A month has gone by since the last earnings report for Regions Financial Corporation RF. Shares have added about 4.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Regions Financial Tops Q1 Earnings, Expenses Escalate

Regions Financials’ first-quarter 2017 earnings from continuing operations of $0.23 per share surpassed the Zacks Consensus Estimate by a penny. Also, the figure was 15% higher than the prior-year quarter tally.

Better-than-expected results were supported by impressive growth in non-interest income and easing margin pressure. Further, the quarter recorded continued growth in deposits, though loans balance declined. However, credit quality reflected a mixed bag. Rise in operating expenses was also a headwind.

Income from continuing operations available to common shareholders was $278 million, up 8.2% year over year.

Non-Interest Income Improves, Costs Up

Total revenue (net of interest expense) came in at $1.37 billion in the quarter, lagging the Zacks Consensus Estimate of $1.39 billion. However, the figure was relatively stable on a year over year basis.

Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $497 million, down 5.7% year over year.

On a fully taxable equivalent (FTE) basis, net interest income was $881 million, marginally down year over year. Net interest margin (on an FTE basis) expanded 6 basis points (bps) year over year to 3.25% in the quarter.

Regions Financial reported around 1% growth in non-interest income to $510 million. On an adjusted basis, non-interest income remained stable year over year.

Non-interest expense was up 1% year over year to $877 million. On an adjusted basis, non-interest expenses increased 3.4% year over year to $872 million.

Balance Sheet Strength

As of Mar 31, 2017, total loans were down 2.1% year over year to $79.9 billion. Further, total deposits came in at $99.4 billion, up about 1.2% from the prior-year quarter. Total funding costs were 32 bps.

As of Mar 31, 2017, low-cost deposits, as a percentage of average deposits, were 93.0% compared with 92.0% as of Dec 31, 2016. Further, deposit costs came in at 14 bps in the reported quarter.

Credit Quality: A Mixed Bag

Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, expanded 1 bps from the prior-year quarter to 1.37%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 1.26%, up 4 bps from the year-ago quarter.

Allowance for loan losses as a percentage of loans, net of unearned income was 1.33%, down 8 bps from the prior-year quarter. Additionally, provision for loan losses was $70 million, plunging 38.1% year over year.  

However, net charge-offs as a percentage of average loans came in at 0.51%, up 17 bps. Further, the company’s total business services criticized loans declined 2.8% year over year.

Strong Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Mar 31, 2017, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 11.2% and 12.1%, respectively, compared with 10.7% and 11.6% in the prior-year quarter.

During first-quarter 2017, Regions Financial repurchased 10.2 million shares of common stock for a total cost of $150 million and declared $78 million in dividends to common shareholders. This reflects 80% of earnings returned to shareholders.

Outlook

A rise in interest rates helped Regions Financial reduce the amount of the premium amortization on mortgage related securities to $38 million in the first quarter of 2017. If interest rates remain at current levels, or continue to rise, management expects to benefit from marginal declines in premium amortization ultimately achieving a quarterly run rate in the low to mid $30 million range in 2017.

For 2017, Regions expects NII and other financing income growth in the range of 3–5% and adjusted non-interest income is estimated to grow 1–3%.

Management expects net interest margin to expand by 3–5 bps in the second quarter of 2017.

Regions projects adjusted expenses to trend from a flat to 1% increase, while efficiency ratio is expected to scale at approximately 62% in 2017. Adjusted operating leverage is expected in the range of 2–4%.

Owing to current global macroeconomic headwinds, management’s plan to curb $300 million of core expenses in the coming three years is on track. Further, encouraged by recent increases in market interest rates, management expects to eliminate an additional $100 million by 2019.

Management expects average loans in 2017 to be flat to marginally down on a year-over-year basis. This excludes the impact of the third-party indirect-vehicle portfolio.

Average deposits are expected to be relatively stable compared to the prior year.

Net charge-offs (NCOs) are estimated at 35–50 basis points for 2017. Also, owing to the current credit scenario, additional energy charge-offs for the remaining quarters of 2017 are projected to be below $27 million.

If oil prices go below $25, management expects to incur additional $100 million of provision for loan losses over the next eight quarters.

Notably, the 2017 expectations are based on certain assumptions, including GDP growth of 2–2.5%, projected decline in indirect vehicle loans, consistent cost-reduction efforts, average Fed Funds rate of 1.06% and average 10-year Treasury rate of 2.48%. Additionally, the company assumes to remain on track to exceed the target of 150 branch consolidations by the end of 2017.

The effective tax rate is projected to be in the 30–32% range for 2017.

The company separately provided long-term financial targets, along with strategic initiatives focused on growing and diversifying revenues, expense management and effective capital deployment. Regions anticipates adjusted EPS Compound Annual Growth Rate (CAGR) of 12–15% during the 2016–2018 period, adjusted efficiency ratio of below 60% and adjusted ROATCE in the range of 12–14% by 2018. Furthermore, management targets elimination of core expenses by $400 million by 2019.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six upward revisions for the current quarter compared to five downward.

Regions Financial Corporation Price and Consensus

Regions Financial Corporation Price and Consensus | Regions Financial Corporation Quote

VGM Scores

At this time, Regions Financial's stock has an average Growth Score of 'C', though it is lagging a bit on the momentum front with a 'D'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

While estimates have been trending upward for the stock, the magnitude of these revisions has been net zero. Interestingly, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.

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