SAN DIMAS, Calif. — Western Corporate filed September financialsthat just barely crossed into the black, recording a slim $115,000net income for the month.

WesCorp is still enjoying a healthy revenue stream, thanks tothe spread between the Fed funds rate and Libor that is boostingall corporates this year, but the $27 billion institution took bothexpected and unexpected lumps on the investment side of the booksat quarter-end.

In the unexpected category, WesCorp was forced to end its swapderivative business with Lehman Brothers, which declared bankruptcySept. 15. Swaps are agreements between two parties to exchange cashflow based on the values of the underlying assets on specific,agreed-upon future dates. So, depending upon underlying values, oneparty is either owed, or conversely owes, money to the otherparty.

When Lehman Bros. went under, WesCorp had to settle up, paying$3.9 million to unwind the swap and place it with another party,said Chief Financial Officer Jim Hayes. The way swaps work, that$3.9 million will come back to WesCorp when the contract matures,he said.

Not unexpected was a $3 million income reversal related to a2006 audit, in which certain hedge positions did not qualify forhedge accounting treatment under current SFAS 133 guidelines. As aresult, WesCorp added income to 2005 and 2006 statements it knew itwould have to reverse in 2007, 2008 and 2009. Most of it was turnedaround in 2007, Hayes said, leaving about $13 million to reverse in2008 and another $10 million in 2009. As of Sept. 30, WesCorp hasreversed $10.7 million of the $13 million expected for 2008, whichmeans it will reverse the remaining $2.3 million at Decembermonth-end.

WesCorp also recorded $6.5 million of derivatives expenserelated to a short-term derivative transaction. However, becausethis transaction matures before the end of the year, the $6.5million will reverse at that time and is simply a timingdifference, Hayes explained.

Hayes said he's remaining hopeful that the accounting powersthat be will make modifications to fair value standards. WesCorphas not taken any other-than-temporary impairments–contrary torumors that corporates are hiding OTTI losses in the pipeline,hoping accounting standards will change before they are forced toreport them–Hayes said that is not the case at WesCorp.

“We continue to monitor our portfolio for other-than-temporaryimpairment and would record such losses when they became known asrequired by accounting guidelines,” Hayes said. “We don'tanticipate losses in the fourth quarter, but the continueddeterioration of the markets obviously impacts our portfolio, so weare keeping a close watch on the situation.”

Liquidity is holding steady, with WesCorp's borrowed fundsslightly lower than last month by about $100 million, though thecorporate did tap its new Fed discount window line for the firsttime in September. Total shares are down, with the decline beingattributed to both the seasonal and special liquidity needs atnatural person credit unions.

On a positive note, WesCorp's retained earnings increase is $10million ahead of budget year-to-date.

On the other hand, the $10 billion Southwest Corporate has beenpreparing members for OTTI losses since Lehman declared bankruptcySept. 15, by sending out executives to meet with members in person,addressing the subject in monthly financial Webcasts and againduring its economic forum in late October. Southwest Corporatereported a $24.7 million other-than-temporary impairment.

The charge weighed on month-end net loss numbers, but, againthanks to the Fed-Libor spread, Southwest said it has nearly madeit all up in additional year-to-date net interest income, which isup more than $23 million over this time last year.

All told, Southwest is currently $20 million in the black so farthis year, and according to Senior Vice President/Chief FinancialOfficer Melissa Wardell, the corporate expects to finish 2008 withstrong earnings.

“We anticipate our year-end capital ratio to exceed 6.50% andyear-end retained earnings ratio to exceed 3.00%. This compares toDecember 2007 capital and retained earnings ratios of 5.57% and2.50% respectively,” she said.

Southwest has increased its outstanding borrowings at theFederal Home Loan Bank of Dallas over the past year, with $1billion outstanding at month-end compared to $755 million for sameperiod last year. However, the corporate has a total credit line of$2.3 billion at the FHLB, so it's got plenty of additionalliquidity to spare. Southwest did access the central liquidityfacility in September, to the tune of $100 million as of Sept.30.

The $1.6 billion corporate's financials aren't normallycategorized with larger aggregates like WesCorp and SouthwestCorporate. However, when Fitch Ratings placed Constitution on watchnegative this past spring, and subsequently downgraded thecorporate along with two larger peers Oct. 16, theConnecticut-based corporate was thrust into the trade pressspotlight.

September was a tough month for Constitution, as the corporatetook impairments on its investments in the amount of $6.3 million.Despite receiving the same Fed-Libor spread boost as the othercorporates and posting a year-to-date net income before impairmentcharges, the corporate nonetheless posted a year-to-date net lossSept. 30 of $2.9 million.

“These losses are manageable in the context of the corporate'scapital and reserves, which continue to exceed all regulatoryminimums,” the corporate stated in its financial summary.

Constitution Corporate recorded a regulatory capital ratio of6.81% as of Sept. 30, 2008. That marks an increase over same periodlast year, when the corporate posted a capital ratio of 6.46%.

–[email protected]