Sprawling organizations and post-financial crisis compliance costs and legal settlements are making it difficult for the largest banks to generate pre-2008 returns. To diversify the portfolio away from that regulatory overhang, we selected three regional banks that are not subject to as many or as strict rules on how to run their businesses and manage their capital. We also think that the Federal Reserve might increase a key regulatory threshold that these banks expect to cross in the next several years, prolonging one of their competitive advantages.

Each of the banks operates a lean business, originates high quality assets, and is heavily exposed to domestic growth markets. These banks are specialists in their geographic areas, and work to fund their loans with deposits, which cost them less over time than capital markets alternatives. Because these banks are at least five times smaller by assets than the smallest “global systemically important bank” and their portfolios are so narrowly focused, we diversified our investment by buying three banks, each with a different combination of assets and deposit bases, exposure to geographic markets, and strategies for the unpredictable regulatory market.

First Republic Bank (tkr: FRC) is a relatively young institution, with branches predominantly in the affluent urban coastal markets near San Francisco Bay and in New England. The majority of its loans and deposits are in California, with most of the remainder in New York City. The bank’s lending focus is large, high down payment mortgages and home equity lines of credit in the San Francisco area. First Republic services about a quarter of the number of accounts relative to peers with similar assets, which allows them to provide high-touch client service while keeping headcount lower.

SVB Financial Group (tkr: SIVB), the parent company of Silicon Valley Bank, is entrenched in the domestic innovation economy, with a strong foothold in lending to and taking deposits from early-stage businesses and the venture capital firms that fund them. The bank also invests in and manages venture capital funds and funds of funds. Its investment portfolio consists primarily of warrants and post-IPO equity investments, which exceeds the value of its loan portfolio.

New York Community Bancorp (tkr: NYCB) is an expert in lending to the owners of multifamily housing in New York City, a market where rent regulation confers unusually stable returns and low default levels. It is one of the most efficient banks in the country, and its recent acquisition deals have diversified the bank’s deposit base and increased its fee income. NYCB also stands out with its 12-month dividend yield of over 6%.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.