Western Corporate Federal Credit Union must restructure its investment portfolio or risk a downgrade in its performance rating, sources said.

Examiners from the National Credit Union Administration decided that the $12.1 billion-asset corporate, the industry's largest, was unable to keep an undisclosed amount of underwater investments in the "hold-to-maturity" accounting category.

The San Dimas, Calif., institution must come up with a plan by the end of August outlining how it either will sell the securities or keep them until their value picks up.

The regulator issued this directive on June 16, when examiners met with the corporate's management, the sources said. The agency began its examination April 21.

"The NCUA did recently complete an examination of Wescorp, and we found it to be a sound institution," said Bob Loftus, agency director of public and congressional affairs. "As is the case in any examination, issues were raised by the NCUA and officials of the credit union are committed to addressing those issues as soon as possible."

Wescorp chief executive Richard M. Johnson declined to comment on specifics of the examination, but indicated some changes were coming.

"In all cases we thought we were doing the right thing, but they had a different idea," he said. "There's probably never been an examination where they said there's nothing to change."

Neither Mr. Johnson nor Mr. Loftus would comment on what performance rating Wescorp received, but sources close to the situation said it was Camel 3.

The Camel system grades corporates according to their capital, assets, management, earnings, and liquidity on a scale of 1 to 5, with 5 being the lowest score.

A 3 is the medium grade, but the agency considers such a rating in a corporate as a serious matter, one justifying stepped-up supervision and close monitoring.

Agency officials told Wescorp the grade would be ratcheted down to a 4 if the problems weren't addressed, sources said.

Conversely, sources said it was possible the grade could be raised to a 2, depending on how Wescorp addressed issues raised by the agency.

Sources said that the agency is not overly concerned about the situation and is confident that Wescorp will come up with an acceptable plan.

As of May 31, Wescorp's $12.1 billion investment portfolio had lost $142 million in fair market value. The credit union also experienced an unrealized loss of $5.7 million on $1.1 billion of securities classified as "available for sale."

Wescorp has $270 million of capital.

Sources said the agency's rating of Wescorp reflects a tougher line on corporates in wake of the failure of Capital Corporate Federal Credit Union earlier this year, the largest failure in the industry's history.

Indeed, in May the agency slapped U.S. Central Credit Union, the industry's primary liquidity facility, with a Camel 4 rating.

If the agency wanted to get tough with corporates, Wescorp would be an obvious target, sources said.

For instance, Wescorp's investment strategy is more risky than the agency would like. The NCUA is on track to issue regulations that will require corporates to run "matched book" investment portfolios, in which investments are funded with deposits of similar maturity. Wescorp mismatches some of its portfolio to maximize yield.

Further, Mr. Johnson has been an outspoken critic of the agency's proposed regulation. He also denounced the agency for rejecting a merger between Wescorp and Cap Corp earlier this year. The agency said it was concerned that underwater mortgage securities in Cap Corp's portfolio would threaten the health of Wescorp.

Whatever his personal feelings, though, Mr. Johnson seems committed to living up to the regulator's expectations.

"We've always been better because of NCUA's examinations, and we'll be better for this one," he said.

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