SOURCE: National Rural Utilities Cooperative Finance Corporation (NRUCFC)

December 02, 2008 18:37 ET

NRUCFC to Increase Loss Provision

Finance Cooperative Continues to Serve the Increasing Capital Needs of America's Rural Utilities

HERNDON, VA--(Marketwire - December 2, 2008) - For the quarter ending November 30, 2008, National Rural Utilities Cooperative Finance Corporation (NRUCFC) expects to record a loss provision ranging from $90 million to $140 million primarily related to loans previously classified as impaired to Innovative Communication Corporation (ICC). The anticipated increase to the loss provision is mainly due to the significant disruptions in the capital markets, which have contributed to a decrease in the fair value of the collateral supporting the ICC impaired loans.

"The new valuation is indicative of what is going on in the broader economy at this time," said NRUCFC Chief Financial Officer Steven Lilly. "We anticipate that for the reporting period ending November 30, 2008, NRUCFC will remain in compliance with the covenants in its financing agreements and will be adequately reserved."

The specific amount of the loss provision will not be determined until NRUCFC files its second-quarter 10-Q with the Securities and Exchange Commission on or before January 14, 2009.

Lilly underscored NRUCFC's solid fundamentals, while citing the following aspects of the company's recent financial performance:

-- NRUCFC does not anticipate any additional non-performing or impaired loans to be identified for the quarter ended November 30, 2008. ICC is the only significant credit that is not performing according to the terms of its loan agreements. It should be noted that ICC has been a borrower since 1987 and performed according to its loan agreements until it stopped making payments in 2005.

-- The increase to the loss provision has no impact on cash flow and, thus, does not impact NRUCFC's ability to service its outstanding debt.

-- NRUCFC does not trade in credit default swaps, collateralized debt obligations, collateralized loan obligations or mortgage-backed securities.

-- During its second quarter -- one of historic turmoil in the credit markets -- NRUCFC continued to meet its members' increasing demand for capital.

"Since the collapse of the capital markets, we have seen massive write-downs by banks globally," said NRUCFC Governor and CEO Sheldon C. Petersen. "NRUCFC is not immune from those forces sweeping the credit markets. By increasing the loss provision, we expect to get this issue behind us. In the meantime, we are making funding available to our members at increased levels during these turbulent times."

Petersen itemized the steps NRUCFC has taken to prepare for today's credit market conditions:

-- Concentrating on the electric cooperative sector. Previously, NRUCFC's electric utility book of business made up only 70 percent of its overall portfolio. Now, it accounts for more than 90 percent.

-- Diversifying funding sources. Besides raising funds in the capital markets, NRUCFC has developed additional avenues of funding, which include federal resources, a government-sponsored enterprise and increased use of bank syndications.

-- Building permanent equity. During the past eight years, NRUCFC has placed more than $187 million in a permanent equity account funded by retained earnings. This increase in equity has strengthened NRUCFC and reduced its cost of funds.

-- Developing stronger risk-management strategies. Since 2002, NRUCFC has redesigned and bolstered its credit risk-management systems and annually evaluates the risk in its portfolio with an independent banking advisory firm.

-- Focusing on bond ratings. NRUCFC has taken a number of steps suggested by rating agencies to reduce risk in its operations. NRUCFC has placed a strong focus on its bond ratings in order to maintain its access to capital and keep its funding costs low for its members.

"Throughout this turbulent period," Petersen concluded, "we have remained committed to our members and to their capital needs. That continues to be our mission and our focus."

NRUCFC is a not-for-profit finance cooperative that serves the nation's rural utility systems, the majority of which are electric cooperatives and their subsidiaries. With approximately $20 billion in assets, NRUCFC provides its member-owners with an assured source of market-priced capital and state-of-the-art financial products and services. For more information about NRUCFC, its mission and its services, go to www.nrucfc.coop.

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that the expectations reflected in such forward-looking statements are based on current reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements due to a variety of known and unknown factors. Factors that could cause future results to vary from current expectations include, but are not limited to, general economic conditions, legislative changes, governmental monetary and fiscal policies, changes in tax policies, changes in interest rates, interest expense, demand for our loan products, changes in the quality or composition of our loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic and governmental factors affecting our operations.