Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PULTEGROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and 2013

($000’s omitted, except per share data)

	2014				2013
ASSETS
Cash and equivalents	$	1,292,862			$	1,580,329
Restricted cash	16,358				72,715
House and land inventory	4,392,100				3,978,561
Land held for sale	101,190				61,735
Land, not owned, under option agreements	30,186				24,024
Residential mortgage loans available-for-sale	339,531				287,933
Investments in unconsolidated entities	40,368				45,323
Other assets	513,032				460,621
Intangible assets	123,115				136,148
Deferred tax assets, net	1,720,668				2,086,754
	$	8,569,410			$	8,734,143
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, including book overdrafts of $32,586 and $35,827 in 2014 and 2013, respectively	$	270,516			$	202,736
Customer deposits	142,642				134,858
Accrued and other liabilities	1,343,774				1,377,750
Income tax liabilities	48,722				206,015
Financial Services debt	140,241				105,664
Senior notes	1,818,561				2,058,168
Total liabilities	3,764,456				4,085,191
Shareholders’ equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued	$	—			$	—
Common stock, $0.01 par value; 500,000,000 shares authorized, 369,458,530 and 381,299,600 shares issued and outstanding at December 31, 2014 and 2013, respectively	3,695				3,813
Additional paid-in capital	3,072,996				3,052,016
Accumulated other comprehensive loss	(690		)		(795		)
Retained earnings	1,728,953				1,593,918
Total shareholders’ equity	4,804,954				4,648,952
	$	8,569,410			$	8,734,143

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2014, 2013, and 2012

(000’s omitted, except per share data)

	2014				2013				2012
Revenues:
Homebuilding
Home sale revenues	$	5,662,171			$	5,424,309			$	4,552,412
Land sale revenues	34,554				114,335				106,698
	5,696,725				5,538,644				4,659,110
Financial Services	125,638				140,951				160,888
Total revenues	5,822,363				5,679,595				4,819,998
Homebuilding Cost of Revenues:
Home sale cost of revenues	4,343,249				4,310,528				3,833,451
Land sale cost of revenues	23,748				104,426				94,880
	4,366,997				4,414,954				3,928,331
Financial Services expenses	71,239				92,379				135,511
Selling, general, and administrative expenses	667,815				568,500				514,457
Other expense, net	38,745				80,753				66,298
Interest income	(4,632		)		(4,395		)		(4,913		)
Interest expense	849				712				819
Equity in earnings of unconsolidated entities	(8,408		)		(1,130		)		(4,059		)
Income before income taxes	689,758				527,822				183,554
Income tax expense (benefit)	215,420				(2,092,294		)		(22,591		)
Net income	$	474,338			$	2,620,116			$	206,145
Net income per share:
Basic	$	1.27			$	6.79			$	0.54
Diluted	$	1.26			$	6.72			$	0.54
Cash dividends declared	$	0.23			$	0.15			$	—
Number of shares used in calculation:
Basic	370,377				383,077				381,562
Effect of dilutive securities	3,725				3,789				3,002
Diluted	374,102				386,866				384,564

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2014, 2013, and 2012

(000’s omitted)

	2014				2013				2012
Net income	$	474,338			$	2,620,116			$	206,145
Other comprehensive income, net of tax:
Change in value of derivatives	105				197				314
Other comprehensive income	105				197				314
Comprehensive income	$	474,443			$	2,620,313			$	206,459

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 2014, 2013, and 2012

(000’s omitted, except per share data)

	Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Accumulated Deficit)				Total
Shares			$
Shareholders' Equity, January 1, 2012	382,608			$	3,826			$	2,986,240			$	(1,306	)		$	(1,050,145	)		$	1,938,615
Stock option exercises	2,877			29				32,780				—				—				32,809
Stock awards, net of cancellations	1,228			12				(12		)		—				—				—
Stock repurchases	(105	)		(1		)		(813		)		—				(147		)		(961		)
Stock-based compensation	—			—				12,694				—				—				12,694
Net income	—			—				—				—				206,145				206,145
Other comprehensive income	—			—				—				314				—				314
Shareholders' Equity, December 31, 2012	386,608			$	3,866			$	3,030,889			$	(992	)		$	(844,147	)		$	2,189,616
Stock option exercises	1,432			14				19,397				—				—				19,411
Stock awards, net of cancellations	1,002			10				(10		)		—				—				—
Dividends declared	—			—				—				—				(57,530		)		(57,530		)
Stock repurchases	(7,742	)		(77		)		(3,063		)		—				(124,521		)		(127,661		)
Stock-based compensation	—			—				14,474				—				—				14,474
Excess tax benefits (deficiencies) from stock-based compensation	—			—				(9,671		)		—				—				(9,671		)
Net income	—			—				—				—				2,620,116				2,620,116
Other comprehensive income	—			—				—				197				—				197
Shareholders' Equity, December 31, 2013	381,300			$	3,813			$	3,052,016			$	(795	)		$	1,593,918			$	4,648,952
Stock option exercises	1,422			14				15,613				—				—				15,627
Stock awards, net of cancellations	(43	)		—				—				—				—				—
Dividends declared	—			—				72				—				(86,442		)		(86,370		)
Stock repurchases	(13,220	)		(132		)		—				—				(252,887		)		(253,019		)
Stock-based compensation	—			—				13,786				—				26				13,812
Excess tax benefits (deficiencies) from stock-based compensation	—			—				(8,491		)		—				—				(8,491		)
Net income	—			—				—				—				474,338				474,338
Other comprehensive income	—			—				—				105				—				105
Shareholders' Equity, December 31, 2014	369,459			$	3,695			$	3,072,996			$	(690	)		$	1,728,953			$	4,804,954

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2014, 2013, and 2012

($000’s omitted)

	2014				2013				2012
Cash flows from operating activities:
Net income	$	474,338			$	2,620,116			$	206,145
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Deferred income tax expense	223,769				(2,096,425		)		—
Write-down of land and deposits and pre-acquisition costs	11,168				9,672				17,195
Depreciation and amortization	39,864				31,587				30,027
Stock-based compensation expense	29,292				30,480				22,897
Loss on debt retirements	8,584				26,930				32,071
Equity in earnings of unconsolidated entities	(8,408		)		(1,130		)		(4,059		)
Distributions of earnings from unconsolidated entities	4,932				2,049				7,488
Other non-cash, net	9,567				9,375				10,356
Increase (decrease) in cash due to:
Restricted cash	1,368				3,387				1,257
Inventories	(346,596		)		265,064				455,223
Residential mortgage loans available-for-sale	(53,734		)		28,448				(60,828		)
Other assets	(46,249		)		(38,190		)		26,014
Accounts payable, accrued and other liabilities	(23,671		)		(17,377		)		20,802
Income tax liabilities	(14,975		)		7,150				(4,448		)
Net cash provided by operating activities	309,249				881,136				760,140
Cash flows from investing activities:
Distributions from unconsolidated entities	8,157				1,001				3,029
Investments in unconsolidated entities	(9		)		(1,677		)		(16,456		)
Net change in loans held for investment	335				(12,265		)		836
Change in restricted cash related to letters of credit	54,989				(4,152		)		28,653
Proceeds from the sale of property and equipment	113				15				7,586
Capital expenditures	(48,790		)		(28,899		)		(13,942		)
Cash used for business acquisition	(82,419		)		—				—
Net cash provided by (used in) investing activities	(67,624		)		(45,977		)		9,706
Cash flows from financing activities:
Financial Services borrowings (repayments)	34,577				(33,131		)		138,795
Other borrowings (repayments)	(250,631		)		(479,827		)		(618,800		)
Stock option exercises	15,627				19,411				32,809
Stock repurchases	(253,019		)		(127,661		)		(961		)
Dividends paid	(75,646		)		(38,382		)		—
Net cash used in financing activities	(529,092		)		(659,590		)		(448,157		)
Net increase (decrease) in cash and equivalents	(287,467		)		175,569				321,689
Cash and equivalents at beginning of period	1,580,329				1,404,760				1,083,071
Cash and equivalents at end of period	$	1,292,862			$	1,580,329			$	1,404,760
Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(4,561	)		$	(171	)		$	(1,470	)
Income taxes paid (refunded), net	$	1,030			$	373			$	(13,322	)

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of significant accounting policies

Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the U.S., and our common stock trades on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of PulteGroup, Inc. and all of its direct and indirect subsidiaries and variable interest entities in which PulteGroup, Inc. is deemed to be the primary beneficiary. All significant intercompany accounts, transactions, and balances have been eliminated in consolidation.

Business acquisition

We acquired certain real estate assets from Dominion Homes in August 2014 for $82.4 million in cash and the assumption of certain payables related to such assets. The net assets acquired are located in Columbus, Ohio, and Louisville and Lexington, Kentucky, and included approximately 8,200 lots, including approximately 400 homes in inventory and control of approximately 900 lots through option contracts. We also assumed a sales order backlog of 622 homes. The acquired net assets were recorded at their estimated fair values. The acquisition of these assets was not material to our results of operations or financial condition.

Use of estimates

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

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission ("SEC").

Cash and equivalents

Cash and equivalents include institutional money market investments and time deposits with a maturity of three months or less when acquired. Cash and equivalents at December 31, 2014 and 2013 also included $5.1 million and $3.7 million, respectively, of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.

Restricted cash

We maintain certain cash balances that are restricted as to their use. Restricted cash includes deposits maintained with financial institutions under cash-collateralized letter of credit agreements (see Note 6) as well as certain other accounts with restrictions, including customer deposits on home sales that are temporarily restricted by regulatory requirements until title transfers to the homebuyer.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Investments in unconsolidated entities

We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of these entities. Certain of these entities sell land to us. We defer the recognition of profits from such activities until the time we ultimately sell the related land.

We evaluate our investments in unconsolidated entities for recoverability in accordance with Accounting Standards Codification (“ASC”) 323, “Investments – Equity Method and Joint Ventures” (“ASC 323”). If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities in the Consolidated Statements of Operations. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. See Note 5.

Intangible assets

Intangible assets consist of tradenames acquired in connection with the 2009 acquisition of Centex Corporation ("Centex") and the 2001 acquisition of Del Webb Corporation ("Del Webb"). These intangible assets were valued at the acquisition date and are being amortized over 20-year lives. The acquired cost and accumulated amortization of our intangible assets were $259.0 million and $135.9 million, respectively, at December 31, 2014, and $259.0 million and $122.9 million, respectively, at December 31, 2013. Amortization expense totaled $13.0 million in 2014, and $13.1 million in 2013 and 2012, and is expected to be $12.9 million in each of the next five years.

The ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If we determine that the carrying values of intangible assets may not be recoverable based upon the existence of one or more indicators of impairment, we use a projected undiscounted cash flow method to determine if impairment exists. If the carrying values of the intangible assets exceed the expected undiscounted cash flows, then we measure impairment as the difference between the fair value of the asset and the recorded carrying value. There were no impairments of tradenames during 2014, 2013, or 2012.

Property and equipment, net, and depreciation

Property and equipment are recorded at cost. Maintenance and repair costs are expensed as incurred. Depreciation is computed by the straight-line method based upon estimated useful lives as follows: model home furniture - two years; office furniture and equipment - three to ten years; and leasehold improvements - life of the lease. Property and equipment are included in other assets and totaled $75.2 million net of accumulated depreciation of $192.2 million at December 31, 2014 and $53.1 million net of accumulated depreciation of $182.0 million at December 31, 2013. Depreciation expense totaled $26.8 million, $18.5 million, and $16.9 million in 2014, 2013, and 2012, respectively.

Advertising costs

Advertising costs are expensed as incurred and totaled $41.8 million, $42.4 million, and $45.8 million, in 2014, 2013, and 2012, respectively.

Employee benefits

We maintain defined contribution retirement plans that cover substantially all of our employees. Company contributions to the plans totaled $12.1 million, $11.0 million, and $9.4 million in 2014, 2013, and 2012, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other expense, net

Other expense, net consists of the following ($000’s omitted):

	2014				2013				2012
Write-offs of deposits and pre-acquisition costs (Note 3)	$	6,099			$	3,122			$	2,278
Loss on debt retirements (Note 6)	8,584				26,930				32,071
Lease exit and related costs	9,609				2,778				7,306
Amortization of intangible assets (Note 1)	13,033				13,100				13,100
Miscellaneous, net (a)	1,420				34,823				11,543
	$	38,745			$	80,753			$	66,298

(a)	Includes charges of $41.2 million in 2013 resulting from a contractual dispute related to a previously completed luxury community (see Note 12) and $5.1 million in 2012 related to the write-down of notes receivable.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares, adjusted for unvested shares, (the “Denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of stock options, unvested restricted stock and restricted stock units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. Our earnings per share excluded 6.6 million, 9.6 million, and 16.6 million stock options, unvested restricted stock and restricted stock units, and other potentially dilutive instruments in 2014, 2013, and 2012, respectively.

In accordance with ASC 260 "Earnings Per Share" ("ASC 260"), the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The Company's outstanding restricted stock awards, restricted stock units, and deferred shares are considered participating securities.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the earnings per share of common stock ($000's omitted, except per share data):

	December 31, 2014				December 31, 2013				December 31, 2012
Numerator:
Net income	$	474,338			$	2,620,116			$	206,145
Less: earnings distributed to participating securities	(583		)		(407		)		—
Less: undistributed earnings allocated to participating securities	(2,668		)		(19,201		)		—
Numerator for basic earnings per share	$	471,087			$	2,600,508			$	206,145
Add back: undistributed earnings allocated to participating securities	2,668				19,201				—
Less: undistributed earnings reallocated to participating securities	(2,643		)		(18,845		)		—
Numerator for diluted earnings per share	$	471,112			$	2,600,864			$	206,145
Denominator:
Basic shares outstanding	370,377				383,077				381,562
Effect of dilutive securities	3,725				3,789				3,002
Diluted shares outstanding	374,102				386,866				384,564
Earnings per share:
Basic	$	1.27			$	6.79			$	0.54
Diluted	$	1.26			$	6.72			$	0.54

Stock-based compensation

We measure compensation cost for restricted stock and restricted stock units at fair value on the grant date. Fair value is determined based on the quoted price of our common stock on the grant date. We recognize compensation expense for restricted stock and restricted stock units, the majority of which cliff vest at the end of three years, ratably over the vesting period. For share-based awards containing performance conditions, we recognize compensation expense ratably over the vesting period when it is probable that the stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change. Compensation expense related to our share-based awards is included in selling, general, and administrative expense, except for a small portion recognized in Financial Services expenses. See Note 8.

Income taxes

The provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the consolidated results of operations or financial position.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including changes in facts or circumstances, changes in law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense (benefit). See Note 9.

Homebuilding revenue recognition

Homebuilding revenue and related profit are generally recognized when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage and the buyer has not made an adequate initial or continuing investment, the profit on such sale is deferred until the sale of the related mortgage loan to a third-party investor has been completed. If there is a loss on the sale of the property, the loss on such sale is recognized at the time of closing. The amount of such deferred profits were not material at either December 31, 2014 or December 31, 2013.

Sales incentives

When sales incentives involve a discount on the selling price of the home, we record the discount as a reduction of revenue at the time of house closing. If the sales incentive requires us to provide a free product or service to the customer, the cost of the free product or service is recorded as cost of revenues at the time of house closing. This includes the cost related to optional upgrades and seller-paid financing costs, closing costs, homeowners’ association fees, or merchandise.

Inventory

Inventory is stated at cost unless the carrying value is determined to not be recoverable, in which case the affected inventory is written down to fair value. Cost includes land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. The specific identification method is used to accumulate home construction costs.

We capitalize interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the timing of home closings.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and commissions and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots.

We record valuation adjustments on land inventory when events and circumstances indicate that the related community may be impaired and when the cash flows estimated to be generated by the community are less than its carrying amount. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. Communities that demonstrate potential impairment indicators are tested for impairment by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we estimate the fair

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

value of the community. Impairment charges are recorded if the fair value of the community's inventory is less than its carrying value. We determine the fair value of a community's inventory using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community. Our evaluations for impairments are based on our best estimates of the future cash flows for our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates. See Note 3.

Land held for sale

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land held for sale is recorded at the lower of cost or fair value less costs to sell. In determining the value of land held for sale, we consider recent offers received, prices for land in recent comparable sales transactions, and other factors. We record net realizable value adjustments for land held for sale within Homebuilding land sale cost of revenues. See Note 3.

Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net. See Note 3.

If an entity holding the land under option is a variable interest entity (“VIE”), our deposit represents a variable interest in that entity. No VIEs required consolidation at either December 31, 2014 or December 31, 2013 because we determined that we were not the primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. Separately, certain land option agreements represent financing arrangements due to the remaining purchase price under the land option agreements, in the event we exercise the purchase rights under the agreements, even though we generally have no obligation to pay these future amounts. As a result, we recorded $30.2 million and $24.0 million at December 31, 2014 and December 31, 2013, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. The following provides a summary of our interests in land option agreements ($000’s omitted):

	December 31, 2014												December 31, 2013
	Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements				Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements
Land options with VIEs	$	56,039			$	891,506			$	12,533			$	40,486			$	661,158			$	8,167
Other land options	71,241				999,079				17,653				50,548				729,128				15,857
	$	127,280			$	1,890,585			$	30,186			$	91,034			$	1,390,286			$	24,024

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Start-up costs

Costs and expenses associated with opening new communities are expensed to selling, general, and administrative expenses when incurred.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home's construction and operating systems for periods of up to 10 years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time the product revenue is recognized.

Self-insured risks

We maintain, and require the majority of our subcontractors to maintain, general liability insurance coverage, including coverage for certain construction defects. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. However, we retain a significant portion of the overall risk for such claims. We reserve for these costs on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims, which include estimates of claims incurred but not yet reported. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from our subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. See Note 12.

Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option to record residential mortgage loans available-for-sale. Election of the fair value option for these loans allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.” See Note 12 for discussion of the risks retained related to mortgage loan originations.

Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. At December 31, 2014 and 2013, residential mortgage loans available-for-sale had an aggregate fair value of $339.5 million and $287.9 million, respectively, and an aggregate outstanding principal balance of $327.4 million and $278.1 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $1.7 million and $(1.2) million for the years ended December 31, 2014 and 2013, respectively. These changes in fair value were substantially offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages during 2014, 2013, and 2012 were $67.2 million, $80.3 million, and $109.2 million, respectively, and have been included in Financial Services revenues.

Mortgage servicing rights

We sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time. We recognize the fair value of our rights to service a mortgage loan as revenue at the time of entering into an interest rate lock commitment with a borrower. Due to the short period of time the servicing rights are held, we do not amortize the servicing asset. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, generally within 90 to 120 days after sale. We establish reserves for this liability at the time the sale is recorded. Such reserves were immaterial at December 31, 2014 and 2013 and are included in accrued and other liabilities.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Loans held for investment

We maintain a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. We have the intent and ability to hold these loans for the foreseeable future or until maturity or payoff. These loans are carried at cost and are reviewed for impairment when recoverability becomes doubtful. Loans held for investment are included in other assets and totaled $12.5 million and $11.0 million at December 31, 2014 and 2013, respectively.

Interest income on mortgage loans

Interest income on mortgage loans is recorded in Financial Services revenues, accrued from the date a mortgage loan is originated until the loan is sold, and totaled $7.2 million, $7.5 million, and $6.0 million in 2014, 2013, and 2012, respectively. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan. Mortgage discounts are not amortized as interest income due to the short period the loans are held until sale to third party investors.

Mortgage servicing, origination, and commitment fees

Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. Loan origination costs related to residential mortgage loans available-for-sale are recognized as incurred in Financial Services expenses while the associated mortgage origination fees are recognized in Financial Services revenues as earned, generally upon loan closing.

Title services

Revenues associated with our title operations are recognized within Financial Services revenues as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed.

Derivative instruments and hedging activities

We are exposed to market risks from commitments to lend, movements in interest rates, and canceled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, we use other derivative financial instruments, principally cash forward placement contracts on mortgage-backed securities and whole loan investor commitments, to economically hedge the interest rate lock commitment. We enter into these derivative financial instruments based upon our portfolio of interest rate lock commitments and closed loans. We do not enter into any derivative financial instruments for trading purposes.

At December 31, 2014 and 2013, we had aggregate interest rate lock commitments of $146.1 million and $175.7 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

Forward contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price that may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. We also use whole loan investor commitments, which are obligations of the investor to buy loans at a specified price within a specified time period. At December 31, 2014 and 2013, we had unexpired forward contracts of $371.0 million and $381.5 million, respectively, and whole loan investor commitments of $63.5 million and $31.7 million, respectively. Changes in the fair value of interest rate lock commitments and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on interest rate lock commitments are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 75 days.

The fair values of derivative instruments and their location in the Consolidated Balance Sheets is summarized below ($000’s omitted):

	December 31, 2014								December 31, 2013
	Other Assets				Other Liabilities				Other Assets				Other Liabilities
Interest rate lock commitments	$	4,313			$	65			$	3,628			$	489
Forward contracts	79				3,653				4,374				34
Whole loan commitments	31				619				189				84
	$	4,423			$	4,337			$	8,191			$	607

New accounting pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,” which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. The guidance is effective for us beginning January 1, 2015 and is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for us for fiscal and interim periods beginning January 1, 2017 and allows for full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact that the standard will have on our financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” ("ASU 2014-11"), which makes limited amendments to ASC 860, "Transfers and Servicing." The ASU requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets. ASU 2014-11 is effective for us for fiscal periods beginning January 1, 2015 and interim periods beginning April 1, 2015 and is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on our financial statements.

2. Corporate office relocation

In May 2013, we announced our plan to relocate our corporate offices to Atlanta, Georgia, from the previous location in Bloomfield Hills, Michigan. The relocation of operations is occurring in phases over time and is expected to be substantially complete in 2015. We recorded employee severance, retention, relocation, and related costs of $7.6 million and $15.0 million in 2014 and 2013, respectively. We also recorded lease exit and asset impairment costs totaling $8.7 million and $0.4 million in 2014 and 2013, respectively. Severance, retention, relocation, and related costs are recorded within selling, general, and administrative expense, while lease exit and asset impairments are included in other expense, net. We expect the remaining costs to total less than $15.0 million. We have also incurred costs at the new location related to the recruitment and onboarding of new employees and certain redundant operating costs, the amount of which has not been material.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Inventory and land held for sale

Major components of inventory at December 31, 2014 and 2013 were ($000’s omitted):

	2014				2013
Homes under construction	$	1,084,137			$	1,042,147
Land under development	2,545,049				2,189,387
Raw land	762,914				747,027
	$	4,392,100			$	3,978,561

In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):

	Years Ended December 31,
	2014				2013				2012
Interest in inventory, beginning of period	$	230,922			$	331,880			$	355,068
Interest capitalized	131,444				154,107				201,103
Interest expensed (a)	(194,728		)		(255,065		)		(224,291		)
Interest in inventory, end of period	167,638				230,922				331,880

(a)	Interest expensed to Home sale cost of revenues for 2014, 2013, and 2012 included $1.3 million, $2.9 million, and $6.5 million, respectively, of capitalized interest write-offs resulting from land-related charges and sales.

Land-related charges

We recorded the following land-related charges:

	2014				2013				2012
Land impairments	$	3,911			$	2,944			$	13,437
Net realizable value adjustments ("NRV") - land held for sale	1,158				3,606				1,480
Write-off of deposits and pre-acquisition costs	6,099				3,122				2,278
Total land-related charges	$	11,168			$	9,672			$	17,195

Land held for sale

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land held for sale at December 31, 2014 and 2013 was as follows ($000’s omitted):

	2014				2013
Land held for sale, gross	$	108,725			$	70,003
Net realizable value reserves	(7,535		)		(8,268		)
Land held for sale, net	$	101,190			$	61,735

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. Home sale revenues for detached and attached homes were $4.8 billion and $885.8 million in 2014, $4.5 billion and $939.0 million in 2013, and $3.6 billion and $925.4 million in 2012, respectively. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

Northeast:		Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Texas:		Texas
North:		Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Northern California, Ohio, Washington
Southwest:		Arizona, Nevada, New Mexico, Southern California

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments. Evaluation of segment performance is generally based on income before income taxes. Each reportable segment generally follows the same accounting policies described in Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000’s omitted) Years Ended December 31,
	2014				2013				2012
Revenues:
Northeast	$	710,859			$	819,709			$	755,148
Southeast	949,635				842,921				691,113
Florida	917,956				802,665				628,997
Texas	859,165				835,473				682,929
North	1,436,500				1,232,814				1,022,633
Southwest	822,610				1,005,062				878,290
	5,696,725				5,538,644				4,659,110
Financial Services	125,638				140,951				160,888
Consolidated revenues	$	5,822,363			$	5,679,595			$	4,819,998
Income before income taxes:
Northeast	$	103,865			$	110,246			$	73,345
Southeast	156,513				121,055				64,678
Florida	190,441				139,673				73,472
Texas	133,005				111,431				60,979
North	197,230				164,348				84,597
Southwest	136,357				179,163				79,887
Other homebuilding (a)	(282,234		)		(346,803		)		(278,967		)
	635,177				479,113				157,991
Financial Services	54,581				48,709				25,563
Consolidated income before income taxes	$	689,758			$	527,822			$	183,554

(a)

Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Other homebuilding also included the following: losses on debt retirements of $8.6 million, $26.9 million, and $32.1 million for 2014, 2013, and 2012, respectively; charges totaling $69.3 million to increase general liability insurance reserves in 2014; costs associated with the relocation of our corporate headquarters totaling $16.3 million and $15.4 million in 2014 and 2013, respectively; and charges of $41.2 million in 2013 resulting from a contractual dispute related to a previously completed luxury community.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2014				2013				2012
Land-related charges*:
Northeast	$	2,824			$	557			$	1,794
Southeast	1,826				998				1,363
Florida	487				1,076				214
Texas	321				191				556
North	3,227				3,434				4,546
Southwest	816				472				2,254
Other homebuilding	1,667				2,944				6,468
	$	11,168			$	9,672			$	17,195

*	Land-related charges include land impairments, net realizable value adjustments for land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges. See Note 1 for additional discussion of these charges.

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2014				2013				2012
Depreciation and amortization:
Northeast	$	1,852			$	1,987			$	1,790
Southeast	2,666				1,647				1,028
Florida	2,150				1,334				1,640
Texas	1,698				1,784				1,619
North	4,414				2,265				1,709
Southwest	4,002				2,969				3,143
Other homebuilding (a)	19,548				16,248				16,168
	36,330				28,234				27,097
Financial Services	3,534				3,353				2,930
	$	39,864			$	31,587			$	30,027

(a)	Other homebuilding includes amortization of intangible assets.

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2014				2013				2012
Equity in (earnings) loss of unconsolidated entities:
Northeast	$	(4,733	)		$	(58	)		$	(4	)
Southeast	—				—				—
Florida	(7		)		(4		)		—
Texas	—				—				—
North	(2,417		)		(608		)		(1,497		)
Southwest	(486		)		(678		)		(1,137		)
Other homebuilding	(583		)		355				(1,235		)
	(8,226		)		(993		)		(3,873		)
Financial Services	(182		)		(137		)		(186		)
	$	(8,408	)		$	(1,130	)		$	(4,059	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment
	($000's omitted)
	December 31, 2014
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	184,974			$	266,229			$	106,077			$	557,280			$	659,224
Southeast	147,506				304,762				117,981				570,249				605,067
Florida	150,743				350,016				112,225				612,984				717,531
Texas	134,873				250,102				91,765				476,740				528,392
North	280,970				478,665				137,044				896,679				996,908
Southwest	166,056				698,513				163,421				1,027,990				1,113,592
Other homebuilding (a)	19,015				196,762				34,401				250,178				3,527,731
	1,084,137				2,545,049				762,914				4,392,100				8,148,445
Financial Services	—				—				—				—				420,965
	$	1,084,137			$	2,545,049			$	762,914			$	4,392,100			$	8,569,410
	December 31, 2013
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	212,611			$	325,241			$	106,681			$	644,533			$	731,259
Southeast	139,484				274,981				146,617				561,082				599,271
Florida	140,366				295,631				104,766				540,763				618,449
Texas	130,398				223,979				57,480				411,857				466,198
North	227,537				350,239				78,945				656,721				716,239
Southwest	159,350				512,164				201,659				873,173				940,462
Other homebuilding (a)	32,401				207,152				50,879				290,432				4,334,591
	1,042,147				2,189,387				747,027				3,978,561				8,406,469
Financial Services	—				—				—				—				327,674
	$	1,042,147			$	2,189,387			$	747,027			$	3,978,561			$	8,734,143
	December 31, 2012
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	198,549			$	445,436			$	109,136			$	753,121			$	866,024
Southeast	147,227				286,210				120,193				553,630				590,650
Florida	130,276				310,625				100,633				541,534				620,220
Texas	145,594				256,704				54,556				456,854				523,843
North	219,172				369,144				46,414				634,730				680,447
Southwest	226,204				496,488				167,295				889,987				963,540
Other homebuilding (a)	49,162				270,771				64,257				384,190				2,140,739
	1,116,184				2,435,378				662,484				4,214,046				6,385,463
Financial Services	—				—				—				—				348,946
	$	1,116,184			$	2,435,378			$	662,484			$	4,214,046			$	6,734,409

(a)	Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments in unconsolidated entities

We participate in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes. A summary of our joint ventures is presented below ($000’s omitted):

	December 31,
	2014				2013
Investments in joint ventures with debt non-recourse to PulteGroup	$	26,488			$	26,532
Investments in other active joint ventures	13,880				18,791
Total investments in unconsolidated entities	$	40,368			$	45,323
Total joint venture debt	$	25,849			$	12,408
PulteGroup proportionate share of joint venture debt:
Joint venture debt with limited recourse guaranties	$	283			$	750
Joint venture debt non-recourse to PulteGroup	11,341				3,654
PulteGroup's total proportionate share of joint venture debt	$	11,624			$	4,404

In 2014, 2013, and 2012, we recognized income from unconsolidated joint ventures of $8.4 million, $1.1 million, and $4.1 million, respectively. During 2014, 2013, and 2012, we made capital contributions of $0.0 million, $1.7 million, and $16.5 million, respectively, and received distributions of $13.1 million, $3.1 million, and $10.5 million, respectively.

The timing of cash obligations under a joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial loss exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals.

6. Debt

Our senior notes are summarized as follows ($000’s omitted):

	December 31,
	2014				2013
5.20% unsecured senior notes due February 2015 (a)	$	—			$	95,633
5.25% unsecured senior notes due June 2015 (a)	236,452				233,085
6.50% unsecured senior notes due May 2016 (a)	462,009				459,581
7.625% unsecured senior notes due October 2017 (b)	122,752				122,663
7.875% unsecured senior notes due June 2032 (a)	299,239				299,196
6.375% unsecured senior notes due May 2033 (a)	398,640				398,567
6.00% unsecured senior notes due February 2035 (a)	299,469				299,443
7.375% unsecured senior notes due June 2046 (a)	—				150,000
Total senior notes – carrying value (c)	$	1,818,561			$	2,058,168
Estimated fair value	$	1,952,774			$	2,070,744

(a)	Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.

(b)	Not redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.

(c)	The recorded carrying value reflects the impact of various discounts and premiums that are amortized to interest cost over the respective terms of the senior notes.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The indentures governing the senior notes impose certain restrictions on the incurrence of additional debt along with other limitations. At December 31, 2014, we were in compliance with all of the covenants and requirements under the senior notes. Total senior note principal maturities of $1.8 billion during the five years following 2014 and thereafter are as follows: 2015 - $238.0 million; 2016 - $465.2 million; 2017 - $123.0 million; 2018 - $0.0 million; 2019 - $0.0 million; and thereafter - $1.0 billion. Refer to Note 13 for supplemental consolidating financial information of the Company.

Debt retirement

During the last three years, we significantly reduced our outstanding senior notes through a variety of transactions. As a result of these transactions, we reduced our outstanding senior notes by $245.7 million, $461.4 million, and $592.4 million during 2014, 2013, and 2012, respectively, and recorded losses totaling $8.6 million, $26.9 million, and $32.1 million in 2014, 2013 and 2012, respectively. Losses on debt repurchase transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense (income), net.

Revolving credit facility

In July 2014, we entered into a senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in July 2017. The Revolving Credit Facility provides for maximum borrowings of $500 million and contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.0 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce available borrowing capacity under the Revolving Credit Facility and may total no more than the greater of: (i) 50% of the size of the facility or (ii) $300 million in the aggregate. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate or Base Rate plus an applicable margin, as defined. At December 31, 2014, we had no borrowings outstanding and $208.4 million of letters of credit issued under the Revolving Credit Facility.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of December 31, 2014, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Other letter of credit facilities

We maintain a separate cash-collateralized letter of credit agreement with a bank. Letters of credit totaling $3.7 million and $58.7 million were outstanding under this agreement (or similar previous agreements with different financial institutions) at December 31, 2014 and 2013, respectively. Under this agreement, we are required to maintain deposits with the financial institution in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash. An unsecured letter of credit facility we previously maintained with a bank expired in September 2014.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties totaling $22.3 million and $7.5 million at December 31, 2014 and 2013, respectively. These notes have maturities ranging up to 6 years, are collateralized by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders. In September 2014, Pulte Mortgage entered into an amendment to the Repurchase Agreement that extended the effective date to September 2015 and established a borrowing capacity of $150.0 million. The capacity will reduce to $99.8 million in February 2015, and will increase again to $150.0 million in June 2015. The purpose for the change in capacity during the term of the agreement is to lower associated fees during seasonally low volume periods when the additional capacity is unnecessary. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $140.2 million and $105.7 million outstanding under the Repurchase Agreement at December 31, 2014, and 2013, respectively, and was in compliance with all of its covenants and requirements as of such dates.

The following is aggregate borrowing information for our mortgage operations ($000’s omitted):

	December 31,
	2014				2013				2012
Available credit lines	$	150,000			$	150,000			$	150,000
Unused credit lines	$	9,759			$	44,336			$	11,205
Weighted-average interest rate	2.70		%		2.90		%		3.00		%

7. Shareholders’ equity

We reinstated our quarterly cash dividend in July 2013. During 2013, we declared three cash dividends of $0.05 per common share each. During 2014, we declared cash dividends of $0.05 per common share in each of the first three quarters and $0.08 per common share in the fourth quarter for a total of $86.4 million.

In previous years, our Board of Directors authorized a share repurchase program. In October 2014, our Board of Directors approved an increase of $750.0 million to such authorization. We repurchased 12.9 million and 7.2 million shares under the repurchase authorizations for a total of $245.8 million and $118.1 million in 2014 and 2013, respectively. There were no repurchases under these programs during 2012. At December 31, 2014, we had remaining authorization to repurchase $738.5 million of common shares.

Under our stock-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of restricted stock, generally related to the payment of minimum tax obligations. During 2014, 2013, and 2012, employees surrendered shares valued at $7.2 million, $9.6 million, and $1.0 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Stock compensation plans

We maintain a stock award plan for both employees and non-employee directors. The plan provides for the grant of a variety of equity awards, including options (generally non-qualified options), restricted stock, performance shares, and restricted stock units ("RSUs") to key employees (as determined by the Compensation and Management Development Committee of the Board of Directors) for periods not exceeding ten years. Non-employee directors are entitled to an annual distribution of stock options, common stock, or restricted stock units. All options granted to non-employee directors vest immediately and are exercisable on the grant date for ten years. Options granted to employees generally vest incrementally over four years. Restricted stock and RSUs generally cliff vest after three years. Restricted stock holders have voting rights during the vesting period and both restricted stock and RSU holders receive cash dividends during the vesting period. Performance shares vest upon attainment of the stated performance targets and minimum service requirements and are converted into shares of common stock upon distribution. RSUs represent the right to receive an equal number of shares of common stock and are converted into shares of common stock upon distribution. As of December 31, 2014, there were 23.5 million shares that remained available for grant under the plan.

Our stock compensation expense for the three years ended December 31, 2014 is presented below ($000's omitted):

	2014				2013				2012
Stock options	$	121			$	1,056			$	2,617
Restricted stock (including RSUs and performance shares)	13,690				13,418				10,077
Long-term incentive plans	15,481				16,006				10,203
	$	29,292			$	30,480			$	22,897

Stock options

A summary of stock option activity for the three years ended December 31, 2014 is presented below (000’s omitted except per share data):

	2014								2013								2012
	Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price
Outstanding, beginning of year	12,887				$	23			17,148				$	22			21,641				$	21
Granted	—				—				—				—				—				—
Exercised	(1,422		)		11				(1,432		)		14				(2,877		)		11
Forfeited	(2,095		)		29				(2,829		)		25				(1,616		)		27
Outstanding, end of year	9,370				$	23			12,887				$	23			17,148				$	22
Options exercisable at year end	9,265				$	23			12,402				$	23			15,719				$	23
Weighted-average per share fair value of options granted during the year	$	—							$	—							$	—

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information about the weighted-average remaining contractual lives of stock options outstanding and exercisable at December 31, 2014:

	Options Outstanding									Options Exercisable
	Number Outstanding (000's omitted)			Weighted- Average Remaining Contract Life (in years)		Weighted- Average Per Share Exercise Price				Number Exercisable (000's omitted)			Weighted- Average Per Share Exercise Price
$0.01 to $11.00	907			4.0		$	10			802			$	10
$11.01 to $18.00	4,003			4.6		12				4,003			12
$18.01 to $25.00	417			0.3		23				417			23
$25.01 to $35.00	1,997			1.9		34				1,997			34
$35.01 to $45.00	2,046			0.9		40				2,046			40
	9,370			3.0		$	23			9,265			$	23

We did not issue any stock options during 2014, 2013, or 2012. As a result, there is no unrecognized compensation cost related to stock option awards at December 31, 2014. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The aggregate intrinsic value of stock options that were exercised during 2014, 2013, and 2012 was $14.1 million, $10.8 million, and $8.6 million, respectively. As of December 31, 2014, options outstanding had an intrinsic value of $48.8 million, of which $47.3 million related to options exercisable.

Restricted stock (including RSUs and performance shares)

A summary of restricted stock activity, including RSUs and performance shares, for the three years ended December 31, 2014 is presented below (000’s omitted, except per share data):

	2014							2013							2012
	Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value
Outstanding, beginning of year	3,211			$	11			3,822			$	9			3,042			$	9
Granted	974			$	19			806			$	21			1,461			$	10
Distributed	(1,019	)		$	10			(1,391	)		$	11			(544	)		$	11
Forfeited	(276	)		$	15			(26	)		$	15			(137	)		$	10
Outstanding, end of year	2,890			$	15			3,211			$	11			3,822			$	9
Vested, end of year	75			$	13			60			$	12			51			$	10

During 2014, 2013, and 2012, the total fair value of shares vested during the year was $8.1 million, $12.7 million, and $3.7 million, respectively. Unamortized compensation cost related to restricted stock awards was $13.9 million at December 31, 2014. These costs will be expensed over a weighted-average period of approximately 2 years.

Certain individuals have received grants of performance shares. The fair value of each performance share was calculated using the stock price on the grant date. We recognize expense when it becomes probable that the stated performance targets will be achieved. Unamortized compensation cost related to performance shares considered probable was $0.2 million at December 31, 2014 and will be expensed over a weighted-average period of less than one year. Additionally, there were 75,080 RSUs outstanding at December 31, 2014 that had vested but had not yet been paid out because the payout date had been deferred by the holder.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Long-term incentive plans

We maintain a long-term incentive plan for certain of our field employees that provides awards based on the achievement of stated performance targets over a three-year period. Awards are earned each year in the form of share units that are paid out in cash at the end of the performance period based upon the number of share units earned times the stock price at the end of the performance period. Accordingly, the liability associated with the awards is adjusted each reporting period based on movements in the stock price and totaled $9.5 million and $12.6 million at December 31, 2014 and 2013, respectively.

We also maintain a long-term performance award plan for senior management that provides awards based on the achievement of stated performance targets over a three-year period. Awards are earned based on our cumulative performance over the performance period and are stated in dollars but settled in common shares based on the stock price at the end of the performance period. If the stock price falls below a floor of $5.00 per share at the end of the performance period or we do not have a sufficient number of shares available under our stock incentive plans at the time of settlement, then a portion of each award will be paid in cash. We recognize expense for these awards based on the probability of achievement of the stated performance targets. The liability for these awards totaled $26.2 million and $14.3 million at December 31, 2014 and 2013, respectively.

9. Income taxes

Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):

	2014				2013				2012
Current provision (benefit)
Federal	$	5,619			$	5,725			$	(8,523	)
State and other	(13,968		)		(1,596		)		(14,068		)
	$	(8,349	)		$	4,129			$	(22,591	)
Deferred provision (benefit)
Federal	$	232,969			$	(1,833,580	)		$	—
State and other	(9,200		)		(262,843		)		—
	$	223,769			$	(2,096,423	)		$	—
Income tax expense (benefit)	$	215,420			$	(2,092,294	)		$	(22,591	)

The following table reconciles the statutory federal income tax rate to the effective income tax rate:

	2014			2013			2012
Income taxes at federal statutory rate	35.0	%		35.0	%		35.0	%
Effect of state and local income taxes, net of federal tax	3.0			4.0			3.0
Deferred tax asset valuation allowance	(6.6	)		(438.0	)		(37.7	)
Tax contingencies	(1.4	)		0.3			(10.6	)
Other	1.2			2.3			(2.0	)
Effective rate	31.2	%		(396.4	)%		(12.3	)%

Our effective tax rate is affected by a number of factors, the most significant of which are the valuation allowance related to our deferred tax assets, changes in tax laws or other circumstances that impact the value of our deferred tax assets, and changes in our unrecognized tax benefits. Due to the effects of these factors, our effective tax rates in 2014, 2013, and 2012 are not correlated to the amount of our income before income taxes. The income tax expense for 2014 reflects a reversal of a portion of our valuation allowance, primarily related to certain of our state deferred tax assets, along with the favorable resolution of certain federal and state income tax matters. The income tax benefit for 2013 resulted from the reversal of substantially all of the valuation allowance related to our federal deferred tax assets and certain of our state deferred tax assets, while the income tax benefit for 2012 resulted primarily from the favorable resolution of certain federal and state income tax matters.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred tax assets and liabilities reflect temporary differences arising from the different treatment of items for tax and accounting purposes. Components of our net deferred tax asset are as follows ($000’s omitted):

	At December 31,
	2014				2013
Deferred tax assets:
Non-deductible reserves and other	$	445,128			$	475,730
Inventory valuation reserves	599,763				770,566
Net operating loss ("NOL") carryforwards:
Federal	515,568				726,398
State	257,738				292,195
Alternative minimum tax credits	34,812				28,683
Energy credit and charitable contribution carryforward	27,858				39,978
	1,880,867				2,333,550
Deferred tax liabilities:
Capitalized items, including real estate basis differences, deducted for tax, net	(31,584		)		(39,449		)
Trademarks and tradenames	(46,362		)		(50,047		)
	(77,946		)		(89,496		)
Valuation allowance	(82,253		)		(157,300		)
Net deferred tax asset	$	1,720,668			$	2,086,754

Our gross federal NOL carryforward is approximately $1.5 billion and expires between 2028 and 2032. A portion of the federal NOL is subject to the provisions of Internal Revenue Code Section 382. We also have significant state NOLs in various jurisdictions. These state NOLs may generally be carried forward from 5 to 20 years, depending on the jurisdiction, and expire between 2014 and 2034. In addition, we have energy credit carryforwards expiring in 2026 to 2034 and alternative minimum tax credits, which can be carried forward indefinitely.

As a result of our merger with Centex in 2009, our ability to use certain of Centex’s pre-ownership change NOL carryforwards and built-in losses or deductions is limited by Section 382 of the Internal Revenue Code. Our Section 382 limitation is approximately $67.4 million per year for NOLs, losses realized on built-in loss assets that are sold within 60 months of the ownership change, and certain deductions. We do not believe that the Section 382 limitation will prevent the Company from using Centex’s pre-ownership change federal NOL carryforwards and built-in losses or deductions.

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy.

In 2014, we recorded an income tax benefit of $45.6 million as the result of a reversal of valuation allowance related primarily to certain of our state deferred tax assets as the result of an increase in expected future taxable income in certain jurisdictions. At December 31, 2014, our remaining valuation allowance relates primarily to state net operating loss carryforwards that have not met the "more likely than not" realization threshold, primarily due to state related section 382 limitations. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In 2013, we recorded an income tax benefit of $2.1 billion as the result of a reversal of valuation allowance. Based on our evaluation through June 30, 2013, we had fully reserved our net deferred tax assets due to the uncertainty of their realization. One of the primary pieces of negative evidence we considered was the significant losses we incurred in recent years, including being in a three-year cumulative pre-tax loss position, which we exited in 2013. In the third quarter of 2013, we determined that the valuation allowance against substantially all of our federal deferred tax assets and a significant portion of our state deferred tax assets was no longer required. Accordingly, we reversed $2.1 billion of valuation allowance in the third quarter. When a change in valuation allowance is recognized in an interim period, a portion of the valuation allowance to be reversed must be allocated to the remaining interim periods. Accordingly, an additional $73.7 million of the remaining valuation allowance reversed in the fourth quarter of 2013, which was offset by income tax expense based on fourth quarter earnings.

We conducted our evaluations by considering all available positive and negative evidence. The principal positive evidence that led to the reversal of the valuation allowance in 2013 included: (1) our emergence from a three-year cumulative loss in 2013; (2) the significant positive income we generated during 2012 and 2013, including seven consecutive quarters of pretax income as of December 31, 2013; (3) continued improvements in 2013 over recent years in other key operating metrics, including revenues, gross margin, and overhead leverage; (4) our forecasted future profitability; (5) improvement in our financial position; and (6) significant evidence that conditions in the U.S. housing industry are more favorable than in recent years and our belief that conditions will continue to be favorable over the long-term. Even if industry conditions weaken from current levels, we believe we will be able to adjust our operations to sustain long-term profitability.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At December 31, 2014, we had $32.9 million of gross unrecognized tax benefits, of which $21.4 million (net of federal benefit) would impact the effective tax rate if recognized. At December 31, 2013, we had $173.3 million of gross unrecognized tax benefits, of which $21.5 million would impact the effective rate if recognized. Income tax liabilities decreased from $206.0 million at December 31, 2013 to $48.7 million at December 31, 2014, primarily as the result of the resolution of certain income tax matters. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $4.1 million, excluding interest and penalties, primarily due to potential settlements. Additionally, we had accrued interest and penalties of $17.3 million and $33.1 million at December 31, 2014 and 2013, respectively. Our net tax-related interest and penalties totaled a benefit of $15.8 million and an expense of $3.0 million in 2014 and 2013, respectively. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):

	2014				2013				2012
Unrecognized tax benefits, beginning of period	$	173,310			$	170,425			$	171,863
Increases related to tax positions taken during a prior period	—				12,877				8,782
Decreases related to tax positions taken during a prior period	(133,883		)		(7,502		)		(9,373		)
Increases related to tax positions taken during the current period	237				381				11,797
Decreases related to settlements with taxing authorities	(6,753		)		(1,434		)		—
Reductions as a result of a lapse of the applicable statute of limitations	—				(1,437		)		(12,644		)
Unrecognized tax benefits, end of period	$	32,911			$	173,310			$	170,425

We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2004 to 2014.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Fair value disclosures

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

Level 1		Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2		Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3		Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques

Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted):

Financial Instrument		Fair Value Hierarchy		Fair Value
December 31, 2014				December 31, 2013
Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale		Level 2		$	339,531			$	287,933
Interest rate lock commitments		Level 2		4,248				3,139
Forward contracts		Level 2		(3,574		)		4,340
Whole loan commitments		Level 2		(588		)		105
Measured at fair value on a non-recurring basis:
House and land inventory		Level 3		$	13,925			$	—
Disclosed at fair value:
Cash and equivalents (including restricted cash)		Level 1		$	1,309,220			$	1,653,044
Financial Services debt		Level 2		140,241				105,664
Senior notes		Level 2		1,952,774				2,070,744

Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair value included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates. See Note 1 for a more detailed discussion of the valuation methods used for inventory.

The carrying amounts of cash and equivalents, Financial Services debt, and the Revolving Credit Facility approximate their fair values due to their short-term nature and floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $1.8 billion and $2.1 billion, at December 31, 2014 and 2013, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. Other assets and accrued and other liabilities

Other assets are presented below ($000’s omitted):

	December 31,
	2014				2013
Accounts and notes receivable:
Insurance receivables	$	60,598			$	51,764
Notes receivable	30,699				32,944
Other receivables	63,867				52,720
	$	155,164			$	137,428
Prepaid expenses	72,585				65,965
Deposits and pre-acquisition costs (Note 1)	127,280				91,034
Property and equipment, net (Note 1)	75,219				53,051
Income taxes receivable (Note 9)	21,330				35,437
Other	61,454				77,706
	$	513,032			$	460,621

We record receivables from various parties in the normal course of business, including amounts due from insurance companies (see Note 12), municipalities, and vendors. In certain instances, we may accept consideration for land sales or other transactions in the form of a note receivable.

Accrued and other liabilities are presented below ($000’s omitted):

	December 31,
	2014				2013
Self-insurance liabilities (Note 12)	$	710,245			$	668,100
Loan origination liabilities (Note 12)	58,222				124,956
Compensation-related	142,586				171,686
Warranty (Note 12)	65,389				63,992
Community development district obligations (Note 12)	17,122				26,124
Liability for land, not owned, under option agreements (Note 1)	30,186				24,024
Accrued interest	20,446				22,283
Limited recourse notes payable	22,255				7,521
Other	277,323				269,064
	$	1,343,774			$	1,377,750

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Commitments and contingencies

Leases

We lease certain property and equipment under non-cancelable operating leases. The future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2014 are as follows ($000’s omitted):

Years Ending December 31,
2015	$	28,744
2016	25,713
2017	18,817
2018	14,870
2019	12,846
Thereafter	42,733
Total minimum lease payments (a)	$	143,723

(a)	Minimum payments have not been reduced by minimum sublease rentals of $5.3 million due in the future under non-cancelable subleases.

Net rental expense for 2014, 2013, and 2012 was $25.3 million, $23.0 million, and $24.2 million, respectively. Certain leases contain renewal or purchase options and generally provide that we pay for insurance, taxes, and maintenance.

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If a loan is determined to be faulty, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S. Most requests received to date relate to make-whole payments on loans that have been foreclosed. Requests undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment.

During 2014, we reduced our loan origination liabilities by $18.6 million based on settlements of various pending repurchase requests and current conditions. During 2012, we recorded $49.0 million of provisions for losses as a change in estimate primarily to reflect projected claim volumes in excess of previous estimates. Reserves provided and related adjustments are reflected in Financial Services expenses. Given the ongoing volatility in the mortgage industry, changes in values of underlying collateral over time, and other uncertainties regarding the ultimate resolution of these claims, actual costs could differ from our current estimates.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in these liabilities were as follows ($000's omitted):

	2014				2013				2012
Liabilities, beginning of period	$	124,956			$	164,280			$	128,330
Reserves provided (released)	(18,604		)		—				49,025
Payments	(48,130		)		(39,324		)		(13,075		)
Liabilities, end of period	$	58,222			$	124,956			$	164,280

The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. In 2011, the bank notified us that it had been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions which included $162 million of loans originated by Centex's mortgage subsidiary. The plaintiffs seek unspecified compensatory and/or rescissory damages on behalf of persons who purchased the securities. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. We cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company. We are aware of six other RMBS transactions with similar indemnity provisions that include an aggregate $116 million of loans originated by Centex's mortgage subsidiary, and we are not aware of any current or threatened legal proceedings regarding those transactions.

Community development and other special district obligations

A community development district or similar development authority (“CDD”) is a unit of local government created under various state statutes that utilizes the proceeds from the sale of bonds to finance the construction or acquisition of infrastructure assets of a development. A portion of the liability associated with the bonds, including principal and interest, is assigned to each parcel of land within the development. This debt is typically paid by subsequent special assessments levied by the CDD on the landowners. Generally, we are only responsible for paying the special assessments for the period during which we are the landowner of the applicable parcels. However, in certain limited instances we record a liability for future assessments. At December 31, 2014 and 2013, we had $17.1 million and $26.1 million, respectively, in accrued liabilities for outstanding CDD obligations.

Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $212.1 million and $1.0 billion, respectively, at December 31, 2014, and $183.1 million and $958.3 million, respectively, at December 31, 2013. In the event any such letter of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be called. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Litigation and regulatory matters

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

During 2013, we settled a number of claims related to a previously completed luxury community in a market we have since exited. The claims related to a contractual dispute with certain homeowners. As a result of these settlements, we recorded charges of $41.2 million during 2013.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):

	2014				2013				2012
Warranty liabilities, beginning of period	$	63,992			$	64,098			$	68,025
Reserves provided	51,348				49,399				45,705
Payments	(47,968		)		(44,925		)		(45,365		)
Other adjustments	(1,983		)		(4,580		)		(4,267		)
Warranty liabilities, end of period	$	65,389			$	63,992			$	64,098

Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates comprise a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

Our recorded reserves for all such claims totaled $710.2 million and $668.1 million at December 31, 2014 and 2013, respectively, the vast majority of which relates to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 72% and 78% of the total general liability reserves at December 31, 2014 and 2013, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

During 2014, we recorded a change in estimate increasing general liability insurance reserves by $69.3 million, which is reflected in "Reserves provided" in the below table. Such additional reserves were primarily driven by estimated costs associated with siding repairs in certain previously completed communities that, in turn, impacted actuarial estimates for potential future claims. Adjustments to reserves are recorded in the period in which the change in estimate occurs. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses related and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs. Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):

	2014				2013				2012
Balance, beginning of period	$	668,100			$	721,284			$	739,029
Reserves provided	141,790				64,737				54,262
Payments	(99,645		)		(117,921		)		(72,007		)
Balance, end of period	$	710,245			$	668,100			$	721,284

13. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by each of the Company's wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2014

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	7,454			$	1,157,307			$	128,101			$	—			$	1,292,862
Restricted cash	3,710				1,513				11,135				—				16,358
House and land inventory	—				4,391,445				655				—				4,392,100
Land held for sale	—				100,156				1,034				—				101,190
Land, not owned, under option agreements	—				30,186				—				—				30,186
Residential mortgage loans available- for-sale	—				—				339,531				—				339,531
Securities purchased under agreements to resell	22,000				—				(22,000		)		—				—
Investments in unconsolidated entities	74				36,126				4,168				—				40,368
Other assets	34,214				421,145				57,673				—				513,032
Intangible assets	—				123,115				—				—				123,115
Deferred tax assets, net	1,712,853				15				7,800				—				1,720,668
Investments in subsidiaries and intercompany accounts, net	4,963,831				967,032				6,359,441				(12,290,304		)		—
	$	6,744,136			$	7,228,040			$	6,887,538			$	(12,290,304	)		$	8,569,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	71,874			$	1,514,954			$	170,104			$	—			$	1,756,932
Income tax liabilities	48,747				(25		)		—				—				48,722
Financial Services debt	—				—				140,241				—				140,241
Senior notes	1,818,561				—				—				—				1,818,561
Total liabilities	1,939,182				1,514,929				310,345				—				3,764,456
Total shareholders’ equity	4,804,954				5,713,111				6,577,193				(12,290,304		)		4,804,954
	$	6,744,136			$	7,228,040			$	6,887,538			$	(12,290,304	)		$	8,569,410

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2013

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	262,364			$	1,188,999			$	128,966			$	—			$	1,580,329
Restricted cash	58,699				2,635				11,381				—				72,715
House and land inventory	—				3,977,851				710				—				3,978,561
Land held for sale	—				60,701				1,034				—				61,735
Land, not owned, under option agreements	—				24,024				—				—				24,024
Residential mortgage loans available- for-sale	—				—				287,933				—				287,933
Investments in unconsolidated entities	68				41,319				3,936				—				45,323
Other assets	50,251				359,228				51,142				—				460,621
Intangible assets	—				136,148				—				—				136,148
Deferred tax assets, net	2,074,137				17				12,600				—				2,086,754
Investments in subsidiaries and intercompany accounts, net	4,532,950				(16,513		)		5,939,784				(10,456,221		)		—
	$	6,978,469			$	5,774,409			$	6,437,486			$	(10,456,221	)		$	8,734,143
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	65,334			$	1,413,752			$	236,258			$	—			$	1,715,344
Income tax liabilities	206,015				—				—				—				206,015
Financial Services debt	—				—				105,664				—				105,664
Senior notes	2,058,168				—				—				—				2,058,168
Total liabilities	2,329,517				1,413,752				341,922				—				4,085,191
Total shareholders’ equity	4,648,952				4,360,657				6,095,564				(10,456,221		)		4,648,952
	$	6,978,469			$	5,774,409			$	6,437,486			$	(10,456,221	)		$	8,734,143

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2014

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	5,662,171			$	—			$	—			$	5,662,171
Land sale revenues	—				34,554				—				—				34,554
	—				5,696,725				—				—				5,696,725
Financial Services	—				889				124,749				—				125,638
	—				5,697,614				124,749				—				5,822,363
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,343,249				—				—				4,343,249
Land sale cost of revenues	—				23,748				—				—				23,748
	—				4,366,997				—				—				4,366,997
Financial Services expenses	784				(130		)		70,585				—				71,239
Selling, general, and administrative expenses	—				661,308				6,507				—				667,815
Other expense, net	8,521				29,273				951				—				38,745
Interest income	(337		)		(4,244		)		(51		)		—				(4,632		)
Interest expense	849				—				—				—				849
Intercompany interest	9,800				(90		)		(9,710		)		—				—
Equity in (earnings) loss of unconsolidated entities	(7		)		(8,182		)		(219		)		—				(8,408		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(19,610		)		652,682				56,686				—				689,758
Income tax expense (benefit)	(7,473		)		201,332				21,561				—				215,420
Income (loss) before equity in income (loss) of subsidiaries	(12,137		)		451,350				35,125				—				474,338
Equity in income (loss) of subsidiaries	486,475				38,534				403,505				(928,514		)		—
Net income (loss)	474,338				489,884				438,630				(928,514		)		474,338
Other comprehensive income (loss)	105				—				—				—				105
Comprehensive income (loss)	$	474,443			$	489,884			$	438,630			$	(928,514	)		$	474,443

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2013

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	5,424,309			$	—			$	—			$	5,424,309
Land sale revenues	—				114,335				—				—				114,335
	—				5,538,644				—				—				5,538,644
Financial Services	—				2,353				138,598				—				140,951
	—				5,540,997				138,598				—				5,679,595
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,310,528				—				—				4,310,528
Land sale cost of revenues	—				104,426				—				—				104,426
	—				4,414,954				—				—				4,414,954
Financial Services expenses	832				970				90,577				—				92,379
Selling, general, and administrative expenses	—				573,904				(5,404		)		—				568,500
Other expense, net	26,870				49,681				4,202				—				80,753
Interest income	(349		)		(3,954		)		(92		)		—				(4,395		)
Interest expense	712				—				—				—				712
Intercompany interest	17,518				(8,260		)		(9,258		)		—				—
Equity in (earnings) loss of unconsolidated entities	1,461				(1,783		)		(808		)		—				(1,130		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(47,044		)		515,485				59,381				—				527,822
Income tax expense (benefit)	(2,113,827		)		(799		)		22,332				—				(2,092,294		)
Income (loss) before equity in income (loss) of subsidiaries	2,066,783				516,284				37,049				—				2,620,116
Equity in income (loss) of subsidiaries	553,333				35,086				485,400				(1,073,819		)		—
Net income (loss)	2,620,116				551,370				522,449				(1,073,819		)		2,620,116
Other comprehensive income (loss)	197				—				—				—				197
Comprehensive income (loss)	$	2,620,313			$	551,370			$	522,449			$	(1,073,819	)		$	2,620,313

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2012

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
Revenues:
Homebuilding
Home sale revenues	$	—			$	4,552,412			$	—			$	—			$	4,552,412
Land sale revenues	—				106,698				—				—				106,698
	—				4,659,110				—				—				4,659,110
Financial Services	—				2,082				158,806				—				160,888
	—				4,661,192				158,806				—				4,819,998
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				3,833,451				—				—				3,833,451
Land sale cost of revenues	—				94,880				—				—				94,880
	—				3,928,331				—				—				3,928,331
Financial Services expenses	379				567				134,565				—				135,511
Selling, general, and administrative expenses	—				515,283				(826		)		—				514,457
Other expense (income), net	32,027				33,506				765				—				66,298
Interest income	(229		)		(4,597		)		(87		)		—				(4,913		)
Interest expense	819				—				—				—				819
Intercompany interest	587,281				(573,852		)		(13,429		)		—				—
Equity in (earnings) loss of unconsolidated entities	(1		)		(3,555		)		(503		)		—				(4,059		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(620,276		)		765,509				38,321				—				183,554
Income tax expense (benefit)	426				(22,299		)		(718		)		—				(22,591		)
Income (loss) before equity in income (loss) of subsidiaries	(620,702		)		787,808				39,039				—				206,145
Equity in income (loss) of subsidiaries	826,847				34,596				476,806				(1,338,249		)		—
Net income (loss)	206,145				822,404				515,845				(1,338,249		)		206,145
Other comprehensive income (loss)	314				—				—				—				314
Comprehensive income (loss)	$	206,459			$	822,404			$	515,845			$	(1,338,249	)		$	206,459

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2014

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	206,485			$	175,415			$	(72,651	)		$	—			$	309,249
Cash flows from investing activities:
Distributions from unconsolidated entities	—				8,161				(4		)		—				8,157
Investments in unconsolidated entities	—				—				(9		)		—				(9		)
Net change in loans held for investment	—				—				335				—				335
Change in restricted cash related to letters of credit	54,989				—				—				—				54,989
Proceeds from the sale of property and equipment	—				113				—				—				113
Capital expenditures	—				(44,956		)		(3,834		)		—				(48,790		)
Cash used for business acquisition	—				(82,419		)		—				—				(82,419		)
Net cash provided by (used in) investing activities	54,989				(119,101		)		(3,512		)		—				(67,624		)
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				34,577				—				34,577
Other borrowings (repayments)	(249,765		)		(866		)		—				—				(250,631		)
Stock option exercises	15,627				—				—				—				15,627
Stock repurchases	(253,019		)		—				—				—				(253,019		)
Dividends paid	(75,646		)		—				—				—				(75,646		)
Intercompany activities, net	46,419				(87,140		)		40,721				—				—
Net cash provided by (used in) financing activities	(516,384		)		(88,006		)		75,298				—				(529,092		)
Net increase (decrease) in cash and equivalents	(254,910		)		(31,692		)		(865		)		—				(287,467		)
Cash and equivalents at beginning of year	262,364				1,188,999				128,966				—				1,580,329
Cash and equivalents at end of year	$	7,454			$	1,157,307			$	128,101			$	—			$	1,292,862

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2013

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	(41	)		$	865,267			$	15,910			$	—			$	881,136
Cash flows from investing activities:
Distributions from unconsolidated entities	—				1,001				—				—				1,001
Investments in unconsolidated entities	—				(1,677		)		—				—				(1,677		)
Net change in loans held for investment	—				—				(12,265		)		—				(12,265		)
Change in restricted cash related to letters of credit	(4,152		)		—				—				—				(4,152		)
Proceeds from the sale of property and equipment	—				15				—				—				15
Capital expenditures	—				(26,472		)		(2,427		)		—				(28,899		)
Net cash provided by (used in) investing activities	(4,152		)		(27,133		)		(14,692		)		—				(45,977		)
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				(33,131		)						(33,131		)
Other borrowings (repayments)	(485,048		)		5,221												(479,827		)
Stock option exercises	19,411				—				—				—				19,411
Stock repurchases	(127,661		)		—				—				—				(127,661		)
Dividends paid	(38,382		)		—				—				—				(38,382		)
Intercompany activities, net	752,069				(718,299		)		(33,770		)		—				—
Net cash provided by (used in) financing activities	120,389				(713,078		)		(66,901		)		—				(659,590		)
Net increase (decrease) in cash and equivalents	116,196				125,056				(65,683		)		—				175,569
Cash and equivalents at beginning of year	146,168				1,063,943				194,649				—				1,404,760
Cash and equivalents at end of year	$	262,364			$	1,188,999			$	128,966			$	—			$	1,580,329

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2012

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	(582,762	)		$	1,332,342			$	10,560			$	—			$	760,140
Cash flows from investing activities:
Distributions from unconsolidated entities	—				3,029				—				—				3,029
Investments in unconsolidated entities	—				(16,456		)		—				—				(16,456		)
Net change in loans held for investment	—				—				836				—				836
Change in restricted cash related to letters of credit	28,653				—				—				—				28,653
Proceeds from the sale of property and equipment	—				7,586				—				—				7,586
Capital expenditures	—				(10,831		)		(3,111		)		—				(13,942		)
Net cash provided by (used in) investing activities	28,653				(16,672		)		(2,275		)		—				9,706
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				138,795				—				138,795
Other borrowings (repayments)	(620,700		)		1,900				—				—				(618,800		)
Stock option exercises	32,809				—				—				—				32,809
Stock repurchases	(961		)		—				—				—				(961		)
Intercompany activities, net	1,169,842				(1,129,188		)		(40,654		)		—				—
Net cash provided by (used in) financing activities	580,990				(1,127,288		)		98,141				—				(448,157		)
Net increase (decrease) in cash and equivalents	26,881				188,382				106,426				—				321,689
Cash and equivalents at beginning of year	119,287				875,561				88,223				—				1,083,071
Cash and equivalents at end of year	$	146,168			$	1,063,943			$	194,649			$	—			$	1,404,760

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Quarterly results (unaudited)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total (a)
2014
Homebuilding:
Revenues	$	1,093,999			$	1,254,989			$	1,561,273			$	1,786,464			$	5,696,725
Cost of revenues	833,614				959,524				1,198,908				1,374,951				4,366,997
Income before income taxes (b)	108,435				58,573				214,051				254,118				635,177
Financial Services:
Revenues	$	24,895			$	31,198			$	33,452			$	36,093			$	125,638
Income before income taxes (c)	21,594				9,108				10,877				13,002				54,581
Consolidated results:
Revenues	$	1,118,894			$	1,286,187			$	1,594,725			$	1,822,557			$	5,822,363
Income before income taxes	130,029				67,681				224,928				267,120				689,758
Income tax expense (d)	55,210				25,801				84,383				50,025				215,420
Net income	$	74,819			$	41,880			$	140,545			$	217,095			$	474,338
Net income per share:
Basic	$	0.19			$	0.11			$	0.37			$	0.58			$	1.27
Diluted	$	0.19			$	0.11			$	0.37			$	0.58			$	1.26
Number of shares used in calculation:
Basic	383,991				376,072				373,531				369,533				370,377
Effect of dilutive securities	3,815				3,592				3,761				3,734				3,725
Diluted	387,806				379,664				377,292				373,267				374,102

(a)	Due to rounding, the sum of quarterly results may not equal the total for the year. Additionally, quarterly and year-to-date computations of per share amounts are made independently.

(b)

Homebuilding income before income taxes includes losses on debt retirement of $8.6 million in the 1st Quarter; charges of $84.5 million to increase general liability insurance reserves in the 2nd Quarter; and costs associated with the relocation of our corporate headquarters of $8.7 million, offset by favorable adjustments of $15.2 million to decrease general liability insurance reserves in the 4th Quarter.

(c)	Financial Services expenses in the 1st Quarter includes a reduction in loan origination liabilities totaling $18.6 million.

(d)	Income tax expense in the 4th Quarter includes a benefit of $49.6 million related to the resolution of certain tax matters and the reversal of valuation allowance related to certain state deferred tax assets.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total (a)
2013
Homebuilding:
Revenues	$	1,125,883			$	1,240,060			$	1,547,742			$	1,624,959			$	5,538,644
Cost of revenues	923,488				1,011,528				1,230,070				1,249,868				4,414,954
Income before income taxes (b)	68,037				21,971				163,594				225,511				479,113
Financial Services:
Revenues	$	36,873			$	39,362			$	34,336			$	30,380			$	140,951
Income before income taxes	14,313				16,359				11,128				6,909				48,709
Consolidated results:
Revenues	$	1,162,756			$	1,279,422			$	1,582,078			$	1,655,339			$	5,679,595
Income before income taxes	82,350				38,330				174,722				232,420				527,822
Income tax expense (benefit) (c)	588				1,913				(2,107,162		)		12,367				(2,092,294		)
Net income	$	81,762			$	36,417			$	2,281,884			$	220,053			$	2,620,116
Net income per share:
Basic	$	0.21			$	0.09			$	5.92			$	0.58			$	6.79
Diluted	$	0.21			$	0.09			$	5.87			$	0.57			$	6.72
Number of shares used in calculation:
Basic	384,228				385,389				382,883				379,879				383,077
Effect of dilutive securities	6,093				5,791				3,220				3,845				3,789
Diluted	390,321				391,180				386,103				383,724				386,866

(a)	Due to rounding, the sum of quarterly results may not equal the total for the year. Additionally, quarterly and year-to-date computations of per share amounts are made independently.

(b)	Homebuilding income before income taxes in the 2nd Quarter includes charges totaling $66.6 million consisting of losses on debt retirements, costs associated with the relocation of our corporate headquarters, and a contractual dispute related to a previously completed luxury community.

(c)	Income tax expense (benefit) includes a benefit of $2.1 billion and $73.7 million in the 3rd Quarter and 4th Quarter, respectively, related to the reversal of substantially all of the valuation allowance previously recorded against our deferred tax assets.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of PulteGroup, Inc.

We have audited the accompanying consolidated balance sheets of PulteGroup, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of PulteGroup, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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), PulteGroup, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 4, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Atlanta, Georgia

February 4, 2015