SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q



[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2016

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _______ to _______

Commission files number     001-13133



BBX CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)





(954) 940-4000

(Registrant's telephone number, including area code)

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, and (2) has been subject to such filing requirements for the past 90 days.   [X] YES   [   ] 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).   [X] YES   [   ] NO



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 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   [X] NO



Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

 

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BBX CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION-UNAUDITED 









 

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BBX CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - UNAUDITED 







See Notes to Condensed Consolidated Financial Statements - Unaudited





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BBX CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF TOTAL EQUITY 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015 - UNAUDITED 







See Notes to Condensed Consolidated Financial Statements - Unaudited

 

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BBX CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED





See Notes to Condensed Consolidated Financial Statements - Unaudited



 

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1.  Presentation of Interim Financial Statements

Basis of Financial Statement Presentation – BBX Capital Corporation together with its subsidiaries is referred to herein as “BBX Capital”, “we”, “us,” or “our” and is referred to herein without its subsidiaries as “BBX Capital Corporation”. BBX Capital is a Florida-based company involved in the acquisition, development, ownership and management of and investments in real estate and real estate development projects as well as operating businesses.  Prior to the sale of BankAtlantic to BB&T Corporation (“BB&T”) on July 31, 2012, BBX Capital Corporation was a bank holding company and its principal asset was the ownership of BankAtlantic.  The principal assets of BBX Capital currently consist of its 46% equity interest in Woodbridge Holdings, LLC (“Woodbridge”), investments in real estate joint ventures and operating businesses,  and legacy loans and real estate assets transferred to BBX Capital in connection with the sale of BankAtlantic.  

In April 2013, BBX Capital acquired a 46% equity interest in Woodbridge. Woodbridge’s principal asset is its ownership of Bluegreen Corporation and its subsidiaries (“Bluegreen”). Bluegreen manages, markets and sells the Bluegreen Vacation Club, a points-based, deeded vacation ownership plan with more than 190,000 owners.  BFC Financial Corporation (“BFC”), the controlling shareholder of BBX Capital, owns the remaining 54% of Woodbridge (see Note 2 - Investment in Woodbridge Holdings, LLC). 

In October 2013, Renin Holdings, LLC (“Renin”), a joint venture owned 81% by BBX Capital and 19% by BFC, acquired substantially all of the assets and certain liabilities of Renin Corp. (“the Renin Transaction”).  Renin manufactures interior closet doors, wall décor, hardware and fabricated glass products. Renin is headquartered in Canada and has two manufacturing, assembly and distribution facilities in Canada and the United States.

In December 2013, a wholly-owned subsidiary of BBX Capital, BBX Sweet Holdings, LLC, acquired Hoffman’s Chocolates (“Hoffman’s”).  Hoffman’s is a manufacturer of gourmet chocolates, with retail locations in South Florida.   



Subsequent to January 2014, BBX Sweet Holdings acquired manufacturers in the chocolate and candy industries serving wholesalers, boutique retailers, big box chains, department stores, national resort properties, corporate customers and private label brands.  The companies acquired were Williams and Bennett, Helen Grace Chocolates (“Helen Grace”), Jer’s Chocolates (“Jer’s”), Anastasia Confections (“Anastasia”) and Kencraft Confections, LLC (“Kencraft”).  In May 2015, BBX Sweet Holdings acquired a controlling interest in Droga Chocolates, LLC.  BBX Sweet Holdings has a 75% equity interest in Droga and Droga products are manufactured at the Kencraft facility.



In September 2016, BBX Capital entered into an area development agreement with MOD Super Fast Pizza, LLC with a goal of opening 50 MOD Super Fast Pizza franchise locations throughout Florida over the next seven years.  

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 53% of the combined voting power of the Class A common stock and the Class B common stock. Class B common stock represents the remaining 47% of the combined vote. The percentage of total common equity represented by Class A and Class B common stock was 99% and 1%, respectively, at September 30, 2016.  The fixed voting percentages will be eliminated, and shares of Class B common stock will be entitled to only one vote per share from and after the date that BFC or its affiliates no longer own in the aggregate at least 97,523 shares of Class B common stock (which is one-half of the number of shares it now owns). Class B common stock is convertible into Class A common stock on a share for share basis at any time at BFC’s discretion.



On September 30, 2016, 381,622 shares of restricted Class A common stock units granted to executive officers in September 2012 and September 2014 vested.  BBX Capital repurchased and retired an aggregate of 158,024 shares of the executive officers’ Class A common stock to satisfy the $3.2 million withholding tax obligations associated with the vesting of these shares. Between October 1, 2016 and October 5, 2016 104,872 shares of restricted Class A common stock units granted to executive officers in September 2015 vested.  BBX Capital repurchased and retired an aggregate of 43,749 shares of the executive officers’ Class A common stock to satisfy the $0.9 million withholding tax obligations associated with the vesting of these shares.

   

BBX Capital entered into a definitive merger agreement (the “Merger Agreement”) with BFC and BBX Merger Subsidiary LLC, a newly formed wholly owned subsidiary of BFC (“Merger Sub”) on July 27, 2016 and amended on October 20, 2016. The Merger Agreement provides for BBX Capital Corporation to merge with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving company of the Merger and a wholly owned subsidiary of BFC. Under the terms of the Merger Agreement, which has been approved by a special committee comprised of BBX Capital Corporation’s independent directors as well as the full boards of directors of both BFC and BBX Capital Corporation, each share of BBX Capital’s Class A Common Stock outstanding immediately prior to the effective time of the Merger (other than shares of BBX Capital’s Class A Common Stock held by BFC and shares of BBX Capital’s Class A Common Stock as

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to which appraisal rights are exercised and perfected in accordance with Florida law) will be converted into the right to receive, at the election of the holder, 5.4 shares of BFC’s Class A Common Stock or $20.00 in cash for each share of BBX Class A Common Stock held by them.  BBX Capital’s shareholders will have the right to elect to receive all cash, all stock, or a combination of cash and stock in exchange for their shares. Each option to acquire shares of BBX Capital’s Class A Common Stock that is outstanding at the effective time of the Merger, whether or not then exercisable, will be converted into an option to acquire shares of BFC’s Class A Common Stock and be subject to the same terms and conditions as in effect at the effective time of the Merger, except that the number of shares which may be acquired upon exercise of the option will be multiplied by the exchange ratio of 5.4 shares of BFC’s Class A Common Stock for each share of BBX Capital’s Class A Common Stock subject to the option and the exercise price of the option will be divided by 5.4. In addition, each share of BBX Capital’s Class A Common Stock subject to a restricted stock award outstanding at the effective time of the Merger will be converted into a restricted share of BFC’s Class A Common Stock and be subject to the same terms and conditions as in effect at the effective time of the Merger, except that the number of shares subject to the award will be multiplied by the exchange ratio of 5.4 shares of BFC’s Class A Common Stock for each share of BBX Capital’s Class A Common Stock subject to the award.  Consummation of the Merger is subject to certain closing conditions, including, without limitation, (i) the approval of the Merger Agreement by (a) holders of shares of BBX Capital’s Class A Common Stock and Class B Common Stock representing a majority of the votes entitled to be cast on the Merger Agreement, and  (b) holders of a majority of the shares of BBX Capital’s Class A Common Stock voted on the Merger Agreement other than shares held by BFC and its affiliates and (ii) unless waived by BFC and BBX Capital, any litigation or threatened litigation against BFC or BBX Capital Corporation or their affiliates relating to the Merger shall be resolved to the satisfaction of BFC and BBX Capital Corporation or the holders of at least 2,250,000 shares of BBX Capital’s Class A Common Stock shall execute a waiver and release irrevocably waiving the right to participate in, or receive any proceeds from, any shareholder class action lawsuit relating to the Merger and releasing BFC, BBX Capital and their affiliates from any claims arising out of the Merger Agreement other than with respect to appraisal rights or the right to receive the Merger consideration. Pursuant to the Merger Agreement, BFC has agreed to vote all of BBX Capital’s Class A Common Stock and Class B Common Stock owned by it in favor of the Merger Agreement. Accordingly, approval of the Merger Agreement with respect to the combined vote of the holders of BBX Capital’s Class A Common Stock and Class B Common Stock described under clause (i)(a) above is assured. There is no assurance that the approval of the unaffiliated shareholders will be received. The Merger is also conditioned, unless waived, on holders of not more than 150,000 shares of BBX Capital’s Class A Common Stock exercising appraisal rights and the absence of any “Material Adverse Effect” (as defined in the Merger Agreement)  with respect to either BFC or BBX Capital. The Merger is not subject to a financing condition. There is no assurance that the conditions to completing the Merger will be satisfied or waived, or that the Merger will be otherwise consummated in the anticipated time frame, on the proposed terms, or at all.



A lawsuit seeking to establish a class of BBX Capital’s shareholders and challenging the Merger is pending in the 17th Judicial Circuit in and for Broward County, Florida. The lawsuit alleges, among other things, that the proposed Merger consideration undervalues BBX Capital and is unfair to BBX Capital’s public shareholders and that BBX Capital’s directors and BFC breached certain fiduciary duties to BBX Capital’s public shareholders. The lawsuit seeks to enjoin the Merger or, if it is completed, to rescind the Merger or recover relief as determined by the court. BFC and BBX Capital believe that the lawsuit is without merit and intend to vigorously defend the action. See Note 10 and “Part II, Item 1 – Legal Proceedings” of this report for additional information regarding this lawsuit.  BFC and BBX Capital have also received letters threatening additional litigation relating to the Merger.



All significant inter-company balances and transactions have been eliminated in consolidation.  As used in each case in this document, the term “fair value” is an estimate of fair value as discussed herein.



The accompanying unaudited condensed consolidated financial statements of BBX Capital have been prepared in accordance with generally accepted accounting principles 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 (consisting only of normal recurring adjustments) as are necessary for a fair statement of BBX Capital's condensed consolidated statement of financial condition at September 30, 2016, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015, and the condensed consolidated statements of total equity and statements of cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of results of operations that may be expected for the subsequent interim period during 2016 or for the year ended December 31, 2016.  The condensed consolidated financial statements and related notes are presented as permitted by Form 10-Q and should be read in conjunction with the consolidated financial statements appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Basic earnings per share excludes dilution and is computed by dividing net income attributable to BBX Capital by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential

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dilution that could occur if options to issue common shares were exercised or restricted stock units of BBX Capital were to vest. In calculating diluted earnings per share, net income attributable to BBX Capital is divided by the weighted average number of common shares. Options and restricted stock units are included in the weighted average number of common shares outstanding based on the treasury stock method, if dilutive.  During the three and nine months ended September  30, 2016, options to acquire 6,614 shares of Class A common stock were anti-dilutive and excluded from diluted earnings per share.  During the three and nine months ended September 30, 2015, options to acquire 10,323 shares of Class A common stock were anti-dilutive and excluded from diluted earnings per share.



Recently Adopted Accounting Pronouncements



As of January 1, 2016, BBX Capital adopted Accounting Standards Update (“ASU”) Number 2015-03 –– Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs as amended by ASU 2015-15.  ASU 2015-03 requires debt issuance costs related to recognized debt liabilities to be presented in the statement of financial condition as a direct deduction from the debt liability rather than an asset. However, ASU 2015-03 also permits presentation of debt issuance costs on line-of-credit arrangements as assets. Accordingly, as of September 30, 2016, approximately $23,000 of deferred debt issuance costs was presented as a direct deduction within Notes Payable on BBX Capital's Condensed Consolidated Statement of Financial Condition. Additionally, BBX Capital reclassified $36,000 of deferred debt issuance costs from Other Assets to Notes Payable as of December 31, 2015. Debt issuance costs for line-of-credit arrangements of $257,000 and $306,000 were included in other assets in BBX Capital’s Condensed Consolidated Statement of Financial Condition as of September 30, 2016 and December 31, 2015, respectively.



As of January 1, 2016, BBX Capital adopted ASU 2015-02 – Amendments to the Consolidation Analysis (Topic 810). ASU 2015-02 changed the manner in which a reporting entity assesses one of the five characteristics that determines if an entity is a variable interest entity.  In particular, when decision-making over the entity’s most significant activities has been outsourced, the update changes how a reporting entity assesses if the equity holders at risk lack decision making rights. The update also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making rights.  The adoption of this update on January 1, 2016 did not have a material impact on BBX Capital’s consolidated financial statements.



New Accounting Pronouncements:



The FASB has recently issued the following accounting pronouncements and guidance relevant to the preparation of BBX Capital’s financial statements. (See BBX Capital’s Annual Report on Form 10-K for the year ended December 31, 2015 for accounting pronouncements issued prior to March 31, 2016 relevant to BBX Capital’s operations):



Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. This ASU presents guidance on the classification of certain cash receipts and payments with the objective of reducing the existing diversity in current practice. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted in any interim or annual period.  BBX Capital is currently evaluating the requirements of this update and has not yet determined its impact on BBX Capital’s consolidated financial statements.



Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The ASU changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.  The ASU sets forth a “current expected credit loss” (CECL) model which requires BBX Capital to measure expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years BBX Capital is currently evaluating the requirements of this update and has not yet determined the impact it may have on its consolidated financial statements.



Accounting Standards Update (ASU) No. 2016-09 – Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.  This update simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016 and interim periods within the reporting period.  Early adoption is permitted in any interim or annual period.  The adoption of this update is not expected to have a material impact on BBX Capital’s consolidated financial statements.



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Accounting Standards Update (ASU) No.  2016-07 –– Investments – Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting. This update eliminates retroactive adjustments for an investment that qualifies for the use of the equity method as a result of an increase in the level of ownership interest associated with an existing investment.  The amendment requires that the equity method investor add the cost of acquiring the additional interest to the current investment and adopt the equity method on the date that the investment becomes qualified for equity method accounting. The amendments in this update are effective for fiscal years beginning after December 15, 2016.  Early adoption is permitted.  The adoption of this update is not expected to have a material impact on BBX Capital’s consolidated financial statements.



Accounting Standards Update (ASU) No. 2014-09 –  Revenue Recognition (Topic 606): Revenue from Contracts with Customers. This guidance is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach. It also requires disclosures designed to enable readers of financial statements to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Further, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in April and May 2016, the FASB issued ASU 2016-10 and 2016-12, respectively, Revenue from Contracts with Customers (Topic 606) and also in May 2016 the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivative and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-19. These updates clarify implementation guidance on the related topic. The accounting guidance updates will replace most existing revenue recognition guidance in GAAP. The standard is effective for annual and interim reporting periods beginning after December 15, 2017.  Earlier adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  BBX Capital is currently evaluating the requirements of these updates and has not yet determined their impact on its consolidated financial statements. 



 

2.    Investment in Woodbridge Holdings, LLC



On April 2, 2013, BBX Capital invested $71.75 million in Woodbridge in exchange for a 46% equity interest in Woodbridge. The investment was made in connection with Woodbridge’s acquisition on April 2, 2013 of the publicly held shares of Bluegreen. BFC holds the remaining 54% of Woodbridge’s outstanding equity interests and is the majority member of Woodbridge. Since BFC is the majority owner of Woodbridge, BBX Capital’s investment in Woodbridge is accounted for under the equity method. In connection with BBX Capital’s investment in Woodbridge, BBX Capital and BFC entered into an Amended and Restated Operating Agreement of Woodbridge, which sets forth BBX Capital’s and BFC’s respective rights as members of Woodbridge and provides, among other things, for unanimity on certain specified “major decisions” and for distributions to be made on a pro rata basis in accordance with BBX Capital’s and BFC’s percentage equity interests in Woodbridge.



The following is activity related to BBX Capital’s investment in Woodbridge, which is accounted for under the equity method (in thousands):









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The Condensed Consolidated Statements of Financial Condition as of the dates indicated of Woodbridge were as follows (in thousands):











The Condensed Consolidated Statements of Operations of Woodbridge were as follows (in thousands):

















 





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3.  Investments in Unconsolidated Real Estate Joint Ventures



BBX Capital had the following investments in unconsolidated real estate joint ventures (in thousands):





BBX Capital’s investments in unconsolidated real estate joint ventures are accounted for as variable interest entities.



The amount of interest capitalized in investments in unconsolidated real estate joint ventures associated with joint venture real estate development activities for the three and nine months ended September 30, 2016 was $275,000 and $608,000, respectively, and for the three and nine months ended September 30, 2015 was $131,000 and $359,000, respectively.



BBX Capital received $5.0 million and $6.6 million of distributions from unconsolidated real estate joint ventures for the three and nine months ended September 30, 2016, respectively.



The condensed Statements of Operations for the three and nine months ended September 30, 2016 and 2015 for all the above listed equity method joint ventures in the aggregate was as follows (in thousands):







See Note 6 to the Consolidated Financial Statements included in BBX Capital’s Annual Report on Form 10-K for the year ended December 31, 2015 for information on investments in BBX Capital’s unconsolidated real estate joint ventures.













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4.  Loans Held-for-Sale and Loans Receivable



BBX Capital’s loans held-for-sale and loans receivable portfolios consisted of the following components (in thousands):



As of September 30, 2016, foreclosure proceedings were in-process on $10.2 million of residential loans and $0.3 million of consumer loans.



Loans held-for-sale are reported at the lower of cost or fair value measured on an aggregate basis.  As of December 31, 2015 the lower of cost or fair value adjustment on loans held-for-sale was $1.6 million. BBX Capital transfers loans from held-for-sale to loans receivable when, based on the current economic environment and related market conditions, it has the intent to hold those loans for the foreseeable future. As of June 30, 2016, based on then current market conditions and an evaluation of the residential loan portfolio, BBX Capital transferred residential loans held-for-sale with aggregate unpaid principal balances, net of charge-offs, of $17.3 million from loans held-for-sale to loans receivable. The lower of cost or fair value of the residential loans on the transfer date was $16.1 million. Any difference between the lower of cost or fair value of the loan and the unpaid principal balance net of charge-offs was recognized as a discount.



The total discount on loans receivable was $3.6 million and $3.3 million as of September 30, 2016 and December 31, 2015, respectively.  



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





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An age analysis of the past due recorded investment in loans receivable as of September  30, 2016 and December 31, 2015 was as follows (in thousands):







 (1)  BBX Capital had no loans that were 90 days or more past due and still accruing interest as of September 30, 2016 and December 31, 2015.



The activity in the allowance for loan losses for the three and nine months ended September  30, 2016 and 2015 was as follows (in thousands): 



Impaired Loans -  Loans are considered impaired when, based on current information and events, BBX Capital 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 past 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. 



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Impaired loans as of September 30, 2016 and December 31, 2015 were as follows (in thousands):





Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 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, 2015 were as follows (in thousands):



Impaired loans without valuation allowances 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.



BBX Capital had no commitments to lend additional funds on impaired loans as of September 30, 2016.







5.  Real Estate Held-for-Investment and Real Estate Held-for-Sale



While BBX Capital has in the past acquired certain real estate parcels, BBX Capital’s real estate has been primarily acquired through foreclosures, settlements, or deeds in lieu of foreclosure.  Upon acquisition, real estate is classified as real estate held-for-sale or real estate held-for-investment. Real estate is classified as held-for-sale when the property is available for immediate sale in its present condition, management commits to a plan to sell the property, an active program to locate a buyer has been initiated, the property is being marketed at a price that is reasonable in relation to its current fair value and it is likely that a sale will be completed within one year. When the property does not meet the real estate held-for-sale criteria, the real estate is classified as held-for-investment.



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The following table presents real estate held-for-sale grouped in the following classifications (in thousands):





The following table presents real estate held-for-investment grouped in the following classifications (in thousands):







The amount of interest capitalized to land held-for-investment associated with real estate development improvements for the three and nine months ended September 30, 2015 was $275,000 and $706,000, respectively.  There was no interest capitalized to land held-for-investment for the three or nine months ended September 30, 2016.



The following table presents the activity in real estate held-for-sale and held-for-investment for the three and nine months ended September 30, 2016 (in thousands):

   





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The following table presents the activity in real estate held-for-sale and held-for-investment for the three and nine months ended September 30, 2015 (in thousands):









The following table presents the real estate held-for-sale valuation allowance activity for the three and nine months ended September 30, 2016 and 2015 (in thousands):



  

  

  



6.   Inventories



Inventories were as follows (in thousands):





Inventories consisted of  $10.6 million at Renin and $7.6 million at BBX Sweet Holdings as of September 30, 2016, and $8.4 million at Renin and $7.9 million at BBX Sweet Holdings as of December 31, 2015.  Shipping and handling fees billed to the customers were recorded as trade sales and shipping and handling fees paid by BBX Capital were recorded as selling, general, and administrative expenses.  Included in BBX Capital’s Condensed Consolidated Statements of Operations as selling, general, and administrative expenses for the three and nine months ended September 30, 2016 were $1.4 million and $3.9 million, respectively, of costs associated with shipping goods to customers. Included in BBX Capital’s Condensed 

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Consolidated Statements of Operations as selling, general, and administrative expenses for the three and nine months ended September  30, 2015  were $1.4 million and $3.9 million, respectively, of costs associated with shipping goods to customers.    



Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first out method.  In valuing inventory, BBX Capital makes assumptions regarding the reserves required for excess and obsolete inventory based on judgments and estimates formulated from available information. BBX Capital’s estimates for excess and obsolete inventory are based on historical and forecasted usage. Inventory is also examined for upcoming expiration and reserves  are recorded where appropriate. Reserves for lower of cost or market value for expiring, shrinkage and excess and obsolete inventory were $2.6 million and $1.1 million as of September 30, 2016 and December 31, 2015, respectively, and included in costs of goods sold was $238,000  and $3.4 million of inventory write-downs for the three and nine months ended September 30, 2016, respectively.    

 



 

7.   Related Parties



BBX Capital, BFC and Bluegreen are entities under common control. The controlling shareholder of BBX Capital and Bluegreen is BFC.  Shares of BFC’s capital stock representing a majority of the voting power are owned or controlled by Alan Levan, BBX Capital’s Chairman until December 23, 2015 and Jack Abdo, BBX Capital’s Vice Chairman. Alan Levan was also previously chairman of BFC and Bluegreen. Mr. Abdo currently serves as Vice Chairman of BFC and Acting Chairman of Bluegreen. Alan Levan is currently a non-executive employee of Bluegreen, BBX Capital and BFC.  Mr. Jarett Levan, son of Alan Levan, is currently serving as BBX Capital’s acting CEO and Chairman.  BBX Capital, BFC and Bluegreen share certain office premises and employee services, pursuant to the agreements described below.



Effective December 1, 2012, BBX Capital entered into an agreement with BFC pursuant to which BBX Capital provides office facilities to BFC and is reimbursed by BFC based on cost. BFC also provides risk management services to BBX Capital and BFC is reimbursed by BBX Capital based on cost.  During the three and nine months ended September 30, 2015, BBX Capital’s employees were provided health insurance under policies maintained by Bluegreen for which Bluegreen was reimbursed at cost. Beginning January 1, 2016, BBX Capital employees have been provided health insurance through health insurance policies maintained by BBX Capital.



The table below shows the effect of these related party agreements and arrangements on BBX Capital’s Condensed Consolidated Statements of Operations for the three and nine months ended September  30, 2016 and 2015 (in thousands):





As disclosed in Note 2, on April 2, 2013, BBX Capital invested $71.75 million in Woodbridge in exchange for a 46% equity interest in Woodbridge. The investment was made in connection with Woodbridge’s acquisition of the publicly held shares of Bluegreen. BFC holds the remaining 54% of Woodbridge.  BBX Capital contributed $60 million in cash and issued to Woodbridge an $11.75 million note payable in connection with BBX Capital’s acquisition of its 46% equity interest in Woodbridge.  During September 2015, in connection with the settlement of the Bluegreen shareholder litigation, the $11.75 million Woodbridge note payable was paid-in-full.  During the three month periods ended September 30,  2016 and 2015,  BBX Capital recognized $0 and $124,000, respectively, of interest expense in connection with the Woodbridge note payable. During the nine month periods ended September 30,  2016 and 2015,  BBX Capital recognized $0 and $420,000, respectively, of interest expense in connection with the Woodbridge note payable.



On May 8, 2015, BFC, BBX, Woodbridge, Bluegreen and their respective subsidiaries entered into an “Agreement to Allocate Consolidated Income Tax Liability and Benefits” pursuant to which, among other customary terms and conditions, the parties agreed to file consolidated federal tax returns. The parties will calculate their respective income tax liabilities and attributes as if each of them were a separate filer.  If any tax attributes are used by another party to the

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agreement to offset its tax liability, the party providing the benefit will receive an amount for the tax benefits realized.  There were no tax sharing agreement payments or receipts during the three and nine months ended September 30, 2016 and 2015, respectively. 



On July 27, 2016, BBX Capital entered into the Merger Agreement with BFC and a wholly-owned subsidiary of BFC which provides for BBX Capital to merge with and into the BFC subsidiary and become a wholly-owned subsidiary of BFC.  See Note 1 for a description of the Merger Agreement.

 





8.   Segment Reporting



The information provided for segment reporting is based on internal reports utilized by management. Results of operations are reported through three reportable segments: BBX, Renin and Sweet Holdings.



The BBX reportable segment activities consist of managing its commercial loan portfolio and real estate properties, the portfolio of charged off loans, its investment in Woodbridge and investments in real estate joint ventures.  The activities of managing the commercial loan portfolios included renewing, modifying, collecting, extending, refinancing and making protective advances on these loans, as well as managing and liquidating real estate properties acquired through foreclosure.



The Renin reportable segment consists of the activities of Renin. Total revenues for the Renin reportable segment include $7.0 million and $5.7 million of trade sales to two major customers and their affiliates for the three months ended September 30, 2016 and 2015, respectively.  Renin’s revenues generated outside of the United States totaled $5.0 million and $5.5 million for the three months ended September 30, 2016 and 2015, respectively.   Total revenues for the Renin reportable segment include $18.3 million and $18.6 million of trade sales to two major customers and their affiliates for the nine months ended September 30, 2016 and 2015, respectively. Renin’s revenues generated outside of the United States totaled $16.1 million and $17.0 million for the nine months ended September 30, 2016 and 2015, respectively.  Renin’s properties and equipment located outside the United States totaled $1.2 million as of September 30, 2016 and as of December 31, 2015.

The Sweet Holdings reportable segment consists of the activities of the acquired operating businesses of Hoffman’s, Williams & Bennett, Jer’s, Helen Grace,  Anastasia, Droga and Kencraft for the three and nine months ended September  30, 2016 and the three months ended September 30, 2015.  Kencraft was acquired on April 1, 2015 and Droga was acquired in May 2015. The activities of Kencraft and Droga are included in Sweet Holdings operating results from the respective dates of acquisition.



In June 2016, the Jer’s sales office and distribution facilities were closed and relocated to Kencraft’s facilities in Utah.  The relocation resulted in the termination of key employees including a sales representative and the President of Jer’s.  Based on the changes in circumstances, management performed an impairment analysis on Jer’s long-lived assets consisting of trademarks, customer relationships and properties and equipment. As a result, BBX Capital recognized an impairment loss of  $423,000 included in selling, general and administrative expenses in BBX Capital’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016. 

The accounting policies of the segments are generally the same as those described in the summary of significant accounting policies.  Intersegment transactions are eliminated in consolidation.  Certain intercompany management fees and interest income/expense for prior periods have been reclassified to conform to the 2016 presentation.

Depreciation and amortization consist of depreciation on properties and equipment and amortization of leasehold improvements, intangible assets and deferred financing costs.



BBX Capital evaluates segment performance based on segment net income after tax. The tables below provide segment information for the three and nine months ended September  30, 2016 and 2015 (in thousands):









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9.  Fair Value Measurement



There were no assets or liabilities measured at fair value on a recurring basis in BBX Capital’s financial statements as of September 30, 2016 and December 31, 2015.



The following table presents major categories of assets measured at fair value on a non-recurring basis as of September 30, 2016 (in thousands):







Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):







(1)  Range and average appraised values were reduced estimated by costs to sell.

(2)  Average was computed by dividing the aggregate amounts by the number of loans or real estate properties.



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The following table presents major categories of assets measured at fair value on a non-recurring basis as of September 30, 2015 (in thousands):





(1) Total impairments represent the amount of losses recognized during the nine months ended September 30, 2015 on assets that were held and measured at fair value as of September 30, 2015.



Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):







(1)  Range and average appraised values were reduced by estimated costs to sell.

(2)  Average was computed by dividing the aggregate appraisal amounts by the number of appraisals.



There were no material liabilities measured at fair value on a non-recurring basis in BBX Capital’s financial statements as of September 30, 2016 or December 31, 2015.



Loans Measured For Impairment



Impaired loans are generally valued based on the fair value of the underlying collateral less cost to sell as the majority of BBX Capital’s loans are collateral dependent. The fair value of BBX Capital’s loans may significantly increase or decrease based on changes in property values.  BBX Capital primarily uses third party appraisals to assist in measuring non-homogenous impaired loans and broker price opinions to assist in measuring homogenous 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 BBX Capital may also adjust these values for changes in market conditions subsequent to the appraisal date. When current appraisals are not available for certain loans, BBX Capital uses its judgment on market conditions to adjust the most current appraisal. As a consequence, the calculation of the fair value of the collateral is considered a Level 3 input. BBX Capital generally recognizes impairment losses based on third party broker price opinions when impaired homogenous loans become 120 days delinquent. These third party valuations from real estate professionals

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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. 



Real Estate Held-for-Sale and Held-for-Investment



Real estate is generally valued using third party appraisals or broker price opinions. These appraisals generally use the market or income approach valuation techniques and use market observable data to formulate an estimate of the fair value of the properties. The market observable data typically consists of comparable property sales, rent rolls, market capitalization rates on income producing properties and risk adjusted discount rates.   The above inputs are considered Level 3 inputs as the appraiser uses professional judgment in the calculation of the fair value of the properties.



The following table presents the fair value of BBX Capital’s consolidated financial instruments as of September 30, 2016:





The following table presents the fair value of BBX Capital’s consolidated financial instruments as of December 31, 2015:







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, management has derived the fair value of the majority of these financial

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instruments using the income approach technique with Level 3 unobservable inputs. Management 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. BBX Capital’s 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, BBX Capital may not receive the estimated value upon sale or disposition of the asset or pay the estimated value upon disposition of the liability in advance of its scheduled maturity.



Fair values are estimated for loan portfolios with similar financial characteristics. Loans are segregated by category, and each loan category is further segmented by delinquency categories.



The fair value of loans is calculated by using an income approach with Level 3 inputs.  The fair value of loans is estimated by discounting forecasted cash flows using estimated market discount rates that reflect the interest rate and credit risk inherent in the loan portfolio. Management assigns a credit risk premium and an illiquidity adjustment to these loans based on delinquency status.  The fair value of 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.  



The fair value of notes payables and principal and interest advances on residential loans were measured using the income approach with Level 3 inputs obtained by discounting the forecasted cash flows based on estimated market rates.

 



10.  Commitments and Contingencies



BBX Capital guarantees certain obligations of its wholly-owned subsidiaries and unconsolidated real estate joint ventures as described below:

During the year ended December 31, 2014, the Sunrise and Bayview Partners, LLC joint venture owned 50% by Procacci Bayview, LLC and 50% by BBX Capital refinanced its land acquisition loan with a financial institution.  BBX Capital provided the financial institution with a guarantee of 50% of the outstanding balance of the joint venture’s loan which had an outstanding balance of $5.0 million as of September 30, 2016.

In July 2014, BBX Capital entered into the Hialeah Communities joint venture with CC Bonterra to develop approximately 394 homes in a portion of the newly proposed Bonterra community in Hialeah, Florida. BBX Capital transferred approximately 50 acres of land at an agreed upon value of approximately $15.6 million subject to an $8.3 million mortgage which was assumed by the joint venture.  In March 2015, the joint venture refinanced the $8.3 million mortgage loan as part of a $31.0 million acquisition and development loan.  In March 2016, the loan was modified reducing the loan balance from $31.0 million to $26.5 million. BBX Capital is a guarantor of up to $5.3 million of the joint venture’s $26.5 million acquisition and development loan.

BBX Capital is a guarantor on a $5.5 million note payable of Anastasia owed to the seller. The Anastasia note payable is also secured by the common stock of Anastasia.  In October 2016, BBX Capital made a $2.0 million scheduled principal payment and the outstanding principal balance of the note payable to Anastasia was reduced to $3.5 million.



On August 7, 2015, BBX Sweet Holdings entered into a Loan and Security Agreement and related agreements with Iberiabank, which provides for borrowings of up to $5.0 million on a revolving basis. The outstanding availability of the Iberiabank facility was $5.0 million as of September 30, 2016.  In February 2016, BBX Sweet Holdings executed Addendum No. 1 to the Iberiabank Loan and Security Agreement. The addendum replaced the debt service coverage financial covenant with a working capital to debt ratio financial covenant. The facility is secured by the assets of BBX Sweet Holdings and its subsidiaries and is guaranteed by BBX Capital. BBX Sweet Holdings was in compliance with the debt financial covenants as of September 30, 2016.

BBX Sweet Holdings and BBX Capital are guarantors of a $1.6 million note payable of Hoffman’s owed to Centennial Bank.  This note is secured by $2.1 million of properties and equipment.

In connection with the Kencraft acquisition, BBX Sweet Holdings issued a $400,000 note payable maturing on April 1, 2017 to the seller.  BBX Capital is the guarantor on this note payable.



BBX Capital and its consolidated subsidiaries are parties to lawsuits as plaintiff or defendant involving its collections, lending and prior period tax certificate activities. Although BBX Capital believes it has meritorious defenses in all current legal actions, the outcome of litigation and the ultimate resolution are uncertain and inherently difficult to predict.

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Reserves are accrued for matters in which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The actual costs of resolving these legal claims may be substantially higher or lower than the amounts accrued for these claims.  There were no reserves accrued as of September 30, 2016.



In certain matters, BBX Capital is unable to estimate the loss or reasonable range of loss until additional developments in the case 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 the claim.    



BBX Capital believes that liabilities arising from litigation discussed below, in excess of the amounts currently accrued, if any, are not expected to have a material impact on BBX Capital’s financial statements. However, due to the significant uncertainties involved in these legal matters, BBX Capital may incur losses in excess of accrued amounts and an adverse outcome in these matters could be material to the BBX Capital’s consolidated financial statements. 



The discussion below does not include litigation relating to companies which are not consolidated into BBX Capital’s financial statements, including Woodbridge and Bluegreen. 



The following is a description of certain ongoing or recently concluded litigation matters: 



Securities and Exchange Commission Complaint 



In early 2012, the SEC brought suit against BBX Capital and Alan B. Levan, BBX Capital’s then-serving Chairman and Chief Executive Officer, alleging disclosure and accounting violations arising from public disclosures published in, or for the fiscal year ended, December 31, 2007. The case is styled In re: Securities and Exchange Commission v. BankAtlantic Bancorp, Inc. and Alan B. Levan. Prior to trial, the district court entered two summary judgments, one finding as a matter of fact that three sentences in an earnings conference call on July 25, 2007 were false, and the other striking a reliance on accountants defense. On December 15, 2014, the jury rendered a verdict finding in favor of BBX Capital and Mr. Alan Levan on all of the claims but the two tied to the pretrial summary judgments. Following the trial, the district court entered a final judgment (i) barring Mr. Alan Levan from serving as an officer or director of any SEC reporting company for two years commencing on December 23, 2015, (ii) imposing monetary penalties of $4,550,000 against BBX Capital and $1,300,000 against Mr. Alan Levan; and (iii) permanently restraining BBX Capital and Mr. Alan Levan from violating securities laws. As a result of the court’s decision, effective December 23, 2015, Mr. Alan Levan resigned as Chairman and Chief Executive Officer of BBX Capital, as Chairman, Chief Executive Officer and President of BFC, and as a director of BBX Capital and BFC. BBX Capital and Mr. Alan Levan appealed the district court’s judgment to the Eleventh Circuit Court of Appeals. On September 28, 2016, the Eleventh Circuit Court of Appeals reversed the pretrial summary judgments and set aside the judgment of the district court. The reversal, once final, will terminate the financial penalties and set aside the two year officer and director bar imposed against Mr. Alan Levan. The court remanded the case for a new trial on the two claims stripped of the summary judgments. The SEC has the right to seek a retrial of the two claims. The order entered by the Eleventh Circuit Court of Appeals will not be final until the time to file motions for rehearing expire or any filed motions for rehearing are denied. Once the decision is final, it is expected that Mr. Alan Levan will be re-appointed as Chairman, Chief Executive Officer and President of BFC and as Chairman and Chief Executive Officer of BBX Capital. Mr. Alan Levan continues to serve BFC and BBX Capital in a non-executive capacity as Founder and strategic advisor to each company’s board of directors.



New Jersey Tax Sales Certificates Antitrust Litigation

 

On December 21, 2012, plaintiffs filed an Amended Complaint in an existing purported class action filed in Federal District Court in New Jersey adding BBX Capital and Fidelity Tax, LLC, a wholly owned subsidiary of CAM, among others as defendants.  The class action complaint is brought on behalf of a class defined as “all persons who owned real property in the State of New Jersey and who had a Tax Certificate issued with respect to their property that was purchased by a Defendant during the Class Period at a public auction in the State of New Jersey at an interest rate above 0%.”  Plaintiffs alleged that beginning in January 1998 and at least through February 2009, the Defendants were part of a statewide conspiracy to manipulate interest rates associated with tax certificates sold at public auction from at least January 1, 1998, through February 28, 2009. During this period, Fidelity Tax was a subsidiary of BankAtlantic.  Fidelity Tax was contributed to CAM in connection with the sale of BankAtlantic in the BB&T Transaction. BBX Capital and Fidelity Tax filed a Motion to Dismiss in March 2013 and on October 23, 2013, the Court granted the Motion to Dismiss and dismissed the Amended Complaint with prejudice as to certain claims, but without prejudice as to plaintiffs’ main antitrust claim.  BBX Capital reached an agreement to settle the action for $400,000 and the court approved the settlement in September 2016.







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Litigation Regarding Proposed Merger



On August 10, 2016, Shiva Stein filed a lawsuit against BFC, Merger Sub, BBX Capital and the members of BBX Capital’s board of directors, which seeks to establish a class of BBX Capital’s shareholders and challenges the currently proposed Merger pursuant to which BBX Capital would merge with and into a wholly-owned subsidiary of BFC.  This action, styled Shiva Stein, on behalf of herself and all others similarly situated, v. BBX Capital Corp., John E. Abdo, Norman H. Becker, Steven M. Coldren, Willis N. Holcombe, Jarett S. Levan, Anthony P. Segreto, Charlie C. Winningham, II, BFC Financial Corporation and BBX Merger Subsidiary LLC, Case No. CACE16014713, was filed in the Circuit Court of the 17​th Judicial Circuit in and for Broward County, Florida. The plaintiff asserts that the proposed Merger consideration undervalues BBX Capital and is unfair to BBX Capital’s public shareholders, that the sales process was unfair and that BBX Capital’s directors breached their fiduciary duties of care, loyalty and candor owed to the public shareholders of BBX Capital because, among other reasons, they failed to take steps to maximize the value of BBX Capital to its public shareholders and instead diverted consideration to themselves. The lawsuit also alleges that BFC, as the controlling shareholder of BBX Capital, breached its fiduciary duties of care, loyalty and candor owed to the public shareholders of BBX Capital by utilizing confidential, non-public information to formulate the Merger consideration and not acting in the best interests of BBX Capital’s public shareholders. In addition, the lawsuit includes a cause of action against BBX Capital, BFC and Merger Sub for aiding and abetting the alleged breaches of fiduciary duties. The lawsuit requests 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.  BFC and BBX Capital believe that the lawsuit is without merit and intend to vigorously defend the action.



A second lawsuit which sought to challenge the merger and included many of the same claims as set forth in the Stein action described above was filed in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida during September 2016. This lawsuit was dismissed with prejudice during October 2016.



BBX Capital and BFC have also received threats of additional litigation relating to the proposed Merger.







11.  Subsequent Event



BBX Capital obtained entitlements to develop raw land in St Johns County, Florida into 1,476 finished lots which will comprise the Beacon Lake Community.  BBX Capital acquired the undeveloped property through foreclosure and intends to sell the finished lots to home builders. The Meadow View at Twin Creeks Community Development District (“CDD”) was formed by St. Johns County in connection with the issuance of community development bonds to fund infrastructure improvements in the Beacon Lake Community.  In November 2016, the CDD issued $21.4 million of bonds.  The CDD bonds are secured by a lien on the property and are repaid through special assessments on the property. The CDD bonds are nonrecourse to BBX Capital.  The carrying value of the property was $9.7 million as of September 30, 2016.