ANNUAL REPORT ANNUAL REPORT

2010 ANNUAL REPORT ANNUAL REPORT 2010 1

CONTENTS MANAGING DIRECTOR S FOREWORD... 3 ABOUT THE COMPANY IN BRIEF... 5 Activities of the Company... 5 Strategy and aims of the Company s activities... 7 Organisational structure and personnel of the Company... 7 A SURVEY OF ACTIVITIES IN 2010... 9 Guarantees to credit institutions... 9 The sum and number of guarantees issued... 9 Guarantees via credit institutions...10 Guarantees for investment and acquisition of current assets...10 Guarantees per type of the customer...12 Guarantees per area of activity...13 Guarantees per purpose of the credit...14 Guarantees per county and district...15 Administration of state aid...16 Administration of the Credit Fund...16 Risk management and fulfilment of guarantee obligations...18 Cooperation and partners...20 International cooperation...20 Dissemination of information...21 FINANCIAL PERFORMANCE...22 Independent auditor s opinion...22 Balance Sheet (in LTL)...24 Income Statement (in LTL)...25 ANNEXES...26 1 annex. Use of State Guarantee Limit...26 2 annex. Consolidated Activity Results...27 3 annex. Guarantees Granted and Guarantee Liabilities Fulfilled to Credit Institutions...28 ANNUAL REPORT 2010 2

MANAGING DIRECTOR S FOREWORD The economic crisis of recent years has affected many industries in Lithuania, including agriculture. Although the agricultural sector remains one of the most stable and least affected industries, the reduction in sources of credits, the fall in the purchase price of agricultural products, and other economic factors affected both large and small farms. Last year was the year of recovery of lending to the agricultural sector. Credit institutions, farmers, and rural entrepreneurs started looking ahead with greater optimism, planning new investments, and borrowing. In 2010 the Rural Credit Guarantee Fund (hereinafter the Company) issued 415 credit guarantees of LTL 92.5 million for LTL 150.7 million borrowed from credit institutions by farmers, rural entrepreneurs, and processors of agricultural products. Guarantees of LTL 46.2 million were provided for credits issued to the Lithuanian Agricultural and Food Market Regulation Agency. Over 13 years of operation, the Company has provided guarantees of LTL 2.1 billion to credit institutions for credits of LTL 2.7 billion. Compared to 2009, nearly twice as many guarantees were provided for the credits issued to farmers, rural entrepreneurs, and processors of agricultural products. Due to the guarantees, farmers could borrow from credit institutions twice as much money as they could in 2009 and this allowed them both to implement investment projects and to supplement lack of working capital. The Company cooperates with all banks and credit unions operating in Lithuania. In 2010, Medicinos Bankas (22% of the total number of guarantees), DnB NORD Bankas (19%), and SEB Bank (17%) issued the largest amount of guaranteed credits. Since the credits issued by Medicinos Bankas were small and intended for financing small farms, according to the amount lent, DnB NORD Bankas (22% of the credits), SEB Bankas (19% of the credits), and SNORAS bank (13% of the credits) were in the lead. Last year almost all credit institutions issued far more guaranteed credits than they did in 2009. Credit unions were also much more active and issued four times as many credits with guarantees. The Company s major customers continue to be farmers, who were issued 62% of all guaranteed credits in 2010 intended for farmers, rural entrepreneurs, and processors of agricultural products, i.e. LTL 95.2 million. Young farmers (under 40 years of age) who wish to start ANNUAL REPORT 2010 3

business in rural areas borrowed the most money last year. They were provided credits of over LTL 50 million (55% of the total sum). A total of 350 farms used guaranteed credits for start-up or expansion and modernisation of operations. Small and medium-sized companies, agricultural cooperatives, and companies also borrowed with a guarantee. Guaranteed credits to farmers, rural entrepreneurs, and processors of agricultural products allow them to modernise and expand farms, launch new economic activities, and create jobs in rural areas. As in previous years, the majority of the farmers who borrowed with a guarantee are engaged in crop production (52%) and animal husbandry (25%). More than half of all credits were allocated for the purchase of agricultural machinery and slightly less were for the acquisition of various production equipment, construction, and reconstruction. In 2010, the Company continued to contribute to the absorptions of the funds of the 2007 2013 Lithuanian Rural Development Programme. Last year 69% of guaranteed credits were issued for EU-funded projects. Borrowers implementing investment projects according to the measures of this programme received 331 guarantees for LTL 63.5 million in 2010. This was also influenced by successfully absorbed funds from the Credit Fund, a financial engineering instrument. Last year the second and third calls were announced to those credit institutions that intend to provide preferential credits to farmers and processors of agricultural products. In three stages of the activities of the Credit Fund, a total of LTL 228 million was lent to credit institutions by the end of 2010 for preferential credits and credit institutions have already issued credits of LTL 100 million to farmers and processors of agricultural products. In 2011, the Rural Credit Guarantee Fund plans to continue and implement its goals to promote economic development in the agricultural sector in Lithuania by facilitating credit access to the operators in the agricultural sector that do not have sufficient collateral. We believe that the Company will continue to be a strong partner of credit institutions and to provide support to those who wish to borrow from those institutions. Danguolė Čukauskienė Director of the Rural Credit Guarantee Fund ANNUAL REPORT 2010 4

COMPANY IN BRIEF UAB Žemės ūkio paskolų garantijų fondas (Rural Credit Guarantee Fund) (hereinafter the Company) is a public limited company registered on 26 November 1997 with the Register of Legal Entities (Company code 124261860). The actual articles of association of the Company was registered with the Register of Legal Entities on 16 July 2009. The company s registered address is Blindžių 17, Vilnius. The Company s principal activities are carried out at the registered address. Activities of the Company The Company s business covers three main areas: issue of guarantees for credit institutions, administration of state aid, and administration of the Credit Fund. Issue of guarantees to credit institutions The Company guarantees credit institutions up to 70% (and 80% for young farmers and agricultural entities which insure their crop fields) of outstanding credit or credit line repayment and guarantees the State Enterprise Lithuanian Agricultural and Food Market Regulation Agency (hereinafter the Agency) 100% of outstanding credit repayment. Guarantees are granted (if their sum does not exceed the state guarantee limit set by the Government of the Republic of Lithuania for a particular year) to credit institutions for credits issued for: investment and provided to economic entities engaged in agricultural and/or alternative activities; cooperatives recognised as agricultural cooperatives; rural communities and local action groups; academic and study institutions, including vocational training institutions (nonbudgetary organisations), that have experimental, sample, training or test farms and are implementing investment projects according to the measures of the 2007 2013 Lithuanian Rural Development Programme; and businesses purchasing, processing, and selling agricultural products and/or providing agricultural production services; ANNUAL REPORT 2010 5

acquisition of current assets and/or services in accordance with the List of Services for Agriculture approved by order No. 528 of 31 December 2002 of the Minister of Agriculture and provided to entities engaged in agricultural and/or alternative agricultural activities and cooperatives; acquisition of current assets by businesses that purchase, process, and sell agricultural products and that sell the current assets to Lithuanian agricultural entities; acquisition of current assets that will be used in processing agricultural products and provided to companies processing agricultural products; purchase of agricultural products by businesses purchasing and/or processing and/or selling agricultural products and/or providing agricultural production services; intervention purchases of agricultural and food products and repayment of credits provided to the Agency. By decision No. 240 of 10 March 2010, the Government of the Republic of Lithuania set a guarantee limit of LTL 602 million for the Rural Credit Guarantee Fund. The final guarantee obligations to credit institutions on 31 December 2009 amounted to LTL 403.07 million (Annex 1). Following order No. 3D-723 of 10 August 2010 of the Minister of Agriculture, the Company s operating procedures were replaced by new procedures which stipulate that a promissory note can be issued to ensure repayment of a credit to a credit institution. The amount of the fee for the extension of a guarantee was also revised. Administration of state aid The Company administers compensation for a part of the guarantee payment and interest paid to credit institutions. Part of the guarantee payment is compensated for entities operating in rural areas and taking credits with a guarantee from the Rural Credit Guarantee Fund for investment projects in primary agricultural production and/or activities other than primary agricultural production (80% of the guarantee payment is compensated). The guarantee payment is not reimbursed for entities operating in rural areas and implementing projects according to the measures of the 2007 2013 Lithuanian Rural Development Programme, except for the measure Setting up of Young Farmers. Part of the interest paid to credit institutions is compensated only for those who took credits with a guarantee prior to 31 December 2009 under the regulations and rules governing compensation at that time. Interest is not reimbursed for agricultural entities that were granted credits starting 1 January 2010. ANNUAL REPORT 2010 6

Administration of the Credit Fund After the establishment of the Credit Fund under order No. 3D-525 of 17 July 2009 of the Ministry of Agriculture, the Rural Credit Guarantee Fund was appointed the manager of the Credit Fund. Money from the Credit Fund is used to provide soft loans for the following two measures of the first Rural Development Programme (RDP) axis, Increasing the Competitiveness of the Agriculture, Food and Forestry Sector, Modernization of Agricultural Holdings Support by Credits, Processing of Agricultural Products and Increasing of Added Value Support by Credits. Those who wish to receive soft loans are subject to the same eligibility criteria and requirements that are set in the rules for the implementation of the RDP measures above. Soft loans can only be provided for investment projects. Strategy and aims of the Company s activities The Company s aim is to promote economic development in the agricultural sector in Lithuania by facilitating credit access to economic entities that do not have sufficient collateral. To this end, the Company has a strategy and an action plan that includes the following activities: to improve the evaluation of projects and the calculation system of guarantee payments, adapting it to European Union requirements; to strengthen the internal control system and improve the internal information system; to analyse lending trends and risk factors. In 2011, the Company plans to continue implementation of its aims, operate profitably, and ensure that sufficient reserves will be accumulated to fulfil guarantee obligations. Organisational structure and personnel of the Company The general meeting of shareholders, the board of supervisors, and the manager of the Company are the managing bodies of the Company. The state owns 100% of the Company s shares, which are managed in trust by the Ministry of Agriculture of the Republic of Lithuania. The ANNUAL REPORT 2010 7

board of supervisors consists of three members and is elected for a period of 4 years. The board of supervisors is elected at the general meeting of shareholders. The board of directors consists of five members delegated by the Ministries of Agriculture, Finance, and Justice. The board of directors is headed by a chairman. In 2010, the Company had four divisions: the Guarantee Division, Finance Division, Development and Information Division, and the Credit Fund. The quality of services provided depends on the Company s employees. In order to improve the quality of services, the company constantly improves the qualifications and professional skills of its employees. To this end, training, counselling, and workshops are organised, and employees attend seminars. The average number of employees in the company is nineteen and staff turnover is low. Organisational structure General Meeting of Shareholders Board of Supervisors Analyst Administration Board of Directors Senior Lawyer Finance Division Credit Fund Division Director Guarantee Division Internal auditor Deputy Director Development and Information Division ANNUAL REPORT 2010 8

A SURVEY OF ACTIVITIES IN 2010 Guarantees to credit institutions The sum and number of guarantees issued In 2010, the Company granted guarantees totalling LTL 138.7 million for credits of LTL 197 million provided by credit institutions. The total number of guarantees issued was 427, more than twice as many as were issued in 2009. For credits of LTL 150.7 million provided to farmers, small and medium-sized rural entrepreneurs, and processors of agricultural products, the Company issued 415 guarantees amounting to LTL 92.5 million. For the credits provided to the Lithuanian Agricultural and Food Market Regulation Agency (hereinafter the Agency), the Company issued guarantees of LTL 46.2 million (Fig. 1). 300,0 276,5 600 256,1 250,0 246,7 233,3 500 196,9 202,2 200,0 400 183,1 151,4 150,0 145,2 138,7 300 Sum, millions of LTL 100,0 200 Number Fig 1. Credits and guarantees per year (together with the Agency), millions of LTL 50,0 0,0 2006 2007 2008 2009 2010 100 0 Credits Guarantees Number Compared to 2009, the amount of credit guarantees issued to farmers, rural entrepreneurs, and processors doubled, and the number of guarantees increased from 194 to 415. Many more farmers benefited from guarantees, but the amounts of individual credits were relatively smaller. By taking credits, farmers were more careful in assessing their investments and borrowed more reasonably, thus the decrease in the average credit: in the reporting year 2010, the average credit was LTL 360,000, while in 2009 it was LTL 410,000. ANNUAL REPORT 2010 9

Since the Company s incorporation (1998 2010), a total of 3,362 guarantees for LTL 2.1 billion have been issued. Of them, 3,306 guarantees amounting to LTL 858.7 million were provided to secure the credits of farmers, rural entrepreneurs, and processors, and 56 guarantees totalling LTL 1.3 billion were provided to guarantee credits by the Agency (Annex 2). Guarantees via credit institutions The Company cooperates with all banks and credit unions operating in Lithuania. In 2010, Medicinos Bankas (22% of the total number of guarantees), DnB NORD Bankas (19%), and SEB Bank (17%) issued the largest amount of guaranteed credits. Since the credits issued by Medicinos Bankas were small and intended for financing small farms, according to the amount lent, DnB NORD Bankas (22% of the credits), SEB Bankas (19% of the credits), and SNORAS bank (13% of the credits) were in the lead. Last year almost all credit institutions issued far more guaranteed credits than they did in 2009. Credit unions were also much more active and issued four times as many credits with guarantees (Fig. 2). 35,00 30,00 33,7 28,0 Credits Guarantees 25,00 Fig. 2. Credits and guarantees in 2010 per credit institution (excluding the Agency), millions LTL Sum, millions of LTL 20,00 15,00 10,00 5,00 0,00 19,4 DnB Nord bankas 17,5 SEB bankas 20,2 13,8 19,2 10,5 18,2 Snoras Swedbank Medicinos bankas 11,9 12,6 7,5 Šiaulių bankas 8,5 5,7 Credit Unions 3,9 3,8 2,3 2,3 1,5 1,1 1,2 0,7 0,0 0,0 Ūkio bankas Citadele bankas Nordea bankas UniCredit bankas Danske bankas Guarantees for investment and acquisition of current assets The Company provides guarantees for investment credits and credits for the acquisition of current assets. In 2010, 77% of all guarantees were granted to farmers to ensure repayment of investment credits (Fig. 3). ANNUAL REPORT 2010 10

In 2010, the trend of farmers more frequently borrowing money from credits institutions for their working capital was observed. Compared to 2009, the number of guarantees issued by the Company for short-term credits nearly doubled. Short-term credit guarantees 23% Investment credit guarantees 77% Fig. 3. Guarantees in 2010 per type of credit (per sum of guarantee), %. Analysis of data about credits secured by agro-businesses shows that the most active borrowing period was Q3 of last year, when 34% of guaranteed credits over the reporting year were provided (Fig. 4). 60,00 160 Fig. 4. Guarantees in 2010 per quarter, millions of LTL Sum, millions of LTL 50,00 40,00 30,00 20,00 10,00 0,00 Credits 51,3 Guarantees Number 38,8 34,3 30,3 26,3 21,2 23,9 17,1 I quarter II quarter III quarter VI quarter 140 120 100 80 60 40 20 0 Number In 2010, the Company continued to contribute to the absorptions of the funds of the 2007 2013 Lithuanian Rural Development Programme. Last year 69% of guaranteed credits were issued for EU-funded projects. Borrowers implementing investment projects according to the measures of this programme received 331 guarantees for LTL 63.5 million in 2010 ANNUAL REPORT 2010 11

Guarantees per type of the customer As in previous years, the Company s major customers continue to be farmers, who were issued 62% of all guaranteed credits in 2010 intended for farmers, rural entrepreneurs, and processors of agricultural products, i.e. LTL 95.2 million (Fig. 5). Agricultural company 9% Agricultural enterprise 7% Agricultural cooperative 5% Processing company 4% Small and medium-sized company 13% Farmer s holding 62% Fig. 5. Guarantees in 2010 per type of customer (per sum of guarantee), % Young farmers (under 40 years of age) who start and agricultural business in a rural area borrowed the most money last year. They were provided credits amounting to over LTL 50 million (55% of the total sum). The most active in this group are farmers between 30 and 40 years of age. Over 300 farms used guaranteed credits for the start-up, expansion, and modernisation of activities (Fig. 6). Compared to 2009, the largest leap in borrowing was made by young farmers (20 30 years of age), who were provided twice as many credit guarantees as they were in 2009. According to the information available to the Company, thirty farmers started a business in a rural area by borrowing money from a credit institution with a guarantee. Fig. 6. Guarantees in 2010 per age of farmers, millions of LTL Sum, millions of LTL 20,00 18,00 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 0,0 14,1 17,7 14,0 10,4 The sum of guarantees The number of guarantees 0,7 0,6 iki 20 20 30 30 40 40 50 50 60 60 70 above 70 120 100 80 60 40 20 0 Number ANNUAL REPORT 2010 12

Guarantees per area of activity Analysis of guarantees per area of activity shows no great changes since 2009. As in previous years, the major amount and number of guarantees are guarantees issued to entities engaged in agricultural crop production (52% of all guarantees) and animal husbandry (25%) (Fig. 7). Compared to last year, there was a decline in borrowing for rural tourism projects and food production companies in cities. Due to difficulties in the forestry sector last year, businesses in this sector continue to be cautious about borrowing. Production of food products in the city/town 9% Services for agriculture 2% Fisheries 1% Alternative agricultural activity 11% Animal husbandry 25% Agricultural crop production 52% Fig. 7. Guarantees in 2010 per area of activity (per sum of guarantees), % In 2010, the number of guarantees provided for the development of alternative businesses in rural areas increased. In 2009 nine guarantees and in 2010 25 guarantees were provided, which accounted for 11% (2009) and 16% (2010) of the total guarantee portfolio. Small businesses develop biofuel production, modernise meat processing units, and provide agro and wood processing services. Alternative businesses complement traditional agricultural industries, increase rural incomes, and create job. ANNUAL REPORT 2010 13

Guarantees per purpose of the credit In order to improve the structure of farms and to ensure the development of economically strong and competitive farms, large investments are required. Guarantees provided by the Company provide conditions to borrow money from credit institutions and therefore allow farmers, small rural businesses, and processing companies to modernise farms, expand them, start a new business activity, and create new jobs in rural areas. As in previous years, the money borrowed was largely allocated to purchase agricultural machinery, i.e. 54% of all guarantees (Fig. 8). Compared to 2009, more farmers used borrowed money to buy various production equipment and biological assets, but considerably fewer credit guarantees were issued to purchase dairy equipment, industrial buildings, and reconstruction services. Agricultural equipment 54% Livestock and other animals 1% Other manufacturing equipment 14% Other use 2% Dairy farming equipment 1% Construction and reconstruction 3% Current assets 20% Fig. 8. Guarantees in 2010 per purpose of the credit (per sum of guarantees), % Agricultural land 2% Purchase of agricultural products 3% ANNUAL REPORT 2010 14

Guarantees per county and district Farmers and rural entrepreneurs in almost all districts actively used money borrowed from credit institutions in 2010. Traditionally, farmers of the most fertile lands borrowed the largest amounts of money. Farmers in Kaunas County were provided eighty-three guarantees for LTL 17.2 million, 19% of all guarantees. Farmers and agricultural businesses in Panevėžys County were provided 17% of all guarantees. Analysis of guarantees per district shows that farmers in Kėdainiai and Anykščiai districts secured most of the guaranteed credits to invest into their business. In these districts, 36 (LTL 6.1 million) and 25 guarantees (LTL 3.6 million) were provided respectively. Successful cooperation between Medicinos Bankas and farmers largely contributed to the active borrowing of farmers in Anykščiai District. Agro-businesses in the municipal areas of Trakai, Druskininkai, Rietavas, and Elektrėnai did not use borrowed money (Fig. 9). Fig. 9. Guarantee distribution per district in 2010 Up to 5 guarantees 5-10 guarantees 10-20 guarantees Over 20 guarantees ANNUAL REPORT 2010 15

Administration of state aid The Company administers compensation of a part of the guarantee payment and interest paid to credit institutions. Borrowers of Special Rural Support Programme funds were compensated LTL 4.8 million in interest and LTL 1.1 in guarantee payments. The interest was compensated for 910 customers By resolution No. 782 of 15 July 2009 of the Government of the Republic of Lithuania and order No. 3D-996 of 23 December 2009 of the Minister of Agriculture, it was established that no compensation of interest will be available to agricultural entities that borrowed with a guarantee beginning 1 January 2010. Interest will continue to be compensated for credits with a guarantee taken prior to 31 December 2009 under the regulations and the rules governing compensation at that time. Administration of the Credit Fund The possibility to get preferential credits for investment projects appeared in autumn 2009 when the Credit Fund was established and the Company was appointed as its manager. In 2009 the Company announced the first and in 2010 the second and third financial intermediary (banks and credit unions) tenders and signed contracts with credit institutions that complied with the selection criteria. In Phase 2 of lending contracts were signed with four banks and eight credit unions operating in Lithuania, which were subsequently provided LTL 49.7 million, and in Phase 3 contracts were signed with eight banks and six credit unions, which were subsequently provided LTL 77.8 million from the Credit Fund for the issue of preferential credits (Fig. 10 and Fig. 11). In 2010, financial intermediaries signed 346 contracts with borrowers for preferential credits amounting to LTL 96.5 million: 341 contracts for LTL 83.1 million under the Modernisation of Agricultural Holdings Support by Credits measure and 5 contracts for LTL 13.4 million under the Processing of Agricultural Products and Increasing of Added Value Support by Credits measure. In the three phases of the Credit Fund operations, a total amount of LTL 227 million was provided to credit institutions for the payment of preferential credits, as a result of which 256 contracts were signed for LTL 100 million. In 2010, more than half (54%) of the projects for which preferential credits were granted were in the area of crop farming, mainly for farms developing the crop and rape-seed growing sector. Projects for the modernisation of animal husbandry farms amounted to around 28% of the projects, investment into processing of agricultural products and increasing added value accounted for 16% of the projects, and the rest were for preferential credits to entities providing services to agricultural businesses. ANNUAL REPORT 2010 16

DnB NORD signed the largest number of contracts (79) during the reporting year; following that bank was Ūkio Bankas with 58, Medicinos Bankas with 55, and Swedbank with 46 contracts. Among credit unions, Raseiniai Credit Union signed the largest number (11) of contracts, and Germano Lobis Credit Union and Anykščiai Credit Union signed 7 contracts each. Ūkio bankas 15% Citadele bankas 13% Šiaulių bankas 4% DnB Nord bankas 15% Swedbank 14% Medicinos bankas 14% Fig. 10. Funds of the Credit Fund provided to banks in Phase 2 and Phase 3 of lending, % Snoras 15% SEB bankas 10% CU Raseinių 23% CU Šilutės 4% CU Vilniaus regiono 1% CU Vilniaus taupomoji kasa 12% CU Germanto lobis 16% CU Kupiškėnų taupa 6% Fig. 11. Funds provided to credit unions in Phase 2 and Phase 3 of lending, % CU Jurbarko 24% CU Anykščių 8% CU Tikroji viltis 6% CU Zanavykų bankelis 0,07% ANNUAL REPORT 2010 17

Risk management and fulfilment of guarantee obligations The Company assesses the risk of guarantees it provides using indicators that reflect the financial and economic situation of borrowers. Guarantee risk assessment is conducted throughout the entire term of the guarantee and provisions are calculated to cover possible credit loss. Guarantees are divided into five groups: A (standard risk), B (potential risk), C (increased risk), D (high risk), and E (highest risk). At the end of 2010, standard risk guarantees accounted for the major part (30.4%) of all guarantees (Fig. 12). High risk 3% Highest risk 9% Standard risk 30% Fig. 12. Structure of guarantees per risk group on 31 December 2010, % Increased risk 29% Potential risk 29% The portion of high and highest risk guarantees of is growing, however. The high and highest risk groups (D and E) were related to guarantees amounting to LTL 22.6 million in 2008, LTL 43.4 million in 2009, and after regrouping a portfolio of guarantees, LTL 44.7 million in 2010. Many farmers and small and medium-sized enterprises in rural areas that in the past did not have any financial problems encountered difficulties in fulfilling their financial liabilities to credit institutions. This was largely due to the economic crisis in Lithuania, delay in payment for agricultural products, declining value of assets, shrinking market for products, and other reasons that affected the business of farmers, agricultural enterprises, and small rural entrepreneurs. The Company anticipates that between 2011 and 2013 guarantee obligations in the amount of LTL 35.4 million may have to be fulfilled: LTL 23.8 million for processors of agricultural products and small and medium-sized entrepreneurs in rural areas and LTL 11.5 million for farmers. The Company accumulates funds for fulfilment of guarantee obligations to cover loss related to guaranteed credits. Provisions are accrued from guarantee payments (90% of the payments made by customers) and net profit earned. At the end of 2010, LTL 79.6 million was accrued for fulfilment of guarantee obligations. ANNUAL REPORT 2010 18

To reduce risk, the Company looks for solutions and opportunities to assist customers faced with insolvency problems. As a result of communication with banks, joint decisions are made regarding amendment of credit terms or extension of guarantees. During the reporting year, 364 requests of banks regarding amendment of credit agreements were approved, and of these requests 75 borrowers had their repayment term postponed. On 31 December 2010, the ratio of fulfilled guarantee obligations to guarantees issued, i.e. the portion of bad guarantees, was 0.7% of all guarantees issued during the period of operation and 1.7% of the guarantees issued to farmers, rural entrepreneurs, and processors (excluding the Agency) (Fig. 13). 2,50 2,00 1,50 1,93 1,45 1,49 1,89 Total Excluding the Agency 1,69 Fig. 13. Ratio of fulfilled guarantee obligations and guarantees issued, % 1,00 0,50 0,00 0,72 0,68 0,55 0,59 0,50 2006.12.31 2007.12.31 2008.12.31 2009.12.31 2010.12.31 Despite all difficulties, in 2010 the company fulfilled only one guarantee obligation and paid a bank LTL 73,000. During the entire period of the Company s operations, nearly LTL 14.5 million was paid to banks for the outstanding credits of 101 borrowers, including long-term credits of LTL 13 million and short-term credits of LTL 1.5 million (Annex 3). Once the Company fulfils its guarantee obligations to the banks, it acquires the right of recourse against the debtor for the amount paid. Debt is recovered according to the procedures established by law or debtors voluntarily pay back the amount due by signing agreements regarding debt repayment. In 2010, LTL 186,000 was recovered from debtors and the total amount recovered in 2000 2010 was LTL 3.5 million: LTL 2.1 million according to arrangements, LTL 1.3 million by selling the debtor s assets, and LTL 45,800 via court proceedings. Of 96 debtors, 35 farmers paid their debts in full. Part of the debt was written off since recovery was not feasible. The total amount of debts written off was LTL 5.9 million, 40.9% of all payments made to banks. ANNUAL REPORT 2010 19

Cooperation and partners International cooperation International cooperation, exchange of information, and development of relationships are very significant in shaping effective guarantee schemes. The Company actively implements international cooperation programs both in Lithuania and abroad and develops relationships with EU institutions, the European Association of Mutual Guarantee Societies (AECM), and Central and Eastern European partner countries. Since 2001 the Company has been a member of the AECM, which unites all the guarantee societies of Europe. The AECM represents thirty-four credit guarantee institutions and national associations that are active in twenty-one EU countries and Turkey. The association consolidates and develops the role of guarantees as financial instruments in small and medium-sized business development, promotes the harmonisation of legal framework and work principles of guarantee institutions, represents and defends the interests of its members at EU institutions, and provides proposals and schemes for various organisations involved in economic policy. Company representatives actively participate in working groups and seminars organised by the AECM. In 2010, the Company participated in Financing of Subordinated Loans, a congress organised by the AECM and the Association of German Guarantee Banks. Relevant topics were discussed at the congress: the financing of corporate venture capital and the need for subordinated loans and their significance during times of economic recession and recovery. In 2010, two meetings of the Agriculture and Rural Development working group organised by the AECM and the Guarantee Fund of Hungary were held. At the meetings, the participants were introduced to the principles of the operation of a guarantee fund in providing guarantees for the agricultural sector, the working group formulated its proposals, and the position of the association on agricultural and rural development issues in discussions with EU institutions was identified. The Company not only learns from the experience of Western European countries but is also an equal partner in sharing its experience and is actively involved in advising guarantee institutions about the issues of guarantees. In view of the Lithuanian experience in implementing its financial engineering tool, the Credit Fund, a meeting of a working group was organised in Vilnius. Participants from Italy, Hungary, Portugal, and Romania benefited from the Company s advice and experience. Representatives of the Company, the Ministry of Agriculture, and the National Paying Agency participated in Objectives for the establishment of the Credit Fund, a working group meeting organised by the Ministry of Agriculture of Latvia and the Latvian Agricultural Consultancy and Training Centre. During the meeting, the parties shared their experience in developing, administering, and managing the Credit Fund. Lithuanian experience in developing guarantee instruments and providing economic entities access to financial resources easier was included in the AECM study entitled Guarantees and the Recovery: the Impact of Anti-Crisis Guarantee Measures. ANNUAL REPORT 2010 20

The Company s services and experience were presented to the representatives of Ukraine and Latvia. A relationship was also established with the representatives of the Ministry of Agriculture of Montenegro, and possibilities for further cooperation in helping their country s farmers to get easier access to funding from credit institutions were discussed. Dissemination of information The company maintains a close business relationship with banks, credit unions, and farmers organisations. In 2010, the Company participated in seminars, training sessions, and presentations of its activities that covered the entire country. The Company also participated in specialised exhibitions: As you sow... 2010 and AgroBalt 2010. On the Company s initiative, meetings with representatives of credit institutions were organised; a seminar about the current and future situation in agriculture was held in Kaunas for employees of banks and the Lithuanian Central Credit Union. The Company participated in training employees of Medicinos Bankas, Nordea Bank Finland Plc Lithuania Branch, and credit unions. The aim of these meetings was to disseminate information about the Company, its activities, procedures, and services. The Company s activities, services, and possibilities to access credits for business start-up or further business development were presented at seminars for farmers and rural entrepreneurs. The seminars were organised for farmers and entrepreneurs in Ukmergė, Raseiniai, Telšiai, Kretinga, Šilutė, Kaunas, and Biržai. The enthusiasm of the participants and abundance of questions revealed that information is lacking and that seminars organised for a specific audience are useful. Each month, information is provided to the Public Relations Division of the Ministry of Agriculture about guarantees issued and changes in the Company s activities. This information is subsequently passed on to the media and posted on the Company s website. In 2010, the Company prepared and distributed questionnaires to credit institutions and agricultural entities. Analysis of the questionnaires allowed the scope, opportunities and trends of borrowing from credit institutions to be identified. The results of the financial performance of agricultural companies and agricultural enterprises over the past year were collected and analysed. A summary of the material was presented at the seminar to employees of credit institutions. The Company devoted considerable attention to the presentation and dissemination of the new financial engineering instrument, the Credit Fund, delegated to the Company. A series of seminars was organised for the employees of banks and credit unions about the activities of the Credit Fund and opportunities it provides. In order to ensure efficient publicity of preferential credits, the Company promoted the Credit Fund in the media representing the agricultural sector and on web sites. ANNUAL REPORT 2010 21

FINANCIAL PERFORMANCE In 2010, the Company s authorised capital amounted to LTL 8.6 million. The authorised capital is divided into 860 ordinary registered material shares with a par value of LTL 10,000. At the beginning of 2010, the Company did not have any of its own shares and did not acquire any during the reporting period. In 2010, the company operated profitably and earned LTL 2.5 million of gross profit, i.e. LTL 0.12 million more than it earned in 2009. The income tax of the Company amounted to LTL 382,000. In 2010, the Company paid LTL 466,000 in dividends to the state. The Company s 2010 annual financial statements were audited by UAB Audifina. The Credit Fund was audited by UAB Tezaurus Auditas. Report of independent auditor To the shareholders of UAB Žemės ūkio paskolų garantijų fondas (Rural Credit Guarantee Fund) Report on the financial statements We carried out the audit of the accompanying set of financial statements of UAB Žemės ūkio paskolų garantijų fondas, comprising the balance sheet as of 31 December 2010 and the profit (loss) statement for the year then ended, cash flow statement, statement of change in equity and explanatory letter (hereinafter referred to as financial statements). Management liability for financial statements The management is liable for drawing up and truthful presentation of these financial statements in accordance with the legislative acts valid in the Republic of Lithuania, regulating bookkeeping and compilation of financial statements as well as Business Accounting Standards, and for such internal control that, in the opinion of the management, is necessary for drawing up the financial statements free of material misrepresentations due to fraud or error. Our responsibility is to express an opinion on these financial statements based on the audit performed. We carried out the audit in line with the International Standards on Auditing. These standards require that we comply with the ethics requirements and perform the audit in such a way as to obtain sufficient assurance that the financial statements are free of material misrepresentations. An audit involves performing procedures aimed at collecting audit evidence about the amounts and disclosures in the financial statements. ANNUAL REPORT 2010 22

The selection of procedures depends on the judgment of the auditor including the risk assessment associated with significant misrepresentation of financial statements due to fraud or error. In making these risk assessments, the auditor takes into account the internal control associated with drawing up and truthful presentation of the company s financial statements in order to select the audit procedures appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the company. Furthermore, an audit includes an evaluation of the appropriateness of the accounting methods applied, the rationality of accounting estimates carried out by the management and overall presentation of financial statements. We believe that the audit evidence collected by us is sufficient and appropriate to substantiate our audit opinion. Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial performance of UAB Žemės ūkio paskolų garantijų fondas as of 31 December 2010, and of their financial results and their cash flows for the year then ended in accordance with the legislative acts regulating the bookkeeping and preparation of financial statements in the Republic of Lithuania and Business Accounting Standards. Report on other legal and regulatory requirements Furthermore, we have read the accompanying Annual Report for 2010 of UAB Žemės ūkio paskolų garantijų fondas and have not noted any material inconsistencies between the financial information included in it and the financial statements for 2010 of UAB Žemės ūkio paskolų garantijų fondas. Auditor Gediminas Vaskela Director Jolanta Ruzgienė Auditor s certificate No 000483 Auditor s certificate No 000239 9 March 2011 UAB Audifina Vilnius, the Republic of Lithuania Audit company s certificate No 001243 ANNUAL REPORT 2010 23

Balance Sheet (in LTL) 31 Dec. 2010 ASSETS Current financial year Previous financial year A. FIXED ASSETS 231.968.363 135.631.104 I. INTANGIBLE ASSETS 153.184 127.931 I.1. Development work - - I.2. Goodwill - - I.3. Patents, licences - - I.4. Software 153.184 127.931 I.5. Other intangible assets - - II. TANGIBLE ASSETS 541.442 629.300 II.1. Land - - II.2. Buildings and works 454.188 505.125 II.3. Machinery and equipment - - II.4. Vehicles 38.978 52.784 II.5. Other equipment, devices, tools and plants 48.276 71.391 II.6. Construction in progress - - II.7. Other tangible assets - - II.8. Investment assets - - II.8.1. Land - - II.8.2. Buildings - - III. FINANCIAL ASSETS 231.273.101 134.871.966 III.1. Investment in subsidiary and associated companies - - III.2. Credits to associated and subsidiary companies - - III.3. Amounts receivable after one year - - III.4. Other financial assets 231.273.101 134.871.966 IV. OTHER FIXED ASSETS 636 1.907 IV.1. Deferred tax assets - - IV.2. Other fixed assets 636 1.907 B. CURRENT ASSETS 27.153.567 35.340.988 I. INVENTORIES, PREPAYMENTS AND ONGOING CONTRACTS 51.984 34.185 I.1. Inventories 125 190 I.1.1. Raw materials and consumables 125 190 I.1.2. Work in progress - - I.1.3. Finished products - - I.1.4. Goods purchased for resale - - I.2. Prepayments 51.859 33.995 I.3. Ongoing contracts - - II. AMOUNTS RECEIVABLE WITHIN ONE YEAR 447.553 4.167.376 II.1. Trade debtors 96.416 67.582 II.2. Debts of subsidiary and associated companies - - II.3. Other amounts receivable 35.1137 4.099.794 III. OTHER CURRENT ASSETS 26.157.767 30.670.603 III.1. Short-term investment 11.591.233 17.501.626 III.2. Term deposits 14.566.534 13.168.977 III.3. Other current assets - - IV. CASH AND CASH EQUIVALENTS 496.263 468.824 TOTAL ASSETS: 259.121.930 170.972.092 EQUITY CAPITAL AND LIABILITIES Current financial year Previous financial year C. EQUITY CAPITAL 14.465.630 12.813.227 I. CAPITAL 8.600.000 7.300.000 I.1. Authorised (subscribed) capital 8.600.000 7.300.000 I.2. Subscribed but unpaid capital (-) - - I.3. Share premium account - - I.4. Own shares (-) - - II. REVALUATION RESERVES (RESULTS) - - III. RESERVES 3.728.027 3.606.710 III.1. Legal 867.256 867.256 III.2. For purchase of own shares - - III.3. Other reserves 2.860.771 2.739.454 IV. PROFIT (LOSS) BROUGHT FORWARD 2.137.603 1.906.517 IV.1. Current year profit (loss) 2.137.603 1.906.517 IV.2. Previous year profit (loss) - - D. GRANTS, SUBSIDIES 898.075 177.327 E. ACCOUNTS PAYABLE AND LIABILITIES 243.758.225 157.981.538 I. ACCOUNTS PAYABLE AFTER ONE YEAR AND LONG-TERM LIABILITIES 243.540.733 157.621.075 I.1. Financial debts - - I.1.1. Leasing or similar obligations - - I.1.2. Credit institutions - - I.1.3. Other financial debts - - I.2. Debts to suppliers - - I.3. Prepayments received - - I.4. Provisions 60.512.582 57.561.064 I.4.1. Liabilities and claims 60.512.582 57.561.064 I.4.2. Pension and similar liabilities - - I.4.3. Other provisions - - I.5. Deferred tax liability - - I.6. Other accounts payable and long-term liabilities 183.028.151 100.060.011 II. ACCOUNTS PAYABLE WITHIN ONE YEAR AND SHORT-TERM LIABILITIES 217.492 360.463 II.1. Current portion of long-term debts - - II.2. Financial debts - - II.2.1. Credit institutions - - II.2.2. Other debts - - II.3. Debts to suppliers - - II.4. Prepayments received 38.703 57.593 II.5. Liabilities related to profit tax 44.328 190.569 II.6. Liabilities related to labor relations 105.116 94.665 II.7. Provisions - - II.8. Other accounts payable and short-term liabilities 29.345 17.636 TOTAL EQUITY CAPITAL AND LIABILITIES: 259.121.930 170.972.092 Director Danguolė Čukauskienė ANNUAL REPORT 2010 24

Income Statement (in LTL) 31 Dec. 2010 No. Items Current financial year Previous financial year I. INCOME FROM SALES 3.279.465 4.356.418 II. COST OF SALES 2.951.518 3.920.776 III. GROSS PROFIT (LOSS) 327.947 435.642 IV. OPERATING EXPENSES 1.719.641 1.959.088 IV.1 Sales - - IV.2 General and administrative 1.719.641 1.959.088 V. PROFIT (LOSS) FROM ORDINARY ACTIVITIES (1.391.694) (1.523.446) VI. OTHER OPERATIONS 187.353 213.446 VI.1. Income 187.353 213.446 VI.2. Expenditure - - VII. FINANCIAL AND INVESTMENT ACTIVITIES 3.704.382 3.687.075 VII.1. Income 4.249.658 4.041.831 VII.2. Expenditure 545.276 354.756 VIII. PROFIT (LOSS) FROM ORDINARY ACTIVITIES 2.500.041 2.377.075 IX. EXTRAORDINARY GAIN - - X. EXTRAORDINARY LOSS - - XI. PROFIT (LOSS) BEFORE TAXES 2.500.041 2.377.075 XII. PROFIT TAX 381.638 492.008 XIII. NET PROFIT (LOSS) 2.118.403 1.885.067 Director Danguolė Čukauskienė ANNUAL REPORT 2010 25

ANNEXES 1 annex. Use of State Guarantee Limit 31 Dec. 2010 Guarantee liabilities to credit institutions of which Credit Institutions Total Agricultural entities, processing companies and economic entities, engaged into activities alternative to agriculture State Enterprise Lithuanian Agricultural and Food Products Market Regulation Agency Number Amount, m LTL Number Amount, m LTL Number Amount, m LTL Citadele bankas 133 14,16 133 14,16 0 0,00 Danske bankas 4 1,97 4 1,97 0 0,00 DnB NORD bankas 612 127,70 607 99,53 5 28,17 Credit Unions 40 7,14 40 7,14 0 0,00 Medicinos bankas 147 15,76 147 15,76 0 0,00 Nordea bankas 26 65,60 20 4,01 6 61,59 SEB bankas 238 54,02 233 33,87 5 20,15 Snoras 133 38,66 133 38,66 0 0,00 Swedbankas 252 32,41 252 32,41 0 0,00 Šiaulių bankas 120 31,59 120 31,59 0 0,00 UniCredit bankas 3 0,88 3 0,88 0 0,00 Ūkio bankas 92 13,19 92 13,19 0 0,00 Total 1800 403,07 1784 293,16 16 109,91 Guarantee liabilities, m LTL 403,07 Guarantee limit in 2010, m LTL 602,00 Unused guarantee limit, m LTL 198,93 ANNUAL REPORT 2010 26

2 annex. Consolidated Activity Results 31 Dec. 2010 Number Total Credit Guarantee amount, m LTL amount, m LTL Guarantees granted for credits Number of which 2009 2010 Credit Guarantee amount, m LTL amount, m LTL Number Credit Guarantee amount, m LTL amount, m LTL Agricultural entities, rural businessmen, processing companies 3306 1410,48 858,71 194 80,28 49,21 415 150,73 92,50 Guarantees for investment credits - 1210,45 740,02-69,05 41,84-118,14 71,15 of which under EU support 1167 787,03 474,59 143 58,46 35,73 331 105,07 63,52 short-term credit guarantees - 200,03 118,69-11,23 7,37-32,59 21,35 Lithuanian Agricultural and Food Products Market Regulation Agency 56 1280,02 1280,02 8 153,00 153,00 12 46,20 46,20 Total 3362 2690,50 2138,73 202 233,28 202,21 427 196,93 138,70 Credits and guarantees according to credit institutions (without Agency) Citadele bankas 172 57,20 33,80 3 0,75 0,41 16 3,81 2,34 Danske bankas 10 21,77 9,63 0 0,00 0,00 0 0,00 0,00 DnB NORD bankas 1026 496,33 288,54 38 20,96 12,07 77 33,68 19,40 Credit Unions 46 13,57 9,15 6 1,71 1,24 24 8,50 5,68 Medicinos bankas 185 41,43 27,24 13 3,16 2,12 90 18,21 11,85 Nordea bankas 37 25,43 17,81 3 2,81 1,97 4 1,51 1,07 SEB bankas 538 263,22 160,57 58 22,76 14,89 72 27,97 17,46 Snoras 180 132,99 83,76 8 2,28 1,59 40 20,20 13,76 Swedbankas 713 183,77 116,87 45 15,71 8,78 53 19,23 10,48 Šiaulių bankas 208 118,19 72,60 15 7,36 4,19 21 12,56 7,47 UniCredit bankas 6 7,38 5,03 2 2,39 1,67 2 1,19 0,70 Ūkio bankas 185 49,21 33,72 3 0,41 0,29 16 3,87 2,30 Total 3306 1410,48 858,71 194 80,28 49,21 415 150,73 92,50 ANNUAL REPORT 2010 27

3 annex. Guarantees Granted and Guarantee Liabilities Fulfilled to Credit Institutions 31 Dec. 2010 Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Farmers, rural businessmen, processing companies Investment credit guarantees, m LTL 13,7 23,0 0,4 1,6 9,9 51,0 52,0 92,7 130,1 121,8 130,8 41,8 71,2 740,0 Short-term credit guarantees, m LTL 1,5 0,0 0,0 4,9 1,8 12,8 6,2 13,8 13,9 20,7 14,4 7,4 21,4 118,7 Number 230 345 9 10 40 118 162 334 462 523 464 194 415 3306 Total Amount, m LTL 15,2 23,0 0,4 6,5 11,7 63,8 58,1 106,5 144,0 142,5 145,2 49,2 92,5 858,7 Lithuanian Agricultural and Food Products Market Regulation Agency Number 5 6 3 5 6 5 1 2 2 1 0 8 12 56 Amount, m LTL 240,0 217,6 113,4 117,7 125,5 115,3 42,5 60,9 39,1 8,9 0,0 153,0 46,2 1280,0 Total Number 235 351 12 15 46 123 163 336 464 524 464 202 427 3362 Amount, m LTL 255,2 240,5 113,8 124,2 137,3 179,1 100,6 167,4 183,1 151,4 145,2 202,2 138,7 2138,7 Average guarantee amount (without Agency) Average guarantee size, m LTL 0,07 0,07 0,04 0,65 0,29 0,54 0,36 0,32 0,31 0,27 0,31 0,25 0,22 0,26 Fulfilment of guarantee liabilities Number of payoffs 0 1 10 34 25 13 3 4 2 0 3 5 1 101 Amount of payoffs, m LTL 0,00 1,50 1,24 2,74 1,99 0,49 0,09 0,23 0,03 0,00 2,37 3,79 0,07 14,54 ANNUAL REPORT 2010 28

Blindžių str. 17, 08111 Vilnius, Lithuania Tel. (+370 5) 260 84 06 Fax (+370 5) 260 84 05 Email info@garfondas.lt www.garfondas.lt ANNUAL REPORT 2010 29 1