The broad picture is more nuanced than it was during the 2023 regional banking stress. CRE is still a genuine credit issue for many regional and community banks, but the industry as a whole has stronger liquidity, deposit trends, and capital than it did then. The opportunity set is becoming increasingly idiosyncratic rather than a blanket "buy regional banks" trade.
Here's the framework I'd use.
1. Separate liquidity risk from credit risk
In 2023, investors worried about both.
Today:
- Liquidity risk has generally improved. Industry deposits have reached record levels, wholesale funding has moderated somewhat, and most large banks maintain strong liquidity buffers.
- Credit risk remains concentrated in CRE, especially:
- older office loans
- urban Class B/C office
- construction & development
- borrowers facing refinancing at much higher rates
Office remains the weakest property type, while multifamily, industrial and many retail segments have generally held up much better.
2. Where I still look for stress
I focus less on "CRE exposure %" and more on loss-absorbing capacity.
The metrics I monitor every quarter include:
| Metric | Why it matters |
|---|
| CRE / tangible common equity | High ratios reduce flexibility if losses emerge |
| Office concentration | Office remains the biggest uncertainty |
| Classified assets | Shows loans regulators already dislike |
| Non-performing CRE loans | Early warning before charge-offs |
| Net charge-offs | Are losses actually arriving? |
| Allowance / non-performing loans | Reserve adequacy |
| CET1 or tangible common equity | Cushion against surprises |
A bank with 350% CRE/TCE may actually be safer than one with 220% if:
- reserves are larger,
- office exposure is lower,
- deposit base is stickier,
- capital generation is stronger.
3. Deposit flows
This is still one of my highest-frequency indicators.
I watch:
Quarterly deposit growth
- Organic growth is preferable.
- Heavy brokered deposit growth deserves scrutiny.
Deposit mix
- Non-interest-bearing deposits
- Commercial operating accounts
- Consumer deposits
These are much "stickier" than rate-sensitive CDs.
Uninsured deposits
After SVB, this became a permanent monitoring item.
Higher uninsured deposits don't automatically mean danger—but they increase run risk if confidence deteriorates.
Industrywide, uninsured deposits remain below their 2022 highs despite a modest increase from post-2023 lows.
4. Bond marks (unrealized losses)
I'm watching two things.
A. AOCI / AFS portfolio
Most unrealized losses have improved as older low-coupon securities roll off and interest rates stabilize.
The Fed notes that available-for-sale unrealized losses fell sharply through late 2025, while the FDIC reports industrywide unrealized losses have continued to decline from their peak, though they remain elevated.
B. HTM portfolio
These don't flow through capital for most banks.
The question becomes:
Could the bank ever be forced to sell them?
That circles back to deposits.
If deposits remain stable:
- HTM losses mostly amortize away over time.
If deposits become unstable:
- HTM marks suddenly matter.
That's why I never analyze securities portfolios without also looking at funding.
5. Preferred stock opportunities
Preferreds become interesting when markets overprice liquidity risk.
I generally look for banks with:
- strong common equity generation
- stable deposit franchises
- improving securities marks
- manageable office exposure
- preferred yields substantially above historical norms
Less attractive are preferreds issued by banks where:
- dividends depend on avoiding large CRE provisions,
- capital ratios are only marginally above regulatory minimums,
- earnings barely cover preferred dividends.
Unlike common stock, preferred investors mainly care about:
- survival,
- capital,
- dividend continuity.
6. Where opportunities may exist
The market often over-penalizes banks with:
- moderate CRE exposure but very strong deposit franchises
- improving net interest margins
- excess capital
- diversified loan books
Conversely, I remain cautious on institutions with:
- heavy office concentration
- rapid reserve builds every quarter
- reliance on brokered funding
- weak deposit growth despite paying high deposit rates
My monitoring dashboard
Every earnings season I would update:
- Deposits (QoQ and YoY)
- Uninsured deposit %
- Brokered deposits
- Loan-to-deposit ratio
- Office exposure
- Total CRE/TCE
- Non-performing assets
- Net charge-offs
- Reserve coverage
- CET1 / tangible common equity
- HTM unrealized losses
- Net interest margin
- Dividend payout ratio
- Preferred dividend coverage
This combination tends to identify deterioration before it becomes obvious in earnings.
One additional observation: recent regulatory commentary suggests deposit competition has shifted away from panic-driven withdrawals toward competition on rates. Banks with attractive loan opportunities have often been willing to pay more for deposits, which means rising funding costs aren't necessarily a sign of distress by themselves.
