BIRMINGHAM (AP) – Regions Financial Corp. said Tuesday its third-quarter profit fell 80 percent as it set aside more cash to offset defaulting loans and its deposit base shrunk.

Net income fell to $79.5 million, or 11 cents per share, during the quarter ended Sept. 30, from $394.2 million, or 56 cents per share, during the same period a year earlier.

Excluding charges tied to merger costs and discontinued operations, Regions earned $105.6 million, or 15 cents per share, during the third quarter.

Analysts polled by Thomson Reuters, on average, forecast earnings of 27 cents per share for the quarter. Analysts do not always include special charges and gains in their estimates.

Regions set aside $417 million during the third quarter to cover loan losses. The Birmingham, Ala.-based bank reserved just $90 million for losses during the third quarter in 2007. Nearly all banks have been forced to ramp up their loan-loss reserves over the past year and a half as customers increasingly default on their loans, especially mortgages and other residential real estate-related loans.

Charge-offs — loans written off as not being repaid — totaled $416 million during the third quarter. Regions said about $186 million in charge-offs were related to the sale or transfer to a held-for-sale portfolio of about $430 million in non-performing loans and foreclosed properties. By taking the charges now, it reduces balance sheet risk in future quarters.

Regions’ charge-off rate — which measures loans written off as not being repaid compared with the bank’s total lending portfolio — increased to 1.68 percent from 0.27 percent during the same quarter in 2007.

The government recently passed a plan that will enable banks to boost their capital through direct investments from the government. Regions Financial said it plans to participate in the program and is eligible to receive between $1.17 billion and $3.51 billion in capital.

Under the plan, the government would receive preferred stock and warrants to purchase common stock in return for its investment in a bank.

Regions said the investment would provide “a significant strengthening of our overall capital base.”

Regions currently carries a Tier 1 capital ratio of 7.47 percent, which is considered “well capitalized” by regulatory standards.

Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, fell 14 percent to $930.6 million during the quarter from $1.09 billion during the year-ago period. Deposits declined by $683 million from the end of the second quarter. Customers concerned about the strength of regional banks shifted their money to safer investments such as Treasury securities during the quarter.

Non-interest income, money derived from fees and other charges, declined slightly to $719.3 million from $729.1 million during the same quarter last year.