LOS ANGELES — In a new sign of economic recovery, credit unions are moving tens of millions out of their loan loss reserves, enabling them to reduce red ink, and in some cases, move into the black.

"Loan losses, which had been extremely high in 2008 and 2009, have reduced significantly in the second half of 2010, and that trend looks likely to continue into 2011," said John Tippets, president of San Diego's North Island CU, which moved from a $52.4 million loss for 2009 to a $11.5 million net for 2010, due mainly to the shift of loan loss reserves. The net helped the troubled credit union giant build its net worth ratio back to 5.3%, after falling to just 3.4% at year-end 2009.

Tippets, brought in last year to work out the problem one-time $1.7 billion credit union, said the credit union was over-reserved when he took over, so it did not need to add anything to loss reserves in 2010. In fact, North Island took $800,000 out of its loan loss account for 2010, after adding $6.8 million in 2009.

"That allowed us to do some write-downs and pay severance costs [for layoffs] and absorb some of the costs," Tippets told Credit Union Journal. "When we started the year we were thinking we might lose $10 million."

The shift also helped Wescom Central CU, Pasadena, Calif., which reported $200-million in losses the past three years, to move into the black for the first time since 2006, a slim $2.7-million net, for 2010. Wescom cut its provision for loan losses by almost two-thirds to $47.5 million for 2010.

Elsewhere, lower loan loss provisions helped AltaOne CU move from the red to a $3.4-million net; Schools Financial CU from the red to a $1.1-million net, and helped several other California and Arizona credit unions reduce their annual losses.

Lower loss provisions helped Kern Schools FCU cut its losses from $40.6 million for 2009 to $12.8 million for 2010; Altura CU cut its losses from $20.1 million in 2009 to $2.8 million for 2010; American First FCU from $14.4 million of losses to $4.1 million of losses; Arizona's Desert Schools FCU from a loss of $81.3 million in 2009 to a loss of $18.9 million, and Florida's Grow Financial CU cut losses from $18.3 million to $3.6 million.

Daniel Penrod, a financial analyst with the California/Nevada CU Leagues, said the lower amounts moved to loss reserves are a sign that some stability is returning to credit union fields of membership. Now those funds can be used for other productive purposes, especially more lending, he said.

'Things Are Stabilizing'

"What we're looking at is numbers that indicated that things are stabilizing [in California]," Penrod said. "The next step is growth."

He said home prices in major markets in the Golden State, including the coast and the Bay Area, appear to have leveled off and some job growth has materialized, giving confidence to businesses and credit union members.

Tun Wai, chief economist for NAFCU, was more guarded. "I think in some sense they're making the turn," said Wai, who also cited numerous barriers to profitability for credit unions heading into 2011, including low loan demand and the NCUA assessments for both the corporate credit union restructuring and a National CU Share Insurance Fund premium. "There are still pockets of problems out there that will pose a damper on the bottom line."

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