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Sz. Fuzet A Vegrehajtasi Eljaras Alapvet Szabalyai

BlueOrange Bank reported a profitable year in 2017 with earnings of EUR 4.8 million. The bank grew its total assets to EUR 692 million, including a 26% increase in its loan portfolio to EUR 214 million. Over 61% more clients were added in 2017. However, the bank also invested over EUR 1 million in technology and compliance to improve security and risk management practices in response to regulatory changes and to support its expanding international operations. BlueOrange Bank aims to continue developing innovative banking services while maintaining high standards of security and quality in 2018.

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0% found this document useful (0 votes)

93 views95 pages

Sz. Fuzet A Vegrehajtasi Eljaras Alapvet Szabalyai

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blazsek

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AS BlueOrange Bank

Group Consolidated and Bank

Separate Annual Report for the
year ended 31 December 2017
AS BlueOrange Bank Group Consolidated and Bank Separate Annual Report for the year ended 31 December 2017 1

Content
REPORT OF COUNCIL AND MANAGEMENT BOARD...........................................................................................................2

COUNCIL AND BOARD OF THE BANK....................................................................................................................................4

STATEMENT OF THE MANAGEMENT’S RESPONSIBILITY...................................................................................................5

INDEPENDENT AUDITORS’ REPORT.......................................................................................................................................6

GROUP CONSOLIDATED AND BANK SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED AS AT 31
DECEMBER 2017:......................................................................................................................................................................15

GROUP CONSOLIDATED AND BANK SEPARATE INCOME STATEMENTS.................................................................15

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF OTHER COMPREHENSIVE INCOME...........16

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF FINANCIAL POSITION..................................17

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF FINANCIAL POSITION..................................18

GROUP CONSOLIDATED STATEMENTS OF CHANGES IN THE SHAREHOLDERS’ EQUITY....................................19

BANK SEPARATE STATEMENTS OF CHANGES IN THE SHAREHOLDERS’ EQUITY.................................................20

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF CASH FLOWS ................................................21

NOTES TO THE GROUP CONSOLIDATED AND BANK SEPARATE FINANCIAL STATEMENTS................................22

A S BlueOrange Bank | Smilšu iela 6, Rīga, LV-1050, Latvija | Registration No. 40003551060 | SWIF T code: CBBRLV22 
Phone: +371 67 031 333 | WhatsApp: +371 26 552 244 | E-mail: [email protected] | www.blueorangebank.com
AS BlueOrange Bank Group Consolidated and Bank Separate Annual Report for the year ended 31 December 2017 2

Report of Council and Management Board

AS BlueOrange Bank is a joint–stock company established on 22 June 2001 and entered into the Register
of Enterprises of the Republic of Latvia under uniform registration No. 40003551060. The bank’s address is
Smilšu iela 6, Rīga, LV–1050, Republic of Latvia. On 8 June 2001, the bank received a license for conducting the
activities of a credit institution, which was re-registered on 28 June 2011 and on 14 September 2017 – license
No. 06.01.05.002/483 at the license register of the FCMC. The bank operates in accordance with the applicable
legislation of the Republic of Latvia and the European Union.

AS BlueOrange Bank develops new lines of business in 2017

Last year, the bank underwent significant changes, becoming an international financial platform that offers
services to a much broader clientele. The bank adjusted its business model and expanded the market where it
offers services. Timed to the introduction of new products and services, in January the bank began to operate
under a new brand, BlueOrange, and in autumn it registered with the new trade name AS BlueOrange Bank
(previous name – Baltikums Bank).
According to audited data, the year 2017 was closed with profit of EUR 4.8 million. The bank’s income from
operating activities during the reporting period constituted EUR 36.9 million. Its equity increased by 2 % year on
year, reaching EUR 60 million. Total assets (including assets under management) increased by EUR 18.1 million,
reached EUR 692 million by the end of 2017. During the reporting period the Bank’s operating income decreased
by 15% compared to the previous year. The decrease is mainly the result of lower commission fee income from
servicing of customer payment operations and payment card servicing in the e-commerce business. In 2016,
profit of EUR 1.96 million was recognised on exchange of VISA shares.
The bank’s core financial performance indicators are strong: its liquidity ratio at the end of 2017 equalled 76.61%,
its capital adequacy 18.68%, with return on equity (ROE) of 8.09% and return on assets (ROA) of 0.75%.
The volume of BlueOrange Bank lending grew significantly during the year: the total loan portfolio and credit
obligations reached EUR 214.4 million at the end of 2017, posting a 26% improvement. Loans worth EUR 84.3
million were issued during the year, with nearly half (EUR 38.3 M) invested in the national economy of Latvia,
facilitating the growth of local businesses.
Impairment allowances for assets and doubtful loans amounted to EUR 2.4 million, which is 69% less than last
year. The amount of allowances recognised in 2016 was untypically high and appears to be overstated due to an
excessively prudent policy. A significant part of the allowances recognised in 2016, EUR 2.6 million, was recovered
in 2017 after the respective loans were repaid. The significant changes in net allowances had a positive impact
on the Bank’s profit.
Last year, the bank invested substantial resources and assets in expanding the range of products and services
available to entrepreneurs and retail clients in Latvia. The number of BlueOrange Bank clients increased by 61%.
Client portfolio management was very successful, where weighted average yield after fees totalled 18.39% for
the 12 months of 2017. The amount of assets under management in client portfolios increased by 38 % year-on-
year.
For the convenience of clients, a new Client Support Centre was opened in Old Riga, supplementing the bank’s
extensive online communication with clients with in-person service.
Late in 2017, BlueOrange Bank started working with a major fintech company in Germany, attracting significant
numbers of retail clients from Germany and Austria. Within the last few months of 2017, this brought a total of
EUR 38.5 million in deposits to the bank.
Over 1 million euros were invested in the bank’s technological development projects last year. BlueOrange Bank
was among the first few banks in Latvia to release its API in 2017 – an interface with the bank’s systems that
attract high-tech businesses as partners. Likewise, the BlueOrange Internet Bank was optimised with expanded
functionality, and a large volume of the bank’s internal processes are now automated.

Report of Council and Management Board

BlueOrange Bank paid a lot of attention to mitigating risks and enhancing security standards: internal controls
are being improved, and work is ongoing to accommodate the growing client base and new regulations. This
process is time-consuming and resource-intensive, and, as the external AML reviews in 2017 show, there are still
many tasks to complete, as described in the financial statements 4(8) note.
In 2017, the bank launched, and is currently implementing a number of ongoing internal control system
enhancement initiatives and activities that will develop its business and ensure effectiveness in detecting
suspicious transactions. The bank has expanded relevant staff and maintains continuous training and professional
development activities. Crucial compliance initiatives were launched in 2017 and are slated for completion
in 2018: in cooperation with US partners, two automated monitoring systems will be implemented for client
transaction monitoring and detection of suspicious transaction indicators. The bank’s new business model has
manifested in fewer clients from high-risk geographical regions, with substantially higher numbers of domestic
and Western European clients. This process will continue in 2018 in order to meet the expected changes in AML
legislation, as described in the financial statements 47 Note.
Further in 2018, the bank will develop state of the art technological platforms, introduce new high-tech services
and modernise existing solutions. In the 1st quarter of 2018, BlueOrange Bank installed the first five ATMs in
Latvia that accept contactless cards.
Last year, BlueOrange Bank proved that it can offer innovative, convenient solutions t o its clients while adhering
to high standards of banking security and service quality.
Events in the first few months of 2018 on the Latvian financial market affirmed the timing and reasoning of
the decision to change the business model that bank management had adopted two years ago. This year,
considering increased reputational risk throughout the banking sector of Latvia, the bank will continue to focus
particular attention on every aspect of security, maintaining its status as a stable, sustainable banking institution
for servicing individuals and business clients.

On behalf of bank management,

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

Council and Board of the Bank

Council as of 31 December 2017
Vārds, uzvārds Amats Iecelšanas datums
Aleksandrs Peškovs Chairman of the Council 22 June 2001
Member of the Council 22 June 2001
Sergejs Peškovs
Deputy Chairman of the Council 25 July 2002
Andrejs Kočetkovs Member of the Council 22 June 2001

Management Board as of 31 December 2017

Vārds, uzvārds Amats Iecelšanas datums
Member of the Board 1 July 2002
Dmitrijs Latiševs Deputy Chairman of the Board 25 April 2003
Chairman of the Board 27 April 2011
Inga Preimane Member of the Board 11 January 2016
Jānis Dubrovskis Member of the Board 24 July 2017

On 24 July 2017, Jānis Dubrovskis was appointed a Member of the Board.

On 29 December 2017, Ēriks Zaics was released from his duties of a Member of the Board.

On behalf of bank management,

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

Statement of the Management’s responsibility

The Management of AS BlueOrange Bank (hereinafter – the “Bank”) is responsible for the preparation of the
consolidated financial statements of the Bank and its subsidiaries (hereinafter – the “Group”) as well as for the
preparation of the financial statements of the Bank.

The Group consolidated and Bank separate financial statements are prepared in accordance with International
Financial Reporting Standards as adopted by the European Union on a going concern basis. Appropriate
accounting policies have been applied on a consistent basis. Prudent and reasonable judgements and estimates
have been made by the Management in the preparation of the Group consolidated and Bank separate financial
statements.

The Group consolidated and Bank separate financial statements on pages 15 to 96 are prepared in accordance
with the source documents and present fairly the financial position of the Group as at 31 December 2017 and
the consolidated results of its operations and cash flows for the year then ended, as well as the financial
position of the Bank as at 31 December 2017 and the results of its operations and cash flows for the year ended
31 December 2017.

The management of the Bank is responsible for the maintenance of a proper accounting system, safeguarding
the Group’s and Bank’s assets, and the detection and prevention of fraud and other irregularities in the Group
and Bank. Management is also responsible for operating the Group and Bank in compliance with the Law on
Credit Institutions, regulations of the Finance and Capital Market Commission and other legislation of the
Republic of Latvia applicable to credit institutions.

On behalf of bank management,

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

Independent Auditors’ Report

GROUP CONSOLIDATED AND BANK SEPARATE INCOME STATEMENTS

2017 2016
Note Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Interest income 10 850 10 850 11 103 11 103
Interest expenses (3 835) (3 835) (3 159) (3 159)
Net interest income 6 7 015 7 015 7 944 7 944
Fee and commission income 17 018 17 021 23 282 23 286
Fee and commission expense (4 985) (4 985) (7 905) (7 905)
Net fee and commission income 7 12 033 12 036 15 377 15 381
Net profit from trading and revaluation of financial 8 473 473 2 542 2 542
instruments
Net foreign exchange income 9 7 885 7 886 7 381 7 380
Other operating income 10 772 712 335 282
Total operating income 28 178 28 122 33 579 33 529
Administrative expenses 11 (18 835) (17 629) (17 151) (16 075)
Other operating expenses 12 (1 776) (2 051) (1 696) (2 053)
Net impairment losses 13 (1 885) (2 386) (7 983) (7 727)
Total operating expenses (22 496) (22 066) (26 830) (25 855)
Profit before taxation 5 682 6 056 6 749 7 674
Corporate income tax 14 (1 231) (1 225) 128 137
Net profit for the year 4 451 4 831 6 877 7 811
Attributable to:
Equity holders of the Bank 4 442 4 831 6 851 7 811
Non-controlling interest 9 – 26 –

The accompanying notes on pages 22 to 94 form an integral part of these financial statements.
The Council and the Board of the Bank approved the issue of these financial statements as presented from page
15 to 94 on 20 April 2018 The financial statements are signed on behalf of the Council and the Board of the Bank
by:

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF OTHER

COMPREHENSIVE INCOME

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Net profit for the year 4 451 4 831 6 877 7 811
Other comprehensive income
Items that are or may be reclassified to profit or loss
Foreign exchange revaluation reserve (1) – (18) –
Revaluation reserve – AFS financial assets 123 123 86 86
Total other comprehensive income 122 123 68 86
Total comprehensive income 4 573 4 954 6 945 7 897
Attributable to:
Equity holders of the Bank 4 564 4 954 6 919 7 897
Non-controlling interest 9 – 26 –

The accompanying notes on pages 22 to 94 form an integral part of these financial statements.
The Council and the Board of the Bank approve the issue of these financial statements as presented from page
15 to 94 on 20 April 2018. The financial statements are signed on behalf of the Council and the Board of the Bank
by:

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF FINANCIAL POSITION

2017 2016
Aktīvi Note Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Cash and demand deposits with central bank 15 233 803 233 803 153 865 153 865
Loans and receivables from banks 16 118 030 118 002 181 180 181 141
Demand deposits with credit institutions 112 523 112 495 118 886 118 847
Term deposits with credit institutions 521 521 57 247 57 247
Loans issued to credit institutions 4 986 4 986 5 047 5 047
Financial assets designated as at fair value through profit or 18 397 397 – –
loss
Held-for-trading financial assets 8 372 8 372 3 045 3 045
Fixed income securities 17 8 253 8 253 2 955 2 955
Derivatives 32 119 119 90 90
Available-for-sale financial assets 19 54 461 54 461 68 998 68 998
Fixed income securities 53 660 53 660 68 009 68 009
Non fixed income securities 801 801 989 989
Loans and receivables 20 161 000 161 000 114 920 114 920
Held-to-maturity financial assets 21 31 535 31 535 82 786 82 786
Investments in associates 22 827 – 827 –
Investments in subsidiary undertakings 22 – 31 138 – 19 085
Investment property 23 2 788 1 355 3 684 2 527
Property and equipment 24 30 291 5 463 23 204 4 928
Intangible assets 25 1 322 1 321 1 216 1 214
Prepayments and accrued income 287 287 221 221
Other assets 26 13 681 13 544 17 956 17 705
Corporate income tax receivable 317 317 262 262
Deferred tax assets – – 795 795
Total assets 657 111 660 995 652 959 651 492

The accompanying notes on pages 22 to 96 form an integral part of these financial statements.
The Council and the Board of the Bank approve the issue of these financial statements as presented from page
15 to 96 on 20 April 2018. The financial statements are signed on behalf of the Council and the Board of the Bank
by:

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF FINANCIAL POSITION

2017 2016
Liabilities and Equity Note Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Due to credit institutions on demand 27 1 428 1 428 3 504 3 504
Derivatives 32 232 232 136 136
Financial liabilities carried at amortized cost 594 189 596 424 582 779 585 240
Deposits and balances due to financial institutions 28 96 96 – –
Deposits 29 564 506 566 741 557 730 560 191
Deposits (subordinated) 29 4 561 4 561 5 112 5 112
Debt securities (subordinated) 30 25 026 25 026 19 937 19 937
Deferred income and accrued expenses 1 125 1 126 987 987
Corporate income tax payable 5 – 6 –
Other liabilities 31 2 227 1 759 2 746 2 553
Total liabilities 599 206 600 969 590 158 592 420

Shareholders’ equity
Share capital 33 39 493 39 493 39 493 39 493
Statutory reserves 33 24 24 24 24
Revaluation reserve – AFS financial assets 143 143 20 20
Other reserves 22, 33 (3 431) (2 400) (2 417) (2 400)
Retained earnings 21 676 22 766 21 243 21 935
Total equity attributable to equity holders of the Bank 57 905 60 026 58 363 59 072

Non-controlling interest 22 – – 4 438 –

Total equity 57 905 60 026 62 801 59 072
Total equity and liabilities 657 111 660 995 652 959 651 492

Contingent liabilities and commitments 35 66 189 66 201 55 447 55 459

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board

20 April 2018

GROUP CONSOLIDATED STATEMENTS OF CHANGES IN THE SHAREHOLDERS’

EQUITY
Total
Revalua- equity
tion
Retained attribut- Non-con-
Share Statutory reserve Other Total
NO- able to trolling
capital reserves – AFS reserves earnings equity
TE equity interest
financial holders of
assets the parent
EUR`000 EUR`000 EUR`000 EUR’000 EUR`000 EUR`000 EUR`000 EUR`000
Balance as at 1 January 39 493 24 (66) (2 399) 18 142 55 194 4 412 59 606
2016
Comprehensive income for the reporting period:
Revaluation reserve – AFS – – 86 – – 86 – 86
financial assets
Foreign exchange
revaluation reserve – – – (18) – (18) – (18)

Net profit for the period – – – – 6 851 6 851 26 6 877

Total comprehensive
income for the reporting – – 86 (18) 6 851 6 919 26 6 945
period
Transactions with shareholders recorded directly in equity:
Dividends paid 33 – – – – (3 750) (3 750) – (3 750)
Balance as at 39 493 24 20 (2 417) 21 243 58 363 4 438 62 801
31 December 2016
Comprehensive income for the reporting period:
Revaluation reserve – AFS
financial assets – – 123 – – 123 – 123

Foreign exchange – – – (1) – (1) – (1)

revaluation reserve
Net profit for the reporting – – – – 4 442 4 442 9 4 451
period
Total comprehensive
income for the reporting – – 123 (1) 4 442 4 564 9 4 573
period
Transactions with shareholders recorded directly in equity:
Adjustment of profit/(loss) – – – – (9) (9) – (9)
of previous years
Acquisition of NCI without a 22 – – – (1 013) – (1 013) (4 447) (5 460)
change in control
Dividends paid 33 – – – – (4 000) (4 000) – (4 000)
Balance as at 39 493 24 143 (3 431) 21 676 57 905 – 57 905
31 December 2017

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board
20 April 2018

BANK SEPARATE STATEMENTS OF CHANGES IN THE SHAREHOLDERS’

EQUITY
Revaluation
Statutory Retained Total capital
Share capital Other reserves reserve – AFS
Note reserves Earnings and reserves
financial assets
EUR'000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Balance as at 39 493 24 (2 400) (66) 17 874 54 925
1 January 2016
Comprehensive income for the reporting period:
Revaluation reserve – AFS – – – 86 – 86
financial assets
Net profit for the period – – – – 7 811 7 811
Total comprehensive
income for the reporting – – – 86 7 811 7 897
period
Transactions with shareholders recorded directly in equity:
Dividends paid – – – – (3 750) (3 750)
Balance at 31 December 39 493 24 (2 400) 20 21 935 59 072
2016
Comprehensive income for the reporting period:
Revaluation reserve – AFS – – – 123 – 123
financial assets
Net profit for the reporting – – – – 4 831 4 831
period
Total comprehensive
income for the reporting – – – 123 4 831 4 954
period
Transactions with shareholders recorded directly in equity:
Dividends paid 33 – – – – (4 000) (4 000)
Balance as at 39 493 24 (2 400) 143 22 766 60 026
31 December 2017

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board
20 April 2018

GROUP CONSOLIDATED AND BANK SEPARATE STATEMENTS OF CASH FLOWS

2017 2016
NO- Group Bank Group Bank
TE
EUR’000 EUR’000 EUR’000 EUR’000
Cash flow from operating activities
Profit before taxation 5 682 6 056 6 749 7 674
Adjustment of profit of previous years (9) – – –
Depreciation of intangible assets, property and equipment and 807 665 480 327
investment property
Impairment of assets 1 885 2 386 7 983 7 727
Interest expense from bonds 1 379 1 379 1 170 1 170
Result from disposal of property investment and investment (72) (73) – –
property
Increase in cash and cash equivalents before changes in assets 9 672 10 413 16 382 16 898
and liabilities, as a result of ordinary operations
(Increase) in loans and receivables (44 659) (44 659) (44 314) (44 314)
(Increase)/decrease in term deposits with banks (5 405) (5 405) 5 158 5 158
(Increase)/decrease in available-for-sale financial assets 14 348 14 348 (11 469) (11 469)
Increase/(decrease) in held-for-trading financial assets (5 327) (5 327) 10 766 10 766
Increase in financial assets at fair value through profit or loss (397) (397) – –
(Increase)/decrease in held-to-maturity financial assets 51 251 51 251 1 241 1 241
(Increase)/decrease in prepayments and accrued income (66) (66) (56) (56)
(Increase)/Decrease in other assets 2 594 1 556 (9 968) (9 870)
Increase/(decrease) in deposits and due to banks 6 321 6 095 (107 170) (106 432)
Increase/(decrease) in held-for-trading financial liabilities 96 96 76 76
Increase/(decrease) in other liabilities and current tax liabilities (1 012) (1 280) (1 122) (1 250)
Increase/(decrease) in deferred income and accrued expenses 138 139 611 611
Net cash from/(used in) operating activities before tax and 27 554 26 764 (139 865) (138 641)
interest
Interest paid for bonds (1 290) (1 290) (1 058) (1 058)
Corporate income tax paid (739) (739) (916) (916)
Net cash from/(used in) operating activities 25 525 24 735 (141 839) (140 615)
Cash flows from investment activities
Purchase of fixed and intangible assets (8 006) (1 312) (6 040) (2 993)
Disposal of investment property 400 400 – –
Capital increase in investment in subsidiaries 22 – (5 404) – (4 260)
Acquisition of subsidiaries, net of cash acquired 22 – (489) – –
Net cash from/(used in) investing activities (7 606) (6 805) (6 040) (7 253)
Cash flows from financing activities
Bonds issued 30 5 000 5 000 2 000 2 000
Acquisition of Non-controlling interests (5 460) (5 460) – –
Dividends paid 33 (4 000) (4 000) (3 750) (3 750)
Net cash from/(used in) financing activities (4 460) (4 460) (1 750) (1 750)
Net changes in cash and cash equivalents 13 459 13 470 (149 629) (149 618)
Cash and cash equivalents at the beginning of the reporting year 331 541 331 502 481 170 481 120
Cash and cash equivalents at the end of the reporting period 34 345 000 344 972 331 541 331 502

Aleksandrs Peškovs Dmitrijs Latiševs

Chairman of the Council Chairman of the Board
20 April 2018

1. GENERAL INFORMATION
AS BlueOrange Bank (previous name – Baltikums Bank) (“the Bank”) is a Joint Stock Company registered with
the Enterprise Register of the Republic of Latvia on 22 June 2001. The address of the Bank is Smilšu iela 6, Riga,
LV 1050, Latvia. The Bank holds a banking license issued in Latvia and it acts in accordance with the legislation
of Latvia and the European Union.
The primary lines of business for the Bank are servicing corporate customers and high net worth individuals, and
managing investments and finances.
The sole shareholder of the Bank is Joint Stock Company BBG that holds 100% voting shares of the Bank. JSC
BBG is a financial management company registered in Latvia and owned by four Latvian companies and two
private individuals. The consolidated financial statements of the parent company AS BBG can be obtained from
the Enterprise Register of Latvia.
The Bank has a number of subsidiaries in Latvia, special purpose entities in foreign countries and investments in
associated companies. The above entities form the Group which comprises the following:
Holding Holding
Name of the company Country of incorporation, address Line of business 31.12.2017, % 31.12.2016, %
SIA BlueOrange M. Pils iela 13, Riga, Latvia, Financial Services 100 100
International
Kr. Valdemara iela 149, Riga, Real estate
SIA CityCap Service 100 100
Latvia development
SIA Zapdvina Kr. Valdemara iela 149, Riga, Real estate 100 100
Development Latvia development
Etiera k-s ½B – 18, Sveti Vlas,
Kamaly Development Burgas obl., Nesebier 8256, 100 100
EOOD Bulgaria
Real estate development 100 100 100 100
Management of
UAB Kamaly Development Klaipedos m. sav. Klaipedos m., collaterals overtaken by 100 100
Karklu g. 12, Lithuania the bank
Real estate
AS Pils Pakalpojumi Smilšu iela, Riga, Latvia development 100 61

Management of
Suite 102, Blake Building, Corner
Foxtran Management Ltd collaterals overtaken by 100 100
Eyre & Huston Str., Belize the bank
Management of
Suite 102, Blake Building, Corner
Enarlia International Inc collaterals overtaken by 100 100
Eyre & Huston Str., Belize the bank
Real estate
SIA Jēkaba 2 Jēkaba iela, Riga, Latvia 100 100
development
Baltikums E-Centre 55 Park Lane - Suite 14, London 100 –
Limited W1 1NR, UK
Advisory services 100 100 100 –
Kr. Valdemara 149-405, Riga, Real estate
Mateli Estate SIA Latvia development 100 -

Kr. Valdemara 149-405, Riga, Real estate

Darzciems Entity SIA 100 -
Latvia development
Kr. Valdemara 149-405, Riga, Real estate
Mazirbe Estate SIA 100 -
Latvia development
Kr. Valdemara 149-405, Riga, Real estate
Lielie Zaķi SIA 100 -
Latvia development
Kr. Valdemara 149-405, Riga, Real estate
Pulkarne Entity SIA 100 -
Latvia development

Investments in associated companies (the Bank and the Group):

Holding (%) Holding (%)
Company Country of incorporation, address Line of business 31.12.2017 31.12.2016
Kr. Valdemāra iela 149, Riga, Real estate
AS Termo biznesa Centrs 26.15 26.15
Latvia development

2. BASIS OF PREPARATION

(1) Statement of Compliance

The financial statements of the Bank and the Group (“financial statements”) have been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted by the European Union, and regulations of
the Financial and Capital Market Commission of the Republic of Latvia (‘FCMC’) in force as at 31 December 2017.
The Group consolidated and Bank separate financial statements were authorized for issue by the Board on 20
April 2018. Shareholders have the power to reject the financial statements prepared and issued by management
and the right to request that new financial statements be issued.

(2) Functional and presentation currency

These consolidated and separate financial statements are presented in thousands of euros (‘000 EUR), unless
stated otherwise. Subsidiaries of the Group and the Bank operate in the functional currency of euro and bulgarian
lev.
(3) Basis of measurement
The Group’s consolidated financial statements and the Bank’s separate financial statements are prepared
on the historical cost basis except for the following:
- financial instruments at fair value through profit or loss are stated at fair value;
- derivative instruments are stated at fair value;
- available-for-sale assets are stated at fair value;
- repossessed collateral are recognised at take-over value which set to be a notional cost, and subsequently,
recoverable amount is determined which was fair value less cost to sell.

3. SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies have been applied in the preparation of these Group Consolidated
and Bank Separate Financial Statements. The accounting principles have been consistently applied except for
the changes in accounting policies described in Note 3.21.

(1) Basis for consolidation

(i) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has
rights to, variable returns from its involvement with the entity and has the ability to affect those returns through
its power over the entity. The financial statements of subsidiaries are included in the consolidated financial
statements from the date on which control commences until the date on which control ceases.
Investments in subsidiaries are carried in the Bank’s separate financial statements at cost less impairment, if any.

(ii) Non-controlling interest

Non-controlling interest is measured as a proportion of fair value of net assets of the acquired subsidiary at the
acquisition date. Changes in the Group’s interest in a subsidiary other than resulting in the loss of control are
recognised through equity (transactions with shareholders).

(iii) Loss of control

When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and
any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any
interest retained in the former subsidiary is measured by the Group at fair value when control is lost.

(iv) Special purpose entities

The Group has established a number of special purpose entities (SPE’s) for trading and investment purposes.
The SPE's are established under terms that impose strict limits on the decision-making powers of the SPE’s
management over the operations of the SPE. SPE’s are consolidated by the Group because the Group owns
100% capital and has control over these SPE.

(v) Acquisition of entities under common control

Acquisitions of controlling interests in entities that were under the control of the same controlling shareholder as
the Group are accounted for on the date the common control was established. The acquired assets and liabilities
are recognised at their carrying amount as recognised in the separate financial statements of the acquiree at the
acquisition date. Any net transaction result is included as a separate reserve under equity.

(vi) Interest in equity-accounted investees

The Group’s interests in equity accounted investees comprise interests in associates.
Associates are those entities in which the Group has significant influence, but not control or joint control, over
the financial and operating policies.
Investments in associates are accounted for in the Group consolidated financial statements using the equity
method. They are initially recognised at cost, including transaction costs. Subsequent to initial recognition, the
consolidated financial statements include the Group’s share of the profit or loss and OCI in equity-accounted
investees, until the date on which significant influence or joint control ceases.
Investments in associates are carried in the Bank’s separate financial statements at cost less impairment, if any.

(vii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are
eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with
equity-accounted investees are eliminated to the extent of the Group’s interest in the investee. Unrealised
losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of
impairment.

(viii) Common Group accounting policy

In the preparation of the consolidated financial statements, the financial statements of those Group entities
that use different accounting policies are adjusted to conform with the Group’s accounting policy.

(2) Foreign currency

Transactions in foreign currencies are translated into the respective functional currencies of Group companies
at the exchange rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the
functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items
is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for
effective interest and payments during the period, and the amortized cost in foreign currency translated at the
exchange rate at the end of the period.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are
retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined.
Foreign currency differences arising on retranslation are recognized in the income statement except for the
differences arising on the retranslation of available-for-sale equity instruments or a financial liability designated
as the hedging instrument in a hedge of the net investment in a foreign operation or in a qualifying cash flow
hedge, which are recognized in other comprehensive income.

The exchange rates for the most significant currencies as set by the European Central Bank at reporting date are
as follows:

31 December 2017 31 December 2016

USD 1.1993 1.0541

Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on
acquisition, are translated into EUR at exchange rates set by the European Central Bank at the reporting date.
The income and expenses of foreign operations are translated into the functional currency at the exchange
rates of transaction dates.
Foreign currency differences are recognized in other comprehensive income and accumulated in the translation
reserve, except to the extent that the translation difference is allocated to non-controlling interest.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation,
the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is
considered to form part of the net investment in the foreign operation, are recognized in other comprehensive
income and accumulated in the translation reserve.

(3) Financial instruments

a) Classification
Financial instruments are classified into the following categories:
Financial instruments at fair value through profit or loss are held-for-trading financial instruments and
financial assets and liabilities that the Group and the Bank initially defines as assets and liabilities designated at
fair value through profit or loss.
A financial instrument is classified as held for trading if it is acquired or incurred principally for the purpose
of selling or repurchasing in the near term or is part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
Derivatives are also categorized as held for trading unless they are designated as a hedging instrument for
hedge accounting purposes.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturity that the Group and the Bank has the positive intention and ability to hold to maturity, and which
are not designated at fair value through profit or loss, available for sale, or loans and receivables. Held-to-
maturity financial instruments include certain debt securities.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market, other than (a) those that the Group or the Bank intends to sell immediately or in the
short-term, (b) those that the Group or the Bank upon initial recognition designates as at the fair value through
profit or loss or as available for sale; or (c) those for which the holder may not recover substantially all of its initial
investments, other than because of credit deterioration. Loans and receivables include amounts due from credit
institutions on term, loans and receivables from customers and other financial assets which comply with these
classification criteria. Loans and receivables are accounted for at amortized cost using the effective interest
method. Certain expenses, such as legal fees or sales commissions for employees acting as agents or other
expenses that are incurred in securing a loan are treated as part of the cost of the transaction.
Available-for-sale financial assets are financial assets classified at inception as available for sale or assets
other than classified as financial assets at fair value through profit and loss or held to maturity or loans and
receivables. Available for sale instruments include short term investments and certain debt and equity
securities. Generally, this category is assigned by the Bank and the Group to financial assets that are held for an
indeterminate period of time and may be sold based on liquidity or interest rate needs, or as a result of changes
in exchange rates and share prices.
Financial liabilities carried at amortised cost represent financial liabilities of the Group and the Bank other
than financial instruments designated at fair value through profit or loss. This category includes due to credit
institutions on term, customer deposits, issued bonds and other financial liabilities.

Financial liabilities carried at amortized cost are initially measured at fair value less directly attributable
transaction costs and are subsequently remeasured to amortized cost using the effective interest rate.
Subordinated deposits have a fixed term of at least five years from the date of placement and they are repayable
before maturity only in the event of termination of the Bank’s operations or the Bank’s bankruptcy and such
deposits rank before shareholders’ claims. Subordinated debts are repayable before maturity only in the event
of termination of the Bank’s operations, or the Bank’s bankruptcy.
b) Recognition
The Group and the Bank initially recognize loans and advances, deposits, debt securities issued and subordinated
liabilities on the date at which they are originated. Regular way purchases and sales of financial assets are
recognized on the settlement date at which the Group commits to purchase or sell the asset. All other financial
assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially
recognized on the trade date at which the Group and the Bank becomes a party to the contractual provisions of
the instrument.
c) Measurement
A financial asset or financial liability is initially measured at fair value plus (for a financial asset or liability other
than measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition
of the financial asset or liability, in the case of a financial asset or liability other than measured at fair value
through profit or loss.
Subsequent to initial recognition, all financial assets and liabilities measured at fair value through profit or loss
and all available for sale financial assets are measured at fair value except those available for sale instruments
which have no quoted market price in an active market or for which no reliable fair value measurement is possible.
Such instruments are carried at cost less transaction costs and impairment.
All financial liabilities other than those measured at fair value through profit or loss, loans and receivables
and held to maturity assets are measured at amortized cost using the effective interest rate method. All such
instruments are subject to revaluation when impaired.
Profit or loss arising from changes in the fair value of financial instruments measured at fair value through
profit or loss are recognized in the income statement. Profit or loss arising from changes in the fair value of
available-for-sale financial instruments is recognized in equity through other comprehensive income (except for
impairment losses and foreign exchange gains and losses on monetary assets) until the asset is derecognized,
at which time the cumulative gain or loss previously recognized in equity is recognized in profit or loss. Interest
on an available-for-sale financial asset is recognized in the income statement using the effective interest rate
method.For financial assets and liabilities carried at amortised cost, a gain or loss is recognized in the profit or
loss when the financial asset or liability is derecognized or impaired, and through the amortization process.
d) Amortized cost measurement
The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured
at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective
interest method, minus any reduction for impairment.
The effective interest rate is a method of calculating the amortized cost of a financial asset or liability, which
is based on the recognition of interest income and expenses over a specific period. The effective interest rate
is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the
financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, the management estimates cash flows considering
all contractual terms of the financial instrument but does not consider future losses. The calculation includes
all fees paid or received between parties to the contract that are an integral part of the effective interest rate,
transaction costs, and all other premiums or discounts.
e) Derecognition
A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire
or when the Group and the Bank transfer substantially all of the risks and rewards of ownership of the financial
asset. Any interest in transferred financial assets that is created or retained by the Group and Bank is recognized
as a separate asset or liability.

The Group and the Bank derecognize a financial liability when its contractual obligations are discharged or
cancelled or expire.
f) Offsetting
Financial assets and liabilities are set off and the net amount presented in the statement of financial position
when, and only when, the Group and the Bank have a legal right to set off the amounts and intend either to
settle on a net basis or to realize the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only when permitted by the accounting standards, or for
gains and losses arising from a group of similar transactions such as in the trading activity.

(4) Identification and measurement of impairment of financial assets

At each reporting date the Group and the Bank assess whether there is objective evidence that the financial
assets other than carried at fair value through profit or loss are impaired. Financial assets are impaired when
objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and
that the impairment event has an impact on the future cash flows of the asset that can be estimated reliably.
Objective evidence that financial assets (including equity securities) are impaired can include default or
delinquency by a borrower, restructuring of a loan or advance by the Group and the Bank on terms that the
Group and the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy,
the disappearance of an active market for a security, or other observable data relating to a group of assets
such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions
that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or
prolonged decline in its fair value below its cost is objective evidence of impairment.
The Group and Bank consider evidence of impairment for loans and advances and held-to-maturity investment
securities at specific asset level. All loans and receivables from customers and held-to-maturity investment
securities are assessed for specific impairment. Accordingly, the Bank does not set aside a collective impairment
allowance on loans and receivables due from customers and held-to-maturity investment securities. The Group
and the Bank believe that credit risk arising from these financial assets is covered by individual assessment.
Loans are stated at the amount of the principal outstanding, less any impairment allowances. Impairment
losses and recoveries are recognized monthly based on regular loan reviews. Allowances during the period are
recognized in the income statement.
Impairment losses on assets carried at amortized cost are measured as the difference between the carrying
amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s
original effective interest rate. Losses are recognized in the income statement and reflected in an allowance
account against loans and advances. Interest on the impaired asset continues to be recognized through the
unwinding of the discount. If an event occurring after the impairment was recognised causes the amount of
impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
Impairment losses on available-for-sale assets are recognized by transferring the cumulative loss that has been
recognized in equity through the statement of other comprehensive income to the income statement. The
cumulative loss that is removed from equity and recognized in the income statement is the difference between
the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any
impairment loss previously recognized in the income statement. Changes in impairment allowance attributable
to time value are reflected as a component of interest income.
If, in a subsequent period, the fair value of an impaired available for sale bond increases and the increase can
be objectively related to an event occurring after the impairment loss was recognised in income statement, the
impairment loss is reversed, with the amount of the reversal recognised in income statement. However, any
subsequent recovery in the fair value of an impaired available-for-sale equity security is not reversed through
the income statement and is recognized directly in other comprehensive income.

(5) Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the principal, or in its absence, the most advantageous
market to which the Group and the Bank has access at that date. The fair value of a liability reflects its non-
performance risk.
A S BlueOrange Bank | Smilšu iela 6, Rīga, LV-1050, Latvija | Registration No. 40003551060 | SWIF T code: CBBRLV22 
Phone: +371 67 031 333 | WhatsApp: +371 26 552 244 | E-mail: [email protected] | www.blueorangebank.com
AS BlueOrange Bank Group Consolidated and Bank Separate Annual Report for the year ended 31 December 2017
NOTES TO THE GROUP CONSOLIDATED AND BANK SEPAR ATE FINANCIAL STATEMENTS 28

The Group and the Bank have an established control framework with respect to the measurement of fair
values. This includes a valuation team that has overall responsibility for overseeing all significant fair value
measurements, including Level 3 fair values, and reports directly to the CFO.
Specific controls include:
- Verification of observable pricing;
- Re-performance of model valuations;
- A review and approval process for new models against observed market transactions;
- Analysis and investigation of significant daily valuation movements;
- Review of significant unobservable inputs, valuation adjustments and significant changes to the fair
value measurement of Level 3 instruments compared to previous month.
The methods described below have been used for the determination of fair values.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair
value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison
with other observable current market transactions with the same instrument or based on a valuation technique
whose variables include only data from observable markets. When transaction price provides the best evidence
of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any
difference between this price and the value initially obtained from a valuation model is subsequently recognized
in the profit and loss statement depending on the individual facts and circumstances of the transaction but not
later than when the valuation is supported wholly by observable market data or the transaction is closed out.
When available, the Group and Bank measure the fair value of an instrument using quoted prices in an active
market for that instrument. A market is regarded as ‘active’ if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on an ongoing basis.
If a market for a financial instrument is not active, the Group and the Bank determine fair value using a valuation
technique. Valuation techniques include recent arm’s length transactions between knowledgeable, willing
parties (if available), reference to the current fair value of other instruments that are substantially the same,
discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum
use of market inputs, relies as little as possible on estimates specific to the Group and the Bank, incorporates
all factors that market participants would consider in setting a price, and is consistent with accepted economic
methodologies for pricing financial instruments.
Where third-party information, such as broker quotes or pricing services, are used to measure fair value, the
Group and the Bank assesses and documents the evidence obtained from the third parties to support the
conclusion that such valuations meet the requirements of IFRS. This includes:
- Verifying that equity broker or pricing service is approved by the Group and Bank for use in pricing the
relevant type of financial instrument;
- Understanding how the fair value has been arrived at and the extent to which it represents actual market
transactions;
- When prices for similar instruments are used to measure fair value, how these prices have been adjusted
to reflect the characteristics of the instrument subject to measurement;
Fair value is classified into different levels of the fair value hierarchy based on the inputs used in the measurement
techniques:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the
fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value
hierarchy as the lowest level input that is significant to the entire measurement.

The Group and the Bank recognize transfers between levels of the fair value hierarchy at the end of the reporting
period during which the change has occurred. The Group and the Bank recognizes transfers between levels of
the fair value hierarchy as of the end of the reporting period during which the change has occurred. For further
analysis of the basis for fair value refer to Note 45.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking
price. Where the Group and the Bank has positions with offsetting risks, mid-market prices are used to measure
the offsetting risk positions and a quoted bid or asking price adjustment is applied only to the net open position
as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of
the provisions of the instrument. Fair value estimates obtained from models are adjusted for any other factors,
such as liquidity risk or model uncertainties, to the extent that the Group and the Bank believes a third-party
market participant would take them into account in pricing a transaction.

Due from other credit institutions

The fair value of placements on demand, overnight deposits and floating rate placements is considered to be
close to their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted
cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.
Loans
The estimated fair value of loans represents the discounted amount of estimated future cash flows expected to
be received. The interest rated used to discount estimated cash flows are based on the prevailing money-market
interest rates curve plus an adequate credit spread.
Shares and other non-fixed income securities
The fair value of shares and other non-fixed income securities is determined by reference to their quoted bid
price at the reporting date, if available. For a number of non-listed shares where disposal was limited, it was
assumed that it was not possible to make a reliable estimate of fair value.
The fair value of S.W.I.F.T shares was determined based on the “transfer amount”, approved for the respective
year by the shareholders’ meeting, representing the price for new share allocation and the participants’ quit
price.

Derivatives
Valūtas mijmaiņas darījumu patiesā vērtība tiek aplēsta, diskontējot līgumā noteiktās naudas plūsmas, kas tiks
saņemtas un samaksātas atbilstošā ārvalstu valūtā ar atlikušo dzēšanas termiņu, un pārvēršot diskontētās
naudas plūsmas starpību eiro, piemērojot Eiropas Centrālās Banks noteikto valūtas kursu. Diskontēšanā tiek
izmantotas EURIBOR un LIBOR procentu likmes.
Liabilities to other credit institutions and customers
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is
the amount repayable on demand, as they are largely due on demand. The estimated fair value of overnight
deposits is their carrying amount. The estimated fair value of fixed interest-bearing deposits not quoted in an
active market is based on discounted cash flows using interest rates for new deposits with similar remaining
maturities.

(6) Derivatives
Derivatives include foreign currency swaps and forwards. As at 31 December 2017 and 2016 all derivatives of the
Group and the Bank were classified as financial instruments held for trading.
Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as
liabilities when their fair value is negative.
Changes in the fair value of derivatives are recognised immediately in the income statement.
Although the Group and the Bank trades in derivative instruments for risk hedging purposes, the Group and the
Bank does not apply hedge accounting.
A S BlueOrange Bank | Smilšu iela 6, Rīga, LV-1050, Latvija | Registration No. 40003551060 | SWIF T code: CBBRLV22 
Phone: +371 67 031 333 | WhatsApp: +371 26 552 244 | E-mail: [email protected] | www.blueorangebank.com
AS BlueOrange Bank Group Consolidated and Bank Separate Annual Report for the year ended 31 December 2017
NOTES TO THE GROUP CONSOLIDATED AND BANK SEPAR ATE FINANCIAL STATEMENTS 30

(7) Repo transactions

Repo transactions are recognized as financing transactions. When the Bank or the Group is the seller of
securities, securities continue to be recognized on the statement of financial position. Proceeds from the sale
are recognized as a liability to the purchaser of the securities. When the Bank or the Group is the purchaser
of securities, the purchased securities are not recognized in the statement of financial position. The amount
paid for securities is recognized as a loan provided to the seller. The Group is involved in two types of such
transactions – classic repo and buy/sellback transactions. The result of repo and buy/sellback transactions is
recognized in the income statement on an accrual basis as interest income or expense.
Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts receivable under
reverse repo transactions. The differences between the purchase and resale prices are treated as interest
income and accrued over the term of the reverse repo agreement using the effective interest method.

(8) Investment property

Investment property is property held either to earn rental income or for capital appreciation or for both, but
not for sale in the ordinary course of business, use in the production or supply of goods or services or for
administrative purposes.
If the use of the property has been changed, investment properties are reclassified to property and equipment.
Investment property is initially measured at cost. Subsequently investment property is carried at its cost less any
accumulated depreciation and any accumulated impairment losses. The useful life of investment property has
been estimated at 20 years with the annual depreciation rate of 5%.

(9) Repossessed assets

In the normal course of business the Group and the Bank occasionally take title to property and other assets
that originally were pledged as security for a loan. When the Group and Bank acquires (i.e. gains a full title to) an
asset in this way, the asset’s classification follows the nature of its intended use by the Group and Bank. When
the Group or the Bank is uncertain of its intentions with respect to land and buildings that it has repossessed,
those properties are classified as investment property. Other types of collateral are classified as other assets or
property, plant and equipment.

(10) Property and equipment

Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.
Current repair and maintenance costs are charged to the income statement as incurred. Capital repairs of
property and equipment are added to property and equipment at cost, and its useful life is extended. Upon
increasing the carrying amount of an item of property and equipment by expenses incurred to replace a material
component, the replaced component is derecognised according to the derecognition requirements.
Items of property and equipment are derecognised when disposed or when no economic benefits are expected
from the use or disposal of these items in the future. Gains or losses from derecognition of items of property
and equipment are determined as the difference between the proceeds from disposal and the net carrying
amount of the asset at the date of disposal, and are recognised in the income statement.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the
individual assets. Depreciation is calculated from the date of acquisition or, in respect of internally constructed
assets, from the time an asset is completed and ready for use. Where an item of property and equipment
comprises major components having different useful lives, they are accounted for as separate items of property
and equipment.
Depreciation methods, useful lives and residual amounts are reviewed at each reporting date.
Land and buildings
The cost of land and buildings disclosed in the financial statements is their assumed fair value measured at the

date of acquisition. Subsequent measurement is carried out on a cost basis similar to other items of property and
equipment. Land is not depreciated.
Construction in progress and capital repairs of real estate properties include costs directly attributable to
construction in progress, including a corresponding proportion of direct overheads incurred during the
establishment of the item of property and equipment. Depreciation of such assets is calculated from the date
when the assets are put into operation.
For real estate properties that are in use at the acquisition date, depreciation is not discontinued after
reconstruction begins. Depreciation is calculated assuming the useful life of the building is 20 years and the
annual depreciation rate is 5%.
Corporate assets
Buildings that include the headquarters of the Group and the Bank are classified as corporate assets. Corporate
assets are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated
assuming the useful life of the building is 20 years and the annual depreciation rate is 5%.
Leasehold improvements
Depreciation of leasehold improvements is calculated over the remaining period of lease. Depreciation is
calculated from the date when leasehold improvements are completed and ready for use.
Useful lives of vehicle and other property and equipment
The estimated useful lives are as follows:

Furniture and equipment 20%

Computers 25%
Others 20%
Vehicle 10%

(11) Intangible assets

Intangible assets, except goodwill, are identifiable non-monetary assets without physical substance (licenses,
software that is separately identifiable from electronic devices and others) held for rendering of services or
other purposes if it is expected that an economic benefit attributable to these assets will flow to the Group and
the Bank.
Intangible assets are recorded at cost less accumulated amortization and amortized to the profit or loss in equal
amounts over the useful life of the intangible asset. The annual amortization rate for software is 20%.

(12) Recognition of income and expenses

All significant categories of income and expenses, including interest income and expenses, are recognized on an
accrual basis.
Interest income and expenses are recognized in the income statement based on the effective interest rate of the
asset/liability. The effective interest rate is the rate that exactly discounts the estimated future cash payments
and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period)
to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group
and Bank estimate future cash flows considering all contractual terms of the financial instruments, but not
future credit losses. Interest income and expenses include discount or premium amortization or other difference
between the carrying amount of an interest bearing instrument and its value on the maturity date calculated
based on the effective interest rate method.
Fees and commissions (excluding commissions for long-term loans issued) are accounted for when earned and/
or incurred. Income and expenses that refer to the reporting period are reflected in the income statement
regardless of the date of receipt or payment. Loan origination fees together with the related direct costs, are
deferred and amortised to interest income over the estimated life of the financial instrument using the effective
interest rate method.

Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realized
and unrealized fair value changes, interest, dividends and foreign exchange differences.

(13) Credit liabilities

In the normal course of business, the Group and the Bank enter into credit related commitments, comprising
undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.
Financial guarantees are contracts that require the Group and the Bank to make specified payments to reimburse
the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the
terms of a debt instrument or loan agreement.
A financial guarantee liability is recognized initially at fair value net of associated transaction costs, and is
measured subsequently at the higher of the amount initially recognized less cumulative amortization or the
amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other
credit related commitments are recognized when losses are considered probable and can be measured reliably.
Financial guarantee liabilities and provisions for other credit related commitments are included within other
liabilities.

(14) Taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in the income
statement except to the extent that it relates to the items recognized in other comprehensive income or directly
in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively
enacted at the reporting date and any adjustment to tax payable in respect of previous years.
Deferred tax is provided for temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for
the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or
liabilities in a transaction that is not a business combination and that affects neither accounting nor tax profit,
and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the
foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the
reporting date.
A deferred tax asset is recognized to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilized. Deferred tax assets are reviewed at each reporting
date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Changes to the Corporate Income Tax legislation effective since 1 January 2018
As of 1 January 2018, the new Law on Corporate Income Tax of the Republic of Latvia comes into effect, setting
out a conceptually new regime for paying taxes. As of the date, the tax rate will be 20% instead of the current
15%, the taxation period will be one month instead of a year and the taxable base will include:
- distributed profit (dividends calculated, payments equivalent to dividends, conditional dividends) and
- conditionally or theoretically distributed profit (non-operating expenses, doubtful debts, excessive
interest
payments, loans to related parties, decrease of income or excessive expenses which are incurred by entering
into transactions at prices other than those on the market that should be calculated using the methodology
determined by the Cabinet of Ministers, benefits bestowed by the non-resident upon its staff or board (council
members) regardless of whether the receiving party is a resident or a non-resident, if they relate to the operation
of a permanent establishment in Latvia, liquidation quota).
The use of tax losses carried forward from previous periods is limited: it will be possible to utilise these losses
to decrease the amount of tax calculated on dividends in the reporting period by not more than 50%. It will be
possible to carry forward unused tax losses and utilise them in the previously described manner only until 2022.

Deferred tax
According to the new Law on Enterprise Income Tax of the Republic of Latvia adopted on 28 July 2017, and
effective from 1 January 2018, a 20% rate is only applied to distributed profits while a 0% rate is expected to
be applied to undistributed profits. Therefore, deferred tax assets and liabilities are recognisable at nil amount.
This principle has been applied in the Group’s and Bank's financial statements for the year ended 31 December
2017.
The carrying amounts of deferred tax assets and liabilities were reversed and changes were charged to profit or
loss in the reporting period, except when deferred tax had previously been recognised in relation to revaluation
reserves.

(15) Dividends
The Group and the Bank receive dividends from the equity instruments that are recorded to income when the
right to receive payment is established. Proposed dividends are recognized in the financial statements only
when approved by the shareholders.

(16) Cash and cash equivalents

Cash and cash equivalents are cash on hand and amounts due from the Bank of Latvia and other credit institutions
with initial maturities of up to 3 months, except liabilities towards the Bank of Latvia and other credit institutions
with initial maturities of up to 3 months.

(17) Leases
Operating lease (the Group and the Bank as a lessee)
Payments made under operating leases are recognized in profit or loss statement on a straight-line basis over
the term of the lease.
Operating lease (the Group as lessor)
An operating lease is a lease other than a finance lease. Assets leased out under an operating lease, are presented
within property and equipment in the statement of financial position, less accumulated depreciation. They are
depreciated over their expected useful lives on a basis consistent with similar owned Property and equipment.
Income is recognised on a straight-line basis over each lease term.

(18) Provisions
Provisions are recognized in the statement of financial position when the Group and the Bank have a present
legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the
obligation can be made.
Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current
market assessments of the time value of money and, where appropriate, the risks specific to the liability.

(19) Short-term employee benefits

Short term employee benefits, including salaries and social security contributions, bonuses and vacation
benefits are included in net operation expenses on an accrual bases. The Group and the Bank pay fixed security
contributions to the State Social Fund on behalf of its employees during the employment period in accordance
with local legal requirements and the Group and the Bank will have no obligations to pay further contributions
relating to retired employees.

(20) Assets under management

Assets managed by the Bank and the Group on behalf of customers are not treated as assets of the Bank and the
Group. The Group and the Bank assume no risk in relation to these assets.

(21) New standards and interpretations

(a) Changes in accounting policies
Except for the changes below, the Group and the Bank have consistently applied the accounting policies set out
in Note 3 to all periods presented in these consolidated and separate financial statements.
The Group and the Bank have adopted the following new standards and amendments to standards, including
any consequential amendments to other standards, with a date of initial application of 1 January 2017.
- Amendments to IAS 7
The amendments require new disclosures that help users to evaluate changes in liabilities arising from financing
activities, including changes from cash flows and non-cash changes (such as the effect of foreign exchange gains
or losses, changes arising for obtaining or losing control of subsidiaries, changes in fair value). For the disclosure
please refer to Note 22, 30 and 33.
The following guidance with effective date of 1 January 2017 did not have any impact on these consolidated and
separate financial statements:
(b) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are effective for annual periods
beginning after 1 January 2017, and have not been applied in preparing these consolidated financial statements.
Those which may be relevant to the Group and the Bank are set out below. The Group and the Bank do not plan
to adopt these standards early.

(i) IFRS 9: Financial instruments (effective for annual periods beginning on or after 1 January
2018)
In July 2014, the International Accounting Standards Board issued the final version of IFRS 9 Financial Instruments.
It replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods
beginning on or after 1 January 2018, with early adoption permitted. The Group plans to apply IFRS 9 as of 1
January 2018.
In October 2017, the IASB issued Prepayment Features with Negative Compensation (Amendments to IFRS 9).
The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption
permitted.
The Bank and the Group adopted the following IFRS 9 implementation strategy and process:
The IFRS 9 implementation process has been managed by a working group including representatives of
risk management, financial, operational and IT units. The working group meets once a week to discuss key
assumptions, approve relevant decisions and follow up on the status implementation progress. To support
timely decision making, The Bank’s and the Group’s senior management also receive regular updates on the
implementation progress.
As at the date of approval of these separate and consolidated financial statements, the Bank and the Group
have substantially completed their transition date assessment of the effects of the IFRS 9 adoption and are now
working on the design, setup and refining of the underlying models, systems, processes and internal controls.

Classification and measurement

From classification and measurement perspective, the new standard will require all financial assets, except
equity instruments and derivatives, to be assessed based on an approach taking into consideration the business
model in which the assets are managed and their cash flow characteristics. The existing classification categories
of IAS 39 are to be replaced by the following three categories: Fair value through profit or loss (FVTPL), fair value
through other comprehensive income (FVOCI), and amortised cost. The new standard eliminates the existing
IAS 39 categories of held to maturity, loans and receivables and available for sale.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated
as at FVTPL:
It is held within a business model whose objective is to hold assets to collect contractual cash flows, and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and
interest (SPPI) on the principal amount outstanding.
A financial asset is measured at FVOCI only if tit meets both of the following conditions and is not
designated as at FVTPL:
It is held within a business model whose objective is achieved by both collecting contractual cash flows
and selling financial assets, and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured
at FVTPL. IFRS 9 also allows entities to irrevocably designate a financial asset that otherwise meets the
requirements to be measured at amortised cost or FVOCI as FVTPL, if doing so eliminates or significantly reduces
an accounting mismatch that would otherwise arise.
On initial recognition, an equity instrument other than held for trading, may be irrevocably designated as FVOCI,
with no subsequent reclassification of profit or losses to the income statement.
The accounting for financial liabilities is to be largely the same as under the existing requirements of IAS 39,
except for the treatment of gains or losses arising from the Bank’s and the Group’s own credit risk relating to
liabilities designated as FVPL. Such movements will be presented in OCI with no subsequent reclassification to
profit or loss, unless an accounting mismatch in profit or loss would arise.

Business model assessment

The Bank and the Group made an assessment of the objective of the business model in which a financial asset is
held at portfolio level because this best reflects the way the business is managed and information is provided to
management. The information that is considered includes:
the stated policies and objectives for the portfolio and the operation of those policies in practice, including
whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular
interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are
funding those assets or realising cash flows through the sale of assets;
how the performance of the portfolio is evaluated and reported to the Bank’s and the Group’s management;
the risks that affect the performance of the business model (and the financial assets held within that
business model) and how those risks are managed;
the frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations
about future sales activity. However, information about sales activity is not considered in isolation, but as
part of an overall assessment of how the Bank and the Group’s stated objective for managing the financial
assets is achieved and how cash flows are realised.
Financial assets that are held for trading and those that are managed and whose performance is evaluated on
a fair value basis will be measured at FVTPL because they are neither held to collect contractual cash flows nor
held both to collect contractual cash flows and to sell financial assets.

Impairment of financial assets, loan commitments and financial guarantee contracts

IFRS 9 will also fundamentally change the loan loss impairment methodology. The standard will replace IAS 39’s
“incurred loss” model with a forward-looking ”expected credit loss” (ECL) model. The Bank and the Group will be
required to recognise an impairment allowance for expected credit losses for all loans and other debt financial
assets not held at FVTPL, together with loan commitments and financial guarantee contracts. Investments in
equity instruments are outside the impairment requirements, as they are accounted for either at FVTPL or at
FVOCI.

IFRS 9 requires a loss allowance to be recognized at an amount equal to either 12-month ECLs or lifetime ECLs.
Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial
instrument, whereas 12-month ECLs are the portion of ECLs that result from default events that are possible
within the 12 months after the reporting date.
The Bank and the Group will recognize loss allowances at an amount equal to lifetime ECLs, except financial
instruments for which credit risk has not increased significantly since initial recognition, for which the amount
recognized will be the 12-month ECLs:
Accordingly, the Bank and the Group have established a policy to perform an assessment at the end of each
reporting period as to whether a given asset’s credit risk has increased significantly since initial recognition. When
determining whether the credit risk on a financial instrument has increased significantly since initial recognition,
the Bank and the Group will consider reasonable and supportable information that is relevant and available
without undue cost or effort, including both quantitative and qualitative information and analysis based on the
Bank’s and the Group’s historical experience and forward-looking information. The Bank and the Group will
primarily identify whether a significant increase in credit risk has occurred for an exposure by comparing the
remaining lifetime probability of default (PD) as at the reporting date, with the remaining lifetime PD for this
point in time that was estimated on initial recognition of the exposure.
The Bank and the Group will estimate ECLs based on a probability-weighted estimate of the present value
of all cash shortfalls over the remaining expected life of the financial asset, i.e. the difference between: the
contractual cash flows that are due to the Bank and the Group under the contract, and the cash flows that they
expect to receive, discounted at the effective interest rate of the loan.
The Bank and the Group are planning to group their loans into Stage 1, Stage 2 and Stage 3, based on the applied
impairment methodology, as described below:

Stage 1 – Performing loans: when loans are first recognized, the Bank and the Group recognize an
allowance based on twelve months expected credit losses. Under IAS 39, the Bank and the Group
recognized an allowance for incurred But Not Identified (IBNI) impairment losses. The change is expected
to increase the impairment allowance compared to the current IBNI approach.
Stage 2 – Loans with a significant increase in credit risk: when a loan shows a significant increase in credit
risk since initial recognition, the Bank and the Group recognize an allowance for the lifetime expected
credit loss. Since this is a new concept compared to IAS 39, it will result in a substantial additional increase
in the allowance, as most such assets are not considered to be credit-impaired under IAS 39.
In addition, a significant increase in credit risk is assumed to have taken place if the borrower falls more
than 30 days past due in making its contractual payments, an alarm signal is reported concerning the loan
that indicates a significant increase in credit risk, the Bank and the Group expect to grant the borrower
forbearance, or the facility is placed on their watch list.
Stage 3 – Impaired loans: Financial assets will be recognized in Stage 3 when there is objective evidence
that the loan is impaired. The lifetime expected credit losses will be recognized for these loans and in
addition, the Bank and the Group will accrue interest income on the amortised cost of the loan net of
allowances. The criteria of the objective evidence of impairment are the same as under the current IAS 39
methodology, and accordingly, the Bank expects the population to be generally the same under both
standards. The individual impairment allowance will continue to be calculated on the same basis as under
IAS 39, and collateral values will be adjusted to reflect the amounts that can be expected to be realized.
The Bank and the Group will recognize impairment for FVOCI debt securities as applicable, depending on whether
they are classified as Stage 1, 2 or 3, as explained above. However, the expected credit losses will not reduce
the carrying amount of these financial assets in the statements of financial position, which shall remain to be
stated at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at
amortised cost will be recognized in OCI as an accumulated impairment amount, with a corresponding charge
to profit or loss.
When estimating lifetime ECLs for undrawn loan commitments, the Bank and the Group will estimate the expected
portion of the loan commitment that will be drawn down over the expected life of the loan commitment, and,
for that portion, will calculate the present value of cash shortfalls between the contractual cash flows that are
due to the Bank and the cash flows that the Bank expects to receive.

For financial guarantee contracts, the Bank and the Group will estimate their lifetime ECLs based on the present
value of the expected payments to reimburse the holder for a credit loss that is incurred less any amounts that
the guarantor expect to recover from the holder, the debtor or any other party.

Forward-looking information
The Bank and the Group will incorporate forward-looking information in their assessment of significant
increase in credit risk and the measurement of ECLs. In this process, they plan to use statistical data on official
macroeconomic indicators as the basis on which to adjust the relevant probability of default. Both the Risk and
Finance management teams will need to approve the forward-looking assumptions before they are applied for
different scenarios.
Limitation of estimation techniques
The models applied by the Bank and the Group may not always capture all characteristics of the market at a point
in time as they cannot be recalibrated at the same pace as changes in market conditions. Interim adjustments are
expected to be needed until the base models are updated. Although the Bank and the Group will use data that
are as current as possible, models used to calculate ECLs will be based on data that are one month in arrears and
adjustments will be made for significant events occurring prior to the reporting date.
Capital management
Regulation (EU) 2017/2395 of the European Parliament and of the Council amending Regulation (EU) No 575/2013
as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and
for the large exposures treatment of certain public sector exposures has entered into force. The Bank decided
to apply the transitional arrangements of the Regulation to mitigate the impact of the introduction of IFRS 9 on
own funds.

Transition and estimated adjustments associated with the adoption of IFRS 9

As at the date of approval of these separate and consolidated financial statements, the Bank and the Group
are in the final stages of the assessment of the estimated adjustment of the adoption of IFRS 9 on the opening
balance of the Bank’s and the Group’s equity as at 1 January 2018.
Among other things, the Bank and the Group have performed their transition date SPPI testing for all financial
asset portfolios and believe that the testing will not present significant challenges as to the Bank’s ability to
identify correctly the attributes of SPPI for all the financial assets.
Having completed its initial assessment, the Bank and the Group concluded that:
The majority of loans and advances to the Bank, loans and advances to customers, cash collateral for
reverse repo agreements and balances with financial institutions that are classified as loans and receivables
under IAS 39 are expected to be measured at amortised cost under IFRS 9.
Financial assets and liabilities held for trading and financial assets and liabilities designated at FVTPL are
expected to continue to be measured at FVTPL.
The majority of the debt securities classified as available for sale under IAS 39 are expected to be measured
at FVOCI.
Debt securities classified as held to maturity are expected to continue to be measured at amortised cost.
In overall terms, any movements between categories of financial instruments under IAS 39 and IFRS 9 are not
expected to have a material effect on the separate and consolidated financial statements of the Bank and the
Group, respectively.
Accordingly, substantially all of the estimated impact is expected to be related to the implementation of the new
impairment requirements, and will come from the release of the existing credit loss allowances and recognition
of new allowances in line with IFRS 9, resulting in an estimated net increase of EUR 1.5 million for the Group and
the Bank. The increase is attributed mainly to loans and off-balance-sheet commitments, with a corresponding
reduction in capital and reserves. In accordance with the performed assessment, the effect of modification is
insignificant and therefore is not reflected in the financial statements.

The above assessment is still preliminary because not all transition work has been finalized, as previously
discussed Also, the new accounting policies, assumptions, judgments and estimation techniques employed are
subject to change until the Bank and the Group finalize their first separate and consolidated financial statements
that include the date of initial application.
Changes in accounting policies resulting from the adoption of IFRS 9 will generally be applied retrospectively.
However, the Group and the Bank is using the exemption from restatement of prior period comparatives to
reflect changes in classification and measurement (including impairment) and changes in the carrying amounts
of financial assets and financial liabilities caused by the implementation of IFRS 9 are charged to retained
earnings and reserves as at 1 January 2018.

(ii) IFRS 15 Revenue from contracts with customers (Effective for annual periods beginning on or
after 1 January 2018. Earlier application is permitted)
The new Standard provides a framework that replaces existing revenue recognition guidance in IFRS. Entities
will adopt a five-step model to determine when to recognise revenue, and at what amount. The new model
specifies that revenue should be recognised when (or as) an entity transfers control of goods or services to a
customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are
met, revenue is recognised 1) over time, in a manner that depicts the entity’s performance; or 2) at a point in
time, when control of the goods or services is transferred to the customer. IFRS 15 also establishes the principles
that an entity shall apply to provide qualitative and quantitative disclosures which provide useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from a contract with a customer. The management does not expect that the new Standard, when initially
applied, to have a material impact on the Group and Bank’s financial statements. The timing and measurement
of the Group and Bank’s revenues are not expected to change significantly under IFRS 15 because of the nature
of Group and Bank’s operations and the types of revenues it earns.

(iii) IFRS 16 Leases – (Effective for annual periods beginning on or after 1 January 2019. Earlier
application is permitted if the entity also applies IFRS 15)
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-
use (ROU) asset representing its right to use the underlying asset and a lease liability representing its obligation
to make lease payments. There are optional exemptions for short-term leases and leases of low-value items.
Lessor accounting remains similar to the current standard- i.e. lessors continue to classify leases as finance or
operating leases.
IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions
Involving the Legal Form of a Lease.
The standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for
entities that apply IFRS 15 at or before the date of initial application of IFRS 16.
The Group and the Bank have started an initial assessment of the potential impact on its consolidated and
separate financial statements. So far, the most significant impact identified is that the Group and the Bank
will recognise new assets and liabilities for its operating leases of office premises. In addition, the nature of
expenses related to those leases will now change because IFRS 16 replaces the straightline operating lease
expense with a depreciation charge for ROU assets and interest expense on lease liabilities. The Group and the
Bank have not yet decided whether they will use the optional exemptions. The Group and the Bank are also in
the process of assessing the impact on its CET1 ratio, particularly in respect of ROU assets in leases where the
Group and the Bank are as lessees.

Transition
The Group and the Bank currently plan to apply IFRS 16 initially on 1 January 2019. As a lessee, the Group and the
Bank can either apply the standard using a:

retrospective approach; or
modified retrospective approach with optional practical expedients.

The lessee applies the election consistently to all of its leases. The Group and the Bank have not yet determined
which transition approach to apply. As a lessor, the Group is not required to make any adjustments for leases
except where it is an intermediate lessor in a sub-lease.
The Group and the Bank have not yet quantified the impact on its reported assets and liabilities of the adoption
of IFRS 16. The quantitative effect will depend on, inter alia, the transition method chosen, the extent to which
the Group and the Bank use the practical expedients and recognition exemptions, and any additional leases
that the Group and the Bank enter into. The Group and the Bank expect to disclose its transition approach and
quantitative information before adoption.

4. RISK MANAGEMENT
Within the framework of the internal control system, the Group and the Bank have developed and follow the risk
management policy or fundamental principles approved by the Council, which are defined below:
1) general guidelines observed by the Group and the Bank in their activities aimed at decreasing all types of risks
which may lead to losses;
2) description of risk transactions and other risks to which the Group and the Bank are exposed;
3) identification and management of the significant risks, including measurement, evaluation, control, and preparation
of risk reports;
4) setting limits and restrictions for risk transactions together with regular control and development;
5) updating of normative documents regarding the risk management process according to market changes.
The risk management policy describes and determines the aggregate of measures to ensure that the possibility
of suffering losses is minimized in the event the invested resources are not repaid in due time or the Bank or the
Group suffers other losses.
The development of the risk management system as described by the risk management policy is ensured by the
Management Board of the Bank, the key decisions are made by the Investment Committee, Credit Committee,
Non-financial Risk Management Committee and Customer Activity Compliance Control Committee according
to their regulations. Risk Officer is responsible for the overall control and monitoring of the risk management
system. Risk management on a daily basis is ensured by independent risk management departments. The risk
management system is monitored by the Internal Audit Service on a regular basis is being continuously developed
pursuant to the development of the Group and the Bank and activities on financial markets. Risk management is
carried out both on the Group and Bank level.

(1) Credit risk

Credit risk is the risk of potential loss resulting from the non-fulfilment of contractual obligations by the Group’s
or the Bank’s debtor or counterparty.
Credit risk is managed in accordance with the Credit Risk Management Policy approved by the Council. This
policy details the basic principles of credit risk management, identification, assessment, mitigation and control.
The management of risks related to ordinary loans involves the assessment of the potential borrower’s credit
standing that is performed by the Financial Analysis and Risk Management Department. Decisions on granting
loans are made by the Credit Committee based on the above analysis and evaluation of collateral. Subsequent
to loan granting, the Financial Analysis and Risk Management Department performs a regular analysis of the

borrower’s financial position, which enables the Bank and the Group to take prompt action in the case of
deterioration of the borrower’s financial position.
Credit risk that is related to inter-bank operations (or operations with financial institutions), including the credit
risk related to inter-bank settlements and the Bank's investments in debt securities, is controlled by the Bank’s
Investment Committee that sets limits for transactions with each counter party and issuer.
The Bank and the Group monitor the concentration of significant assets, liabilities, as well as contingent liabilities
and commitments’ credit risk by geographical regions (i.e. countries, groups of countries, specific regions within
the countries etc.), customer groups (i.e. central governments, local authorities, state enterprises, private
enterprises, private individuals, etc.) and industries. Credit risks are presented in Note 43.

(2) Currency risk

Foreign exchange risk is the risk of potential loss as a result of the revaluation of assets, liabilities, as well as
contingent liabilities and commitments denominated in foreign currencies due to change in exchange rates.
The Bank and the Group continuously monitor the open positions of foreign currencies and regularly assesses
the structure of assets and liabilities by currency.
An analysis of sensitivity of the Bank’s net profit or loss for the year and comprehensive income to changes in the
foreign currency exchange rates based on positions existing as at 31 December 2017 and 2016 and a simplified
scenario of a 20% change in the USD to EUR exchange rates is as follows:
2017 2016
EUR’000 Shareholders’ Shareholders’
Profit or loss Profit or loss
equity equity
20% appreciation of USD against EUR 17 17 61 61
20% depreciation of USD against EUR (17) (17) (61) (61)
An analysis of the foreign currency position is presented in Note 41.

(3) Interest rate risk

Interest rate risk is related to potential losses incurred by the Group and the Bank due to movements in interest
rates.
For the purpose of controlling the interest rate risk, the Investment Committee performs regular analyses of
assets and liabilities by maturity and type of interest. A change of interest rates by 100 basis points would result
in the following changes in profit or loss and capital and reserves:
2017 2016
EUR’000 EUR’000
EUR 2 403 1 642
USD 703 1 780
The interest reprising analysis is disclosed in Note 42.

(4) Debt securities price risk

Debt securities price risk is the potential loss that may arise to the debt securities included in the trading portfolio
due to the decline in market prices as a result of changes in market factors.
The debt securities price risk is managed by the Bank by setting limits on the total amount of the trading
portfolio, as well as purchasing debt securities with relatively short maturities that are less sensitive to price risk.

2017 2016
EUR’000 Pārējie Pārējie
Peļņa vai Peļņa vai
visaptverošie visaptverošie
zaudējumi zaudējumi
ienākumi ienākumi
10% increase in securities prices 825 5 366 296 6 801
10% decrease in securities prices (825) (5 366) (296) (6 801)

(5) Liquidity risk

Liquidity risk is the risk of potential loss as a result of sales of assets or acquisition of resources at unfavourable
prices in order for the Group and the Bank to fulfil its liabilities to creditors and depositors.
The Bank focuses on a conservative approach to liquidity management. The Bank allocates funds (attracted
mainly from deposits) to assets in order to maintain an asset structure that is appropriate to support the Bank’s
operations (executing of customers’ transactions) and comply with regulatory requirements concerning the
liquidity ratio even in case of a significant outflow of customer deposits or a significant decrease in liquidity on
the securities market.
Liquidity risk management procedures are described in the Liquidity Management Policy and consist of several
components: liquidity risk indicator system, balance sheet planning, stress testing, and limits for investments in
assets of limited liquidity.
The purpose of liquidity risk indicators is to reflect the actual level of the Bank's liquidity risk and quickly identify
any increase in liquidity risk. The Bank's Liquidity Risk Management Policy determines specific actions to improve
the Bank's liquidity position when liquidity risk indicators reach certain levels.
The aim of liquidity risk stress testing is to measure the deficit or surplus of the Bank's liquid assets that may
occur due to significant outflows of customer deposits or a significant decrease in liquidity on the securities
market. Based on the results of stress testing, the Bank’s Investment Committee sets limits on investments in
assets of limited liquidity.
Details of the reported ratio of net liquid assets versus current liabilities at the reporting date were as follows:

2017 2016
As at 31 December 76.61% 70.03%

Net liquid assets include cash and cash equivalents, bonds and receivables from credit institutions net of current
liabilities.
Liquidity Coverage Ratio (LCR) at the reporting date was as follows:

2017 2016
As at 31 December 230.69% 303.60%

In accordance with ‘Normative regulations on establishing a capital and liquidity adequacy assessment process’
No. 199 of the FCMC, the Bank carries out the assessment of the liquidity reserve adequacy necessary for its
operations within the liquidity adequacy assessment process (ILAAP). Liquidity analysis is presented in Note 40.

(6) Country risk

Country risk is the risk of potential losses arising from transactions with residents of foreign countries (or their
securities) due to changes in the economic, political, and legal environment of the respective countries.
Before entering into transactions with residents of foreign countries, the Group and the Bank perform an
assessment of the influence of economic, social, political and legal circumstances on the residents’ ability to
fulfil their obligations.

(7) Operational risk

Operational risk is the risk of losses resulting from inadequate or improper internal processes, human and
systems error, or external events, including legal risk but excluding strategic and reputational risk.
The principles of managing operational risk at the Group and the Bank are implemented via internal regulations,
which stipulate:
The organizational structure, division of authorisations and principles of delegations, functional duties,
procedure for the exchange of information among the structural units and employees;
The order, conditions and procedures, and the accounting procedure, for operations and other transactions,
and the organisation of internal processes;

Compliance control regarding the limits set for banking operations and other transactions;
Regulations, procedures and processes for the functioning of information systems (technical,
informational, etc.);
Procedure for granting access rights to information and material assets;
Procedure for reporting and preparation of other information;
Procedure for motivating employees and other matters.
To ensure efficient conditions for the identification and assessment of operational risk at the Group and the
Bank, the Bank has established Operational Risk Management Board, which is responsible for training staff on
operational risk matters. The Operational Risk Management Board has an operational event data base in place
which helps receive information about operation risk events which enables appropriate recording, management
and addressing of risks.
A systemic approach is applied to the identification and management of risk pertaining to new financial services
and products as part of the approval process. This process involves all units engaged in control and support
functions together with units of the relevant business lines to carry out an assessment of a new financial service
or product in line with their business.
The Bank has also developed an action plan for various crisis situations. The Bank and the Group have set up an
independent “Internal Audit Service” (IAS) whose primary function is to ensure that the activities of the Bank and
the Group comply with effective laws and regulations, approved plans, policies and other internal documents
of the Bank and to review the conformity with the internal control procedures governing the functions of the
Group’s and the Bank’s departments.

(8) Management of money laundering and terrorist financing risk and the Customer Policy
(a) General Policy
The Group's and the Bank's existing business model has been to provide banking services to client portfolio that
involves substantial share of non-resident customers, thereby involving heightened risks of money laundering
and terrorism financing. Accordingly, the Group and the Bank devote significant efforts to ensuring compliance
with the relevant regulations on the prevention of money laundering and terrorism financing, both international
and specific to the Republic of Latvia. There is an approved by the management Money Laundering and Terrorism
Financing Risk Management Policy in place at the Bank that details the basic principles for the management
of money laundering and terrorism financing risk as well as the risk identification, mitigation and control
mechanisms. The Money Laundering and Terrorism Financing Risk Management Policy has been implemented
by means of approved by the management internal documents and an appropriate organisational structure
based on three-tier protection and control principles:
Tier 1 controls - effected by the employees of the business units attracting and servicing customers to
ensure compliance with the 'Know Your Customer' ('KYC') principle both at the customer acceptance
stage and during business relationships;
Tier 2 controls - effected by customer transaction monitoring and support units that perform an analysis
of customer acceptance and transactions using several tools, including automated ones, and monitor and
report on transactions, and
Tier 3 control - effected by the Internal Audit Service performing independent and regular assessments of
AML/CFT risk management practices.
The internal control system, built on the principle of segregation of duties and responsibilities between
structural units and employees, outlines requirements for decision-making, sets responsibilities for monitoring
of customer activities and the basis for the operations of the compliance unit. A Customer Compliance Control
Committee has been established for the organisation and control of the monitoring measures regarding the
overall internal control.
The primary goal of the above-mentioned policy is to lay down guidelines for initiating cooperation with
customers and matters of customer due diligence, requirements for the identification of customers and their
beneficial owners, analysis of their businesses and business partners. In addition to the customer identification

requirements, the Customer Policy requires relevant staff to conduct interviews, meet the customer or its
authorised representative(s) face-to-face and receive information from the customer necessary for the review.
Based on the information gathered during the customer due diligence, the initial risk grading is established
for the customer, to be then further automatically and independently reviewed by the risk scoring system
during the business relationship based on a number of risk factors. As the relationship between the customer
and the Bank progresses, the Bank gathers information on the customer's actions. The customer's case file
is supplemented and updated on a regular basis with the results of research of the customer's actions and
transactions. In management's view, through knowing the customer's business activities, monitoring their
transactions and refraining from the performance of suspicious financial transactions, the Group and the Bank
minimize the risk that the Group and the Bank may get involved in potential laundering of proceeds derived from
criminal activity and terrorism financing.

(b) Implementation of the action plan in response to the results of the reviews conducted in 2016 by US
consultants
Following recommendations of the Financial and Capital Market Commission ("the Commission") in 2016, the
Bank entered into an agreement with a US advisory firm, Lewis Baach Kaufmann Middlemiss. The consultant's
task was to evaluate the Bank's anti money laundering and counter terrorism financing and sanctions programme
for compliance with the US Bank Secrecy Act, Patriot Act, the OFAC sanctions program and the requirements of
other binding acts or regulatory guidance, and to identify gaps and recommendations for improvement.
The evaluation was focused on the following key areas: management and accountability in the anti money
laundering and counter terrorism financing programme, internal controls, training measures, independent
testing, and information systems used for anti money laundering and counter terrorism financing procedures.
A number of recommendations were included in the resulting report, based on which the Bank's Board of
Directors approved an action plan with measures aimed at improving the internal control system for anti money
laundering and counter terrorism financing in the area of customer transaction monitoring, risk assessment and
management, and to improve information systems.
The Bank started implementing the above action plan during the first half of 2017 and achieved improvements
in its internal control system and internal regulations, and provided additional training to staff. Among other
things, a decision was taken by the Board of Directors to implement two new information systems for monitoring
of customer transactions. Given the time-consuming nature of the implementation process, the expected
implementation completion of these new systems for customer monitoring was mid-2018.

(c) Customer due diligence and transaction monitoring deficiencies and a fine paid in 2017
At the beginning of 2017, the Commission carried out an off-site examination of payments made by certain of the
Bank's customers between 2008 and 2013. As a result of the examination, it was indicated by the Commission
that a number of transactions carried out by three of the Bank's non-resident customers appear to have been
carried out, and the Bank appears to have been used, to circumvent international sanctions. The Commission also
indicated that the Bank's internal control system did not include sufficient customer due diligence measures.
Consequently, the Commission initiated administrative proceedings .
In the course of the above proceedings, the Commission concluded that the Bank, along with a number of
other banks, was used to conduct criminal transactions by way of complicated transaction schemes aimed at
circumventing sanctions and using transfers between customers of banks of several countries. However, the
transfers, when executed, were not made by or received on behalf of persons included in the sanctions lists,
as admitted by the Commission. It was also recognised by the Commission that in the circumstances the
identification of a direct connection between the breach of the sanctions regime and the Bank's inadequate
customer due diligence procedures could not have been established. Accordingly, in the particular circumstances,
while the Bank was indirectly used to circumvent the sanction regime, no deliberate breach was identified in its
actions. The Bank's own internal investigation into the payment details did not reveal direct matches to persons
included in international sanctions lists.
In the course of the administrative proceedings, the Commission and the Bank signed an Administrative
Agreement, dated 26 June 2017, which effectively terminated the proceedings initiated by the Commission
and imposed a specific set of measures aimed at improving the Bank's internal control system. By signing

the Administrative Agreement, the Bank committed to further improving its internal control system over
the monitoring of customer transactions and compliance with international sanctions, which included the
commitment to conduct an independent review of the sanctions programme and consider purchasing a real-
time transaction-control system within a specified period of time. The Bank also agreed to pay a fine of EUR
35.6 thousand to the Latvian state. Entering into the Administrative Agreement represents the Bank's voluntary
decision to seek settlement and undertake improvements aimed at eliminating deficiencies in customer due
diligence and transaction monitoring.
In the wake of the above developments, in the second half of 2017, the Bank's Board of Directors approved
purchase of a real-time transaction-monitoring system, provided staff training on compliance with international
sanctions, improved its internal regulations, and was subjected to an independent review of its internal control
system for anti-money-laundering and counter-terrorism-financing and compliance with sanctions carried out
by an independent audit firm, as discussed below.

(d) Results of the independent review of the internal control system for AML/CTF conducted in 2017
and the resulting action plan
As discussed above, according to the Administrative Agreement signed in 2017 with the Commission, the
Bank undertook to commission an independent review of the Bank's internal control system for AML/CTF and
sanctions risk management. An independent audit firm was engaged by the Bank in September 2017 to conduct
this review, which was completed till the end of 2017. As a result of the review it was indicated that the Bank
should continue improving its internal control system, with the following measures to be taken:
improving corporate governance and introducing an internal requirement to conduct regular independent
external AML reviews and process quality assurance in the form of second line of defence AML controls,
and periodic testing of the transaction-screening system;
completing the implementation of all regulatory requirements set by the Commission and EBA (European
Banking Authority) guidance;
introducing a documented quality-assurance and follow-up process to manage AML/CTF risk and sanctions
risk;
supplementing the internal regulations with periodic testing of the transaction-monitoring system and
regular testing of the alert-generating system, and
improving the customer risk evaluation process by including evaluation of the indirect sanction risk factor.
Although the sanctions risk management principles have been described within the regulations already in force
at the Bank, the auditors believed that it would be more efficient to introduce a dedicated policy for sanctions
risk management.
After evaluating the results of the review, at the beginning of 2018, the Bank's Board of Directors approved an
additional action plan for improvement of the internal control system. The largest share of the measures are
to be performed in the first half of 2018 by making amendments to AML/CTF regulations and completing the
implementation of the new customer transaction monitoring systems, as discussed in (b) above.

(e) Review conducted by the FCMC in 2017

Further to the reviews outlined above, in the second half of 2017, the Commission conducted a full scope AML/CTF
review at the Bank in order to evaluate Bank's compliance with the Latvian AML/CTF Law and to verify whether
the Bank's practice was compliant with the regulations of the Commission and other relevant regulators. As at
the date of issue of these separate and consolidated financial statements, the Bank has received preliminary
results and findings of the review, prepared its responses and comments, which are intended to partly address
and satisfy the Commission's findings, and presented to the Commission a set of documents supporting the
Bank's position.
The key findings from the review concerned the following aspects of the internal control system for AML/CTF,
which require significant improvements:
gathering documents and information on the source of wealth of the customers' beneficial owners and
documentation of the evaluation process,

customer risk scoring,

customer due diligence process and documentation, and
customer transaction monitoring and documentation of decisions.
As at the date of issue of these separate and consolidated financial statements, the review by the Commission
has not yet been completed. Section 78(3) of the law currently in force on the prevention of laundering of
proceeds derived from criminal activity and terrorism financing stipulates that whenever the Commission
identifies a breach of AML/CTF laws and regulations it has the right to impose a fine on the Bank in the amount
of up to 10% of the its annual unconsolidated turnover based on the latest audited financial statements, not to
exceed EUR 5,000,000, and also to introduce measures limiting the Bank's operating activity, including the right
to revoke the banking licence.
Following the receipt of the final review report from the Commission, the Bank will approve further amendments
to its action plan for the elimination of the deficiencies. At the same time, the Bank has begun improving its
customer risk scoring system and introduced a set of new customer risk assessment factors in the customer risk
scoring system in April 2018.
The Bank continues improving its AML/CTF processes and policies and the Board of Directors expects that these
processes and the measures being taken to eliminate business with certain customer categories, as referred to
in Note 47 Going concern, will result in a significantly lower risk exposure in this area.

(9) Capital management

The Bank’s Capital Adequacy Management Policy requires maintenance of a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future development of the business as well as to ensure
the Bank’s capital at an adequate level for covering potential risks arising from current and future operations.
Under the capital requirements introduced by Regulation (EU) No 575/2013 of the European Parliament and of
the Council and the FCMC banks need to maintain a ratio of capital to risk weighted assets (“statutory capital
ratio”) above the prescribed minimum level. Although the minimum required level as at 31 December 2017 was
8%, according to a special request by the FCMC the Bank was required to ensure a higher capital adequacy of
11.60% during the period from 1 December 2017 to 30 November 2018 (13.75% for the period from 1 October
2016 to 30 November 2017). In addition to the above capital requirement for the overall risk coverage, the Bank
is required to maintain compliance with the total capital reserve requirement calculated in accordance with
Section 3522, 3523, 3524 or 3525 of the Credit Institution Law (Capital conservation buffer – 2.50%, institution-
specific countercyclical capital buffer – 0.02% (as at 31.12.2017), systemic risk buffer – 1% for risk transactions
with Estonian residents). The requirements of the total capital reserve should be met using Tier 1 capital.
As at 31 December 2017 the Bank and the Group were in compliance with the capital adequacy and the minimum
capital requirement specified in the Law On Credit Institutions and the rules of the FCMC, as well as in compliance
with the higher ratio required by the FCMC. For the calculation of capital adequacy refer to Note 44.
In addition to the calculation of the capital adequacy ratio in accordance with ‘Normative regulations on
establishing a capital and liquidity adequacy assessment process’ No. 199 of the FCMC, the Bank regularly
conducts its own internal capital adequacy assessment in order to ensure that it covers all the risks assumed by
the Bank and whether they are covered by the capital.

5. USE OF ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with IFRS as adopted by EU requires management to make
judgements, estimates and assumptions that affect the application of policies and reported amounts of assets
and liabilities, income and expenses. Although these estimates are based on management’s best knowledge of
current events and actions, the actual results ultimately may differ from those estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to the accounting
estimates are recognized in the period, in which the estimate is revised if the revision affects only that period, or
in the period of the revision and future periods if the revision affects both current and future periods.

Judgements
These consolidated and separate financial statements include financial information of subsidiaries. The annual
evaluation described in Note 3(1) (i) of the Group structure and identification of entities in which the Group has
control requires judgement to be made by the Group management.
These consolidated and separate financial statements are prepared on going concern basis. Please refer to Note
47 for further discussion on the application of going concern principle.

Key sources of estimation uncertainty:

(i) Allowances for doubtful debts
For financial assets carried at amortised cost, impairment is determined based on the accounting policy described
in Note 3.
Financial assets are evaluated for impairment individually for each counterparty and it is based upon management’s
best estimate of the present value of the cash flows that are expected to be received. In estimating these cash
flows, management makes judgements about the counterparty’s financial situation and potential net realizable
value of any underlying collateral. Each impaired asset is assessed individually and the Credit Risk Function
approves the workout strategy and the estimate of cash flows considered recoverable.
(ii) Valuation of financial instruments
The determination of fair value for financial assets and liabilities for which there is no observable market price
requires the use of valuation techniques as described in the accounting policies, Note 3. For financial instruments
that trade infrequently and have no observable prices, fair value is less objective, and requires varying degrees
of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and
other risks affecting the specific instrument. The Bank uses valuation models based on quoted market prices of
similar products.
To determine the amount of impairment loss the Bank’s management makes estimates of any expected changes
in future cash flows from a specific financial instrument based on an analysis of the financial position of the
issuer of the financial instrument.
(iii) Impairment of non-financial assets
The carrying amounts of the Group’s and Bank’s non-financial assets, other than deferred tax assets, are reviewed
at each reporting date to determine whether there is any indication of impairment. If any such indication exists,
the asset’s recoverable amount is estimated.
When measuring the recoverable value of the property or movable assets, management relies on external
valuations based either on income valuation method or comparative valuation method and assesses the
reliability of such valuation in light of the current market situation. Income method is based on discounted
estimated future cash flows from the property. Comparative method is based on recent market transactions
with comparable property.
Since the corporate assets, including headquarters, do not generate separate cash inflows, the recoverable
amount of an individual corporate asset cannot be determined unless management has decided to dispose of
the asset. If there is an indication that a corporate asset may be impaired, recoverable amount is determined
for the cash-generating unit or group of cash-generating units to which the corporate asset belongs, and is
compared with the carrying amount of this cash-generating unit or group of cash-generating units.
The value of a corporate asset, which cannot be reasonably and consistently attributed to cash-generating units,
identifies the smallest cash-generating unit the asset belongs to (in this case, most likely, the Bank or the Group
as a whole) and compares the carrying amount of this cash-generating unit, in which the corporate asset is
included, with its recoverable amount. An impairment loss is recognised if the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount.
A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are
independent from other assets and groups. Impairment losses are recognized in the income statement.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the
unit (group of units) on a pro rata basis.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value
less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses
recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or
no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine
the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized.
(iv) Recognition of deferred tax asset
A deferred tax asset is recognized to the extent that it is probable that taxable profit will be available against
which the deductable temporary differences can be recognized. According to the new Law on Enterprise Income
Tax of the Republic of Latvia adopted on 28 July 2017, and effective as of 1 January 2018, a 20% rate is only
applied to distributed profits while a 0% rate is expected to be applied to undistributed profits. Therefore,
deferred tax assets and liabilities are recognisable at nil amount in the Group and the Bank’s financial statements
for the year ended 31 December 2017.

6. NET INTEREST INCOME

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Interest income
Interest income on assets at amortized 8 328 8 328 7 752 7 752
cost:
Deposits with credit institutions 385 385 794 794
Loans and receivables 7 943 7 943 6 958 6 958
including interest income
on impaired loans 690 690 1 467 1 467

Interest income from securities at fair

value through profit or loss 379 379 414 414

Interest income from available-for-sale 325 325 445 445

financial assets
Interest income from held-to-maturity
securities 1 818 1 818 2 492 2 492

Total interest income 10 850 10 850 11 103 11 103

Interest expense
Interest expense from liabilities 489 489 440 440
measured at amortized cost:
Deposits 489 489 440 440
Interest expense on issued bonds 1 379 1 379 1 170 1 170
Payments to the Deposit Guarantee
Fund and other funds 909 909 882 882

Other interest expense 1 058 1 058 667 667

Total interest expense 3 835 3 835 3 159 3 159
Net interest income 7 015 7 015 7 944 7 944

7. NET COMMISSION AND FEE INCOME

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Fee and commission income
Payments 5 039 5 039 6 891 6 891
Corporate banking fee income 743 743 594 594
Securities transactions 2 344 2 344 1 614 1 614
Trust operations 1 142 1 142 707 707
Account servicing 2 498 2 501 3 116 3 120
Cash transactions and payment card 5 252 5 252 10 360 10 360
transaction
Total fee and commission income 17 018 17 021 23 282 23 286

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Fee and commission expense
Correspondent accounts 603 603 719 719
Cash transactions and payment card 4 025 4 025 6 849 6 849
transaction
Securities transactions 357 357 337 337
Total fee and commission expenses 4 985 4 985 7 905 7 905
Net fee and commission income 12 033 12 036 15 377 15 381

During the reporting year, commission fee income from servicing of customer payment operations and from
payment card servicing in the e-commerce business decreased significantly. The key reasons for this are the
AML requirements introduced in 2017 with regard to international customers. After implementation of stricter
requirements, the number and volume of customer transactions reduced significantly.

8. NET PROFIT/LOSS FROM TRADING AND REVALUATION OF FINANCIAL

INSTRUMENTS
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Net profit/(loss) from trading with
financial assets and liabilities held-for- 276 276 439 439
trading
Net profit from revaluation of financial 197 197 145 145
assets and liabilities
Net profit from sale of available-for-
sale financial assets (shares) – – 1 958 1 958

Net profit from trading and 473 473 2 542 2 542

revaluation of financial instruments

During 2016, Visa Inc. purchased Visa Europe shares from all European participating banks. As a result of this
sale the Bank realized a profit of EUR 1 958 thousand upon partial settlement in cash and partial deferred
consideration.

9. PROCEEDS FROM TRADING AND REVALUATION OF FOREIGN EXCHANGE

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Net profit from foreign exchange 7 888 7 888 7 331 7 332
transactions
Net profit/(loss) from revaluation of (3) (2) 50 48
foreign exchange
Net foreign exchange gains 7 885 7 886 7 381 7 380

10. OTHER OPERATING INCOME

2017 2016
Note Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Fines received 83 81 67 66
Profit from disposal of real estate 78 78 – –
Gain on disposal of property and 2 – 1 –
equipment
Dividends received 2 2 2 2
Social tax refund from the budget – – 30 30
Recovery of written-off assets 1 1 2 2
Gain from initial recognition of financial
asset 18 397 397 – –

Other 209 153 233 182

Total other operating income 772 712 335 282

11. ADMINISTRATIVE EXPENSES

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Salaries to the members of the Board 619 619 663 663
and Council
Staff remuneration 8 728 8 410 8 278 7 868
Compulsory state social security 2 192 2 133 2 045 1 983
contributions
Other staff costs 194 189 297 282
Communications and transport 368 349 500 456
Professional services 1 581 1 556 1 586 1 561
Rent, public utilities and maintenance 1 398 1 265 1 219 1 245
Depreciation and amortization costs 807 665 480 327
Computer network 631 631 431 431
Advertisement and marketing 409 408 134 131
expenses
Other taxes 911 814 813 733
Insurance 115 114 111 109
Audit fee 56 56 65 65
Other 826 420 529 221
Total administrative expenses 18 835 17 629 17 151 16 075

The average number of employees in the Group in 2017 was 349 (2016 – 311) and that in the Bank was 335
(2016 – 295).
In 2017, the auditor received a fee of EUR 56 thousand, of which EUR 50 thousand was for the audit of the
financial statements (consolidated annual report) and EUR 6 thousand for other audit related engagements.
In 2016, the fee amounted to EUR 65 thousand, of which EUR 52 thousand was for the audit of the financial
statements (consolidated annual report) and EUR 13 thousand for other audit related engagements.

a) Information on the remuneration by category of positions in 2017

Fixed remunera- Variable remunera-

Average number of Average number of
Group tion tion
employees employees
EUR’000 EUR’000
Board, Council 561 6 58 4
Material risk takers 1 719 50 289 31
Other employees 6 347 293 373 166
Total 8 627 349 720 201

Information on the remuneration by category of positions in 2017

Fixed remunera- Variable remunera-

Average number of Average number of
Bank tion tion
employees employees
EUR’000 EUR’000
Board, Council 561 6 58 4
Material risk takers 1 719 50 289 31
Other employees 6 029 279 373 166
Total 8 309 335 720 201

Information on the remuneration by category of positions in 2016

Fixed remunera- Variable remunera-
Average number of Average number of
Group tion tion
employees employees
EUR’000 EUR’000
Board, Council 637 6 26 3
Material risk takers 1 359 47 216 28
Other employees 6 101 258 602 220
Total 8 097 311 844 251

Information on the remuneration by category of positions in 2016

Fixed remunera- Variable remunera-
Average number of Average number of
Bank tion tion
employees employees
EUR’000 EUR’000
Board, Council 637 6 26 3
Material risk takers 1 359 47 216 28
Other employees 5 691 242 602 220
Total 7 687 295 844 251

b) Operating lease payments (Group)

31.Dec.2017 31.Dec.2016
’000 EUR ’000 EUR
Less than one year 45 298
Between one and five years 7 1
More than 5 years – –
52 299

The Group leases a number of premises under operating lease. The leases typically run for 1 to 5 years, with an
option to renew the lease after that date. None of the leases includes contingent rentals.
During the current year EUR 302 thousand was recognised as an expense in the profit or loss in respect of
operating leases (2016: EUR 382 thousand).
Operating lease payments (Bank)
31.Dec.2017 31.Dec.2016
’000 EUR ’000 EUR
Less than one year 94 380
Between one and five years 173 234
More than 5 years 620 467
887 1 081

The Bank leases a number of premises under operating lease. The leases typically run for 1 to 5 years, with an
option to renew the lease after that date. None of the leases includes contingent rentals.
During the current year EUR 366 thousand was recognised as an expense in the profit or loss in respect of
operating leases (2016: EUR 485 thousand).

12. OTHER OPERATING EXPENSES

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Membership fees 227 227 192 192
Fees for real estate management 21 11 117 15
Fines 37 37 1 1
Royalties for the use of a trademark 1 283 1 283 1 189 1 189
Other 208 493 177 636
Result of disposal of repossessed – – 20 20
movable property
Total other operating expenses 1 776 2 051 1 696 2 053

In 2017, as part of its operating activities the Bank made payments of EUR 1 283 thousand (2016: EUR 1 189
thousand) for the use of the registered trademarks BlueOrange and Baltikums to the owner of this trademark
(licensor).

13. IMPAIRMENT OF FINANCIAL AND NON-FINANCIAL ASSETS

2017 2016
EUR’000 EUR’000
Total allowances as at the beginning of the reporting period 15 158 7 579
Increase in the impairment allowance for loans 1 176 5 013
Increase in the impairment allowance for other assets 2 118 2 395
Release of allowances for other assets (167) –
Allowances for investments in associates – 63
Release of provisions for loans (2 597) (27)
Release of allowances for held-to-maturity financial assets – (139)
Impairment of goodwill – 564
Increase in the impairment allowance for non-fixed income securities 312 –
Increase in the impairment allowance for investment property 1 043 114
Change for the year 1 885 7 983
Loans written off during the year (543) (376)
Investment property written off during the reporting year (1 463) –
Other assets written off during the year (2 373) (44)
Change of allowances due to currency fluctuations (41) 16
Total allowance as at the end of the reporting period 12 623 15 158

Impairment of assets for the Bank

2017 2016
EUR’000 EUR’000
Total allowances as at the beginning of the period 15 406 8 018
Increase in the impairment allowance for loans 1 176 5 013
Increase in the impairment allowance for other assets 2 112 2 390
Increase in the impairment allowance for investment properties 850 –
Increase in the impairment allowance for investments in subsidiaries 700 490
Release of provisions for loans (2 597) –
Increase in the impairment allowance for non-fixed income securities 312 (27)
Release of allowances for other assets (167) (139)
Change for the year 2 386 7 727
Loans written off during the year (543) (376)
Investment property written off during the reporting year (1 463) –
Other assets written off during the year (2 373) (44)
Change of allowances due to currency fluctuations (41) 81
Total allowance as at the end of the reporting period 13 372 15 406

14. CORPORATE INCOME TAX

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Deferred tax (795) (795) 795 795
Corporate income tax (436) (430) (667) (658)
Total current year tax expense (1 231) (1 225) 128 137

The table below shows the reconciliation between the current tax expense and the theoretically calculated tax
amount using the basic tax rate, which was 15% in 2017 and 2016.

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Profit before tax 5 682 6 056 6 749 7 674
Theoretically calculated tax at rate 15% (852) (908) (1 012) (1 151)
Non-deductible expenses (817) (753) (778) (628)
Exempt income 1 233 1 231 1 123 1 121
Deferred tax changes (795) (795) 795 795
Total corporate income tax (1 231) (1 225) 128 137
Deferred tax assets and liabilities
Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes give rise to net deferred tax assets and liabilities as of 31 December
2017 and 2016.
The Group and the Bank

Assets Liabilities Net

EUR ’000
2017 2016 2017 2016 2017 2016
Property and equipment – – – (135) – (135)
Investment property – 597 – – – 597
Other assets – 333 – – – 333
Total deferred tax asset/(liabilities) – 930 – (135) – 795
According to the new Law on Enterprise Income Tax of the Republic of Latvia adopted on 28 July 2017, and
effective as of 1 January 2018, a 20% rate is only applied to distributed profits while a 0% rate is expected to be
applied to undistributed profits. Therefore, deferred tax assets and liabilities are recognisable at nil amount as
of 31 December 2017. The rate of tax applicable for deferred tax was 15% in 2016.

15. CASH AND DUE FROM THE CENTRAL BANK

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Cash 1 302 1 302 361 361
Balance with the Bank of Latvia
(including the minimum reserve 232 501 232 501 153 504 153 504
deposit)
Total 233 803 233 803 153 865 153 865
According to the regulations of the Financial and Capital Markets Commission, the total amount of funds on the
account with the Central Bank should not be less than the amount of the obligatory reserves calculated from the
average amount of customer deposits during the month. The obligatory reserve as at 31 December 2017 was
EUR 4 277 thousand (2016: EUR 5 676 thousand).

16. DEPOSITS WITH CREDIT INSTITUTIONS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Demand deposits with credit institutions
Credit institutions registered in Latvia 5 476 5 476 3 620 3 620
Credit institutions registered in OECD 40 581 40 581 72 658 72 658
countries
Credit institutions of other countries 66 466 66 438 42 608 42 569
Total demand deposits with credit
institutions 112 523 112 495 118 886 118 847

Loans issued to credit institutions 4 986 4 986 5 047 5 047

Term deposits with credit institutions 521 521 57 247 57 247
Total deposits with credit institutions 118 030 118 002 181 180 181 141
In 2017, the growth of the loan portfolio and low interest rates on the interbank market contributed to the
decrease in the amounts due on demand from credit institutions registered in OECD countries and term deposits
with credit institutions.
The Bank’s demand deposits with credit institutions based on rating agency ratings are as follows:
2017 2016
’000 EUR ’000 EUR
Rated from AAA to A- 55 169 95 682
Rated from BBB+ to BBB- 2 181 3 379
Rated from BB- to BB+ 19 978 21 928
Rated below BB- 10 061 15 522
Not rated 30 613 44 630
Total deposits with credit institutions 118 002 181 141

As at 31 December 2017, the Bank had correspondent accounts with 33 banks (2016: 43). The largest account
balances were with BANK OF CHINA – EUR 34 757 thousand (2016: EUR 27 231 thousand), with the total amount
exceeding 10% of total deposits with credit institutions.
As 31 December 2017, EUR 4,514 thousand was pledged with ED AND F MAN CAPITAL MARKETS LIMITED as a
security for customer derivative transaction contracts.

17. HELD-FOR-TRADING FINANCIAL ASSETS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Fixed income securities:
Eurobonds issued by other financial 2 062 2 062 471 471
institutions in Latvia
Eurobonds issued by companies and 1 959 1 959 1 305 1 305
credit institutions of OECD countries
Eurobonds issued by companies and
credit institutions of non-OECD 4 232 4 232 1 179 1 179
countries
Total 8 253 8 253 2 955 2 955

An analysis of the credit quality of held-for-trading financial assets. based on rating agency ratings where
applicable, is as follows:

2017 2016
EUR’000 EUR’000
Fixed income securities
-Corporate bonds and securities of credit institutions
Rated from AAA to A- 2 594 –
Rated from BB- to BB+ 2 722 1 505
Rated below BB- 2 937 524
Not rated – 926
Total corporate bonds and securities of credit institutions 8 253 2 955
Total fixed income securities 8 253 2 955

18. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

In January 2016, the Bank acquired claim rights of the Bank's client (the borrower), a Lithuanian company
SUBARE, against an insurance company S.C. Certasig – Societate De Asigurare Si Reasigurare S.A. (Certasig).
Claim rights are based on an insurance policy of EUR 1 200 000, which SUBARE used to insure the towing of the
ship Georg Buchner from Rostock in Germany to Klaipėda in Lithuania. The ship sunk on 30 May 2013 (an actual
insurance event occurred), however the insurance company (Certasig) refused to pay the claim.
Fair value of the claim right against the insurance company Certasig as estimated by the Bank is EUR 397 350.
This estimate is based on the assumptions made by the Bank’s specialists after consulting Thomas Cooper, a law
firm hired by the Bank.

19. AVAILABLE-FOR-SALE FINANCIAL ASSETS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Fixed income securities
Eurobonds issued by credit institutions 23 391 23 391 28 765 28 765
Eurobonds issued by central
governments of Republic of Latvia 4 082 4 082 – –

Eurobonds issued by central 2 001 2 001 5 329 5 329

governments of OECD countries
Eurobonds issued by central 23 750 23 750 – –
governments of Non-OECD countries
Eurobonds issued by international 436 436 33 915 33 915
organisations
Total fixed income securities 53 660 53 660 68 009 68 009
Shares and other non-fixed income securities
Shares in VISA INC 518 518 394 394
Shares of Viduskurzemes AAO SIA 530 530 530 530
SWIFT shares 65 65 65 65
Total 1 113 1 113 989 989
Impairment allowance (312) (312) – –
Total of shares and other securities
with non-fixed income 801 801 989 989

Total available for sale financial 54 461 54 461 68 998 68 998

assets for sale

In 2017, the eurobonds of international organisations held in the Bank’s liquidity portfolio were redeemed and
eurobonds issued by central governments of OECD countries were purchased.

Available-for-sale financial assets based on rating agency ratings are as follows:

2017 2016
EUR’000 EUR’000
Fixed income securities
- Eurobonds issued by credit institutions
Rated from AAA to A- 17 831 23 714
Rated from BBB+ to BBB- 5 034 5 051
Rated from BB- to BB+ 526 –
Total Eurobonds issued by credit institutions 23 391 28 765
- Eurobonds issued by central governments of LR
No rate 4 082 –
Total eurobonds issued by central governments of LR 4 082 –
- Eurobonds issued by central governments of OECD countries

Rated from AAA to A- – 5 329

Rated from BBB+ to BBB- 2 001 –
Total Eurobonds issued by central governments of OECD countries 2 001 5 329
Eurobonds issued by central governments of Non-OECD countries
Rated from AAA to A- 22 350 –
No rate 1 400 –
Total Eurobonds issued by central governments of Non-OECD countries 23 750 –
- Eurobonds issued by international organisations
Rated from AAA to A- – 33 915
Rated from BB- to BB+ 436 –
Total Eurobonds issued by international organisations 436 33 915
Total fixed income securities 53 660 68 009

12. LOANS AND RECEIVABLES

(a) Loans
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Financial institutions 4 749 4 749 5 459 5 459
Corporates 148 641 148 641 110 824 110 824
Individuals 11 644 11 644 4 676 4 676
Total loans and receivables 165 034 165 034 120 959 120 959
Impairment allowance (4 034) (4 034) (6 039) (6 039)
Net loans and receivables 161 000 161 000 114 920 114 920

(b) Analysis of loans by type

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Loan portfolio
Corporate loans 87 478 87 478 56 596 56 596
Industrial loans 49 535 49 535 41 357 41 357
Payment cards loans 1 089 1 089 834 834
Mortgage loans 12 303 12 303 8 104 8 104
Finance lease 1 939 1 939 1 956 1 956
Other loans – – – –
Total loan portfolio 4 710 4 710 1 332 1 332
Kredītportfelis Total 157 054 157 054 110 179 110 179
Securities-backed loans
Reverse repo 7 980 7 980 10 780 10 780
Total securities-backed loans 7 980 7 980 10 780 10 780
Total loans and receivables 165 034 165 034 120 959 120 959
Impairment allowance (4 034) (4 034) (6 039) (6 039)
Net loans and receivables 161 000 161 000 114 920 114 920

(c) Geographical segmentation of the loans

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Loans to residents of Latvia 83 450 83 450 55 566 55 566
Loans to residents of OECD countries 43 994 43 994 26 057 26 057
Loans to residents of non-OECD 37 590 37 590 39 336 39 336
countries
Total loans and receivables 165 034 165 034 120 959 120 959
Impairment allowance (4 034) (4 034) (6 039) (6 039)
Net loans and receivables 161 000 161 000 114 920 114 920

(d) Ageing structure of the loan portfolio

Total Of which Of which past due by the following terms Net
not past carrying
Bank due on the Less than 91-180 More than amount of
EUR’000 reporting 31-90 days overdue
30 days days 180 days
date loans
As at 31 December 2017
Net carrying amount 161 000 159 012 19 966 613 390 1 988
Out of which impaired 12 063 11 057 – 3 613 390 1 006
31 December 2016
Net carrying amount 114 920 106 912 6 199 2 2 1 805 8 008
Out of which impaired 23 415 16 041 6 199 2 2 1 171 7 374

The Group’s ageing structure is not materially different from that of the Bank.
The amounts shown in the table are the carrying values of loans and do not necessarily represent the fair value
of collateral. Impaired or overdue loans of EUR 1 875 thousand (2016: EUR 7 999 thousand) are secured by a
collateral with a fair value of EUR 3 088 thousand (2016: EUR 13 523 thousand). Loans of EUR 113 thousand
(2016: EUR 9 thousand) that are not impaired, secured by collateral or it is impracticable to determine the fair
value of collateral are overdrafts.
(e) Impaired loans
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Impaired loans, gross 16 097 16 097 29 454 29 454
Impairment allowance (4 034) (4 034) (6 039) (6 039)
Net loans and receivables 12 063 12 063 23 415 23 415

The repayment of certain loans in 2017 resulted in decrease in the amount of impaired loans. There is one large
exposure which constitutes 73% of total impaired loans, which is not past due on the reporting date, which was
partly repaid at the beginning of 2018. The remaining exposure of this large loan is covered by related collateral.
The remaining 27% of total impaired loans are secured by collaterals.
(f) Movements in the impairment allowance
Movements in the loan impairment allowance for the year ended 31 December 2017 and 2016 are as follows:

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Opening balance 6 039 6 039 1 354 1 354
Increase in the impairment allowance 1 176 1 176 5 013 5 013
for loans and receivables
Reversal of impairment loss (2 597) (2 597) (27) (27)
Loan write-offs (543) (543) (376) (376)
Effect of foreign currency translation (41) (41) 75 75
Closing balance 4 034 4 034 6 039 6 039

Due to the deterioration of borrowers' solvency, additional impairment allowance of individual loans were
recognised during the year. At the same time the Group and the Bank have received partial repayment for the
previously impaired loan which led to partial reversal of impairment.
(g) Industry analysis of the loan portfolio of the Group and the Bank

2017 2016
EUR’000 EUR’000
Water transport 26 578 16 946
Financial services 7 453 12 088
Wholesale 54 664 44 923
Real Estate 17 189 3 884
Leisure, recreation, sports 589 596
Overdrafts 4 660 2 641
Metal manufacture 9 105 8 089
Transport and storage 5 014 11 511
Private customers – mortgage loans and consumer loans 10 780 2 522
Manufacture of food products 2 095 1 867
Other services 22 873 9 853
Net loans and receivables 161 000 114 920

(h) Analysis of loans by type of collateral (Group and Bank)

EUR’000 31 December 2017 % of loan portfolio 31 December 2016 % of loan portfolio
Commercial buildings 48 725 30 28 660 25.2
Real estate – first mortgage 13 645 8 5 994 5
Commercial assets pledge 45 952 29 27 988 24
Commercial assets: water transport 16 029 10 16 946 14.9
Trading securities 7 980 5 10 780 9.4
Guarantee 3 650 2 1 907 1.6
Deposit 57 – 57 0.1
Inventories 16 949 11 19 820 17.4
No collateral 8 013 5 2 768 2.4
Net loans and receivables 161 000 100 114 920 100

(j) Restructured loans

As at 31 December 2017 and 2016, the loans restructured by the Group and the Bank possessed the following
signs of restructuring:
2017 2016
EUR’000
EUR’000 EUR’000
Reduced interest rate 589 596
Loan holidays 15 376 11 308
Total restructured loans 15 965 11 904

(k) Repossessed assets

In 2017, loan collateral in the amount of EUR 610 thousand was repossessed. No collaterals were repossessed
during 2016.

(l) Significant credit exposures

As at 31 December 2017 the Bank had no borrowers or groups of related borrowers, respectively, whose total
loan balances exceeded 10% of loans and receivables from customers.
As at 31 December 2016, the Bank had 1 borrower whose loan balances exceeded 10% of loans and receivables
from customers and the balance represented EUR 12 916 thousand.
According to regulatory requirements, the Bank is not allowed to have a credit exposure to one customer or
group of related customers of more than 25% of Bank’s equity. As at 31 December 2017 and 2016, the Bank was
in compliance with this requirement.

21. FINANCIAL ASSETS HELD-TO-MATURITY

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Debt securities and other fixed income securities
Eurobonds issued by companies and
credit institutions of LR 2 049 2 049 2 278 2 278

Eurobonds issued by companies and 29 486 29 486 80 508 80 508

credit institutions of other countries
Total debt securities 31 535 31 535 82 786 82 786

Quality analysis of held-to-maturity financial assets, based on rating agency ratings, is as follows:

2017 2016
EUR’000 EUR’000
Debt securities and other fixed income securities
- Corporate bonds
Rated from AAA to A- 2 532 33 650
Rated from BBB+ to BBB- 4 695 13 577
Rated from BB- to BB+ 19 647 22 214
Rated below BB- 1 957 10 259
No rate 2 704 3 086
Total corporate bonds 31 535 82 786
Debt securities and other fixed income securities 31 535 82 786

22. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

(a) Investments in subsidiaries (Group)
Carrying amount at Carrying amount at
Capital contribu- 31.12.2017 31.12.2016
Company tion
EUR’000 EUR’000
SIA BlueOrange International 100% 5 009 3 209
Impairment allowance (2 249) (1 549)
SIA Zapdvina Development 100% 12 024 7 024
Impairment allowance (806) (806)
SIA CityCap Service 100% 548 546
Impairment allowance (158) (158)
UAB Kamaly Development 100% 3 3
AS Pils Pakalpojumi 100% 15 281 9 821
Non-reciprocal capital contribution by a parent into subsidiary
(2 400) (2 400)
(See note 33)
Impairment allowance (548) (548)
SIA Jēkaba 2 100% 4 049 4 049
Impairment allowance (106) (106)
SIA Mateli Estate 100% 81 –
SIA Darzciems Estate 100% 63 –
SIA Mazirbe Estate 100% 88 –
SIA Lielie Zaki 100% 84 –
SIA Pulkarne Entity 100% 175 –
31 138 19 085
In 2017, the Bank increased the share capital of its subsidiary, SIA Zapdvina Development, by EUR 5 000 000.
After this increase, the share capital of SIA Zapdvina Development consisted of 11 498 018 shares with nominal
value of EUR 1 amounting to EUR 11 498 018. In previous years the Bank recognised an impairment allowance for
its investment in SIA Zapdvina Development in the amount of EUR 806 thousand triggered by impairment of this
subsidiary’s assets. In 2017, based on the appraisal, no additional impairment allowances were not recognised.
SIA Zapdvina Development owns a land plot in Daugavpils.
In 2017, the Bank increased the share capital of its subsidiary, SIA CityCap Service by EUR 2 100. After this increase,
the share capital of SIA CityCap Service consisted of 20 706 shares with nominal value of EUR 28 amounting to
EUR 579 768. In previous years, the Bank recognised an impairment allowance for its investment in SIA CityCap
Service in the amount of EUR 158 thousand triggered by impairment of this subsidiary’s assets. Based on the
appraisal, in 2017 impairment allowances were not recognised.
In 2017, the Bank’s subsidiary SIA Baltikums International changed its name to SIA BlueOrange International. In
2017, the Bank increased the share capital of its subsidiary, SIA BlueOrange International by 1 800 000 shares
with nominal value of EUR 1 for a total of EUR 1 800 000. After this increase, the share capital of SIA Baltikums
International consisted of 4 986 658 shares with nominal value of EUR 1 amounting to EUR 4 986 658.
In 2017, the Bank recognised an impairment allowance for its investment in SIA BlueOrange International in
the amount of EUR 700 thousand EUR triggered by impairment of this investment in subsidiaries. Impairment
allowances were recognised since the investment in SIA BlueOrange International exceeded net assets of its
subsidiaries.
In previous years, the Bank recognised an impairment allowance for its investment in SIA BlueOrange International

in the amount of EUR 1 549 thousand triggered by impairment of this investment in subsidiary. SIA BlueOrange
International has four subsidiaries and an associate.
In previous years, the Bank recognised an impairment allowance for its investment in SIA Jēkaba 2 in the amount
of EUR 106 thousand.

(b) Investments in subsidiaries by the Bank’s subsidiary SIA BlueOrange International

Carrying amount at Carrying amount at
Ieguldījums 31.12.2017 31.12.2016
Company kapitālā
EUR’000 EUR’000
KamalyDevelopment EOOD (Bulgaria) 100% 692 692
Impairment allowance (364) (100)
Foxtran Management Ltd. (Belize) – special purpose entity 100% 1 984 334
Impairment allowance (559) (283)
Enarlia International Inc. (Belize) - special purpose entity 100% 363 213
Impairment allowance (353) (175)
1 763 681

In 2017, SIA BlueOrange International increased the share capital of its subsidiary Foxtran Management Ltd. By
EUR 1 650 thousand. After this increase, the share capital of Foxtran Management Ltd. consists of 2 379 757
shares with the nominal value USD 1 amounting to USD 2 379 757 or EUR 1 984 thousand (according to the
central bank rate of 1.1993).
In 2017, SIA BlueOrange International increased the share capital of its subsidiary Enarlia International Inc by EUR
150 thousand. After this increase, the share capital of “Enarlia International Inc. consists of 435 439 shares with
the nominal value USD 1 amounting to USD 435 439 or EUR 363 thousand (according to the central bank rate of
1.1993).
In 2017, an impairment allowance for the investment in Foxtran Management Ltd. was recognised in the amount
of EUR 276 thousand and for the investment in Enarlia International Inc. an impairment allowance in the amount
of EUR 178 thousand was recognised. Allowances were recognised since the investment in SIA BlueOrange
International exceeded net assets of Foxtran Management Ltd and Enarlia International Inc.
In the previous years, an impairment allowance for the investment in Foxtran Management Ltd. was recognised
in the amount of EUR 283 and for the investment in Enarlia International Inc. an impairment allowance in
the amount of EUR 175 thousand was recognised. Allowances were recognised since the investment in SIA
BlueOrange International exceeded net assets of Foxtran Management Ltd and Enarlia International Inc.
In 2017, SIA BlueOrange International recognised impairment allowances for the investment in KamalyDevelopment
EOOD in the amount of EUR 264 thousand. KamalyDevelopment EOOD owns a property for which the fair value
was established using the market method. Market approach relies on considering similar offers. Based on the
appraisal, in 2017 impairment allowances were recognised.
In prior years SIA BlueOrange International recognised impairment allowances for the investment in
KamalyDevelopment EOOD in the amount of EUR 100 thousand based on discounted cash flow method which
used a 5% capitalisation rate and market method which relied on considering similar offers.
(c) Equity-accounted investments in associates (Group and Bank)
Carrying amount at 31.12.2017 Carrying amount at 31.12.2016
Capital
Company EUR’000 EUR’000
contribution
Group Bank Group Bank
AS Termo biznesa Centrs 26.15% 1 848 – 1 848 –
Impairment allowance (1 021) – (1 021) –
Total 827 – 827 –

Group and Bank

AS Termo biznesa Total
Centrs
Amount as at 31 December 2015 890 890
Impairment allowance (63) (63)
Amount as at 31 December 2016 827 827
Amount as at 31 December 2017 827 827

SIA BlueOrange International has an associate AS Termo biznesa Centrs. The property owned by AS Termo
biznesa Centrs was appraised on the basis of discounted cash flow using a weighted average rate of 9.14%.
Based on an appraisal, in 2017 an impairment allowance was not recognised (2016: 63 thousand was recognised)
Financial information of the associate AS Termo biznesa centrs:

Group’s Group’s
Long- Non-
Current Current Total Expens- Net loss share in share in
term Total current Net
assets liabili- liabili- Income net
invest- assets liabili- assets es loss
ties ties assets
ments ties 26.15% 26.15%
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
31 December 2016
AS „Termo
biznesa 58 343 401 (22) (17) (39) 362 216 (224) (8) (95) (2)
Centrs”
31 December 2017
AS „Termo
biznesa 68 339 407 (34) (14) (48) 359 220 (221) (1) (94) (0.26)
Centrs”

AS „Termo biznesa Centrs”

Group’s share in net assets 26.15% as at 31 December 2016 (95)

Fair value adjustment for the building 922
Equity-accounted investments in associates as at 31 December 2016 827

Group’s share in net assets 26.15% as at 31 December 2017 (94)

Fair value adjustment for the building 921
Equity-accounted investments in associates as at 31 December 2017 827

As losses for 2017 are insignificant they have no impact on the Group results.
(e) Acquisition of non-controlling interest in 2017
In August 2017, the Bank acquired 39% of the controlling interest in AS Pils Pakalpojumi from AS BBG, therefore
the investment in share capital increased to 100%; to that date the Bank held a 61% investment.
The carrying amount of AS Pils Pakalpojumi’s net assets in the Group’s consolidated financial statements on the
date of the acquisition was EUR 11 403 thousand.

In thousands of euro

Carrying amount of NCI acquired (11 403 х 39%) 4 447

Consideration paid to NCI 5 460
Result of acquisition of NCI without a change in control (1 013)

The decrease in equity attributable to owners of the Company comprised a decrease in other reserves of EUR 1
013 thousand.

Carrying
amount Profit
Long- Current Total Net of
Current term Total Net Expens- attribut-
liabili- liabili- Income profit/ non-
assets invest- assets assetsi es control- able to
ties ties loss
ments NCI
ling
interest
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000

31 December 2016
AS „Pils pakalpojumi” 187 11 227 11 414 (33) (33) 11 381 497 (430) 67 4 438 26
31 July 2017
AS „Pils pakalpojumi” 189 11 225 11 414 (11) (11) 11 403 248 (226) 22 4 447 9

Reconciliation of movements of liabilities to cash flows arising from financing activities (acquisition of
NCI) (no comparative available for 2016 as there was no such transaction)
Assets
EUR Note
Acquisition of NCI
Balance at 1 January 2017 –
Change from financing cash flows –
Consideration paid (5 460)
Total changes from financing cash flows (5 460)
Balance at 31 December 2017 –

(d) Transactions under common control in 2017

In 2017, the Bank obtained 100% ownership of five subsidiaries under common control transaction:
Fair value of net assets as at
Sabiedrības: Shareholding obtained the transaction date Consideration paid
31.07.2017
SIA „Darzciems Estate” 100% 61 (61)
SIA „Mazirbe Estate” 100% 88 (88)
SIA „Pulkarne Entity” 100% 175 (175)
SIA „Lielie Zaķi” 100% 84 (84)
SIA „Mateli Estate” 100% 81 (81)
Total 489 (489)

In 2017, the Bank increased the share capital of its subsidiary, SIA Darzciems Estate by EUR 2,000. After this
increase, the share capital of SIA Darzciems Estate consisted of 227 730 shares with nominal value of EUR 1
amounting to EUR 227 730.

23. INVESTMENT PROPERTY

Investment property of the Group and the Bank represents the following:
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Real estate in Latvia 2 200 155 3 516 1 940
Real estate in Lithuania 2 807 2 807 2 807 2 807
Real estate in Bulgaria 521 – 521 –
Impairment allowance (2 740) (1 607) (3 160) (2 220)
2 788 1 355 3 684 2 527

Group Bank
EUR’000 EUR’000
31 December 2016 3 684 2 527
Acquisition of investment property 469 –
Impairment allowance created (Lithuania and Bulgaria) (1 043) (850)
Disposals (property in Latvia) (1 785) (1 785)
Disposals - Impairment allowance (property in Latvia) 1 463 1 463
31 December 2017 2 788 1 355

Investment property is recognized at cost. Investment property consists of land and commercial properties.

In light of stagnation witnessed in the real estate market in Lithuania and Bulgaria, the Group in December 2017
recognised impairment allowance for investment properties in Lithuania in amount EUR 850 thousands and in
Bulgaria – EUR 193 thousand. In December 2017, the Bank recognised impairment allowance for investment
properties in Lithuania in amount EUR 850 thousand.
The recoverable amount was measured based on fair value less cost to sell. Fair value of investment property in
Klaipeda was determined by external, independent property valuer based on comparable transaction method,
having appropriate recognised professional qualifications and recent experience in the location and category of
the property being valued. The fair value was determined for each piece of land included in this property.
The fair value of investment property in Bulgaria was determined internally based on comparable transaction
method.
Direct operating expenses (including repairs and maintenance costs) incurred by the Group in connection with
the investment property which has not earned a rental income during the reporting year amounted to EUR 21
thousand (2016: EUR 16 thousand).
Direct operating expenses (including repairs and maintenance costs) incurred by the Bank in connection with
the investment property which has not earned a rental income during the reporting year amounted to EUR 11
thousand (2016: EUR 11 thousand).
The Group and the Bank did not earn any income on investment property neither in 2017 nor in 2016.

Group’s investment

Significant unobservable inputs

Sales price* varies from Correlation between balance
Carrying Valuation EUR to EUR per m2 sheet data and fair value
Type amount method measurement,
‘EUR ‘000 ‘EUR ‘000
2017 2016

Land plot, Kungu iela, 60 Comparison Fair value would increase

Liepāja, Latvia (2016: 60) approach 11,1–15,8 11,1–15,85 (reduce) if the price per m2
was higher (lower)
Buildings and a land Fair value would increase
95 Comparison
plot, Jurģu iela, 435–446 435–446 (reduce) if the price per m2
(2016: 95) approach
Jūrmala, Latvia was higher (lower)
0,37–0,57 par
zemes gabalu 2,4 par zemes
lielāku nekā gabalu lielāku
8,2 ha nekā 8,2 ha
Golf club divided into 5–5,8 par Fair value would increase
103 adjacent land plots 1 200 Comparison zemes gabalu EUR 1 par (reduce) if the price per m2
and warehouse, (2016: 2 050) approach lielāku nekā visiem was higher (lower)
Klaipeda, Lithuania 1 ha pārējiem
2,42–6,41 par zemes
zemes gabalu gabaliem
līdz 300 m2
Fair value would increase
328 Comparison
Apartments, Bulgaria 1 176 –1 506 1 900 –1 950 (reduce) if the price per m2
(2016: 521) approach was higher (lower)
Fair value would increase
386 Comparison
Land plot, Mūku purvs, 28,7–41 28,7–41 (reduce) if the price per m2
(2016: 386) approach was higher (lower)
Fair value would increase
Land plot, Akācijas iela, 250 Comparison 7,8–8,71 7,8–8,71 (reduce) if the price per m2
Daugavpils, Latvia (2016: 250) approach was higher (lower)
Land plot in Ķekavas Fair value would increase
pagasts, Ķekavas 170 Comparison 3,02–3,21 – (reduce) if the price per m2
novads, Latvia (2016: none) approach was higher (lower)
Fair value would increase
Land plot, Kārsavas 61 Comparison 70,42–82,16 – (reduce) if the price per m2
iela, Riga, Latvia (2016: none) approach was higher (lower)
Land plot in Kolkas 86 Comparison Fair value would increase
pagasts, Dundaga (2016: none) approach 1,46–2,08 – (reduce) if the price per m2
novads, Latvia was higher (lower)
Land plot in Lejas Fair value would increase
82 Comparison
akmeņi, Ķekavas 0,55–0,58 – (reduce) if the price per m2
(2016: none) approach
novads, Latvia was higher (lower)
Land plot in Krāslavas Fair value would increase
70 Comparison
novads, Kombuļu 0,08–0,11 – (reduce) if the price per m2
(2016: none) approach
pagasts was higher (lower)
Total 2 788

* sales prices are market prices for similar properties adjusted for certain criteria such as land plot footage
adjustment, location area adjustment, property condition, offer price adjustment, resulting in the significant
unobservable inputs.

Bank’s investment
Significant unobservable inputs
Sales price* varies from Correlation between balance
Carrying Valuation EUR to EUR per m2 sheet data and fair value
Type amount, method measurement,
EUR ‘000 ‘EUR 000
2017 2016

Land plot, Kungu iela, 60 Comparison Fair value would increase

Liepāja, Latvia (2016: 60) approach 11,1–15,8 11,1–15,85 (reduce) if the price per m2
was higher (lower);.
Buildings and land plot, Fair value would increase
95 Comparison
Jurģu iela, Jūrmala, 435–446 435–446 (reduce) if the price per m2
(2016: 95) approach
Latvia was higher (lower);
0.37-0.57 for 2.4 for land
land plot over plot over 8.2
8.2 ha ha
Golf club divided into Fair value would increase
103 adjacent land plots 1 200 Comparison 5 -5.8 for land (reduce) if the price per m2
and warehouse, (2016: 2 050) approach plot 1 ha 1 EUR for the was higher (lower);
Klaipeda, Lithuania rest of the land
2.42 – 6.41 for
land plots till plots
300 m2
Total 1 355

24. PROPERTY AND EQUIPMENT

Land and Leasehold Office equipment Construction in
Vehicles Total
buildings improvements progress
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Group Bank Group Bank Group Bank Group Bank Group Bank Group Bank

Iegādes vērtība
31 December 14 835 – – – 66 66 1 234 1 080 3 044 2 266 19 179 3 412
2015
Additions – – – – – – 532 308 4 955 2 131 5 487 2 439
Adjustment
(write-off of a (114) – – – – – – – (3) – (117) –
replaced
component)
Disposals – – – – – – (44) (44) – – (44) (44)
31 December 14 721 – – – 66 66 1 722 1 344 7 996 4 397 24 505 5 807
2016
Additions – – – – 1 439 39 733 450 5 400 389 7 572 878
Transfer 4 783 – – 4 786 – – (124) (123) (4 783) (4 786) (124) (123)
Disposals - - - - - - (124) (123) - - (124) (123)
31 December 19 504 – – 4 786 1 505 105 2 331 1 671 8 613 – 31 953 6 562
2017
Depreciation
31 December 178 – – – 14 14 899 806 – – 1 091 820
2015
Depreciation 125 – – – 14 14 115 89 – – 254 103
Disposals – – – – – – (44) (44) – – (44) (44)
31 December
2016 303 – – – 28 28 970 851 – – 1 301 879

Depreciation 295 – – 166 17 17 167 155 – – 479 338

Disposals – – – – – – (118) (118) – – (118) (118)
31 December 598 – – 166 45 45 1 019 888 – – 1 662 1 099
2017

Net carrying amount

31 December 14 418 – – – 38 38 752 493 7 996 4 397 23 204 4 928
2016
31 December 18 906 – – 4 620 1 460 60 1 312 783 8 613 – 30 291 5 463
2017

The two buildings that the Bank rents from its subsidiaries at Smilšu street and Jēkaba street are used as the
Head office of the Bank. During 2017, the construction work at property at Jēkaba street has been finished.
Currently, construction work is carried out at Smilšu iela and capitalised construction expenses on the Group
level as at the end of 2017 amounted to EUR 8 613 thousand (2016: EUR 7 996 thousand). From the Group’s
perspective, these buildings are considered to be corporate assets and are classified as property and equipment.
In 2017 and 2016, the management believes that there are no indications that these sites may be impaired.

25. INTANGIBLE ASSETS

Goodwill Software Total
Group
EUR’000 EUR’000 EUR’000
Acquisition cost
31 December 2015 564 1 687 2 251
Acquired in the reporting period – 554 554
Disposed in the reporting period – (18) (18)
Impairment of goodwill (564) – (564)
31 December 2016 – 2 223 2 223
Acquired in the reporting period – 434 434
Disposed in the reporting period – (6) (6)
31 December 2017 – 2 651 2 651
Amortization for the reporting period
31 December 2015 – 798 798
Amortization for the reporting period – 226 226
Amortization of assets disposed in the reporting period – (17) (17)
31 December 2016 – 1 007 1 007
Amortization for the reporting period – 328 328
Amortization of assets disposed in the reporting period – (6) (6)
31 December 2017 – 1 329 1 329
Net carrying amount
31 December 2016 – 1 216 1 216
31 December 2017 – 1 322 1 322

Software
Bank
EUR’000
Acquisition cost
31 December 2015 1 667
Disposed in the reporting period (17)
Acquired in the reporting period 554
31 December 2016 2 204
Disposed in the reporting period (6)
Acquired in the reporting period 434
31 December 2017 2 632
Amortization
31 December 2015 783
Amortization for the reporting period 224
Amortization of assets disposed in the reporting period (17)
31 December 2016 990
Amortization for the reporting period 327
Amortization of assets disposed in the reporting period (6)
31 December 2017 1 311
Net carrying amount
31 December 2016 1 214
31 December 2017 1 321

26. OTHER ASSETS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Other financial assets
Security deposit (MasterCard Europe, 7 686 7 686 7 987 7 987
VISA Card)
Receivables under transactions with
credit cards 974 974 3 608 3 608

Advance payment for acquisition of – – 2 730 2 730

shares
Receivables under SPOT transactions 37 37 256 256
Other receivables 4 193 4 116 362 303
Deferred payment for VISA shares 121 121 121 121
Other non-financial assets
Repossessed collaterals – movable 3 552 3 552 6 634 6 634
property
Assets classified as held for sale 610 610 – –
Overpaid taxes (VAT and other) 71 – 243 46
Total other assets 17 244 17 096 21 941 21 685
Allowances for other assets (3 563) (3 552) (3 985) (3 980)
Other assets, net 13 681 13 544 17 956 17 705
In 2017, security deposits of EUR 7 686 thousand (2016: EUR 7 987 thousand) were reserved for potential
transactions connected with MasterCard Europe and VISA Card systems. In 2016, the Bank paid an advance of
EUR 2 730 thousand for purchase of 39% shares of AS Pils Pakalpojumi, which form 50% of the purchase price.
The deal was completed in 2017 (see Note 22).
Assets classified as held for sale in the amount of EUR 610 thousand, arose in 2017 as repossessed loan collateral
(see Note 20(k)). Assets classified as held for sale are initially recognised at take-over value which set to be a
notional cost. Subsequently, management has determined a recoverable amount which was fair value less cost
to sell as at 31 December 2017 using market data.
As of 31 December 2017, the movable property includes one yacht (in 2016 – two yachts). Initially, movable
property was recognised based on take-over value which set to be a notional cost. Subsequently, management
reviewed movable property for impairment indicators and recognised assets based on its recoverable value
which was fair value less cost to sell as at 31 December 2017 and 2016. The fair value was determined using
market data.
In 2017, movable property - the yacht White Rose was invested in the share capital of the Bank's subsidiary
BlueOrange International Ltd. at a market value of EUR 1 400 thousand and is classified as a fixed asset in the
Group’s financial statements. The yacht market value was determined on the basis of the certified judgment of
the valuator.
Movements in the impairment allowance
Movements in the loan impairment allowance for the year ended 31 December 2016 and 2017 are as follows:
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Opening balance 3 985 3 980 1 634 1 634
Increase in the impairment allowance 1 421 1 421 2 346 2 346
for repossessed collaterals
Increase in the impairment allowance 697 691 49 44
for other assets
Other assets write-offs (691) (691) (44) (44)
Repossessed collaterals write offs (1 849) (1 849) – –
Closing balance 3 563 3 552 3 985 3 980

As at 31 December 2017, the Group and Bank recognised an additional impairment allowance of EUR 1 421
thousand for movable property (2016: EUR 2 346 thousand) and impairment allowance of EUR 691 thousand
for receivable from e-commerce sellers (2016: nil). The estimated net fair value of the Group's and the Bank's
movable property (yacht Silver Rose), taking into account the poor technical condition of the yacht (damage to
the hull), was set at 0 EUR (in 2016 - EUR 1 421 thousand).
As at 31 December 2017, the fair value of other non-financial assets of EUR 610 thousand is categorized within
Level 3 of the Fair Value Hierarchy (2016: EUR 2 654 thousand).
The table describes the valuation method used to arrive at the fair value of other assets, and the significant
unobservable inputs 31 December 2017 and 31 December 2016:

Carrying Significant unobservable inputs Saistība starp bilances datiem un

Valuation
Type amount patiesās vērtības novērtēšanu,
method 2017 2016
‘000 EUR ‘000 EUR
Apartment, Bulduru Purchase price Fair value would increase
Prospekts, Jūrmala, 610 Comparison (reduce) if the price per m2
Latvia (2016: nav) approach 610 – was higher (lower)

Moveable property, – Comparison Sales price* varies from Fair value would increase
yacht White Rose (2016: 1 421) approach (reduce) if the price per m2
1 421 was higher (lower)
Sales price* varies from Fair value would increase
Moveable property, – Comparison (reduce) if the price per m2
yacht White Rose (2016: 1 233) approach – 1 233 was higher (lower)
Total 610
(2016: 2 654)

* sales price for moveable property are market prices for similar yachts adjusted for certain criteria such as size,
age, yacht builder and yacht location, resulting in the significant unobservable inputs.

27. DUE TO CREDIT INSTITUTIONS ON DEMAND

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Credit institutions registered in Latvia 893 893 1 763 1 763
Credit institutions registered in OECD 449 449 212 212
countries
Credit institutions registered in other 86 86 1 529 1 529
countries (non-OECD)
1 428 1 428 3 504 3 504

As at 31 December 2017 the Bank had four credit institutions whose account balances each exceeded 10%
of total deposits on demand with other credit institutions. Total balances of these credit institutions as at 31
December 2017 amounted to EUR 1 338 thousand.
As at 31 December 2016, the Bank had two credit institutions whose account balances each exceeded 10% of
total deposits on demand with other credit institutions. Total balances of accounts of these credit institutions
as at 31 December 2016 amounted to EUR 3 017 thousand.

28. DUE TO CREDIT INSTITUTIONS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Credit institutions registered in other 96 96 – –
countries (non-OECD)
96 96 – –

29. FINANCIAL LIABILITIES CARRIED AT AMORTIZED COST: DEPOSITS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Current accounts:
Financial institutions 31 104 31 269 27 306 27 448
Corporate entities 381 632 383 702 430 468 432 787
Individuals 82 118 82 118 83 285 83 285
494 854 497 089 541 059 543 520
Term deposits:
Subordinate liabilities 4 561 4 561 5 112 5 112
Other financial institutions 1 482 1 482 1 076 1 076
Corporate entities 25 005 25 005 13 656 13 656
Individuals 43 165 43 165 1 939 1 939
74 213 74 213 21 783 21 783
Total deposits 569 067 571 302 562 842 565 303

Geographical segmentation of the deposits

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Deposits of residents registered in 39 648 41 818 26 876 29 239
Latvia
Deposits of residents registered in
OECD countries 237 847 237 862 197 499 197 500

Deposits of residents registered in 291 572 291 622 338 467 338 564
other countries (non-OECD)
Total deposits 569 067 571 302 562 842 565 303

As at 31 December 2017, the Bank maintained customer deposit balances of EUR 10 002 thousand which were
reserved by the Bank as collateral for loans and other credit instruments granted by the Bank (as at 31 December
2016: EUR 11 841 thousand).
As at 31 December 2017, the Bank had no customers/customer groups with deposits exceeding 10% of the total
customer deposits (as at 31 December 2016: none).

30. FINANCIAL LIABILITIES CARRIED AT AMORTIZED COST:

SUBORDINATED DEBT SECURITIESI
Subordinated bonds have a fixed term at their origination. Subordinated bonds are repayable before maturity
only on winding up or bankruptcy of the Bank. Subordinated bonds rank before shareholders’ claims.
This issue is offered to a limited number of investors and it does not represent a public offer in the understanding
of the Financial Instruments Market Law of Latvia.

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Issued subordinated bonds 24 511 24 511 19 626 19 626
Accrued interest payments 515 515 311 311
Total 25 026 25 026 19 937 19 937

The table below summarises issued bonds with the following maturities and carrying amount:
Discount/ Group/ Group/
Date of
ISIN Currency Issue size Par value Date of issue coupon Bank Bank
maturity rate, % 31/12/2017 31/12/2016
Subordinated bonds
LLV0000801082 USD 880 1 000 05.12.2012 12.11.2019 6.0 733 835
LV0000801074 EUR 10 000 1 000 05.12.2012 12.11.2019 6.0 3 200 3 200
LV0000801629 EUR 10 000 1 000 25.11.2014 28.11.2021 6.0 10 000 10 000
LV0000801611 USD 10 000 1 000 25.11.2014 28.11.2021 6.0 98 111
LV0000801728 EUR 20 000 1 000 16.04.2015 24.04.2022 6.0 10 480 5 480
Issued debt securities, Total (‘000 EUR) 24 511 19 626

Reconciliation of movements of liabilities to cash flows arising from financing activities (bonds)

Liabilities
EUR Note
Bonds issued
Balance at 1 January 2017 19 937
Change from financing cash flows
Proceeds from bonds issued 5 000
Total changes from financing cash flows 5 000
The effect of changes in foreign exchange rates (115)
Liability - related
Interest expense 6 1 379
Interest paid (1 175)
Total liability-related other changes 204
Balance at 31 December 2017 25 026

Liabilities
EUR Note
Bonds issued
Balance at 1 January 2016 17 825
Change from financing cash flows
Proceeds from bonds issued 2 000
Total changes from financing cash flows 2 000
The effect of changes in foreign exchange rates 30
Liability - related
Interest expense 6 1 170
Interest paid (1 088)
Total liability-related other changes 90
Balance at 31 December 2016 19 937

31. OTHER LIABILITIES

2016 2015
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Other financial liabilities
Credit card payments 580 580 983 983
Financing transactions 456 456 – –
Receivables under VP transactions 9 9 33 33
Money in transit 6 6 8 8
Suspense accounts – – 995 995
Other liabilities, balances of closed 200 200 199 199
customers’ accounts
Other non-financial liabilities
Operating and other liabilities 232 169 48 10
Tax settlements 5 5 4 4
VAT payable 4 – 4 –
Other liabilities related to contrition 735 334 472 321
work
2 227 1 759 2 746 2 553

32. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES

2017 2016
Group and Bank EUR’000 EUR’000
Carrying amount Nominal value Carrying amount Nominal value
Assets
Future contracts 119 55 680 90 16 463
Total derivative financial assets 119 55 680 90 16 463

Liabilities 232 55 793 136 16 509

Future contracts
232 55 793 136 16 509

Total derivative liabilities

As at 31 December 2017 the Bank had 22 outstanding foreign exchange forward contracts and none with related
parties (in 2016 – 7 contracts, including none with related parties).

33. SHARE CAPITAL AND RESERVES

As of 31 December 2017, the authorized share capital comprised 28 209 653 ordinary shares (2016: 28 209 653
ordinary shares). As at 31 December 2017, share capital comprised 28 209 653 shares with total nominal value
of EUR 39 493 514.20. Nominal value of one share is EUR 1.40. The structure of shareholders holding ordinary
shares did not change. The holders of ordinary shares are entitled to receive dividends as declared and are
entitled to one vote per share at the shareholders’ meetings. All shares rank equally with regard to the Bank’s
residual assets.
2017 2016
Quantity EUR’000 Quantity EUR’000
Share capital
Ordinary shares with voting rights 28 209 653 39 493 28 209 653 39 493
28 209 653 39 493 28 209 653 39 493

The reserve capital of EUR 24 thousand is not subject to any restrictions and can be distributed to the shareholders
following an appropriate decision.
As at 31 December 2017, The Bank’s reserves consisted of the non-reciprocal contribution into the subsidiary’s
capital in the amount of EUR 2 400 thousand (2016: EUR 2 400 thousand). As at 31 December 2017, the Group’s
reserves consisted of the non-reciprocal contribution into the subsidiary’s capital in the amount of EUR 2,400
thousand and the result of the disposal of the non-controlling interest in the subsidiary of EUR 1 013 thousand,
and a currency revaluation reserve was recognised in the amount of EUR 1 thousand. As at 31 December 2016,
the Group’s reserves consisted of the non-reciprocal contribution into the subsidiary’s capital in the amount of
EUR 2 400 thousand and a currency revaluation reserve was recognised in the amount of EUR 17 thousand.
Dividends
Dividends payable are restricted to the maximum retained earnings of the Bank, which are determined according
to the legislation of Latvia. In accordance with the legislation of the Republic of Latvia, the amount of reserves
available for distribution at the reporting date is EUR 22 766 thousand (2016: EUR 21 935 thousand).
During 2017, dividends of EUR 4 million were distributed (2016: EUR 3.7 million).
Reconciliation of movements of liabilities to cash flows arising from financing activities (dividend)

Liabilities
EUR Note
Dividend
Balance at 1 January 2017 –
Dividend declared 4 000
Change from financing cash flows
Dividend paid (4 000)
Total changes from financing cash flows (4 000)
Balance at 31 December 2017 –

Liabilities
EUR Note
Dividend
Balance at 1 January 2016 –
Dividend declared 3 750
Change from financing cash flows
Dividend paid (3 750)
Total changes from financing cash flows (3 750)
Balance at 31 December 2016 –

34. CASH AND CASH EQUIVALENTS

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Cash and balances due from central 233 803 233 803 153 865 153 865
banks
Due from credit institutions on demand
and within 3 months 112 625 112 597 181 180 181 141

Due to credit institutions on demand (1 428) (1 428) (3 504) (3 504)

and within 3 months
Total cash and cash equivalents 345 000 344 972 331 541 331 502

35. CONTINGENT LIABILITIES AND COMMITMENTS

At any time the Bank has outstanding commitments to extend credit. These commitments take the form of
approved loans and credit card limits and overdraft facilities.
The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third
parties. These agreements have fixed limits and generally extend for a period of up to five years.
The contractual amounts of commitments are set out in the following table by category. The amounts reflected
in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table
for guarantees and letters of credit represent the maximum accounting loss that would be recognized at the
reporting date if counterparties failed to completely perform as contracted.

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Unused loan facilities 51 319 51 319 53 273 53 273
Unused credit card facilities 2 111 2 123 2 076 2 088
Guarantees 12 759 12 759 98 98
66 189 66 201 55 447 55 459

The total contractual amounts of the above loan commitments may differ from the cash flow that may actually
be required in future as these commitments may expire before they are claimed.

36. LITIGATION
In the second half of 2017, the Financial and Capital Market Commission conducted a full scope AML/CTF
review at the Bank in order to evaluate the Bank’s compliance with the AML/CTF Law and to verify if the Bank’s
practice was compliant with the regulations of the FCMC and other regulations. As at the date of these financial
statements, the review by the FCMC is not complete. For possible outcome of the review please refer to Note
4(8).
Management is unaware of any other significant actual, pending or likely claims against the Bank and its
subsidiaries.

37. ASSETS AND LIABILITIES UNDER MANAGEMENT

2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Assets under management
Due from credit institutions registered 1 497 1 497 2 858 2 858
in Latvia
Due from foreign credit institutions – – 223 223
Loans to customers 6 002 6 002 4 846 4 846
Non fixed income securities 12 846 12 846 3 595 3 595
Fixed income securities 8 767 8 767 8 977 8 977
of which: pledged under repo 1 437 1 437 1 931 1 931
transactions
Other assets 1 971 1 971 1 961 1 961
Total assets under management 31 083 31 083 22 460 22 460
Liabilities under management
Non-resident trust liabilities 19 869 19 869 16 010 16 010
Resident trust liabilities 11 214 11 214 6 450 6 450
Total liabilities under management 31 083 31 083 22 460 22 460

As the number of customers grew in 2017 so did the amount of assets under management. The largest share of
assets under management were invested in non-fixed income securities. As at 31 December 2017 there were no
assets under management from related parties (as at 31 December 2016: none).

38. RELATED PARTY TRANSACTIONS

Related parties are defined as shareholders who have a significant influence over the Bank, companies in which
they have a controlling interest, members of the Council and the Board, key management personnel, their
close relatives and companies in which they have a controlling interest, as well as associated companies. All
transactions with related parties have been carried out at an arm’s length.
Loans, deposits and other claims and liabilities to related parties include the following:
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Loans to related parties
incl. the parent company – – 1 750 1 750
incl. members of the Council and the
Board 371 371 138 138

incl. other 2 498 2 498 163 163

Other requirements 4 5 2 734 2 767
Total loans and other claims 2 873 2 874 4 785 4 818
Term and demand deposits and loans
incl. from the parent company 195 195 152 152
incl. from subsidiaries of the parent – – 18 18
company
incl. from subsidiaries – 2 235 – 2 461
incl. from the members of the Council 614 614 553 553
and Board
incl. from others 1 664 1 664 2 436 2 436
Other liabilities 170 171 191 199
Total deposits and liabilities 2 643 4 879 3 350 5 819
Contingent liabilities and
commitments 2 970 2 982 1 710 1 722

Group Bank Group Bank

Interest rate % Interest rate % Interest rate % Interest rate %
Loans to related parties 1.00 1.003 1.03 1.03
Term and demand deposits 0.01 0.01 0.01 0.01

Remuneration to the member of Council and Board during 2017 amounted to EUR 619 thousand (2016: EUR 663
thousand) (see Note 11).
2017 2016
Group Bank Group Bank
EUR’000 EUR’000 EUR’000 EUR’000
Income from related party transactions
Commission revenue 36 40 40 44
Interest income 33 33 88 88
Other income – – 3 3
Expenses from related party transactions
Interest expenses 11 11 11 11
Other expenses 37 399 53 516
Rent payments 204 416 204 503
A S BlueOrange Bank | Smilšu iela 6, Rīga, LV-1050, Latvija | Registration No. 40003551060 | SWIF T code: CBBRLV22 
Phone: +371 67 031 333 | WhatsApp: +371 26 552 244 | E-mail: [email protected] | www.blueorangebank.com
AS BlueOrange Bank Group Consolidated and Bank Separate Annual Report for the year ended 31 December 2017
NOTES TO THE GROUP CONSOLIDATED AND BANK SEPAR ATE FINANCIAL STATEMENTS 80

39. MATURITY ANALYSIS OF ASSETS AND LIABILITIES (BANK)

The table below reflects the maturity analysis of financial assets and liabilities based on the term from the
reporting date until the maturity dates of the respective assets and liabilities. The remaining period to maturity
of assets and liabilities as at 31 December 2017 was as follows:

Up to 1 From 6 5 years and

2017 From 1 to 3 From 3 to 6 From 1 to 5 Total,
month months to 1 over, or no
EUR’000 months months years EUR’000
including year maturity
Financial assets
Cash and demand
deposits with central 233 803 – – – – – 233 803
banks
Deposits with credit
institutions 112 597 – 4 986 419 – – 118 002

Financial assets at fair

value through profit – – 397 – – 397 397
and loss
Held-for-trading 5 371 50 10 2 941 – – 8 372
financial assets
Available-for-sale 53 660 – – – – 801 54 461
financial assets
Loans and receivables 7 531 13 590 11 333 43 364 77 589 7 593 161 000
Held-to-maturity 22 872 607 902 2 872 4 282 – 31 535
financial assets
Other financial assets 7 096 – – – – 5 838 12 934
Total financial assets 442 930 14 247 17 231 49 596 81 871 14 629 620 504
Financial liabilities
Demand deposits
with credit 1 428 – – – – – 1 428
institutions
Derivatives 71 161 – – – – 232
Financial liabilities
carried at amortized 501 128 268 3 655 36 687 54 446 240 596 424
cost
Other financial 1 251 – – – – – 1 251
liabilities
Total financial 503 878 429 3 655 36 687 54 446 240 599 335
liabilities
Maturity gap (60 948) 13 818 13 576 12 909 27 425 14 389 21 169
Contingent liabilities 53 441 – 453 – 12 307 – 66 201
and commitments

The maturity analysis of the Group is not significantly different from that of the Bank disclosed above.

39. MATURITY ANALYSIS OF ASSETS AND LIABILITIES (BANK)

(CONTINUED)

Up to 1 From 6 5 years and

2016 From 1 to 3 From 3 to 6 From 1 to 5 Total,
month months to 1 over, or no
EUR’000 months months years EUR’000
including year maturity
Financial assets
Cash and demand
deposits with central 153 865 – – – – – 153 865
banks
Deposits with credit 168 244 12 897 – – – – 181 141
institutions
Financial assets at fair
value through profit 1 506 117 11 1 411 – – 3 045
and loss
Available-for-sale 68 009 – – – – 989 68 998
financial assets
Loans and receivables 29 288 3 860 7 253 19 328 51 471 3 720 114 920
Held-to-maturity
financial assets 35 595 7 432 6 340 4 632 28 787 – 82 786

Other financial assets – – – – – 15 005 15 005

Total financial assets 456 507 24 306 13 604 25 371 80 258 19 714 619 760
Financial liabilities
Demand deposits
with credit 3 504 – – – – – 3 504
institutions
Derivatives 29 107 – – – – 136
Financial liabilities
carried at amortized 547 554 636 2 946 3 431 24 833 5 840 585 240
cost
Other financial 2 218 – – – – – 2 218
liabilities
Total financial 553 305 743 2 946 3 431 24 833 5 840 591 098
liabilities
Maturity gap (96 798) 23 563 10 658 21 940 55 425 13 874 28 662
Contingent liabilities 55 401 34 10 14 – – 55 459
and commitments

The maturity analysis of the Group is not significantly different from that of the Bank disclosed above.

40. FINANCIAL RISK MANAGEMENT

Liquidity risk (Bank)
Residual contractual maturities of financial liabilities of the Bank are presented below. The Group’s residual
contractual maturities of financial liabilities have not been presented as the difference to the Bank’s analysis is
insignificant.

Gross
EUR’000 Carrying nominal Less than 1 3 months to 1-5 years
1– 3 months
amount inflow / month 1 year and more
31 December 2017 (outflow
Non-derivative liabilities
Demand deposits with credit 1 428 (1 428) (1 428) – – –
institutions
Financial liabilities carried at
amortized cost 596 424 (603 383) (501 322) (657) (42 050) (59 354)

Total non-derivative liabilities 597 852 (604 811) (502 750) (657) (42 050) (59 354)
Derivative liabilities
Trading: outflow 49 007 (49 007) (8 322) (40 685) – –
Trading: inflow (48 775) 48 775 8 251 40 524 – –
Total derivative liabilities 232 (232) (71) (161) – –
Contingent liabilities and 66 201 (66 201) (53 441) - (453) (12 307)
commitments
Total Liabilities 664 285 (671 244) (556 262) (818) (42 503) (71 661)

Gross
EUR’000 Carrying nominal Less than 1 3 months to 1-5 years
1– 3 months
amount inflow / month 1 year and more
31 December 2016 (outflow)
Non-derivative liabilities
Demand deposits with credit 3 504 (3 504) (3 504) – – –
institutions
Financial liabilities carried at 585 240 (591 583) (547 684) (894) (7 503) (35 502)
amortized cost
Total non-derivative liabilities 588 744 (595 087) (551 188) (894) (7 503) (35 502)
Derivative liabilities
Trading: outflow 15 095 (15 095) (3 604) (11 491) – –
Trading: inflow (14 959) 14 959 3 575 11 384 – –
Total derivative liabilities 136 (136) (29) (107) – –
Contingent liabilities and 55 459 (55 459) (55 401) (34) (24) –
commitments
Total liabilities 644 339 (650 682) (606 618) (1 035) (7 527) (35 502)

41. CURRENCY ANALYSIS OF ASSETS AND LIABILITIES (BANK)

The Latvian banking legislation requires that the total foreign currency open position may not exceed 20% of
the equity.
The EUR equivalent of assets and liabilities as at 31 December 2017 by the currencies in which they are
denominated is as follows:
2017 EUR USD Citas valūtas Total
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000

Financial assets
Cash and demand deposits with central banks 233 519 228 56 233 803
Loans and receivables from banks 23 704 82 996 11 302 118 002
Financial assets at fair value through profit and loss 397 – – 397
Held-for-trading financial assets 3 595 4 773 4 8 372
Available-for-sale financial assets 45 445 8 054 962 54 461
Loans and receivables 81 874 77 487 1 639 161 000
Held-to-maturity financial assets 14 251 17 284 – 31 535
Other financial assets 6 974 5 396 564 12 934
Total financial assets 409 759 196 218 14 527 620 504
Financial liabilities
Demand deposits with credit institutions 294 1 134 – 1 428
Derivatives 232 – – 232
Financial liabilities carried at amortized cost 352 576 227 588 16 260 596 424
Other financial liabilities 248 950 53 1 251
Total financial liabilities 353 350 229 672 16 313 599 335
Assets (liabilities) arising from currency exchange
Spot and forward transaction receivables 33 307 70 313 3 663 107 283
Spot and forward transaction liabilities (68 907) (36 774) (1 679) (107 360)
Net long/short currency position 20 809 85 198 21 092

The currency analysis of the Group is not significantly different from that of the Bank disclosed above.

41. CURRENCY ANALYSIS OF ASSETS AND LIABILITIES (BANK) (CONTINUED)

The Latvian banking legislation requires that the total foreign currency open position may not exceed 20% of
the equity.
The EUR equivalent of assets and liabilities as at 31 December 2016 by the currencies in which they are
denominated is as follows:
Other
2016 EUR USD Total
currencies
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000

Financial assets
Cash and demand deposits with central banks 153 697 107 61 153 865
Loans and receivables from banks 41 782 120 630 18 729 181 141
Financial assets at fair value through profit and loss 301 2 654 90 3 045
Available-for-sale financial assets 21 373 47 625 – 68 998
Loans and receivables 38 329 75 133 1 458 114 920
Held-to-maturity financial assets 51 141 31 645 – 82 786
Other financial assets 12 382 2 561 62 15 005
Total financial assets 319 005 280 355 20 400 619 760
Financial liabilities
Demand deposits with credit institutions 123 3 381 – 3 504
Derivatives 134 – 2 136
Financial liabilities carried at amortized cost 247 872 316 487 20 881 585 240
Other financial liabilities 997 1 000 221 2 218
Total financial liabilities 249 126 320 868 21 104 591 098
Assets (liabilities) arising from currency exchange
Spot and forward transaction receivables 7 164 49 173 1 503 57 840
Spot and forward transaction liabilities (48 705) (8 354) (571) (57 630)
Net long/short currency position 28 338 306 228 28 872

The currency analysis of the Group is not significantly different from that of the Bank disclosed above.

42. REPRICING MATURITY ANALYSIS (BANK)

Interest rate risk relates to the changes in the value of the financial instrument as a result of changes in the
market rates. As at 31 December 2017, interest rate re-pricing categories were:

Up to 1 From 6 Non
2017 From 1 to 3 From 3 to 6 months to 1 From 1 to 5 Over 5 Total,
month interest
EUR’000 months months years years EUR’000
including year bearing
FINANCIAL ASSETS
Cash and demand deposits
with central banks 232 501 – – – – – 1 302 233 803

Loans and receivables from – – 4 980 417 – – 112 605 118 002
banks
Financial assets at fair value
through profit and loss – – – – – – 397 397

Held-for-trading financial 99 20 – – 6 348 1 756 149 8 372

assets
Available-for-sale financial
3 334 428 4 677 5 026 39 985 – 1 011 54 461
assets
Loans and receivables 62 376 10 610 13 306 38 763 34 301 999 645 161 000
Held-to-maturity financial
assets 1 664 2 153 4 037 8 610 14 604 – 467 31 535

Other financial assets – – – – – – 12 934 12 934

Total financial assets 299 974 13 211 27 000 52 816 95 238 2 755 129 510 620 504
FINANCIAL LIABILITIES
Demand deposits with – – – – – – (1 428) (1 428)
credit institutions
Derivative financial (71) (161) – – – – – (232)
instruments
Financial liabilities carried at (3 980) (250) (2 760) (36 561) (45 542) (240) (507 091) (596 424)
amortized cost
Other financial liabilities – – – – – – (1 251) (1 251)
Total financial Liabilities (4 051) (411) (2 760) (36 561) (45 542) (240) (509 770) (599 335)
Interest rate risk net 295 923 12 800 24 240 16 255 49 696 2 515 (380 260) 21 169
position
Interest rate risk gross 295 923 308 723 332 963 349 218 398 914 401 429 21 169 42 338
(cumulative) position

The reprising maturity analysis of the Group is not significantly different from that of the Bank disclosed above.

42. REPRICING MATURITY ANALYSIS (BANK) (CONTINUED)

Interest rate risk relates to the changes in the value of the financial instrument as a result of changes in the
market rates. As at 31 December 2016, interest rate re-pricing categories were:

Up to 1 From 6 Non
2016 From 1 to 3 From 3 to 6 months to 1 From 1 to 5 Over 5 Total,
month interest
EUR’000 months months years years EUR’000
including year bearing
FINANCIAL ASSETS
Cash and demand deposits 153 504 – – – – – 361 153 865
with central banks
Loans and receivables from 49 333 12 897 – – – – 118 911 181 141
banks
Financial assets at fair value 1 89 – – 2 851 49 55 3 045
through profit and loss
Available-for-sale financial 14 286 23 749 14 194 – 15 324 – 1 445 68 998
assets
Loans and receivables 64 399 2 761 5 578 15 281 25 552 1 134 215 114 920
Held-to-maturity financial 5 012 22 778 6 206 18 009 29 220 – 1 561 82 786
assets
Other financial assets – – – – – – 15 005 15 005
Total financial assets 286 535 62 274 25 978 33 290 72 947 1 183 137 553 619 760
FINANCIAL LIABILITIES
Demand deposits with – – – – – – (3 504) (3 504)
credit institutions
Derivative financial (29) (107) – – – – – (136)
instruments
Financial liabilities carried at
amortized cost (5 187) (588) (1 534) (3 317) (24 779) (5 835) (544 000) (585 240)

Other financial liabilities – – – – – – (2 218) (2 218)

Total financial Liabilities (5 216) (695) (1 534) (3 317) (24 779) (5 835) (549 722) (591 098)
Interest rate risk net 281 319 61 579 24 444 29 973 48 168 (4 652) (412 169) 28 662
position
Interest rate risk gross 281 319 342 898 367 342 397 315 445 483 440 831 28 662 57 324
(cumulative) position

The reprising maturity analysis of the Group is not significantly different from that of the Bank disclosed above.

43. MAXIMUM CREDIT ANALYSIS

The Bank’s maximum exposure to credit risk is set out below. The impact of possible netting of assets and
liabilities to reduce potential credit exposure is not significant.
Maximum credit exposure
Gross maximum credit exposure
At 31 December Notes Bank Bank
EUR'000
2017 2016

Cash and balances with central banks 15 233 803 153 865
Loans and receivables from banks 16 118 002 181 141
Financial assets at fair value through profit and loss 18 397 –
Held-for-trading financial assets 17, 33 8 372 3 045
Available-for-sale financial assets 19 53 660 68 009
Loans and receivables 20 161 000 114 920
Held-to-maturity financial assets 21 31 535 82 786
Other financial assets 26 12 932 15 005
Total financial assets 619 701 618 771
Outstanding letters of credit 34 – –
Unused loan facilities 34 51 319 53 273
Unused credit card facilities 34 2 123 2 088
Guarantees 34 12 759 98
Total guarantees and commitments 66 201 55 459
Total maximum credit risk exposure 685 902 674 230

The maximum credit risk exposure analysis of the Group is not significantly different from that of the Bank
disclosed above.

44. CAPITAL ADEQUACY CALCULATION (BANK)

2017 2016
EUR’000 EUR’000
Tier 1
Share capital 39 493 39 493
Statutory reserves 24 24
Retained earnings for the previous periods 17 935 14 124
Profit for the reporting period 4 831 7 811
Revaluation reserve – AFS financial assets 129 –
Other reserves (2 418) (2 400)
Intangible Assets (1 321) (1 214)
Other deductions (169) (104)
Reduction of Tier 1 capital (Pillar 2 adjustments) (279) (430)
Total Tier 1 58 225 57 304
Subordinated debt 20 812 20 631
Reduction of Tier 2 capital (Pillar 2 adjustments) (279) (430)
Tier 2 capital 20 533 20 201
Equity 78 758 77 505
Risk-weighted value
Banking portfolio 349 358 307 050
Trading portfolio 13 769 5 317
Operating risk 58 549 55 975
Total risk exposure amount loan adjustment 16 –
Total risk weighted assets 421 692 368 342
Total capital as a percentage of risk weighted assets (total capital ratio) 18.68% 21.04%
Total tier 1 capital expressed as a percentage of risk-weighted assets
(“tier 1 capital ratio”) 13.81% 15.56%

As at 3l December 2017,the Bank's capital adequacy ratio was 18.68% (2016: 21.04%) which corresponds to the
requirements set in the Basel Capital Accord and the regulations of the FCMC of Latvia.

45. FAIR VALUE OF FINANCIAL INSTRUMENTS

(a) Financial instruments measured at fair value
The table below analyses financial instruments measured at fair value at the end of the reporting period, by the
level in the fair value hierarchy into which the fair value measurement is categorised.
The Group and the Bank
Published price Valuation techniques based Valuation techniques based on
31 December 2017 quotations on market observable inputs unobservable inputs Total
(1) (2) (3)
Financial assets
Financial assets designated as at fair value through profit or loss:
Fixed income securities 7 027 – 1 226 8 253
Financial assets – – 397 397
Derivatives – 119 – 119
Available-for-sale assets
Fixed income securities 53 660 – – 53 660
Non fixed income securities and – 583 218 801
shares
60 687 702 1 841 63 230
Financial liabilities
Derivatives – 232 – 232
– 232 – 232

Published price Valuation techniques based Valuation techniques based on

2016. gada 31. decembrī quotations on market observable inputs unobservable inputs Total
(1) (2) (3)
Financial assets
Financial assets at fair value through profit or loss:
Fixed income securities 2 654 – 301 2 955
Derivatives – 90 – 90
Available-for-sale assets
Fixed income securities 68 009 – – 68 009
Non fixed income securities and – 459 530 989
shares
70 663 549 831 72 043
Financial liabilities
Derivatives – 136 – 136
– 136 – 136

Included in category "Published price quotations" (Level 1) are financial assets and liabilities that are measured
by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active
market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing
service or regulatory agency and those prices represent actual and regularly occurring market transactions on
an arm’s length basis. The main asset classes included in this category are financial assets for which the fair value
is obtained via pricing vendors or binding broker quotes and assets for which the fair value is determined by
reference to indices.

45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Included in category 2 “Valuation methods based on market observable data” are financial assets and liabilities
that are measured using a valuation technique based on assumptions that are supported by prices from
observable current market transactions in the same instrument or based on available market data.
Not based upon market observable (Level 3) input means that fair values are determined in whole or in part
using a valuation technique (model) base on assumptions that are neither supported by prices from observable
current market transactions in the same instrument nor are they based on available market data.
The following table shows the valuation techniques used in measuring Level 2 fair values:

Type Valuation technique

Financial assets and Market comparison technique: The fair values are based on broker quotes. Similar
liabilities designated as at contracts are traded in an active market and the quotes reflect the actual transactions in
fair value through profit or similar instruments.
loss

Available-for-sale assets Valuation is based on financial indicators, including discounted cash flows and value of
(VISA INC) Bank’s position with the price hedge

Under Level 3 of fair value hierarchy certain financial assets are classified, the fair value of which is measured
based on estimated fair value of underlying assets.
Inter-relation between
Type Valuation method Significant unobservable inputs significant unobservable inputs
and fair value measurement
Assets at fair value through Valuation is based on Net assets The estimated fair value
profit or loss (illiquid bonds) financial indicators, would increase (decrease),if:
including discounted cash Increase/(decrease) in net
flows. assets
Financial assets at fair value Outlook of the court case Court case's order The estimated fair value
through profit or loss and estimated proceeds would increase (decrease),if:
Positive (negative) court
case's order

Available-for-sale assets Valuation is based Future net revenues; The estimated fair value
(Viduskurzemes AAO SIA) discounted dividend model CAPEX would increase (decrease),if:
revenue increases/
(decreases/
CAPEX decreases/
(increases

Changes in financial instruments of the Group/Bank classified as Level 3 in Fair Value Hierarchy:
31.12.2017
Impairment
Financial assets at fair value 31.12.2016. Acquired 31.12.2017.
allowance

Financial assets at fair value through profit or loss:

Fixed income securities 301 925 – 1 226

Financial assets at fair value through profit or 397 397
loss:
Available-for-sale assets
Non fixed income securities and shares 530 – (312) 218
Total financial assets at fair value 831 1 322 (312) 1 841

45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

31.12.2016
Impairment
Financial assets at fair value 31.12.2015. Acquired 31.12.2016.
allowance
Financial assets at fair value through profit or loss:
Fixed income securities – 301 – 301
Financial assets at fair value through profit or
loss:
Available-for-sale assets
Non fixed income securities and shares 530 – – 530
Total financial assets at fair value 530 301 – 831

a. Financial instruments not measured at fair value

The table below analyses the fair values of financial instruments other than measured at fair value by the level
in the fair value hierarchy into which each fair value measurement is categorised.
Total carrying
Level 1: Level 2: Level 3: Total fair value
31 December 2017 amount
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Financial assets
Due from central banks 232 501 – – 232 501 232 501
Loans and advances due from financial – – 118 002 118 002 118 002
institutions
Loans to customers – – 161 000 160 768 161 000
Held-to-maturity instruments 28 979 – 2 556 31 880 31 535
Other financial assets – – 12 932 12 932 12 932
Financial liabilities
Deposits and balances due to financial – – 1 428 1 428 1 428
institutions
Deposits – – 596 424 596 475 596 424
Other financial liabilities – – 1 251 1 251 1 251

Total carrying
Level 1: Level 2: Level 3: Total fair value
31 December 2016 amount
EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Financial assets
Due from central banks 153 865 – – 153 865 153 865
Loans and advances due from financial – – 181 141 181 114 181 141
institutions
Loans to customers – – 114 209 113 937 114 209
Held-to-maturity instruments 80 001 – 2 785 83 553 82 786
Other financial assets – – 15 005 15 005 15 005
Financial liabilities
Deposits and balances due to financial – – 3 504 3 504 3 504
institutions
Deposits – – 585 240 585 281 585 240
Other financial liabilities – – 2 218 2 218 2 218

45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The following table shows the valuation techniques use in measuring Level 2 and Level 3 fair values, as well as
the significant unobservable inputs used:

Veids Vērtēšanas metode Būtiski nenovērojami dati

Loans and advances due from financial Discounted cash flows Discount rates
institutions
Loans Discounted cash flows Discount rates
Due to financial institutions Discounted cash flows Discount rates
Deposits Discounted cash flows Discount rates

46. EVENTS AFTER THE REPORTING PERIOD

Events, which occurred during 2018 through to the approval date of these separate and consolidated financial
statements have adversely affected the stability of the financial sector of Latvia, and have also worsened its
reputation, both locally and internationally.
On 13 February 2018, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury
issued a notice of proposed rulemaking (NPRM) under Section 311 of the US Patriot Act against one of the
largest banks in Latvia. Following this announcement, that bank experienced an abrupt wave of withdrawal of
deposits and a lack of access to USD funding. This resulted in that bank being unable to make payments in USD.
On 19 February 2018, following an outflow of deposits from the said institution, the European Central Bank
(ECB) instructed the Latvian prudential regulator to introduce a prohibition on outbound payments from that
bank. On 23 February, ECB determined that that bank was failing or likely to fail in accordance with the Single
Resolution Mechanism Regulation. On 26 February 2018, the shareholders of the said bank adopted a resolution
to wind the bank up.
In response to the above developments, in March 2018, the Financial Sector Development Council of the Republic
of Latvia proposed amendments strengthening the current AML/CTF (anti-money laundering and counter-
terrorist financing) laws that are expected, among other things, to set a prohibition to service shell companies,
which are considered to be companies without real substance as measured by certain criteria set out in law. Shell
companies are primarily non-resident, and comprise part of the Bank’s portfolio of non-resident customers.
The legislation, which is in the process of being drafted, is expected to be passed in April 2018 and come into
force in May 2018with a specified transition period.
In addition, also since March 2018, the Bank has been in discussions with the Commission, who has expressed
its expectation for the Bank to perform a further assessment of its customer portfolio as a basis for reducing
over time its exposure to and business with customers not domiciled in the Republic of Latvia (non-resident
customers), particularly those from CIS countries, in addition to the shell companies referred to above. No
further criteria or timeframe have been specified in those discussions to date.
In this context, and given the fact that its past business model was substantially reliant on non-resident business,
similarly to the bank described above (now in the process of liquidation), BlueOrange Bank is currently focusing
its attention on all aspects of risk management, continues to make enhancements to its internal controls and
other activities to develop its business and facilitate efficient detection of any signs of criminal transactions as
described in Note 4(8) Management of money laundering and terrorist financing risk and the Customer Policy.
The Bank is receiving ongoing consultations from Lewis Baach Kaufmann Middlemiss – an international company
with substantial experience in AML/CFT procedures and compliance with international sanctions, and who have
previously conducted readiness and compliance audits at the Bank in the past.
In 2018, through to the date of these separate and consolidated financial statements, the Bank’s operations
have been stable; the reputational and compliance crisis sparked by the developments in the financial market
in Latvia has so far had no adverse financial effect on the Bank. The regulatory ratios for liquidity and capital
adequacy have remained above those planned and above the minimum regulatory levels. Please refer to Note
47 Going concern for a description of further expedited measures planned by the Bank in relation to the pending
changes in the AML/CTF laws and regulations and their impact on the Bank.

47. GOING CONCERN

(a) Assessed effects of the expected amendments to Latvian laws and regulations, and the Bank’s response
As discussed in Note 46 Events after the reporting period, in March 2018, the government of the Republic of
Latvia expressed its intent to strengthen the country’s legal and regulatory framework for the banking sector.
As part of the above, among other things, amendments are expected to be introduced to the country’s anti-
money laundering (AML/CFT) legislation during the first six months of 2018, as discussed in Note 46, specifically
introducing the prohibition to service shell companies (entities without active business operations or significant
assets). In addition to the above, discussions have been held by market participants, including the Bank, with
the Commission, which may result in refocusing the Bank’s business strategy away from, and further limiting its
ability to conduct business with, other foreign (non-resident) customers.
In anticipation of the above pending legislative changes, and having evaluated the risks associated with further
servicing of non-resident customers, the Bank has developed a plan, at the Commission’s request, which assumes
that it would, by 30th June 2018, cease servicing deposits of all shell companies and would also significantly
reduce the number of other customers who are not residents of the Republic of Latvia.
As at the date of these financial statements the Bank has performed the process of customer segmentation and
started giving notices to the relevant customers about the termination of their business relationship. To further
foster the process and to limit any potential risk exposures, the Bank decided to restrict the provision of USD
payment services to the majority of its non-resident customers from 20 April 2018. Please see the analysis of
financial effects of these measures in section (b) of this note.
In addition, since the elevated reputational risks of the Latvian banking sector resulted in additional credit risk
assessed in respect of each local bank, the Bank reduced the scope of cooperation with local banks (e.g. closing
Loro accounts of certain local banks) and plans to keep it at such reduced level going forward.
The major market for the Bank will henceforth be Latvia and the EU and to this end the Bank plans to increase
business with non-resident customers in EU and other OECD countries. The Bank plans to provide services
to customers of all segments, including corporates, small and medium-sized companies and individuals. The
key products currently offered on the local market are deposits, various types of loans, corporate finance,
e-commerce services and POS terminals and credit cards. The bank is consistently expanding the range of
services offered on the local market, in particular to the retail banking segment and to small and mid-sized
businesses. Having considered the inherent market size limitations and the key success factors of the strategy
introduced in 2016, the Board of Directors is currently considering the Bank’s future business model to include
the following key elements:
By means of Internet platform solutions directed at EU-based individuals as well as small and mid-sized
companies, offering products such as deposits, various types of loans and investment opportunities;
Providing banking services to shipping companies, raw material traders and high net worth individuals
domiciled in OECD countries. The product offering shall include various types of loans and wealth
management services (portfolio management, broker services);
Reducing the Bank’s offering to customers in the CIS countries to an insignificant share of its total
revenues. The Bank will principally focus on trading companies that use the Baltic transport infrastructure
(ports, terminals), ship owners and high net worth individuals;
Irrespective of the above measures, applying additional controls over the Bank’s relationships with non-
resident customers as part of its efforts to strengthen the overall internal control for AML/CTF risks (refer
also to Note 4(8)); and,
Significantly growing the lending business and the share of interest income. A large portion non-interest
income is also expected to be comprised of income from servicing customer investments (brokerage and
asset management).
(b) Effects of the de-risking measures on the Bank’s projected future financial performance
The final results of the Bank’s operations in 2017 indicate that the key financial objectives for the year under
the base scenario set by the Bank management have been exceeded. The Bank’s liquidity and capital adequacy
ratios are above the planned as at 31 December 2017 – liquidity (actual 76.61% versus 65.2% planned) and capital
adequacy (actual 18.68% versus 15.9% planned). Likewise, the developments in the Latvian financial market

that took place in February and March 2018 have not so far had a significant impact on the Bank’s or the Group’s
operational indicators and customer behaviour.
Nevertheless, following the closure of shell accounts, the Bank’s self-imposed restriction on the provision of
services in USD, and other measures as discussed in (a) above, the Board of Directors expects an outflow of
deposits in the first six months of 2018 to amount to approximately EUR 320 million and for the level of customer
deposits to remain stable thereafter, with the annual decrease in total assets amounting to EUR 210 million at
the end of 2018 (at 31st December 2017, customer deposits in the Bank amounted to EUR 567 million and total
assets to EUR 661 million). The Board of Directors has assumed that the outflow of customer deposits will result
in a decrease in revenue (net interest and commission income) by 30%, and that a cut in administrative expenses
of 50% would be needed to maintain profitability at the level compatible with 2017.
The Board of Directors believes that the planned fundamental changes in the Bank’s business model, and also
the restructuring and automation of internal processes, both as discussed in (a) above, will allow the Bank to
implement the required cost cutting measures. The Bank plans to reduce its annual spending budget by EUR
9 million by, among others, closing of and/or cutting financial support for a number of foreign subsidiaries.
Reducing staff costs and related expenses (workplace equipment, office machinery) by approximately 50%
represent another measure to be implemented in the above context. In addition, the Board of Directors plans to
reduce rent, advertisement and marketing, business trip and representation expenses.
As a result of the above, the liquidity ratio is expected to decrease, yet it is still expected to remain above the
regulatory requirement (minimum of 60%). Likewise, the capital adequacy ratio is expected to be maintained
above the regulatory levels.
In 2019, the Bank plans to further increase its loan portfolio and the related interest income. Regardless of the
transformation of the business model, individual liquidity and capital adequacy ratios are expected to remain
within the regulatory requirements and the Bank expects to generate profit in 2019. Assets at the end of 2019
are expected to amount to EUR 500 million.
(c) Going concern assumption
The Board of Directors believes that the activities and measures to be undertaken to fundamentally transform
the Bank’s business model should not have a material impact on its financial or operational stability. Among other
things, as discussed above, all relevant statutory core ratios are expected to remain at the required minimum
levels.
Nevertheless, the transformation is expected to have a direct effect on the expense and revenue structure, and
will necessitate changes to the key business processes, as outlined above. The change in the customer base will
enable the Bank to mitigate its compliance and reputational risks significantly.
Having considered the facts and circumstances laid out in the preceding paragraphs, management have prepared
these separate and consolidated financial statements on the going concern basis, and they therefore do not
include any adjustments that would have been required had the Bank not applied the going concern basis of
accounting. As the transformation process is ongoing and the Bank, as previously outlined, is in discussions with
the Commission regarding its high level development plan that is to transform into full business plan in the course
of 2018, the management made certain judgements and assumptions related to future events disclosed above
that form the basis for financial plans for 2018 and further years and allowed the management to conclude on
the appropriateness of further application of the going concern basis in the preparation of these separate and
consolidated financial statements. The Board of Directors recognises that material uncertainty exists in relation
to the future outcomes of these events that may cast significant doubt on the Bank’s and the Group’s ability to
continue as a going concern. The key sources of this uncertainty include:
The outcomes of any potential fines and sanctions coming out of ongoing AML reviews conducted in the
Bank (see Note 4(8) Management of the money laundering and terrorist financing risk and the Customer
Policy);
The ability of the Bank and the Group to implement the measures, including their prior validation with the
regulator in the course of development of full business plan, to reduce the regulatory, compliance and
reputational risks in the timeframe outlined in paragraph (a) and (c) above;
The ability of the Bank and the Group to demonstrate the practical viability of the new business model,
including the attraction of business from new sources in a highly competitive environment and reduction
in administrative expenses, outlined in paragraph (b) above.

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