Interactive Brokers Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Interactive Brokers is a global electronic broker operating across more than 135 exchanges and market centers. IBG, Inc. owned approximately 22.0% of IBG LLC at quarter-end; the remaining 78.0% was held by noncontrolling interests. Unless indicated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total net revenues | $754 million | $539 million | $1,647 million | $1,071 million |
| Net interest income | $274 million | $196 million | $579 million | $452 million |
| Income before income taxes | $541 million | $222 million | $1,180 million | $530 million |
| Net income available to common stockholders | $92 million | $32 million | $199 million | $78 million |
| Diluted EPS | $1.00 | $0.40 | $2.17 | $1.00 |
| Pretax margin | 72% | 41% | 72% | 49% |
- Q2 revenue rose 40% year over year, reflecting higher commissions, fees, net interest income and other income. Commission revenue increased 11% to $307 million; customer options volume rose 34% and stock share volume rose 160% year over year, partly reflecting unusually strong activity in low-priced stocks.
- Q2 net interest income increased 40%, driven by higher margin-loan balances and securities-lending activity. Net interest margin was 1.15%, versus 0.99% a year earlier. For the six-month period, net interest margin was 1.21%, unchanged year over year.
- Q2 non-interest expenses fell 33% to $213 million. General and administrative expense declined mainly because $103 million of customer compensation costs related to April 2020 WTI crude-oil losses did not recur. Employee compensation rose with staffing growth.
- GAAP results included a $113 million Q2 mark-to-market gain on the strategic Tiger Brokers investment, compared with a $14 million gain in Q2 2020. For the first half, the gain was $212 million. Adjusted diluted EPS, a company-defined non-GAAP measure excluding specified items including investment mark-to-market gains and currency effects, was $0.82 for Q2 and $1.80 for the first half.
Financial position, cash flow and liquidity
- At June 30, total assets were $104.3 billion, total liabilities $94.4 billion and total equity $9.9 billion. Cash and cash equivalents were $3.2 billion; regulatory-segregated cash was $22.1 billion. These customer-protection balances are restricted and should not be treated as freely available corporate cash.
- Customer receivables, primarily margin loans, were $50.0 billion, up from $39.3 billion at year-end 2020. Customer payables were $81.5 billion. Securities borrowed and loaned were $3.6 billion and $11.6 billion, respectively.
- Short-term borrowings were $425 million, versus $118 million at year-end. This included $252 million of senior notes outstanding at June 30; the filing states all such notes were redeemed by August 9, 2021. The company had issued $1.237 billion and redeemed $1.081 billion of senior notes during the first half.
- For the six months, operating cash flow was $5.1 billion, investing cash outflow $38 million and financing cash inflow $157 million. Cash, cash equivalents and restricted cash increased $5.1 billion to $25.3 billion. Management says operating cash flow is substantially affected by changes in customer balances and segregated assets.
- Management characterized 98.9% of total assets as liquid and stated available cash, operating cash flows and borrowings should meet liquidity needs for more than twelve months. Aggregate excess regulatory capital was $6.2 billion; all regulated subsidiaries were compliant at quarter-end.
Changes, outlook and risks
- Customer accounts grew 61% year over year to 1.414 million and customer equity rose 79% to $363.5 billion. Compared with Q1 2021, accounts increased 7%, while DARTs and trading volumes declined 30% as activity moderated from a particularly strong prior quarter.
- Management cited active markets, new investor participation and low or negative interest rates as influences on activity. It also noted lower volatility than Q2 2020 and warned that retail trading volumes are unpredictable and may not be sustainable. Low rates constrain interest yields and margins; the future effects of COVID-19 remain uncertain. No specific earnings or revenue guidance was provided.
- Interest-rate sensitivity analysis estimated that an unexpected 0.25% U.S. dollar rate increase would raise net interest income by approximately $99 million in the first year, while a 0.25% decrease would reduce it by approximately $32 million. These are estimates based on quarter-end balances and stated assumptions.
- Legal and regulatory matters include the Trading Technologies patent litigation, a customer margin-liquidation class action, and class actions related to the January 2021 short squeeze. The company reported no material accruals for legal matters; outcomes and potential losses are uncertain. The Trading Technologies trial on two remaining patents began August 6, 2021.
- The company had agreed to AML/BSA settlements with FINRA, SEC and CFTC involving penalties totaling $38 million plus approximately $0.7 million disgorgement, and continued use of an independent compliance consultant. It was cooperating with a Department of Justice inquiry and said its outcome could not be predicted.
- Other risk exposures include customer margin loans, which totaled about $50.0 billion; market and foreign-currency risks; potential spread and pricing pressure; regulatory scrutiny of payment for order flow; and off-balance-sheet exposures and clearing-member guarantees. Management reported no material change to previously disclosed risk factors.
- After quarter-end, a July 30, 2021 exchange of IBG LLC interests for 6.08 million common shares increased IBG, Inc.’s ownership of IBG LLC from 22.0% to 23.5%.
Investor verification points
- Assess how much reported earnings growth depends on the Tiger Brokers mark-to-market gain and compare GAAP results with the company’s non-GAAP reconciliations.
- Review the sustainability of trading activity, margin balances and securities-lending income, and the effect of changing benchmark rates on net interest income.
- Distinguish customer and regulatory-segregated balances from corporate liquidity; review regulatory capital by subsidiary and short-term funding needs.
- Monitor developments and potential financial effects of the disclosed litigation, AML/BSA matters and DOJ inquiry; the filing does not provide a clear quantified range of possible losses for these proceedings.
- Consider the 78% noncontrolling interest in IBG LLC when relating consolidated earnings and equity to IBG, Inc. common stockholders.