Silicon Valley Bank (SIVB +0.00%) is a special animal. For more than 30 years, it's been serving the tech start-up community in its famous region, and has become known as the go-to bank for the industry.
Operating in a niche market can be risky, and there are fewer higher-risk sectors than tech. Anything can happen, and everything can go wrong. But this bank has figured out an innovative way to mitigate this, and to consistently turn a profit while doing so.
In this video segment, Motley Fool analyst Gaby Lapera and senior banking specialist John Maxfield discuss why Silicon Valley Bank has been so successful at what it does.
A full transcript follows the video.
This podcast was recorded on Dec. 7, 2015.
Gaby Lapera: Actually, one of the really interesting things about them is, like you said, they're venture capitalists -- they're investing in the tech industry -- which is really the biggest source of innovation in the country right now.
A lot of the people that they have, or not a lot but some of the people they have sponsored, have been huge winners like Cisco, Twitter. I believe they also had Facebook for a little bit -- I'd have to check on that one. Uber was another one that they had, speaking about transportation.
John Maxfield: And here's what is another really unique thing about this -- and this goes to show why this has worked so well for Silicon Valley Bank. All of those companies... a lot of times, when Silicon Valley Bank goes in, you either finance, help them finance a deal, or to provide services that they will take warrants in these companies which are derivatives -- which gives Silicon Valley Bank the opportunity to buy shares in these companies at set prices. And oftentimes, when you exercise those warrants, those prices in the actual companies are much higher than the warrant price.
So when you look at Silicon Valley Banks' income statement, its top two non-interest income sources -- and this is really unusual for a bank -- are gains or losses from these types of instruments.
Lapera: Yeah, that's really cool. The other thing that was really interesting about this bank to me is that it operates a little bit more like a small bank would, like a little small-town bank, where if people are having trouble repaying their loans, and they really think that they've got a good shot, they just need more time -- they'll give people extensions. It's that the lot more of a humanitarian approach to finances than you're used to seeing with banks.
Maxfield: Yeah, and I think you're talking about that Wall Street Journal article, where they're talking about there's a ... I can't remember the name of the company. It was TinyCo or something like that. Where they were in breach of their loan covenants because, I guess, they'd missed a loan payment, or something was going on there.
I don't know if it was a loan payment, or maybe some of their financial ratios got off kilter, and they went back to Silicon Valley Bank, and they got something like a six-month extension. And then they were able to turn things around, and then pay off their loan. So forbearance in certain instances certainly pays off.
Lapera: Absolutely. Anything more you want to say about that? Or do you want to move on to our next topic?
Maxfield: No, nothing in particular. Just that, if you're looking for a niche bank, this is one you're going to want to throw into your kind of analysis.
Lapera: This might be a good way to help diversify your portfolio, as long as you don't put all of your money in one place.
Maxfield: That's right.
Lapera: Fair?
Maxfield: That's right. Fair.
