capital				Earnings				Stock				Trust				Liability				Total
Balance, December 31, 2009		$	206			$	830,531			$	3,823,067			$	(2,896,542	)		$	(40,799	)		$	40,799			$	1,757,262
Net income			—				—				147,307				—				—				—				147,307
Deferred compensation activity			—				—				—				—				13,217				(13,217	)			—
Purchase of common stock for treasury			—				—				—				(377,293	)			—				—				(377,293	)
Stock-based compensation			—				40,750				—				—				—				—				40,750
Tax benefit from stock options exercised and deferred compensation distributions			—				61,659				—				—				—				—				61,659
Proceeds from stock options exercised			—				56,993				—				—				—				—				56,993
Treasury stock issued upon option exercise			—				(52,310	)			—				52,310				—				—				—
Balance, September 30, 2010		$	206			$	937,623			$	3,970,374			$	(3,221,525	)		$	(27,582	)		$	27,582			$	1,686,678

     The Company repurchased approximately 581,000 shares of its common stock during the nine months ended September 30, 2010. The Company settles option exercises by issuing shares of treasury stock to option holders. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired. Approximately 261,800 options to purchase shares of the Company’s common stock were exercised during the nine month period ended September 30, 2010.

10. Product Warranties

     The Company establishes warranty and product liability reserves (“warranty reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with NVR’s general counsel and outside counsel retained to handle specific product liability cases. The following table reflects the changes in the Company’s warranty reserve during the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Warranty reserve, beginning of period		$	70,181			$	60,858			$	64,417			$	68,084
Provision			6,636				11,154				29,310				18,806
Payments			(9,454	)			(9,376	)			(26,364	)			(24,254	)
Warranty reserve, end of period		$	67,363			$	62,636			$	67,363			$	62,636

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

11. Segment Disclosures

     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:

Homebuilding Mid Atlantic - Virginia, West Virginia, Maryland, and Delaware

Homebuilding North East - New Jersey and eastern Pennsylvania

		Homebuilding Mid East - Kentucky, New York, Ohio, western Pennsylvania and Indiana
		Homebuilding 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 eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the years presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital. The Company records charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer, or to restructure a lot purchase agreement resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a 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, human resources, etc., 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. Likewise, equity-based compensation expense is not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on the Company’s outstanding Senior Notes and working capital line borrowings, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

     Following are tables presenting revenues, segment profit and segment assets for each reportable segment, with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Revenues:
Homebuilding Mid Atlantic		$	395,265			$	491,669			$	1,294,839			$	1,212,785
Homebuilding North East			72,552				74,563				221,671				185,081
Homebuilding Mid East			138,879				156,281				458,603				362,373
Homebuilding South East			55,239				69,997				211,175				193,088
Mortgage Banking			14,234				21,506				44,599				44,719
Total consolidated revenues		$	676,169			$	814,016			$	2,230,887			$	1,998,046

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Profit:
Homebuilding Mid Atlantic		$	47,192			$	71,919			$	162,110			$	150,804
Homebuilding North East			8,512				7,156				20,440				15,479
Homebuilding Mid East			9,103				18,225				41,418				30,970
Homebuilding South East			1,042				2,870				12,056				9,344
Mortgage Banking			7,515				15,515				27,480				28,724
Total segment profit			73,364				115,685				263,504				235,321
Contract land deposit impairments (1)			545				6,841				8,063				17,302
Equity-based compensation expense (2)			(19,924	)			(11,446	)			(40,750	)			(34,848	)
Corporate capital allocation (3)			16,239				17,003				48,672				47,398
Unallocated corporate overhead (4)			(10,422	)			(10,017	)			(47,391	)			(34,348	)
Consolidation adjustments and other			5,492				(1,920	)			8,065				(9,190	)
Corporate interest expense			(404	)			(2,706	)			(4,283	)			(7,748	)
Reconciling items sub-total			(8,474	)			(2,245	)			(27,624	)			(21,434	)
Consolidated income before taxes		$	64,890			$	113,440			$	235,880			$	213,887

		September 30,
		2010				2009
Assets:
Homebuilding Mid Atlantic		$	501,284			$	471,449
Homebuilding North East			47,892				56,637
Homebuilding Mid East			109,420				108,451
Homebuilding South East			56,173				52,223
Mortgage Banking			181,909				121,633
Total segment assets			896,678				810,393
Consolidated variable interest entities (5)			22,771				57,461
Cash and cash equivalents			1,053,166				1,114,581
Land under development (6)			72,856				—
Marketable securities			25,000				259,406
Deferred taxes			188,698				193,460
Intangible assets			48,927				48,927
Contract land deposit reserve			(80,787	)			(136,154	)
Consolidation adjustments and other			22,510				26,706
Reconciling items sub-total			1,353,141				1,564,387
Consolidated assets		$	2,249,819			$	2,374,780

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Homebuilding Mid Atlantic		$	11,078			$	11,341			$	32,742			$	31,351
Homebuilding North East			1,476				1,727				4,698				4,988
Homebuilding Mid East			2,350				2,448				7,087				6,690
Homebuilding South East			1,335				1,487				4,145				4,369
Total		$	16,239			$	17,003			$	48,672			$	47,398

12. Fair Value

     Financial Instruments

     Except as otherwise noted here, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments.

     Derivative Instruments and Mortgage Loans Held for Sale

     In the normal course of business, NVR’s mortgage banking segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by NVR. 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, the Company enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVR does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At September 30, 2010, there were contractual commitments to extend credit to borrowers

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

aggregating approximately $209,088 and open forward delivery contracts aggregating approximately $349,264.

     GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs. The fair value of the Company’s rate lock commitments to borrowers and the related input levels includes, as applicable:

	i)		the assumed gain/loss of the expected resultant loan sale (level 2);
	ii)		the effects of interest rate movements between the date of the rate lock and the balance sheet date (level 2); and
	iii)		the value of the servicing rights associated with the loan (level 2).

     The assumed gain/loss considers the amount that the Company has discounted the price to the borrower from par for competitive reasons and the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. The Company sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights, which averaged 108 basis points of the loan amount as of September 30, 2010, is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. The Company assumes an approximate 7% fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on historical experience.

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

     Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. The fair value of loans held for sale of $170,601 included in the accompanying condensed consolidated balance sheet has been increased by $1,275 from the aggregate principal balance of $169,326.

     The undesignated derivative instruments are included in the accompanying condensed consolidated balance sheet as follows:

		Balance				Fair
		Sheet				Value
		Location				September 30, 2010
Derivative Assets:
Rate Lock Commitments		NVRM - Other assets				$	1,213
Derivative Liabilities:
Forward Sales Contracts		NVRM - Accounts payable and other liabilities				$	354

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     The unrealized gain or loss from the change in the fair value measurements is included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income as follows:

						Assumed				Interest												Total Fair
		Notional or				Gain (Loss)				Rate				Servicing				Security				Value
		Principal				From Loan				Movement				Rights				Price				Adjustment
		Amount				Sale				Effect				Value				Change				Gain/(Loss)
Rate lock commitments		$	209,088			$	(934	)		$	31			$	2,116							$	1,213
Forward sales contracts		$	349,264																(354	)			(354	)
Mortgages held for sale		$	169,326				(664	)			148				1,791								1,275
Total Fair Value Measurement, September 30, 2010							(1,598	)			179				3,907				(354	)			2,134
Less: Fair Value Measurement, December 31, 2009							(788	)			(2,501	)			2,187				2,445				1,343
Total Fair Value Adjustment for the nine-month period ended September 30, 2010						$	(810	)		$	2,680			$	1,720			$	(2,799	)		$	791

     The fair value measurement will be impacted in the future by the change in the value of the servicing rights and the volume and product mix of the Company’s closed loans and locked loan commitments.

13. Debt

     On June 15, 2010, the Company redeemed upon maturity, $133,370 in outstanding 5% Senior Notes due 2010 (“Senior Notes”) at par. The Company has no Senior Notes outstanding as of September 30, 2010.

     NVR’s wholly owned mortgage banking subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), provides for its mortgage origination activities through a revolving mortgage repurchase facility (“Repurchase Facility”). On July 30, 2010, NVRM entered into an amendment extending the term of the Repurchase Facility to August 2, 2011. The Repurchase Facility provides for loan purchases up to $100,000, subject to certain sublimits. In addition, the Repurchase Facility provides for an accordion feature under which NVRM may request that the aggregate commitments under the Repurchase Facility be increased to an amount up to $125,000.

     Advances under the Repurchase Facility carry a Pricing Rate based on the Libor Rate plus the Libor Margin, or the Default Pricing Rate, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 4.5%. 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. As of September 30, 2010, there was approximately $99,000 outstanding under the Repurchase Facility, which is included in Mortgage Banking “Note payable” in the accompanying condensed consolidated financial statement. Amounts outstanding under the Repurchase Facility are collateralized by the Company’s mortgage loans held for sale, which are included in assets in the September 30, 2010 balance sheet in the accompanying condensed consolidated financial statements. There were no borrowing base limitations as of September 30, 2010. The average Pricing Rate on outstanding balances at September 30, 2010 was 4.5%.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Effective October 27, 2010, NVR voluntarily terminated its $300,000 working capital facility which was set to expire on December 6, 2010. The Company currently does not intend to enter into a new credit facility; however, effective October 27, 2010, the Company entered into an uncommitted collateralized letter of credit facility to issue letters of credit in our ordinary course of business.

14. Commitments and Contingencies

     On July 18, 2007, former and current employees filed lawsuits against the Company in the Court of Common Pleas in Allegheny County, Pennsylvania and Hamilton County, Ohio, in Superior Court in Durham County, North Carolina, and in the Circuit Court in Montgomery County, Maryland, and on July 19, 2007 in the Superior Court in New Jersey, alleging that the Company incorrectly classified its sales and marketing representatives as being exempt from overtime wages. These lawsuits are similar in nature to another lawsuit filed on October 29, 2004 by another former employee in the United States District Court for the Western District of New York. The complaints seek injunctive relief, an award of unpaid wages, including fringe benefits, liquidated damages equal to the overtime wages allegedly due and not paid, attorney and other fees and interest, and where available, multiple damages. The suits were filed as purported class actions. However, while a number of individuals have filed consents to join and assert federal claims in the New York action, none of the groups of employees that the lawsuits purport to represent have been certified as a class. The lawsuits filed in Ohio, Pennsylvania, Maryland, New Jersey and North Carolina have been stayed pending further developments in the New York action.

     The Company believes that its compensation practices in regard to sales and marketing representatives are entirely lawful and in compliance with two letter rulings from the United States Department of Labor (“DOL”) issued in January 2007. The two courts to most recently consider similar claims against other homebuilders have acknowledged the DOL’s position that sales and marketing representatives were properly classified as exempt from overtime wages and the only court to have directly addressed the exempt status of such employees concluded that the DOL’s position was valid. Accordingly, the Company has vigorously defended and intends to continue to vigorously defend these lawsuits. Because the Company is unable to determine the likelihood of an unfavorable outcome of this case, or the amount of damages, if any, the Company has not recorded any associated liabilities in the accompanying condensed, consolidated balance sheets.

     In June 2010, the Company received a Request for Information from the United States Environmental Protection Agency (the “EPA”) pursuant to Section 308 of the Clean Water Act. The request seeks information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company. The Company has been cooperating with this request, has provided information to the EPA and intends to continue cooperating with the EPA’s inquiries. At this time, the Company cannot predict the outcome of this inquiry, nor can it reasonably estimate the potential costs that may be associated with its eventual resolution.

     In April 2010, NVRM received a Report of Examination (“ROE”) from the Office of the Commissioner of Banks of the State of North Carolina reporting certain findings that resulted from the Commissioner’s examination of selected files relating to loans originated by NVRM in North Carolina between August 1, 2006 and August 31, 2009. The ROE alleged that certain of the loan files reflected violations of North Carolina and/or U.S. lending or consumer protection laws. The ROE requested that NVRM correct or otherwise address the alleged violations and in some instances requested that NVRM undertake an examination of all of its other loans in North Carolina to determine whether similar alleged violations may have occurred, and if so, to take corrective action. NVRM responded to the ROE by letter dated June 10, 2010, contesting the findings and allegations, providing factual information to correct certain of the findings, and refuting the Commissioner’s interpretation of applicable law. The Commissioner has not yet formally responded to NVRM’s letter. Accordingly, while the outcome of the matter is currently not

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

determinable, the Company does not expect resolution of the matter to have a material adverse effect on the Company’s financial position.

     The Company and its subsidiaries are also involved in various other litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on the financial position or results of operations of the Company. Legal costs incurred in connection with outstanding litigation are expensed as incurred.

15. Mortgage Loan Loss Allowance

     During the three-month periods ended September 30, 2010 and 2009, the Company recorded pre-tax charges for loan losses of approximately $1,960 and $670, respectively. For the nine-month periods ended September 30, 2010 and 2009, the Company recorded pre-tax charges for loan losses of approximately $2,010 and $680, respectively. Included in the Mortgage Banking segment’s Accounts Payable and Other Liabilities line item within the accompanying condensed consolidated balance sheet is a mortgage loan loss allowance equal to approximately $4,000 and $3,200 at September 30, 2010 and December 31, 2009, respectively. The allowance is calculated based on an analysis of historical experience and anticipated losses on mortgages held for investment, real estate owned, and specific expected loan repurchases or indemnifications. For additional information, see Management’s Discussion and Analysis in Part 1, Item 2, and the disclosure of Risk Factors in Part II, Item 1A.

16. Recent Accounting Pronouncements

     In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, as codified in ASC 860, Transfers and Servicing, which changes the conditions for reporting a transfer of a portion of a financial asset as a sale and requires additional year-end and interim disclosures. ASC 860 was effective for the Company beginning January 1, 2010. The adoption of ASC 860 did not have a material impact on the Company’s financial statements.

     In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements, which amends ASC 820 to require the disclosure of additional information related to fair value measurement and provide clarification to existing requirements for fair value measurement disclosure. ASU 2010-06 was effective for the Company beginning January 1, 2010. The Company’s disclosures conform to the requirements of ASU 2010-06. Refer to Note 12 for additional discussion of fair value measurements.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)

Forward-Looking Statements

     Some of the statements in this 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. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward looking statements. Forward looking statements contained in this document include those regarding market trends, NVR’s financial position, business strategy, the outcome of pending litigation, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of NVR to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by NVR and NVR’s customers; increased regulation of the mortgage banking industry; competition; the availability and cost of land and other raw materials used by NVR in its homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which NVR has little or no control. NVR undertakes no obligation to update such forward-looking statements, except as required by law. For additional information regarding risk factors, see Part I, Item 1A of our Form 10-K for the year ended December 31, 2009 and Part II, Item 1A of this Report.

     Unless the context otherwise requires, references to “NVR”, “we”, “us” or “our” include NVR and its subsidiaries.

Results of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

Overview

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

		Mid Atlantic:		Maryland, Virginia, West Virginia and Delaware
		North East:		New Jersey and eastern Pennsylvania
		Mid East:		Kentucky, New York, Ohio, western Pennsylvania and Indiana
		South East:		North Carolina, South Carolina, Tennessee and Florida

     Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. Historically, we have not engaged in land development to obtain finished lots for use in our homebuilding operations. Instead, we have acquired finished lots at market prices from various third party land developers pursuant to fixed price purchase agreements. These 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 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.

     Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build and on our developers’ ability to timely deliver finished lots to meet the sales demands of our customers. However, the current economic conditions and the continued downturn of the homebuilding industry have exerted pressure on our developers’ ability to obtain acquisition and development financing or to raise equity investments to finance land development activity, potentially constraining our supply of finished lots. This pressure has necessitated that 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 any raw ground, we will determine whether to sell the raw parcel to a developer and enter into a fixed price purchase agreement with the developer to purchase the finished lots, or whether we will 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 fixed price purchase agreements with forfeitable deposits.

     As of September 30, 2010, we controlled approximately 49,600 lots under purchase agreements with deposits in cash and letters of credit totaling approximately $171,800 and $4,900, respectively, and approximately 1,100 additional lots through joint ventures. Included in the number of controlled lots are approximately 11,000 lots for which we have recorded a contract land deposit impairment reserve of $80,800 as of September 30, 2010. See Note 3 to the condensed consolidated financial statements included herein for additional information regarding contract land deposits. Further, as of September 30, 2010, we had approximately $73,000 in land under development, that once fully developed will result in approximately 840 lots.

     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.

Current Overview of the Business Environment

     During the third quarter of 2010, new housing demand declined from the higher new order results experienced in the first two quarters of 2010. Our third quarter new orders of 2,151 units were 5% lower than the third quarter of 2009, and 16% lower than our second quarter 2010 new order results. In addition, cancellation rates increased to 18% in the third quarter of 2010, compared to 14% in the third quarter of 2009 and 12% in the second quarter of 2010. The market stabilization we had experienced toward the end of 2009 and into the first quarter of 2010 was negatively impacted by the expiration of the federal homebuyer tax credit which required purchasers to enter into a sales contract prior to April 30, 2010 to qualify. After April 30, 2010, new home sales experienced sharp declines, providing evidence that rather than increasing overall demand, the tax credit may have merely accelerated existing demand. In addition, the current home sales environment continues to be adversely impacted by high inventory levels; low consumer confidence driven by high unemployment rates; and a highly restrictive mortgage lending environment that has made it more difficult for our customers to obtain mortgage financing.

     Reflecting the challenging market conditions discussed above, consolidated revenues totaled $676,169 for the quarter ended September 30, 2010, a 17% decrease from the same period in 2009. Net income and diluted earnings per share in the third quarter of 2010 decreased approximately 39% and

37%, respectively, compared to the third quarter of 2009. Gross profit margins within our homebuilding business declined to 18.3% in the third quarter of 2010 compared to 19.7% in the third quarter of 2009.

     We expect to experience continued sales and pricing pressures over the next several quarters across all of our markets despite historically low mortgage rates and reduced housing prices, as significant economic uncertainties remain. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, contains numerous provisions affecting residential mortgages and mortgage lending practices. Because these provisions are to be implemented through future rulemaking, the ultimate impact of such provisions on lending institutions, including our mortgage banking subsidiary, will depend on how the implementing rules are written.

     We believe that we are well positioned to take advantage of opportunities that may arise due to the strength of our balance sheet and liquidity. As of September 30, 2010, our cash and cash equivalents and marketable securities balances totaled approximately $1,080,000. In addition, we repurchased approximately $201,200 of our common stock during the quarter.

Homebuilding Operations

     The following table summarizes the results of operations and other data for the consolidated homebuilding operations:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	661,935			$	792,510			$	2,186,288			$	1,953,327
Cost of Sales		$	540,783			$	636,642			$	1,783,327			$	1,593,512
Gross profit margin percentage			18.3	%			19.7	%			18.4	%			18.4	%
Selling, general and administrative		$	65,534			$	56,662			$	195,412			$	171,020
Settlements (units)			2,127				2,671				7,391				6,492
Average settlement price		$	311.1			$	296.3			$	295.7			$	300.4
New orders (units)			2,151				2,255				7,650				7,409
Average new order price		$	306.3			$	297.1			$	299.9			$	291.3
Backlog (units)											3,790				4,081
Average backlog price										$	312.5			$	296.6
New order cancellation rate			17.9	%			13.8	%			12.7	%			14.1	%

Consolidated Homebuilding — Three Months Ended September 30, 2010 and 2009

     Homebuilding revenues decreased 16% for the third quarter of 2010 from the same period in 2009 as a result of a 20% decrease in the number of units settled, offset partially by a 5% increase in the average settlement price quarter over quarter. Settlements in each of our reportable segments in the current quarter were negatively impacted by the federal homebuyer tax credit’s initial settlement deadline of June 30, 2010, which pulled forward settlements into the second quarter of 2010. The increase in the average settlement price is attributable to a product mix shift away from our attached products to our detached product which is partially attributable to first time homebuyers representing a lower percentage of our total third quarter 2010 settlements.

     Gross profit margins in the quarter ended September 30, 2010 decreased compared to the third quarter of 2009. The decline is attributable to continued downward pressure on selling prices and increased operating and personnel costs coupled with reduced settlement volume in the quarter ended September 30, 2010 as compared to the same period in the prior year. Due to significant market uncertainties we expect to continue to experience gross profit margin pressure over at least the next several quarters.

     The number of new orders, net of cancellations (“new orders”) for the third quarter of 2010 decreased 5% compared to the third quarter of 2009, while the average sales price of new orders increased 3% quarter over quarter. The decline in new orders was driven primarily by the lingering impact of the federal homebuyer tax credit April 30, 2010 sales ratification deadline, which we believe generated urgency for certain homebuyers intending to qualify for the tax credit, pulling sales forward into the first quarter of 2010. In addition, as discussed in the Overview section above, current economic uncertainties have continued to depress home sales. We expect new orders to be negatively impacted over the next several quarters until the economy begins to exhibit consistent stability and job growth.

     Selling, general and administrative (“SG&A”) expenses in the third quarter of 2010 increased by 16% compared to the third quarter of 2009, and as a percentage of revenue increased to 10% from 7% quarter over quarter. The increase in SG&A expense was attributable primarily to an approximate $7,900 increase in stock-based compensation costs in the third quarter of 2010 compared to the same period in 2009 due to the grant of non-qualified stock options and restricted share units under the 2010 Equity Incentive Plan which was approved by our shareholders at the May 2010 Annual Meeting (see Note 5 in the accompanying condensed consolidated financial statements for additional discussion of stock-based compensation and the 2010 Equity Incentive Plan). SG&A expenses were also impacted by an approximate $1,800 increase in selling and marketing costs quarter over quarter due to the difficult selling conditions in the current quarter and to an increase in the average number of active communities to 374 communities in the third quarter of 2010 from 353 communities in the same period in 2009.

Consolidated Homebuilding — Nine Months Ended September 30, 2010 and 2009

     Homebuilding revenues increased 12% for the nine months ended September 30, 2010 compared to the same period in 2009 primarily due to a 14% increase in the number of units settled period over period. The number of units settled increased in all of our market segments period over period. Settlement increases were primarily attributable to the impact of the federal homebuyer tax credit which resulted in strong first quarter sales and increased settlements through the second quarter of 2010 as compared to the same period in 2009. In addition, the increase in settlements was also favorably impacted by a 12% higher beginning backlog unit balance entering 2010 compared to the same period in 2009.

     Gross profit margins in the first nine months of 2010 remained unchanged from those in the first nine months of 2009. We expect to experience gross profit margin pressure over at least the next several quarters due to significant market uncertainties as discussed in the Overview section above.

     The number of new orders and the average sales price of new orders for the first nine months of 2010 each increased 3% compared to the same period in 2009. The increase in new orders was primarily attributable to higher new orders in the first quarter of 2010, driven we believe by the federal homebuyer tax credit. Since the first quarter of 2010, we have experienced a consistent decline in the number of new orders across all of our markets in both the second and third quarters of 2010 compared to the respective periods in 2009. The increase in the average price of new orders was attributable to a product mix shift away from our attached products to our detached product which generally sell at higher price points.

     SG&A expenses in the first nine months of 2010 increased 14% compared to the same period of 2009, but as a percentage of revenue remained flat at 9% each year, respectively. The increase in SG&A expenses was primarily attributable to an approximate $6,600 increase in management incentive costs as prior year incentive plans were limited to payouts of 50% of incentive earned, while no similar restrictions are imposed on 2010 incentive compensation. SG&A expense was also higher due to an approximate $5,500 increase in stock-based compensation costs in 2010 compared to the same period in 2009 due to the aforementioned grant of non-qualified stock options and restricted share units under the 2010 Equity Incentive Plan. In addition, SG&A expenses were impacted by an approximate $5,900 increase in selling and marketing costs period over period due primarily to an approximate $3,000

increase in advertising costs and to an increase in the average number of active communities to 368 communities in the first nine months of 2010 from 356 communities in the same period in 2009.

     Backlog units and dollars decreased approximately 7% to 3,790 and 2% to $1,184,488, respectively, as of September 30, 2010 compared to 4,081 and $1,210,447 as of September 30, 2009. The decrease in backlog units was primarily attributable to the increased settlement activity for the nine-month period ended September 30, 2010 as discussed above. Backlog dollars were negatively impacted by the decrease in backlog units.

     Backlog, which represents homes sold but not yet settled with the customer, may be impacted by customer cancellations for various reasons that are beyond our control, such as 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 13% and 14% in the first nine months of 2010 and 2009, respectively. During the most recent four quarters, approximately 5% 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 in 2010. See Risk Factors in Part I, Item 1A of our Form 10-K for the year ended December 31, 2009 and Part II, Item 1A of this Report.

Reportable Segments

     Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the periods presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer or to restructure 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 additional information regarding our contract land deposit impairment analysis, see the Critical Accounting Policies section within this Management Discussion and Analysis. For presentation purposes below, the contract land deposit reserve at September 30, 2010 and 2009 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 $4,882 and $5,499 at September 30, 2010 and 2009, respectively, of letters of credit issued as deposits in lieu of cash. The following table summarizes certain homebuilding operating activity by segment for the three and nine months ended September 30, 2010 and 2009:

Selected Segment Financial Data:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues:
Mid Atlantic		$	395,265			$	491,669			$	1,294,839			$	1,212,785
North East			72,552				74,563				221,671				185,081
Mid East			138,879				156,281				458,603				362,373
South East			55,239				69,997				211,175				193,088
Total		$	661,935			$	792,510			$	2,186,288			$	1,953,327
Gross profit margin:
Mid Atlantic		$	78,784			$	102,145			$	256,856			$	239,469
North East			13,878				12,960				37,720				32,072
Mid East			22,705				30,319				79,994				65,125
South East			8,544				10,316				34,017				30,641
Total		$	123,911			$	155,740			$	408,587			$	367,307
Segment profit:
Mid Atlantic		$	47,192			$	71,919			$	162,110			$	150,804
North East			8,512				7,156				20,440				15,479
Mid East			9,103				18,225				41,418				30,970
South East			1,042				2,870				12,056				9,344
Total		$	65,849			$	100,170			$	236,024			$	206,597
Gross profit margin percentage:
Mid Atlantic			19.9	%			20.8	%			19.8	%			19.8	%
North East			19.1	%			17.4	%			17.0	%			17.3	%
Mid East			16.4	%			19.4	%			17.4	%			18.0	%
South East			15.5	%			14.7	%			16.1	%			15.9	%

Segment Operating Activity:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2010				2009				2010				2009				2010				2009				2010				2009
		Units								Average Price								Units								Average Price
Settlements:
Mid Atlantic			1,049				1,388			$	376.8			$	354.1				3,656				3,373			$	354.1			$	359.5
North East			222				260				326.8				286.8				724				641				306.2				288.7
Mid East			625				722				222.1				215.2				2,112				1,668				217.0				215.7
South East			231				301				238.8				232.5				899				810				234.8				238.4
Total			2,127				2,671				311.1				296.3				7,391				6,492				295.7				300.4
New orders, net of cancellations:
Mid Atlantic			1,193				1,199			$	358.7			$	344.3				3,887				3,823			$	358.8			$	345.3
North East			171				222				318.7				312.0				650				703				318.0				291.3
Mid East			559				560				219.4				224.0				2,187				2,007				217.5				216.2
South East			228				274				235.2				227.8				926				876				234.2				227.4
Total			2,151				2,255				306.3				297.1				7,650				7,409				299.9				291.3
Backlog:
Mid Atlantic																			2,094				2,226			$	367.1			$	344.5
North East																			251				365				332.5				294.5
Mid East																			1,035				1,070				225.2				222.2
South East																			410				420				242.2				234.4
Total																			3,790				4,081				312.5				296.6