Senior managers at a major corporate credit union seized last month were preparing to report a credit loss significantly below what an external analysis had revealed, the U.S. regulator of credit unions said on Friday.

An external analysis by Western Corporate (WesCorp) Federal Credit Union resulted in a credit loss estimate more than $500 million greater than WesCorp's internal estimates, the credit union regulator said.

Senior managers at WesCorp were prepared to report an impairment figure for certain securities as of December 31 that was based on the lower internal estimate, the National Credit Union Administration said.

The credit union regulator seized WesCorp and U.S. Central Federal Credit Union on March 20 after stress tests revealed that losses on their soured mortgage-related investments had reached a critical stage.

U.S. Central, of Lenexa, Kansas, and WesCorp of San Dimas, California, were two of the largest corporate credit unions with a combined $61 billion of assets.

Corporate credit unions provide liquidity and settlement services to more than 90 percent of the nation's nearly 8,000 retail credit unions, which are member-owned and are considered cooperative entities, unlike banks.

NCUA Chairman Michael Fryzel said in a statement on Friday that liquidity remains stable in the corporate credit union system. But he said, it is important credit unions continue to support liquidity in corporate credit unions to prevent the selling of distressed assets into the current dysfunctional market.

Fryzel told Reuters last month that managers at the seized credit unions were overly optimistic about the value of mortgage-backed securities they held.

Some information was not as accurate as it could have been, Fryzel said about the institutions' asset valuations and loss figures. He also said the NCUA had not yet seen signs of fraud.

Fryzel said in a statement on Friday that the NCUA's analysis shows the severity of the stress on the investments at WesCorp and U.S. Central.

Though virtually all of the securities purchased by these two corporate credit unions were AAA or AA rated at the time of purchase, the summary clearly demonstrates how the nature of the securities and the deterioration in the economy have resulted in significant expected credit losses, he said.

NCUA said corporate unions starting increasing their investment concentrations in mortgage-backed securities (MBS) after 2003 because they provided better yields than traditional sectors while still being highly rated.

The NCUA told corporate credit unions to stop buying non-agency MBS in mid-2007 as the securities started to show signs of stress.

By 2008, MBS made up 79 percent of WesCorp's portfolio and 34 percent of U.S. Central's portfolio.

The NCUA said 94.4 percent of U.S. Central's total investment portfolio was rated AAA at the time of purchase. Only 45.3 percent was rated AAA as of February 23, 2009.

For WesCorp, 86.5 percent of its investment portfolio was rated AAA at the time of purchase, compared with 36.3 percent as of February 23, 2009.

NCUA's analysis showed that U.S. Central's credit loss estimates for December 2008 were within the current range of the NCUA's outside vendor.

However, NCUA's analysis showed a large gap between WesCorp's credit loss estimates and the regulator's estimates.

NCUA is obtaining an expanded credit analysis of U.S. Central and WesCorp's portfolios and expects to get the results in mid-April.

(Reporting by Karey Wutkowski; Editing by John Picinich and Steve Orlofsky)