The nearly $97 billion asset Silicon Valley Bank (NASDAQ:SIVB) just had a blowout quarter. The bank's stock is now up more than 10% year to date and trading 196% above book value . A lot of the success in the quarter was driven by initial public offerings and venture capital activity in the tech and life sciences sector.

While the bank has always specialized in this niche, the results show just how much the bank could benefit in the future as these sectors begin to further adapt to life in the coronavirus pandemic and after. In fact, the coronavirus pandemic may very well end up taking Silicon Valley Bank to new heights.

Silicon Valley Bank building

Image source: Silicon Valley Bank.

An incredible quarter 

The bank turned a profit of more than $441 million in the third quarter, up more than 65% from the third quarter of 2019. Deposits grew by more than $10 billion from the second quarter of the year; net interest income, despite the low-rate environment, is higher than it was in the third quarter of 2019; and non-interest income is up 86% from a year ago as well. The bank also released $52 million of its reserves, or roughly 9% of its total reserves, for future potential loan losses, back into earnings . 

Although several other banks released reserves in the quarter, Silicon Valley Bank's reserve release is the largest one I've seen this quarter in terms of percentage of total reserves. The release came in the company's private banking division, which does a lot of consumer loans such as mortgages, home equity lines of credit, capital call lines of credit, and other secured and unsecured lending products.

Silicon Valley Bank's Chief Credit Officer Marc Cadieux said on the company's most recent earnings call that the release was partly due to the fact that Moody's economic forecasts, which the bank uses to model and project loan losses, have improved. Cadieux also said that many of the borrowers that went on deferral earlier in the pandemic have also resumed making loan payments in the third quarter .

The other big jump in the quarter can be attributed to a huge gain on an equity investment the bank made in a venture-backed start-up. Three years ago, the bank made a convertible loan to the IT service management company BigCommerce (NASDAQ:BIGC), which is essentially a loan that is at some point converted into equity in the company.

BigCommerce completed its IPO in August and has seen its stock surge 217% since hitting the public markets. The investment resulted in a gain of more than $149 million from common shares Silicon Valley Bank obtained in the company and the exercise of certain warrants , all of which benefited non-interest income. Silicon Valley CEO Greg Becker said the bank doesn't do many convertible debt loans, but this is one example of how the bank can profit from venture-backed start-up exits through IPOs or acquisitions.

VC and start-up activity set to take off

Recessions can often ignite a fury of innovation, because as unemployment rises, more people out of work can explore the idea of launching a business. Or it can become a necessity if people can't find good jobs. Silicon Valley Bank added 1,500 new clients in the third quarter , most of which Becker said are early stage companies .

Additionally, Silicon Valley Bank President Mike Descheneaux said that venture capital firms right now have "record levels of dry powder" in terms of fundraising, which is impressive when you consider the slowdown in venture capital funding earlier this year. It makes a certain amount of sense because investors are starved for yields right now, with the bond market and commercial real estate not very attractive.

Venture capital and private equity funding is important for Silicon Valley Bank because the company specializes in providing capital call lending, short-term lines of credit that provide VC and PE companies with the funds they need to make investments quickly until their investors can get them the funding. Silicon Valley Bank has been doing capital call lending since the 1990s and has had net zero losses. These loans also make up half of the bank's loan book .

The other potentially exciting development is that more venture capitalists and private equity firms are warming to doing deals via Zoom Video Communications (NASDAQ: ZM) products. Becker said very few executives were willing to do this at the beginning of the pandemic, but after a call with many executives recently, now everyone is. "Everyone was doing it and they were just talking about how efficient it was and how this [is] maybe a new normal and [will] allow them to look at investments more broadly in different markets where it's easier to kind of connect with those founders, the executive team of those companies," he said .

Leerink, the healthcare and life science investment bank Silicon Valley Bank purchased in 2014, has also performed incredibly well, generating more than $108 million in commissions and revenues in the quarter. That's actually down from the bank's stellar performance in the second quarter, but still much higher than normal .

Investment banking revenue may continue to normalize, but IPO growth has been strong and this is an area Silicon Valley Bank can continue to grow in. Becker said the bank had 62% market share of the venture-backed IPOs that took place in the third quarter and 73% of the venture-backed IPOs on health and tech in 2020 .

The forecast

I am not sure that Silicon Valley Bank will continue to have quarters like this every time, as investment banking activity may begin to normalize, and the gain from BigCommerce is a one-off. However, Silicon Valley Bank did provide guidance for 2021, and it looks pretty good as far as the banking outlook goes.

The bank expects to grow loans in the high single- to low double-digit percentage gains, which is great when you look at how sluggish loan growth is in the banking industry right now. It also expects deposits to keep growing at a very healthy clip, and continues to express confidence about its credit outlook . I wouldn't be surprised to see the bank's stock hit new highs sooner rather than later.