Impairment charges tied to the divestiture of its Morgan Keegan broker-dealer unit drove Regions to a $602 million net loss in the fourth quarter. But executives argue the pending sale — along with an overhaul of its deposit business — will put Regions back on track and gird it against higher regulatory and credit costs.

"Although we are encouraged by the recent improvements and economic indicators … we do believe the economy remains challenged by the housing market, and the pace of economic recovery does appear to be incremental," Regions president and chief executive, O.B. Grayson Hall Jr., said during a conference call Tuesday. "We expect to be very disciplined and focus on basic banking and customers."

Birmingham-based Regions said Jan. 11 that it had agreed to sell Morgan Keegan to Raymond James Financial for up to $1.2 billion to reduce its risk and to increase liquidity and capital ratios.

The company had to write off $731 million in impairment charges related to the deal. The painful move will help Regions boost capital ratios and repay its Troubled Asset Relief Program funds, analysts said.

"The capital freed up by Morgan Keegan is probably more important than the lost earnings," said Chris Marinac, managing principal and director of research at FIG Partners LLC, in an email. "The company is trying to avoid issuing any more common shares than necessary."

Many analysts expect the company to raise capital for a Tarp repayment once Regions receives its capital-testing results from regulators in mid-March. But Regions' management remained vague about when they would tap the capital markets.

"There are other things we need to take care of before we reflect" on potential dilution in repaying Tarp, said David Edmonds, Regions' chief financial officer, during the call. "There is no specific timing. … We've submitted a capital plan and expect in March to perhaps provide clarity for what to do from there."

Guggenheim Partners LLC's analyst Marty Mosby estimated the company would need less than $1 billion in common equity to repay Tarp after the Morgan Keegan sale closes. This would dilute earnings by about 10% incrementally, but it would be less than a 3% dilution to tangible book value, Mosby wrote in his note.

Regions said it expects to close the Morgan Keegan deal this quarter.

Excluding the impairment charges, Regions beat analysts' consensus by 3 cents, posting earnings of 9 cents per share. The company previously projected 7 cents to 9 cents a share.

Regions officials said they were also working on moving their free depositors to "fee-eligible" deposits as part of a plan to restructure its deposit mix to compensate for new regulatory costs.

The company lost $47 million in service charges on deposit accounts during the quarter due to the Durbin Amendment. Through its restructuring, Hall said, they expect to recover $180 million lost from implementing the Durbin Amendment and another $100 million from Regulation E this year.

Regions also managed to raise its net interest margin by 4 basis points to 3.08% as cash reserves at the Federal Reserves as well as deposit costs fell. Hall said he expected the "margin to remain relatively stable with incremental improvements."

The company also lowered its provision for loan losses for the fifth consecutive quarter as credit quality improved.

"From any metric observed, you will find much improved credit quality from Regions," Edmonds said.

Nonperforming assets fell 24% to $2.4 billion for the year. More importantly, the inflows of new nonperforming loans fell 26% to $561 million compared with the previous quarter.

Marinac noted before the conference call that the reduction in inflow was "significant for investors judging the future risk of credit-related issues at the company."

Regions' management indicated that a majority of their credit issues were behind them. Still, management was careful not to promise golden days ahead this year as there are many unknown factors related to the economy and unwinding Region's government aide. Their favorite word of the day for the rest of 2012: incremental improvements.

"We expect a slow, incremental economic recovery," Hall said. "We are confident we can continue to make progress."

Rachel Witkowski writes for American Banker.