Item 15. Exhibits and Financial Statement Schedules.

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Item 15. Exhibits and Financial Statement Schedules.

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The following documents are filed as part of this report:

1.	Financial Statements

NVR, Inc.-Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2.	Exhibits


*Exhibit Number*		*Description*

3.1		Restated Articles of Incorporation of NVR, Inc. (“NVR”). Filed as Exhibit 3.1 to NVR’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated herein by reference.

3.2		Bylaws, as amended, of NVR, Inc. Filed as Exhibit 3.2 to NVR’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated herein by reference.

4.1		Indenture dated as of April 14, 1998 between NVR, as issuer and the Bank of New York as trustee. Filed as Exhibit 4.3 to NVR’s Current Report on Form 8-K filed April 23, 1998 and incorporated herein by reference.

4.2		Form of Note (included in Indenture filed as Exhibit 4.1).

10.1*		Employment Agreement between NVR, Inc. and Paul C. Saville dated December 21, 2010. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.

10.2*		Employment Agreement between NVR, Inc. and Dennis M. Seremet dated December 21, 2010. Filed as Exhibit 10.2 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.



10.3*		Employment Agreement between NVR, Inc. and Robert A. Goethe dated December 21, 2010. Filed as Exhibit 10.3 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.

10.4*		Employment Agreement between NVR, Inc. and Robert W. Henley dated December 21, 2010. Filed as Exhibit 10.4 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.

10.5*		Profit Sharing Plan of NVR, Inc. and Affiliated Companies. Filed as Exhibit 4.1 to NVR’s Registration Statement on Form S-8 (No. 333-29241) filed June 13, 1997 and incorporated herein by reference.

10.6*		Employee Stock Ownership Plan of NVR, Inc. Incorporated by reference to NVR’s Annual Report on Form 10-K/A for the year ended December 31, 1994.

10.7*		NVR, Inc. 1998 Management Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79951) filed June 4, 1999 and incorporated herein by reference.

10.8*		NVR, Inc. 1998 Directors’ Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79949) filed June 4, 1999 and incorporated herein by reference.

10.09*		NVR, Inc. Management Long-Term Stock Option Plan. Filed as Exhibit 99.3 to NVR’s Registration Statement on Form S-8 (No. 333-04975) filed May 31, 1996 and incorporated herein by reference.

10.10*		NVR, Inc. 2000 Broadly-Based Stock Option Plan. Filed as Exhibit 99.1 to NVR’s Registration Statement on Form S-8 (No. 333-56732) filed March 8, 2001 and incorporated herein by reference.

10.11*		NVR, Inc. Nonqualified Deferred Compensation Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on December 16, 2005 and incorporated herein by reference.

10.12*		Description of the Board of Directors’ compensation arrangement. Filed as Exhibit 10.27 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated herein by reference.

10.13*		The NVR, Inc. 2010 Equity Incentive Plan. Filed as exhibit 10.1 to NVR’s Form S-8 (No. 333-166512) filed on May 4, 2010 and incorporated herein by reference.

10.14*		The Form of Non-Qualified Stock Option Agreement (Management grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.1 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.

10.15*		The Form of Non-Qualified Stock Option Agreement (Director grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.2 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.

10.16*		The Form of Restricted Share Units Agreement (Management grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.3 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.

10.17*		The Form of Restricted Share Units Agreement (Director grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.4 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.



10.18*		The Form of Non-Qualified Stock Option Agreement under the NVR, Inc. 2000 Broadly Based Stock Option Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed January 3, 2008 and incorporated herein by reference.

10.19*		The Form of Non-Qualified Stock Option Agreement under the 1998 Directors’ Long- Term Stock Option Plan. Filed as Exhibit 10.34 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2007 and incorporated herein by reference.

10.20*		Summary of 2012 Named Executive Officer annual incentive compensation plan. Filed herewith.

21		NVR, Inc. Subsidiaries. Filed herewith.

23		Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith.

31.1		Certification of NVR’s Chief Executive Officer pursuant to Rule 13a-14(a). Filed herewith.

31.2		Certification of NVR’s Chief Financial Officer pursuant to Rule 13a-14(a). Filed herewith.

32		Certification of NVR’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.



101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Exhibit is a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


NVR, Inc.

	By:	/s/ Paul C. Saville
		Paul C. Saville
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Dwight C. Schar	Chairman	February 22, 2012
Dwight C. Schar

/s/ C. E. Andrews	Director	February 22, 2012
C. E. Andrews

/s/ Robert C. Butler	Director	February 22, 2012
Robert C. Butler

/s/ Timothy M. Donahue	Director	February 22, 2012
Timothy M. Donahue

/s/ Thomas D. Eckert	Director	February 22, 2012
Thomas D. Eckert

/s/ Alfred E. Festa	Director	February 22, 2012
Alfred E. Festa

/s/ Manuel H. Johnson	Director	February 22, 2012
Manuel H. Johnson

/s/ William A. Moran	Director	February 22, 2012
William A. Moran

/s/ David A. Preiser	Director	February 22, 2012
David A. Preiser

/s/ W. Grady Rosier	Director	February 22, 2012
W. Grady Rosier

/s/ John M. Toups	Director	February 22, 2012
John M. Toups

/s/ Paul W. Whetsell	Director	February 22, 2012
Paul W. Whetsell

/s/ Paul C. Saville	Principal Executive Officer	February 22, 2012
Paul C. Saville


/s/ Dennis M. Seremet	Principal Financial Officer	February 22, 2012
Dennis M. Seremet

/s/ Robert W. Henley	Principal Accounting Officer	February 22, 2012
Robert W. Henley

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited the accompanying consolidated balance sheets of NVR, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NVR, Inc. as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NVR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting_._

KPMG LLP

McLean, Virginia

February 22, 2012

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited NVR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NVR, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, NVR, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NVR, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 22, 2012 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

McLean, Virginia

February 22, 2012

NVR, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)


	December 31,
	2011		2010
ASSETS

*Homebuilding:*
Cash and cash equivalents	$	475,566	$	1,190,731
Receivables		6,789		6,948
Inventory:
Lots and housing units, covered under sales agreements with customers		363,833		275,272
Unsold lots and housing units		82,578		70,542
Land under development		78,045		78,058
Manufacturing materials and other		8,694		7,457

		533,150		431,329

Assets related to consolidated variable interest entity		20,182		22,371
Contract land deposits, net		131,930		100,786
Property, plant and equipment, net		23,243		19,523
Reorganization value in excess of amounts allocable to identifiable assets, net		41,580		41,580
Deferred tax assets, net		155,881		184,930
Other assets		112,997		58,075

		1,501,318		2,056,273


*Mortgage Banking:*
Cash and cash equivalents		4,766		2,661
Mortgage loans held for sale, net		252,352		177,244
Property and equipment, net		1,694		950
Reorganization value in excess of amounts allocable to identifiable assets, net		7,347		7,347
Other assets		12,008		15,586

		278,167		203,788

Total assets	$	1,779,485	$	2,260,061


						(Continued)

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Balance Sheets (Continued)

(in thousands, except share and per share data)


	December 31,
	2011			2010
LIABILITIES AND SHAREHOLDERS’ EQUITY

*Homebuilding:*
Accounts payable	$	125,649		$	115,578
Accrued expenses and other liabilities		183,810			237,052
Liabilities related to consolidated variable interest entity		1,013			500
Non-recourse debt related to consolidated variable interest entity		4,983			7,592
Customer deposits		61,223			53,705
Other term debt		1,613			1,751

		378,291			416,178

*Mortgage Banking:*
Accounts payable and other liabilities		26,395			13,171
Note payable		—			90,338

		26,395			103,509

Total liabilities		404,686			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 December 31, 2011 and 2010, respectively		206			206
Additional paid-in-capital		1,072,779			951,234
Deferred compensation trust – 152,964 and 158,894 shares of NVR, Inc. common stock as of December 31, 2011 and 2010, respectively		(25,581	)		(27,582	)
Deferred compensation liability		25,581			27,582
Retained earnings		4,158,492			4,029,072
Less treasury stock at cost – 15,578,565 and 14,894,357 shares as of December 31, 2011 and 2010, respectively		(3,856,678	)		(3,240,138	)

Total shareholders’ equity		1,374,799			1,740,374

Total liabilities and shareholders’ equity	$	1,779,485		$	2,260,061

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Statements of Income

(in thousands, except per share data)


	Year Ended			Year Ended			Year Ended
	December 31, 2011			December 31, 2010			December 31, 2009

*Homebuilding:*
Revenues	$	2,611,195		$	2,980,758		$	2,683,467
Other income		4,301			9,299			8,697
Cost of sales		(2,165,625	)		(2,438,292	)		(2,185,733	)
Selling, general and administrative		(264,266	)		(257,394	)		(233,152	)

Operating income		185,605			294,371			273,279
Interest expense		(1,017	)		(4,903	)		(10,196	)

Homebuilding income		184,588			289,468			263,083


*Mortgage Banking:*
Mortgage banking fees		47,954			61,134			60,381
Interest income		5,702			5,411			2,979
Other income		456			767			629
General and administrative		(30,249	)		(33,261	)		(27,474	)
Interest expense		(875	)		(1,126	)		(1,184	)

Mortgage banking income		22,988			32,925			35,331


*Income before taxes*		207,576			322,393			298,414
Income tax expense		(78,156	)		(116,388	)		(106,234	)


*Net income*	$	129,420		$	206,005		$	192,180


*Basic earnings per share*	$	23.66		$	34.96		$	33.10


*Diluted earnings per share*	$	23.01		$	33.42		$	31.26


*Basic weighted average shares outstanding*		5,469			5,893			5,807


*Diluted weighted average shares outstanding*		5,624			6,165			6,149

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Statements of Shareholders’ Equity

(in thousands)


	Common Stock		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Deferred Compensation Trust			Deferred Compensation Liability			Total

*Balance, December 31, 2008*	$	206	$	722,265		$	3,630,887	$	(2,979,569	)	$	(74,978	)	$	74,978		$	1,373,789

Net income		—		—			192,180		—			—			—			192,180
Deferred compensation activity		—		—			—		—			34,179			(34,179	)		—
Equity-based compensation		—		46,302			—		—			—			—			46,302
Tax benefit from stock options exercised and deferred compensation distributions		—		66,448			—		—			—			—			66,448
Proceeds from stock options exercised		—		78,543			—		—			—			—			78,543
Treasury stock issued upon option exercise		—		(83,027	)		—		83,027			—			—			—

*Balance, December 31, 2009*		206		830,531			3,823,067		(2,896,542	)		(40,799	)		40,799			1,757,262

Net income		—		—			206,005		—			—			—			206,005
Deferred compensation activity		—		—			—		—			13,217			(13,217	)		—
Purchase of common stock for treasury		—		—			—		(417,079	)		—			—			(417,079	)
Equity-based compensation		—		53,136			—		—			—			—			53,136
Tax benefit from stock options exercised and deferred compensation distributions		—		63,558			—		—			—			—			63,558
Proceeds from stock options exercised		—		77,492			—		—			—			—			77,492
Treasury stock issued option exercise		—		(73,483	)		—		73,483			—			—			—

*Balance, December 31, 2010*		206		951,234			4,029,072		(3,240,138	)		(27,582	)		27,582			1,740,374

Net income		—		—			129,420		—			—			—			129,420
Deferred compensation activity		—		—			—		—			2,001			(2,001	)		—
Purchase of common stock for treasury		—		—			—		(689,302	)		—			—			(689,302	)
Equity-based compensation		—		64,473			—		—			—			—			64,473
Tax benefit from stock options exercised and deferred compensation distributions		—		22,835			—		—			—			—			22,835
Proceeds from stock options exercised		—		106,999			—		—			—			—			106,999
Treasury stock issued upon option exercise		—		(72,762	)		—		72,762			—			—			—

*Balance, December 31, 2011*	$	206	$	1,072,779		$	4,158,492	$	(3,856,678	)	$	(25,581	)	$	25,581		$	1,374,799

See notes to consolidated financial statements

NVR, Inc.

Consolidated Statements of Cash Flows

(in thousands)


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009

*Cash flows from operating activities:*
Net income	$	129,420		$	206,005		$	192,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,672			7,263			9,713
Excess income tax benefit from equity-based compensation		(22,835	)		(63,558	)		(66,448	)
Equity-based compensation expense		64,473			53,136			46,302
Contract land deposit impairments (recoveries)		11,241			4,264			(6,464	)
Gain on sale of loans		(34,632	)		(46,225	)		(46,960	)
Gain on sale of fixed assets		(217	)		(167	)		(358	)
Deferred tax expense		23,732			13,558			21,905
Mortgage loans closed		(1,754,655	)		(2,109,505	)		(1,943,074	)
Proceeds from sales of mortgage loans		1,716,966			2,011,765			2,018,151
Principal payments on mortgage loans held for sale		4,271			2,554			2,072
Distribution of earnings from unconsolidated joint ventures		2,347			1,307			—
Net change in assets and liabilities:
Increase in inventory		(99,527	)		(8,783	)		(18,148	)
Increase in contract land deposits		(42,385	)		(53,866	)		(14,848	)
Decrease in receivables		465			1,532			3,682
(Decrease) increase in accounts payable, accrued expenses and customer deposits		(2,977	)		56,752			82,578
Other, net		(896	)		(20,644	)		(38,641	)

Net cash provided by operating activities		1,463			55,388			241,642


*Cash flows from investing activities:*
Purchase of marketable securities		—			(150,000	)		(858,362	)
Redemption of marketable securities at maturity		—			369,535			638,827
Investments in unconsolidated joint ventures		(61,600	)		(2,000	)		—
Distribution of capital from unconsolidated joint ventures		10,653			1,193			—
Purchase of property, plant and equipment		(11,444	)		(6,943	)		(3,044	)
Proceeds from the sale of property, plant and equipment		525			655			962

Net cash (used in) provided by investing activities		(61,866	)		212,440			(221,617	)


*Cash flows from financing activities:*
Purchase of treasury stock		(689,302	)		(417,079	)		—
Net (repayments) borrowings under note payable and credit lines		(90,476	)		77,579			(32,559	)
Repayments under non-recourse debt related to consolidated variable interest entity		(7,958	)		(4,167	)		—
Borrowings under non-recourse debt related to consolidated variable interest entity		5,349			11,759			—
Redemption of senior notes		—			(133,370	)		(29,950	)
Excess income tax benefit from equity-based compensation		22,835			63,558			66,448
Proceeds from the exercise of stock options		106,999			77,492			78,543

Net cash (used in) provided by financing activities		(652,553	)		(324,228	)		82,482


Net (decrease) increase in cash and cash equivalents		(712,956	)		(56,400	)		102,507
Cash and cash equivalents, beginning of year		1,193,750			1,250,150			1,147,643


Cash and cash equivalents, end of year	$	480,794		$	1,193,750		$	1,250,150


								(Continued)

See notes to consolidated financial statements.

NVR, Inc.

Consolidated Statements of Cash Flows (Continued)

(in thousands)


	Year Ended December 31, 2011		Year Ended December 31, 2010			Year Ended December 31, 2009

*Supplemental disclosures of cash flow information:*
Interest paid during the year, net of interest capitalized	$	2,000	$	5,805		$	10,010

Income taxes paid during the year, net of refunds	$	49,763	$	40,669		$	(28,807	)


*Supplemental disclosures of non-cash activities:*
Investment in newly formed consolidated joint venture	$	—	$	(25,214	)	$	—
Change in net consolidated variable interest entities	$	—	$	—		$	(976	)

See notes to consolidated financial statements.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

1.	Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying 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 3 herein for additional information). All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management continually evaluates the estimates used to prepare the consolidated financial statements and updates those estimates as necessary. In general, the Company’s estimates are based on historical experience, on information from third party professionals, and other various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments with original maturities of three months or less. At December 31, 2011, $462 of cash related to a consolidated variable interest entity is included in “Assets related to consolidated variable interest entity” on the accompanying consolidated balance sheet.

The homebuilding segment had restricted cash of $19,119 and $22,889 at December 31, 2011 and 2010, respectively. Restricted cash in both 2011 and 2010 was primarily attributable to holding requirements related to outstanding letters of credit issued under the Company’s letter of credit agreement as discussed further in Note 11 herein. In addition, restricted cash relates to customer deposits for certain home sales. Restricted cash is recorded in “Other assets” in the homebuilding section of the accompanying consolidated balance sheets.

The mortgage banking segment had restricted cash of $1,373 and $555 at December 31, 2011 and 2010, respectively, which included amounts collected from customers for in process loans and at closing for mortgage loans held for sale. The mortgage banking segment’s restricted cash is recorded in “Other assets” in the mortgage banking section of the accompanying consolidated balance sheets.

Homebuilding Inventory

The carrying value of inventory is stated at the lower of cost or market value. Cost of lots and completed and uncompleted housing units represent the accumulated actual cost of the units. Field construction supervisors’ salaries and related direct overhead expenses are included in inventory costs. Interest costs are not capitalized into inventory, with the exception of land under development, as applicable (see below). Upon settlement, the cost of the unit is expensed on a specific identification basis. Cost of manufacturing materials is determined on a first-in, first-out basis.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Sold inventory is evaluated for impairment based on the contractual selling price compared to the total estimated cost to construct. Unsold inventory is evaluated for impairment by analyzing recent comparable sales prices within the applicable community compared to the costs incurred to date plus the expected costs to complete. Any calculated impairments are recorded immediately.

Contract Land Deposits

The Company purchases finished lots under fixed price purchase agreements that require deposits that may be forfeited if NVR fails to perform under the contract. The deposits are in the form of cash or letters of credit in varying amounts and represent a percentage of the aggregate purchase price of the finished lots.

NVR maintains an allowance for losses on contract land deposits that reflects the Company’s judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, NVR utilizes an Accounting Standards Codification (“ASC”) 450, Contingencies, loss contingency analysis that is conducted each quarter. In addition to considering market and economic conditions, NVR assesses contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either the Company or the developer along with an analysis of the expected outcome of any such default.

NVR’s analysis is focused on whether the Company can sell houses profitably in a particular community in the current market with which the Company is faced. Because the Company does not own the finished lots on which the Company has placed a contract land deposit, if the above analysis leads to a determination that the Company can’t sell homes profitably at the current contractual lot price, the Company then determines whether it will elect to default under the contract, forfeit the deposit and terminate the contract, or whether the Company will attempt to restructure the lot purchase contract, which may require it to forfeit the deposit to obtain contract concessions from a developer. The Company also assesses whether impairment is present due to collectability issues resulting from a developer’s non-performance because of financial or other conditions.

For the years ended December 31, 2011 and 2010, the Company incurred pre-tax charges of approximately $11,200 and $4,300, respectively, related to the impairment of contract land deposits. For the year ended December 31, 2009, the Company had a net pre-tax recovery of approximately $6,500 of contract land deposits previously considered to be uncollectable. These impairment charges and recoveries were recorded in cost of sales on the accompanying consolidated statements of income. The contract land deposit asset on the accompanying consolidated balance sheets is shown net of an approximate $70,300 and $73,500 impairment valuation allowance at December 31, 2011 and 2010, respectively.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Land Under Development

On a very 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.

Land under development, including the land under development held by our unconsolidated joint ventures and the related joint venture investments, is reviewed for potential write-downs when impairment indicators are present. In addition to considering market and economic conditions, the Company assesses land under development impairments on a community-by-community basis, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, and the dollar differential between the projected fully-developed cost of the lots and the current market price for lots. If indicators of impairment are present for a community, NVR performs an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if so, impairment charges are required to be recorded if the fair value of such assets is less than their carrying amounts. For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company’s determination of fair value is primarily based on discounting the estimated future cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams. NVR does not believe that any of the land under development is impaired at this time.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of the assets using the straight-line method. Amortization of capital lease assets is included in depreciation expense. Model home furniture and fixtures are generally depreciated over a two-year period, office facilities and other equipment are depreciated over a period from three to ten years, manufacturing facilities are depreciated over periods of from five to forty years and property under capital leases is depreciated in a manner consistent with the Company’s depreciation policy for owned assets, or the lease-term if shorter.

Intangible Assets

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 its annual assessment of impairment and management determined that there was no impairment of excess reorganization value.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Warranty/Product Liability Accruals

The Company establishes warranty and product liability reserves to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to 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 the Company’s general counsel and outside counsel retained to handle specific product liability cases.

Mortgage Loans Held for Sale, Derivatives and Hedging Activities

NVR originates several different loan products to its customers to finance the purchase of a home through its wholly-owned mortgage subsidiary. NVR sells all of the loans it originates into the secondary market typically within 30 to 60 days from origination. All of the loans that the Company originates are underwritten to the standards and specifications of the ultimate investor. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, VA and FHA. Insofar as the Company underwrites its originated loans to those standards, the Company bears no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. The Company employs a quality control department to ensure that its underwriting controls are effectively operating, and further assesses the underwriting function as part of its assessment of internal controls over financial reporting. The Company maintains an allowance for losses on mortgage loans originated that reflects NVR’s judgment of the present loss exposure in the loans that it has originated and sold. 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 (see Note 13 herein for further information).

Mortgage loans held for sale are recorded at fair value at closing and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold.

In the normal course of business, our 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 December 31, 2011, there were contractual commitments to extend credit to borrowers aggregating $126,929, and open forward delivery sale contracts aggregating $353,555. See Note 12 herein for a description of our fair value accounting calculation.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Earnings per Share

The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Weighted average number of shares outstanding used to calculate basic EPS		5,469,159		5,893,105		5,806,773

Dilutive securities:
Stock options and restricted share units		154,658		271,512		341,996


Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS		5,623,817		6,164,617		6,148,769

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 stock option or 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 or vesting less the actual stock-based compensation expense to be recognized in the income statement.

Stock options issued under equity benefit plans to purchase 467,367; 443,565 and 134,405 shares of common stock were outstanding during the years ended December 31, 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

Revenues-Homebuilding Operations

NVR builds single-family detached homes, townhomes and condominium buildings, which generally are constructed on a pre-sold basis for the ultimate customer. Revenues are recognized at the time the unit is settled and title passes to the customer, adequate cash payment has been received and there is no continuing involvement. In situations where the buyer’s financing is originated by NVR Mortgage Finance, Inc. (“NVRM), a wholly-owned subsidiary of NVR, and the buyer has not made an adequate initial or continuing investment as prescribed by GAAP, the profit on such settlement is deferred until the sale of the related loan to a third-party investor has been completed.

Mortgage Banking Fees

Mortgage banking fees include income earned by NVRM for originating mortgage loans, servicing mortgage loans held on an interim basis, title fees, gains and losses on the sale of mortgage loans and mortgage servicing and other activities incidental to mortgage banking. Mortgage banking fees are generally recognized after the loan has been sold to an unaffiliated, third party investor.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite the Company’s belief that its filing position is supportable, the benefit of that tax position is not recognized in the statements of income. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of the taxing authorities to not seek penalties from the Company for the tax positions it 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. The Company recognizes unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation.

Financial Instruments

Except as otherwise noted herein, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments (see Note 12 herein for further information).

Stock-Based Compensation

The company accounts for its stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires an entity to recognize an expense within its income statement for all share-based payment arrangements, which includes employee stock option and restricted share unit plans. The expense is based on the grant-date fair value of the stock options and restricted share units granted, and is recognized ratably over the requisite service period. The Company calculates the fair value of its non-publicly traded, employee stock options using the Black-Scholes option-pricing model. The grant date fair value of the restricted share units is the closing price of the Company’s common stock on the day immediately preceding the date of grant. The Company’s equity-based compensation programs are accounted for as equity-classified awards. See Note 10 herein for further discussion of stock-based compensation plans.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Comprehensive Income

For the years ended December 31, 2011, 2010 and 2009, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying consolidated financial statements.

Recent Accounting Pronouncements

There have not been any pronouncements issued and implemented during 2011 that we believe will have a material impact on our financial statements.

2.	Segment Information, Nature of Operations, and Certain Concentrations

NVR’s homebuilding operations primarily construct and sell single-family detached homes, townhomes and condominium buildings under four trade names: Ryan Homes, NVHomes, Fox Ridge Homes, and Rymarc Homes. The Ryan Homes, Fox Ridge Homes, and Rymarc Homes products are marketed primarily to first-time homeowners and first-time move-up buyers. The Ryan Homes product is sold in twenty-five metropolitan areas located in Maryland, Virginia, West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Florida, Ohio, New Jersey, Delaware, Indiana, Illinois and Kentucky. The Fox Ridge Homes product is sold solely in the Nashville, TN metropolitan area. The Rymarc Homes product is sold solely in the Columbia, SC metropolitan area. The NVHomes product is sold in the Washington, D.C., Baltimore, MD, Philadelphia, PA and Maryland Eastern Shore metropolitan areas, and is marketed primarily to move-up and up-scale buyers. NVR derived approximately 46% of its 2011 homebuilding revenues in the Washington, D.C. and Baltimore, MD metropolitan areas.

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

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

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, Indiana and Illinois

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

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

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 Senior Notes and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

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


	Year Ended December 31,
	2011		2010		2009
Revenues:
Homebuilding Mid Atlantic	$	1,582,826	$	1,780,521	$	1,661,244
Homebuilding North East		221,146		287,561		254,654
Homebuilding Mid East		549,384		632,377		505,431
Homebuilding South East		257,839		280,299		262,138
Mortgage Banking		47,954		61,134		60,381

Total Consolidated Revenues	$	2,659,149	$	3,041,892	$	2,743,848

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)


	Year Ended December 31,
	2011			2010			2009
Profit:
Homebuilding Mid Atlantic	$	148,373		$	209,496		$	185,861
Homebuilding North East		13,463			25,090			19,572
Homebuilding Mid East		27,194			56,882			38,012
Homebuilding South East		14,162			10,870			7,384
Mortgage Banking		26,102			35,704			38,138

Total Segment Profit		229,294			338,042			288,967

Contract land deposit impairment reserve (1)		(2,878	)		16,206			42,939
Equity-based compensation expense (2)		(64,473	)		(53,136	)		(46,302	)
Corporate capital allocation (3)		71,226			65,971			61,753
Unallocated corporate overhead (4)		(45,355	)		(55,992	)		(44,103	)
Consolidation adjustments and other		20,477			15,848			4,970
Corporate interest expense (5)		(715	)		(4,546	)		(9,810	)

Reconciling items sub-total		(21,718	)		(15,649	)		9,447

Consolidated Income before Taxes	$	207,576		$	322,393		$	298,414


	As of December 31,
	2011			2010			2009
Assets:
Homebuilding Mid Atlantic	$	626,157		$	492,148		$	448,019
Homebuilding North East		55,948			35,827			54,132
Homebuilding Mid East		94,593			78,246			94,225
Homebuilding South East		63,263			43,041			37,663
Mortgage Banking		270,820			196,441			52,696

Total Segment Assets		1,110,781			845,703			686,735

Consolidated variable interest entities		20,182			22,371			70,430
Cash and cash equivalents		475,566			1,190,731			1,248,689
Marketable securities		—			—			219,535
Deferred taxes		155,881			184,930			200,340
Intangible assets		48,927			48,927			48,927
Contract land deposit reserve		(70,333	)		(73,517	)		(94,940	)
Consolidation adjustments and other		38,481			40,916			16,054

Reconciling items sub-total		668,704			1,414,358			1,709,035

Consolidated Assets	$	1,779,485		$	2,260,061		$	2,395,770


	Year Ended December 31,
	2011		2010		2009
Interest Income:
Mortgage Banking	$	5,702	$	5,411	$	2,979

Total Segment Interest Income		5,702		5,411		2,979
Other unallocated interest income		3,202		5,301		5,407

Consolidated Interest Income	$	8,904	$	10,712	$	8,386

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)


	Year Ended December 31,
	2011			2010			2009
Interest Expense:
Homebuilding Mid Atlantic	$	48,971		$	45,082		$	41,130
Homebuilding North East		5,776			5,936			6,475
Homebuilding Mid East		11,080			9,669			8,873
Homebuilding South East		5,701			5,641			5,661
Mortgage Banking		875			1,126			1,184

Total Segment Interest Expense		72,403			67,454			63,323
Corporate capital allocation		(71,226	)		(65,971	)		(61,753	)
Senior Note and other interest		715			4,546			9,810

Consolidated Interest Expense	$	1,892		$	6,029		$	11,380


Depreciation and Amortization:
Homebuilding Mid Atlantic	$	3,353		$	3,369		$	4,351
Homebuilding North East		409			515			612
Homebuilding Mid East		1,398			1,224			1,233
Homebuilding South East		729			758			1,163
Mortgage Banking		295			362			357

Total Segment Depreciation and Amortization		6,184			6,228			7,716
Unallocated corporate		488			1,035			1,997

Consolidated Depreciation and Amortization	$	6,672		$	7,263		$	9,713


Expenditures for Property and Equipment:
Homebuilding Mid Atlantic	$	3,784		$	2,165		$	1,511
Homebuilding North East		424			440			414
Homebuilding Mid East		5,611			2,247			741
Homebuilding South East		369			583			269
Mortgage Banking		1,049			883			87

Total Segment Expenditures for Property and Equipment		11,237			6,318			3,022
Unallocated corporate		207			625			22

Consolidated Expenditures for Property and Equipment	$	11,444		$	6,943		$	3,044

(1)	This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. The 2011 and 2010 variances are attributable to year over year reductions in amounts allocated to our operating segments that had been previously reserved.

(2)

The increase in equity-based compensation expense in 2011 compared to the prior year was primarily due to recognizing a full year of expense in 2011 related to non-qualified stock options and restricted share units granted in the second quarter of 2010 under the 2010 Equity Incentive Plan. In addition, stock-based compensation expense in 2010 was reduced by an approximate $7,000 pre-tax reversal of stock-based compensation expense attributable to the adjustment of our option forfeiture estimates based on our actual forfeiture experience.

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


	Year Ended December 31,
	2011		2010		2009
Homebuilding Mid Atlantic	$	48,697	$	44,758	$	40,765
Homebuilding North East		5,763		5,926		6,473
Homebuilding Mid East		11,074		9,657		8,863
Homebuilding South East		5,692		5,630		5,652

Total	$	71,226	$	65,971	$	61,753

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(4)

The decrease in unallocated corporate overhead in 2011 from 2010 was attributable to reduced management incentive costs year over year. The increase in costs in 2010 from 2009 was attributable to increased personnel levels year over year and to higher management incentive costs as the 2009 incentive plan was limited to a payout of 50% of the maximum bonus opportunity, while no similar restrictions were imposed on 2010 incentive compensation.

(5)	The decrease in corporate interest expense in 2011 from 2010 was attributable to the redemption upon maturity of the outstanding senior notes in the second quarter of 2010 and the termination of the working capital credit facility in the fourth quarter of 2010.

3.	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 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.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

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 of December 31, 2011, NVR controlled approximately 48,200 lots with deposits in cash and letters of credit totaling approximately $202,300 and $3,200, 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. NVR’s total risk of loss related to contract land deposits as of December 31, 2011 and 2010 was as follows:


	December 31, 2011			December 31, 2010

Contract land deposits	$	202,263		$	174,303
Loss reserve on contract land deposits		(70,333	)		(73,517	)

Contract land deposits, net		131,930			100,786

Contingent obligations in the form of letters of credit		3,228			6,610
Contingent specific performance obligations (1)		8,526			1,944

Total risk of loss	$	143,684		$	109,340

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(1)	At December 31, 2011 and 2010, the Company was committed to purchase 92 and 43 finished lots under specific performance obligations, respectively.

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, in addition to any deposits placed 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 joint venture, 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. At December 31, 2011, the joint venture controlled approximately 5,500 lots within the nine parcels, of which approximately 2,800 lots were under contract with NVR and approximately 2,700 were not under contract.

At December 31, 2011, the Company had an aggregate investment totaling approximately $89,500 in four JVs, including the JV with Morgan Stanley described above, that are expected to produce approximately 6,700 finished lots. In addition, at December 31, 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 $75,300 and is reported in the “Other assets” line item on the accompanying 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 December 31, 2011 and 2010 of the consolidated JV were as follows:


	December 31, 2011		December 31, 2010

Cash	$	462	$	358
Restricted cash		503		501
Other assets		125		126
Land under development		19,092		21,386

Total assets	$	20,182	$	22,371


Debt	$	4,983	$	7,592
Accrued expenses		108		59
Equity		15,091		14,720

Total liabilities and equity	$	20,182	$	22,371

At December 31, 2010, the Company had an aggregate investment totaling approximately $37,200 in three JVs, inclusive of the consolidated JV discussed above, and additional funding commitments in the aggregate totaling $5,000 to one of the three JVs. The three JVs were expected to produce approximately 1,100 finished lots.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Distributions received from joint ventures are considered operating cash flows within the accompanying statements of cash flows to the extent of NVR’s cumulative share of joint venture income. Any distributions received in excess of that amount are considered a return of capital, and is classified as cash flows from investing activities.

4.	Land Under Development

As of December 31, 2011, NVR directly owned three separate raw parcels of land with a carrying value of $78,045 that it intends to develop into approximately 800 finished lots for use in its homebuilding operations. All of the raw parcels are located in the Washington, D.C. metropolitan area and none of them had any indicators of impairment as of December 31, 2011. Based on current market conditions, NVR may, on a very limited basis, directly acquire additional raw parcels to develop into finished lots. As of December 31, 2010, NVR directly owned four separate raw parcels of land with a carrying value of approximately $78,000 and expected to produce approximately 890 finished lots.

5.	Related Party Transactions

During the year ended December 31, 2011, NVR entered into new forward lot purchase agreements to purchase finished building lots for a total purchase price of approximately $31,000 with Elm Street Development, Inc. (“Elm Street”), which is controlled by one of our directors, Mr. Moran. The independent members of our Board approved these transactions. During 2011, 2010 and 2009, NVR purchased developed lots at market prices from Elm Street for approximately $36,100, $54,600 and $46,700. The Company also continues to control a parcel of raw land expected to yield at least 1,000 finished lots through a joint venture entered into with Elm Street during 2009. NVR did not make any additional capital contributions to that joint venture in 2011 or 2010. Further, during 2010, NVR also purchased a zoned, unimproved raw parcel of land from Elm Street for a total purchase price of approximately $49,000 which is expected to produce approximately 600 finished lots. During 2011, we paid Elm Street approximately $143 to manage the development of that property. Approximately 100 of these lots were finished and the related cost was transferred from “Land under development” to “Unsold lots and housing units” on the accompanying consolidated balance sheet. As of December 31, 2011, approximately $43,000 in costs related to the purchase and development of this property were recorded in “Land under development” on the accompanying consolidated balance sheet.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

6.	Property, Plant and Equipment, net


	December 31,
	2011			2010
*Homebuilding:*
Office facilities and other	$	14,584		$	13,554
Model home furniture and fixtures		16,950			16,545
Manufacturing facilities		33,373			28,398
Property under capital leases		3,976			3,976

		68,883			62,473
Less: accumulated depreciation		(45,640	)		(42,950	)

	$	23,243		$	19,523


*Mortgage Banking:*
Office facilities and other	$	4,833		$	4,088
Less: accumulated depreciation		(3,139	)		(3,138	)

	$	1,694		$	950

Certain property, plant and equipment listed above is collateral for certain debt of NVR as more fully described in Note 7 herein.

7.	Debt


	December 31,
	2011		2010
*Homebuilding:*
Other term debt:
Capital lease obligations due in monthly installments through 2014 (a)	$	1,613	$	1,751


*Mortgage Banking:*
Master repurchase agreement (b)	$	—	$	90,338

(a)	The capital lease obligation has a fixed interest rate of 13.0% and is collateralized by buildings and equipment with a net book value of approximately $495 and $681 at December 31, 2011 and 2010, respectively.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

The following schedule provides future minimum lease payments under the capital lease together with the present value as of December 31, 2011:


Year ending December 31,
2012	$	609
2013		644
2014		725
2015		—
2016		—
Thereafter		—

		1,978
Amount representing interest		(365	)

	$	1,613

(b)	On August 2, 2011, NVRM entered into a revolving mortgage repurchase agreement with U.S. Bank National Association (the “Repurchase Agreement”). The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement provides for loan purchases up to $25,000, subject to certain sub limits. The Repurchase Agreement expires on August 1, 2012.

Advances under the Repurchase Agreement 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 3.75%. 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. At December 31, 2011 there was no debt outstanding under the Repurchase Agreement. There were no borrowing base limitations at December 31, 2011. The average Pricing Rate for amounts outstanding under the previous repurchase agreement at December 31, 2010 was 4.1%.

The Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum net income requirement, and (iv) a maximum leverage ratio requirement. The Company was in compliance with all covenants under the Repurchase Agreement at December 31, 2011.

Maturities with respect to the Company’s debt as of December 31, 2011 are as follows:


Year ending December 31,
2012	$	421
2013		520
2014		672
2015		—
2016		—
Thereafter		—

Total	$	1,613

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

8.	Common Stock

There were 4,977,633 and 5,663,556 common shares outstanding at December 31, 2011 and 2010, respectively. As of December 31, 2011, NVR had reacquired a total of approximately 22,400,000 shares of NVR common stock at an aggregate cost of approximately $4,526,000 since December 31, 1993. The Company repurchased 1,017,588 shares at an aggregate purchase price of approximately $689,300 during 2011. The Company repurchased 644,562 shares at an aggregate purchase price of approximately $417,100 during 2010 and did not repurchase any shares during 2009.

Since 1999, the Company has issued shares from the treasury for all stock option exercises. There have been approximately 6,840,000 common shares reissued from the treasury in satisfaction of stock option exercises and other employee benefit obligations. The Company issued 333,380; 359,765 and 418,775 such shares during 2011, 2010 and 2009, respectively.

9.	Income Taxes

The provision for income taxes consists of the following:


	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
*Current:*
Federal	$	45,112	$	96,449	$	69,911
State		8,004		12,468		8,556

*Deferred:*
Federal		21,492		6,352		23,474
State		3,548		1,119		4,293

	$	78,156	$	116,388	$	106,234

In addition to amounts applicable to income before taxes, the following income tax benefits were recorded in shareholders’ equity:


	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Income tax benefits arising from compensation expense for tax purposes in excess of amounts recognized for financial statement purposes	$	22,835	$	63,558	$	66,448

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Deferred income taxes on NVR’s consolidated balance sheets were comprised of the following:


	December 31,
	2011		2010
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	83,744	$	96,459
Deferred compensation		10,939		11,642
Equity-based compensation expense		35,417		49,469
Inventory		6,622		5,495
Unrecognized tax benefit		25,594		24,514
Other		4,228		5,856

Total deferred tax assets		166,544		193,435
Less: deferred tax liabilities		2,128		948

Net deferred tax position	$	164,416	$	192,487

Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes, stock option expense and deferred compensation, which are not currently deductible for tax return purposes.

Management believes that the Company will have sufficient available carry-backs and future taxable income to make it more likely than not that the net deferred tax assets will be realized. Federal taxable income is estimated to be $72,351 for the year ended December 31, 2011, and was $117,801 for the year ended December 31, 2010.

A reconciliation of income tax expense in the accompanying consolidated statements of income to the amount computed by applying the statutory Federal income tax rate of 35% to income before taxes is as follows:


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Income taxes computed at the Federal statutory rate	$	72,652		$	112,838		$	104,445
State income taxes, net of Federal income tax benefit		8,071			7,731			7,467
Other, net		(2,567	)		(4,181	)		(5,678	)

	$	78,156		$	116,388		$	106,234

The Company’s effective tax rate in 2011, 2010 and 2009 was 37.65%, 36.10% and 35.60%, respectively. The 2009 effective tax rate was favorably impacted by the expiration of certain tax reserves, the receipt of tax refunds from the amendment of certain prior year federal and state returns, and a tax benefit related to compensation expense recorded for certain outstanding option grants that were previously considered to be a permanent non-deductible tax difference.

The Company files a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where the Company maintains operations. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2008.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	Year Ended December 31, 2011			Year Ended December 31, 2010
Balance at beginning of year	$	44,722		$	48,669
Additions for tax positions for prior years		—			—
Additions based on tax positions related to the current year		3,291			4,092
Reductions for tax positions of prior years		(2,964	)		(8,039	)
Settlements		—			—

Balance at end of year	$	45,049		$	44,722

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (on a net basis) is $29,283.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2011, 2010 and 2009 the Company accrued interest on unrecognized tax benefits in the amounts of $2,076, $573 and $932, respectively. As of December 31, 2011 and 2010, the Company had a total of $24,797 and $22,721, respectively, of accrued interest on unrecognized tax benefits which are included in “Accrued expenses and other liabilities” on the accompanying consolidated balance sheets. 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 it 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.

The Company believes that within the next 12 months, it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $3,945 due to statute expiration in various state jurisdictions. The Company is currently under audit by the states of New Jersey, South Carolina and Tennessee.

10.	Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

Equity-Based Compensation Plans

NVR’s equity-based compensation plans provide for the granting of non-qualified stock options to purchase shares of NVR common stock (“Options”) and restricted share units (“RSUs”) to key management employees, including executive officers and Board members, of the Company. The exercise price of Options granted is equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant, and RSUs are issued at a $0 exercise price. Options are granted for a ten-year term and typically vest in separate tranches over periods of 3 to 6 years, depending upon the plan from which the shares were granted, based solely on continued employment or continued service as a Director. RSUs generally vest in separate tranches over a period of 2 years, based solely on continued employment or continued service as a Director. At December 31, 2011, there was an aggregate of 737,702 options and 154,483 RSUs outstanding, and there were an additional 239,646 available shares to be granted under existing equity-based compensation plans. Of the available shares to be granted, up to 85,517 shares may be granted in the form of RSUs.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

The following is a summary description of each of the Company’s equity-based compensation plans for any plan with grants outstanding at December 31, 2011:

	•		During 1996, the Company’s shareholders approved the Board of Directors’ adoption of the Management Long-Term Stock Option Plan (the “1996 Option Plan”). There were 2,000,000 Options authorized under the Management Long Term Stock Option Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The outstanding Options expire 10 years after the dates upon which they were granted, and vest annually in 25% increments beginning on December 31, 2006, or later depending on the date of grant. There are no grants remaining available to issue from the 1996 Option Plan.

	•		During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Management Long-Term Stock Option Plan (the “1998 Option Plan”). There were 1,000,000 Options authorized under the 1998 Option Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The Options expire 10 years after the dates upon which they were granted. The outstanding Options generally vest in 25% increments beginning on December 31, 2006, or later depending on the date of grant. There are no grants remaining available to issue from the 1998 Option Plan.

	•		During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Directors’ Long Term Stock Option Plan (the “1998 Directors’ Plan”). There were 150,000 Options to purchase shares of common stock authorized for grant to the Company’s outside directors under the 1998 Directors’ Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The Options were granted for a 10-year period and generally vest annually in twenty-five percent (25%) increments beginning on December 31, 2006, or later as determined by the date of grant. There are no grants remaining available to issue from the 1998 Directors’ Plan.

	•		During 2000, the Board approved the 2000 Broadly-Based Stock Option Plan (the “2000 Plan”). The Company did not seek approval from its shareholders for the 2000 Plan. There were 2,000,000 Options authorized under the 2000 Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. Grants under the 2000 Plan were available to both employees and members of the Board. The distribution of Options to key employees and members of the board, in aggregate, were limited to 50% or less of the total options authorized under the 2000 Plan. Options granted under the 2000 Plan expire 10 years from the date of grant, and generally vest annually in 25% increments beginning on December 31, 2006, or later depending on the date of grant. There are no grants remaining available to issue from the 2000 Plan.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

	•		During 2010, the Company’s shareholders approved the Board of Directors’ adoption of the 2010 Equity Incentive Plan (the “2010 Equity Plan”). 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. All Options are granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant, and all RSUs are granted at a $0 exercise price. The Options are granted for a 10-year period. The RSUs generally vest annually in 50% increments beginning on December 31, 2011, or later as determined by the date of grant, and the Options generally vest as to 50% of the underlying shares in annual increments beginning on December 31, 2013, or later as determined by the date of grant. At December 31, 2011, there were 239,646 shares available to be granted under the 2010 Equity Plan, of which 85,517 may be granted as RSUs.

During 2011, the Company issued 39,960 Options and 11,394 RSUs under the 2010 Equity Plan. The exercise price of each Option granted was equal to the closing price of the Company’s common stock on the day immediately preceding the date of grant, and each RSU was granted at a $0 exercise price. Each Option was granted for a term of ten (10) years from the date of grant. The majority of the Options and RSUs granted under the 2010 Equity Plan will vest in 50% increments with the beginning vesting dates ranging from December 31, 2013 through December 31, 2015 for the Options and December 31, 2011 through December 31, 2015 for the RSUs. All Options and RSUs granted are subject to the grantee’s continued employment or continued service as a Director, as applicable.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

The following table provides additional information relative to NVR’s equity-based compensation plans for the year ended December 31, 2011:


	Options			Weighted Average Exercise Price		Weighted Average Remaining Contract Life (Years)		Aggregate Intrinsic Value
Stock Options
Outstanding at beginning of period		1,053,425		$	529.18
Granted		39,960			711.86
Exercised		(333,380	)		324.92
Forfeited		(21,835	)		669.63
Expired		(468	)		769.40

Outstanding at end of period		737,702		$	627.08		6.9	$	43,465

Exercisable at end of period		258,900		$	509.73		4.1	$	45,636


RSUs (1)
Outstanding at beginning of period		149,727
Granted		11,394
Forfeited		(6,638	)

Outstanding at end of period		154,483						$	105,975

Vested at end of period		73,130						$	50,167

(1)	RSU grants were issued at a $0 exercise price.

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 2011, 2010 and 2009 were estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:


	2011		2010		2009
Estimated option life		4.79 years		5.02 years		4.70 years
Risk free interest rate (range)		0.44% - 2.86%		0.99% - 2.84%		1.78% - 3.65%
Expected volatility (range)		31.29% - 37.43%		34.34% - 41.12%		31.83% - 41.72%
Expected dividend rate		0.00%		0.00%		0.00%
Weighted average grant-date fair value per share of options granted	$	230.38	$	256.35	$	187.10

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 $714.59 per share.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

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 equity-based compensation and requires that the compensation costs of equity-based awards be recognized net of estimated forfeitures. The impact on compensation costs due to changes in the expected forfeiture rate will be recognized in the period that they become known. In 2011, 2010, and 2009, the Company recognized $64,473, $53,136 and $46,302 in equity-based compensation costs, respectively, and approximately $23,600, $19,200 and $18,000 tax benefit related to equity-based compensation costs, respectively.

As of December 31, 2011, the total unrecognized compensation cost for all outstanding Options and RSUs equals approximately $116,672, 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, 2016. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 1.7 years.

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 of treasury shares acquired. During the years ended December 31, 2011, 2010 and 2009, options to purchase shares of the Company’s common stock of 333,380; 359,765 and 418,775 were exercised. Information with respect to the exercised options is as follows:


	2011		2010		2009
Aggregate exercise proceeds (1)	$	108,322	$	78,626	$	79,157
Aggregate intrinsic value on exercise dates	$	142,381	$	165,007	$	135,652

(1)	Aggregate exercise proceeds include the option exercise price received in cash or the fair market value of NVR stock surrendered by the optionee in lieu of cash.

Profit Sharing Plans

NVR has a trustee-administered, profit sharing retirement plan (the “Profit Sharing Plan”) and an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees. The Profit Sharing Plan and the ESOP provide for annual discretionary contributions in amounts as determined by the NVR Board of Directors. The combined plan contribution for the years ended December 31, 2011, 2010 and 2009 was $6,616, $6,567 and $6,447, respectively. The ESOP purchased approximately 9,300 and 8,700 shares of NVR common stock in the open market for the 2011 and 2010 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2011, all shares held by the ESOP had been allocated to participants’ accounts. The 2011 plan year contribution was funded and fully allocated to participants in February 2012.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Deferred Compensation Plans

The Company has two deferred compensation plans (“Deferred Comp Plans”). The specific purpose of the Deferred Comp Plans is to i) establish a vehicle whereby named executive officers may defer the receipt of salary and bonus that otherwise would be nondeductible for Company tax purposes into a period where the Company would realize a tax deduction for the amounts paid, and ii) to enable certain of our employees who are subject to the Company’s stock holding requirements to acquire shares of our common stock on a pre-tax basis in order to more quickly meet, and maintain compliance with those stock holding requirements. Amounts deferred into the Deferred Comp Plans are invested in NVR common stock, held in a rabbi trust account, and are paid out in a fixed number of shares upon expiration of the deferral period.

The rabbi trust account held 152,964 and 158,894 shares of NVR common stock as of December 31, 2011 and 2010, respectively. During 2011, 5,930 shares of NVR common stock were issued from the rabbi trust related to deferred compensation for which the deferral period ended. There were no shares of NVR common stock contributed to the rabbi trust in 2011 or 2010. Shares held by the Deferred Comp Plan are treated as outstanding shares in the Company’s earnings per share calculation for each of the years ended December 31, 2011, 2010 and 2009.

11.	Commitments and Contingent Liabilities

NVR is committed under multiple non-cancelable operating leases involving office space, model homes, manufacturing facilities, automobiles and equipment. Future minimum lease payments under these operating leases as of December 31, 2011 are as follows:


Year ended December 31,
2012	$	16,983
2013		11,929
2014		9,803
2015		7,219
2016		5,659
Thereafter		14,351

		65,944
Sublease income		(927	)

	$	65,017

Total rent expense incurred under operating leases was approximately $33,607, $33,172 and $36,699 for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company 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 the Company 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. The Company believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

ownership and land development. The Company generally seeks to maintain control over a supply of lots believed to be suitable to meet its five-year business plan. At December 31, 2011, assuming that contractual development milestones are met, the Company is committed to placing additional forfeitable deposits with land developers under existing lot option contracts of $47,525. The Company also has eight specific performance contracts pursuant to which the Company is committed to purchasing 92 finished lots at an aggregate purchase price of approximately $8,500.

During the ordinary course of operating the mortgage banking and homebuilding businesses, the Company is required to enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize its obligations under various contracts. The Company had approximately $46,300 of contingent obligations under such agreements (including $10,623 for letters of credit issued under an uncommitted, collateralized letter of credit facility) as of December 31, 2011. The Company believes it will fulfill its obligations under the related contracts and does not anticipate any material losses under these bonds or letters of credit.

The following table reflects the changes in the Company’s warranty reserve (see Note 1 herein for further discussion of warranty/product liability reserves):


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Warranty reserve, beginning of year	$	69,787		$	64,417		$	68,084
Provision		37,040			44,633			35,688
Payments		(42,819	)		(39,263	)		(39,355	)

Warranty reserve, end of year	$	64,008		$	69,787		$	64,417

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 three 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 on the accompanying consolidated balance sheets.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

In June 2010, the Company received a Request for Information from the United States Environmental Protection Agency (“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 in New York and New Jersey. The Company cooperated with this request, and provided information to the EPA. The Company has since been informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that the Company meet with the government to discuss the status of the case. A meeting took place in late January, 2012 with representatives from both the EPA and DOJ. It is as yet unclear what next steps the DOJ will take in the matter. The Company intends to continue cooperating with any future EPA and/or DOJ 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 August 2011, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) notified the Company that it was initiating an investigation to determine the Company’s compliance with the Fair Standards Labor Act (“FSLA”). In the notice, the DOL requested certain information, including payroll data for a two year period and multiple community-specific items related to the Company’s homebuilding operations. The Company has cooperated with this information request, has either provided or made available the information that the DOL has requested and expects to continue to cooperate with the DOL’s investigation. The Company believes that its payroll practices are in compliance with the FSLA. At this time, the Company cannot predict the outcome of this investigation, nor can it reasonably estimate the potential costs that may be associated with its eventual resolution.

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.

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

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

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 December 31, 2011, there were contractual commitments to extend credit to borrowers aggregating $126,929 and open forward delivery contracts aggregating $353,555.

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 63 basis points of the loan amount as of December 31, 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.

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 $252,352 included on the accompanying consolidated balance sheet has been increased by $1,526 from the aggregate principal balance of $250,826.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

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


	Balance Sheet Location	Fair Value December 31, 2011
Derivative Assets:
Rate Lock Commitments	NVRM - Other assets	$	833


Derivative Liabilities:
Forward Sales Contracts	NVRM - Accounts payable and other liabilities	$	2,430

The fair value measurement as of December 31, 2011 was as follows:


	Notional or Principal Amount		Assumed Gain (Loss) From Loan Sale			Interest Rate Movement Effect		Servicing Rights Value		Security Price Change			Total Fair Value Measurement Gain/(Loss)
Rate lock commitments	$	126,929	$	(393	)	$	548	$	678	$	—		$	833
Forward sales contracts	$	353,555		—			—		—		(2,430	)		(2,430	)
Mortgages held for sale	$	250,826		(842	)		720		1,648		—			1,526


Total Fair Value Measurement, December 31, 2011			$	(1,235	)	$	1,268	$	2,326	$	(2,430	)	$	(71	)

For the years ended December 31, 2011 and 2010, NVRM recorded fair value adjustment losses of $1,080 and $335, respectively, and for the year ended December 31, 2009, recorded a fair value adjustment gain of $437. Unrealized losses/gains from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, security price fluctuations, and the volume and product mix of the Company’s closed loans and locked loan commitments.

13.	Mortgage Loan Loss Allowance

During the years ended December 31, 2011, 2010 and 2009, the Company recorded pre-tax charges for loan losses related to mortgage loans sold of approximately $5,100, $6,200 and $200, respectively. Included in the Mortgage Banking segment’s “Accounts payable and other liabilities” line item on the accompanying consolidated balance sheets is a mortgage loan loss allowance equal to approximately $12,850 and $8,200 at December 31, 2011 and 2010, respectively.

14.	Quarterly Results (unaudited)

The following table sets forth unaudited selected financial data and operating information on a quarterly basis for the years ended December 31, 2011 and 2010.

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)


	Year Ended December 31, 2011
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
Revenues-homebuilding operations	$	728,808	$	696,980	$	682,663	$	502,744
Gross profit – homebuilding operations	$	112,086	$	124,598	$	124,062	$	84,824
Mortgage banking fees	$	12,480	$	10,496	$	13,218	$	11,760
Net income	$	32,392	$	43,409	$	38,445	$	15,174
Diluted earnings per share	$	6.32	$	7.98	$	6.48	$	2.52
Contracts for sale, net of cancellations (units)		2,158		2,218		2,468		2,403
Settlements (units)		2,391		2,255		2,207		1,634
Backlog, end of period (units)		3,676		3,909		3,946		3,685
Loans closed	$	520,919	$	489,866	$	504,116	$	353,571


	Year Ended December 31, 2010
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
Revenues-homebuilding operations	$	794,470	$	661,935	$	946,972	$	577,381
Gross profit – homebuilding operations	$	139,505	$	121,152	$	175,497	$	106,312
Mortgage banking fees	$	16,535	$	14,234	$	17,532	$	12,833
Net income	$	58,698	$	43,944	$	71,276	$	32,087
Diluted earnings per share	$	9.96	$	7.31	$	11.13	$	5.01
Contracts for sale, net of cancellations (units)		1,765		2,151		2,559		2,940
Settlements (units)		2,639		2,127		3,345		1,919
Backlog, end of period (units)		2,916		3,790		3,766		4,552
Loans closed	$	597,949	$	497,404	$	706,551	$	418,042

Previous: Item 14. Principal Accountant Fees and Services.