Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PULTEGROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2015 and 2014

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

	2015				2014
ASSETS
Cash and equivalents	$	754,161			$	1,292,862
Restricted cash	21,274				16,358
House and land inventory	5,450,058				4,392,100
Land held for sale	81,492				101,190
Residential mortgage loans available-for-sale	442,715				339,531
Investments in unconsolidated entities	41,267				40,368
Other assets	671,099				543,218
Intangible assets	110,215				123,115
Deferred tax assets, net	1,394,879				1,720,668
	$	8,967,160			$	8,569,410
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, including book overdrafts of $60,547 and $32,586 in 2015 and 2014, respectively	$	327,725			$	270,516
Customer deposits	186,141				142,642
Accrued and other liabilities	1,284,273				1,343,774
Income tax liabilities	57,050				48,722
Financial Services debt	267,877				140,241
Term loan	500,000				—
Senior notes	1,584,769				1,818,561
Total liabilities	4,207,835				3,764,456
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, 349,148,351 and 369,458,530 shares issued and outstanding at December 31, 2015 and 2014, respectively	3,491				3,695
Additional paid-in capital	3,093,802				3,072,996
Accumulated other comprehensive loss	(609		)		(690		)
Retained earnings	1,662,641				1,728,953
Total shareholders’ equity	4,759,325				4,804,954
	$	8,967,160			$	8,569,410

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2015, 2014, and 2013

(000’s omitted, except per share data)

	2015				2014				2013
Revenues:
Homebuilding
Home sale revenues	$	5,792,675			$	5,662,171			$	5,424,309
Land sale revenues	48,536				34,554				114,335
	5,841,211				5,696,725				5,538,644
Financial Services	140,753				125,638				140,951
Total revenues	5,981,964				5,822,363				5,679,595
Homebuilding Cost of Revenues:
Home sale cost of revenues	4,440,893				4,343,249				4,310,528
Land sale cost of revenues	35,858				23,748				104,426
	4,476,751				4,366,997				4,414,954
Financial Services expenses	82,047				71,057				92,242
Selling, general, and administrative expenses	589,780				667,815				568,500
Other expense, net	17,363				26,736				76,077
Income before income taxes	816,023				689,758				527,822
Income tax expense (benefit)	321,933				215,420				(2,092,294		)
Net income	$	494,090			$	474,338			$	2,620,116
Net income per share:
Basic	$	1.38			$	1.27			$	6.79
Diluted	$	1.36			$	1.26			$	6.72
Cash dividends declared	$	0.33			$	0.23			$	0.15
Number of shares used in calculation:
Basic	356,576				370,377				383,077
Effect of dilutive securities	3,217				3,725				3,789
Diluted	359,793				374,102				386,866

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2015, 2014, and 2013

(000’s omitted)

	2015				2014				2013
Net income	$	494,090			$	474,338			$	2,620,116
Other comprehensive income, net of tax:
Change in value of derivatives	81				105				197
Other comprehensive income	81				105				197
Comprehensive income	$	494,171			$	474,443			$	2,620,313

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 2015, 2014, and 2013

(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, 2013	386,608			$	3,866			$	3,030,889			$	(992	)		$	(844,147	)		$	2,189,616
Stock option exercises	1,432			14				19,397				—				—				19,411
Share issuances, net of cancellations	1,002			10				(10		)		—				—				—
Dividends declared	—			—				—				—				(57,530		)		(57,530		)
Share repurchases	(7,742	)		(77		)		(3,063		)		—				(124,521		)		(127,661		)
Share-based compensation	—			—				14,474				—				—				14,474
Excess tax benefits (deficiencies) from share-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
Share issuances, net of cancellations	(43	)		—				—				—				—				—
Dividends declared	—			—				72				—				(86,442		)		(86,370		)
Share repurchases	(13,220	)		(132		)		—				—				(252,887		)		(253,019		)
Share-based compensation	—			—				13,786				—				26				13,812
Excess tax benefits (deficiencies) from share-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
Stock option exercises	904			9				10,525				—				—				10,534
Share issuances, net of cancellations	428			4				7,420				—								7,424
Dividends declared	—			—				8				—				(117,881		)		(117,873		)
Share repurchases	(21,642	)		(217		)		—				—				(442,521		)		(442,738		)
Share-based compensation	—			—				16,888				—				—				16,888
Excess tax benefits (deficiencies) from share-based compensation	—			—				(14,035		)		—				—				(14,035		)
Net income	—			—				—				—				494,090				494,090
Other comprehensive income	—			—				—				81				—				81
Shareholders' Equity, December 31, 2015	349,149			$	3,491			$	3,093,802			$	(609	)		$	1,662,641			$	4,759,325

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2015, 2014, and 2013

($000’s omitted)

	2015				2014				2013
Cash flows from operating activities:
Net income	$	494,090			$	474,338			$	2,620,116
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense (benefit)	311,699				223,769				(2,096,425		)
Write-down of land and deposits and pre-acquisition costs	11,467				11,168				9,672
Depreciation and amortization	46,222				39,864				31,587
Share-based compensation expense	24,752				29,292				30,480
Loss on debt retirements	—				8,584				26,930
Other, net	5,605				6,091				10,294
Increase (decrease) in cash due to:
Restricted cash	(8,626		)		1,368				3,387
Inventories	(927,768		)		(346,596		)		265,064
Residential mortgage loans available-for-sale	(104,609		)		(53,734		)		28,448
Other assets	(177,063		)		(46,249		)		(38,190		)
Accounts payable, accrued and other liabilities	(23,898		)		(38,646		)		(10,227		)
Net cash provided by (used in) operating activities	(348,129		)		309,249				881,136
Cash flows from investing activities:
Net change in loans held for investment	8,664				335				(12,265		)
Change in restricted cash related to letters of credit	3,710				54,989				(4,152		)
Capital expenditures	(45,440		)		(48,790		)		(28,899		)
Cash used for business acquisition	—				(82,419		)		—
Other investing activities, net	2,212				8,261				(661		)
Net cash used in investing activities	(30,854		)		(67,624		)		(45,977		)
Cash flows from financing activities:
Proceeds from debt issuance	500,000				—				—
Repayments of debt	(239,193		)		(250,631		)		(479,827		)
Borrowings under revolving credit facility	125,000				—				—
Repayments under revolving credit facility	(125,000		)		—				—
Financial Services borrowings (repayments)	127,636				34,577				(33,131		)
Stock option exercises	10,535				15,627				19,411
Share repurchases	(442,738		)		(253,019		)		(127,661		)
Dividends paid	(115,958		)		(75,646		)		(38,382		)
Net cash used in financing activities	(159,718		)		(529,092		)		(659,590		)
Net increase (decrease) in cash and equivalents	(538,701		)		(287,467		)		175,569
Cash and equivalents at beginning of period	1,292,862				1,580,329				1,404,760
Cash and equivalents at end of period	$	754,161			$	1,292,862			$	1,580,329
Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(4,193	)		$	(4,561	)		$	(171	)
Income taxes paid (refunded), net	$	(5,654	)		$	1,030			$	373

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 acquisitions

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 were located primarily in Columbus, Ohio, and Louisville, Kentucky, and included approximately 8,200 lots, including approximately 400 homes in inventory and control of approximately 900 lots through land 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.

We acquired substantially all of the assets of JW Homes, including the brand John Wieland Homes and Neighborhoods, in a series of transactions in January 2016 for approximately $430.0 million in cash (of which approximately $13.0 million is expected to be paid subsequent to January 2016) and the assumption of certain payables related to such assets. The net assets acquired were located primarily in Atlanta, Charleston, Charlotte, Nashville, and Raleigh and included approximately 7,000 lots, including approximately 400 homes in inventory and control of approximately 1,300 lots through land option contracts. We also assumed a sales order backlog of approximately 300 homes. The acquired net assets will be recorded at their estimated fair values. The acquisition of these assets is not expected to have a material impact on 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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

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, 2015 and 2014 also included $27.5 million and $5.1 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.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted cash

We maintain certain cash balances that are restricted as to their use, including customer deposits on home sales that are temporarily restricted by regulatory requirements until title transfers to the homebuyer.

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. 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 $148.8 million, respectively, at December 31, 2015, and $259.0 million and $135.9 million, respectively, at December 31, 2014. Amortization expense totaled $12.9 million, $13.0 million and $13.1 million in 2015, 2014 and 2013, respectively, 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 cash flows 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 2015, 2014, or 2013.

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 $86.3 million net of accumulated depreciation of $185.8 million at December 31, 2015 and $75.2 million net of accumulated depreciation of $192.2 million at December 31, 2014. Depreciation expense totaled $33.3 million, $26.8 million, and $18.5 million in 2015, 2014, and 2013, respectively.

Advertising costs

Advertising costs are expensed to selling, general, and administrative expense as incurred and totaled $45.3 million, $41.8 million, and $42.4 million, in 2015, 2014, and 2013, respectively.

Employee benefits

We maintain defined contribution retirement plans that cover substantially all of our employees. Company contributions to the plans totaled $12.6 million, $12.1 million, and $11.0 million in 2015, 2014, and 2013, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other expense, net

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

	2015				2014				2013
Write-offs of deposits and pre-acquisition costs (Note 3)	$	5,021			$	6,099			$	3,122
Loss on debt retirements (Note 6)	—				8,584				26,930
Lease exit and related costs	2,463				9,609				2,778
Amortization of intangible assets (Note 1)	12,900				13,033				13,100
Equity in (earnings) loss of unconsolidated entities (Note 5)	(7,355		)		(8,226		)		(993		)
Interest income	(3,107		)		(4,632		)		(4,395		)
Interest expense	788				849				712
Miscellaneous, net (a)	6,653				1,420				34,823
	$	17,363			$	26,736			$	76,077

(a)	Miscellaneous, net includes a charge of $20.0 million in 2015 resulting from the Applecross matter (see Note 12) and charges totaling $41.2 million in 2013 resulting from a contractual dispute related to a previously completed luxury community (see Note 12).

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 shares and restricted share units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price of our common shares are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. Our earnings per share excluded 3.9 million, 6.6 million, and 9.6 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, in 2015, 2014, and 2013, 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. Our outstanding restricted share awards, restricted share units, and deferred shares are considered participating securities.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

	December 31, 2015				December 31, 2014				December 31, 2013
Numerator:
Net income	$	494,090			$	474,338			$	2,620,116
Less: earnings distributed to participating securities	(755		)		(583		)		(407		)
Less: undistributed earnings allocated to participating securities	(2,448		)		(2,668		)		(19,201		)
Numerator for basic earnings per share	$	490,887			$	471,087			$	2,600,508
Add back: undistributed earnings allocated to participating securities	2,448				2,668				19,201
Less: undistributed earnings reallocated to participating securities	(2,429		)		(2,643		)		(18,845		)
Numerator for diluted earnings per share	$	490,906			$	471,112			$	2,600,864
Denominator:
Basic shares outstanding	356,576				370,377				383,077
Effect of dilutive securities	3,217				3,725				3,789
Diluted shares outstanding	359,793				374,102				386,866
Earnings per share:
Basic	$	1.38			$	1.27			$	6.79
Diluted	$	1.36			$	1.26			$	6.72

Share-based compensation

We measure compensation cost for restricted shares and restricted share units at fair value on the grant date. Fair value is determined based on the quoted price of our common shares on the grant date. We recognize compensation expense for restricted shares and restricted share 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 our 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, 2015 or December 31, 2014.

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 and cost of revenues

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 accrual for costs incurred but not yet paid. 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 margins 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 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

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2015 or December 31, 2014 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.

The following provides a summary of our interests in land option agreements ($000’s omitted):

	December 31, 2015								December 31, 2014
	Deposits and Pre-acquisition Costs				Remaining Purchase Price				Deposits and Pre-acquisition Costs				Remaining Purchase Price
Land options with VIEs	$	77,641			$	1,064,506			$	56,039			$	891,506
Other land options	84,478				981,687				71,241				999,079
	$	162,119			$	2,046,193			$	127,280			$	1,890,585

Start-up costs

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

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 revenue is recognized for each home closing.

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 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 and their related servicing rights 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, 2015 and 2014, residential mortgage loans available-for-sale had an aggregate fair value of $442.7 million and $339.5 million, respectively, and an aggregate outstanding principal balance of $429.6 million and $327.4 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.3) million and $1.7 million for the years ended December 31, 2015 and 2014, 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 2015, 2014, and 2013 were $80.8 million, $67.2 million, and $80.3 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, 2015 and 2014 and are included in accrued and other liabilities.

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

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

reviewed annually for impairment, or when recoverability becomes doubtful. Loans held for investment are included in other assets and totaled $7.6 million and $12.5 million at December 31, 2015 and 2014, 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 $6.9 million, $7.2 million, and $7.5 million in 2015, 2014, and 2013, 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). At December 31, 2015 and 2014, we had aggregate interest rate lock commitments of $208.2 million and $146.1 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.

In order to reduce risks associated with our loan origination activities, 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.

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, 2015 and 2014, we had unexpired forward contracts of $525.0 million and $371.0 million, respectively, and whole loan investor commitments of $77.6 million and $63.5 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.

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.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

	December 31, 2015								December 31, 2014
	Other Assets				Other Liabilities				Other Assets				Other Liabilities
Interest rate lock commitments	$	5,854			$	280			$	4,313			$	65
Forward contracts	1,178				840				79				3,653
Whole loan commitments	358				345				31				619
	$	7,390			$	1,465			$	4,423			$	4,337

New accounting pronouncements

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. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", which delayed the effective date by one year. As a result, the standard is effective for us for annual and interim periods beginning January 1, 2018 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 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.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” ("ASU 2015-03"), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The guidance is effective for us beginning January 1, 2016. We currently present deferred financing costs within Other assets. Accordingly, the adoption of the new guidance will result in the reclassification of debt issuance costs as an offset to the related debt on the balance sheet, which we do not expect to be material to 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 2016. We recorded employee severance, retention, relocation, and related expenses of $2.0 million, $7.6 million, and $15.0 million in 2015, 2014, and 2013, respectively. We also recorded lease exit and asset impairment expenses totaling $2.3 million, $8.7 million, and $0.4 million in 2015, 2014, and 2013, respectively. Severance, retention, relocation, and related expenses are recorded within selling, general, and administrative expense, while lease exit and asset impairment expenses are included in other expense, net. We expect the remaining expenses to total less than $10.0 million.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Inventory and land held for sale

Major components of inventory at December 31, 2015 and 2014 were ($000’s omitted):

	2015				2014
Homes under construction	$	1,408,260			$	1,084,137
Land under development	3,259,066				2,545,049
Raw land	782,732				762,914
	$	5,450,058			$	4,392,100

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

	Years Ended December 31,
	2015				2014				2013
Interest in inventory, beginning of period	$	167,638			$	230,922			$	331,880
Interest capitalized	120,001				131,444				154,107
Interest expensed	(138,141		)		(194,728		)		(255,065		)
Interest in inventory, end of period	$	149,498			$	167,638			$	230,922

Land-related charges

We recorded the following land-related charges ($000's omitted):

	2015				2014				2013
Land impairments	$	7,347			$	3,911			$	2,944
Net realizable value adjustments ("NRV") - land held for sale	(901		)		1,158				3,606
Write-offs of deposits and pre-acquisition costs	5,021				6,099				3,122
Total land-related charges	$	11,467			$	11,168			$	9,672

Land held for sale

Land held for sale at December 31, 2015 and 2014 was as follows ($000’s omitted):

	2015				2014
Land held for sale, gross	$	86,913			$	108,725
Net realizable value reserves	(5,421		)		(7,535		)
Land held for sale, net	$	81,492			$	101,190

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 $5.0 billion and $841.5 million in 2015, $4.8 billion and $885.8 million in 2014, and $4.5 billion and $939.0 million in 2013, respectively. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments. For 2015, we realigned our organizational structure and reportable segment presentation. Accordingly, the segment information provided in this note has been reclassified to conform to the current presentation for all periods presented.

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

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.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000’s omitted) Years Ended December 31,
	2015				2014				2013
Revenues:
Northeast	$	682,112			$	710,859			$	819,709
Southeast	1,058,089				949,635				842,921
Florida	1,019,733				917,956				802,665
Midwest	1,020,691				872,241				791,537
Texas	845,772				859,165				835,473
West	1,214,814				1,386,869				1,446,339
	5,841,211				5,696,725				5,538,644
Financial Services	140,753				125,638				140,951
Consolidated revenues	$	5,981,964			$	5,822,363			$	5,679,595
Income before income taxes:
Northeast (a)	$	82,616			$	103,865			$	110,246
Southeast	172,330				156,513				121,055
Florida	196,525				190,441				139,673
Midwest	91,745				78,863				84,551
Texas	121,329				133,005				111,431
West	169,394				254,724				258,960
Other homebuilding (b)	(76,622		)		(282,234		)		(346,803		)
	757,317				635,177				479,113
Financial Services (c)	58,706				54,581				48,709
Consolidated income before income taxes	$	816,023			$	689,758			$	527,822

(a)	Northeast includes a charge of $20.0 million in 2015 resulting from the Applecross matter (see Note 12).

(b)

Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments, in addition to: losses on debt retirements of $8.6 million and $26.9 million in 2014 and 2013, respectively (see Note 6); adjustments to general liability insurance reserves relating to a reversal of $62.2 million in 2015 and a charge of $69.3 million in 2014 (see Note 12); costs associated with the relocation of our corporate headquarters totaling $4.4 million, $16.3 million, and $15.4 million in 2015, 2014, and 2013, respectively (see Note 2); and charges of $41.2 million in 2013 resulting from a contractual dispute related to a previously completed luxury community (see Note 12).

(c)	Financial Services included reductions in loan origination liabilities totaling $11.8 million and $18.6 million in 2015 and 2014, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2015				2014				2013
Land-related charges*:
Northeast	$	3,301			$	2,824			$	557
Southeast	3,022				1,826				998
Florida	4,555				487				1,076
Midwest	2,319				2,347				1,883
Texas	295				321				191
West	(2,615		)		1,696				2,023
Other homebuilding	590				1,667				2,944
	$	11,467			$	11,168			$	9,672

*	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,
	2015				2014				2013
Depreciation and amortization:
Northeast	$	1,682			$	1,852			$	1,987
Southeast	3,492				2,666				1,647
Florida	3,536				2,150				1,334
Midwest	5,019				3,153				1,644
Texas	2,928				1,698				1,784
West	5,995				5,263				3,590
Other homebuilding (a)	20,254				19,548				16,248
	42,906				36,330				28,234
Financial Services	3,316				3,534				3,353
	$	46,222			$	39,864			$	31,587

(a)	Other homebuilding includes amortization of intangible assets.

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2015				2014				2013
Equity in (earnings) loss of unconsolidated entities:
Northeast	$	2			$	(4,733	)		$	(58	)
Southeast	—				—				—
Florida	2				(7		)		(4		)
Midwest	(337		)		(481		)		151
Texas	—				—				—
West	(5,107		)		(2,422		)		(1,437		)
Other homebuilding	(1,915		)		(583		)		355
	(7,355		)		(8,226		)		(993		)
Financial Services	—				(182		)		(137		)
	$	(7,355	)		$	(8,408	)		$	(1,130	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment
	($000's omitted)
	December 31, 2015
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	163,173			$	292,631			$	121,522			$	577,326			$	688,610
Southeast	196,456				367,577				139,246				703,279				765,933
Florida	227,910				574,092				97,185				899,187				1,013,543
Midwest	197,738				414,386				68,918				681,042				734,834
Texas	191,424				317,702				107,737				616,863				691,342
West	413,208				1,094,112				222,920				1,730,240				1,924,958
Other homebuilding (a)	18,351				198,566				25,204				242,121				2,638,951
	1,408,260				3,259,066				782,732				5,450,058				8,458,171
Financial Services	—				—				—				—				508,989
	$	1,408,260			$	3,259,066			$	782,732			$	5,450,058			$	8,967,160
	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
Midwest	176,966				326,549				70,266				573,781				624,815
Texas	134,873				250,102				91,765				476,740				528,392
West	270,060				850,629				230,199				1,350,888				1,485,685
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
Midwest	109,251				184,172				23,092				316,515				346,851
Texas	130,398				223,979				57,480				411,857				466,198
West	277,636				678,231				257,512				1,213,379				1,309,850
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

(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. These joint ventures generally purchase, develop, and sell land, including selling land to us for use in our homebuilding operations. A summary of our joint ventures is presented below ($000’s omitted):

	December 31,
	2015				2014
Investments in joint ventures with debt non-recourse to PulteGroup	$	23,236			$	26,488
Investments in other active joint ventures	18,031				13,880
Total investments in unconsolidated entities	$	41,267			$	40,368
Total joint venture debt	$	16,369			$	25,849
PulteGroup proportionate share of joint venture debt:
Joint venture debt with limited recourse guaranties	$	226			$	283
Joint venture debt non-recourse to PulteGroup	6,744				11,341
PulteGroup's total proportionate share of joint venture debt	$	6,970			$	11,624

In 2015, 2014, and 2013, we recognized income from unconsolidated joint ventures of $7.4 million, $8.4 million, and $1.1 million, respectively (of which $0.2 million and $0.1 million for 2014 and 2013, respectively, related to Financial Services). We received distributions from our unconsolidated joint ventures of $6.0 million, $13.1 million, and $3.1 million, in 2015, 2014, and 2013, respectively, and made no significant capital contributions during such periods.

The timing of cash flows related to a joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved by the joint venture, 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 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,
	2015				2014
5.25% unsecured senior notes due June 2015 (a)	$	—			$	236,452
6.50% unsecured senior notes due May 2016 (a)	464,436				462,009
7.625% unsecured senior notes due October 2017 (b)	122,841				122,752
7.875% unsecured senior notes due June 2032 (a)	299,283				299,239
6.375% unsecured senior notes due May 2033 (a)	398,714				398,640
6.00% unsecured senior notes due February 2035 (a)	299,495				299,469
Total senior notes – carrying value (c)	$	1,584,769			$	1,818,561
Estimated fair value	$	1,643,651			$	1,952,774

(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, 2015, we were in compliance with all of the covenants and requirements under the senior notes. Our senior note principal maturities are as follows: 2016 - $465.2 million; 2017 - $123.0 million; 2018 through 2020 - $0.0 million; and thereafter - $1.0 billion. Refer to Note 13 for supplemental consolidating financial information of the Company.

Debt retirement

We retired outstanding senior notes totaling $238.0 million, $245.7 million, and $461.4 million during 2015, 2014, and 2013, respectively. The 2014 and 2013 retirements occurred prior to the stated maturity dates and resulted in losses totaling $8.6 million and $26.9 million in 2014 and 2013, respectively. Losses on debt repurchase transactions include the write-off of unamortized discounts, premiums, and transaction fees related to the repurchased debt 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 $500.0 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) $300.0 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, 2015, we had no borrowings outstanding and $191.3 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, 2015, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $308.7 million and $291.6 million as of December 31, 2015 and 2014, respectively.

Term loan

On September 30, 2015, we entered into a senior unsecured $500.0 million term loan agreement (the “Term Loan”) with an initial maturity date of January 3, 2017, which can be extended at our option up to 12 months. The interest rate on the Term Loan may be based on either LIBOR or a base rate plus an applicable margin, as defined, and was 1.5% at December 31, 2015. Borrowings are interest only with the principal being due at the maturity date and are guaranteed by certain of our wholly-owned subsidiaries. The Term Loan contains customary affirmative and negative covenants for loans of this type, including the same financial covenants as under the Revolving Credit Facility. As of December 31, 2015, we were in compliance with all covenants.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $35.3 million and $22.3 million at December 31, 2015 and 2014, respectively. These notes have maturities ranging up to six 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 2015, Pulte Mortgage entered into an amendment to the Repurchase Agreement that extended the effective date to September 2016. The Repurchase Agreement was subsequently amended in December 2015 to increase the borrowing capacity to $310.0 million. The capacity decreased to $175.0 million on January 19, 2016, and increases to $200.0 million on July 29, 2016. The purpose for the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. 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 $267.9 million and $140.2 million outstanding under the Repurchase Agreement at December 31, 2015, and 2014, respectively, and was in compliance with its covenants and requirements as of such dates.

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

	December 31,
	2015				2014
Available credit lines	$	310,000			$	150,000
Unused credit lines	$	42,123			$	9,759
Weighted-average interest rate	2.65		%		2.70		%

7. Shareholders’ equity

We reinstated our quarterly cash dividend in July 2013 and subsequently raised the quarterly dividend in both 2014 and 2015. Our declared quarterly cash dividends totaled $117.9 million, $86.4 million, and $57.5 million in 2015, 2014, and 2013, respectively. Under the share repurchase program authorized by our Board of Directors, we repurchased 21.2 million, 12.9 million, and $7.2 million shares in 2015, 2014, and 2013, respectively, for a total of $433.7 million, $245.8 million, and $118.1 million in 2015, 2014, and 2013, respectively. At December 31, 2015, we had remaining authorization to repurchase $604.8 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 2015, 2014, and 2013, employees surrendered shares valued at $9.0 million, $7.2 million, and $9.6 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 shares, performance shares, and restricted share units ("RSUs") to key employees (as determined by the Compensation and Management Development Committee of the Board of Directors) for periods not to exceed ten years. Non-employee directors are entitled to an annual distribution of stock options, common shares, or RSUs. All options granted to non-employee directors vest immediately and are exercisable for ten years from the grant date. Options granted to employees generally vest incrementally over four years and are generally exercisable for ten years from the vest date. Restricted shares and RSUs generally cliff vest after three years. Restricted share holders have voting rights during the vesting period and both restricted share 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 common shares upon distribution. RSUs represent the right to receive an equal number of common shares and are converted into common shares upon distribution. As of December 31, 2015, there were 25.1 million shares that remained available for grant under the plan.

Our stock compensation expense for the three years ended December 31, 2015, is presented below ($000's omitted):

	2015				2014				2013
Stock options	$	37			$	121			$	1,056
Restricted shares (including RSUs and performance shares)	16,852				13,690				13,418
Long-term incentive plans	7,863				15,481				16,006
	$	24,752			$	29,292			$	30,480

Stock options

A summary of stock option activity for the three years ended December 31, 2015, is presented below (000’s omitted except per share data):

	2015								2014								2013
	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	9,370				$	23			12,887				$	23			17,148				$	22
Granted	—				—				—				—				—				—
Exercised	(904		)		12				(1,422		)		11				(1,432		)		14
Forfeited	(2,426		)		37				(2,095		)		29				(2,829		)		25
Outstanding, end of year	6,040				$	19			9,370				$	23			12,887				$	23
Options exercisable at year end	6,040				$	19			9,265				$	23			12,402				$	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, 2015:

	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 $10.00	326			4.8		$	8			326			$	8
$10.01 to $20.00	3,697			3.5		12				3,697			12
$20.01 to $30.00	152			1.0		28				152			28
$30.01 to $40.00	1,865			1.0		34				1,865			34
	6,040			2.7		$	19			6,040			$	19

We did not issue any stock options during 2015, 2014, or 2013. As a result, there is no unrecognized compensation cost related to stock option awards at December 31, 2015. 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 2015, 2014, and 2013 was $9.4 million, $14.1 million, and $10.8 million, respectively. As of December 31, 2015, options outstanding had an intrinsic value of $25.3 million, of which $25.3 million related to options exercisable.

Restricted shares (including RSUs and performance shares)

A summary of restricted share activity, including RSUs and performance shares, for the three years ended December 31, 2015, is presented below (000’s omitted, except per share data):

	2015							2014							2013
	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	2,890			$	15			3,211			$	11			3,822			$	9
Granted	932			$	22			974			$	19			806			$	21
Distributed	(1,090	)		$	10			(1,019	)		$	10			(1,391	)		$	11
Forfeited	(156	)		$	19			(276	)		$	15			(26	)		$	15
Outstanding, end of year	2,576			$	18			2,890			$	15			3,211			$	11
Vested, end of year	89			$	14			75			$	13			60			$	12

During 2015, 2014, and 2013, the total fair value of shares vested during the year was $10.2 million, $8.1 million, and $12.7 million, respectively. Unamortized compensation cost related to restricted share awards was $16.0 million at December 31, 2015. These costs will be expensed over a weighted-average period of approximately 2 years. Additionally, there were 88,727 RSUs outstanding at December 31, 2015, that had vested but had not yet been paid out because the payout date had been deferred by the holder.

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 share 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 share price and totaled $2.7 million and $9.5 million at December 31, 2015 and 2014, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 share 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 $20.5 million and $26.2 million at December 31, 2015 and 2014, respectively.

9. Income taxes

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

	2015				2014				2013
Current expense (benefit)
Federal	$	8,760			$	5,619			$	5,725
State and other	1,474				(13,968		)		(1,596		)
	$	10,234			$	(8,349	)		$	4,129
Deferred expense (benefit)
Federal	$	277,895			$	232,969			$	(1,833,580	)
State and other	33,804				(9,200		)		(262,843		)
	$	311,699			$	223,769			$	(2,096,423	)
Income tax expense (benefit)	$	321,933			$	215,420			$	(2,092,294	)

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

	2015			2014			2013
Income taxes at federal statutory rate	35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax	2.8			3.0			4.0
Deferred tax asset valuation allowance	0.4			(6.6	)		(438.0	)
Tax contingencies	0.1			(1.4	)		0.3
Other	1.2			1.2			2.3
Effective rate	39.5	%		31.2	%		(396.4	)%

Our effective tax rate was 39.5%, 31.2% and (396.4)% for 2015, 2014, and 2013 respectively. The 2015 effective tax rate exceeds the federal statutory rate, primarily due to state taxes including changes in valuation allowance on state deferred tax assets and revaluation of deferred tax assets due to state law changes and business operations. The 2014 effective tax rate is less than the federal statutory rate primarily due to reversal of a portion of our valuation allowance related to certain state deferred tax assets, along with the favorable resolution of certain federal and state income tax matters. The 2013 effective tax rate differed from the federal statutory rate primarily due to the reversal of substantially all of the valuation allowance related to our federal and certain state deferred tax assets.

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,
	2015				2014
Deferred tax assets:
Accrued insurance	$	237,836			$	254,031
Non-deductible reserves and other	155,488				191,097
Inventory valuation reserves	476,673				599,763
Net operating loss ("NOL") carryforwards:
Federal	367,302				515,568
State	274,686				257,738
Alternative minimum tax credit carryforwards	44,161				34,812
Energy and other credit carryforwards	28,669				27,858
	1,584,815				1,880,867
Deferred tax liabilities:
Capitalized items, including real estate basis differences, deducted for tax, net	(39,220		)		(31,584		)
Trademarks and tradenames	(41,664		)		(46,362		)
	(80,884		)		(77,946		)
Valuation allowance	(109,052		)		(82,253		)
Net deferred tax asset	$	1,394,879			$	1,720,668

Our gross federal NOL carryforward is approximately $1.0 billion and expires between 2028 and 2032. We also have significant state NOLs in various jurisdictions which may generally be carried forward from 5 to 20 years, depending on the jurisdiction. The state NOL carryforwards expire at various dates as follows: of the total state DTA, $32.2 million from 2016 to 2020, $46.1 million from 2021 to 2025, and $196.4 million from 2026 to 2035. In addition, we have federal energy credit carryforwards expiring in 2026 to 2034 and alternative minimum tax credits that can be carried forward indefinitely.

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.

As a result of the 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. 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. We do believe that certain of our state NOL carryforwards will be limited due to Section 382.

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. 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.

In 2013, we recorded an income tax benefit of $2.1 billion as the result of a reversal of valuation allowance. Based on previous evaluations, 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 had incurred in the recent years prior to 2013, including being in a three-year cumulative pre-tax loss position, which we exited in 2013. During 2013, we

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

We conduct 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 were more favorable than in recent years and our belief that conditions would 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.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2015 and 2014, that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $19.4 million if and when such deferred tax assets are ultimately realized. We use the with-and-without approach when determining when excess tax benefits have been realized.

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 had $39.0 million and $32.9 million of gross unrecognized tax benefits at December 31, 2015 and 2014, respectively. Of these amounts, $39.0 million and $32.9 million, respectively, would impact the effective tax rate if recognized. Additionally, we had accrued interest and penalties of $17.2 million and $17.3 million at December 31, 2015 and 2014, respectively.

It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $35.0 million, excluding interest and penalties, primarily due to potential settlements. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):

	2015				2014				2013
Unrecognized tax benefits, beginning of period	$	32,911			$	173,310			$	170,425
Increases related to tax positions taken during a prior period	5,763				—				12,877
Decreases related to tax positions taken during a prior period	—				(133,883		)		(7,502		)
Increases related to tax positions taken during the current period	318				237				381
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		)
Unrecognized tax benefits, end of period	$	38,992			$	32,911			$	173,310

We continue to participate in the Compliance Assurance Process (“CAP”) with the IRS as an alternative to the traditional IRS examination process. As a result of our participation in CAP, federal tax years 2013 and prior are closed. Tax year 2014 is expected to close by the second quarter of 2016, and tax year 2015 is expected to close by the second quarter of 2017. We are currently under examination by 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 2005 to 2015.

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, 2015				December 31, 2014
Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale		Level 2		$	442,715			$	339,531
Interest rate lock commitments		Level 2		5,574				4,248
Forward contracts		Level 2		338				(3,574		)
Whole loan commitments		Level 2		13				(588		)
Measured at fair value on a non-recurring basis:
House and land inventory		Level 3		$	11,052			$	13,925
Disclosed at fair value:
Cash and equivalents (including restricted cash)		Level 1		$	775,435			$	1,309,220
Financial Services debt		Level 2		267,877				140,241
Term loan		Level 2		500,000				—
Senior notes		Level 2		1,643,651				1,952,774

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, the Term Loan, 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 $1.6 billion and $1.8 billion, at December 31, 2015 and 2014, 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,
	2015				2014
Accounts and notes receivable:
Insurance receivables (Note 12)	$	130,170			$	60,598
Notes receivable	28,288				30,699
Other receivables	83,177				63,867
	241,635				155,164
Prepaid expenses	109,113				72,585
Deposits and pre-acquisition costs (Note 1)	162,119				127,280
Property and equipment, net (Note 1)	86,312				75,219
Income taxes receivable (Note 9)	25,080				21,330
Other	46,840				91,640
	$	671,099			$	543,218

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,
	2015				2014
Self-insurance liabilities (Note 12)	$	692,053			$	710,245
Loan origination liabilities (Note 12)	46,381				58,222
Compensation-related	124,798				142,586
Warranty (Note 12)	61,179				65,389
Community development district obligations (Note 12)	11,964				17,122
Accrued interest	20,541				20,446
Limited recourse notes payable	35,336				22,255
Dividends payable	31,568				29,682
Other	260,453				277,827
	$	1,284,273			$	1,343,774

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, 2015, are as follows ($000’s omitted):

Years Ending December 31,
2016	$	28,561
2017	21,353
2018	18,320
2019	15,981
2020	8,940
Thereafter	34,974
Total minimum lease payments (a)	$	128,129

(a)	Minimum payments have not been reduced by minimum sublease rentals of $2.5 million due in the future under non-cancelable subleases.

Net rental expense for 2015, 2014, and 2013 was $27.7 million, $25.3 million, and $23.0 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).

Estimating the required liability for these potential losses requires a significant level of management judgment. During 2015 and 2014, we reduced our loan origination liabilities by net reserve releases of $11.4 million and $18.6 million, respectively, based on probable settlements of various repurchase requests and current conditions. Reserves provided (released) 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.

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

	2015				2014				2013
Liabilities, beginning of period	$	58,222			$	124,956			$	164,280
Reserves provided (released), net	(11,433		)		(18,604		)		—
Payments	(408		)		(48,130		)		(39,324		)
Liabilities, end of period	$	46,381			$	58,222			$	124,956

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2015 and 2014, we had $12.0 million and $17.1 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 $191.3 million and $1.0 billion, respectively, at December 31, 2015, and $212.1 million and $1.0 billion, respectively, at December 31, 2014. In the event any such letter of credit or surety bonds is drawn, 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 drawn. 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.

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.

In September 2012, Applecross Club Operations ("Applecross") filed a complaint for breach of contract and promissory estoppel in Applecross v. Pulte Homes of PA, et al. The complaint alleged that we induced Applecross to purchase a golf course from us in 2010 by promising to build over 1,000 residential units in a planned community located outside Philadelphia, Pennsylvania. In September 2015, the jury in the case found in favor of Applecross and awarded damages in the amount of $20.0 million. We believe we have meritorious defenses and have filed post-trial motions seeking to, among other things, overturn the jury verdict. If unsuccessful, we plan to appeal the award. However, in light of the jury’s verdict, we recorded a reserve of $20.0 million in 2015, which is reflected in other expense, net

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, which are reflected in other expense, net.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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):

	2015				2014				2013
Warranty liabilities, beginning of period	$	65,389			$	63,992			$	64,098
Reserves provided	52,684				51,348				49,399
Payments	(60,968		)		(47,968		)		(44,925		)
Other adjustments	4,074				(1,983		)		(4,580		)
Warranty liabilities, end of period	$	61,179			$	65,389			$	63,992

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 us. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by us. This self-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.

Our recorded reserves for all such claims totaled $692.1 million and $710.2 million at December 31, 2015 and 2014, 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 65% and 72% of the total general liability reserves at December 31, 2015 and 2014, 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

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Housing market conditions have been volatile across most of our markets over the past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority 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. 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.

Adjustments to reserves are recorded in the period in which the change in estimate occurs. During 2015, we recorded general liability reserve reversals of $32.6 million resulting from a legal settlement and $29.6 million related to changes in our actuarial estimates resulting from favorable claims experience relative to previous actuarial projections. During 2014, we increased general liability insurance reserves by $69.3 million, which was primarily driven by estimated costs associated with siding repairs in certain previously completed communities that, in turn, impacted actuarial estimates for potential future claims. Such adjustments are reflected in "Reserves provided, net" in the below table.

Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):

	2015				2014				2013
Balance, beginning of period	$	710,245			$	668,100			$	721,284
Reserves provided, net	16,085				141,790				64,737
Payments	(34,277		)		(99,645		)		(117,921		)
Balance, end of period	$	692,053			$	710,245			$	668,100

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. As reflected in Note 11, our receivables from insurance carriers totaled $130.2 million and $60.6 million at December 31, 2015 and 2014, respectively. The increase in insurance receivables resulted from the continued progression of insured construction defect claims. Given the complexity inherent with resolving construction defect claims in the homebuilding industry as described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers. Additionally, we are the plaintiff in litigation with certain of our insurance carriers relating to a large portion of the insurance receivables balance. We believe collection of these insurance receivables is probable based on the legal merits of our positions, favorable legal rulings received to date, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims. While the outcome of these matters 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.

13. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, 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.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2015

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	—			$	638,602			$	115,559			$	—			$	754,161
Restricted cash	—				20,274				1,000				—				21,274
House and land inventory	—				5,450,058				—				—				5,450,058
Land held for sale	—				80,458				1,034				—				81,492
Residential mortgage loans available- for-sale	—				—				442,715				—				442,715
Investments in unconsolidated entities	93				36,499				4,675				—				41,267
Other assets	49,255				531,120				90,724								671,099
Intangible assets	—				110,215				—				—				110,215
Deferred tax assets, net	1,392,251				11				2,617				—				1,394,879
Investments in subsidiaries and intercompany accounts, net	5,529,606				465,644				6,293,018				(12,288,268		)		—
	$	6,971,205			$	7,332,881			$	6,951,342			$	(12,288,268	)		$	8,967,160
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	70,061			$	1,558,885			$	169,193			$	—			$	1,798,139
Income tax liabilities	57,050				—				—				—				57,050
Financial Services debt	—				—				267,877				—				267,877
Term loan	500,000				—				—				—				500,000
Senior notes	1,584,769				—				—				—				1,584,769
Total liabilities	2,211,880				1,558,885				437,070				—				4,207,835
Total shareholders’ equity	4,759,325				5,773,996				6,514,272				(12,288,268		)		4,759,325
	$	6,971,205			$	7,332,881			$	6,951,342			$	(12,288,268	)		$	8,967,160

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
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				451,331				57,673				—				543,218
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 STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2015

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	5,792,675			$	—			$	—			$	5,792,675
Land sale revenues	—				48,536				—				—				48,536
	—				5,841,211				—				—				5,841,211
Financial Services	—				1				140,752				—				140,753
	—				5,841,212				140,752				—				5,981,964
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,440,893				—				—				4,440,893
Land sale cost of revenues	—				35,858				—				—				35,858
	—				4,476,751				—				—				4,476,751
Financial Services expenses	313				(276		)		82,010				—				82,047
Selling, general, and administrative expenses	3				585,870				3,907				—				589,780
Other expense, net	760				17,424				(821		)		—				17,363
Intercompany interest	2,110				7,922				(10,032		)		—				—
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(3,186		)		753,521				65,688				—				816,023
Income tax expense (benefit)	(1,210		)		297,485				25,658				—				321,933
Income (loss) before equity in income (loss) of subsidiaries	(1,976		)		456,036				40,030				—				494,090
Equity in income (loss) of subsidiaries	496,066				40,484				411,699				(948,249		)		—
Net income (loss)	494,090				496,520				451,729				(948,249		)		494,090
Other comprehensive income (loss)	81				—				—				—				81
Comprehensive income (loss)	$	494,171			$	496,520			$	451,729			$	(948,249	)		$	494,171

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		)		70,403				—				71,057
Selling, general, and administrative expenses	—				661,308				6,507				—				667,815
Other expense, net	9,026				16,847				863				—				26,736
Intercompany interest	9,800				(90		)		(9,710		)		—				—
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												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
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				90,440				—				92,242
Selling, general, and administrative expenses	—				573,904				(5,404		)		—				568,500
Other expense (income), net	28,694				43,944				3,439				—				76,077
Intercompany interest	17,518				(8,260		)		(9,258		)		—				—
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 CASH FLOWS

For the year ended December 31, 2015

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	184,033			$	(449,701	)		$	(82,461	)		$	—			$	(348,129	)
Cash flows from investing activities:
Net change in loans held for investment	—				—				8,664				—				8,664
Change in restricted cash related to letters of credit	3,710				—				—				—				3,710
Capital expenditures	—				(41,857		)		(3,583		)		—				(45,440		)
Other investing activities, net	—				1,937				275				—				2,212
Net cash provided by (used in) investing activities	3,710				(39,920		)		5,356				—				(30,854		)
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				127,636				—				127,636
Proceeds from debt issuance	500,000				—				—								500,000
Repayments of debt	(237,995		)		(1,198		)		—				—				(239,193		)
Borrowings under revolving credit facility	125,000				—				—				—				125,000
Repayments under revolving credit facility	(125,000		)		—				—				—				(125,000		)
Stock option exercises	10,535				—				—				—				10,535
Share repurchases	(442,738		)		—				—				—				(442,738		)
Dividends paid	(115,958		)		—				—				—				(115,958		)
Intercompany activities, net	90,959				(27,886		)		(63,073		)		—				—
Net cash provided by (used in) financing activities	(195,197		)		(29,084		)		64,563				—				(159,718		)
Net increase (decrease) in cash and equivalents	(7,454		)		(518,705		)		(12,542		)		—				(538,701		)
Cash and equivalents at beginning of year	7,454				1,157,307				128,101				—				1,292,862
Cash and equivalents at end of year	$	—			$	638,602			$	115,559			$	—			$	754,161

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:
Net change in loans held for investment	—				—				335				—				335
Change in restricted cash related to letters of credit	54,989				—				—				—				54,989
Capital expenditures	—				(44,956		)		(3,834		)		—				(48,790		)
Cash used for business acquisitions	—				(82,419		)		—				—				(82,419		)
Other investing activities, net	—				8,274				(13		)		—				8,261
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
Repayments of debt	(249,765		)		(866		)		—				—				(250,631		)
Stock option exercises	15,627				—				—				—				15,627
Share 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:
Net change in loans held for investment	—				—				(12,265		)		—				(12,265		)
Change in restricted cash related to letters of credit	(4,152		)		—				—				—				(4,152		)
Capital expenditures	—				(26,472		)		(2,427		)		—				(28,899		)
Other investing activities, net	—				(661		)		—				—				(661		)
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		)
Repayments of debt	(485,048		)		5,221								—				(479,827		)
Stock option exercises	19,411				—				—				—				19,411
Share 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)

14. Quarterly results (unaudited)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total (a)
2015
Homebuilding:
Revenues	$	1,105,700			$	1,249,537			$	1,467,780			$	2,018,194			$	5,841,211
Cost of revenues	854,523				958,592				1,122,175				1,541,461				4,476,751
Income before income taxes (b)	90,748				157,640				164,911				344,019				757,317
Financial Services:
Revenues	$	27,598			$	30,754			$	38,967			$	43,434			$	140,753
Income before income taxes (c)	5,057				9,987				14,365				29,297				58,706
Consolidated results:
Revenues	$	1,133,298			$	1,280,291			$	1,506,747			$	2,061,628			$	5,981,964
Income before income taxes	95,805				167,627				179,276				373,315				816,023
Income tax expense	40,834				64,303				71,507				145,288				321,933
Net income	$	54,971			$	103,324			$	107,769			$	228,027			$	494,090
Net income per share:
Basic	$	0.15			$	0.28			$	0.31			$	0.65			$	1.38
Diluted	$	0.15			$	0.28			$	0.30			$	0.64			$	1.36
Number of shares used in calculation:
Basic	366,748				361,009				350,147				348,699				356,576
Effect of dilutive securities	3,362				3,232				3,225				3,047				3,217
Diluted	370,110				364,241				353,372				351,746				359,793

(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 reserve reversals resulting from a legal settlement (see Note 12)of $26.9 million and $5.7 million in the 2nd and 3rd Quarters, respectively; a charge of $20.0 million in the 3rd Quarter related to the Applecross matter (see Note 12); and $29.6 million relating to decreased general liability insurance reserves in the 4th Quarter.

(c)	Financial Services expenses in the 4th Quarter includes a reduction in loan origination liabilities totaling $11.8 million..

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)
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 (benefit) (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.

(a)

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.

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

(c)	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.

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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 8, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Atlanta, Georgia

February 8, 2016