Interactive Brokers Group, Inc. — 2020 Form 10-K Summary
Business context and reporting period
This annual report covers the year ended December 31, 2020; it is not a standalone fourth-quarter filing. Interactive Brokers is a global electronic broker providing execution, clearing, custody, financing and related services across more than 135 exchanges and market centers. The company reported one operating segment beginning in 2020 as it continued to wind down market-making activities and focus on electronic brokerage.
COVID-19 market volatility and increased retail participation drove higher trading activity and customer growth, while near-zero benchmark interest rates reduced interest income. At year-end, the company had more than 1.07 million customer accounts and $288.6 billion in customer equity, up 56% and 66%, respectively, from 2019.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenues | $2.218 billion | $1.937 billion | +15% |
| Income before income taxes | $1.256 billion | $1.157 billion | +9% |
| Net income | $1.179 billion | $1.089 billion | +8% |
| Net income available to common stockholders | $195 million | $161 million | +21% |
| Diluted EPS | $2.42 | $2.10 | +$0.32 |
| GAAP pretax margin | 57% | 60% | Down 3 percentage points |
| Adjusted pretax margin | 61% | 63% | Down 2 percentage points |
- Revenue mix: Commissions rose 58% to $1.112 billion on higher trading volumes. Net interest income fell 19% to $872 million as the average federal funds effective rate declined to 0.38% from 2.16%. Other fees and services increased to $175 million; other income was $59 million.
- Expenses: Non-interest expenses increased 23% to $962 million. General and administrative expense rose to $236 million, including the crude-oil event customer compensation; execution, clearing and distribution fees were $293 million and employee compensation and benefits were $325 million.
- Cash flow: Cash provided by operating activities was $8.068 billion, compared with $2.666 billion in 2019. The filing says operating cash flows largely reflect changes in customer credit and margin balances, so this measure should not be read as a conventional operating-cash proxy. Investing activities used $50 million and financing activities used $229 million. Cash, cash equivalents and restricted cash reached $20.195 billion.
- Balance sheet and liquidity: Total assets were $95.679 billion, liabilities $86.676 billion and total equity $9.003 billion, versus $71.676 billion, $63.736 billion and $7.940 billion, respectively, at 2019 year-end. Management classified approximately $94.8 billion, or 99.1% of assets, as liquid. Customer receivables included $39.333 billion, primarily margin loans; customer payables were $75.882 billion. These customer-related balances are central to interpreting the balance sheet.
- Debt and capital: Short-term borrowings were $118 million, including $96 million of senior notes; the company reported no variable-rate debt at year-end. Aggregate excess regulatory capital was $6.785 billion, and all regulated subsidiaries were compliant with their requirements.
- Q4 operating indicators: At fourth-quarter 2020 end, customer accounts were 1.073 million and customer equity was $288.6 billion. Fourth-quarter total customer DARTs averaged 2.109 million, up 165% year over year; commission per cleared commissionable order was $2.46, down 32%.
Material changes versus 2019
- Customer trading surged: annual total DARTs rose 115% to 1.79 million, while customer stock-share, options-contract and futures-contract volumes increased 97%, 67% and 30%, respectively. Average commission per cleared commissionable order declined 24% to $2.78, reflecting smaller trades and exchange rebates passed to customers.
- Lower interest rates outweighed growth in customer balances and securities-lending activity: reported net interest income declined by $211 million. Net interest margin was 1.07%, compared with 1.70% in 2019.
- Net income available to common stockholders rose despite lower pretax margin. Adjusted net revenues were $2.204 billion and adjusted income before taxes were $1.346 billion, up 11% and 8%, respectively; adjusted diluted EPS was $2.49 versus $2.27. These are non-GAAP measures and exclude specified items.
- Reported other income improved by $52 million to $59 million, including a smaller currency-diversification loss and a larger mark-to-market gain on the Tiger Brokers investment; principal trading gains declined and the company recorded a $13 million OneChicago impairment.
- IBG, Inc. issued 12.71 million shares in 2020 in exchange for IBG LLC membership interests. Its ownership of IBG LLC increased to 21.8%, with Holdings retaining 78.2%.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said future results remain difficult to predict and depend on the pandemic, trading volumes, customer growth, benchmark interest rates, regulation and competition. Increased trading activity benefited commissions in 2020, but management cautioned that elevated retail participation and trading volumes may not persist.
- The April 2020 West Texas Intermediate crude-oil futures event resulted in an aggregate loss of approximately $104 million after the company compensated certain affected customers for losses on contracts that settled below zero. Approximately $103 million was recorded in general and administrative expense and $1 million in customer bad debt.
- In August 2020, the company agreed to AML and Bank Secrecy Act settlements with FINRA, the SEC and CFTC: penalties totaling $38 million, plus approximately $0.7 million in disgorgement. An independent consultant is reviewing enhanced compliance practices. The company is cooperating with a Department of Justice inquiry and said its outcome cannot be predicted.
- Other disclosed exposures include ongoing regulatory inquiries, litigation concerning trading technology and margin liquidations, and the possibility of losses from customer defaults, market dislocations, cybersecurity incidents, system outages and clearinghouse obligations. The company stated that its systems are not fully redundant and that backup capabilities for non-U.S. operations are limited.
- The company paid a $5 million COVID-19-related donation. The Folio Investments self-directed retail brokerage acquisition closed in January 2021, after year-end, adding approximately 57,000 customer accounts.
- Management intended to continue quarterly dividends of $0.10 per share for the foreseeable future, subject to board discretion and available distributions from IBG LLC.
Most important facts for investors to verify
- Whether unusually high trading volumes and new-account growth persist, and how price competition affects commissions and unit economics.
- How prolonged low or changing interest rates affect net interest income and margins, including the sensitivity estimates disclosed by management.
- The final financial and regulatory consequences of the crude-oil event, AML settlements and DOJ inquiry, along with the status of other material proceedings.
- The quality and interpretation of reported operating cash flow given large movements in customer balances, and the liquidity and regulatory-capital position of individual subsidiaries.
- The effects of future IBG LLC interest redemptions, share issuance, concentrated voting control and Tax Receivable Agreement payments on public shareholders.