NVR INC - Quarter Report: 2011 June (Form 10-Q)

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

		June 30, 2011				December 31, 2010
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable		$	148,658			$	115,578
Accrued expenses and other liabilities			184,615				237,052
Liabilities related to consolidated variable interest entity			1,242				500
Non-recourse debt related to consolidated variable interest entity			6,535				7,592
Customer deposits			67,593				53,705
Other term debt			1,696				1,751
			410,339				416,178
Mortgage Banking:
Accounts payable and other liabilities			24,891				13,171
Note payable			89,649				90,338
			114,540				103,509
Total liabilities			524,879				519,687
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,556,198 and 20,557,913 shares issued as of June 30, 2011 and December 31, 2010, respectively			206				206
Additional paid-in-capital			1,037,299				951,234
Deferred compensation trust — 152,964 and 158,894 shares of NVR, Inc. common stock as of June 30, 2011 and December 31, 2010, respectively			(25,582	)			(27,582	)
Deferred compensation liability			25,582				27,582
Retained earnings			4,082,691				4,029,072
Less treasury stock at cost — 14,977,205 and 14,894,357 shares at June 30, 2011 and December 31, 2010, respectively			(3,469,400	)			(3,240,138	)
Total shareholders’ equity			1,650,796				1,740,374
Total liabilities and shareholders’ equity		$	2,175,675			$	2,260,061

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Homebuilding:
Revenues		$	682,663			$	946,972			$	1,185,407			$	1,524,353
Other income			1,362				2,110				2,820				4,479
Cost of sales			(558,601	)			(771,475	)			(976,521	)			(1,242,544	)
Selling, general and administrative			(68,045	)			(69,137	)			(135,233	)			(129,878	)
Operating income			57,379				108,470				76,473				156,410
Interest expense			(287	)			(1,897	)			(509	)			(4,068	)
Homebuilding income			57,092				106,573				75,964				152,342
Mortgage Banking:
Mortgage banking fees			13,218				17,532				24,978				30,365
Interest income			1,085				1,492				2,200				2,248
Other income			121				233				160				399
General and administrative			(7,898	)			(7,275	)			(14,575	)			(13,804	)
Interest expense			(264	)			(296	)			(538	)			(560	)
Mortgage banking income			6,262				11,686				12,225				18,648
Income before taxes			63,354				118,259				88,189				170,990
Income tax expense			(24,909	)			(46,983	)			(34,570	)			(67,627	)
Net income		$	38,445			$	71,276			$	53,619			$	103,363
Basic earnings per share		$	6.65			$	11.64			$	9.24			$	16.96
Diluted earnings per share		$	6.48			$	11.13			$	8.98			$	16.15
Basic average shares outstanding			5,785				6,123				5,804				6,095
Diluted average shares outstanding			5,929				6,405				5,974				6,402

See notes to condensed consolidated financial statements.

NVR, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net income		$	53,619			$	103,363
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			3,236				3,728
Excess income tax benefit from exercise of stock options			(21,391	)			(58,562	)
Equity-based compensation expense			31,705				20,826
Contract land deposit impairments (recoveries)			4,069				(949	)
Gain on sales of loans			(18,865	)			(22,978	)
Mortgage loans closed			(816,908	)			(1,073,149	)
Proceeds from sales of mortgage loans			833,579				895,491
Principal payments on mortgage loans held for sale			2,061				330
Distribution of earnings from unconsolidated joint ventures			1,657				—
Net change in assets and liabilities:
Increase in inventories			(103,558	)			(1,983	)
Increase in contract land deposits			(32,485	)			(19,256	)
Increase in receivables			(487	)			(6,169	)
Increase in accounts payable, accrued expenses and customer deposits			29,100				91,155
Other, net			9,445				1,847
Net cash used in operating activities			(25,223	)			(66,306	)
Cash flows from investing activities:
Purchase of marketable securities			—				(150,000	)
Redemption of marketable securities at maturity			—				194,535
Investments in and advances to unconsolidated joint ventures			(61,600	)			(2,000	)
Distribution of capital from unconsolidated joint ventures			7,343				—
Purchase of property, plant and equipment			(7,478	)			(2,921	)
Proceeds from the sale of property, plant and equipment			307				265
Net cash (used in) provided by investing activities			(61,428	)			39,879
Cash flows from financing activities:
Purchase of treasury stock			(300,885	)			(176,084	)
Net (repayments) borrowings under notes payable and credit lines			(744	)			66,514
Redemption of senior notes			—				(133,370	)
Net repayments under non-recourse debt related to consolidated variable interest entity			(1,057	)			—
Excess income tax benefit from equity-based compensation			21,391				58,562
Exercise of stock options			104,592				51,537
Net cash used in financing activities			(176,703	)			(132,841	)
Net decrease in cash and cash equivalents			(263,354	)			(159,268	)
Cash and cash equivalents, beginning of the period			1,193,750				1,250,150
Cash and cash equivalents, end of period		$	930,396			$	1,090,882
Supplemental disclosures of cash flow information:
Interest paid during the period, net		$	1,056			$	4,527
Income taxes paid, net of refunds		$	14,033			$	9,710
Supplemental disclosures of non-cash activities:
Investment in consolidated joint venture		$	—			$	(23,776	)

See notes to condensed consolidated financial statements.

NVR, Inc.

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 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 2010 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 six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

     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 six-month periods ended June 30, 2011 and 2010, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying financial statements.

2. Variable Interest Entities and Joint Ventures

     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 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

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

flow returns to its 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. Those development entities are deemed to be variable interest entities (“VIE”). 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 discussed 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. NVR’s total risk of loss related to contract land deposits as of June 30, 2011 and December 31, 2010, is as follows:

		June 30, 2011				December 31, 2010
Contract land deposits		$	197,324			$	174,303
Loss reserve on contract land deposits			(68,122	)			(73,517	)
Contract land deposits, net			129,202				100,786
Contingent obligations in the form of letters of credit			3,054				6,610
Contingent specific performance obligations (1)			3,617				1,944
Total risk of loss		$	135,873			$	109,340

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

     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 it has invested, in addition to any deposits place under fixed price purchase agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into a standard fixed price purchase agreement to purchase lots from these JVs, and as a result has a variable interest in these JVs.

     During the second quarter of 2011, NVR invested $61,250 for a fifty percent (50%) interest in a joint venture entered into with Morgan Stanley Real Estate Investing, which holds the other fifty percent interest. NVR is not contractually committed to making any additional investments in the JV, nor will it be a borrower, guarantor or obligor on any debt of the joint venture, as applicable. The joint venture acquired nine separate parcels of land from entities controlled by a single developer that are in various stages of development and all nine parcels are zoned for their intended use. The joint venture controls approximately 5,600 lots within the nine parcels, as follows:

		Lots Under Contract With:								Not Under
Location		NVR				Others				Contract				Totals
Spotsylvania County, VA			143				16				—				159
Loudoun County, VA			1,769				50				—				1,819
Prince Georges County, MD			969				—				—				969
Jefferson County, WV			—				—				2,659				2,659
Total			2,881				66				2,659				5,606

Substantially all of the 2,881 lots under contract with the joint venture noted above were previously controlled by NVR under contracts with the prior developer, and those lots were formerly reported in NVR’s lots controlled total. In 2008, NVR recorded a valuation reserve on the deposits related to those lots.

     At June 30, 2011, the Company had investments in four JVs that are expected to produce approximately 6,600 finished lots. In addition, at June 30, 2011, NVR had additional funding commitments in the aggregate totaling $5,000 to one of the four JVs. The Company has determined that it is not the primary beneficiary of three of the JVs because NVR and the other JV partner either share power or the other JV partner has the controlling financial interest. The aggregate investment in these three JVs was approximately $77,200 and is reported in the Other assets line item in accompanying condensed consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV. The condensed balance sheets at June 30, 2011 and December 31, 2010, of the consolidated JV are as follows:

		June 30, 2011				December 31, 2010
Cash		$	951			$	358
Restricted cash			852				501
Other assets			125				126
Land under development			21,094				21,386
Total assets		$	23,022			$	22,371
Debt		$	6,535			$	7,592
Accrued expenses			492				59
Equity			15,995				14,720
Total liabilities and equity		$	23,022			$	22,371

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

3. Land Under Development

     On a limited basis, NVR directly acquires raw parcels of land already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes. As of June 30, 2011, NVR directly owned three separate raw parcels of land with a carrying value of approximately $78,500 that it intends to develop into approximately 850 finished lots for use in its homebuilding operations. All three of the raw parcels are located in the Washington, D.C. metropolitan area and none of them had any indicators of impairment as of June 30, 2011. 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.

4. Contract Land Deposits

     As of June 30, 2011, NVR controlled approximately 49,100 lots with deposits in cash and letters of credit of $197,300 and $3,100, respectively. At December 31, 2010, NVR controlled approximately 50,400 lots with deposits in cash and letters of credit totaling approximately $174,300 and $6,600, respectively. During the three and six month periods ended June 30, 2011, the Company recognized a net pre-tax charge of approximately $2,700 and $4,100, respectively, related to the impairment of contract land deposits. During the three-month period ended June 30, 2010, the Company recognized a net pre-tax contract land deposit impairment charge of approximately $970 and for the six-month period recognized a net pre-tax recovery of approximately $950 of contract land deposits previously determined to be uncollectible. The contract land deposit asset is shown net of an approximate $68,100 and $73,500 impairment valuation allowance at June 30, 2011 and December 31, 2010, respectively.

5. 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 six months ended June 30, 2011 and 2010:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Weighted average number of shares outstanding used to calculate basic EPS			5,785,000				6,123,000				5,804,000				6,095,000
Dilutive Securities:
Stock options and restricted share units			144,000				282,000				170,000				307,000
Weighted average number of shares and share equivalents used to calculate diluted EPS			5,929,000				6,405,000				5,974,000				6,402,000

     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 to additional paid-in capital assuming exercise of the option or the vesting of the restricted share unit. The assumed amount credited to additional paid-in capital equals the tax benefit from assumed exercise of stock options or the assumed vesting of restricted share units after consideration of the intrinsic value upon assumed exercise less the actual stock-based compensation expense to be recognized in the income statement from 2006 and future periods.

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

     Stock options issued under equity benefit plans to purchase 449,134 and 448,810 shares of common stock were outstanding during the three and six month periods ended June 30, 2011, and stock options issued under equity benefit plans to purchase 435,548 and 434,206 shares of common stock were outstanding during the three and six months ended June 30, 2010, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive in the respective periods.

6. 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 2011 and determined that there was no impairment of excess reorganization value.

7. 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, 2010		$	206			$	951,234			$	4,029,072			$	(3,240,138	)		$	(27,582	)		$	27,582			$	1,740,374
Net income			—				—				53,619				—				—				—				53,619
Deferred compensation activity			—				—				—				—				2,000				(2,000	)			—
Purchase of common stock for treasury			—				—				—				(300,885	)			—				—				(300,885	)
Equity-based compensation			—				31,705				—				—				—				—				31,705
Tax benefit from stock options exercised and deferred compensation distributions			—				21,391				—				—				—				—				21,391
Proceeds from stock options exercised			—				104,592				—				—				—				—				104,592
Treasury stock issued upon option exercise			—				(71,623	)			—				71,623				—				—				—
Balance, June 30, 2011		$	206			$	1,037,299			$	4,082,691			$	(3,469,400	)		$	(25,582	)		$	25,582			$	1,650,796

     The Company repurchased 411,477 shares of its common stock during the six months ended June 30, 2011 at an aggregate purchase price of $300,885. 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 329,000 options to purchase shares of the Company’s common stock were exercised during the six months ended June 30, 2011.

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

8. 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 our 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 six months ended June 30, 2011 and 2010:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Warranty reserve, beginning of period		$	65,330			$	65,082			$	69,787			$	64,417
Provision			8,041				14,452				11,773				22,673
Payments			(10,567	)			(9,353	)			(18,756	)			(16,909	)
Warranty reserve, end of period		$	62,804			$	70,181			$	62,804			$	70,181

9. 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 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 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

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

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.

     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:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues:
Homebuilding Mid Atlantic		$	404,253			$	560,105			$	717,193			$	899,574
Homebuilding North East			67,715				84,962				106,908				149,119
Homebuilding Mid East			143,381				194,736				241,533				319,725
Homebuilding South East			67,314				107,169				119,773				155,935
Mortgage Banking			13,218				17,532				24,978				30,365
Total Consolidated Revenues		$	695,881			$	964,504			$	1,210,385			$	1,554,718

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Profit:
Homebuilding Mid Atlantic		$	45,327			$	77,058			$	71,203			$	114,918
Homebuilding North East			6,676				6,173				7,799				11,928
Homebuilding Mid East			8,722				21,382				10,329				32,316
Homebuilding South East			5,251				9,956				7,464				11,013
Mortgage Banking			7,041				12,537				13,782				19,965
Total Segment Profit			73,017				127,106				110,577				190,140
Contract land deposit impairment reserve (1)			(1,375	)			5,510				(2,505	)			7,518
Equity-based compensation expense (2)			(16,125	)			(15,148	)			(31,705	)			(20,826	)
Corporate capital allocation (3)			17,897				17,953				33,320				32,433
Unallocated corporate overhead (4)			(14,401	)			(16,290	)			(30,861	)			(36,969	)
Consolidation adjustments and other (5)			4,448				929				9,573				2,573
Corporate interest expense (6)			(107	)			(1,801	)			(210	)			(3,879	)
Reconciling items sub-total			(9,663	)			(8,847	)			(22,388	)			(19,150	)
Consolidated income before taxes		$	63,354			$	118,259			$	88,189			$	170,990

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

		June 30,				December 31,
		2011				2010
Assets:
Homebuilding Mid Atlantic		$	629,559			$	492,148
Homebuilding North East			50,141				35,827
Homebuilding Mid East			115,495				78,246
Homebuilding South East			48,494				43,041
Mortgage Banking			195,282				196,441
Total Segment Assets			1,038,971				845,703
Consolidated variable interest entity			23,022				22,371
Cash and cash equivalents			927,370				1,190,731
Deferred taxes			172,318				184,930
Intangible assets			48,927				48,927
Contract land deposit reserve			(68,122	)			(73,517	)
Consolidation adjustments and other			33,189				40,916
Reconciling items sub-total			1,136,704				1,414,358
Consolidated Assets		$	2,175,675			$	2,260,061

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Homebuilding Mid Atlantic		$	12,105			$	11,869			$	22,936			$	21,664
Homebuilding North East			1,566				1,672				2,729				3,222
Homebuilding Mid East			2,840				2,661				5,044				4,737
Homebuilding South East			1,386				1,751				2,611				2,810
Total		$	17,897			$	17,953			$	33,320			$	32,433

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

10. 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 June 30, 2011, there were contractual commitments to extend credit to borrowers aggregating $158,084 and open forward delivery contracts aggregating $316,053.

     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 128 basis points of the loan amount as of June 30, 2011, 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 9% 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.

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

     Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. The fair value of loans held-for-sale of $181,525 included in the accompanying condensed consolidated balance sheet has been increased by $1,692 from the aggregate principal balance of $179,833.

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

		Balance				Fair
		Sheet				Value
		Location				June 30, 2011
Derivative Assets:
Forward Sales Contracts and Rate Lock Commitments		NVRM - Other assets				$	1,313

     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		$	158,084			$	(536	)		$	(887	)		$	1,896			$	—			$	473
Forward sales contracts		$	316,053				—				—				—				840				840
Mortgages held for sale		$	179,833				(812	)			246				2,258				—				1,692
Total Fair Value Measurement, June 30, 2011							(1,348	)			(641	)			4,154				840				3,005
Less: Fair Value Measurement, December 31, 2010							(1,366	)			(6,534	)			4,004				4,904				1,008
Total Fair Value Adjustment for the period ended June 30, 2011						$	18			$	5,893			$	150			$	(4,064	)		$	1,997

     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.

11. Debt

     NVR’s mortgage banking wholly-owned subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), has a revolving mortgage repurchase facility (the “Repurchase Facility”) that provides for loan purchases up to $100,000, subject to certain sublimits. In addition, the Repurchase Agreement provides for an accordion feature under which NVRM may request that the aggregate commitments under the Repurchase Agreement be increased to an amount up to $125,000. At June 30, 2011, there was approximately $89,600 outstanding under the Repurchase Facility, which is included in Mortgage Banking “Note payable” in the accompanying condensed consolidated financial statements. Amounts outstanding under the Repurchase Facility are collateralized by the Company’s mortgage loans held for sale. As of June 30, 2011, there were no borrowing

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

base limitations reducing the amount available for borrowings under the Repurchase Agreement. The average Pricing Rate on outstanding balances at June 30, 2011 was 4.1%.

     The Repurchase Agreement expired on August 2, 2011. NVRM entered into a new repurchase agreement, effective with the current repurchase agreement’s expiration, with a reduced available purchase limit of $25,000. NVRM primarily will use internally generated cash and borrowings from NVR to fund its mortgage origination activity.

12. 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 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 sought information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company. The Company has cooperated with this request, has provided information to the EPA and intends to continue cooperating with any future EPA 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 (the “NCCOB”) reporting certain findings that resulted from the NCCOB’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

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

refuting the NCCOB’s interpretation of applicable law. On November 15, 2010, the NCCOB provided a written response to NVRM’s June 10, 2010 letter closing certain alleged violations while reasserting certain other violations. On January 12, 2011, NVRM responded to the NCCOB’s November 15, 2010 letter providing additional factual information to address the remaining findings, and refuting the NCCOB’s interpretation of applicable law. Accordingly, while the Company believes that it has provided the NCCOB with all necessary information to resolve the matter, the Company does not believe that it can determine the likely outcome of the matter. However, the Company does not expect resolution of the matter to have a material adverse effect on the Company’s financial position, results of operations or liquidity.

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

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, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward looking statements. Forward looking statements contained in this document 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 II, Item 1(a) 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 Six Months Ended June 30, 2011 and 2010

Overview

Business

     Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings. To serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets and generally seek to 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 allows us to maximize inventory turnover, which 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, 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 June 30, 2011, we controlled approximately 49,100 lots with deposits in cash and letters of credit totaling approximately $197,300 and $3,100, respectively, and approximately 6,600 additional lots through joint venture limited liability corporations with an aggregate investment of approximately $92,400. Included in the number of controlled lots are approximately 9,800 lots for which we have recorded a contract land deposit impairment reserve of approximately $68,100 as of June 30, 2011. See Notes 2 and 4 to the condensed consolidated financial statements included herein for additional information regarding contract land deposits. Further, as of June 30, 2011, we had approximately $78,500 in land under development, that once fully developed will result in approximately 850 lots. See Note 3 to the condensed consolidated financial statements included herein for additional information regarding land under development.

     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.

Overview of Current Business Environment

     The homebuilding market continues to be negatively impacted by a sluggish economy, high unemployment and a tight mortgage lending environment. These factors continue to weigh on homebuyer confidence and in turn, suppress housing demand. In addition to the foregoing pressures on demand, new home sales have been negatively impacted by market uncertainty surrounding home prices. As a result, we continue to face sales and pricing pressures in many of our markets. Our new orders, net of cancellations (“new orders”), for the second quarter of 2011 decreased 4% when compared to the second quarter of 2010.

     Consolidated revenues for the second quarter of 2011 totaled $695,881, a 28% decrease from the second quarter of 2010. Additionally, net income and diluted earnings per share in the current quarter decreased approximately 46% and 42%, respectively, compared to the second quarter of 2010. Gross profit margins within our homebuilding business decreased to 18.2% in the second quarter of 2011 compared to 18.5% in the second quarter of 2010.

     We expect to continue to experience pressure on sales and selling prices over at least the next several quarters in all of our markets, as significant economic uncertainties remain. Further, our expectation of continued sales and pricing pressures has been factored into the impairment analysis of our homebuilding inventory, land under development and contract land deposits. We assess our land under development, including land under development held in joint ventures, and contract land deposits each quarter for

impairment on a community-by-community basis by considering, among other items, overall market and economic conditions, and analyzing, as applicable, current sales absorption levels and recent sales’ gross profit. At this time, we do not believe that any of the land under development is impaired, and we consider the allowance for losses on contract land deposits reflected on the June 30, 2011 balance sheet to be adequate. Further, we believe that our homebuilding inventory is stated at the lower of cost or market. 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. 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. Despite these uncertainties, 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.

Homebuilding Operations

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues		$	682,663			$	946,972			$	1,185,407			$	1,524,353
Cost of sales		$	558,601			$	771,475			$	976,521			$	1,242,544
Gross profit margin percentage			18.2	%			18.5	%			17.6	%			18.5	%
Selling, general and administrative		$	68,045			$	69,137			$	135,233			$	129,878
Settlements (units)			2,207				3,345				3,841				5,264
Average settlement price		$	309.2			$	283.0			$	308.5			$	289.5
New orders (units)			2,468				2,559				4,871				5,499
Average new order price		$	303.5			$	309.6			$	299.7			$	297.4
New order cancellation rate			12.5	%			12.0	%			12.4	%			10.5	%
Backlog (units)											3,946				3,766
Average backlog price										$	312.5			$	315.3

Consolidated Homebuilding — Three Months Ended June 30, 2011 and 2010

     Homebuilding revenues decreased 28% for the second quarter of 2011 from the same period in 2010 as a result of a 34% decrease in the number of units settled, offset partially by a 9% increase in the average settlement price quarter over quarter. Unit settlements declined in each of our market segments primarily due to an increased number of settlements in the second quarter of the prior year driven by the initial settlement deadline of June 30, 2010, to qualify for the federal homebuyer tax credit. Average settlement prices were impacted primarily by a 7% higher average price of homes in our beginning backlog entering the second quarter of 2011 compared to the same period in 2010.

     Gross profit margins in the quarter ended June 30, 2011 decreased 36 basis points compared to the second quarter of 2010 due primarily to a higher contract land deposit impairment charge of $2,721, or 40 basis points, in the second quarter of 2011, compared to $973, or 10 basis points, in the second quarter of 2010.

     As discussed in the Overview section above, the number of new orders for the second quarter of 2011 decreased 4% when compared to the second quarter of 2010. The average selling price for new orders during the second quarter of 2011 decreased 2% compared to the same period in 2010. New orders were lower quarter over quarter in each of our market segments, except the South East, as mortgage lending requirements remain tight and homebuyer confidence continues to be negatively impacted by continuing economic

uncertainty and high unemployment rates. In addition, new orders in the current quarter were also negatively impacted by increased competition from existing homes, the prices of which continue to decline in many of our markets. We expect to see continued pressure on new orders over at least the next several quarters until the economy begins to exhibit consistent stability and job growth.

     Selling, general and administrative (“SG&A”) expenses in the second quarter of 2011 declined approximately 2% compared to the second quarter of 2010, but as a percentage of revenue increased to 10.0% from 7.3% quarter over quarter. The increase in SG&A as a percentage of revenue was attributable to the significant decline in homebuilding revenues quarter over quarter, as discussed previously.

Consolidated Homebuilding — Six Months Ended June 30, 2011 and 2010

     Homebuilding revenues decreased 22% for the six months ended June 30, 2011 compared to the same period in 2010 as a result of a 27% decrease in the number of units settled, offset partially by a 7% increase in the average settlement price period over period. The number of units settled decreased in all of our market segments period over period. These decreases are primarily attributable to the aforementioned impact of the federal homebuyer tax credit’s June 30, 2010 settlement deadline. Average settlement prices were favorably impacted primarily by a 8% higher average price of homes in the beginning backlog entering 2011 compared to the same period in 2010.

     Gross profit margins in the first six months of 2011 decreased approximately 87 basis points compared to the first six months of 2010 due in part to the reduction in settlement volume year over year, and its impact on our ability to leverage certain operating costs. In addition, gross profit margins in 2011 were negatively impacted by the contract land deposit charge of $4,069, or 34 basis points, compared to the recovery of $949, or 6 basis points, in 2010, of contract land deposits previously determined to be uncollectible.

     The number of new orders for the first six months of 2011 decreased 11% compared to the same period in 2010, while the average sales price of new orders was flat period over period. New orders were lower period over period in each of our market segments. As noted in the second quarter discussion above, the decrease in new orders is attributable to continued consumer confidence issues and the tight mortgage lending requirements. In addition, sales continue to be negatively impacted by increased competition from existing homes, the prices of which continue to decline in many of our markets. New orders were also negatively impacted by an increase in the cancellation rate to 12.4% from 10.5%.

     Selling, general and administrative (“SG&A”) expenses for the first six months of 2011 increased approximately $5,400 compared to the same period in 2010 and increased as a percentage of revenue to 11.4% from 8.5% quarter over quarter. The increase in SG&A was attributable to an approximate $10,300 increase in stock-based compensation expense in 2011 as compared to the same period in 2010, due to the grant of non-qualified stock options and restricted share units under the 2010 Equity Incentive Plan in the second quarter of 2010. This increase was partially offset by a decrease of approximately $4,200 in management incentive costs recorded year over year.

     Backlog units and dollars were 3,946 and $1,233,269, respectively, as of June 30, 2011 compared to 3,766 and $1,187,599, respectively, as of June 30, 2010. The increase in backlog units is primarily attributable to the aforementioned 27% decline in settlement activity year over year. Backlog dollars were favorably impacted by the increase 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 12.4% and 10.5% in the six months of 2011 and 2010, respectively. During the most recent four quarters, approximately 6% of a reporting quarter’s opening

backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur in 2011.

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 June 30, 2011 and 2010 has been allocated to the respective year’s reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $3,100 and $5,100 at June 30, 2011 and 2010, 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 six months ended June 30, 2011 and 2010:

Selected Segment Financial Data:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues:
Mid Atlantic		$	404,253			$	560,105			$	717,193			$	899,574
North East			67,715				84,962				106,908				149,119
Mid East			143,381				194,736				241,533				319,725
South East			67,314				107,169				119,773				155,935
Total		$	682,663			$	946,972			$	1,185,407			$	1,524,353
Gross profit margin:
Mid Atlantic		$	78,722			$	110,931			$	136,357			$	178,072
North East			12,867				12,381				19,216				23,842
Mid East			23,261				35,011				37,708				57,289
South East			11,990				17,786				20,422				25,473
Total		$	126,840			$	176,109			$	213,703			$	284,676
Segment profit:
Mid Atlantic		$	45,327			$	77,058			$	71,203			$	114,918
North East			6,676				6,173				7,799				11,928
Mid East			8,722				21,382				10,329				32,316
South East			5,251				9,956				7,464				11,013
Total		$	65,976			$	114,569			$	96,795			$	170,175

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Gross profit margin percentage:
Mid Atlantic			19.5	%			19.8	%			19.0	%			19.8	%
North East			19.0	%			14.6	%			18.0	%			16.0	%
Mid East			16.2	%			18.0	%			15.6	%			17.9	%
South East			17.8	%			16.6	%			17.1	%			16.3	%

Segment Operating Activity:

		Three Months Ended June 30,																Six Months Ended June 30,
		2011				2010				2011				2010				2011				2010				2011				2010
		Units								Average Price								Units								Average Price
Settlements:
Mid Atlantic			1,076				1,672			$	375.7			$	335.0				1,912				2,607			$	375.1			$	345.0
North East			217				282			$	312.1			$	301.3				345				502			$	309.9			$	297.0
Mid East			612				922			$	234.1			$	211.0				1,043				1,487			$	231.4			$	214.9
South East			302				469			$	222.5			$	228.5				541				668			$	221.0			$	233.4
Total			2,207				3,345			$	309.2			$	283.0				3,841				5,264			$	308.5			$	289.5
New orders, net of cancellations:
Mid Atlantic			1,219				1,303			$	367.8			$	367.5				2,364				2,694			$	362.6			$	358.9
North East			208				219			$	308.4			$	332.0				460				479			$	301.0			$	317.8
Mid East			691				749			$	236.0			$	227.5				1,382				1,628			$	233.7			$	216.9
South East			350				288			$	210.0			$	244.5				665				698			$	212.3			$	233.9
Total			2,468				2,559			$	303.5			$	309.6				4,871				5,499			$	299.7			$	297.4
Backlog:
Mid Atlantic																			2,047				1,950			$	377.2			$	377.4
North East																			347				302			$	302.2			$	336.2
Mid East																			1,069				1,101			$	236.7			$	226.4
South East																			483				413			$	213.9			$	244.1
Total																			3,946				3,766			$	312.5			$	315.3

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
New order cancellation rate:
Mid Atlantic			12.0	%			9.5	%			12.5	%			8.7	%
North East			12.6	%			16.1	%			10.3	%			14.9	%
Mid East			13.0	%			11.9	%			12.6	%			10.6	%
South East			13.4	%			19.3	%			13.0	%			13.4	%
Average active communities:
Mid Atlantic			186				169				184				165
North East			31				34				32				34
Mid East			112				110				110				109
South East			57				60				57				58
Total			386				373				383				366