Bluegreen Vacations Holding Corp - Quarter Report: 2017 September (Form 10-Q)





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, DC  20549



FORM 10-Q



[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the Quarter Ended September 30, 2017



[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



Commission File Number

001-09071



BBX Capital Corporation

(Exact name of registrant as specified in its charter)













Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



YES [X]NO [   ]



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



YES [X]NO [   ]



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    [   ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



YES [   ]NO [ X ]



The number of shares outstanding of each of the registrant’s classes of common stock as of November 2, 2017 is as follows:

 

Class A Common Stock of $.01 par value, 85,962,198 shares outstanding.
Class B Common Stock of $.01 par value, 16,565,728 shares outstanding.





 

---

 





  

 

---

 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements









---

 











---

 

















---

 











---

 















 

---

 

BBX Capital Corporation 

Notes to Condensed Consolidated Financial Statements - Unaudited





1.    Presentation of Interim Financial Statements



Basis of Financial Statement Presentation



BBX Capital Corporation is referred to in this report together with its subsidiaries as the “Company” or, unless otherwise indicated or the context otherwise requires, “we,” “us” or “our” and is referred to in this report without its subsidiaries as “BBX Capital.” The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements.



In management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, as are necessary for a fair statement of the condensed consolidated financial condition of the Company at September 30, 2017; the condensed consolidated results of operations and comprehensive income of the Company for the three and nine months ended September 30, 2017 and 2016; the condensed consolidated changes in equity of the Company for the nine months ended September 30, 2017; and the condensed consolidated cash flows of the Company for the nine months ended September 30, 2017 and 2016.  Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future period. 



These unaudited condensed consolidated financial statements and related notes are presented as permitted by Form 10-Q and should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”).  All significant inter-company balances and transactions have been eliminated in consolidation.  As used throughout this document, the term “fair value” reflects the Company’s estimate of fair value as discussed herein.  Certain amounts for prior periods have been reclassified to conform to the current period’s presentation.



BBX Capital is a diversified holding company whose core investments include Bluegreen Vacations Corporation (“Bluegreen”), real estate and middle market operating businesses.  Bluegreen is a sales, marketing and management company focused on the vacation ownership industry. The Company’s real estate investments include real estate joint ventures and the ownership, financing, acquisition, development and management of real estate. The Company’s investments in middle market operating businesses include Renin Holdings, LLC (“Renin”), a company that manufactures products for the home improvement industry, and the Company’s investments in confectionery businesses through its wholly-owned subsidiary, BBX Sweet Holdings, LLC (“BBX Sweet Holdings”).  The Company’s investment in confectionery businesses includes BBX Sweet Holdings’ acquisition of IT’SUGAR, LLC (“IT’SUGAR”) in June 2017 (see Note 2 – Acquisitions).



On December 15, 2016, the Company completed the acquisition of all of the outstanding shares of the former BBX Capital Corporation (“BCC”) not previously owned by the Company, and on January 30, 2017, the Company changed its name from BFC Financial Corporation to BBX Capital Corporation. On September 27, 2017, Bluegreen changed its name from Bluegreen Corporation to Bluegreen Vacations Corporation.



Prior to the acquisition of all of the outstanding shares of BCC, the Company had an 82% equity interest in BCC and a direct 54% equity interest in Woodbridge Holdings, LLC (“Woodbridge”), the parent company of Bluegreen.  BCC held the remaining 46% interest in Woodbridge.  As a result of the acquisition of the publicly held shares of BCC, BCC (directly) and Bluegreen (indirectly through Woodbridge) are wholly owned subsidiaries of the Company.



BBX Capital has two classes of common stock. Holders of the Class A common stock are entitled to one vote per share, which in the aggregate represents 22% of the combined voting power of the Class A common stock and the Class B common stock. Class B common stock represents the remaining 78% of the combined vote. The percentage of total common equity represented by Class A and Class B common stock was 87% and 13%, respectively, at September 30, 2017.   Class B common stock is convertible into Class A common stock on a share for share basis at any time at the option of the holder.



---

 

On October 23, 2017, the Company announced that Bluegreen filed a registration statement on Form S-1 with the SEC relating to a proposed initial public offering of shares of Bluegreen’s common stock representing a minority interest in Bluegreen. The number of shares to be offered and the price range for the proposed offering have not yet been determined.  It is currently contemplated that Woodbridge will participate in the proposed offering as a selling shareholder with respect to a portion of the offering.  There is no assurance that Bluegreen will complete the proposed offering or that Woodbridge will sell any shares in the offering. 



Recently Adopted Accounting Pronouncements



On January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-based Payment Accounting.  The new standard requires the recognition of excess tax benefits (“windfall”) and tax deficiencies in the income statement when the stock awards vest or are settled, thus eliminating additional paid in capital pools. The new standard also removes the requirement to delay recognition of windfall tax benefits until it reduces current taxes payable. The new standard instead requires the recognition of windfall tax benefits at the time of settlement, subject to valuation allowance considerations.  The new standard clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s statement of cash flows and cash flows related to windfall tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows which are classified as operating activities.  The new standard provides an accounting policy election to account for forfeitures as they occur instead of on an estimated basis and allows for the employer to repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory rate in the employee’s applicable jurisdictions without triggering liability accounting. The new standard changes the computation of diluted earnings per share as windfall tax benefits will not be included in the calculation of assumed proceeds when applying the treasury stock method. 



The primary impact of the implementation of this standard on the Company’s Consolidated Financial Statements was the recognition of a $3.1 million  windfall tax benefit as a cumulative effect to accumulated earnings associated with windfall tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable. 



Upon adoption of the new standard, the Company made an accounting policy election to recognize forfeitures as they occur.  The presentation requirement for cash flows related to employee taxes paid for withheld shares had no impact to operating cash flows on any of the periods presented in the Company’s consolidated cash flows statements since these cash flows have historically been presented as a financing activity.



New Accounting Pronouncements



The FASB has issued the following accounting pronouncements and guidance which may be applicable to the Company but have not yet become effective. (See the 2016 Annual Report for additional accounting pronouncements and guidance issued relevant to the Company’s operations which have not been adopted as of September 30, 2017): 



Accounting Standards Update (ASU) No. 2014-09 –  Revenue Recognition (Topic 606): In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations and other technical corrections and minor improvements affecting a variety of topics and required disclosures in the new standard.  This standard will be effective and the Company will adopt this standard on January 1, 2018. Entities have the option to apply the new guidance under a full retrospective approach or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company will determine the transition method of this standard later in 2017 following the issuance of timeshare industry-specific guidance.



The Company’s initial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the Company is currently analyzing the potential impacts that adopting this standard may have on its consolidated financial statements and related disclosures and its business processes, accounting policies and controls.    



The Company believes that the new standard will impact the timing of revenue recognition associated with the sale of real estate.  Specifically, the Company believes the new standard will result in the recognition of revenue sooner for

---

 

contingent consideration on real estate sales and on the contribution of real estate to joint ventures in which the Company has an equity interest. 



The Company believes that the new standard will not materially affect revenue recognition associated with trade sales. Retail trade sales performance obligations are satisfied at the time of the transaction as customers of the retail business typically pay in cash at the time of transfer of the promised goods.  Wholesale trade sales performance obligations are generally satisfied when the promised goods are shipped by the Company or received by the customer. 



The Company does not expect this standard to materially change the accounting for the recognition of its fee-based sales commission revenue, ancillary revenues, and rental revenue. The Company currently expects possible areas of impact will include (i) gross versus net presentation for payroll reimbursement and insurance premiums reimbursement related to resorts managed by Bluegreen on behalf of third parties and (ii) the timing of the recognition of VOI revenue related to the removal of certain bright line tests regarding the determination of the adequacy of the buyer’s commitment under existing industry-specific guidance.  Final industry-specific guidance remains open for the following issues: (i) application of percentage of completion related to sales of incomplete VOIs, (ii) satisfaction of performance obligations and (iii) contract costs.  Due to the nature and potential significant impact of these open issues, the Company expects to disclose additional details on the impact of the adoption of this accounting standard following the issuance of timeshare industry-specific guidance on these items.



Accounting Standards Update (ASU) No. 2016-02 – Leases (Topic 842).  This update will require assets and liabilities to be recognized on the balance sheet of a lessee for the rights and obligations created by leases of assets with terms of more than 12 months.  For income statement purposes, the update retained a dual model, requiring leases to be classified as either operating or finance based on largely similar criteria to those applied in current lease accounting, but without explicit bright lines.  ASU 2016-02 also requires extensive quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases.  This standard will be effective for the Company on January 1, 2019.  Early adoption is permitted.  The Company expects that the implementation of this new standard will have an impact on its consolidated financial statements and related disclosures as the Company has aggregate future minimum lease payments of $159.7 million at September  30, 2017 under its current non-cancelable lease agreements with various expirations dates between 2017 and 2030. The Company anticipates the recognition of additional assets and corresponding liabilities related to these leases on its consolidated statement of financial condition.   



Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.  This update introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. Further, public entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). This standard will be effective for the Company on January 1, 2020. Early adoption is permitted beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-13 may have on its consolidated financial statements.



Accounting Standard Update (ASU) No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).    This update indicates that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity by transferring ownership in the legal entity to a counterparty.  The update indicates that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when the counterparty obtains control of the asset.  This update supersedes the guidance in Topic 845 and eliminates partial sale accounting associated with the transfer of real estate to a joint venture for a noncontrolling interest in the joint venture.  The ASU is effective upon adoption of ASU 2014-09.  In certain joint ventures, the Company accounted for the transfer of land to joint ventures for initial capital contributions as partial sales resulting in deferred gains and joint venture basis adjustments.  Joint venture aggregate basis adjustments and deferred gains were $6.3 million and $0.5 million as of September 30, 2017.  The Company is currently evaluating the requirements of this update and has not yet determined its impact on the Company’s consolidated financial statements.



Accounting Standard Update (ASU) No. 2017-09, Compensation – Stock Compensation (Topic 718).  This update was issued to provide guidance on determining which changes to the terms and conditions of share-based compensation awards require an entity to apply modification accounting under Topic 718.  An entity should apply modification accounting to changes to terms or conditions of a share-based compensation awards unless there is no change in the fair value, vesting or classification of the modified award as compared to the original award. The ASU is effective for

---

 

annual periods and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted.  The Company believes that the adoption of this update will not have a material impact on the Company’s consolidated financial statements. 





2.    Acquisitions



Acquisition of IT’SUGAR



On June 16, 2017 (the “Acquisition Date”), a wholly-owned subsidiary of BBX Sweet Holdings acquired IT’SUGAR, a specialty candy retailer with 95 retail locations in 26 states and Washington, DC, through the acquisition of all of its Class A Preferred Units and 90.4% of its Class B Common Units for cash consideration of approximately $58.4 million, net of cash acquired. The remaining 9.6% of IT’SUGAR’s Class B Common Units are owned by JR Sugar Holdings, LLC (“JR Sugar”), an entity owned by the founder and CEO of IT’SUGAR. 



The consolidated net assets and results of operations of IT’SUGAR are included in the Company’s consolidated financial statements commencing on the Acquisition Date and resulted in the following impact to trade sales and net income attributable to shareholders for the three and nine months ended September 30, 2017 (in thousands):





Purchase Price Allocation



The Company accounted for the acquisition of IT’SUGAR using the acquisition method of accounting, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values at the Acquisition Date. The following table summarizes the provisional purchase price allocation based on the Company’s preliminary valuation, including the fair values of the assets acquired, liabilities assumed, and the redeemable noncontrolling interest in IT’SUGAR at the Acquisition Date (in thousands):











As management is still in the process of completing its valuation analysis, our accounting for the acquisition is not complete as of the date of this report. As a result, the amounts reported in the above table are provisional amounts that

---

 

may be updated in subsequent periods to reflect the completion of our valuation analysis and any additional information obtained during the measurement period.



The provisional fair values reported in the above table have been estimated by the Company using available market information and appropriate valuation methods. As considerable judgment is involved in estimates of fair value, the provisional fair values presented above are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair value amounts.



The following summarizes the Company’s methodologies for estimating the fair values of certain assets and liabilities associated with IT’SUGAR:



Property and Equipment



Property and equipment acquired consisted primarily of leasehold improvements at IT’SUGAR’s retail stores. The fair value of the leasehold improvements and other equipment was estimated based on the replacement cost approach.



Identifiable Intangible Assets and Liabilities



The identifiable intangible assets acquired primarily consisted of the fair value of IT’SUGAR’s trademark, which was estimated using the relief-from-royalty method, a form of the income approach. Under this approach, the fair value was estimated by calculating the present value using a risk-adjusted discount rate of the expected future royalty payments that would have to be paid if the IT’SUGAR trademark was not owned. 



The identifiable intangible assets and liabilities also included the fair value of IT’SUGAR’s operating lease agreements associated with its retail stores. The fair value of these assets and liabilities were estimated by calculating the present value using a risk-adjusted discount rate of the difference between the contractual amounts to be paid pursuant to the lease agreements and the estimate of market lease rates at the Acquisition Date.



The $4.2 million trademark intangible asset is amortized over 15 years and the $0.2 million favorable and the $0.7 million of unfavorable lease agreements are amortized over a weighted average period of 6.5 years. The noncompetition agreement is amortized over five years.



Goodwill



The goodwill recognized in connection with the acquisition reflects the difference between the estimated fair value of the net assets acquired and the Company’s consideration paid to acquire IT’SUGAR. The goodwill recognized in the acquisition is deductible for income tax purposes.  



Pro Forma Information



The following unaudited pro forma financial data presents the Company’s revenues and earnings for the three and nine months ended September 30, 2017 and 2016 as if the Acquisition Date had occurred on January 1, 2016 (in thousands):









---

 

The unaudited pro forma financial data reported in the above table does not purport to represent what the actual results of the Company’s operations would have been assuming that the Acquisition Date was January 1, 2016, nor does it purport to predict the Company’s results of operations for future periods.



Noncontrolling Interest



Under the terms of IT’SUGAR’s operating agreement, JR Sugar may require the Company to purchase for cash its IT’SUGAR Class B Common Units upon the occurrence of certain events, including events relating to the employment agreement between BBX Sweet Holdings and the CEO of IT’SUGAR, as described below. The purchase price payable by the Company for such Class B Common Units will be determined based on the circumstance giving rise to such purchase obligation in accordance with prescribed formulas set forth in IT’SUGAR’s operating agreement.  In addition, following the seventh anniversary of the Acquisition Date, the Company shall have the right, but not the obligation, to require JR Sugar to sell its Class B Common Units to the Company in accordance with a prescribed formula set forth in IT’SUGAR’s operating agreement.



As a result of the redemption features, JR Sugar’s Class B Common Units are considered redeemable noncontrolling interests and reflected in the mezzanine section as a separate line item in the Company’s Condensed Consolidated Statements of Financial Condition. As the noncontrolling interests are not currently subject to redemption but are probable of becoming redeemable in a future period, the Company will measure the noncontrolling interests by accreting changes in the estimated purchase price from the Acquisition Date to the earliest redemption date and may adjust the carrying amount of such interests to equal the calculated value in the event it is in excess of the carrying amount at such time.



Employment and Loan Agreements



In connection with the acquisition of IT’SUGAR, BBX Sweet Holdings entered into an employment agreement with the founder and CEO of IT’SUGAR for his continued services as CEO of IT’SUGAR. Upon the occurrence of certain events constituting a breach of the employment agreement by the CEO resulting in his termination, the Company may exercise its ability to purchase JR Sugar’s Class B Common Units for cash for an amount equal to the lesser of the fair market value of such units determined in accordance with the prescribed formula set forth in IT’SUGAR’s operating agreement and the initial value ascribed to such units at the Acquisition Date. Similarly, upon the occurrence of certain “not for cause” termination events associated with the termination of the CEO’s employment, JR Sugar may require the Company to purchase its Class B Common Units for cash for an amount equal to the greater of the fair market value of such units determined in accordance with the prescribed formula set forth in IT’SUGAR’s operating agreement and the initial value ascribed to such units at the Acquisition Date.



Concurrent with the acquisition, JR Sugar borrowed $2.0 million from BBX Sweet Holdings in the form of two promissory notes, as partial consideration for the purchase of its 9.6% ownership of IT’SUGAR’s Class B Common Units. The notes mature on June 16, 2024, and a portion of the aggregate principal balance and accrued interest of such notes may be forgiven on an annual basis provided that IT’SUGAR’s CEO continues to remain employed with BBX Sweet Holdings pursuant to his employment agreement. The notes receivable are presented as a deduction from the balance of the related Class B Common Units.





3.    Consolidated Variable Interest Entities



From time to time, Bluegreen sells VOI notes receivable through special purpose finance entities. These transactions are generally structured as non-recourse to Bluegreen and are designed to provide liquidity for Bluegreen and to transfer certain of the economic risks and benefits of the notes receivable to third-parties.  In a securitization, various classes of debt securities are issued by the special purpose finance entities that are generally collateralized by a single tranche of transferred assets, which consist of VOI notes receivable.  Bluegreen services the securitized notes receivable for a fee pursuant to servicing agreements negotiated with third-parties based on market conditions at the time of the securitization.



In these securitizations, Bluegreen generally retains a portion of the securities and continues to service the securitized notes receivable.  Under these arrangements, the cash payments received from obligors on the receivables sold are generally applied monthly to pay fees to service providers, make interest and principal payments to investors, and fund required reserves, if any, with the remaining balance of such cash retained by Bluegreen; however, to the extent the portfolio of receivables fails to satisfy specified performance criteria (as may occur due to, among other things, an increase in default rates or credit loss severity) or other trigger events occur, the funds received from obligors are

---

 

required to be distributed on an accelerated basis to investors.  Depending on the circumstances and the transaction, the application of the accelerated payment formula may be permanent or temporary until the trigger event is cured.  As of September 30, 2017, Bluegreen was in compliance with all applicable terms under its securitization transactions, and no trigger events had occurred.



In accordance with applicable accounting guidance for the consolidation of VIEs, Bluegreen analyzes its variable interests, which may consist of loans, servicing rights, guarantees, and equity investments, to determine if an entity in which Bluegreen has a variable interest is a variable interest entity.  Bluegreen’s analysis includes a review of both quantitative and qualitative factors.  Bluegreen bases its quantitative analysis on the forecasted cash flows of the entity and bases its qualitative analysis on the structure of the entity, including Bluegreen’s decision-making ability and authority with respect to the entity, and relevant financial agreements.  Bluegreen also uses its qualitative analysis to determine if Bluegreen must consolidate a variable interest entity as the primary beneficiary.  In accordance with applicable accounting guidance, Bluegreen has determined these securitization entities to be VIEs of which Bluegreen is the primary beneficiary and, therefore, Bluegreen consolidates these entities into its financial statements. 



Under the terms of certain of Bluegreen’s VOI note sales, Bluegreen has the right to repurchase or substitute a limited amount of defaulted notes for new notes at the outstanding principal balance plus accrued interest.  Voluntary repurchases and substitutions by Bluegreen of defaulted notes during the nine months ended September 30, 2017 and 2016 were $7.4 million and $3.5 million, respectively.  Bluegreen’s maximum exposure to loss relating to its non-recourse securitization entities is the difference between the outstanding VOI notes receivable and the notes payable, plus cash reserves and any additional residual interest in future cash flows from collateral.



Information related to the assets and liabilities of Bluegreen’s consolidated VIEs included in the Company’s Condensed Consolidated Statements of Financial Condition is set forth below (in thousands):









The restricted cash and securitized notes receivable balances disclosed in the table above are restricted to satisfy obligations of the VIEs.





4.    Loans Receivable 



The loans receivable portfolio consisted of the following components (in thousands):







As of September 30, 2017, foreclosure proceedings were in process with respect to $8.5 million of residential loans and $0.1 million of consumer loans.



The total discount on loans receivable was $2.4 million and $3.3 million as of September 30, 2017 and December 31, 2016, respectively.



---

 

Credit Quality of Loans Receivable and the Allowance for Loan Losses



The Company assesses loan credit quality by monitoring loan delinquencies. 



The unpaid principal balance less charge-offs and discounts of non-accrual loans receivable was as follows (in thousands):







An age analysis of the past due recorded investment in loans receivable as of September 30, 2017 and December 31, 2016 was as follows (in thousands):













---

 

The activity in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands): 







Impaired Loans



Loans are considered impaired when, based on current information and events, management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is evaluated based on past due status for consumer and residential loans. Impairment is evaluated for commercial and small business loans based on payment history, financial strength of the borrower or guarantors and cash flow associated with the collateral or business. Collateral dependent impaired loans are charged down to the fair value of collateral less cost to sell. Interest payments on impaired loans are recognized on a cash basis as interest income. Impaired loans, or portions thereof, are charged off when deemed uncollectible.    



Individually impaired loans as of September 30, 2017 and December 31, 2016 were as follows (in thousands):









Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):















Impaired loans with no valuation allowances recorded represent loans that were written-down to the fair value of the collateral less cost to sell, loans in which the collateral value less cost to sell was greater than the carrying value of the loan, loans in which the present value of the cash flows discounted at the loans’ effective interest rate was equal to or greater than the carrying value of the loans, or loans that were collectively measured for impairment.



There were no commitments to lend additional funds on impaired loans as of September 30, 2017.



5.    Notes Receivable



The table below provides information relating to Bluegreen’s notes receivable and related allowance for credit losses as of September 30, 2017 and December 31, 2016 (in thousands):













The weighted-average interest rate on Bluegreen’s notes receivable was 15.4%, and 15.7% at September 30, 2017 and December 31, 2016, respectively.  Bluegreen’s notes receivable secured by VOIs bear interest at fixed rates. 



Bluegreen’s notes receivable are carried at amortized cost less an allowance for credit losses.  Interest income is suspended, and previously accrued but unpaid interest income is reversed on all delinquent notes receivable when principal or interest payments are more than three months contractually past due and not resumed until such loans are less than three months past due.  As of September 30, 2017 and December 31, 2016, $10.9 million and $11.4 million, respectively, of Bluegreen’s VOI notes receivable were more than 90 days past due, and accordingly, consistent with Bluegreen’s policy, were not accruing interest income.  After 120 days, Bluegreen’s VOI notes receivable are generally written off against the allowance for credit losses.



Credit Quality of Notes Receivable and the Allowance for Credit Losses



Bluegreen holds large amounts of homogeneous VOI notes receivable and assesses uncollectibility based on pools of receivables.  In estimating future credit losses, Bluegreen’s management does not use a single primary indicator of credit quality but instead evaluates its VOI notes receivable based upon a static pool analysis that incorporates the aging of the respective receivables, default trends and prepayment rates by origination year, as well as the FICO® scores of the borrowers at the time of origination.



---

 

The activity in Bluegreen’s allowance for loan losses (including notes receivable secured by homesites) was as follows (in thousands):









The following table shows the delinquency status of Bluegreen’s VOI notes receivable as of September 30, 2017 and December 31, 2016 (in thousands):













6.     Inventory



Inventory consisted of the following (in thousands):







In June 2017, Bluegreen revised its VOI pricing matrix, which has resulted in an increase in the average selling price of its VOIs of 4%.  As a result of this pricing change, Bluegreen’s management also increased its estimate of total gross margin generated on the sale of its VOI inventory.  Under the relative sales value method prescribed for timeshare developers to relieve the cost of VOI inventory, changes to the estimate of gross margin expected to be generated on the sale of VOI inventory are recognized on a retrospective basis in earnings.  Accordingly, during the second quarter of 2017, Bluegreen recognized a benefit to cost of VOIs sold of $5.1 million.



Further, in September 2016, Bluegreen increased the selling price of its VOIs by 5%.  Accordingly, during the third quarter of 2016, Bluegreen recognized a benefit to cost of VOIs sold of $5.6 million.

---

 

The Company’s inventory includes trade inventory of Renin and BBX Sweet Holdings and consists of the following (in thousands):







Trade inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first out method.  In valuing inventory, the Company makes assumptions regarding the write-downs required for excess and obsolete inventory based on judgments and estimates formulated from available information. The Company’s estimates for excess and obsolete inventory are based on historical and forecasted usage. Inventory is also examined for upcoming expiration and is written down where appropriate. Included in costs of trade sales for the three and nine months ended September 30, 2017 was $0.1 million and $1.0 million, respectively, of trade inventory net write-downs.  Included in costs of trade sales for the three and nine months ended September 30, 2016 was $0.2 million and $3.4 million, respectively, of trade inventory write-downs.

 



7.     Investments in Unconsolidated Real Estate Joint Ventures



As of September 30, 2017, the Company had equity investments in 14 unconsolidated real estate joint ventures involved in the development of single-family master planned communities, multifamily apartment facilities and retail centers. Investments in unconsolidated real estate joint ventures are accounted for as unconsolidated variable interest entities. See Note 3 for information regarding the Company’s investments in consolidated variable interest entities.



The Company had the following investments in unconsolidated real estate joint ventures (in thousands):







In September 2017, the Company invested approximately $1.9 million as one of a number of investors in the Altis at Grand Central joint venture with Altman Development (“Altman”). The joint venture purchased an office building and land to develop 314 multi-family units with related amenities located in Tampa, Florida.  The Company is entitled to receive its pro-rata percentage of the joint venture distributions until it receives its aggregate capital contribution plus a specified return on its investment.  Any distributions thereafter are shared with the managing member receiving an increased percentage of the distributions.  

---

 

BBX Capital analyzed the Altis at Grand Central joint venture operating agreement and determined that it is not the primary beneficiary and therefore the investment in the real estate joint venture was accounted for under the equity method of accounting.  This conclusion was based primarily on the determination that the managing member makes all decisions concerning the operations of the joint venture and is managing the construction, leasing, property management, accounting, tenant improvements and disposition of the property.  The managing member can only be removed by the other members for cause. The managing member receives significant benefits from the joint venture in excess of its membership interest in the form of development, construction and other fees and is also exposed to significant joint venture losses from construction loan and cost overrun guarantees.



In October 2017, the Company invested as one of a number of investors in the BBX/Label & Co Chapel Trail Development joint venture with Label & Co. The joint venture purchased land to develop 125 townhomes located in Pembroke Pines, Florida.  The Company contributed $1.3 million in cash and executed a $3.4 million promissory note to the seller of the property to the joint venture for a 47% membership interest in the joint venture.  The interest on the promissory note is payable monthly at six percent per annum with the entire principal balance due in October 2022.  The Company is entitled to receive its pro-rata percentage of the joint venture distributions until it receives its aggregate capital contribution plus a specified return on its investment.  Any distributions thereafter are shared with the managing member receiving an increased percentage of the distributions.



In certain joint ventures, the Company transferred land to the joint venture as an initial capital contribution resulting in deferred gains and joint venture basis adjustments.  The Company accounted for the contribution of land to the joint ventures on the cost recovery method.  Included in other liabilities in the Company’s Condensed Consolidated Statements of Financial Condition as of September 30, 2017 and December 31, 2016 was $0.4 million and $0.9 million, respectively, of deferred gains associated with these land transfers.  During the three and nine months ended September 30, 2017, the Company recognized $0 and $0.5 million, respectively, of deferred gains upon sales by joint ventures of single-family homes.  During the three and nine months ended September 30, 2016, the Company recognized $1.8 million and $2.2 million, respectively, of deferred gains upon sales by joint ventures of single-family homes. 



Differences between the net investments in unconsolidated real estate joint ventures and the underlying equity in the net assets of the joint ventures result from basis adjustments and the capitalization of interest. 



The aggregate amount of real estate joint venture basis adjustments was $6.3 million as of September 30, 2017 and $7.6 million as of December 31, 2016.  During the three and nine months ended September 30, 2017, the Company recognized $0.4 million and $1.2 million, respectively, of equity earnings associated with basis adjustments from joint ventures arising from sales by joint ventures of single-family homes. During the three and nine months ended September 30, 2016, the Company recognized $0.5 million and $0.8 million, respectively, of equity earnings associated with basis adjustments. 



The equity earnings from unconsolidated real estate joint ventures was $2.5 million and $9.6 million for the three and nine months ended September 30, 2017, respectively, substantially all of which was equity earnings from the Hialeah Communities, LLC real estate joint venture.  The condensed Statements of Operations for the three and nine months ended September 30, 2017 and 2016 for the Hialeah Communities, LLC real estate joint venture was as follows (in thousands):



---

 





See Note 9 to the Consolidated Financial Statements included in the 2016 Annual Report for additional information on BBX Capital’s investments in unconsolidated real estate joint ventures.





8.     Debt



Notes Payable and Other Borrowings



The table below sets forth information regarding the Company’s notes payable and credit facilities (other than receivable-backed notes payable and junior subordinated debentures)  (dollars in thousands):











See Note 12 to the Company’s Consolidated Financial Statements included in the 2016 Annual Report for additional information regarding the above listed notes payable and other borrowings. 





New debt issuances and significant changes related to notes payable and credit facilities during the nine months ended September 30, 2017, as well as certain changes which occurred subsequent to September 30, 2017, are detailed below.



---

 

NBA Line of Credit.  Bluegreen/Big Cedar Vacations has a revolving line of credit (the “NBA Line of Credit”) with National Bank of Arizona (“NBA”).  On September 28, 2017, the NBA Line of Credit was amended to increase the borrowing limit from $15 million to $20 million (subject to adjustment as described below), to extend the revolving advance period from June 2018 to September 2020 and the maturity date from June 2020 to September 2022, and to provide for the NBA Line of Credit to be secured by unsold inventory and a building under construction at Bluegreen/Big Cedar Vacations’ The Cliffs at Long Creek Resort. The NBA Line of Credit was previously secured by unsold inventory and a building under construction at Bluegreen/Big Cedar Vacations’ Paradise Point Resort, but such collateral was released in connection with the repayment of all amounts then outstanding under the NBA Line of Credit during April 2017.   As described below under “Receivable-Backed Notes Payable,” the borrowing limit under the NBA Line of Credit is subject to a dollar-for-dollar decrease to the extent of any increase in the maximum borrowings under the NBA Receivables Facility from $50 million to $70 million. In addition, pursuant to the amendment, borrowings under the NBA Line of Credit will accrue interest at a rate equal to the one month LIBOR plus 3.25% (with an interest rate floor of 4.75%). Prior to the amendment, the NBA Line of Credit provided for an interest rate on borrowings equal to the one month LIBOR plus 3.50% (with an interest rate floor of 5.00%).  Interest payments are paid monthly. Principal payments are effected through release payments upon sales of VOIs in The Cliffs at Long Creek Resort that serve as collateral for the NBA Line of Credit, subject to mandatory principal reductions. The NBA Line of Credit is cross-collateralized and is subject to cross-default with the NBA Receivables Facility described below under “Receivable Backed Notes Payable.” As of September 30, 2017, there was no outstanding balance on the NBA Line of Credit.



Pacific Western Term Loan. Bluegreen has a non-revolving term loan (the “Pacific Western Term Loan”) with Pacific Western Bank, as successor-by-merger to CapitalSource Bank, secured by unsold inventory and undeveloped land at the Bluegreen Odyssey Dells Resort. On October 19, 2017, the Pacific Western Term Loan was amended to increase the loan from $1.4 million to $2.7 million. The Pacific Western Term Loan matures in June 2019, and bears interest at 30-day LIBOR plus 5.25%.  Interest payments are paid monthly, and principal payments are effected through release payments upon sales of VOIs in the Bluegreen Odyssey Dells Resort that serve as collateral for the Pacific Western Term Loan, subject to mandatory principal reductions pursuant to the terms of the loan agreement. The Pacific Western Term Loan is cross-collateralized and is subject to cross-default with the Pacific Western Facility described below under “Receivable-Backed Notes Payable.”



Toronto-Dominion Commercial Bank (“TD Bank”) Term Loan and Line of Credit.  In May 2017, Renin entered into a credit facility with TD Bank and in September 2017 the facility was amended.  Under the terms and conditions of the amended credit facility, TD Bank agreed to provide term loans for up to $1.7 million and loans under a revolving credit facility for up to approximately $16.3 million based on available collateral as defined in the facility and subject to Renin’s compliance with the terms and conditions of the facility, including certain specific financial covenants. The proceeds from the TD Bank credit facility were used to repay the Wells Fargo credit facility and for working capital.



Amounts outstanding under the revolving credit facility bear interest at the Canadian or United States Prime Rate plus a margin of 1.00% per annum or the three-month LIBOR rate plus a margin of 2.75% per annum.  Outstanding principal on the revolving credit facility is payable one-year from the date of the advance.  As of September 30, 2017, the amount outstanding under the revolving credit facility was $14.4 million.



The term loans were funded in three tranches aggregating $1.7 million through July 2017 with no further draws permitted.  Amounts outstanding under the term loans bear interest at fixed interest rates ranging from 3.85% to 4.35% for one-year from the date of the applicable drawdown for each loan.  Annually, the fixed interest rates adjust to a variable rate based on Canadian or United States Prime Rate plus a margin of 1.00% per annum or the three-month LIBOR rate plus a margin of 2.75% per annum.  The amounts outstanding under the term loans mature between June 2020 and June 2022. 



Amounts outstanding under the term loans and borrowings under the revolving credit facility require monthly interest payments.



Under the terms and conditions of the TD Bank credit facility, Renin is required to comply with certain financial covenants including a quarterly Debt Service Coverage Ratio and a quarterly Total Debt to Tangible Net Worth Ratio.  The facility also contains customary affirmative and negative covenants, including those that, among other things, limit the ability of Renin to incur liens or engage in certain asset dispositions, mergers or consolidations, dissolutions, liquidations or winding up of its businesses. The credit facility is collateralized by all of Renin’s assets.  As of September 30, 2017,  Renin was in compliance with the credit facility covenants.



---

 

Receivable-Backed Notes Payable



The table below sets forth information regarding Bluegreen’s receivable-backed notes payable facilities (dollars in thousands):







See Note 12 to the Company’s Consolidated Financial Statements included in the 2016 Annual Report for additional information regarding Bluegreen’s receivable-backed notes payable facilities.



New debt issuances and significant changes related to Bluegreen’s receivable-backed notes payable facilities during the nine months ended September 30, 2017 are detailed below.



NBA Receivables Facility. Bluegreen/Big Cedar Vacations has a revolving VOI hypothecation facility (the “NBA Receivables Facility”) with NBA.  The NBA Receivables Facility provides for advances at a rate of 85% on eligible receivables pledged under the facility, subject to eligible collateral and specified terms and conditions, during a revolving credit period. On September 28, 2017, the NBA Receivables Facility was amended to increase the maximum borrowings from $45 million (inclusive of outstanding borrowings under the NBA Line of Credit) to $50 million.  Pursuant to the amendment, the maximum borrowings may be further increased by up to an additional $20 million (to a total of $70 million); provided, however, that any such increase will result in a corresponding decrease in the maximum borrowings under the NBA Line of Credit.  The amendment also extended the revolving advance period from June 2018 to September 2020 and the maturity date from December 2022 to March 2025.  The interest rate applicable to future borrowings under the NBA Receivables Facility, and borrowings advanced since September 2016, is equal to the one month LIBOR plus 2.75% (with an interest rate floor of 3.50%) and for all other borrowings is equal to the one month LIBOR plus 3.25% (with an interest rate floor of 4.00%). Principal repayments and interest on borrowings under the NBA Receivables Facility are paid as cash is collected on the pledged receivables, subject to future required decreases in the advance rates after the end of the revolving advance period, with the remaining outstanding balance being due upon maturity. As of September 30, 2017, $1.2 million of the outstanding balance bore interest at a rate of 4.50% and $38.8 million of the outstanding balance bore interest at a rate of 4.00%.  All principal

---

 

and interest payments received on pledged receivables are applied to principal and interest due under the facility. The NBA Receivables Facility is cross-collateralized and is subject to cross-default with the NBA Line of Credit.



Pacific Western Facility.  Bluegreen has a revolving VOI notes receivable hypothecation facility (the “Pacific Western Facility”) with Pacific Western Bank, which provides for advances on eligible VOI notes receivable pledged under the facility, subject to specified terms and conditions, during a revolving credit period.  Maximum outstanding borrowings under the Pacific Western Facility are $40.0 million (inclusive of outstanding borrowings under the Pacific Western Term Loan), subject to eligible collateral and customary terms and conditions.  The revolving advance period expiration date is September 2018, subject to an additional 12-month extension at the option of Pacific Western Bank.  Eligible “A” VOI notes receivable that meet certain eligibility and FICO® score requirements, which Bluegreen’s management believes are typically consistent with loans originated under Bluegreen’s current credit underwriting standards, are subject to an 85% advance rate.  The Pacific Western Facility also allows for certain eligible “B” VOI notes receivable (which have less stringent FICO® score requirements) to be funded at a 53% advance rate.  On October 19, 2017, the Pacific Western Facility was amended to decrease the interest rate on a portion of future borrowings, to the extent such borrowings are in excess of established debt minimums, interest will accrue at 30-day LIBOR plus 3.50% to 4.00%.  Principal repayments and interest on borrowings under the Pacific Western Facility are paid as cash is collected on the pledged VOI notes receivable, subject to future required decreases in the advance rates after the end of the revolving advance period, with the remaining outstanding balance maturing in September 2021, subject to an additional 12-month extension at the option of Pacific Western Bank.  The Pacific Western Facility is cross-collateralized and is subject to cross-default with the Pacific Western Term Loan described above.



KeyBank/DZ Purchase Facility. On May 19, 2017, Bluegreen’s VOI notes receivable purchase facility with DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main (“DZ”), and, at that time, Branch Banking and Trust Company (“BB&T”), which permits maximum outstanding financings of $80.0 million, was amended and restated to extend the advance period from December 2017 to December 2019 and increase the advance rate with respect to VOI notes receivable securing amounts financed from 75% to 80%.  In connection with the amendment and restatement, KeyBank National Association (“KeyBank”) replaced BB&T as a funding agent. The facility (the “KeyBank/DZ Purchase Facility”) will mature and all outstanding amounts will become due 36 months after the revolving advance period has expired, or earlier under certain circumstances set forth in the facility. Interest on amounts outstanding under the facility is tied to an applicable index rate of the LIBOR rate, in the case of amounts funded by KeyBank (including amounts previously funded by BB&T), and a cost of funds rate or commercial paper rates, in the case of amounts funded by or through DZ. The interest rate payable under the facility is the applicable index rate plus 2.75% until the expiration of the revolving advance period and thereafter will be the applicable index rate plus 4.75%. Subject to the terms of the facility, Bluegreen will receive the excess cash flows generated by the VOI notes receivable sold (excess meaning after payments of customary fees, interest and principal under the facility) until the expiration of the VOI notes receivable advance period, at which point all of the excess cash flow will be paid to the note holders until the outstanding balance is reduced to zero. While ownership of the VOI notes receivable included in the facility is transferred and sold for legal purposes, the transfer of these VOI notes receivable is accounted for as a secured borrowing for financial reporting purposes. The facility is nonrecourse and is not guaranteed by Bluegreen.



2010 Term Securitization. In April 2017, Bluegreen repaid in full the notes payable issued in connection with the 2010 Term Securitization.  Accordingly, the related unamortized debt issuance costs of $0.3 million were written off in the second quarter of 2017.



2017 Term Securitization. On June 6, 2017, Bluegreen completed a private offering and sale of approximately $120.2 million of investment-grade, VOI receivable-backed notes (the "2017 Term Securitization"). The 2017 Term Securitization consisted of the issuance of two tranches of VOI receivable-backed notes (the “Notes”): approximately $88.8 million of Class A notes and approximately $31.4 million of Class B notes with note interest rates of 2.95% and 3.59%, respectively, which blended to an overall weighted average note interest rate of approximately 3.12%. The gross advance rate for this transaction was 88%. The Notes mature in October 2032.



The amount of the VOI notes receivable sold to BXG Receivables Note Trust 2017 (the “Trust”) was approximately $136.5 million, approximately $117.0 million of which was sold to the 2017 Trust at closing, and approximately $19.6 million of which was subsequently sold to the 2017 Trust. The gross proceeds of such sales to the 2017 Trust were $120.2 million. A portion of the proceeds was used to: repay KeyBank and DZ $32.3 million, representing all amounts outstanding (including accrued interest) under the KeyBank/DZ Purchase Facility; repay Liberty Bank approximately $26.8 million (including accrued interest) under Bluegreen's existing facility with Liberty Bank; capitalize a reserve fund; and pay fees and expenses associated with the transaction. In April 2017, Bluegreen, as servicer, redeemed the notes related to BXG Receivables Note Trust 2010-A for approximately $10.0 million, and certain of the VOI notes

---

 

receivable in such trust were sold to the 2017 Trust in connection with the 2017 Term Securitization.  The remainder of the proceeds from the 2017 Term Securitization were used by Bluegreen for general corporate purposes.



While ownership of the VOI notes receivable included in the 2017 Term Securitization was transferred and sold for legal purposes, the transfer of these VOI notes receivable was accounted for as a secured borrowing for financial accounting purposes.  Accordingly, no gain or loss was recognized as a result of this transaction.  Subject to the performance of the collateral, Bluegreen will receive any excess cash flows generated by the VOI notes receivable transferred under the 2017 Term Securitization (excess meaning after payments of customary fees, interest, and principal under the 2017 Term Securitization) on a pro-rata basis as borrowers make payments on their VOI notes receivable.



Junior Subordinated Debentures 



The table below sets forth information regarding junior subordinated debentures of the Company (in thousands):











Woodbridge and Bluegreen have each formed statutory business trusts (collectively, the “Trusts”) which issued trust preferred securities and invested the proceeds thereof in junior subordinated debentures of Woodbridge and Bluegreen, respectively. The Trusts are variable interest entities in which Woodbridge and Bluegreen, as applicable, are not the primary beneficiaries as defined by the accounting guidance for the consolidation of variable interest entities. Accordingly, the Company and its subsidiaries do not consolidate the operations of these Trusts; instead, the beneficial interests in the Trusts are accounted for under the equity method of accounting. Interest on the junior subordinated debentures and distributions on the trust preferred securities are payable quarterly in arrears at the same interest rate.



During January 2017, Woodbridge purchased approximately $11.1 million of LCTII trust preferred securities for $6.7 million and purchased approximately $7.7 million of LCTIII trust preferred securities for $4.7 million, and in February 2017, Woodbridge delivered such securities to the respective trusts in exchange for the cancellation of $11.1 million of Woodbridge’s junior subordinated debentures held by LCTII and $7.7 million of Woodbridge’s junior subordinated debentures held by LCTIII.  As a result, in February 2017, Woodbridge recognized a $6.9 million gain associated with the cancellation of the notes, which is included in “Net gains on the cancellation of junior subordinated debentures” in the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017.



As of September 30, 2017, the Company was in compliance with all financial debt covenants under its debt instruments.







---

 

9.    Income Taxes



BBX Capital and its subsidiaries file a consolidated federal income tax return and income tax returns in various state and foreign jurisdictions.  The Company’s effective income tax rate was 44% during the nine months ended September 30, 2017 compared to 47% during the same period in 2016.  The Company’s effective tax rate was applied to income before income taxes reduced by net income attributable to non-controlling interests for joint ventures taxed as partnerships. The reduction in the effective income tax rate for the nine months ended September 30, 2017 as compared to the same period in 2016 reflects the deductibility of a portion of executive compensation in connection with the implementation of a performance incentive compensation plan for 2017.  Effective income tax rates for interim periods are based upon the Company’s current estimated annual rate.  The Company’s annual effective income tax rate varies based upon the estimate of taxable earnings as well as the mix of taxable earnings in the various states in which the Company operates.





10.    Commitments and Contingencies 



In the ordinary course of business, the Company is a party to lawsuits as plaintiff or defendant involving its operations and activities. Reserves are accrued for matters in which management believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. There were no reserves accrued by the Company with respect to legal proceedings as of September 30, 2017. Adverse judgments and the costs of defending or resolving legal claims may be substantial and may have a material adverse impact on the Company’s financial statements. Management is not at this time able to estimate a range of reasonably possible losses with respect to matters in which it is reasonably possible that a loss will occur. In certain matters, management is unable to estimate the loss or reasonable range of loss until additional developments provide information sufficient to support an assessment of the loss or range of loss.  Frequently in these matters, the claims are broad, and the plaintiffs have not quantified or factually supported their claim.



The following is a description of certain litigation matters:



Securities and Exchange Commission Complaint



In 2012, the SEC brought an action in the United States District Court for the Southern District of Florida against BCC and Alan B. Levan, BCC’s Chairman and Chief Executive Officer, which is further described in the 2016 Annual Report. Following an initial trial in 2014 and the appeal of certain judgments of the district court to the Eleventh Circuit Court of Appeals, a second trial was held in 2017, and on May 8, 2017, the jury rendered a verdict in favor of BCC and Mr. Levan and against the SEC on all counts.

 

In connection with the Eleventh Circuit Court of Appeals’ reversal of certain judgments in the first trial, which became final on January 31, 2017, and the resolution of the matter in the second trial, BBX Capital received reimbursements of legal fees and costs from its insurance carrier of approximately $12.9 million, including $7.2 million received during the nine months ended September 30, 2017, and a $4.6 million penalty assessed against BCC in the first trial was released.



Legal fees and costs reimbursements of $7.2 million, as well as the release of the $4.6 million penalty, are reflected in “Litigation costs and penalty reimbursements” in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017. In October 2017, the Company received an additional $1.4 million reimbursement of legal fees and costs.



In Re BCC Merger Shareholder Litigation 



On August 10, 2016, Shiva Stein filed a lawsuit against the Company, BBX Merger Sub, LLC (“Merger Sub”), BCC and the members of BCC’s board of directors, which seeks to establish a class of BCC’s shareholders and challenges the Merger between BCC and BBX Capital (“the Merger”).  The plaintiff asserts that the Merger consideration undervalues BCC and is unfair to BCC’s public shareholders, that the sales process was unfair, and that BCC’s directors breached their fiduciary duties of care, loyalty and candor owed to the public shareholders of BCC because, among other reasons, they failed to take steps to maximize the value of BCC to its public shareholders and instead diverted consideration to themselves. The lawsuit also alleges that BBX Capital, as the controlling shareholder of BCC, breached its fiduciary duties of care, loyalty and candor owed to the public shareholders of BCC by utilizing confidential, non-public information to formulate the Merger consideration and not acting in the best interests of BCC’s public shareholders. In addition, the lawsuit includes a cause of action against BCC, the Company, and Merger

---

 

Sub for aiding and abetting the alleged breaches of fiduciary duties. The lawsuit requested that the court grant an injunction blocking the proposed Merger or, if the proposed Merger is completed, rescind the transaction or award damages as determined by the court.  On September 15, 2016, the Defendants filed a Motion to Dismiss the amended complaint. On November 21, 2016, the Court issued an order granting the Motion to Dismiss with prejudice. Plaintiff appealed the Court’s order dismissing the amended complaint to the Fourth District Court of Appeals. The Company believes that the appeal is without merit and intends to continue vigorously defending the action.



Bluegreen Litigation



On August 24, 2016, Whitney Paxton and Jeff Reeser filed a lawsuit against Bluegreen Vacations Unlimited, Inc. (“BVU”), a wholly-owned subsidiary of Bluegreen, and certain employees of BVU, seeking to establish a class action of former and current employees of BVU alleging violations of plaintiffs’ rights under the Fair Labor Standards Act of 1938 (the “FLSA”) and breach of contract. The lawsuit also alleges that BVU terminated plaintiff Whitney Paxton as retaliation for her complaints about violations of the FLSA. The lawsuit seeks damages in the amount of the unpaid compensation owed to plaintiffs.  On July 27, 2017, a magistrate judge entered a report and recommendation to conditionally certify collective action and facilitate notice to potential class members be granted with respect to certain employees and denied as to others.  During September 2017, the judge accepted the recommendation and granted preliminary approval of class certification. Management believes that the lawsuit is without merit and intends to vigorously defend the action. 



On September 22, 2017, Stephen Potje, Tamela Potje, Sharon Davis, Beafus Davis, Matthew Baldwin, Tammy Baldwin, Arnor Lee, Angela Lee, Gretchen Brown, Paul Brown, Jeremy Estrada, Emily Estrada, Guillermo Astorga Jr., Michael Oliver, Carrie Oliver, Russell Walters, Elaine Walters, and Mike Ericson, individually and on behalf of all other similarly situated, filed a lawsuit against Bluegreen which asserts claims for alleged violations of the Florida Deceptive and Unfair Trade Practices Act and the Florida False Advertising Law. In the complaint, the plaintiffs allege the making of certain false representations in connection with Bluegreen’s sales of VOIs, including representations regarding the ability to use points for stays or other experiences with other vacation providers, the ability to cancel VOI purchases and receive a refund of the purchase price, the ability to roll over unused points and that annual maintenance fees would not increase. The complaint seeks to establish a class of consumers who, since the beginning of the applicable statute of limitations, have purchased VOIs from Bluegreen, had their annual maintenance fees relating to Bluegreen VOIs increased, or were unable to roll over their unused points to the next calendar year. The lawsuit alleges damages in excess of $5,000,000 and seeks damages in the amount alleged to have been improperly obtained by Bluegreen, as well as any statutory enhanced damages, attorneys’ fees and costs, and equitable and injunctive relief. Management believes that the lawsuit is without merit and intends to vigorously defend the action.



Commencing in 2015, it came to Bluegreen’s attention that its collection efforts with respect to its VOI notes receivable were being impacted by a then emerging, industry-wide trend involving the receipt of “cease and desist” letters from attorneys purporting to represent certain VOI owners.  Following receipt of these letters, Bluegreen is unable to contact the owners unless allowed by law. Bluegreen believes these attorneys have encouraged such owners to become delinquent and ultimately default on their obligations and that such actions and Bluegreen’s inability to contact the owners are a primary contributor to the increase in its annual default rates.  Bluegreen’s average annual default rates have increased from 6.9% in 2015 to 8.1% for the twelve months ended September 30, 2017.  Bluegreen also estimates that approximately 10.2% of the total delinquencies on its VOI notes receivable as of September 30, 2017 related to VOI notes receivable subject to these letters.  Bluegreen has in a number of cases pursued, and may in the future pursue, legal action against the VOI owners.



Bluegreen has an exclusive marketing agreement with Bass Pro, Inc. (“Bass Pro”), a nationally-recognized retailer of fishing, marine, hunting, camping and sports gear, that provides Bluegreen with the right to market and sell vacation packages at kiosks in each of Bass Pro’s retail locations and through other means. As of September 30, 2017, Bluegreen sold vacation packages in 68 of Bass Pro’s stores. In exchange, Bluegreen compensates Bass Pro based on VOI sales generated through the program. No compensation is paid to Bass Pro under the agreement on sales made at Bluegreen/Big Cedar Vacations’ resorts. During each of the nine months ended September 30, 2017 and 2016, respectively, VOI sales to prospects and leads generated by the agreement with Bass Pro accounted for approximately 15% of Bluegreen’s VOI sales volume. On October 9, 2017, Bass Pro advised Bluegreen that it believes the amounts paid to it as VOI sales commissions should not have been adjusted for certain purchaser defaults. Bluegreen previously informed Bass Pro that the aggregate amount of such adjustments for defaults charged back to Bass Pro between January 2008 and June 2017 totaled approximately $4.8 million. Bluegreen believes these chargebacks are appropriate and consistent with the terms and intent of the agreements with Bass Pro, and Bluegreen is continuing to discuss the matter with Bass Pro. On October 20, 2017, in order to demonstrate its good faith, Bluegreen paid this amount to Bass

---

 

Pro pending a resolution of the matter in the ordinary course.  Bluegreen expects to recognize that amount as an expense during the fourth quarter of 2017.



The following is a description of certain commitments and guarantees:



In lieu of paying maintenance fees for unsold VOI inventory, Bluegreen provides subsidies to certain homeowners’ associations to provide for funds necessary to operate and maintain vacation ownership properties in excess of assessments collected from owners of the VOIs.  During the nine months ended September 30, 2017, Bluegreen made payments related to such subsidies of $1.8 million. As of September 30, 2017, Bluegreen had an aggregate $6.7 million liability for such subsidies to ten homeowners’ associations.



During 2016, the Company entered into a severance arrangement with an executive. Under the terms of the arrangement, the executive is receiving $3.7 million over a three year period ending in August 2019. As of September 30, 2017, $2.1 million was left to be paid under the above arrangement. 



In September 2017, Bluegreen entered an agreement with an executive in connection with his retirement. Pursuant to the terms of the agreement, Bluegreen will make payments totaling approximately $2.9 million between October 2017 and March 2019, the full amount of which was included in selling, general and administrative expenses in September  2017.



The Company guarantees certain obligations of its wholly-owned subsidiaries and unconsolidated real estate joint ventures as follows:











11.    Common Stock



Share Repurchase Program



On September 21, 2009, the Board of Directors of BBX Capital approved a share repurchase program which authorized the repurchase of up to 20,000,000 shares of the Company’s Class A Common Stock and Class B Common Stock at an aggregate cost of up to $10 million. The September 2009 share repurchase program authorized management, at its discretion, to repurchase shares from time to time subject to market conditions and other factors. During April 2017, the Company purchased 1.0 million shares of its Class A Common Stock for approximately $6.2 million under the September 2009 share repurchase program.



On June 13, 2017, the Board of Directors of BBX Capital approved a share repurchase program which replaced the September 2009 share repurchase program and authorizes the repurchase of up to 5,000,000 shares of its Class A Common Stock and Class B Common Stock at an aggregate cost of up to $35 million. The June 2017 repurchase program authorizes management, at its discretion, to repurchase shares from time to time subject to market conditions and other factors.  As of September 30, 2017, no shares had been repurchased under the June 2017 share repurchase program.



---

 

Share-based Compensation



On September 30, 2017, a total of 773,204 shares of restricted Class B common stock awards granted by the Company to certain officers in October 2014 vested and 534,706 shares of restricted Class A common stock units issued by the Company to certain officers of BBX in exchange for their BCC restricted stock units pursuant to the December 2016 merger vested.  The officers surrendered a total of 534,706 shares of Class A common stock and 11,846 shares of Class B common stock to the Company to satisfy the $4.0 million tax withholding obligation associated with the vesting of these shares on September 30, 2017.  The Company retired the surrendered shares.



The following is a summary of the Company’s Class A and Class B nonvested common share activity for the nine months ended September 30, 2017:









The fair value of shares of the Company’s restricted stock awards which vested in September 2017 and 2016 was $9.6 million and $8.2 million, respectively. The Company recognized restricted stock compensation expense of approximately $10.1 million and $4.9 million during the nine months ended September 30, 2017 and 2016, respectively.



Between October 1, 2017 and October 5, 2017, a total of 566,308 shares of restricted Class A common stock and 1,049,039 shares of restricted Class B common stock awards granted by the Company to certain officers in September 2015 and December 2016, respectively, vested.  In addition, on October 7, 2017 and October 8, 2017 a total of 892,224 shares of restricted Class A common stock awards granted by the Company to certain officers in October 2014 vested and 2,322,000 shares of restricted Class A common stock units issued by the Company to certain officers of BBC in exchange for their BCC restricted stock units pursuant to the December 2016 merger vested.  The officers surrendered a total of 1,859,786 shares of Class A common stock and 164,286 shares of Class B common stock to the Company to satisfy the $15.0 million tax withholding obligation associated with the vesting of these shares.  The Company retired the surrendered shares in October 2017.





12.    Certain Relationships and Related Party Transactions



The Company may be deemed to be controlled by Alan B. Levan, the Company’s Chairman and Chief Executive Officer, and John E. Abdo, Vice Chairman of the Company. Together, Mr. Alan Levan and Mr. Abdo may be deemed to beneficially own shares of the Company’s Class A Common Stock and Class B Common Stock representing approximately 77% of the Company’s total voting power. 



During each of the three and nine months ended September 30, 2017 and 2016, the Company paid Abdo Companies, Inc. approximately $77,000 and  $230,000, respectively, in exchange for certain management services. John E. Abdo, the Company’s Vice Chairman, is the principal shareholder and Chief Executive Officer of Abdo Companies, Inc.



Certain of the Company’s affiliates, including its executive officers, have independently made investments with their own funds in investments that the Company has sponsored and in which the Company holds investments.





---

 

13.    Segment Reporting



Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly reviewed by the chief operating decision maker in assessing performance and deciding how to allocate resources. Reportable segments consist of one or more operating segments with similar economic characteristics, products and services, production processes, type of customer, distribution system and, if applicable, the nature of the regulatory environment. 



The information provided for segment reporting is obtained from internal reports utilized by management of BBX Capital and its subsidiaries. The presentation and allocation of assets and results of operations may not reflect the actual economic costs of the segments as standalone businesses. If a different basis of allocation were utilized, the relative contributions of the segments might differ but the relative trends in the segments’ operating results would, in management’s view, likely not be impacted.

In June 2017, BBX Sweet Holdings acquired IT’SUGAR, which recognized sales of approximately $77 million during the year ended December 31, 2016, for cash consideration of approximately $58.4 million. Additionally, in 2017, the Company commenced a reorganization of BBX Sweet Holdings’ businesses including the consolidation of manufacturing facilities and integration of operating entities. As a result of these activities, internal management reports were modified, and the Company’s Chief Operating Decision Maker (“CODM”) began utilizing the new reporting structure to manage operations and allocate resources. As a consequence, the Company determined that it was appropriate to report its results of operations through four reportable segments:  Bluegreen, BBX Capital Real Estate,  Renin, and BBX Sweet Holdings.  Segment information for the three and nine months ended September 30, 2016 was updated retrospectively to conform to 2017 presentation.

In the table for the three and nine months ended September 30, 2017 and 2016, amounts set forth in the column entitled “Corporate Expenses” include interest expense associated with Woodbridge’s trust preferred securities, corporate overhead, and start-up expenses for the Company’s MOD Super-Fast Pizza franchise restaurants. 



The Company evaluates segment performance based on segment income before income taxes.



Set forth below is summary information regarding the Company’s reportable segments:



Bluegreen



Bluegreen markets, sells and manages real estate-based VOIs in resorts generally located in popular, high-volume, “drive-to” vacation destinations, which were developed or acquired by Bluegreen or are owned by others in which case Bluegreen earns fees for providing these services. Bluegreen also earns fees by providing club and homeowners’ association management services, mortgage servicing, VOI title services, reservation services, and construction design and development services. In addition, Bluegreen provides financing to qualified individual purchasers of VOIs, which provides significant interest income.



BBX Capital Real Estate



BBX Capital Real Estate activities include the acquisition, ownership and management of real estate, real estate development projects, and investments in real estate joint ventures. BBX Capital Real Estate also manages the legacy assets acquired in connection with the sale of BankAtlantic to BB&T Corporation in July 2012.  The legacy assets include portfolios of loans receivable, real estate properties and previously charged-off BankAtlantic loans.



Renin 



Renin manufactures interior closet doors, wall décor, hardware, and fabricated glass products and operates through its headquarters in Canada and two manufacturing, assembly, and distribution facilities in Canada and the United States. Total revenues for the Renin reportable segment include $6.8 million and $7.1 million of trade sales to two major customers and their affiliates for the three months ended September 30, 2017 and 2016, respectively. Renin’s revenues generated outside the United States totaled $5.0 million and $6.7 million for the three months ended September 30, 2017 and 2016, respectively. Renin’s property and equipment located outside the United States totaled $2.3 million and $1.2 million as of September 30, 2017 and 2016, respectively. Total revenues for the Renin reportable segment include $23.4 million and $18.3 million of trade sales to two major customers and their affiliates for the nine months

---

 

ended September 30, 2017 and 2016, respectively. Renin’s revenues generated outside of the United States totaled $15.8 million and $16.5 million for the nine months ended September 30, 2017 and 2016, respectively.



BBX Sweet Holdings



BBX Sweet Holdings consists of IT’SUGAR, Hoffman’s Chocolates, and manufacturing facilities in the chocolate and confection industries serving wholesalers such as boutique retailers, big box chains, department stores, national resort properties, corporate customers, and private label brands.  IT’SUGAR is a specialty candy retailer with 95 retail locations in 26 states and Washington, DC.  Hoffman’s Chocolates is a manufacturer of gourmet chocolates with retail locations in South Florida. 



---

 

The table below sets forth the Company’s segment information as of and for the three months ended September 30, 2017 (in thousands):









---

 

The table below sets forth the Company’s segment information as of and for the three months ended September 30, 2016 (in thousands):









---

 

The table below sets forth the Company’s segment information for the nine months ended September 30, 2017 (in thousands):









---

 



The table below sets forth the Company’s segment information as of and for the nine months ended September 30, 2016 (in thousands):









---

 





14.    Fair Value Measurement 



Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The inputs used to measure fair value are classified into the following hierarchy:



Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3: Unobservable inputs for the asset or liability.



Financial Disclosures about Fair Value of Financial Instruments



The following tables present information for financial instruments at September 30, 2017 and December 31, 2016 (in thousands):





---

 











Management has made estimates of fair value that it believes to be reasonable.  However, because there is no active market for many of these financial instruments, the fair value of these financial instruments has been derived using the income approach technique with Level 3 unobservable inputs. Estimates used in net present value financial models rely on assumptions and judgments regarding issues where the outcome is unknown and actual results or values may differ significantly from these estimates. These fair value estimates do not consider the tax effect that would be associated with the disposition of the assets or liabilities at their fair value estimates. As such, the estimated value upon sale or disposition of the asset may not be received and the estimated value upon disposition of the liability in advance of its scheduled maturity may not be paid.



The amounts reported in the consolidated statements of financial condition for cash and cash equivalents and restricted cash approximate fair value.



The fair value of the Company’s accruing loans is calculated using an income approach with Level 3 inputs by discounting forecasted cash flows using estimated market discount rates that reflect the interest rate and credit risk inherent in the loan portfolio. The Company’s management assigns a credit risk premium and an illiquidity adjustment to these loans based on delinquency status. The fair value of non-accruing collateral dependent loans is estimated using an income approach with Level 3 inputs utilizing the fair value of the collateral adjusted for operating and selling expenses and discounted over the estimated holding period based on the market risk inherent in the property.  Impaired loans are generally valued based on the fair value of the underlying collateral less cost to sell as the majority of the Company’s loans are collateral dependent. The fair value of the Company’s loans may significantly increase or decrease based on changes in property values as its loans are primarily secured by real estate. The Company primarily uses third-party appraisals to assist in measuring non-homogenous impaired loans and broker price opinions to assist in measuring homogeneous impaired loans. The appraisals generally use the market or income approach valuation technique and use market observable data to formulate an estimate of the fair value of the loan’s collateral. However, the appraiser uses professional judgment in determining the fair value of the collateral, and the Company may also adjust these values for changes in market conditions subsequent to the appraisal date. As a consequence, the calculation of the fair value of the collateral is considered a Level 3 input. The Company generally recognizes impairment losses based on third-party broker price opinions when impaired homogeneous loans become 120 days delinquent. These third-party valuations from real estate professionals also use Level 3 inputs in determining fair values. The observable market inputs used to fair value loans include comparable property sales, rent rolls, market capitalization rates on income producing properties, risk adjusted discount rates and foreclosure time frames and exposure periods. 

---

 



The fair value of notes receivable and note receivable from preferred shareholders are estimated using Level 3 inputs and are based on estimated future cash flows considering contractual payments and estimates of prepayments and defaults, discounted at a market rate. 



The amounts reported in the consolidated statements of financial condition for notes and mortgage notes payable, including receivable-backed notes payable, approximate fair value for indebtedness that provides for variable interest rates.  The fair value of fixed rate, receivable-backed notes payable was determined using Level 3 inputs by discounting the net cash outflows estimated to be used to repay the debt. These obligations are to be satisfied using the proceeds from the consumer loans that secure the obligations. 



The fair value of other borrowings is measured using the income approach with Level 3 inputs obtained by discounting the forecasted cash flows based on estimated market rates.



The fair value of Community Development Bonds is measured using the market approach with level 3 inputs obtained based on estimated market prices of similar financial instruments. 



The fair value of junior subordinated debentures is estimated using Level 3 inputs based on the contractual cash flows discounted at a market rate or based on market price quotes from the over-the-counter bond market.



The fair value of the 5% Cumulative Preferred Stock, which is subject to mandatory redemption, is calculated using the income approach with Level 3 inputs by discounting the estimated cash flows at a market discount rate.