The recent action in BankAtlantic Bancorp ( BBX) suggests investors expect Florida's real estate crash to bring the bank down.

Shares fell 13% Monday, adding to the misery of Friday's 38% selloff. The stock has lost half its value in two weeks, trading at just above $4 in early action Monday, and is down 70% for the year.

Why? Because the Fort Lauderdale-based company has made some outsized bets on commercial real estate in its home state, and those bets are starting to go bad at a disturbing clip. The company stunned Wall Street last Thursday by posting a $30 million third-quarter loss, as nonperforming assets quadrupled from second-quarter levels to $184 million.

CEO Alan B. Levan tried to downplay the damage, pointing out that the bank has no exposure to Florida's distressed condominium market. He attributed the spike in nonperforming loans to a rash of commercial borrowers missing their Oct. 1 payments -- an unusual shift that led Levan to speculate on a conference call that "maybe it was just in the water."

But it wasn't something in the water that led to a run on the stock. Instead, it was investors getting a look at the declining quality of BankAtlantic's outsize commercial real-estate loan book.

Levan said the troubled loans included 74 "commercial residential" loans, some of which were made to land owners with option contracts in place with large national builders. As Florida residential housing development collapsed, many builders took their options to walk away from deals made with BankAtlantic's borrowers. Other loans were made to developers purchasing land, and some directly to builders.

While commercial real estate loans are always risky, the ones to landowners with option contracts to builders are especially so, since a builder can simply walk away.

The loans in question all remained current through September. But BankAtlantic categorized $156 million of these loans as nonaccrual when they missed their Oct. 1 payments.

On a conference call with analysts and investors, Levan said most of the troubled loans have outstanding balances of less than $20 million. And he pointed out that some of the Oct. 1 payments have been made, but BankAtlantic was still categorizing the loans as nonaccrual -- a conservative stance that reflects well on the bank's accounting.

But don't forget, $20 million is a very high loan balance for a bank with $6.3 billion in assets. And the Florida real estate market is in free fall -- meaning the bank is likely to experience further asset decline and net losses as it is forced to continue reserving at elevated levels.

Another point to consider centers on the personal guarantees provided to the bank on commercial real estate loans. Levan mentioned these, along with letters of credit from builders, as mitigating the credit risk for the real estate loans. Bank examiners insist on seeing the personal guarantees in a commercial loan file, but they are generally not worth the paper they are printed on. It is rare for any bank to actually collect from an individual when a business loan goes bad.


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