It has been about a month since the last earnings report for Regions Financial (RF Quick QuoteRF - Free Report) . Shares have added about 14.5% in that time frame, outperforming the S&P 500.

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

Regions Q4 Earnings Beat Estimates on Stellar Revenues

Regions Financial reported fourth-quarter 2020 adjusted earnings of 62 cents per share, surpassing the Zacks Consensus Estimate of 42 cents on impressive top-line strength. Also, results compare favorably with the prior-year figure of 40 cents.

Results were driven by higher revenues on increases in both net interest income (NII) and fee income. Moreover, rise in deposit balances provided some respite. Notably, mortgage income and capital markets income were on an upswing. Also, credit provision was a tailwind. However, rise in expenses was a major drag.

Including certain one-time items, net income available to common shareholders was $588 million or 61 cents per share compared with earnings of $366 million or 38 cents reported in the year-ago period.

In 2020, income from continuing operations available to common shareholders was $991 million compared with the $1.5 billion reported in 2019. Earnings per share from continuing operations were $1.03, up from the prior year’s $1.50. Results include certain one-time items. The Zacks Consensus Estimate was pegged at 83 cents.

Revenues Increase, Costs Rise

Adjusted total revenues (net of interest expense) came in at $1.66 billion in the reported quarter, outpacing the Zacks Consensus Estimate of $1.55 billion. The revenue figure also increased 11.7% from the year-ago quarter.

Regions Financial recorded adjusted pre-tax pre-provision income from continuing operations of $725 million, up 18.3% year on year.

On a fully-taxable equivalent (FTE) basis, net interest income was $1.02 billion, up 9.2% year on year. Yet, net interest margin shrunk 26 basis points (bps) to 3.13% during the December quarter.

Non-interest income increased 21% year on year to $680 million. This upsurge mainly resulted from higher capital markets income, mortgage income, card and ATM fees, commercial credit card income, bank-owned life insurance, wealth management income and other income. Nonetheless, lower service charges on deposit account acted as a headwind.

Non-interest expense rose 10% year over year to $987 million, mainly due to rise in salaries and employee benefits, furniture and equipment, FDIC insurance assessments, along with other expenses. It was partly offset by lower outside services, net occupancy, marketing, credit expenses, branch consolidation, property and equipment charges, along with professional, legal and regulatory expenses. On an adjusted basis, non-interest expenses jumped 7% year over year to $930 million.

Adjusted efficiency ratio came in at 55.8% compared with the prior-year quarter’s 58.1%. A lower ratio indicates a rise in profitability.

Balance-Sheet Strength

As of Dec 31, 2020, adjusted total loans declined 2.4% sequentially to $80 billion. Total deposits came in at $122.5 billion, up 3.5%.

As of Dec 31, 2020, low-cost deposits, as a percentage of average deposits, were 96% compared with the prior-year quarter’s 90%. In addition, deposit costs were 8 bps during the October-December period.

Credit Quality: A Mixed Bag

Credit metrics was a mixed bag during the fourth quarter. Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, advanced 21 bps from the prior-year quarter to 0.91%.

Additionally, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.87%, expanding 26 bps year over year.

Allowance for loan losses as a percentage of loans, net of unearned income was 2.54%, up 149 bps from the year-earlier quarter. The company’s total business services criticized loans surged 65.2%.

Furthermore, annualized net charge-offs, as a percentage of average loans, came in at 0.43%, contracting 3 bps. Provision for loan losses was a credit of $38 million compared with the year-earlier quarter’s $96 million.

Solid Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Dec 31, 2020, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.8% and 11.4%, respectively, compared with the 9.7% and 10.9% recorded in the year-earlier quarter.

During the October-December period, the bank did not repurchase shares but announced $148 million in dividends to common shareholders.

Outlook

The company expects adjusted average loan balances in 2021 to be down by low single-digits year over year. Also, near-term deposit balances are likely to increase, benefiting from the second round of stimulus.

Management expects first-quarter 2021 NII to be modestly lower due to impacts of lower loan balances along with long-term rate environment pressure being offset by cash management strategies, deposit pricing, and higher hedge notional.

Excluding loans under Paycheck Protection Program and excess cash liquidity, first-quarter 2021 net interest margin is expected to remain stable sequentially.

For 2021, the company expects mortgage and capital markets to remain significant contributors to fee revenues. Capital markets first-quarter revenues are expected to be between $55 million and $65 million on average. Service charges in 2021 are expected to decline 10% to 15% from 2019 levels, due to continued elevated deposits and ongoing enhancements to overdraft practices and transaction posting.

Given the timing of interest rate changes in 2020, combined with exceptionally strong fee income performance, the company expects 2021 adjusted total revenue to be down modestly from 2020, depending on the timing and amount of PPP forgiveness and loan growth.

For 2021, adjusted non-interest expenses are expected to remain stable or decline modestly year over year.

Regarding credit quality, management expects full-year 2021 ratio of net charge-offs to average loans to be between 55 bps and 65 bps.

Long-Term Financial Targets (2019-2021)

In three-year period, Regions expects to deliver adjusted return on average tangible common equity of 18-20% by 2021 compared with 15.59% in 2018. Also, adjusted efficiency ratio of 55% or lower is expected, which is below 59.3% reported in 2018. Further, in both the cases, Regions plans to achieve positive operating leverage.

Pillars of Success

Firstly, Regions plans on taking advantage of its existing strength in areas such as customer focus, markets, team, culture and risk management in order to establish presence in key growth markets like Atlanta, Houston and Orlando. Further, it intends to hire professionals such as corporate bankers, wealth management professionals and mortgage loan originators to better serve and meet clients needs.

The company plans to generate funds for these investments with help of its Simplify and Grow continuous improvement approach that it introduced in 2017. These initiatives aim at making banking easier for customers, simplify processes and drive profitable long-term growth.

Further, Regions is making efforts to reduce costs related to third-party spending through strategic sourcing and vendor selectivity. It anticipates annual cumulative savings of nearly $60 million between 2018 and 2021.

Lastly, Regions highlights the importance of technology, and promises to continue driving innovation and expand digital banking capabilities, such as open accounts online, digital loan applications and wealth management digital advisory capabilities.

For the next three years, the company disclosed plans to pilot voice banking capabilities and expand its use of artificial intelligence for both customer-facing and back-office applications. Additionally, Regions is investing in technology to provide serve customers better and enhance credit risk management, as well as a variety of other internal processes across the company.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 19.33% due to these changes.

VGM Scores

At this time, Regions Financial has an average Growth Score of C, though it is lagging a bit on the Momentum Score 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Regions Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.