Interactive Brokers Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a global electronic broker operating across more than 150 exchanges and market centers. IBG, Inc. owned 24.5% of IBG LLC; the remaining 75.5% was reported as noncontrolling interest. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $790 million | $464 million | $2,091 million | $2,111 million |
| Net interest income | $473 million | $274 million | $1,103 million | $853 million |
| Income before taxes | $523 million | $234 million | $1,309 million | $1,414 million |
| Net income | $483 million | $206 million | $1,209 million | $1,298 million |
| Net income available to common stockholders | $99 million | $42 million | $244 million | $241 million |
| Diluted EPS | $0.97 | $0.43 | $2.43 | $2.58 |
| Pretax profit margin | 66% | 50% | 63% | 67% |
Q3 adjusted diluted EPS, a non-GAAP measure, was $1.08 versus $0.78; adjusted net revenues were $847 million versus $650 million. For the nine-month period, adjusted diluted EPS was $2.74 versus $2.55 and adjusted net revenues were $2,256 million versus $2,096 million. Management’s adjustments exclude currency diversification effects, investment mark-to-market gains or losses, and Tax Receivable Agreement liability remeasurement; these measures supplement, not replace, GAAP results.
Q3 commissions rose 3% to $320 million as options and futures activity offset weaker stock trading. Net interest income increased 73%, reflecting higher rates and larger customer credit balances, partly offset by lower margin lending balances. Other fees and services declined 8% to $45 million. Q3 non-interest expenses rose 16% to $267 million, led by higher execution and clearing costs and employee compensation. Nine-month commissions fell 4%, other fees and services fell 12%, and other income was a $144 million loss versus $68 million income a year earlier.
Balance sheet, cash flow and capital
- At September 30, total assets were $114.7 billion, total liabilities $103.8 billion and total equity $10.9 billion. Stockholders’ equity was $2.7 billion; noncontrolling interests were $8.2 billion.
- Cash and cash equivalents were $3.2 billion, with a further $25.4 billion of cash segregated for regulatory purposes and $31.3 billion of segregated securities. Management characterized 99.2% of assets as liquid; segregated customer-protection assets are not equivalent to unrestricted corporate cash.
- Customer receivables, primarily margin loans, were $40.4 billion, down from $54.9 billion at year-end 2021. Customer payables were $92.6 billion. Short-term borrowings were $35 million; the filing states there was no variable-rate debt outstanding and no senior notes were issued in the first nine months.
- For the first nine months, operating cash flow was $4.0 billion, investing cash outflow $48 million and financing cash outflow $348 million. Cash, cash equivalents and restricted cash increased $3.3 billion to $28.6 billion; exchange-rate effects reduced this total by $269 million.
- Aggregate excess regulatory capital was $8.1 billion, and regulated subsidiaries were in compliance with their requirements. The company said it had liquidity sources sufficient for needs beyond the next 12 months.
Material changes and operating trends
- Q3 revenue growth was driven principally by higher interest income as the average federal funds effective rate rose to 2.18% from 0.09% a year earlier. Net interest margin increased to 1.67% from 1.13%.
- Trading activity was mixed: Q3 customer options volume increased 1% and futures volume 36%, while stock share volume fell 56% year over year. Total customer DARTs declined 15% to 1.9 million. Accounts grew 31% to 2.012 million, while customer equity fell 19% to $287.1 billion.
- Q3 other income remained negative at $48 million, improving from a $170 million loss in the prior-year quarter, mainly because the Tiger Brokers investment loss was smaller. For the nine months, other income was adversely affected by currency diversification losses and mark-to-market losses on U.S. government securities.
- Currency diversification reduced Q3 comprehensive earnings by $163 million, comprising a $40 million loss in other income and a $123 million foreign-currency translation loss in other comprehensive income. About 23% of equity was denominated in currencies other than the U.S. dollar.
- In August, the company issued 3.27 million shares valued at $192 million in exchange for IBG LLC interests, increasing its ownership from 23.7% to 24.5%. It paid quarterly common dividends of $0.10 per share during the period.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management described a market environment of rising rates, inflation, geopolitical uncertainty and elevated volatility. It said higher rates had improved interest spreads, while noting that rate changes, customer balances and the currency mix can affect future interest income. It also highlighted uncertain trading volumes, intense pricing competition, regulatory scrutiny of payment for order flow, international and geopolitical exposures, and risks from market structure changes. The company’s interest-rate sensitivity estimate indicated that an unexpected 0.25 percentage-point U.S. rate move would change annualized net interest income by approximately $55 million, assuming full reinvestment effects.
Market, credit, foreign-exchange and margin-lending risks remain significant. The company’s risk disclosures note that margin-loan and short-sale exposure can be difficult to quantify, that automated liquidation may not work where markets are illiquid, and that VaR models may not capture extreme events. The company reported no material concentrations of credit risk outside the ordinary course of business.
Material matters include an appeal and cross-appeal in the Trading Technologies patent case following a $6.6 million jury award, plus $2.1 million in prejudgment interest and post-judgment interest to be calculated. A customer class action involving liquidation of margin-deficient accounts remained pending, including a class-certification motion. The company also continued cooperating with a U.S. Department of Justice inquiry related to previously settled AML/BSA matters; management did not expect its resolution to have a materially adverse financial effect. Accruals for legal and regulatory matters were not material, but management cautioned that some matters could materially affect results in a particular period. Clearing-house guarantees are not quantified on the balance sheet; management considers the likelihood of payment remote.
The company adopted SEC Staff Accounting Bulletin 121 retrospectively in 2022, recognizing matching crypto-asset safeguarding assets and liabilities of $101 million at September 30 for customer assets held with a third-party provider. The provider reported no loss events. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated net interest income persists as rates, customer credit balances, margin lending and interest paid on customer cash change.
- How the sharp decline in stock volumes and DARTs, alongside account growth and lower customer equity, affects commissions and customer activity.
- The performance and valuation of the Tiger Brokers investment, government securities and currency diversification strategy, including the effect on comprehensive income.
- Developments in the Trading Technologies appeals, the customer class action and the DOJ inquiry, including any change in potential exposure or accruals.
- That regulatory-segregated cash and securities, customer payables and collateralized financing balances are interpreted appropriately when assessing liquidity and available capital.