Fifth Third(US:FITB)2024-02-27 22:11PART I Item 1. Business Fifth Third Bancorp is a diversified financial services company operating three main businesses: Commercial Banking, Consumer and Small Business Banking, and Wealth & Asset Management, with $215 billion in assets as of December 31, 2023 - Fifth Third Bancorp operates three main businesses: Commercial Banking, Consumer and Small Business Banking, and Wealth & Asset Management50 Company Snapshot (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Total Assets | $215 billion | | Full-service Banking Centers | 1,088 | | Branded ATMs | 2,104 | | Assets Under Care | $574 billion | | Managed Assets | $59 billion | | Full-time Equivalent Employees | 18,724 | - The Bancorp is subject to extensive regulation and supervision by the FRB, OCC, and CFPB, which governs its capital levels, liquidity, and business activities. As a Category IV banking organization, it is subject to tailored prudential standards788789 - The company's human capital strategy emphasizes an inclusive culture. As of year-end 2023, its workforce was approximately 57% female and 29% persons of color. Full-year employee turnover decreased from 21.0% in 2022 to 16.9% in 2023775782 Item 1A. Risk Factors The Bancorp faces diverse risks including credit, liquidity, operational, regulatory, market, strategic, and reputational factors that could materially impact its financial condition - Deteriorating credit quality is a primary risk, as the Bancorp incurs losses if borrowers fail to repay their obligations. The determination of the Allowance for Loan and Lease Losses (ALLL) requires complex and subjective judgments about economic conditions35 - The Bancorp's liquidity depends on maintaining adequate funding sources, primarily customer deposits. A loss of market or customer confidence could lead to deposit outflows and negatively affect access to capital markets9596 - Significant operational risks exist, particularly from cybersecurity threats targeting the Bancorp or its third-party providers. A material breach could disrupt systems and cause financial loss and reputational damage107108 - The company is subject to extensive government regulation, and changes in laws or enforcement actions could result in significant costs, fines, or restrictions on business activities132177 - Changes in interest rates significantly affect income and cash flows, influencing loan origination, prepayment speeds, and the value of investment securities. The rising rate environment in 2022-2023 has increased these risks197198 Item 1C. Cybersecurity The Bancorp employs a comprehensive cybersecurity risk management system based on NIST frameworks, with multi-layered oversight, and has reported no material incidents as of December 31, 2023 - The Bancorp has not identified any cybersecurity incidents that have materially affected or are reasonably likely to materially affect its business, strategy, or financial condition as of December 31, 2023283 - Cybersecurity governance involves a multi-layered oversight structure, including the Board's Technology Committee, the Risk and Compliance Committee, and a management-level Information Security Governance Committee (ISGC)289290293 - The cybersecurity program is based on frameworks from the National Institute of Standards and Technology (NIST) and other regulatory requirements, focusing on prevention, detection, and recovery284 - A Third Party Risk Management Program is in place to manage cybersecurity risks associated with vendors and other third parties288 Item 2. Properties The Bancorp's main offices are in Cincinnati, Ohio, and it operated 1,088 banking centers across eleven states as of December 31, 2023 - As of December 31, 2023, the Bancorp operated 1,088 banking centers, of which 727 were owned, 192 were leased, and 169 were in owned buildings on leased land297 Item 3. Legal Proceedings Details on legal proceedings are incorporated by reference from Note 19 of the Notes to Consolidated Financial Statements - Details on legal proceedings are provided in Note 19 of the Notes to Consolidated Financial Statements298 PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Bancorp's financial condition and operations, highlighting $2.2 billion net income in 2023, driven by net interest income growth and prudent risk management Overview In 2023, net income was $2.2 billion, driven by a $227 million increase in net interest income to $5.9 billion, despite a $224 million FDIC special assessment 2023 vs. 2022 Performance Summary | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income Available to Common Shareholders | $2.2 billion | $2.3 billion | | Diluted EPS | $3.22 | $3.35 | | Net Interest Income (FTE, non-GAAP) | $5.9 billion | $5.6 billion | | Provision for Credit Losses | $515 million | $563 million | | Net Interest Margin (FTE, non-GAAP) | 3.05% | 3.02% | - The Bancorp's revenues for 2023 were composed of 67% net interest income (FTE basis) and 33% noninterest income382 - The Bancorp recognized a $224 million FDIC special assessment in November 2023 to recover costs from the bank failures earlier in the year. This amount will be paid over eight quarterly periods starting in Q1 2024388 Statements of Income Analysis Net interest income (FTE) increased by $227 million to $5.9 billion in 2023, while noninterest expense rose by $486 million due to a $224 million FDIC special assessment Net Interest Income Analysis (FTE, non-GAAP) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $5.9 billion | $5.6 billion | | Net Interest Margin | 3.05% | 3.02% | | Net Interest Rate Spread | 2.24% | 2.72% | - The provision for credit losses was $515 million in 2023, a decrease from $563 million in 2022. The 2023 provision was driven by changes in product mix and qualitative factors, partially offset by lower loan balances601 - Noninterest income increased by $115 million year-over-year, mainly due to recognizing net securities gains of $18 million in 2023 compared to net losses of $82 million in 2022605655 - Noninterest expense rose by $486 million, with FDIC insurance and other taxes increasing by $253 million, primarily from a $224 million FDIC special assessment656663 - Mortgage banking net revenue increased by $35 million to $250 million in 2023, as higher net mortgage servicing revenue offset a decrease in origination fees and gains on loan sales609611 Business Segment Review In 2023, Commercial Banking net income increased to $2.6 billion, Consumer and Small Business Banking to $2.8 billion, and Wealth and Asset Management to $279 million Net Income by Business Segment (in millions) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Commercial Banking | $2,559 | $1,649 | | Consumer and Small Business Banking | $2,761 | $1,309 | | Wealth and Asset Management | $279 | $198 | | General Corporate and Other | ($3,250) | ($710) | - The Bancorp uses a Funds Transfer Pricing (FTP) methodology to allocate interest income and expense, insulating business segments from most benchmark interest rate volatility670 - Commercial Banking's net interest income (FTE) increased by $1.3 billion year-over-year, driven by higher loan yields and FTP credits on deposits688 - Consumer and Small Business Banking's net interest income grew by $2.1 billion, benefiting from higher FTP credits on deposits and increased loan yields699 Balance Sheet Analysis As of December 31, 2023, total assets were $214.6 billion, with loans decreasing by 4% to $117.6 billion and deposits increasing by 3% to $168.9 billion - Total loans and leases decreased by $4.9 billion (4%) from year-end 2022, primarily due to a $4.0 billion decrease in commercial and industrial loans719723 - Total deposits increased by $5.2 billion (3%) from year-end 2022, with a notable shift from demand deposits (down $10.0 billion) to interest-bearing deposits like interest checking (up $5.6 billion) and CDs (up $8.7 billion)742743744 - The investment securities portfolio was $51.9 billion at year-end 2023, with an effective duration of 4.8 years for the taxable AFS portfolio, down from 5.4 years at year-end 2022728 - Total borrowings increased by $702 million to $19.4 billion, driven by a $2.7 billion increase in long-term debt, partially offset by a $2.0 billion decrease in other short-term borrowings58680 Risk Management The Bancorp's Enterprise Risk Management Framework uses a Three Lines of Defense model to manage eight risk types, including credit, liquidity, interest rate, and operational risks - The Bancorp's risk management operates on a Three Lines of Defense structure: 1) Front-line units that create risk, 2) Independent Risk Management for oversight, and 3) Internal Audit for independent assurance63 - The credit risk management strategy is based on conservatism, diversification, and monitoring, with a focus on managing concentrations by industry, geography, and product1419 - Interest rate risk is managed using Net Interest Income (NII) simulation and Economic Value of Equity (EVE) analysis to measure sensitivity to rate changes8992 - Liquidity risk management aims to provide adequate funds for loan demand and deposit withdrawals by maintaining liquid assets, unused borrowing capacity, and core deposit growth. The Bancorp maintains over $100 billion in current available liquidity6880 - Operational risk management addresses risks from internal processes, human error, or external events, with a significant focus on managing cybersecurity and climate-related risks138141 Capital Management As of December 31, 2023, all regulatory capital ratios exceeded well-capitalized minimums, with a CET1 ratio of 10.29%, and the Bancorp is evaluating proposed Basel III changes Regulatory Capital Ratios (as of Dec 31, 2023) | Ratio | 2023 | 2022 | | :--- | :--- | :--- | | CET1 Capital | 10.29% | 9.28% | | Tier 1 Risk-Based Capital | 11.59% | 10.53% | | Total Risk-Based Capital | 13.72% | 12.79% | | Leverage | 8.73% | 8.56% | - The Bancorp is subject to a 2.5% stress capital buffer requirement, and its capital ratios have exceeded this requirement for all periods presented149 - The Bancorp is evaluating proposed rulemaking from U.S. banking agencies that would revise Basel III capital rules and introduce new long-term debt requirements, potentially increasing capital needs151152 - In 2023, the Bancorp declared dividends of $1.36 per common share and repurchased approximately 5.6 million shares at an average price of $35.78158161 Item 8. Financial Statements and Supplementary Data This section presents the Bancorp's consolidated financial statements, including balance sheets and income statements, along with notes on accounting policies and auditor's report Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $214,574 | $207,452 | | Portfolio Loans and Leases, net | $114,912 | $119,286 | | Total Deposits | $168,912 | $163,690 | | Total Liabilities | $195,402 | $190,125 | | Total Equity | $19,172 | $17,327 | Consolidated Statement of Income Highlights (in millions) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $5,827 | $5,609 | | Provision for Credit Losses | $515 | $563 | | Noninterest Income | $2,881 | $2,766 | | Noninterest Expense | $5,205 | $4,719 | | Net Income | $2,349 | $2,446 | - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting165166 - Effective January 1, 2023, the Bancorp adopted ASU 2022-02, which eliminated the accounting guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty501 PART III & IV Item 9B. Other Information On February 27, 2024, the Board approved executive retention grants of RSUs for key officers to promote leadership continuity, vesting over three years - On February 27, 2024, the Board approved retention grants of RSUs for key executives, including the Head of Commercial Bank, COO, CIO, and Chief Risk Officer, each receiving an award valued at $2 million9361445 Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits included in the Form 10-K report, along with their page numbers - This section provides a list of all financial statements, schedules, and exhibits included in the annual report filing1484