Regions Financial Corporation (NYSE:RF) today reported financial results for the quarter and year ending December 31, 2011.

Key points for the quarter and full year included:

• Net loss available to common shareholders of $0.48 per diluted share for the quarter was largely driven by a $731 million non-cash goodwill impairment charge (net of tax) related to the company’s Investment Banking/Brokerage/Trust segment. This impairment charge included $478 million related to discontinued operations and $253 million from continuing operations.
• As previously announced, Regions has entered into a stock purchase agreement to sell Morgan Keegan and Co., Inc. and related affiliates (“Morgan Keegan”) to Raymond James Financial for total consideration of $1.18 billion and as a result Morgan Keegan is reported as discontinued operations
• Regions’ fourth quarter loss from continuing operations available to common shareholders totaled $0.11 per diluted share. Excluding goodwill impairment, Regions’ income from continuing operations available to common shareholders was $0.09 per diluted share¹.
• Full-year results reflect a net loss available to common shareholders of $429 million or $0.34 per diluted share. Full-year results for continuing operations available to common shareholders reflected a loss of $0.02 per diluted share. Excluding goodwill impairment and a tax benefit from the second quarter regulatory charge, full-year income from continuing operations available to common shareholders was $0.17 per diluted share¹.
• Fourth quarter pre-tax pre-provision income¹ (“PPI”) totaled $232 million. However, excluding goodwill impairment, PPI¹ was $485 million, decreasing 5 percent linked quarter, primarily due to an expected reduction in service charges.
• Loan growth in the middle market commercial and industrial customer portfolio continued, with average loans up 2 percent linked quarter, and for the full year increasing $2.4 billion, or 11 percent
• Net interest income was stable linked quarter at $849 million and net interest margin increased 4 basis points to 3.08 percent
• Loan yields increased 4 basis points linked quarter to 4.35 percent
• Funding mix continued to improve, deposit costs declined to 40 basis points down 6 basis points from third quarter and for the full year declined 29 basis points
• Non-interest revenue was $507 million, down 1 percent on a linked quarter basis reflecting lower service charges and mortgage income. However, service charges income was relatively stable in 2011 compared to 2010, despite the impact of Regulation E and the Durbin Amendment.
• Non-interest expenses totaled $1.1 billion, reflecting a $253 million goodwill impairment charge. Excluding goodwill impairment, non-interest expenses¹, increased 2 percent linked quarter driven by an expense in the amount of $16 million related to Visa’s announced funding of its escrow account.
• Non-performing loans, excluding loans held for sale, declined for the seventh straight quarter and were down $338 million or 12 percent linked quarter; inflows of non-performing loans declined to $561 million from $755 million or 26 percent from the third quarter
• Non-performing assets decreased by $922 million or 24 percent during 2011
• Allowance for loan losses as a percent of loans declined 19 basis points linked quarter to 3.54 percent, while coverage ratio of non-performing loans increased 7 basis points to 1.16x
• Net charge-offs declined $81 million or 16 percent linked quarter, and for the full year declined 29 percent
• Loan loss provision of $295 million was $135 million less than net charge-offs in the quarter; for the year loan loss provision declined $1.3 billion or 47 percent
• Solid capital position with a Tier 1 Common ratio¹ estimated at 8.5 percent and 7.7 percent on a Basel III basis¹
• Liquidity position remains favorable with a loan-to-deposit ratio of 81 percent and cash held at the Federal Reserve of approximately $4.9 billion.

¹ Non-GAAP, refer to the following pages of the financial supplement to this earnings release:

• Pre-tax pre-provision income from continuing operations on page 10
• Non-interest expense from continuing operations before goodwill impairment on page 11
• Reconciliation to GAAP Financial Measures on pages 20-23

Previously announced non-cash goodwill impairment charge related to Morgan Keegan impacts earnings

As a result of the process of selling Morgan Keegan, Regions results for the fourth quarter include a non-cash goodwill impairment charge of $731 million (net of tax) within the investment banking/brokerage/trust segment. Based on a relative fair value allocation as required by GAAP, $478 million was recorded within Discontinued Operations and $253 million within Continuing Operations. Regulatory and tangible capital ratios were not impacted by this charge.

Disciplined execution of business plan

Regions’ fourth quarter net loss available to common shareholders was $602 million or $0.48 per diluted share, bringing full-year results to a net loss available to common shareholders of $429 million or $0.34 per diluted share. The loss in the fourth quarter and full year was negatively impacted by the goodwill impairment charge related to both discontinued and continuing operations. Regions’ fourth quarter and full-year results from continuing operations were also negatively impacted by the $253 million goodwill impairment, resulting in a loss from continuing operations available to common shareholders of $135 million, or $0.11 per diluted share in the fourth quarter and $25 million or $0.02 per diluted share in 2011. Excluding goodwill impairment¹, fourth quarter net income from continuing operations totaled $118 million or $0.09 per share. Excluding goodwill impairment and a tax benefit from the second quarter regulatory charge¹, net income from continuing operations available to common shareholders in 2011 was $211 million or $0.17 per diluted share¹.

Total loan production for the year was solid, with continued growth of commercial & industrial loans. Credit-related costs declined significantly versus 2010, as the full-year loan loss provision declined $1.3 billion or 47 percent. Average low cost deposits grew more than $4 billion or nearly 6 percent which led to a 29 basis points decline in total deposit costs in 2011. Excluding goodwill impairment, fourth quarter pre-tax, pre-provision income¹ of $485 million exceeded the loan loss provision for the third quarter in a row.

“Despite a continued challenging economic and legislative environment in 2011 we were able to stay focused on our business plan and deliver solid results,” said Grayson Hall, president and chief executive officer. “We improved our fundamentals, profitably grew our customer base, further de-risked our balance sheet, and took actions that better position us for the future. While the economic outlook in 2012 is likely to present its challenges, I am confident that we will continue to make progress to benefit our shareholders, associates and customers.”

Focus on expanding customer relationships and profitable growth

The company remains focused on deepening existing relationships as well as profitably growing new customers by emphasizing superior customer service backed by a broad array of quality products at a fair price.

Total loan production for the year increased to $60 billion. Commercial loan production (including renewals) constituted the majority of that total at $51 billion, of which $15 billion was new loan production, a 14 percent increase over the last year. Growth in lending to middle market commercial and industrial customers continued, with average loans in this category up 11 percent for the full year, and 2 percent in the fourth quarter. Total commercial and industrial commitments grew $1.2 billion, or 4 percent linked quarter. The company continues to focus on its health care, franchise restaurant and transportation specialized industry groups and is expanding into other industry practices, such as technology and defense. Consumer loan production totaled $9 billion in 2011, which reflected strength in mortgage, indirect auto and the company’s purchased credit card portfolio.

The company’s aggregate loan yield increased 4 basis points linked quarter to 4.35 percent, reflecting slightly higher LIBOR rates, partially offset by pricing competition and interest rate swaps that matured in the quarter. Overall, ending loans declined 2 percent linked quarter reflecting a further $1.2 billion decline in the investor real estate portfolio as the company continued its de-risking efforts. This portfolio now comprises only 14 percent of the company’s total loan portfolio, down from 19 percent a year ago.

Improving funding mix

The company’s funding mix continued to improve during the quarter, as average low-cost deposits as a percentage of total deposits rose to 79.2 percent compared to 77.8 percent last quarter. This positive mix shift resulted in deposit costs declining to 40 basis points for the quarter, down 6 basis points from third quarter and a 7 basis points decline in total funding costs to 68 basis points.

Net interest income was $849 million, stable linked quarter, as a reduction in funding costs was offset by a 1.6 percent decline in average earning assets. The net interest margin was 3.08 percent, an increase of 4 basis points. The net interest margin benefited from lower deposit costs and an $843 million decrease in lower average excess cash reserves at the Federal Reserve. The benefits were partially offset by higher prepayments in the securities portfolio and the resulting premium amortization, as well as the impact of maturing interest rate swaps.

Growing fee income and expanding services

Non-interest revenues totaled $507 million, a decline of 1 percent linked quarter. Service charges declined nearly $47 million linked quarter as the Durbin Amendment rules took effect October 1^st. This reduction was in line with expectations and was partially offset by ongoing actions, including restructuring certain deposit accounts from free to fee-eligible, re-entry into the credit card business and the NOW banking product suite launch. Overall service charges for the year were in line with 2010 despite the negative impact of legislative changes. The company is managing through these changes by generating new revenue streams and expects to fully mitigate this impact over time.

As an example, the company recently launched its NOW suite of banking products offering pre-paid reloadable cards, expanded check cashing, money transfers, and expedited bill payment services. These services are being offered through nearly 1,600 branches at year end and program-to-date, the company has executed approximately 40,000 transactions on behalf of its customers with a total transaction value of approximately $25 million. The company has also experienced results from the changes in its checking account structure, as approximately 24 percent of checking accounts currently pay a fee, up from 11 percent this time last year.

Mortgage revenue declined 16 percent linked quarter, reflecting reduced benefits from mortgage servicing rights and related hedging activities. Production in the fourth quarter totaled $1.8 billion, bringing full year production to $6.3 billion. Further, the extended Home Affordable Refinance Program, or HARP II, is expected to enhance mortgage production next year.

Focused on improving productivity and reducing non-interest expenses

Non-interest expenses increased $274 million linked quarter due to the goodwill impairment charge. Excluding goodwill impairment¹, non-interest expenses increased 2 percent linked quarter, reflecting $16 million of expense related to Visa class B shares litigation. Excluding goodwill impairment and prior year’s regulatory charge¹, non-interest expenses declined 5 percent for the full year as the company remained focused on enhancing productivity and efficiency. During 2011, the company reduced headcount by over 1,000 positions and square footage by approximately 700,000 square feet.

Credit quality steadily improving

Over the past year the company sharply reduced credit-related costs, with the full-year loan loss provision down $1.3 billion, or 47 percent, from 2010. Total net charge-offs in the fourth quarter declined $81 million or 16 percent linked quarter and declined 29 percent when comparing 2011 to 2010. The company’s loan loss allowance to non-performing loan coverage ratio increased from 1.01x to 1.16x year-over-year and the allowance for loan losses as a percent of loans was 3.54 percent as of December 31, 2011.

Non-performing loans, excluding loans held for sale, declined for the seventh straight quarter and were down $338 million or 12 percent linked quarter. Inflows of non-performing loans declined to $561 million or 26 percent from the third quarter. Inflows continue to be primarily income-producing commercial real estate loans which have cash flows and lower loss severities than land, condo and single-family loans. In addition, 48 percent of ending Business Services’ non-performing loans were current and paying as agreed as of December 31, 2011, up from 45 percent in the prior quarter. Business Services criticized loans also declined 13 percent in the quarter and are down 35 percent year-over-year. The company executed sales of problem assets totaling $306 million and moved $334 million of problem loans to held for sale during the quarter. Throughout 2011, the company reduced non-performing assets by $922 million or 24 percent.

Divestiture of Morgan Keegan

On January 11^th, the company announced an agreement to sell Morgan Keegan & Co., Inc. and related entities to Raymond James Financial for $930 million. As part of the transaction, Morgan Keegan will also pay the company a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of $1.18 billion to the company, subject to adjustment. The transaction, expected to close in the first quarter of 2012, reduces the company’s overall risk profile, provides greater liquidity at the holding company level and increases key capital ratios. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale and will remain part of Regions’ Wealth Management organization. Regions plans to establish a strong partnership with Raymond James with depository, lending and processing relationships that will provide incremental revenue opportunities and a source of low-cost deposits. The company remains committed to serving affluent and mass affluent customers through its recently announced Wealth Management Group.

Strong capital and liquidity

Tier 1 and Tier 1 common¹ capital ratios remained healthy, ending the quarter at an estimated 13.2 percent and 8.5 percent, respectively, and on a Basel III basis¹ were estimated to be 7.7 percent and 11.3 percent, above the respective 7 percent and 8.5 percent minimum requirements. The company’s liquidity position at both the bank and the holding company remains strong as well. As of December 31, 2011, the company’s loan-to-deposit ratio was 81 percent.

¹ Non-GAAP, refer to the following pages of the financial supplement to this earnings release:

• Pre-tax pre-provision income from continuing operations on page 10
• Non-interest expense from continuing operations before goodwill impairment on page 11
• Reconciliation to GAAP Financial Measures on pages 20-23