At the end of the first quarter of this year, less than one out of every four commercial banks in Tennessee was unprofitable. As of Sept. 30, that ratio had worsened, growing to slightly more than one-in-three, according to a new report from the Federal Deposit Insurance Corp.

By the end of the third quarter, the state’s commercial banks also had lost $343 million in net income, shed about $8 billion in assets and shrunk their total loans and leases by about $5 billion.

Between the second and third quarters, the industry jettisoned almost 1,200 employees in the state. Compared to the third quarter of 2008, around the time the worst of the credit crisis was taking hold, the differences are even more striking.

‘What a recession looks like’

The state’s commercial banks posted a collective net income of $229 million in Q3 2008, compared to -$343 million during the same period this year. Those banks employed almost 2,000 more workers, the number of unprofitable institutions was about 9 percent lower and had about $11 billion more in assets in Q3 2008 compared to the same period this year.

Almost 32 percent of the state’s 179 commercial banks were unprofitable in the third quarter of this year, up from 22.9 percent during the same period in 2008 and 13 percent during the same period in 2007.

Assessing the results from the different periods in 2008 and 2009, Kevin Reynolds, a banking analyst at Wunderlich Securities in Memphis, said the results from 2008 “show what a recession looks like. 2009 is what a recession and global credit crisis looks like.”

In an analyst note published earlier this month, Reynolds also wrote that the pace of bank failures is increasing.

“Since the beginning of 2009, roughly 125 financial institutions have failed, which is the highest number of bank failures in any year since 1992,” he wrote. “There have been 41 failures in the South year to date, representing aggregate deposits of $58 billion and aggregate assets of $72.2 billion.”

Nationally, there was a small uptick in the number of banks that posted a net loss between July and September. The provision banks record to cover soured loans also is on the rise, with loan loss provisions across the board totaling $62.5 billion for the quarter, up 22 percent from the third quarter of 2008.

Failures on the rise

In a statement accompanying the release of the FDIC’s latest quarterly banking profile last week, agency chairwoman Sheila Bair said the results show the industry still has a long way to go to return to normalcy.

“Today’s report shows that, while bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance,” Bair said.

The number of banks on the FDIC’s watch list – which the group does not make public – rose to its highest level in 16 years, with 50 new bank failures during the third quarter. As of Sept. 30, the number of problem institutions rose from 416 on June 30 to 552 at the end of September.

The FDIC’s deposit insurance fund also fell into the red in the third quarter for the first time since 1992. The negative $8.2 billion fund balance reflects almost $39 billion that’s been set aside as a contingent loss reserve to cover estimated bank failures for the next year.

Loan loss provisions for the nation’s banks increased $11.3 billion in the third quarter to $62.5 billion. That pattern has generally held true at the local level as well, with most of the regional and community banks with a presence in the Memphis market bulking up their loan loss provisions.

Memphis-based First Horizon National Corp., the parent company of First Tennessee Bank, is one exception. The company saw its provision for loan losses drop $155 million compared to Q3 2008, falling from $340 million last year to $185.5 million in the third quarter of this year.

First Horizon attributed that positive news to stabilizing asset quality and a shrinking national construction portfolio.