Shares of SVB Financial (NASDAQ:SIVB) soared at market open and are trading higher by about 13% as of 1 p.m. EDT. The holding company for Silicon Valley Bank reported robust profit growth driven by rising rates, gains on its investment portfolio, and a swelling loan portfolio in the third quarter.
SVB Financial is arguably the bank stock for rising interest rates. That's because the company has a valuable deposit franchise that brings in billions of no-cost deposits. Approximately 82% of client deposits are non-interest-bearing, meaning that SVB Financial can lend and invest these funds without sharing the income with its depositors.
Non-interest-bearing deposits are a boon to banks in a rising-rate environment. The bank holding company saw net interest income rise to $374 million this quarter, a 9% jump from the second quarter and a 29% increase from the year-ago period. Its net interest margin, or the difference between what it earns on its assets and what it pays on its liabilities, swelled to 3.1%, up from 2.75% a year ago.
But rising net interest income is just a part of its quarterly earnings haul. SVB Financial also saw a substantial increase in noninterest income due to gains on its warrants and plain-vanilla investment portfolio. Total investment gains tallied to $40.2 million this quarter, adding an extra helping of profits on top of relatively routine interest income.
It all boiled down to an impressive quarter for the preferred banker of Silicon Valley's tech companies and their wealthy employees, owners, and investors. The company reported earnings of $2.79 per diluted share, up roughly 32% from the $2.12 per diluted share it earned in the same period last year.
SVB Financial is a rare breed of bank that operates in an attractive geographical area and serves wealthy individuals and fast-growing businesses. The company reported that total deposits grew 17% and net loans rose 16% compared to the year-ago period. Given the banking industry as a whole can't grow much faster than the economy, it's safe to say that SVB Financial is in an elite group of fast-growing banking institutions.
As long as money flows into the Silicon Valley ecosystem, SVB Financial should be a natural beneficiary, enjoying a growing book of deposits, loans, and client accounts. Of course, banking is inherently cyclical -- and so is the flow and creation of wealth in and around Silicon Valley -- but for now, at least, SVB Financial is cashing in.