Interactive Brokers Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company is a global electronic broker operating in more than 135 exchanges and market centers. IBG, Inc. owned approximately 21.8% of IBG LLC; the remaining 78.2% was held by IBG Holdings LLC and is reflected as noncontrolling interests.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total net revenues | $893 million | $532 million | +68% |
| Net interest income | $305 million | $256 million | +19% |
| Income before income taxes | $639 million | $308 million | +107% |
| Net income | $586 million | $290 million | +102% |
| Net income available to common stockholders | $107 million | $46 million | +133% |
| Diluted EPS | $1.16 | $0.60 | +93% |
| Pretax margin | 72% | 58% | +14 percentage points |
- Revenue growth reflected commissions of $412 million (+53%), other fees and services of $56 million (+47%), net interest income of $305 million (+19%), and other income of $120 million versus a $31 million loss a year earlier.
- Non-interest expenses were $254 million, up 13%. General and administrative expense rose 59% to $59 million, including $19 million of Brexit-related regulatory onboarding costs. Employee compensation increased 21% to $97 million.
- Management’s non-GAAP measures were adjusted net revenue of $796 million, adjusted pretax income of $542 million, adjusted pretax margin of 68%, and adjusted diluted EPS of $0.98. These exclude currency-diversification effects and investment mark-to-market gains or losses.
- Operating cash flow was $3.734 billion, compared with $5.203 billion. Management attributed the current-quarter inflow largely to a $5.3 billion increase in customer payables and a $2.8 billion decrease in segregated securities, partly offset by a $3.3 billion increase in customer margin receivables. Investing cash use was $21 million; financing cash use was $1 million.
- Cash, cash equivalents and restricted cash totaled $23.8 billion at quarter-end, including $21.2 billion segregated for regulatory purposes. Unrestricted cash and cash equivalents were $2.6 billion, down from $4.3 billion at year-end 2020. Total assets were $103.8 billion, total liabilities $94.3 billion, and total equity $9.4 billion.
- Customer receivables, primarily margin loans, were $42.6 billion. Short-term borrowings were $212 million, including $200 million of senior notes outstanding at quarter-end; all those notes were redeemed by May 7, 2021. The company reported $6.7 billion of excess regulatory capital, and all regulated subsidiaries were compliant.
Material changes and drivers
- Customer activity surged: total customer accounts increased 74% year over year to 1.325 million; customer equity rose 106% to $330.6 billion; total DARTs rose 128% to 3.3 million. Stock share volume increased 411% and options volume 72%, while futures volume decreased 17%. Management noted that unusually strong low-priced-stock trading contributed to stock volume; excluding that effect, share volume increased 134%.
- Commission revenue increased $143 million, while average commission per cleared commissionable order fell 30% to $2.31, reflecting smaller average orders and higher exchange rebates passed through to customers.
- Net interest income benefited from securities lending: management said net interest earned from securities lending rose $113 million, or 182%. Low benchmark rates weighed on customer-balance income; average federal funds effective rate was 0.08% versus 1.25% in Q1 2020. Net interest margin narrowed to 1.26% from 1.45%.
- Other income included a $99 million mark-to-market gain on the Tiger Brokers investment, compared with an $8 million loss in Q1 2020, and a $2 million loss from the currency-diversification strategy, compared with a $49 million loss. These items materially affect the year-over-year comparison.
- The company completed its acquisition of Folio Investments’ self-directed retail brokerage business in January, adding approximately 57,000 customer accounts.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings or revenue guidance. Management said future COVID-19 effects are uncertain and not quantifiable. It cited possible changes in trading activity, market volatility, customer growth and economic conditions.
- Management said low or negative interest rates compress interest spreads and reduce income on segregated cash and margin lending. It estimated that a 0.25 percentage-point U.S. dollar rate increase would raise net interest income by about $105 million in the first year, while a comparable decrease would reduce it by about $37 million; these are sensitivity estimates based on quarter-end balances and stated assumptions, not guidance.
- Currency exposure affected comprehensive earnings: management reported a $78 million decrease from the currency-diversification strategy, comprising a $2 million loss in other income and a $76 million OCI loss. Approximately 26% of equity was denominated in currencies other than the U.S. dollar.
- Customer margin lending, short positions and settlement obligations carry credit and off-balance-sheet risks, especially during rapid market moves or when collateral is illiquid or concentrated. The company stated that real-time margin monitoring and liquidation systems mitigate, but do not eliminate, these risks.
- A small number of customer accounts tied to a security that sharply declined in 2018 had generated an aggregate recognized loss of about $44 million; maximum aggregate loss was estimated at $50 million if the security became worthless and no debt was recovered. Collection remains uncertain.
- Legal matters include the Trading Technologies patent litigation, with a district-court trial scheduled for August 2, 2021 on four patents; a customer class action concerning margin-liquidation practices, with a class-certification motion due November 1, 2021; and nine “short squeeze” class actions naming IB LLC or affiliates, consolidated for pretrial proceedings. Management said it intends to defend these matters; outcomes and potential losses are uncertain.
- The company had previously agreed to AML/BSA-related settlements with FINRA, the SEC and CFTC totaling $38 million in penalties plus approximately $0.7 million in disgorgement, and retained an independent consultant. It was also cooperating with a Department of Justice inquiry; management did not believe its resolution was likely to materially adversely affect financial results.
- Management stated that it believes available cash, operating cash flows and borrowings will meet liquidity needs for more than twelve months. It also reported no material changes to previously disclosed risk factors and effective disclosure controls.
Most important facts for investors to verify
- How much of the quarter’s unusually high earnings growth was driven by the $99 million Tiger Brokers mark-to-market gain and currency effects, versus recurring brokerage and net interest operations.
- Whether trading volumes and new-account growth remain elevated, and how lower commissions per order affect revenue per customer.
- How sustained low interest rates and securities-lending demand affect net interest income and the 1.26% net interest margin.
- The quality and liquidity implications of customer-balance-driven cash flows, including the distinction between unrestricted cash and regulatory-segregated cash.
- Developments in the disclosed litigation, AML/BSA compliance oversight and customer-margin credit exposure, including the uncertain potential costs and outcomes.