LHV Group — Annual Report 2021

Mar 1, 2022

AS LHV Group Consolidated Annual Report 2021

(Translation of the Estonian original)

Consolidated Annual Report 01.01.2021 – 31.12.2021

Legal name	AS LHV Group
Commercial Registry no.	11098261
Legal address	Tartu mnt 2, 10145 Tallinn
Phone	(372) 6800400
Fax	(372) 6800410
E-mail	lhv@lhv.ee
Main activities	Activities of holding companies
	Banking
	Security brokerage
	Financial advisory
	Finance lease and other lending
Financial year	1 January – 31 December
Management Board	Madis Toomsalu
Supervisory Board	Rain Lõhmus
	Andres Viisemann
	Tiina Mõis
	Heldur Meerits
	Raivo Hein
	Tauno Tats
	Sten Tamkivi
Shares	Listed on the Nasdaq Tallinn Stock Exchange
Auditor	KPMG Baltics OÜ

Mandatory elements of the basic taxonomy of the ESEF

Name of reporting entity or other means of identification	AS LHV Group
Explanation of change in name of reporting entity or other means of identification from end of preceding reporting period	No changes
Domicile of entity	Tartu mnt 2, Tallinn, 10145, Republic of Estonia
Legal form of entity	Public Limited Company
Country of incorporation	Republic of Estonia
Address of entity's registered office	Tartu mnt 2, Tallinn, 10145, Republic of Estonia
Principal place of business	Republic of Estonia
Description of nature of entity's operations and principal activities	Banking, finance lease and other lending, financial advisory, security brokerage, activities of holding companies
Name of parent entity	AS LHV Group
Name of ultimate parent of group	AS LHV Group

Table of contents

Short summary	5
Management report	6
Statement of the Managing Director	6
Year 2021 overview	7
Business environment	9
Management report	11
Strategy and financial plan	12
Governance of the Group	15
Sustainability report	20
Corporate Governance report	47
Financial results	59
Overview of the Group's subsidiaries in 2021	66
Remuneration report	72
Consolidated financial statements	74
Risk management	74
Consolidated statement of profit or loss and other comprehensive income	120
Consolidated statement of financial position	121
Consolidated statement of cash flows	122
Consolidated statement of changes in equity	123
Summary of significant accounting policies	124
Notes to the consolidated financial statements	137
NOTE 1 General information	137
NOTE 2 Significant management estimates and assumptions	137
NOTE 3 Offsetting assets and liabilities	138
NOTE 4 Fair value of financial assets and financial liabilities	139
NOTE 5 Operating segments	141
NOTE 6 Subsidiaries and goodwill	143
NOTE 7 Net interest income	145
NOTE 8 Net fee and commission income	146
NOTE 9 Operating expenses	147
NOTE 10 Due from central bank, credit institutions and investment companies	147
NOTE 11 Investments in debt and equity securities	148
NOTE 12 Loans and advances to customers	149
NOTE 13 Receivables from customers	150
NOTE 14 Other assets	150
NOTE 15 Tangible and intangible assets	151
NOTE 16 Deposits from customers and loans received	152
NOTE 17 Accounts payable and other liabilities	153
NOTE 18 Right of use assets and lease liabilities	154
NOTE 19 Subordinated debts	154
NOTE 20 Shareholders' equity in the public limited company	155
NOTE 21 Assets under management	157
NOTE 22 Contingent assets and liabilities	157
NOTE 23 Transactions with related parties	159
NOTE 24 Basic earnings and diluted earnings per share NOTE 25 Income tax expense	160 160
NOTE 26 Separate primary financial statements of parent company	161
Signatures of the Management Board to the consolidated annual report	164
Independent Auditor's Report	165
Signatures of the Supervisory Board to the annual report	172
Allocation of income according to EMTA classificators	173

Short summary

Our vision is helping people and businesses dare to think big and act big.

Our mission is to provide better access to financial services and capital.

Our long-term goal is to build strong relationships with all stakeholders by being:

• the best financial services provider for customers;
• the most supportive financial services provider for international financial intermediaries;
• an attractive employer that offers high job satisfaction, development opportunities and self-fulfilment for people;
• a transparent company that delivers 20% return on equity per year for investors; and
• a company with the best management practices, positive social impacts and climate goals for society.

2021 in numbers

• LHV share price increased to 43.2 EUR, providing more than EUR 728 million of additional value for the shareholders.
• Volume of deposits exceeded EUR 5.8 billion, of which EUR 2.2 billion belongs to financial intermediaries. Deposits grew by EUR 1.7 billion within a year.
• Loan portfolio increased by EUR 468 million to EUR 2.7 billion.
• Assets under management decreased by EUR 188 million to EUR 1.3 billion.
• Volume of custody accounts increased by EUR 1.8 billion and reached EUR 3.9 billion.
• Profit at record high EUR 60.3 million, an increase of EUR 20.5 million compared to last year.

Risk view

• As a traditional banking group, the biggest risk for LHV is credit risk which accounts for 91.7% of total Risk Weighted Assets (RWA) of LHV Group. Credit risk arises mainly from loan related activities.
• The second biggest risk for LHV is operational risk which accounts for 7.9% of total RWA. Operational risk is the risk of loss as a result of inadequate or inoperative internal processes, persons and information systems or external events.
• Market risk accounts for 0.3% of total RWA of LHV Group. Market risk arises from LHV's positions which are exposed to changes in interest rates, foreign exchange rates and securities prices.
• LHV capitalization remains solid, especially taking profitability into account. Still Group plans to increase its capitalization level over next years.
• LHV keeps very high liquidity profile, as some customer base is more volatile.

Statement of the Managing Director

2021 was a controversial year without a doubt. On the one hand, trends that had already emerged earlier, increased even further. National budget deficits increased and central banks showed a willingness to finance such deficits. On the other hand, Estonia fared well economically in such an environment, if we consider one of the smallest economic declines in Europe, followed by one of the strongest recoveries, continuously strong employment, and a society with operational services, as the standard of good performance.

However, the controversies are not over yet, as certain economic sectors have emerged where the recovery has been slower compared to the rest of the economy. Many companies are strongly affected by labour shortage and supply issues; the economy as a whole by the increase in energy prices, together with the general increase in prices. To this background, we can add the record-breaking attraction of investments by start-up companies, the liberal monetary policy of the European Central Bank, the rise of crypto assets, and pension reform.

2022 promises to be controversial as well, insofar as many of the aforementioned topics remain without a solution. Different variants of the coronavirus are generating wave after wave; investments left unmade in diversifying the energy supply, together with supply difficulties of goods, have led to a higher increase in prices over two winters than monetary policy has achieved in more than ten years.

The inflation that started with energy prices affects all consumers from companies to private individuals, and all main components of inflation from services to everyday goods and durable goods. The inflation originating from energy prices is much more difficult to manage in terms of financial policy, which is why messages from the European Central Bank have been of a lulling nature, suggesting a short duration for the increased cost of living.

Previously, many events of recent years would have been defined as so-called black swan events. However, one thing that does not qualify as a black swan in terms of its visibility, but the final effect of which is unknown to everyone, is the course of action of central banks. The fate of money markets, stock exchanges, banks and, indirectly and increasingly, even that of companies and private individuals, is centralised to a couple of places – the Federal Reserve and the European Central Bank.

Looking at the forecasts for 2022, completely reasonable economic growth and inflation are forecast for the European Union as a whole, including the larger countries. However, we are not talking about increasing interest rates, but still only about decreasing the money supply. This message is very interesting in the conditions where the Bank of England has already increased interest rates, and an increase is expected in 2022 for the US. In terms of Europe, however, we are talking about 2024.

At the same time, we are still talking about figures at around zero and a change to the optimal level of interest rates. However, any kind of explosive inflation is likely not to be expected on the European level, as central banks are currently still able to push inflation out of asset prices by reducing the balance of the central bank, selling previously purchased financial assets back to the market, or not buying assets. If asset prices go down, so will the confidence of investors, in part. Expectations and confidence often have a larger effect on inflation than interest rate policy.

Despite the controversial environment, 2021 was a successful year for LHV. We have continued to finance the Estonian economy, made successful steps in establishing a bank in the United Kingdom, vigorously increased our number of customers, strengthened our offer of investment services even more, and once again received recognition for being the bank with the best service. Loan portfolios grew, overdue loans remained low, and the grace periods granted during the pandemic generally ended as expected.

16 August marked the day when we achieved the financial vision outlined four years ago – LHV's market value reached one billion euros. As promised years ago, the growth of enterprise value has relied on the increase in business in Estonia, export of financial technology, extraordinary transactions, and development of new business lines. Reaching this important goal is worth celebrating for two reasons.

Firstly, I am thankful to all customers who have entrusted their financial matters in our hands, and also to shareholders who have had faith in LHV and have shouldered the growth of the company. However, most of all, this is recognition of the value of the daily work of more than 650 people employed at LHV. All of them have had an important role in the growth of the company.

Secondly, achieving the previous goals will help in relation to new ones. Our ambitions have only increased, which is why we are continuously growing our international business activities. It is still possible to perfect the amount of products directed at financial intermediaries, and thereby address a wider range of customers in different European countries. In Estonia, we have set the goal of becoming the largest and most profitable bank in Estonia within ten years and becoming the second largest within five years.

Madis Toomsalu

Year 2021 overview

For LHV the past year has been characterised by continuation of rapid growth and higher customer activity than in previous years.

The volume of consolidated assets of the Group rose to EUR 6.84 billion by the end of 2021. The consolidated deposits increased by 41% yoy, that is by EUR 1.69 billion and reached EUR 5.81 billion. At that the deposits of regular customers increased by EUR 705 million (25%), financial intermediaries' deposits by EUR 1.19 billion (+113%) and deposits from platforms decreased by EUR 209 million (-97%).

The consolidated loan portfolio rose by 21% in 2021 or by EUR 468 million to EUR 2.68 billion. In a year, Retail loans grew by EUR 181 million (+18%) and loans to companies by EUR 287 million (+24%). Like it did in 2020, LHV continued financing customers through different kinds of restrictions. Previously issued grace periods ended mainly according to due date. During the whole year credit quality remained high.

The volume of funds managed by LHV decreased by 12% or by EUR 188 million due to pension reform in 2021, reaching EUR 1.35 billion by the year end. At that the II pillar pension funds decreased by EUR 211 million (-14%).

In 2021, the number of processed payments associated with financial intermediaries amounted to 27.4 million. That is 11.3 payments more than in 2020 (indicating a 70% rise).

In 2021, the number of bank customers increased by 63,000, i.e., by 24%. At that, the number of customers who use settlements increased by around 28,000 (+24%), and the number of customers with an investment contract by a whole 46,000 (+64%). In the autumn, public share offerings of several companies and the large addition of new investors promoted the inflow of customers. LHV managed to increase its role as market leader on the Estonian investment services market, which was supported by the focus on providing a full range of services.

At the beginning of the year, we significantly reduced service fees for foreign shares for our customers. After the pension reform, we were the first to offer the opportunity of a pension investment account to our customers. By the end of the year, 3,900 customers had opted for a PIA. In the autumn, we also introduced the opportunity to trade in crypto assets on the bank's mobile app to our customers; by the end of the year, the volume of our customers' crypto assets reached EUR 7.6 million. Use of the Growth Account was active. This product was complemented by the opportunity to save up for the down-payment of a home loan. At the end of the summer, there was also the transition to a new external broker in providing investment services, and we received the accolade of the best broker on the Baltic markets from Nasdaq Baltic.

Becoming an LHV customer has been made easy; from September, companies also gained the opportunity to open an account in LHV bank by electronic means.

Among other important developments, the bank continued the development of means of payment. We lowered the age restriction for bank cards from seven years to six. The possibility to see the PIN digitally was added for our customers' bank cards, the travel insurance of certain cards gained the possibility for Covid-19 cover and the permanent donation function was enabled, allowing one to contribute to charity with every card payment.

LHV Finance introduced a refinancing loan among its products, which enables customers to comfortably combine several consumer loans into a single loan.

The results of LHV Varahaldus were affected by the pension reform that entered into force at the beginning of 2021 and was reflected in the company results for the first time in September. The opportunity of customers to exit the II pillar reduced the volume of funds as well as the number of II pension pillar customers by the end of the year by 42 thousand, to 138 thousand customers. At the same time, the negative effect of the reform remained more modest than expected. However, from the beginning of September, contributions by the state for persons continuing with the II pillar recovered.

In 2021, after all fees, the rate of return for pension funds M, L and XL turned out to be 5.3%, 9% and 10%, respectively. The unit value of the pension fund Indeks with a broadbased share risk increased by 22.8%. For the pension fund Roheline, 2021 was somewhat more modest than the vigorous growth year preceding it: the annual rate of return amounted to 2.9%. Also, all of LHV's III pillar funds achieved a positive result.

LHV's actively managed funds are well-positioned for the upcoming challenges. In the M, L and XL funds, the proportion of alternative assets has been optimised.

2021 saw LHV Kindlustus start its operations, when in the first quarter of the year, it took over the extended warranty insurance contracts related to the sale of technological devices by Euronics and started concluding the first home insurance contracts. In May, LHV home insurance, motor third party liability insurance, as well as the motor own damage insurance were all widely introduced to the customers. Later, the product range was complemented with dwelling insurance for corporate customers and the travel insurance product.

At the same time, strengthening of the insurance undertaking team has continued, and the insurance undertaking is ready to offer a strong alternative in the insurance market that has so far mainly been occupied by foreign capital. The business volume of Kindlustus has consistently increased, the number of customers increased to 143,000, and customer satisfaction with loss adjustment remained high throughout the year.

February 2021 saw the establishment of LHV Group's new subsidiary, LHV UK Limited, and there are plans to shape it into a standalone bank in the United Kingdom, provided that the supervisory authorities grant permission. During the year, the company was engaged in hiring key personnel and making the preparations necessary to receive the banking licence. In July, the LHV team in London moved to a new office.

Throughout the year, LHV as a whole implemented and developed ESG activities. In 2021, the company developed a new Group-wide ESG policy, published the overview of activities meeting the principles of responsible banking, and also joined the PCAF financial partnership at the end of the year. The LHV Tallinn office was issued the international BREEAM environmental certificate. In the course of the year, the conditions of green products (e.g., leasing, home loan) were improved, and new solutions were also introduced to the market (insurance). In addition, in August, LHV entered into a cooperation contract with the start-up company eAgronom, with whom LHV is going to offset the unavoidable negative environmental impacts of office activities.

In 2021, LHV was recognised as an excellent employer: a CV-Online survey deemed LHV the best employer in the financial sector; Kantar Emor's reputation survey of Estonian employers, conducted every spring, showed that LHV Pank rose to 5th place on the leaderboard of preferences of employed people, and became the most valued employer among university students.

Among other forms of recognition, LHV's customer service also caught attention, when the survey company DIVE's analysis showed once again that LHV is the bank with the best service in Estonia, while LHV's Internet bank placed first on the Kantar Emor recommendation index leaderboard of service experience in Estonian online environments. In the favourite Estonian brand survey, LHV made it into the top ten for the first time.

In addition to local recognition, the leading international economic magazine Euromoney declared LHV Pank the best bank in Estonia for the fourth year in a row. The Banker declares LHV the best bank in Estonia for the third year in a row

At the beginning of May, rating agency Moody's Investors Service confirmed LHV Pank's investment grade level credit rating of Baa1 and changed the bank's rating for the outlook of long-term deposits to positive, from the previous stable outlook. The rating agency assigned AS LHV Group a Baa3 long-term local currency issuer rating with a positive outlook.

Among corporate events, in August, LHV Group finished its investment in Bank North of the United Kingdom, obtaining a 9.9% ownership in the company.

At the end of September, LHV Group raised new share capital in the extent of EUR 25.3 million, ensuring further growth both internationally and in Estonia. By the end of the year, the total number of LHV shareholders reached 20,404 investors.

Business environment

The increase of global economic activity slowed down in the autumn. The faster spread of the virus once again forced many factories in Asia to halt their work, and many commercial ports were also temporarily closed. In developed countries with higher vaccination rates and less stringent restrictions on the economy, the demand remained strong, but due to global supply issues, further development is also endangered there. In addition, accelerated inflation, mainly driven by the rise in price of energy and raw materials, has increasingly started to hinder economic development.

Year-on-year, the European economy grew 5.3% in the first nine months. Quarter-on-quarter, growth remained at around 2% in the second and third quarter. With this, the pre-crisis size of the economy was achieved, i.e., recovery from the crisis has been rapid. Estonia's main trading partners have fared better than average, since in Finland, Sweden and Latvia, the pre-crisis size of the economy has already been exceeded by a couple per cent; even more in Lithuania. This also created good prospects for the Estonian economy, which has been at the forefront in Europe in terms of recovery.

The recovery of the labour market has also been remarkable. In the last months of the year, unemployment in the European Union fell to 6.7%; historically, a lower figure than that has only been recorded immediately before the pandemic broke out in later 2019 and early 2020. Within the year, 1.3 million people have once again found a job; compared to the low point of the crisis, the same figure is 2.1 million. Across countries, developments have been different – in most countries (incl. Estonia) unemployment is currently still a touch higher than before the pandemic, but in Greece and Italy, for example, which are countries with some of the highest unemployment rates in Europe, it has already decreased to below pre-crisis levels.

Inflation has accelerated across Europe within the year and reached 4.9% in the euro area in November. Across countries, Estonia and Lithuania have had to witness the highest increase in prices, reaching 9% at the end of the year, whereas in Malta, Portugal and Switzerland, the increase in prices has remained at a maximum of 2–3%. Inflation mainly relies on the rapidly increasing gas and electricity prices, caused partly by unfavourable weather conditions, partly by bad luck, and partly also by politics. There is no quick solution to the normalisation of the price level, which is why we must come to terms with high energy prices in the following quarters as well. In the past months, the appreciation of food products has also contributed to the rise in prices, and this will also carry over into year 2022.

In the conditions of quick inflation, the European Central Bank has also gradually started to change the monetary policy. At a session of the Governing Council of the Central Bank, held in December, it was decided to significantly decrease the asset purchases made within the pandemic emergency purchase programme (PEPP) in Q1 of year 2022, and to end these purchases by the end of March. To balance the discontinuation of PEPP, asset purchases made within the general Asset Purchase Programme (APP) will be increased somewhat from Q2, but the volume of purchases will remain lower, comparable to about half of the current volume (about 40 billion per month). From October 2022, purchases will be decreased even more (about 20 billion per month) until base interest rates are subject to increases.

Regarding increasing interest rates, the ECB has not provided a clear timeframe, and market expectations are variable in this regard. While in early December, the first interest increases were expected to happen later in 2022, in the light of messages from the last sessions of the Governing Council, these expectations have rather been postponed for a year. This is also reflected by the Euribor rate, which sunk to a record low mid-December (3-month Euribor –0.6%). Theoretically, an earlier increase in interest is still possible. According to ECB communication, interest will start to be increased after ending asset purchases which, according to current information, could also happen at the end of 2022.

Year-on-year, the Estonian economy grew 8.5% in the first nine months. This makes Estonia one of the fastest-recovering countries in Europe in terms of the economy, already exceeding the pre-crisis size of the economy by about 5%. Among the fields of activity, IT, industry, and construction have certainly driven the growth, but quick growth is also partially the result of Government decisions, which have somewhat redistributed tax receipts between the years, and inflated the 2021 figures. The real estate and transport sectors also presented strong growth in the second half of the year. The situation has also strongly improved in the accommodation and catering sector that suffered most from the crisis, although the gross product there still remains under the pre-pandemic level.

The rapid economic growth is driven by strong domestic demand and also strong demand regarding the trading partners. The reopened economy increased the people's demand for different goods and services, while consumption was supported by the increase in bank deposits that occurred during the lockdowns. In the autumn, disbursement of the second pension pillar funds gave an additional boost, with slightly over one billion euros having been handed over to the people. Investments in the economy have been more volatile than usual, growing by more than 50% in the first half of the year; however, the growth rate decreased in the second half of the year. In both cases, the dynamics have been guided by the software investments of one company, the scale of which is unprecedentedly high in the Estonian context. The actual effect of these investments on the economy will only be revealed in the coming years.

Other investments by companies in means of transport and production equipment have steadily increased throughout the year, which shows that companies are engaged in increasing the production capabilities, which have started to hinder economic development in recent years.

While the manufacturing sector has usually been driving Estonian export growth, in 2021, the IT sector also made a significant contribution here, with its export growing by about 75% across 9 months, year-on-year. All in all, the growth of export of services has been quicker and also more broad-based than the export of goods, which has mainly relied on the export of mineral fuels. At the same time, there was a very low reference base from the last year for many service types. Export growth has also been supported by the increase in export prices of about 20%.

Inflation in Estonia has mainly followed the regional trends and reacted more strongly than average, as customary. This means that in Estonia as well, the general increase in prices in the last quarters has been shaped by the increase in energy prices, but price fluctuations have been higher than the European average. While in the first half of the year, the price increase remained at around 2%, from July, inflation has crossed the 5% threshold and steadily accelerated. According to the last survey, consumer prices increased by a whole 8.8% in November, year-on-year. Over half of the increase in prices can be attributed to energy, which is manifested in the higher electricity, gas and motor fuel prices. Food and leisure services have also increased more in price than others. Looking ahead, we can expect inflation to become increasingly more broad-based, as higher energy costs are increasingly making their way into the final prices of other products and services. In the first half of 2022, the increase in prices will remain rapid, but should start to gradually subside after that.

Different forecasts show that economic growth in 2021 could have remained at around 8–9% all in all. Looking ahead, the growth will surely slow down, as there is now a clearly stronger reference base and the internal capacity for growth is also limited due to the available workforce and existing production resources. On the background of this, both manufacturers and consumers are suffering from continuously high energy prices. According to the Bank of Estonia, economic growth could reach 2.8% in 2022, with consumer prices increasing by 6.9% at that. Wage growth will remain quicker than inflation, meaning that the actual income of people will also increase this year.

Key economic indicators of Estonia* Bank of Estonia forecast 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E Nominal GDP (EUR billion) 20.63 21.75 23.83 25.82 27.73 26.83 30.37 33.02 35.48 37.82 GDP volume** 1.9% 3.2% 5.8% 4.1% 4.1% -3.0% 8.0% 2.8% 3.9% 2.9% Private consumption expenditures*** 4.9% 4.5% 2.5% 4.3% 4.1% -2.5% 7.3% 4.0% 3.6% 3.9% Government consumption expenditures 3.1% 2.5% 1.9% 1.0% 3.0% 3.0% 4.8% -0.9% -1.3% 0.1% Fixed capital formation -3.2% 5.1% 13.9% -0.1% 6.1% 19.9% 7.4% -14.5% 6.9% 1.2% Exports -1.5% 4.8% 4.8% 3.9% 6.5% -5.0% 15.2% 4.9% 4.8% 3.4% Imports -1.9% 6.5% 4.0% 5.7% 3.8% 0.9% 19.5% -0.9% 4.8% 2.8% CPI -0.5% 0.1% 3.4% 3.4% 2.3% -0.4% 4.4% 6.9% 3.0% 2.6% Unemployment rate (% of the labour force) 6.2% 6.8% 5.8% 5.4% 4.4% 6.9% 6.2% 5.5% 5.3% 4.7% Current account (% of GDP) 2.2% 1.9% 3.3% 1.8% 2.0% -0.3% -3.2% 0.0% -0.2% 0.4% Budget balance (% of GDP)**** 0.1% -0.3% -0.4% -0.5% 0.1% -5.6% -3.6% -2.0% -1.6% -0.7%

* Numbers reported are annual rates of change in per cent, if not noted otherwise; ** GDP and its components are chain-linked; *** including NPISH; **** the budget balance forecast considers only those measures on which sufficient information was available at the date of the forecast.

Sources: Bank of Estonia, Statistics Estonia

Management report

AS LHV Group (hereinafter: the Group or LHV) is the biggest domestic finance group and capital provider in Estonia. The main subsidiaries of AS LHV Group are AS LHV Pank (hereinafter: the Bank) and AS LHV Varahaldus (hereinafter: LHV Varahaldus). LHV was established in 1999 by people with long experience in investing and entrepreneurship.

LHV-s offices for customer servicing are located in Tallinn and Tartu, also London office was opened in 2018. Over 650 people work in LHV. Over 321,000 customers use banking services offered by LHV and the LHV's pension funds have over 170,000 customers.

Operating principles

The mission of LHV is to provide better access to financial services and capital.

LHV concentrates on active and independent customers with an entrepreneurial mindset. For private consumers LHV offers high quality universal banking services. For corporate customers LHV offers flexible and suitable financing and managing of everyday financial operations.

The products and services provided by LHV are simple, transparent, and appropriate. Customer interaction is mainly conducted using modern electronic communication channels. Costs avoided will reach the customers of LHV through affordable cost of everyday service.

LHV was created as a partnership and partnership is the central way of growing LHV's business. New initiatives will be implemented faster and more successfully when partners have same interests and long-term support for each other.

LHV is a public company, which is listed on the Tallinn Stock Exchange since May 2016, so all customers and partners of LHV may be owners of LHV.

Key events in 2021:

• LHV Bank

It was a year of growth in all areas: number of customers, deposits, loans, customer activity, financial intermediaries, income. All areas have been growing and, in many areas, quicker than we were expecting.

• LHV Varahaldus

The largest topic for 2021 was II pillar pension reform, allowing people to leave the system. Around 21% of clients used the possibility, which was lower than expected.

• LHV Kindlustus

The main topic was bringing products to the market. By the end of the year all major product groups had been implemented.

• LHV UK Ltd

The subsidiary company was established in early 2021 and is applying for banking licence in UK. There is no other business activity in the company.

Strategy and financial plan

1. Strategy and the future

LHV's home markets are Estonia and the United Kingdom. Strategically, both markets are connected by our capability to build technological solutions, regardless of the customer and location. We strive to maximise growth, guided by predetermined risks and a 20% return on equity. This means that despite our strong ambitions, we do not wish to grow at the expense of profitability and risks.

We see LHV Group as an international financial group that provides the best service, regardless of the customer group or channel – from the mobile bank to the bank office. If the plans come to fruition, the Group will include four main companies: in addition to the bank and Varahaldus, an insurance undertaking and a separate credit institution in the United Kingdom.

We have made efforts so that LHV Pank would have the strongest possible offer to ensure growth. In Estonia, we are essentially able to finance all Estonian companies today, and our decisions are made quickly and on site. We are able to grant home loans across Estonia, making decisions quickly and with additional conditions that are suitable for the customer. In addition, we provide payments free of charge, the most complete investment service, the opportunity to invest in crypto assets, payment collection service for companies, insurance solutions, and pension funds with a high long-term rate of return. We can provide the majority of our services, incl. trading in securities and applying for private loans together with concluding loan contracts, through our mobile app.

In terms of private persons, we are emphasising increasing the customer base and increasing the customer activity. We are focusing on Estonian cities, where we wish to address active customers who prioritise electronic channels. At the same time, we are opening our third office, in Pärnu. We wish to see customers who use settlements, whose salary is received in LHV bank and who use LHV's bank card for day-to-day financial operations. We are focusing on increasing the home loan market share.

In terms of companies, our focus is on increasing the loan portfolio. We wish for customers for whom it is important that the core of their business activity is understood and that the financing structure is based on it. We continue with a one-step decision-making process, which means that all decisions are made on site, fast and flexibly. We will also continue with the multi-year project of capital calculation based on internal ratings, with the purpose of improving return on equity through effective capital distribution.

In the business line of financial intermediaries, we are focusing on preparations for establishing a bank in the United Kingdom. For customers who are financial intermediaries, we are offering real-time euro and pound payments through our application interface LHV Connect. We will also continue to offer different accounts, the making and receipt of payments, and currency services. As new products, we will introduce direct debits of euro and pound payments to the market. Our branch is in London, but the activity of financial service providers is often of a cross-border nature, which is why we are also looking for customers from other countries.

The aim of LHV Kindlustus is to repeat the success of the bank. LHV Kindlustus is an insurance provider based on domestic capital, with simple, innovative, and customer-friendly products that the company is able to provide through various channels.

In the case of pension funds managed by LHV Varahaldus, achieving a long-term rate of return is the priority. We will continue implementing our changed investment strategy, focusing more than before on finding private capital and real estate investments.

Our long-term aim is to provide strong relations to our partners, being:

• the provider of financial services to our customers with the best service;
• the most cooperative provider of financial services to international financial intermediaries;
• an attractive employer, providing high satisfaction, development, and personal fulfilment to people;
• a transparent company for investors, with the annual rate of return reaching 20%;
• a company with the best management practices, positive social impacts and climate goals.

2. Financial plan

As one of very few listed companies LHV publishes fiveyear financial plan every year. As the forecast horizon is long, only the first year should be taken as commitment, remaining four years as guideline where LHV sees its business develop.

2.1 Assumptions behind the financial plan

Biggest assumption is regarding the macroeconomic situation, where we deliberately do not plan major changes to present the actual development of LHV without significant effects of economic environment.

Year 2021 was affected by COVID-19, and this carries its effects further to following years as well, economic growth is slower in 2022, some sectors are negatively affected. Yet we see that modest economic growth continues and credit risk appears through some individual counterparts.

In addition, we consider competition to remain similar to current situation. Two largest changes taken into account: already known changes in legislation and market view regarding interest rates. There are no major changes in legislation, but there are trends putting even more focus on ESG and higher capitalization levels for banking.

From interest rates side we see that interest rates will continue to be negative during the whole forecasting horizon ending with positive interest rate in 2026.

This plan continues the approach of LHV having four business areas, of which Estonian banking and asset management areas are solid already now, financial intermediaries' business line will be completely separated from Estonian banking unit and insurance will increase. This plan does not include potential incomes from planned establishment of UK bank.

LHV reviews the financial plan in case actual results and rolling forecast differ more than 10% from the existing financial plan.

Profit and loss statement

EURm	2022	2023	2024	2025	2026
Net interest income	110	127	147	171	198
Net fee and commission income	55	71	83	99	111
Other income	1	2	2	3	3
Total revenue	167	200	232	273	312
Total operating expenses	77	86	94	99	108
Amortization	7	8	9	8	8
Impairement losses on loans and advances	9	13	15	17	19
Earning before income tax	74	93	114	148	178
Income tax	2	2	2	2	2
Advance income tax	10	12	14	18	21
Net profit	61	79	98	128	156
Profit attributable to non-controlling interest	2	3	4	6	8
Profit attributable to owners of the parent	59	76	94	122	148

Balance sheet

EURm	2022	2023	2024	2025	2026
Cash and cash equivalents	3,980	4,277	4,614	4,916	5,052
Financial assets at fair value	141	145	147	152	158
Loans granted (net)	3,097	3,674	4,296	4,905	5,520
Long-term financial investments	13	14	14	15	15
Other assets	44	49	50	51	58
Total assets	7,276	8,159	9,121	10,038	10,803
Deposits from customers	6,109	6,841	7,504	8,301	8,912
Loans received	546	610	810	835	835
Subordinated loans	131	136	136	101	101
Other liabilities	86	95	103	113	127
Total liabilities	6,871	7,682	8,553	9,349	9,975
Equity	404	477	568	689	828
Total liabilities and equity	7,276	8,159	9,121	10,038	10,803

Financial and operational ratios	2022	2023	2024	2025	2026
ROE from profit attributable to the owners of parent	16.7%	17.8%	18.5%	20.1%	20.2%
ROE from pre-tax profit attributable to the owners of the parent	19.4%	20.2%	20.8%	22.3%	22.3%
C/I	50.3%	47.2%	44.3%	39.5%	36.9%
L/D	50.7%	53.7%	57.2%	59.1%	61.9%
Risk cost	0.3%	0.4%	0.4%	0.4%	0.4%
EPS (EUR)	1.90	2.41	2.93	3.79	4.55
Dividend (EURt)	11,946	12,444	15,466	19,199	24,915
DPS (EUR)	0.40	0.40	0.49	0.60	0.77
CET1	14.8%	14.6%	15.0%	16.1%	17.3%
T1	16.3%	15.9%	16.2%	17.1%	18.2%
CAD	20.5%	19.7%	19.4%	19.0%	19.8%

Governance of the Group

Supervisory board

Rain Lõhmus is one of the founders of LHV and the chairman of the Supervisory Board of AS LHV Group. He is a member of the Supervisory Board of AS LHV Pank and belongs to the Supervisory Boards of Kodumaja AS and Thermory AS. He is the owner and member of the Management Board of AS Lõhmus Holding, Lohmus Capital OÜ and LHV CAPITAL I PTE. LTD and the owner of OÜ Merona Systems and Kõrberebane OÜ. Additionally, he is the Management Board member and one of the owners of Zerospotnrg OÜ and Umblu Records OÜ. Rain Lõhmus graduated from the Tallinn University of Technology (TalTech) and the management program of Harvard Business School. Rain Lõhmus and the persons related to him (Lõhmus Holdings OÜ, OÜ Merona Systems) own altogether 6,772,331 shares, representing 22.68% of all shares of AS LHV Group.

Raivo Hein is a member of the Supervisory Boards of AS LHV Group and AS LHV Pank. Also, he belongs to the Supervisory Board of AS Puumarket. He is the owner and the member of Management Board of OÜ Kakssada Kakskümmend Volti and a Management Board member of OÜ Saarte Sillad, Zerospotnrg OÜ, E-FINANCE OÜ, Lame Maakera OÜ and Põhjala Kellad OÜ. Raivo Hein graduated from the Tallinn University of Technology (Tal Tech). Raivo Hein does not own shares of AS LHV Group. The persons related to him, OÜ Kakssada Kakskümmend Volti, Lame Maakera OÜ and Astrum OÜ own altogether 550,430 shares of AS LHV Group. R A m B a

Heldur Meerits is a member of the Supervisory Boards of AS LHV Group and AS LHV Pank. He is also a member of the Supervisory Boards of Kodumaja AS and the foundations SA Põltsamaa Ühisgümnaasiumi Toetusfond and Audentese Koolide SA. Heldur Meerits is also the owner and the member Management Board of the companies established for the management of personal economic interests, AS Amalfi, AS Altamira and SIA Valdemara Group and the protector and beneficiary of Castra Hiberna Foundation. Heldur Meerits graduated from the Faculty of Economics and Business Administration of the University of Tartu. Heldur Meerits does not own shares of AS LHV Group. AS Amalfi owns 1,061,390 shares of AS LHV Group. Hel Pan SA also man Gro

Tiina Mõis is a member of the Supervisory Boards of AS LHV Group and AS LHV Pank. She also belongs to the Supervisory Board of Rocca al Mare Kooli SA. She is the owner and the Management Board member of AS Genteel and one of the owners and a Management Board member of Nine Lives OÜ. Tiina Mõis graduated from the Tallinn University of Technology (TalTech). Tiina Mõis does not own any shares of AS LHV Group. AS Genteel owns 1,110,744 shares of AS LHV Group.

Sten Tamkivi is a member of the Supervisory Board of AS LHV Group. He belongs to the Supervisory Boards of ASI Private Equity AS, Salv Technologies OÜ and Kistler-Ritso Eesti SA. In addition, he is the owner and Management Board member of Seikatsu OÜ and Osaluste Hellalt Hoidmise OÜ and a Management Board member of Topia OÜ, Kaigun OÜ, TBD Holdco OÜ and Asutajad MTÜ. He is also one of the owners of osaühing E-laen. Sten Tamkivi graduated from the Stanford University Graduate School of Business. Sten Tamkivi and the person related to him, Seikatsu OÜ, own altogether 15,976 shares of AS LHV Group. S th E O T Ta

Tauno Tats is a member of the Supervisory Board of AS LHV Group. Also, he is a member of the Supervisory Boards of EfTEN Kinnisvarafond AS, AS Ecomet Invest and OÜ Eesti Killustik and a member of Management Board of Ammende Hotell OÜ and MTÜ Plate torn. He is the Management Board member and one of the owners at Ambient Sound Investments OÜ as well as a Management Board member of companies established for the management of investments of the aforementioned companies. Tauno Tats graduated from the Tallinn University of Technology (TalTech). Tauno Tats does not own shares of AS LHV Group. Ambient Sound Investments OÜ owns 1,697,993 shares of AS LHV Group. Taun th Killus is men man

Andres Viisemann is one of the founders of LHV and the manager of LHV pension funds. He is a member of the Supervisory Boards of AS LHV Group, AS LHV Pank and AS LHV Varahaldus. He also belongs to the Supervisory Boards of AS Fertilitas and Rocca al Mare Kooli SA. He is also the owner and a member of the Management Board of Viisemann Holdings OÜ and the owner of Viisemann Investments AG. Andres Viisemann graduated from the University of Tartu and obtained a Master's degree at INSEAD in International Business Management. Andres Viisemann and the persons related to him (Viisemann Investments AG, Viisemann Holdings OÜ) own altogether 2 790 762 shares of AS LHV Group. Due to his position as the head of LHV pension funds, Andres Viisemann is entitled to subscribe a total of 13,438 shares of AS LHV Group for the options issued in 2019, 2020 and 2021. An He Va Ko ing

Management board

Madis Toomsalu is a member of the Management Board of AS LHV Group and the chairman of the Supervisory Boards of AS LHV Pank, AS LHV Kindlustus and AS LHV Varahaldus, a member of the Supervisory Board of AS LHV Finance, the chairman of the board of directors of LHV UK Limited and a member of the board of directors of Bank North. He is also member of the Management Board of MTÜ FinanceEstonia. Madis Toomsalu has obtained a Bachelor's degree in business management from the Tallinn University of Technology (TalTech) in 2009 and a Master's degree in 2011 in public sector finance. Madis Toomsalu and persons related to him own 67,513 shares of AS LHV Group. With the options issued in 2019, 2020 and 2021, Madis Toomsalu has the right to subscribe 104,419 shares of AS LHV Group. M o m o o l

Committees formed on Supervisory Board level

Audit Committee

Kristel Aarna works as CFO of AS TV Play Baltics since 2011 and before that was the chief controller of Swedbank Baltic Banking. Previously she has been the head of financial advisory services at KPMG Baltics AS and worked also at Eesti Pank and CVS Caremark Corporation. She is also the owner and the member of the Management Board of IKA Konsult OÜ. Kristel Aarna on has a Bachelor's degree from the Faculty of Economics of the University of Tartu and Master's degree in Business Administration from the Bentley University Graduate School of Business. Kristel Aarna does not own any shares of AS LHV Group.

Urmas Peiker was the head of Compliance at AS LHV Pank from May 2013 until October 2014. Previously, Urmas Peiker has worked as the head of Business Development in an Estonian start-up Funderbeam, as the head of Market Supervision Department of the Estonian Financial Supervision and Crisis Resolution Authority, also in the European Bank for Reconstruction and Development and Morgan Stanley's. Urmas Peiker is the owner and Management Board member of OÜ Vesilind, OÜ PT Arendus, OÜ Bintous, OÜ Pioneer Engineering Group and OÜ Estcap and also belongs to the Management Boards of FBM SPV1 OÜ and MTÜ Tööstuse Ekspordi ja Innovatsiooni Klaster. Urmas Peiker has a Bachelor's degree from the University of Tartu and Master's degree in Law from the Duke University in the USA. Urmas Peiker does not own any shares of AS LHV Group.

Tauno Tats (member of Supervisory Board of AS LHV Group) Taun

Remuneration Committee

Madis Toomsalu (member of the Management Board of AS LHV Group, chairman of the Supervisory Boards of AS LHV Pank, AS LHV Varahaldus and AS LHV Kindlustus, member of Supervisory Board of AS LHV Finance and the chairman of the board of directors of LHV UK Limited)

Rain Lõhmus (chairman of the Supervisory Board of AS LHV Group, member of the Supervisory Board of AS LHV Pank) Ra me

Andres Viisemann (member of the Supervisory Boards of AS LHV Group, AS LHV Pank and AS LHV Varahaldus) A A

Risk and Capital Committee (AS LHV Pank)

Rain Lõhmus (chairman of the Supervisory Board of AS LHV Group, member of the Supervisory Board of AS LHV Pank)

Andres Viisemann (member of the Supervisory Boards of AS LHV Group, AS LHV Pank and AS LHV Varahaldus)

UK Limited)

Madis Toomsalu (member of Management Board AS LHV Group, chairman of the Supervisory Boards of AS LHV Pank, AS LHV Varahaldus and AS LHV Kindlustus, member of Supervisory Board of AS LHV Finance and the chairman of the Board of Directors of LHV

Tiina Mõis (member of the Supervisory Boards of AS LHV Group and AS LHV Pank)

Nomination Committee

Madis Toomsalu (member of Management Board AS LHV Group, chairman of the Supervisory Boards of AS LHV Pank, AS LHV Varahaldus and AS LHV Kindlustus, member of Supervisory Board of AS LHV Finance and the chairman of the Board of Directors of LHV UK Limited)

Rain Lõhmus (chairman of the Supervisory Board of AS LHV Group, member of the Supervisory Board of AS LHV Pank)

Andres Viisemann (member of the Supervisory Boards of AS LHV Group, AS LHV Pank and AS LHV Varahaldus)

Supervisory and management boards of the subsidiaries

AS LHV Pank

Supervisory Board: Madis Toomsalu (chairman, until 31.03.2026), Rain Lõhmus (until 31.12.2024), Andres Viisemann (until 20.09.2022), Tiina Mõis (until 31.12.2024), Heldur Meerits (until 31.03.2026), Raivo Hein (until 20.09.2022)

Management Board: Kadri Kiisel (chairman, until 20.09.2022), Indrek Nuume (until 20.09.2022), Jüri Heero (until 20.09.2022), Andres Kitter (until 20.09.2022), Meelis Paakspuu (until 20.09.2022), Martti Singi (until 20.09.2022)

AS LHV Finance

Supervisory Board: Kadri Kiisel (chairman, until 29.01.2026), Madis Toomsalu (until 26.06.2025), Veiko Poolgas (until 24.08.2023), Jaan Koppel (until 24.08.2023)

Management Board: Mari-Liis Stalde (until 29.01.2026)

AS LHV Varahaldus

Supervisory Board: Madis Toomsalu (chairman, until 31.03.2026), Erki Kilu (until 28.04.2022), Andres Viisemann (until 28.04.2022)

Management Board: Vahur Vallistu (chairman, until 05.06.2024), Joel Kukemelk (09.10.2022)

AS LHV Kindlustus

Supervisory Board: Madis Toomsalu (chairman, until 06.05.2025), Erki Kilu (until 06.05.2025), Veiko Poolgas (until 06.05.2025), Jaan Koppel (until 06.05.2025)

Management Board: Jaanus Seppa (chairman, until 01.09.2025), Tarmo Koll (until 06.05.2025)

LHV UK Limited

Board of Directors: Erki Kilu (appointed on 04.02.2021), Andres Kitter (appointed on 04.02.2021), Madis Toomsalu (appointed on 04.02.2021), Gary Lewis Sher (appointed on 05.07.2021), Paul Horner (appointed on 04.01.2022)

Sustainability report

1. Sustainability at LHV

1.1 Sustainability mission statement

Sustainability is a constant learning process in which we engage stakeholders and external experts to better understand the consequences of our decisions and create long-term value. We aim to strategically enhance in-house competencies, develop sustainable financial products and services, improve business processes, and develop sector wide partnerships to work toward more responsible business operations.

• We realize the extent to which our business decisions affect society and the environment, and as a result, focus on managing these impacts.
• We aim to be a leader in sustainable development in the financial world by striving toward initiating systemic change and creating possibilities for innovative and sustainable solutions that guide society toward sustainable development.
• We will bring our activities into conformity with the UN Sustainable Development Goals and the Paris Agreement.
• We operate transparently and publicly account for our progress and obstacles in various sustainability reports and through our corporate communication channels. We are continually improving our know-how on sustainability reporting standards and which to move towards a more comprehensive GRI reporting in our annual reports.
• We are committed to creating the necessary conditions for adhering to our sustainability strategy. This can be achieved by internal capacity building and integrating ESG aspects into the business lines

1.2 CEO letter on sustainability

We are living in extraordinary circumstances and facing challenges many of us would not have thought we would face. The changes in our everyday life, the natural environment as well as the economy are not only noticeable but imminent. Desperate times might call for desperate measures, but extraordinary times require innovation, positive change, cooperation, and creativity more than anything else. Extraordinary times also make us see clearer and steer our focus to what matters most. Focus on our employees, our customers, and our shareholders. But also, on our health and well-being, and the well-being of the world around us.

LHV has always paid a lot of attention to the impacts of governance and social risks and has proven to be one of the best places to work in Estonia. In recent years, we have expanded our focus to environmental risk management. Climate change and other ecological problems received considerable attention in 2021 and it is not surprising that the financial sector is also increasingly concerned with sustainable development and understanding the urgency of these issues.

But amid this urgency, for many, 2021 was also a year of obvious limits – personal limits, professional ones, business-related, mobility-related, and even related to creativity and innovation.

What limits us as people and individuals, limits us as organizations, nations, communities, and economies. Our constant attempts for "back to normal" have perhaps inhibited our creativity and constrained us from fully adapting to a present that can, under the right circumstances, push us further into a more sustainable, economically beneficial future. Under the right circumstances, unexpected change can be a catalyst for innovation, creativity, and even more urgency. But acting upon urgency in isolation, without collaboration, can limit the collective brain integral for achieving the global goals.

When we look back at extraordinary historic people, we learn, that collaboration can be the very foundation of success. Leonardo Da Vinci, for example, was a brilliant inventor and artist. Buried in one of his many notebooks dated back to the 1490s is a to-do list titled "It is useful to constantly observe, note, and consider." What is interesting, is that over half of the to-do list was about engaging with other people to teach him new things and steer him to the right direction. The to-do list of one of the most genius men who ever lived was largely about collaboration with other people, which just might have been the key to his success.

Observe, note, and consider are underrated skills in the world where action defines success. LHV's journey toward a more inclusive and greener economy and operations will be thoroughly explained in the report below. In 2022, we will continue to do our part and work towards our goals and setting even more ambitions ones. We will be further integrating sustainability into our core processes and strategy building. We will act in urgency. But we will also work even more with our customers on the issues of sustainability, collaborate with experts on the field and considerably increase our internal capacity and knowledge on the issues. So that we can observe, note, and consider in urgency as well, and in a way that makes all our stakeholders experience the extraordinary, even amid obvious limits and challenges.

2. Global sustainability frameworks

2.1 UNEP FI PRB

The principles of responsible banking The UN Principles for Responsible Banking give banks a framework for sustainable operation and sets out guidelines for promoting life in society. We joined with the initiative to show our commitment to the UN Sustainable Development Goals and align our activities with the Paris Climate Agreement's goals. We take part in international cooperation in the financial sector and sharing best practices

2.2 PCAF

At the end of 2021 we joined with Partnership for Carbon Accounting Financials (PCAF) initiative. While we have measured our scope 1, 2 and 3 emissions in operational level, we have struggled to find the best practice to measure our scope 3 emissions in category 15 (investments). We see that joining with PCAF standard helps us to disclose our scope 3 emissions (category 15, investment activities) which are relevant but have not been calculated yet.

The standard, which is reviewed by GHG protocol, has developed a consistent methodology for measuring and disclosing such emissions, which include those associated with corporate/business loans, commercial real estate loans, residential mortgages, motor vehicle loans, project finance and even the equity and bond positions that banks hold on their balance sheet.

This metric provides us the starting point to assess and disclose climate-related issues; set science-based targets using emission-based methods developed by organizations like the Science Based Targets initiative (SBTi); and set the baseline emissions for target setting in alignment with the Paris Agreement. For us it is the step forward to understand our impact and measure our customers and work together with them while reducing our impact to the environment.

2.3 GRI

This ESG report has been prepared in accordance with the Global Reporting Initiative (GRI) Standards: Core Option. This includes a GRI Content Index located at the end of the report. This is the first year we are aligning our ESG reporting with GRI. Following the GRI reporting standards allows us to report on our impacts and activities in an even more structured way that is transparent to our stakeholders and the public.

society's goals.

for our positive and negative impacts and our contribution to

We have tried to follow all reporting principles of GRI standards (GRI 101):

• stakeholder inclusiveness, sustainability context, materiality and completeness for defining the scope of the content of the report;
• accuracy, balance, clarity, comparability, reliability, and timeliness in ensuring the quality of the content.

However, we also know that our reporting approach could be more mature. We commit to improve each year, and are open to notices, feedback, and suggestions. We strive for greater transparency and a comprehensive reporting approach on ESG and sustainability matters, and therefore aim to disclose such information in a proper way.

3. ESG strategy and materiality

3.1 Material ESG and sustainability aspects

We want to achieve real change through our sustainability efforts. The basis for that is a sufficient knowledge of the most material ESG and sustainability aspect for LHV. Above all, we want to devote our resources to addressing the environmental, social, and economical sustainability matters that are most affected by our business decisions, and that tackle major societal needs.

For the first time, we went through a comprehensive materiality analysis process in 2020 in partnership with an independent external ESG advisory firm. We built the analysis mostly on UNEP FI Portfolio Impact Analysis Tool. Considerations of the materiality review included:

• potential positive and negative environmental and social impacts due to the portfolio allocation of LHV Pank, drawing on the UNEP FI Portfolio Impact Analysis Tool;
• expectations of external stakeholder groups (experts on social and environmental impact, customers and partners);
• opinions of internal stakeholder groups (LHV management, key persons, and employees);
• proper ESG management approach according to dedicated standards and frameworks, and market practice among peers.

The materiality process and portfolio impact analysis

In 2020 we went through a comprehensive portfolio impact analysis process which is the core of our materiality process. We built the analysis based on UNEP FI Portfolio Impact Analysis Tool. The process of the analysis included:

• All core business areas, i.e. Business Banking, Corporate Banking, and Consumer Banking (excluding asset management), and services of LHV in its major location (Estonia) were considered in the scope of the analysis (excluding United Kingdom where LHV was at the time at the very early stages of increasing its presence).
• Based on the portfolio allocation the most significant industries were identified based on where LHV has the major impact through its services (based on the cartography the share of different industries in the portfolio).
• The most relevant societal, economic, and environmental challenges related to sustainable development were defined in the countries of operations (Estonia). The sources for such "country needs" were major global data sources provided by the UNEP FI tool (e.g. UN, OECD, WHO, ILO, FAO, World Bank, etc), complemented with the best location-specific data mapped in cooperation with leading local scientists (where global

data was insufficient for local reality).

• In total, 22 environmental, social, and economic aspects got such country scores (on a 4-point scale)
• The outcome of the analysis was discussed, validated, and elaborated with external experts and stakeholders, including the expectations of customers and partners (there were two panels around environmental and social aspects).
• The impact analysis was conducted with independent external sustainability advisors

Moving forward, we will build on the current finding and widen the scope of the Analysis to LHV Varahaldus in 2022.

Materiality and impact analysis findings

The results of the process were completed and validated by the management team during ESG strategy development process. As an outcome, we identified two environmental and two socioeconomic impact areas as the most material where LHV could achieve the largest impact on sustainable development through its core work across the value chain and portfolio:

• Climate and biodiversity
• Circular economy
• Inclusive and cohesive economy
• Financial literacy and economic sense of security

On top of these four impact areas the fifth, internally relevant material aspect was identified - honest and transparent organizational culture (covering both employee related social, and governance aspects).

These 4+1 impact areas are the starting point for the sustainability strategy of LHV – the basis for strategic directions, KPI-s, targets, green products and services development, and roadmap 2021-2023 for identifying strategic business opportunities, and improving the impact.

All these focus areas are managed through three levels:

• Positive and negative impact areas of LHV's operating activity (e.g., the impact of financial decisions on the environment and society);
• LHV as an organization (i.e., management and organizational impacts, e.g., "house in order" activities);
• LHV's broader impact in society (activities supporting and guiding a more comprehensive, systemic change in Estonian society).

The current report gives an overview of our current state and initial dedicated steps in managing these impact areas more systematically than before.

3.2 Contribution to sustainable development

Our major ESG and sustainability impact areas clearly address relevant sustainability related challenges of the society. Our self-confidence lies in the fact that we considered comprehensive global and local statistics about the current state and needs in various environmental and social aspects in the process of defining material impact areas. We spotted the most burning needs in the society that are related to our business activities.

This gives us a proper starting point to tie our ESG and sustainability strategy with the societal development needs highlighted by UN Sustainable Development Goals (SDG). We are committed to bring our activities into conformity with the UN SDGs.

Working with our most material sustainability aspects contributes to these UN SDGs and its specific sub-targets

Sustainable Development Goal (SDG)	Specific SDG target to which LHV contributes	How LHV contributes?
SDG 1. End poverty in all its forms everywhere	1.2. By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions	• Integrating social and environmental considera tions into the core of our business.
	1.4. By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance	• Investing in spreading financial literacy.
SDG 8. Promote sustained, inclu sive, and sustain able economic growth, full and productive employment and decent work for all	8.3. Promote development-oriented policies that support produc tive activities, decent job creation, entrepreneurship, creativity, and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services	• Driving sustainable growth, creating jobs, encouraging entrepre neurship, and fuelling innovation.
	8.10. Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all
SDG 7. Ensure access to affordable, reliable, sustain able, and modern energy for all	7.1. By 2030, ensure universal access to affordable, reliable, and modern energy services	• Offering customers a choice of green financial products.
	7.2. By 2030, increase substantially the share of renewable energy in the global energy mix	• Improving processes of ESG-related due-dil igence for corporate customers and partners.
SDG 12. Ensure sustainable consumption and production patterns	12.2. By 2030, achieve the sustainable management and efficient use of natural resources	• Considering environ mental factors in busi ness decisions.
	12.6. Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle	• Advocating for respon sible lending and consumption.
SDG 13. Take urgent action to combat climate change and its impacts	13.2. Integrate climate change measures into national policies, strategies, and planning	• Encouraging environ mentally sustainable business practices within
	13.3. Improve education, awareness-raising and human and insti tutional capacity on climate change mitigation, adaptation, impact reduction and early warning	the sector and the State level through supporting sustainable financial sector development.

3.3 Stakeholder engagement

In LHV we believe that sustainability is a constant learning process. We keep on asking ourselves and our stakeholders how we could make the most impactful efforts. We engage stakeholders and external experts to better understand the wider sustainability context, challenges and trends, expectations of the members of the society to us, and the wider consequences of our decisions.

For us, stakeholders are the groups and individuals that LHV affects through its activities, and that, in turn, may affect LHV`s operations in short or long run.

We regularly hold dialogue with stakeholders with whom we have the most direct relations and with whom LHV could collaborate for better impact in the society. But we also keep in touch with the stakeholder groups that are part of shaping the trends and set requirements for the financial market.

Engagement of stakeholder groups

Our major stakeholder groups, ways of their engagement, and their major expectations to LHV:

	How we engage?	Main expectations and key topics raised?
Customers	Active communication and discussions, ESG questionnaire in credit application, green products, and services	Engagement, knowledge building, ESG integration into business and decision making
Employees	Annual survey, individual development and performance reviews, informative sustainability seminars	Feedback, engagement, internal capacity building
Shareholders	Annual shareholder meeting, active communication, ESG reporting	Profitability, engagement, feedback
Policy makers, regulators	Memberships in State level sustainability focused working groups, direct communication with government officials	Policy making input and information about EU legislation on the issues of sustainability and reporting
Business networks, financial sector	Active membership in Estonian Banking Association, Finance Estonia and Rohetiiger	Leadership in ESG promotion
Suppliers, cooperation partners	Direct communication	Sustainability integration into value chain
Sustainability organizations	Active membership in local sustainability focused initiatives and organizations, leading the ESG working group in Estonian Banking Association, member of UNEP FI PRB	Financing sustainable development, enabling green transition
Wider public and society	Active communication, public events and conferences, universities, press and media	Transparency, fair and ethical busi ness conduct

Stakeholder engagement in ESG and sustainability materiality analysis and strategy process

Some of the most important societal and environmental impact experts of Estonia were involved in verifying the results of our ESG materiality analysis and creating the LHV ESG strategy and action plan. During several workshops, about 20 experts (researchers, representatives of the public sector, cooperation networks and NGOs, entrepreneurs) worked on LHV's strategical action plan. The collected input was considered to assess the LHV Group's current activities in managing the company's social and environmental impacts and planning strategic activities.

Leadership for sustainable business development in Estonia

• LHV is the signatory and active member of several working groups of The Principles for Responsible Banking by UNEP FI. We are the only Estonian bank in the network which represents almost half of global banking assets.
• We are leading the Estonian Banking Association sustainable banking committee that represents Estonian banks and their involvement in ESG implementation.
• As an active member of FinanceEstonia (organization that supports the development of the financial sector, innovation, and the export of services in Estonia) and its ESG working group we contribute to the spread of sustainable banking principles throughout the financial sector.
• We are a founding member of Green Tiger, which is a local initiative that contributes to improving local organizations' knowledge regarding environmental issues, keeps tight contact with the state, and educates businesses to make the best environmentalrelated changes within the organization and their suppliers.
• We cooperate with other organizations on sustainability initiatives and regularly share about our ESG journey to other businesses. Our management and ESG team members share at conferences and seminars about our ESG experience and the importance of moving towards a greener economy and more inclusive society.
• We cooperate with universities in spreading the word about sustainability in the finance sector and the need for more capacity building on corporate ESG issues in Academia.
• We continuously collaborate with external experts to better implement our ESG project and research best practices.
• We regularly engage with non-profit organizations and with the public sector (especially in terms of ESG regulatory aspects).
• We regularly speak at national conferences and events about ESG and sustainable finance
• We hold seminars and workshops to or with other companies and organizations and talk about our progress, the importance of corporate sustainability and the future of green finance

4. Management of ESG

At the end of 2020, we adopted a group wide ESG policy which sets the goals, ambitions, and approaches for our sustainability activity in all the subsidiaries of the group. At the same time, we also approved an ESG KPI roadmap for 2021-23 which will help us move closer to a measurable sustainability management and will help us achieve our SMART targets moving forward. The roadmap will be annually updated considering that the needs for data and the availability for data is changing constantly.

The ESG policy also sets a high-level structure and responsibilities for ESG governance group-wide – Head of ESG being responsible for all everyday ESG matters, Group CEO as governing body member ultimately responsible for ESG supervision, all Heads of LHV Group's subsidiaries as responsible for supervision over everyday ESG matters. ESG activities in their respective subsidiaries and the Communications Manager as responsible for external communication related to environmental and social matters and serving as a contact person for all sustainability-related public enquiries. As of 2020, we have a dedicated ESG team who reports directly to the Bank CEO. In 2021, we started considerably growing and developing the ESG competencies in-house, resulting in the growth of our ESG team as well as ESG-focused professionals in the compliance, credit, risk, asset management departments.

The main aim of the management of ESG Group wide is a smooth integration of sustainability principles into all relevant business lines, processes, strategy building, and risk management.

4.1 ESG Steering Committee

In March 2021 we launched an ESG steering committee, which serves as a high-level governing body for ESG issues in LHV Group. The Committee follows the ESG policy adopted by the Supervisory Board of the LHV Group and was launched to ensure the development and implementation of various ESG projects and processes group-wide so that all our objectives can be met. The Committee also coordinate the flow of information on ESG projects, legislation and developments and advises members of the management of LHV's subsidiaries on ESG-related activities to be in line with LHV's business strategy, values, ESG strategic goals and best ESG management practices. We are currently in the process of setting up proper ESG governance system within LHV, with an aim to integrate ESG and sustainability matters to all relevant business functions and processes, and to involve all relevant managers in business units. We have conducted an analysis of the best practices among financial firms internationally and are working on improving our own ESG Governance structure and practice to support us moving closer to our PRB and sustainability goals.

The committee meets up once a month and the members include the Group CEO, the Chairman of the Management Board of LHV Pank, the Chief Risk officer of LHV Pank, LHV Chief Financial Officer of LHV Pank, Chairman of the Management Board of LHV Kindlustus, Chairman of the Management Board of LHV Varahaldus and the Head of ESG.

4.2 Alignment with policies and procedures

Apart from the ESG Policy and the KPI roadmap, that LHV has adopted, we have also made considerable improvements and additions into our Credit Policy (including exclusion list of activities we do not finance) and HR & Remuneration policies as well as the Ethics Policy to support the implementation of sustainability principles and our ESG goals. LHV Varahaldus has adopted and follows a separate Responsible Investment Policy for the management of Pension Funds. We are currently also in the process of reviewing and renewing our Risk Policy and making ESG related updates, while the Group Code of Ethics was updated in 2021 to represent an even more inclusivity and diversity in our operations and culture

As of June 2021, we also have ESG questionnaire integrated into our credit application for our corporate customers onboarding process. Group wide, we have approximately 10 ESG project streams currently running to integrate ESG into our business and operations. The project streams include policy implementation, data & KPIs, ESG governance structure, communications, ESG reporting standards, internal capacity building, credit granting processes, ESG compliance and regulatory gap analysis, portfolio, and customer ESG assessment activities and the building of ESG risk management framework. In 2022, we are planning to update Portfolio Impact Analysis by integrating asset management into the scope as well. Our goal is to regularly re-assess our impact and keep our strategic sustainability activities aligned with the most recent results of portfolio analysis.

4.3 ESG risk management

We understand the need of assessing risk related to ESG and being more transparent and accountable in our decision-making processes. Based on sustainability and responsibility principles, we have supplemented and published a list of business areas that contradict our credit policy and our goals for sustainability. We also realize that an adequate ESG risk management framework is the core of responsible customer relations, and essential for supporting In addition to the above, we are looking thoroughly into current legislative processes which will affect our sustainability efforts moving forward. One of them being the EU Taxonomy. Taxonomy implementation is also one of the current focuses and will be the foundation for creating our Taxonomy alignment and ESG scoring criteria and methodology. Taxonomy implementation will not only challenge our ESG data analysis and scoring methodologies and processes but will be the bridge between helping our corporate customers become more transparent in their sustainability efforts and knowledgeable in managing their own ESG risks and disclosures.

4.4 Responsible investments

The principles of responsible investment and analysis of ESG factors are part of the investment analysis process at LHV. By integrating it into the process, the analysis is comprehensive and considers ESG factors as well as traditional investment analysis factors such as fundamentals and valuation. ESG assessment as one part of the analysis is divided into subgroups, based on the sectors, and needs of each existing or new potential investment (considering the most relevant ESG risks of the company). We aim to generate a list of material ESG issues for relevant sectors. The sources for ESG information are based on public information, including periodic financial reports, ESG, and sustainability reports, press releases, company management meetings, and other relevant material. To demonstrate leadership LHV Varahaldus created Estonia's first green pension fund in 2020 and we regularly educate our customers and the public about the potential benefits of and the future of green investing. We believe following sustainability principles in investing and promoting them to the customer-base is in the best long-term interests of our customers.

5. Management of impact areas

5.1 Environmental

We realize that business enterprises and economic progress can often draw on natural resources. However, we also recognize that there is an alternative, more sustainable way to achieve growth and create value. Through their business and offerings, financial institutions have a transformational capacity to create positive change and scale sustainable business practices through innovation, creativity, and the entrepreneurial spirit. LHV desires to operate sustainably, and as an Estonian company, we want to help the Estonian economy to adapt to meet the climate targets.

To do so, LHV is

• Contributing to achieving the goals of the Paris Climate Agreement
• Supporting Estonia's goal of attaining a climate-neutral economy by 2050
• Open to the opportunities afforded by the new economy
• Working together with external stakeholders to bring about more positive change (i.e., Estonian Banking Association, external consultants, and organizations to help build capacity)
• Following green office principles and monitoring its annual carbon footprint. LHV to become carbon-neutral in its office operations in 2022

A financial institution's sustainable business operation means consistently incorporating ESG-friendly practices into its offering and product development. To date, we have developed special loan offers that motivate our customers to make environmentally responsible consumer decisions. We have also created and disclosed an exclusion list of activities that are not in accordance with our credit policy and the principles of sustainable and responsible operations.

5.1.1 Green office operations

The idea of LHVs Green Office project came in 2019, after hackathon which was targeted at employees. Besides other environmentally oriented activities we considered important to take care of our office. 5Our priority was to make office activities clean and environmentally friendly. We wanted to involve workers in the process to raise their awareness.

Our Green Office project first important step was making the structure to lay the basis for further activities. We convened a Green Office working group, with whose help we complied primary documentation: Green Office principles, reminder, and action plan.

LHVs Green Project starts already its third full year. During that time, we have been achieved quite a lot. The Green Office certificate received in 2020, the title of the best Green Office of the year and the BREEM certificate issued in 2021 will give us further motivation to move forward.

Besides small daily activities there are some larger projects that have gained more attention. For example, we pay close attention to waste generation. LHV has developed a solid waste sorting procedure. We have got rid of our own garbage bins and created garbage sorting sections in the kitchens. In cooperation with Nutriloop, we recycle our own biowaste, which we use to produce plants on the balconies of our office. We organize calls for employees, allowing them to bring stalled clothes or hazardous waste to the office in collection boxes.

At the end of each year, we measure our CO2 footprint. We collect data about business travels, consumption of office buildings, ordered paper, fruits etc. Based on this, we can make comparisons from previous years and introduce new points in the Green Office's action plan to further reduce our footprint.

For the second year in a row, we are organizing information mornings entitled "What is really important?" to raise the awareness of employees. This is an event where we invite two foreign guests to the office to talk on a topical issue with LHVs moderator. It takes place every month.

The journey of LHV's Green Office has been short but comprehensive. Already achieved things on this journey gives us the motivation to move forward to achieve the most environmentally friendly operations possible with all our offices. At the same time, we do not forget our own employees, to whom we offer good opportunities to get involved and educate themselves.

In our supply chain we only consider the usual criteria (e.g., quality, price) but also environmental criteria. The main purpose of such activities is to reduce the cost of products and services, environmental impacts resulting from production, use and disposal, i.e., the total environmental impact of the product/services during its life cycle. Through that it is possible to reduce the risks to human health and the environment. Other than mentioned above, there were no significant changes in the supply chain.

Even though our greatest environmental impact comes from financing and investing activities, it is no less important how we administer our business every day. That's why we wanted to make sure that our own consumption is sustainable, that we keep our house in order and serve as an example on all fronts of the effort to meet climate goals.

LHV has decided to take steps towards more environmentally friendly operations. This has been done by improving the office environment and involving employees in the Green Office process by awareness-raising. In 2020, LHV's Tallinn office was awarded the Green Office Certificate, which

confirms our office operations environmentally sustainable activities. In December 2020, LHV's Tallinn Office was awarded Best Green Office of the Year award by the Estonian Association for Environmental Management.

5.1.2 Our carbon footprint

Greenhouse gas emissions must be reduced significantly to avoid the worst consequences of climate change. Our office activity also generates emissions - both directly and indirectly. Mostly, due to the use of heating, power, employee commute, and business travel. What have we already accomplished? At the beginning of 2020, we started collecting emissions data for the first time and ran the calculations for our carbon emissions for 2019. We did the same for 2021 at the beginning of 2022. In 2020, LHV's office activity had a greenhouse gas emission footprint of 865 tonnes of CO2-equivalent, which is 1.7 tonnes per employee at the time of calculation. For 2021 the results were 1,447 tonnes, or 2.2 tonnes per employee. We see the increase in our operational level CO2 footprint and the main reason is that we have gone more specific in our data collection. In 2021 we added several categories to our operational level calculation. One of the main additions is the adding of home office calculation to our scope 3 calculation. As the pandemic of Covid-19 increased the need of working remotely we realized that we need to take the home office into account as well.

Another important addition to our scopes is IT servers and IT operations. These are the main reasons why our CO2 footprint has significantly increased in 2021.

Our aim is to reduce our CO2 footprint as much as possible but on the way, we have to understand that adding more categories to the scope our CO2 footprint will increase as the measurement system is improving.

LHV's climate impact for the 1 January 2021 to 31 December 2021 period was calculated based on the "GHG Protocol Corporate Accounting and Reporting Standard", which is internationally recognized and the most widely used greenhouse gas accounting standard. The standard encompasses seven kinds of greenhouse gas emissions – carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3).

The results are expressed in CO2 equivalents, the universal greenhouse gas unit of measurement, indicating their different potential for causing global warming. The values expressing global warming potential are based on reports Specialized and recognized databases were used to determine emission factors (e.g. Ecoinvent v3), reports of international studies and scientific literature, government greenhouse gas inventory reports, data on suppliers, and other relevant sources.

The results of the analysis covered the following Scope 3 categories: 1. Purchased goods and services (paper, water consumed, server hosting, customer keepsakes, foodstuffs and miscellaneous products); 2. Capital goods (office furnishing and equipment); 3. Fuel and energy related impacts (not included under Scope 1 and 2); 5. Waste generated in operations; 6. Business travel (flights, train, bus, ship, subway and taxi rides and personal car); 7. Employee commuting (between home and work).

To evaluate the impacts of employee commuting, a web survey was conducted among the employees, which inquired about the distance between home and work (direct route, without possible interim stops) and modes of transport ordinarily used. A total of 67% of employees responded and the results were extrapolated to the number of employees working for the company.

Differences between the 2021 analysis and the 2020 analysis:

• in 2021, there were a number of purchased goods and services and capital goods as additional emissions sources;
• the fuel and energy related impacts previously shown under Scope 2 emissions are now a part of Scope 3 and the impact of network losses has been added based on use of more accurate Estonian-based emissions factors;
• the thermal and electrical energy coefficients were refined using Estonia-based data.

The analysis covered the activities of LHV Group's Tallinn and Tartu offices. Similarly, to analyses of years past, the 2021 analysis did not take into account LHV's UK office (based on the complicated availability of data). Due to the small size of the office, the representation in London would not be expected to have a significant impact on the carbon footprint of LHV Group as a whole.

To perform the calculation of intensity of carbon footprint per employee, the aggregate result was divided by the number of LHV Group employees at the end of the reporting year.

Emissions

(GRI 305:2016)		2021	2020
	Direct (Scope 1) GHG emissions	0	0
	Energy indirect (Scope 2) GHG emissions	445 t/CO2e	572.7 t/CO2e
	Other indirect (Scope 3) GHG emissions	983 t/CO2e	292.5 t/CO2e
	GHG emissions intensity	1,428 t/CO2e	865.2 t/CO2e
	Waste generated	16 t/CO2e	24.6 t/CO2e
	Water consumption	1.0 t/CO2e	2.6 t/CO2e

			2021		2020
Scope 1	Type	tCO2 e	Share %	tCO2 e	Share %
1 - Direct emissions		-	-	-	-
Total Scope 1		-	-	-	-
2 - Indirect, emissions	Electricity (renewable electricity): Tallinn office	0	0	7	0
related to purchased electricity and	Electricity (non-renewable electricity): Tallinn office	-	-	82	9
heat	Total electricity Tallinn Office	0	-	89	-
	Electricity (non-renewable electricity): Tartu office	78	5	52	6
	Thermal energy: Tallinn office	357	25	407	47
	Thermal energy: Tartu office	9	1	24	3
Total Scope 2		445	31	572	66
3 - All other indirect	*Outsourced materials (trading assets)	25	2	-	-
emissions in the value chain	*Client related product marketing materials	3	0	-	-
	*Office furniture	29	2	-	-
	*Office equipment	238	17	-	-
	Generated waste	16	1	26	3
	Water consumption	1	0	3	0
	Business travel: plane	54	4	22	3
	Business travel: train	1	0	1	0
	Business travel: bus	1	0	2	0
	Business travel: taxy	1	0	0	0
	Business travel: personal car	10	1	6	1
	Drive home to work: 2021 (634 employees)	308	22	234	27
	Indirect energy and fuel effects
	*Electricity grid loss	5	0	-	-
	*Grid loss of heat energy	56	4	-	-
	*Indirect effects related to heat production	237	17	-	-
	Home office	19	1	-	-
Total Scope 3		1,002		293
Total		1,447		865

We have put together a climate neutrality achievement plan to operate more sustainably and reduce our negative environmental impact. In 2020 we made the transition to electricity furnished with a green energy certificate, which has cut emissions by 30%. In addition to that, working towards the Green Office Principles, we have also organically reduced our emissions.

We are also working on developing a local and ethical project for carbon offset which we can contribute to offset CO2 which we cannot offset through our everyday office operations. We calculated our footprint based on the internationally recognized Greenhouse Gas Protocol. We will repeat and refine the calculation each year. Based on which additional categories we can gather reliable data in, we will strive toward a fuller picture.

5.1.3 Offsetting our carbon footprint locally through innovation

In 2021, we started a local pilot program with our partner eAgronom. eAgronom is an agricultural start-up whose methods are still being verified by Verra. But eAgronom provides us a local solution to achieve our first emissions related target - to become net-zero in our operational level by 2022. Although we have another 12 months to achieve our target and we can lower our operational level emissions by at least another 15%, we see the rise of demand for trustworthy offset projects.

Working together with eAgronom helps us to understand the offset business a lot better, we can improve local soil quality, store more nutrients in the soil and increase water holding capacity while supporting local farmer to apply to

the new approach which eAgronom helps them to implement into their everyday farming habits.

We are using eAgronom's newly developed solution to buy carbon credits from Estonian farmers who sequester carbon dioxide from the air into the soil and thereby improve the soil quality of their fields. We will receive the first carbon credits from eAgronom in October 2022, after what we are able to declare that we have reached Net-Zero in our operational level.

5.1.4 Green products and services

LHV's influence in the Estonian financial sector is growing. As part of an industry that is vital for society, we, directly and indirectly, affect our surroundings and make our most significant contribution through investing and financing. That is why we have decided to channel cash flows from our core activities more concertedly to activities that support the transition to a climate-neutral and sustainable economy. We have developed unique green products that motivate our customers to make everyday consumer and investment decisions that are as environmentally responsible as possible. In this way, we do our part to support economic growth, which at the same time reduces greenhouse gas emissions, pollution, and waste generation.

Green Home Loan

One of the most important consumer decisions a person will ever make – in terms of the financial cost and the environmental impact – is regarding purchasing their home. One-third of the average Estonian's annual CO2 footprint is related to their home – mostly deriving from energy used for heating and emissions arising from use of household electricity.

We would like to promote the building and buying of the most energy efficient homes, so we're offering our customers the possibility to leverage Estonia's first green home loan.

Green Car Leasing

We aim to promote the purchase of energy-efficient vehicles. The most energy-efficient vehicle you can choose to drive is a fully electric car. But to be sure of its sustainability level, the energy needs to derive from renewable sources entirely. From 2026 onwards, only cars with zero CO2 emissions per kilometer are considered clean vehicles. Only electric and hydrogen vehicles will meet this standard. We, therefore, offer car leasing for new fully electric vehicles purchased for general use. In line with a longer-term strategy and the desire to contribute to Estonia's climate objectives, LHV Pank has decided that LHV will no longer finance the purchasing of new diesel passenger cars from 2030 onwards.

Green hire-purchase

Renewable energy sources are undeniably an investment for the future. Using solar panels for generating energy and heating homes and household water with geothermal energy is a smart choice. Instead of driving vehicles that run on fossil fuels, we want our customers to try considering electric monowheels or two-wheeled vehicles. We want to make it easier to make energy-efficient choices.

Green Investment Loan for Companies

The Estonian economy is very carbon-intensive. Therefore, investing in lower energy consumption, production of renewable energy, or daily resource efficiency is very profitable and will increase any company's competitive advantage.

Green Loan for Housing Development

For people to have energy-efficient apartments, someone has to build them. Therefore, we offer investment loans for energy class A housing developers with a lower-than-usual interest rate.

Pension Fund Green (II pillar)

In March 2020, we launched Estonia's first green pension fund. We had been working on it for exactly a year. LHV Pension Fund Green is meant for anyone who cares even a little about green philosophies and believes that capital investment should be profitable in the long-term and environmentally sound and sustainable. The fund always invests 75% to 100% into equity. At least half of the portfolio is invested in investment funds that abide by sustainability principles or have environmental themes.

Pension Fund Green Plus (III pillar)

In December 2020, LHV established the Pension Fund Green Plus, which is the sister fund of the first Estonian second pillar fund that makes green investments. The first green third pillar fund's investment portfolio will consist of socially responsible, sustainable, and environmental assets. The equity risk to be taken with the fund will always remain between 75% and 100%. The green second and third pillar funds are aimed at everyone who cares about the green mindset and believes that investments must be productive in the long term and environmentally friendly and sustainable.

5.2 Social

While banks and financial institutions play an integral part in driving economic growth in a society, they also have the power to impact individual lives and communities' overall wellbeing. Our business is always conducted with integrity, transparency, and ethics in mind, with the utmost emphasis on fair dealing and respect towards our partners, customers, and employees.

By acknowledging our role and societal influence on the local level, we

• Preserve a budget to support the advancement of music or arts, education, sports, and community events;
• May provide support to external movements and partners to promote the cultural and economic development of local communities;
• Stand for the equal opportunities of people and companies active in the economy;
• Build the confidence of our customers toward LHV as a non-discriminatory financial services provider;
• Encourage financial literacy and economic knowledge-sharing;

• Continuously improve our competencies in the field of ESG to further advance the cohesion of society. The prosperity and welfare of our people is the core of our business operation.

We realize that good business results and growth do not happen in isolation of people who create value, are well taken care of, and are engaged in their personal and collective mission, and feel highly valued.

5.2.1 Social responsibility

Along with the growth of LHV, we are also becoming increasingly aware of our growing role in the Estonian economy and society in general. Based on our mission, we support activities that allow Estonian people and businesses to think more boldly about the future and realize their plans. We consider it important to increase the feeling of economic security and make the economic environment more coherent. In society at large, we primarily support ventures that make Estonia bigger and contribute to the capabilities of our communities. In addition to contributing to investor education and recognition of entrepreneurs, we have several longer-term and more recent cooperation projects, helping to achieve said goals.

5.2.2 Financial literacy

Since its establishment, LHV has been part of the Estonian investor community. As a market leader in investment services and as a listed enterprise that values investor relations simultaneously, we actively contribute to educating the investor community. In our relations with more than 10,000 shareholders, we are open, transparent, and inclusive.

• We organize free seminars as part of the Investment School, where over 8,200 people participated in 2021 (the number of participants in 2020 was 7,400). This year, most seminars were held in the form of webinars.
• We also carry out the annual stock market game Börsihai. This year, the number of participants reached 9,387 (the number in 2020 was 6,576).
• For the third year in a row, we organized an advertising campaign on financial literacy, but this time targeted it at mostly Russian-speaking youth in Estonia, with insightful videos on money management on our social media platforms.
• In cooperation with the University of Tartu, we prepared an elective subject 'Functioning of a modern banking company on the example of LHV Pank for which 39 students registered.
• We participated in projects for improving financial literacy organised by the Estonian Banking Association.
• We supported the Investor Toomas a conference organised by Äripäev and the Investment Festival carried out by the Investment Club, the Women's Investment Club, and the stock training.

5.2.3 Sponsorships

Within its means, LHV supports activities that contribute to the development of Estonian society. In our sponsorship projects, we prefer long-term and substantial cooperation.

Estonian culture and society

• Estonian Music Days for six years now we have supported the publication of the Au Award for new Estonian music, which was awarded to Rasmus Puur in 2021.
• Enn Soosaare Foundation the prize for supported ethical essays was awarded to Jüri Saar in 2021.
• Festivals Sõru Saund ja Mägede Hääl music festivals that bring music to small places
• 53 community initiatives applied for support from the Who's Who? The Järva-Jaani Firefighting Society received the main grant for the renovation of the local rescue team.
• We launched a charity function for LHV bank cards, with the help of which customers can conveniently donate to a charity they like with each use of the card.

By the end of the year, customers raised a total of 64,000 euros for 12 organizations.

Sport & healthy lifestyle

• Estonian Football Association LHV Pank has been the main sponsor of the Estonian Football Association and the Estonian national team since 2010. In addition, in 2021, we supported football clubs with 90,502 euros through the LHV football card support system.
• Estonian Optimist Class Union we support the growth of Estonian sailing.
• Rally Estonia we supported the organization of the stage of the World Rally Championship in Estonia for the second year.
• Simple Session we were one of the main sponsors of the top extreme sports event for the third year.
• Estonian Biathlon Federation we signed an agreement to support Estonian biathlon during the Olympic season, when the Estonian MK stage will be held.
• We are organizing the inter-company football tournament LHV Cup, which took place for the fifth time.

Estonian economy and business

• EY Estonian Entrepreneur of the Year competition we are one of the main sponsors since 2012, in 2021 Priit Kallas was named Entrepreneur of the Year.
• Young Entrepreneur Award in cooperation with the Estonian Chamber of Commerce and Industry, we awarded the prize to an outstanding and innovative young entrepreneur, who was Martin Vares this year.
• Conferences Business plan, Investment festival, Investor Toomas conference - in cooperation with Äripäev, we supported the organization of Estonia's leading business and investment conferences.

We also support smaller local initiatives with our knowledge, gifts about LHV, advice and the presence of our people. We work with universities. We are a member of the Estonian Information Technology and Telecommunications Association, the Estonian Chamber of Commerce and Industry and the Estonian Employers' Confederation. We consider it important to help Estonian producers and entrepreneurs by consciously consuming their products and services.

5.2.4 Social impact through sales and channels

We aim to offer the best and most straightforward use of all our products and services to our customers. The years 2020 and 2021 were remarkable due to COVID-19 and because social distancing made electronic channels play an even more critical role in business and society. This clearly demonstrates that our focus on digital channels is the right way forward in making our services available to everyone.

For LHV, it is continually essential to develop our e-channels so that our internet bank and mobile app will support the availability of all our services. For the past few years, our main target has been the services targeted at private customers, but clearly, we want to offer the same experience to our business customers.

Identification upon onboarding of customers (private customers)

remotely and online.

Our mobile bank app is gaining popularity rapidly, but during the upcoming year we are also advancing the look and feel of our internet bank by making it more user friendly. The customers use electronic channels more with every year and we continue putting a lot of effort into making user experience in our electronic channels as seamless as possible.

The increase of new customers login into the internet bank and mobile app was 40% and 82% in the past year. This means that customers use electronic channels even more than before.

In 2021, we have onboarded about 3,000-5,000 new customers every month. More than half of our new customers open their bank accounts through our e-channel. We have seen this growing trend in previous years, but 2021 has shown that most of our customers can use our services

LHV online banking and mobile bank usage activity

Through LHV it is possible to smoothly open a bank account for underage children through our internet bank or mobile app. Only the child's ID card, passport, or residence permit card issued in Estonia is required for opening the account. We have seen positive trends, meaning that opening bank accounts to children is only gaining popularity.

New Child Accounts

Based on customer segments and the unique needs of those segments. Our goal is to offer all our products and services online and plan our sales activities by segments even more to support a positive customer experience.

Pension Investment Account

From 2021, it is now possible for our customers to invest their pension money via Pension Investment Account. This means that customers can be in charge of their pension money and invest it directly into the stock market, rather than holding it in pension funds. This leads to our customers accumulating financial wisdom even about pension – a topic that falsely seems too far away for a lot of people.

No of clients using PIA

In 2021 LHV started offering insurance services, meaning that the customers can now insure their homes, cars, trips, and a lot more via LHV. All the applications for the insurance, and insurance claims are submitted through our website, keeping the ecological footprint minimal.

We have made the life easier for our business customers by developing a convenient bank account opening flow in our mobile bank. This leaves our customers more time on their hands to deal with activities that help their business succeed.

Focus on customer experience

A positive customer experience is critical to the sustainable growth of any business. And customer experience is essential for us. A positive customer experience promotes loyalty, helps us retain customers, and encourages brand advocacy. Therefore, we have also considered the needs of visually impaired people when developing our channels.

As in previous years, we also focus on promoting financial literacy. For that, we will develop an Assistant Budget Planner tool in our e-channel for our customers to act even smarter in their financial decisions. For the next year, we are

aiming to build a flow that encourages customers to save money, while learning about the importance of investing.

We are always responsible in planning our sales and marketing campaigns and trying to offer the best possible solution for the customer. We try to listen to our customer opinion and preferences as much as possible. All our activities are based on customer segments and the unique needs of those segments. Our goal is to offer all of our products and services online and plan our sales activities by segments even more to support a positive customer experience.

5.2.5 Our societal impact as an employer

LHV, as a large employer and an important part of the society, has a responsibility for its actions, words, and ways of working. LHV is using leverage to promote high ethical standards and inclusive approach in all customers, investor, and employee relations. We aim to be a responsible organization, but also hope to contribute to systematically change towards more sustainable approach and inclusive society in general.

In our employees we look for the same values and follow the mindset in all our practices processes and daily actions internally. We carry out different surveys, during the employee lifecycle to evaluate how we are doing in the eyes of our employees, and where we could do better, for example during exit interviews, end of probation talks, etc. We have set up a quarterly best practices seminar for team leads, where many team leads share their own experiences and ideas, of how to make the workplace better.

In 2020 we introduced a new employee engagement survey – Gallup's Q12. This is an international format developed to measure employee engagement. The format consists of 12 questions, which all measure factors that are influencing employee happiness. The format has proven results internationally to bring out greater performance and help communication between managers and employees. We have concluded 2 surveys this year, in May and in October. The results were very high, 4.6 out of 5 in May and 4.5 out of 5 in October. In addition to the results, we have seen a better communication within teams about important matters and many teams have had changes towards better working climate thanks to the conversations raised within the Q12 format.

Equality and non-discrimination

LHV is an equality-driven, fair, and inclusive employer, we foster and maintain non-discriminatory business and HR practices. In the leadership and recruitment process, we are guided by the highest of ethical standard, human rights, and equal opportunities. Guided by the "Personnel policy" in all recruitment and promotion decisions, we take a gender-neutral, non-discriminatory approach and base the decisions on equal, measurable qualities, such as experience, education, skills and, if necessary, requirements from applicable regulations.

It is important for LHV to not to discriminate against people with disabilities. In recruitment processes we choose the best person for the given role, not considering their disabilities. If the person is fit for the job, no other aspects will play a role. Currently, unfortunately the physical office space is not ready for anyone with a physical disability but working remotely is given as an alternative.

LHV has not found it necessary to implement diversity of equality policies but covers guidelines in different internal documents. In 2021, working relations paragraph "Working relationships" was added in the "Rules of organization of Work", which sets Whistleblowing procedure. This year, there has been no notifications of any violations in LHV. There were no labour disputes, discrimination cases, or violations of human rights. In addition, in 2021 the "Code of Ethics" was updated to reflect equal rights and non-discrimination guidelines.

The remuneration policy sets, the guidelines to follow in determining the renumeration, the decision must be objective and unaffected by the person. If required, a compliance to legislations is checked. In 2021, LHV has set a process for calculation of equal pay. We are using analytical job evaluation method, which has been created and developed by Fontes and bases on ILO recommended method. It is used in all three Baltic States for market benchmarking. LHV has used Fontes' benchmarking method 2011, for yearly evaluation. In this method jobs are evaluated based on education and professional experience, work characteristics and accountability. Analytical job evaluation method is universal and is applicable in every organization and with all jobs. Fontes analytical job evaluation points scale and job family classification scale are compatible. This way we are comparing similar value jobs with each other. The analysis showed that in specialist categories, where the job requirements and the work more comparable, the salary ratio from women to men ranged from 0.97 to 0.80, in the very top specialist category. In the manager categories the range was slightly higher, from 0.98 to 0.74, but these roles are often more specific, incomparable with each other. However, as a part of the analysis the problems were taken into consideration and further activities have been set.

Breakdown of the company employees (head counts) by gender as of 31.12.2021 – 60% Female (388), 40% Male (263)

Age group	Women (%)	Men (%)	Total
19-25	63 (64.3%)	35 (35.7%)	98
26-40	233 (57.5%)	172 (42.5%)	405
41-55	87 (61.7%)	54 (38.3%)	141
56-…	5 (71.4%)	2 (28.6%)	7
Total	388 (60%)	263 (40%)	651

	Total employees (vs 2020)	Tallinn office (EST)	Tartu office (EST)	London office (UK)
Total employees	651 (+134)	571	64	16
Working part time women (%)	6.2%
Working part time men (%)	3.8%
Working contractual basis (of which % in IT department)	23 (88)
New hires (of which nr of interns)	229 (27)
Voluntary turnover rate (%)	8.6%
Overall turnover rate (%)	13.7%

Gender pay gap as of June 2021:

	Salary ratio (women to men)	Breakdown of female employees
Employees
Administrative and office services – job value points 91-159	0.97	82.4%
Specialists 1 – job value points 160-210	0.91	85.0%
Specialists 2 – job value 211-260	0.83	67.7%
Top specialists 1 – job value points 311-370	0.92	61.1%
Top specialists 2 – job value points 371-492	0.8	20.9%
Managers
First level managers 1 – job value points 184-250	N/A	100.0%
First level managers – job value points 251-310	0.76	71.4%
First level managers – job value points 311-380	0.74	75.0%
Middle level managers 1 – job value points 381-440	0.79	33.3%
Middle level managers 2 – job value points 441-500	0.98	45.5%
Function/area managers 1 – job value points 501-700	0.97	45.8%
Function/area managers 2 – job value points over 701	0.91	20.0%

LHV uses analytical job evaluation method which has been created and developed by Fontes and bases on ILO recommended method. It is used in all three Baltic States. Jobs are evaluated based on education and professional experience, work characteristics and accountability. Analytical job evaluation method is universal and is applicable in every organization and with all jobs. Fontes analytical job evaluation points scale and job family classification scale are compatible.

Inclusive workplace

It is important to us that our employee's ideas, thoughts, and statements are heard and taken into considerations. We believe that great success comes from working together and with a "collective brain". Therefore, it is important that employees feel free to have a say and for their words to reach up to the top management. LHV has included all employees in the process of setting goals for each team. These are done as a team effort.

Even though the conversation and opportunity to give your thoughts is daily, the subject is very much in focus at least twice a year, during our engagement survey Q12. The 7th question in the survey is – At work, my opinions seem to count. The average of this question was 4.6 out of 5, both in May and In October. As the format also includes one on one conversations for every team member with their manager the subject is discussed, and actions taken to improve, if anything needs to be improved. Furthermore, LHV has set up several informative and inclusive "coffee morning" series – best practices series for all team leads, information series "what is really important?" for all employees.

LHV employees are not covered by collective agreement, as this is not a very common practice in financial sector in Estonia. However, we are a member of the Estonian Employers' Confederation.

Employee development

Professional and personal development is a part of LHV culture, we strive to innovate and be better at providing smarter solutions to our customers. The ideas for the solutions come from our employees, therefore developing one's skills is part of the daily job. The training approach is guided

by individual's needs, motivation, and goals as well as regulative guidelines for professional development. In addition to professional trainings,

we have contributed to team training with a goal to help teams work better together. We have also focused more intensely on leadership development with a set leadership training program. The next step in the program is working with strengths and setting out internal career development plans.

In addition to personal and professional development, we have started with informational mornings in various subjects about sustainability – for example circular economy, transport and mobility, natural resources and the environment, electricity and energy consumption, and conscious consumption.

Our employee engagement survey measures the satisfaction with one's development. There are three questions focused on development. First is asking if there is someone at work who encourages your development, the second asks if anyone has talked to you about you progress and last one asks if you have had opportunities to learn and grow in the past year. All the questions have seen an increase in the average result, with the last question answered with 4 or a 5 by 95% of the respondents in the October 2021 survey.

Work-life balance

As an employer it is very important to us that our employees have a well-balanced life. When a life is unbalanced, it will affect both private life and work life. Therefore, LHV does not promote working overtime and offers flexible working hours. The general culture within company does not promote an unbalanced work life. During the pandemic we have bettered a hybrid-workplace solution, but in doing this have not closed our office, so if anybody feels they can do their work better at the office this has always been a possibility. This year we have conducted a re-assessment with the Ministry of Social Affairs for family-friendly employer program. We were awarded golden level in 2019, which we were able to retain in 2021. This certificate evaluates all areas of work-life balance and shows that LHV cares for their employees in every stage of their life. We have not added any new perks to promote this subject as many of them have been implemented already – for example we offer part-time and flexible working schedule for students, new parents and to anyone, who feels the need for part-time working, we offer an allowance for a new child and when the child starts school. We offer free time for parents to attend their child's start of school or graduation, reduced hours on their child's birthday. We have 3 free personal days to use, 3 free days for weddings or if you need to organize a funeral. We also offer an allowance to use with mental health professionals, if needed. The usage of this has grown each year, as the employees feel more comfortable using professional help with also private worries.

Promotion of employees' health

LHV has an extensive occupational health package, which is important to keep our employees healthy. We contribute to physical and mental health of its employees. As well as keeping the balance between work and private life, it is important make sure the mental, and physical working environment endorses and supports our employees. LHV provides employees some healthy snacks at the office, promotes physical activity during the working day and offers an allowance for sporting and rehabilitation. This compensation has been used actively: 74% in LHV Pank; 83% in LHV Varahaldus; 71% in LHV Finance, and 57% in LHV Kindlustus. In addition to the mandatory occupational health survey, LHV offers an extensive health survey for employees over the age of 40. The additional survey has been very popular and the usage percentage for the included is over 90%.

A recognized employer

It has never been a goal to be awarded for being a desirable employer, but it is a very nice acknowledgement. LHV has for the past few years gained an increasingly better reputation for being a desirable employer. Our goal has been to offer our employees self-development and culture that inspires. This year we have had many opportunities to share our experiences and our leadership culture in podcasts, at conferences and in schools and universities. All of which has helped in being noticed. We have received acknowledgements in CV-Online's TOP employer, being named the 1st choice in financial sector. CV Keskus named LHV as 2nd most desirable employer. We were also recognized as an attractive employer by students and experienced employees in Instar's survey.

All recognition is an important value for attracting talented people to join the company, especially in these very competitive conditions in the labour market. This year we have had the chance to communicate with almost 5,000 candidates, of whom we have hired 4.4%. In addition to job offerings, we have continued with our internship program and promoted job-shadowing and rotation.

5.3 Governance

LHV is committed to always acting with integrity and in good faith and ensuring that our management policies, business mechanisms, and structures are transparent and reflect accountability, equality, and the highest ethical standard. We are carefully managing all potential conflicts of interest, avoid bribery, money-laundering, unlawful behaviour, and corruption. To encourage the sustainability mindset across all management levels and the organization, we:

• Maintain a flat, non-hierarchical organizational structure to promote the importance of employees taking individual responsibility.
• Continuously enhance the integration of ESG factors into our everyday work, management style, recruitment processes, and strategy building.
• Focus on engagement and cooperation.
• Recognize the integration of ESG factors into our business processes as a change management effort and understand the importance of collaboration to achieve our set goals.
• Work toward better analysing and reporting our ESG activities and progress and appropriately disclosing our metrics and achievements to regulators, partners, and the public.
• In order to ensure a transparent management culture, we follow the Good Corporate Governance Practices recommended by the Financial Supervision Authority and the Nasdaq Tallinn Stock Exchange.
• Report regularly on the UNEP FI Principles of Responsible Banking.
• Have integrated ESG targets into executive compensation program.

5.3.1 Responsible management culture

Responsibility and openness in management are the core pillars of our operating principles and are firmly rooted in our mission and values. We strongly believe that our high ethical standards and consideration of all stakeholders, high-level risk management, and lawful behaviour are critical to our success in the long-term. All managers and employees of LHV must behave ethically and responsibly and following the Code of Ethics is mandatory. LHV's Code of Ethics is the foundation of LHV's various policies, including the Company Governance Policy, internal regulations, and procedures governing the specifics of adherence to the Code of Ethics, which was updated in 2021. In 2020, we also created and published our very first ESG Policy, where our responsibility and commitment to social and environmental issues are clearly stated and explained. Primarily we rely on the lawfulness, best practices, and common-sense principle, doing our job responsibly, transparently, and with a fundamental goal to "do no harm." The work of the Supervisory Board of the Group is supported by different committees: the Remuneration Committee, the Nominating Committee, the Audit Committee, the Risk and Capital Committees. LHV's underlying governance principles are described in more detail in the "Best Practice of Corporate Governance." The LHV management structure is easy-to-understand and includes clear lines of responsibility. An essential part of responsible governance is meticulous risk management and critically analysing our own activities. The mapping and mitigation of credit risks, liquidity risks, market risks, crime risks, and operational risks are taken very seriously at LHV. We have three lines of defence for risk monitoring and risk control. The internal control framework covers both well-functioning independent risk management, compliance checks, and staff performing audit functions. We have established the necessary committees to advise on risk management. The company gives a comprehensive overview of the risks in the annual "Risk and Capital Report of AS LHV Group."

5.3.2 Investor relations

LHV actively contributes to developing good relations with the investor community, and we have set high standards for ourselves in being open, transparent, and raising the awareness of our investors. We have set up an investor relations website, making all documents and information available to the shareholders following the Corporate Governance Recommendations and statutory requirements. LHV treats all shareholders equally and notifies all relevant essential circumstances, ensuring equal and quick access to the respective information and being open to questions. Information is disclosed in accordance with the rules set forth for publicly traded companies.

5.3.3 Transparency through sustainability reporting

We have taken it a goal to improve our sustainability reporting and non-financial disclosure practices and know-how in the coming years. In 2020, we started improving our know-how on reporting ESG metrics and also contributed to several voluntary non-financial disclosure initiatives like the Nasdaq Environmental and Social Disclosure Form and an Estonian banking-sector spBecific ESG disclosure project led by a local Estonian NGO Estwatch. We continued this practice in 2021 as well and the year 2021 was our first year of reporting to UNEP FI about our progress with the UNEP FI Principles of Responsible Banking. Starting from 2021, our ESG reporting practices will be aligned with GRI requirements and the Nasdaq ESG Reporting Guide for Nordic & Baltic Market. We will also keep up regular reporting on the UN Principles of Responsible Banking as required by the Initiative. We understand that aligning our reporting practices with international standards also means disclosing more non-financial information than we do right now.

To do that, we will put much more effort into gathering and analysing ESG data, improving ESG communication and internal processes, developing and publishing more sustainability-related materials and reports, and building in-house capacity on globally recognized ESG reporting standards.

5.3.4 ESG governance and metrics

To meet our goals for more sustainable business development, we comprehend the challenges of ESG governance and measuring or impact and setting KPIs to sustainability goals. In order to manage our impacts, we need to be able to measure them. For that, we must invest more time and effort in the future on the governance structures of ESG as well as and build internal capacity to measure our success better. We have today set key indicators to all our impact areas and developed a plan on what data we need to start gathering and measuring in the coming years to understand and meet our targets. We have also developed an ESG roadmap for 2021-2023 that will help us move closer to our goals in a more structured manner. Incorporating ESG in all our business decisions and business lines will need to go hand in hand with comprehensive mechanisms for measuring our impact across the board and reporting on it correctly. This will be one of the key goals for LHV regarding ESG moving forwards. The goal of 2022 and onward would be to set a more specific target setting plan for these metrics and start setting business specific ESG targets which and tangible and aligns with both our ambition as well as the global goals.

Below in the GRI context index, we have also reported on both GRI as well as voluntary ESG indicators.

5.3.5 Taxonomy reporting

Article 8 of the Taxonomy Regulation (the TR or Taxonomy) obligates any undertaking which is subject to an obligation to publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU to include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking's activities are associated with economic activities that qualify Publication pursuant to Article 8 explained in Commission Delegated Regulation 2021/2178 (Delegated Regulation). It is important to note here that the Delegated Regulation will enter into force in several stages in 2022-2026.

LHV Pank taxonomy eligibility

As the Bank is treated as a financial undertaking based on the Delegated Regulation, the Bank must disclose the following information in 2022-2023 (Article 10 (3)):

• the proportion in their total assets of exposures to taxonomy non-eligible and taxonomy-eligible economic activities;
• the proportion in their total assets of the exposures referred to in Article 7, paragraphs 1 and 2 of the Delegated Regulation (exposures to central governments, central banks and supranational issuers, and derivative instruments);
• the proportion in their total assets of the exposures referred to in Article 7(3) of the Delegated Regulation (exposures to undertakings that are not obliged to publish non-financial information pursuant to Article 19a or 29a of Directive 2013/34/EU);
• the qualitative information referred to in Annex XI of the Delegated Regulation.

Regarding portfolio management, portfolios are not included in total assets in the meaning of Delegated Regulation Article 10 (3). Therefore, these assets are not subject of disclosure at this stage.

Although, responsible investing activities and the assessment of the ESG factors is a part of the process of analysing the investments made in the process of portfolio management, Bank does not currently rely on the EU criteria for environmentally sustainable economic activities.

In the table below you can find our portfolio compliance to the EU taxonomy environmental goals on climate change mitigation and climate change adaptation:

			Eligible	Non-eligible	% coverage
Art 10	3a	Total assets	889,035	5,955,898	13.0%
		Of which trading portfolio and on demand interbank loans
		in total assets	-	113,026	1.7%
	3b	Government & Central Bank	-	3,874,284	56.6%
		Total exposure to derivatives	-	-	0.0%
		Total exposure to non-NFRD companies	-	12,380	0.2%

Group level

LHV Group has qualified itself as a non-financial undertaking, which means that pursuant to Article 10 (2) of the Delegated Regulation it must this year only disclose the proportion of taxonomy-eligible and taxonomy non-eligible economic activities in its total turnover, capital and operational expenditure as well as the qualitative information referred to in Section 1.2 of Annex I relevant for this disclosure.

LHV Group subsidiaries LHV Varahaldus and LHV Kindlustus are not separately in scope of Article 19a or Article 29a of Directive 2013/34/EU. Therefore, they will report relevant information required by Article 10 (2) of the Delegated Regulation on group level.

LHV Varahaldus taxonomy eligibility

The share of economic activities of LHV Varahaldus that can be considered as taxonomy eligible is 0%. In order to achieve the above result, the definition of "taxonomy eligible economic activities" in the Delegated Regulation was taken into account. The definition refers to screening criteria that are currently published for only two environmental objectives: climate change mitigation or adaptation. Asset management services are not described in these screening criteria. As the screening criteria for the remaining four environmental objectives have not yet entered into force, it is not yet possible to assess its performance against them.

Whereas, funds and other financial investments have not been taken into account, LHV asset management fee income should be only considered on this disclosure. Nevertheless, the principles of ESG shall be taken into account when investing the assets of LHV Varahaldus funds to the extent and in the manner provided in the Rules "Principles of Responsible Investment".

LHV Kindlustus taxonomy eligibility

	Capital
	Revenue	Share	Requirements	Share	Expenses	Share
Land vehicle insurance	1,552,051	23.0%	921,840	22.8%	462,130	23.0%
Fire and other property damage insurance	1,283,003	19.0%	1,308,213	32.4%	382,020	19.0%
Total other types of insurance	3,911,677	58.0%	1,810,710	44.8%	1,164,720	58.0%
Total	6,746,731	100.0%	4,040,763	100.0%	2,008,871	100.0%

The turnover is defined as the volume of insurance premiums written on insurance contracts that have entered into force.

Capital requirements are calculated using the Solvency 2 standard formula. The company's expenses (incl. fixed costs and commissions) are divided by turnover.

5.3.6 GRI content index and ESG metrics

The report has been prepared in accordance with the Global Reporting Initiative (GRI) Standards: Core Option. As GRI does not provide enough proper financial-sector specific disclosures for reporting on portfolio impact, various non-GRI disclosures have been used. Such non-GRI disclosures have been categorized by material topics, and listed in the GRI content index below, in order to provide a holistic overview of all main ESG and sustainability indicators covered in the report.

GRI standard	Disclosure number	Disclosure	Location in report and/or explanation See section / sections:
Foundation (GRI 101: 2016)
	General disclosures (GRI 102:2016)
Organizational profile
	102-1	Name of the organization	• Legal name
			• Note 1 General information
	102-2	Activities, brands, products, and services	• Management report
			• Note 1 General information
			• Activities of business areas
	102-3	Location of headquarters	• Legal address
			• Note 1 General information
	102-4	Location of operations	• Legal address
			• Note 1 General information
	102-5	Ownership and legal form	• General Meeting (for legal form)
			• Shares and bonds issued by LHV (for ownership)
			• Note 1 General information (for legal form)
			• Note 6 Subsidiaries and goodwill
	102-6	Markets served	• Strategy
			• Note 1 General information
	102-7	Scale of the organization	• Strategy
			• Note 1 General information
	102-8	Information on employees	• Strategy
		and other workers	• Note 1 General information
	102-9	Supply chain	• Green office operations
	102-10	Significant changes to the organization and its supply chain	• Green office operations
	102-11	Precautionary principle or approach	• ESG Risks in credit risks
	102-12	External initiatives	• Global sustainability frameworks
			• Leadership for sustainable business development in Estonia
	102-13	Membership of associations	• Global sustainability frameworks
			• Leadership for sustainable business development in Estonia
Strategy
	102-14	Statement from senior decision-maker	• Statement of the managing director
Ethics and integrity			• CEO letter on sustainability
	102-16	Values, principles, standards, and norms of behaviour	• Governance of the group
	102-17	Mechanisms for advice and concerns about ethics	• Equality and non-discrimination
Governance
	102-18	Governance structure	• Note 1 General information

Stakeholders' engagement
	102-40	List of stakeholder groups	• Stakeholder engagement
			• Engagement of stakeholder groups
	102-41	Collective bargaining agreements	• Inclusive workplace
	102-42	Identifying and selecting stakeholders	• Stakeholder engagement
	102-43	Approach to stakeholder engagement
	102-44	Key topics and concerns raised
Reporting practice
	102-45	Entities included in the consolidated	• Note 1 General information financial statements
	102-46	Defining report content and topic boundaries • Material ESG and sustainability	aspects
			• GRI
	102-47	List of material topics	• ESG strategy and materiality
	102-49	Changes in reporting	• Summary of significant accounting policies/ basis of preparation
	102-50	Reporting period	01.2021-12.2021
	102-51	Date of most recent report	17.02.2021
	102-52	Reporting cycle	Annual
	102-53	Contact point for questions regarding the report	info@lhv.ee
	102-54	Claim of reporting in accordance with the GRI Standards	• Global sustainability frameworks – GRI
			• GRI content index
	102-55	GRI content index	• GRI content index and ESG metrics
	102-56	External assurance	• Independent auditors report

Material impact areas
1. Climate and biodiversity
		Portfolio impact on climate and biodiversity (non-GRI disclosures)	See sections:
Management approach 103-1 until 103-3			• ESG strategy and materiality
(GRI 103: 2016)			• Contribution to sustainable development
			• Stakeholder engagement - Leadership for sustainable business development in Estonia
			• Management of ESG
			• Management of impact areas - Environmental
Emissions (GRI 305: 2016)
Management approach 103-1 until 103-3			• Our carbon footprint
(GRI 103: 2016)	305-1	Direct (Scope 1) GHG emissions
	305-2	Energy indirect (Scope 2) GHG emissions
	305-3	Other indirect (Scope 3) GHG emissions Limited to office-based activities only
	305-4	GHG emissions intensity	Limited to office-based activities only
Waste (GRI 306:2020)
Management approach 103-1 until 103-3			• Our carbon footprint
(GRI 103:2016)	306-3	Waste generated
Waste and effluents (GRI 303: 2018)
Management approach 103-1 until 103-3			• Our carbon footprint
(GRI 103: 2016)	303-5	Water consumption
2. Circular economy
Portfolio impact on circular economy (non-GRI disclosures)
Management approach 103-1 until 103-3			• Contribution to sustainable
(GRI 103: 2016)			development
			• Management of ESG Management of impact areas - Environmental
3. Inclusive and cohesive economy
Indirect economic impacts (GRI 203: 2016)
Management approach 103-1 until 103-3 (GRI 103: 2016)			• ESG strategy and materiality • Contribution to sustainable development
			• Stakeholder engagement - Leadership for sustainable business development in Estonia
			• Management of ESG Management of impact areas - Social
	203-2	Significant indirect economic impacts	• Social responsibility
			• Financial literacy

• Sponsorship
• Social impact through sales and channels

Management approach 103-1 until 103-3 (GRI 103: 2016)			• ESG strategy and materiality • Contribution to sustainable development
			• Stakeholder engagement - Leadership for sustainable business development in Estonia
			• Management of ESG Management of impact areas - Social
	203-2	Significant indirect economic impacts	• Social responsibility
			• Financial literacy
			• Sponsorship
			• Social impact through sales and channels
5. Honest and transparent organisational culture
Anti-corruption (GRI 205:206)
Management approach 103-1 until 103-3			GRI content index
(GRI 103: 2016)	205-3	Confirmed incidents of corruption and actions taken	0
Socioeconomic compliance (GRI 419: 2016)
Management approach 103-1 until 103-3			• Management of ESG
			• Management of impact areas – Governance
			• Management of impact areas – Social
			• Governance - Responsible management culture
			• Corporate Governance Report (GRI 103: 2016)
	419-1	Non-compliance with laws and regulations None in the social and economic area
Diversity and equal opportunities (GRI 405: 2016)
Management approach 103-1 until 103-3			• Management of ESG
(GRI 103: 2016)			• Management of impact areas – Social
			• Our societal impact as an employer - Equality and non-discrimination
	405-1	Diversity of governance bodies	• Equality and non-discrimination and employees
			• GRI content index and ESG metrics
	405-2	Ratio of basic salary and remuneration	• Equality and non-discrimination of women to men
			• GRI content index and ESG metrics
Stakeholder engagement (non-GRI disclosure)
Management approach 103-1 until 103-3 (GRI 103-2016)			• ESG strategy and materiality - Stakeholder engagement,
			• Engagement of stakeholder groups
			• Stakeholder engagement in ESG and sustainability materiality analysis and strategy process.
			• Management of ESG

4. Financial literacy and economic sense of security

Indirect economic impacts (GRI 203: 2016)

ESG Key performance indicators

1. Climate and biodiversity	2021	2020
Proportion of diesel car leasing in the vehicle leasing portfolio (€)	38.39%	46.18%
Proportion of green car leasing in the vehicle leasing portfolio (€)	2.77%	1.73%
Average CO2 emissions in Group's car leasing portfolio (gCO2/km)	134.86	140.83
Proportion of customers with FSC certification	0.8%	0.8%
Proportion of buildings with energy class A and higher and passive houses in the insurance portfolio	3%	-
Home loan portfolio divided into energy groups (new sales since 07.2021)	C	-
Energy class share in home loan portfolio (since 07.2021)	5.9%	-
"A" energy class share in home loan portfolio (new sales since 07.2021)	12.9%	-
Proportion of home loans for renovation of buildings	4.85%	3.29%
Proportion of private loans for renovation of buildings	8.18%	8.67%
Proportion of microloan for renovation of buildings	3.12%	2.66%
Proportion of SME-loan for renovation of buildings	10.26%	7.68%
Home loan outside of Harju County	32.5%	32.9%
Proportion of green home loans in the total home loan portfolio	2.1%	-
Share of corporate banking loan portfolio to the biomethane industry	0.35%	1.25%
Share of loan portfolio to solar energy industry in corporate banking credit portfolio	2.34%	2%
Share of loan portfolio to wind turbine industry in corporate banking credit portfolio	0.27%	-
Total share of renewable energy production in corporate banking portfolio	2.96%	-
Renewable energy loan share in SME portfolio	4.8%	5.6%
Solar park loan share in SME portfolio	4.8%	5.5%
EMAS certificate share	2.7%	3.4%
Proportion of customers with an environmental impact management certificate (EMAS, ISO)	2.7% (EMAS)	-
Share of corporate banking loan portfolio to Agriculture-related projects	3.9%	5.6%
Share of green home insurance in the total insurance portfolio	2.24%	-
Share of green casco insurance in the total insurance portfolio	2.14%	-
2. Inclusive and cohesive economy
Use of digital channels among different customer groups	64.48%	60.28%
Share of loans issued to companies established outside Harju County	38.6%	43.8%
Share of retail customer base outside big cities (Tallinn, Tartu, Pärnu)	32.1%	31.3%
Success rate of applications	52.94%	55.13%
Share of retail loans issued outside big cities (Tallinn, Tartu, Pärnu)	21.8%	21.5%
Share of corporate banking loan portfolio to Education and public administration projects	6.2%	10.3%
Share of corporate banking loan portfolio to local governments	5.9%	9.0%
3. Financial literacy and economic sense of security
Coverage of young people (up to 26 years old) with investment products agreement	45.7%	29.8%
Share of customer base with native language other than Estonian	15.3%	13.9%
Share of use of investment products agreement among clients with native language other than Estonian	22.8%	17.8%
Private clients with an investment services contract	41.1%	30.8%
Private customers with a growth account agreement	14.9%	10.1%
Total number of Investment School attendees	12,000	7,420
Number of customers with 2nd pillar pension	138,443	-
Number of customers with 3rd pillar pension	30,297	-
Number of microloans	1,001	948
4. Honest and transparent organizational culture
Confirmed incidents of corruption and actions taken	0	0
Customer satisfaction index	95.8%	94.9%
Number of legal proceedings pending against the company as of end of year	1	0
Proportion of female employees in LHV Group	60%	60%
Percentage of female employees in leadership positions	46.1%	44.8%
The ratio of the CEO's salary to median FTE salary at LHV	5.26	5.26
Employee satisfaction indicator	4.5	4.6

Corporate Governance report

This report, which is presented in accordance with the Accounting Act of the Republic of Estonia, provides an overview of the governance of AS LHV Group (LHV) and the compliance of governance with the advisory guidelines Corporate Governance Recommendations (CGR) of the Estonian Financial Supervision and Crisis Resolution Authority and Nasdaq Tallinn Stock Exchange. LHV complies with CGR, unless indicated otherwise in this report.

1. General Meeting

LHV is a public limited company whose governing bodies are the General Meeting, the Supervisory Board, and the Management Board.

The General Meeting where shareholders exercise their rights is the highest governing body of LHV. The primary duties of the General Meeting include amendment of the Articles of Association, increase and decrease of share capital, decisions on the issuance of convertible bonds, election and extension of the powers of Supervisory Board members, early removal of Supervisory Board members, approval of the annual report and allocation of profit, approval of the share option programme, determination of the number of auditors, appointment and removal of the auditor(s) and other decisions within the power of the General Meeting under the law and the Articles of Association.

A resolution on the amendment of the Articles of Association is adopted when at least two-thirds of the votes represented at the General Meeting are in favour. A resolution on the amendment of the Articles of Association enters into force as of the making of a corresponding entry in the commercial register. The resolution of the General Meeting on the amendment of the Articles of Association, the minutes of the General Meeting and the new text of the Articles of Association are attached to the application filed with the commercial register.

A shareholder has the right to participate in the General Meeting, address the General Meeting with regard to items on the agenda, ask relevant questions and make proposals.

The General Meeting is called by the Management Board. The Annual General Meeting whose agenda includes the approval of the annual report is called at least once a year. The Management Board calls the Annual General Meeting within six months after the end of the financial year at the latest. The Management Board gives at least three weeks' notice of the Annual or Extraordinary General Meeting.

The agenda of the General Meeting, proposals of the Management Board and Supervisory Board, draft resolutions and other relevant materials are made available to the shareholders prior to the General Meeting. The materials are made available on LHV's website. Shareholders are given an opportunity to ask questions about items on the agenda before the General Meeting and to vote electronically on the drafts in the agendas of the General Meetings, in which case the shareholders not wishing to participate at the meeting in person were be granted the opportunity to observe the meeting via video broadcast. The corresponding option to observe the General Meeting and participate in the General Meeting via secure electronic means (without being physically present at the General Meeting) has been stated in the Articles of Association.

The list of shareholders entitled to participate in the General Meeting is determined based on the share register seven days before the General Meeting.

In 2021 two General Meetings were held. The Annual General Meeting was held on 24 March 2021, where the annual report for 2020 was approved, the profits for the 2020 financial year were allocated, and the payment of dividends was decided. In addition, an overview of the financial results, the business environment for the first two months of 2021 and the financial forecast for the next five years was given. The Extraordinary General Meeting was held on 23 August 2021 to approve the increase of the share capital and an overview of the 2021 financial plan was presented.

Both General Meetings in 2021 were held in the Estonian language and chaired by Daniel Haab, Head of Legal Department of AS LHV Pank, who introduced the procedure for conducting the General Meetings and the procedure for asking the Management Board questions regarding the company's activities.

The Annual General Meeting was attended by Madis Toomsalu, the Member of the Management Board and Rain Lõhmus, the Chairman of the Supervisory Board. Supervisory Board Member Heldur Meerits was represented by an authorized representative and other members of the Supervisory Board, i.e., Andres Viisemann, Tiina Mõis, Raivo Hein, Sten Tamkivi and Tauno Tats cast their votes electronically. The auditor, Eero Kaup (KPMG), was also present.

The Extraordinary General Meeting was attended by Madis Toomsalu, the Member of the Management Board, Rain Lõhmus, the Chairman of the Supervisory Board and Heldur Meerits, Member of the Supervisory Board. Supervisory Board Member Andres Viisemann was represented by an authorized representative and the members of the

Supervisory Board – Raivo Hein, Sten Tamkivi and Tauno Tats, cast their votes electronically.

No shareholders of LHV hold shares which would grant them special control or voting rights. LHV is not aware of any agreements between shareholders regarding coordinated exercise of shareholder rights.

The only shareholder with significant influence is Rain Lõhmus and persons related to him that hold 22.68% of share capital in aggregate.

2. Management Board

2.1 Composition and duties of the Management Board

The Management Board is a governing body of LHV which represents and manages LHV. The members of the Management Board are elected and removed by the Supervisory Board. In order to elect a member of the Management Board, the candidate's written consent is required. Only a person who has sufficient knowledge and experience to participate in the work of the Management Board and to fulfil the duties of a member of the Management Board and who meets the requirements arising from LHV's Articles of Association, rules of procedure of the Management Board and other internal regulations, and legislation may be appointed as a member of the Management Board. Before appointment, the suitability of the person for the position is assessed in accordance with LHV's procedure for the assessment of the members of the governing bodies and key personnel, taking into account the specific nature of LHV's operations.

According to the Articles of Association of LHV, the Management Board has one to five members. A member of the Management Board is appointed for a term of five years, unless otherwise decided by the Supervisory Board. The extension of the term of office of a member of the Management Board may not be decided earlier than one year before the scheduled expiry of the term of office or for a period exceeding the maximum period permitted by law or the Articles of Association. If the Management Board of LHV has more than two members, the Supervisory Board appoints the Chairman of the Management Board. The Chairman of the Management Board organises the work of the Management Board. The Supervisory Board may remove a member of the Management Board regardless of the reason. A member of the Management Board may resign from the board, regardless of the reason, by informing the Supervisory Board. The rights and obligations arising from a contract entered into with a member of the Management Board expire in accordance with the contract.

LHV's Management Board has currently one member and the member of the Management Board is Madis Toomsalu. The Supervisory Board has entered into a Management Board member contract with Madis Toomsalu. The Supervisory Board decides the remuneration principles of the members of the Management Board and compensation for early termination of the contract of a member of the Management Board. The term of office of the member of the Management Board was extended in 2021 and his term of office lasts until 30 March 2026.

The Management Board makes everyday management decisions at its own discretion and in the best interests of LHV and its shareholders, putting aside personal interests. The duties of a member of the Management Board include day-to-day management of LHV, representation of the company, management of LHV's operations in foreign markets and communication with investors, coordination of the development of LHV's strategy and implementation of the strategy by serving as a chairman of the Supervisory Boards of the major subsidiaries of LHV.

The Management Board ensures that LHV has risk management and internal control appropriate for its operations and business area. LHV's internal control system covers all activities carried out by LHV's Supervisory Board, management, and employees in order to ensure efficiency of operations, adequate risk management, reliability and accuracy of internal and external reporting, correspondence to reality and unconditional compliance with all laws and regulations. The internal control system covers all business, support, and control units.

The objective of risk management within LHV is to identify, correctly quantify and manage risks. The wider objective of risk management is to increase the value of the company by minimising losses and reducing volatility of results.

LHV's risk management is based on a strong risk culture and is based on the principle of three lines of defence. The first line of defence, i.e., business areas, is responsible for risk-taking and daily risk management. The second line of defence, i.e., the risk management area and compliance area, is responsible for developing risk management methods and risk reporting. The third line of defence, i.e., internal audit, exercises independent supervision over the entire organisation.

2.2 Principles of remuneration of the Management Board

The purpose of LHV's remuneration principles is to provide fair, motivating, transparent and lawful remuneration.

The authority to decide the remuneration principles and remuneration of the Management Board is vested in the Supervisory Board. The Remuneration Committee reviews

the bases of the remuneration of the Management Board on an annual basis. In assessing the activities of the Management Board, the Remuneration Committee considers, above all, the duties and activities of the member of the Management Board as well as LHV's financial position, the current status and outlook of business operations in comparison with companies operating in the same sector.

The remuneration payable to a member of the Management Board, including the options programme, must motivate the person to act in the best interests of LHV. The basic salary and remuneration principles of members of the Management Board are set forth in the employment contracts or Management Board member contracts concluded with them. The principles of remuneration of the members of the Management Board or employees engaged in internal control and risk management must ensure their independence and objectivity in the performance of their risk management/internal control duties. The remuneration of those persons must not depend on the results of the areas under their supervision. The goals set must be described at an individual level.

In setting the key quantitative and qualitative performance indicators and risk assessment metrics, LHV is governed by the following principles:

• The performance criteria developed by LHV must not stimulate excessive risk-taking or sale of inappropriate products.
• Performance criteria must not consist of performance efficiency indicators (e.g., profit, revenue, return, costs, and volume indicators) or market-based indicators (e.g., share price or bond yield) only but must be adjusted for risk-based indicators (e.g., capital adequacy, liquidity).
• The criteria used for measuring risks and results must be as closely as possible related to the decisions of the staff member whose results are being appraised and they should ensure that the process of the assignment of remuneration has the desired impact on the staff member's behaviour.
• Performance criteria must be developed by ensuring a good balance between quantitative and qualitative as well as absolute and relative criteria.
• Quantitative criteria must cover a period that is sufficiently long to take into account the risks taken by the staff members or business units and they should be risk-adjusted and contain economic efficiency indicators.
• Examples of qualitative criteria include achievement of strategic objectives, customer satisfaction, adherence to the risk management policy, compliance with internal and external regulations, management skills, teamwork, creativity, motivation and co-operation with other business units and the internal control function.

LHV applies a long-term incentive (LTI) plan, i.e., an option programme. The basic salaries of Management Board members, top management and key personnel included in the option programme (including staff members considered equal to Management Board members) are added annual performance pay the amount and disbursement of which corresponds to the achievement or non-achievement of individual targets and LHV's targets. The lower limit of the performance pay is EUR 0 and the upper limit is 200% of the annual remuneration approved by the shareholders. As a rule, if the financial plan is met, options are granted to the extent of two per cent of the total number of LHV shares. The bases for assigning performance pay through the options programme must be objective and justified and pre-determine the period for which performance pay is paid. The performance pay instruments consist fully of share options.

Severance compensation payable to members of the Management Board is related to their previous work results. No severance compensation is paid if this would damage the interests of LHV. The size of the severance compensation must correspond to the results achieved over time and to the remuneration received.

Currently, the Management Board of LHV has one member and the member of the Management Board, Madis Toomsalu, was paid for 2021 under his Management Board member contract monthly remuneration of EUR 13 thousand and annual remuneration of EUR 156 thousand. The member of the Management Board of LHV, Madis Toomsalu, can receive as performance pay for the options granted in 2019, 2020 and 2021 a total of 104,419 shares in LHV; the member of the LHV's Management Board is not entitled to any additional bonuses or benefits. In 2021, the salaries and other compensation paid to the management of all LHV companies (including LHV) totalled EUR 2,101 thousand (2020: EUR 1,768 thousand), including all taxes. The remuneration/salaries and compensation of the members of the management boards of LHV subsidiaries are included in the above total sum. At the end of 2021, the Management Board of AS LHV Pank comprised six members, the Management Board of AS LHV Finance (a subsidiary of AS LHV Pank) one member, the Management Board of AS LHV Varahaldus two members, the Management Board of AS LHV Kindlustus two members and the Board of Directors of LHV UK Limited four members.

2.3 Conflicts of interests

The Management Board submits a declaration of economic interests and conflicts of economic interests once a year. There have been no conflicts of interest; accordingly, no corrective measures have been applied.

Transactions between LHV and the Management Board, their close family members or persons related to them and the terms thereof must be previously approved by the Supervisory Board. In 2021, there were no such transactions between the member of the Management Board, his close family members or related persons and LHV, nor are there any valid contracts of that nature from earlier periods.

Madis Toomsalu, the Management Board member of LHV, is not a Management Board member or supervisory board member at any other issuer. He has not been granted authority to issue or buy back shares.

3. Supervisory Board

3.1 Composition and duties of the Supervisory Board

The Supervisory Board is a governing body of LHV which plans the activities of LHV, organises the management of LHV and conducts supervision over the activities of the Management Board. The Supervisory Board determines and regularly reviews LHV's strategy, the general action plan, risk management principles and the annual budget. The Supervisory Board has five to seven members. The members of the Supervisory Board are appointed for a term of three years. The members of the Supervisory Board elect from among themselves the Chairman of the Supervisory Board, who organises the activities of the Supervisory Board. The authority to elect and to extend the mandate of the Supervisory Board members is vested in the General Meeting.

Only a person who has sufficient knowledge and experience to participate in the work of the Supervisory Board and to fulfil the duties of a member of the Supervisory Board and who meets the requirements arising from the Articles of Association, rules of procedure of the Supervisory Board and other internal regulations, and legislation may be elected as a member of the Supervisory Board. Before appointment, the suitability of the person for the position is in accordance with LHV's procedure for the assessment of the members of the governing bodies and key personnel, taking into account the specific nature of LHV's operations.

The members of the Supervisory Board of LHV are Rain Lõhmus (Chairman), Andres Viisemann, Tiina Mõis, Heldur Meerits, Raivo Hein, Tauno Tats and Sten Tamkivi. The term of office of Supervisory Board members lasts until 29 March 2023.

The Supervisory Board had eleven ordinary meetings in 2021 and on four occasions decisions were adopted electronically. In 2021, all members of the Supervisory Board participated in ten Supervisory Board meetings and Tiina Mõis was absent from one Supervisory Board meeting.

On the Supervisory Board level there have been four committees formed, which are responsible for advising the Supervisory Board in matters related to audit, remuneration, risks, and selection of members of Management Board as described in subsections 3.3 - 3.6 of this report.

In the framework of its meetings in 2021, the Supervisory Board received regular overviews of the operating and financial results of LHV and its subsidiaries, and the activities, development, and results of related areas. Risk reports and the internal auditor's reports were reviewed on a quarterly basis. In the first quarter of 2021, the Supervisory Board approved the annual report for 2020, the report on the activities of the Supervisory Board and a proposal for the distribution of profit and made the proposal to pay dividends in the net amount of.29 cents per share. The financial and capital plan, capital targets as well as the 5-year financial forecast and the financial calendar for 2021 were also approved. The pricing of options and the grant of share options for the results of 2020, and the exercise of options were approved in February and consent to increase the share capital of LHV in connection with realisation of the staff options programme and subscription results was given in April. In March the term of office of the Remuneration Committee members was prolonged and consent was given to invest in the UK financial undertaking Bank North and acquire a share in the company, which was finalised in August. In May it was decided to terminate the activities of subsidiary OÜ Cuber Technology and initiate liquidation proceedings, which were finalised at the end of 2021. In July the Supervisory Board proposed an increase in the share capital of LHV to shareholders and a calling of an extraordinary General Meeting in August, and later approved the subscription price, subscription outcome of new shares, the volume and distribution of the issue. In addition, in August the financial plan for 2021 was updated due to a better-than-predicted macroeconomic situation and the high activity of customers, which resulted in financial results that were ahead of the forecast. The regular August meeting of the Supervisory Board focused primarily on the discussion of the strategy of LHV and its subsidiaries. During the year, some capital transactions were also carried out, e.g., in January and February the Supervisory Board approved the issue of senior non-preferred bonds and in September the issue of senior unsecured bonds. In October, the decision to establish the Nominating Committee at LHV level was made due to the need of assessment of the individual and collective suitability of the members of the management bodies also at the LHV level, which was then carried out and approved by the Supervisory Board in November. In November the Supervisory Board also renewed the mandate of Madis Toomsalu as the Member of Management Board of LHV. In the fourth quarter of 2021, consent was given also to increase the share capital of subsidiaries AS LHV Pank and LHV UK Limited. During the course of year, several procedures, policies, and internal regulations of LHV and its subsidiaries were reviewed, updated and approved.

3.2 Principles of remuneration of the Supervisory Board and conflicts of interest

The size of the remuneration of the members of the Supervisory Board and its payment procedure are decided by the General Meeting, which takes into account, among other things, the duties of the Supervisory Board and their scope, as well as participation in Supervisory Board meetings and the activities of the Supervisory Board as a governing body. A member of the Supervisory Board may be assigned additional remuneration for participation in the activities of the Audit Committee or another body of the Supervisory Board.

The General Meeting has resolved to provide members of the Supervisory Board with gross remuneration of EUR 1,500 per each meeting of the Supervisory Board in which the member participates. The remuneration payable to the Supervisory Board member is paid out on the next working day following the Supervisory Board meeting at the latest. No separate additional or performance payments or additional bonuses or benefits have been established.

In 2021, the total amount of remuneration paid to LHV's Supervisory Board was EUR 114 thousand, including all taxes, out of which all ten members of the Supervisory Board received EUR 16.5 thousand and one member, who was absent from one meeting, received EUR 15 thousand.

For reasons of clarity, LHV considers it important to note that in the case of the Supervisory Board member Andres Viisemann, LHV applies the LTI plan, i.e., an option programme, based on his activity as the head of pension funds at LHV's subsidiary AS LHV Varahaldus. The LTI instrument comprises of 100% share options. Andres Viisemann is entitled to subscribe a total of 13,438 shares of LHV for the options issued in 2019, 2020 and 2021.

Once a year, the members of the Supervisory Board submit a declaration of economic interests and conflicts of economic interests. LHV did not conduct any significant transactions with its Supervisory Board members, their close family members or related parties in 2021, nor are there any valid contracts of that nature from earlier periods. There have been no conflicts of interest and accordingly, no corrective measures have been applied.

3.3 Audit Committee

The Audit Committee is an advisory body formed by the Supervisory Board for exercising oversight over the effectiveness of accounting and reporting (including the budgeting process), audit, risk and capital management, the internal control system and internal audit as well as legal and regulatory compliance. The Audit Committee is governed in its activities primarily by the Auditors Activities Act and the rules of procedure established by the Supervisory Board of LHV.

One of the responsibilities of the Audit Committee is to monitor and analyse the processes which must ensure accurate and efficient preparation of monthly reports and annual accounts, the efficiency of the audit of group companies' annual accounts, and the independence of the audit firm and the auditor representing the audit firm on the basis of the law and the compliance of their activities with the requirements of the Auditors Activities Act.

The Audit Committee is responsible for making proposals to the Supervisory Board and providing recommendations for the appointment or removal of the audit firm, the appointment or removal of the internal auditor, prevention or elimination of problems and inefficiencies within the organisation and ensuring compliance with laws and regulations and best practice.

The Audit Committee has at least three members. Members of the Audit Committee are appointed by the Supervisory Board for a term of three years in a manner that should ensure diversity of competences and independence of committee members. The persons selected for the Audit Committee must be sufficiently independent of LHV in order to fulfil their role effectively and at least two of them must be experts in accounting, finance or law. LHV's employee, member of the Management Board, internal auditor, authorised signatory or audit service provider may not be a member of the Audit Committee. For the appointment of a member of the Audit Committee, the candidate's written consent is required. The size of remuneration paid to the members of the Audit Committee is decided by the Supervisory Board of LHV.

The members of the Audit Committee are Kristel Aarna, Tauno Tats and Urmas Peiker (Chairman). The term of office the Audit Committee lasts until 31 March 2023. Further information on the members of the Audit Committee is presented in the annual report, in the section Corporate Governance of LHV. LHV's Audit Committee members are paid monthly gross remuneration of EUR 500.

According to its rules of procedure, the Audit Committee meets at least quarterly; however, in 2021 the Audit Committee had eleven meetings. In addition, on two occasions discussions were held and decisions were made electronically. At six meetings, representatives of the Risk Management Department provided the members of the Audit Committee with an overview of various risk management topics, bank and group risk exposures, and the indicators and measures used to monitor and manage them, including matters related to credit risk management, antimoney laundering, management of IT risks, compliance control, and. At one meeting (in June), the Head of Credit Risk gave an overview of the updated status of impacts of the COVID-19 crisis and the measures taken and their effect

were discussed. At the same meeting also risks and situation regarding Real Estate market and impact to LHV were discussed.

In most meetings, the topics discussed included issues raised by the internal audit, particularly those related to audit reports. The internal auditor gave an overview of concluded audits. The Audit Committee has reviewed all internal audit reports, discussed the observations presented and formed an opinion on the observations raised. At the first meeting of the year, the internal audit work plan for 2021 was approved and at the meeting held in November instructions for the internal audit work plan for 2022 were discussed. The plan was approved in January 2022.

Four meetings were attended by the external auditor (KPMG). In February and March, the external auditor gave an overview of the 2020 annual report audit process and findings. In October, KPMG provided an overview of the risk assessment, plan, team, and schedule of the financial audit of 2021. At the last meeting of the year held in December, the external auditor presented the findings raised during the interim audit. Additionally, in April PwC gave an overview of the processes and the results regarding the control of covered bonds.

As the assignment of KPMG as the external auditor expires in 2022, the new tender was organised by the Audit Committee in November-December to enable the Supervisory Board to make the proposal for selection of the auditor to the General Meeting in March 2022.

During the year, the Audit Committee confirmed and approved specific additional services to be provided by the external auditor. No conflicts of interest were identified.

3.4 Remuneration Committee

The Remuneration Committee is a body established by the Supervisory Boards of LHV, AS LHV Pank, AS LHV Finance and AS LHV Kindlustus for the development, implementation, and supervision of a remuneration strategy for the employees and members of the Management Board of the companies. One of the tasks of the Remuneration Committee is to evaluate the impact of any remuneration-related decision on compliance with the requirements established for the management of risks, own funds, and liquidity.

The Remuneration Committee exercises oversight over the remuneration of the Management Board members and employees of AS LHV Pank and AS LHV Kindlustus, evaluates implementation of the remuneration policy at least on an annual basis and, where necessary, makes proposals for updating the remuneration principles and prepares related draft resolutions for the Supervisory Board.

The Remuneration Committee has at least three members who are elected from among the members of the Supervisory Board of AS LHV Pank. The members of the Remuneration Committee are appointed and removed by the Supervisory Board of LHV. A member of the Remuneration Committee is appointed for a term of three years. Members of the Remuneration Committee can be re-elected and their mandate extended unlimited times. A person elected to the Remuneration Committee must have sufficient relevant knowledge, expertise, and experience in the area of remuneration policy and practices, risk management and control. The size of remuneration payable to the members of the Remuneration Committee is decided by the Supervisory Board of LHV.

Members of LHV's Remuneration Committee are Madis Toomsalu (Chairman), Rain Lõhmus and Andres Viisemann whose term of office lasts until 11 April 2024. Further information on the members of the Remuneration Committee is presented in the annual report, in the section Corporate Governance of LHV. Members of the Remuneration Committee are not remunerated.

The Remuneration Committee met once in 2021, in January when the remuneration policy and strategic remuneration principles, benchmarking, and critical and planned positions for 2021 were reviewed, and once, in October, adopted a decision electronically. In January the committee discussed and made a proposal to the Supervisory Board with regard to the recipients and amounts of share options to be granted for the results for 2020, as well as the pricing of share options and the share options of staff members that had left. In addition, the committee introduced the share options to be exercised in 2021 and the share options granted in 2018 for the results of 2017. The remuneration system, including the goals and remuneration of the members of the Management Board of LHV and its subsidiaries, and the principles of remunerating the members of the Management Board and persons considered equal to the members of the Management Board were reviewed and submitted for approval to the Supervisory Board. In October the remuneration system amendment was approved and submitted to the Supervisory Board.

4. Remuneration policy

The remuneration principles for LHV and its affiliated companies (Group companies) are described in the internal Remuneration Policy.

There are no regional differences in the remuneration principles of the Group companies. The most significant differences between the Group companies are that AS LHV Varahaldus has no remuneration committee and applies separate disclosure requirements and LHV UK Limited applies rules arising from its country of activity.

The purpose of establishing remuneration principles within the Group companies is the organisation of fair, motivating and transparent remuneration in accordance with the law. A broader goal of the remuneration policy is the recruitment of employees with the capabilities, skills and experience necessary to implement the strategy, to reconcile the interests of

employees and shareholders, to motivate the employees and to ensure effective risk management for growing business activities. The remuneration system consists of basic remuneration, compensations and employee benefits. The Group companies do not provide employees with services at a lower than the market price, do not make payments to a third pillar pension fund at the expense of the employer and do not provide benefits such as a company car, a mobile phone or a laptop for personal use.

The general remuneration strategy is to ensure a motivating pay to achieve long-term goals, creating a strong link between remuneration and the financial results of the Group companies. When measuring the key quantitative and qualitative results and assessing the risk, the Group companies shall be governed by the following principles:

• Performance criteria are in line with sound and effective risk management principles. The performance criteria established must keep in mind the long-term interests of the Group companies, including not stimulate excessive risk-taking or sale of unsuitable products.
• The performance criteria must not merely contain performance efficiency indicators (e.g., profit, revenue, profitability, expenditure and volume indicators) or market-based indicators (e.g., stock price or bond yield) but must also be adjusted with risk-based indicators (e.g., capital adequacy, liquidity).
• The criteria used for measuring risks and results shall be as closely related to the decisions of the staff member, whose results are being appraised, as possible, and should ensure that the process of the establishment of the remuneration would have an appropriate impact on the staff member's professional behaviour. In the interest of long-term goals, the assessment and control of risk behaviour will take place at an individual employee level.
• A good balance of both quantitative and qualitative as well as absolute and relative criteria shall be used in the specification of the performance criteria.
• Quantitative criteria shall cover a sufficient period, so as to consider the risks taken by the staff members or business units. The criteria shall be risk-adjusted and contain economic efficiency indicators.
• Examples of qualitative criteria include achievement of strategic objectives, customer satisfaction, adherence to the risk management policy, adherence to internal or external rules of procedure, management skills, creativity, motivation and co-operation with other business units and the internal control function.

The recruitment strategy is to find, engage and keep the best people of the labour market. In determining remuneration, the Group companies are rather willing to make exceptions than restrict its choices with strict remuneration intervals for a specific position. To keep its employees, the Group companies will develop its benefits and compensations in cooperation with its employees. In determining remuneration, the following is taken into account:

• Commitment and results of the employee,
• Workload,
• Responsibility,
• The required level of education,
• Management level,
• Intensity of work,
• The necessary knowledge and experience for the position,
• The existence of additional benefits,
• The situation in the labour market,
• The pay level of the geographical location
• The level of criticality of the position

The determination of the amount of remuneration must be objective. The remuneration is paid according to the work done and its value, not according to the personality, gender, age, origin, etc. of the employee.

The Group companies apply a general principle that employees should not use personal hedging strategies or remuneration and liability insurance, which would undermine the effectiveness of the hedging of risks integrated into the Remuneration Policy. In the decisions made on remuneration policy, the financial situation and sustainability of the capital base of the Group companies are taken into account.

The Group companies carry out regular self-assessment, the purpose of which is to identify all employees whose professional activities affect or may affect the risk profile of the Group companies significantly. These specified groups of employees are listed in the table below together with ratios between basic remuneration paid for 2021 and variable remuneration paid in 2021:

Specified group of employees	Ratio in 2021
Senior management	0.35
Staff performing control functions	0.09
Employees with significant impact on the credit risk position (the nominal value of transactions made by the employee is at least 0.5% of LHV Tier 1 own funds and is in the amount of at least	0.15
EUR 5 million)

Self-assessment is carried out once a year at the beginning of the financial year. The assessment covers both the past period (including financial results, risk analysis) and takes into account the forthcoming financial year. The specified group of employees that are determined in the course of the self-assessment are required, within one calendar year after exercising the options, to keep the underlying LHV shares in their own possession and to not sell them, or to encumber in any form (including pledge). The specified group of employees are forbidden to transfer the risk of the decline of the share price to other parties, for example, through insurance or certain type of financial instruments. Self-assessment is carried out by taking into account the degree of complexity, performance indicators and structure of the Group companies. The competence lies on the Management Board of the Group company, who will conduct the analysis in the form of a discussion at a board meeting. The self-assessment is initiated by the Human Resources department, the compliance of the process and results are assessed by the department of Compliance Control, whose representative is also present at the self-assessment. The Remuneration Committee reviews annually the qualitative and quantitative criteria related to the employee and the self-assessment process, which is used for decision-making. The results of the self-assessment are independently reviewed by the internal audit, the results are summarized and presented to the Supervisory Boards of the Group companies.

Self-assessment is carried out once a year at the beginning of the financial year. The assessment covers both the past period (including financial results, risk analysis) and takes into account the forthcoming financial year. The specified group of employees that are determined in the course of the self-assessment are required, within one calendar year after exercising the options, to keep the underlying LHV shares in their own possession and to not sell them, or to encumber in any form (including pledge). The specified group of employees are forbidden to transfer the risk of the decline of the share price to other parties, for example, through insurance or certain type of financial instruments. Self-assessment is carried out by taking into account the degree of complexity, performance indicators and structure of the Group companies. The competence lies on the Management Board of the Group company, who will conduct the analysis in the form of a discussion at a board meeting. The self-assessment is initiated by the Human Resources department, the compliance of the process and results are assessed by the department of Compliance Control, whose representative is also present at the self-assessment. The Remuneration Committee reviews annually the qualitative and quantitative criteria related to the employee and the self-assessment process, which is used for decision-making. The results of the self-assessment are independently reviewed by the internal audit, the results are summarized and presented to the Supervisory Boards of the Group companies.

Share options

LHV shareholders have approved two share option programmes that were relevant in 2021. The share option programme for the Management Board members and key employees that was approved in 2014 was implemented until 2019, hence the share options to that were exercised in 2021 were granted in 2018 for the results of 2017 on the basis of that option programme. In 2020 a new result-based share option programme for Management Boards and equivalent staff as well as key employees of LHV and the group companies was adopted to be implanted from 2020 until 2024. In 2021 the recipients and amounts of share options to be granted for the results for 2020 were based on the latter programme.

The aim of issuing share options is to create conditions where the long-term objectives and interests of the management and equivalent staff as well as key employees of LHV and the group companies would be harmonised with the long-term interests of the shareholders of LHV. Another objective is to offer a system of compensation on the labour market that is equal to competitors.

As part of the program, there is an annual performance pay added to basic salary, the amount or issue of which corresponds to the fulfilment or non-fulfilment of individual and LHV objectives. The objectives of the program are:

• ensuring a competitive remuneration, to be attractive in the labour market;
• keeping and motivating key personnel through creating a relationship of ownership;
• reconciling the interests of shareholders and employees;
• increasing company value through performance management.

The instruments of performance pay under the option program are 100% equity options. The term of share options is 3 years from the moment the options were granted. An additional criterion has been applied to options issued from 2018 onwards for Management Boards' members – they are not allowed to sell these shares after for another year after executing the rights under option. The three-year vesting period before issuance of shares gives the opportunity to evaluate the results in the long run. It is not possible to take the specified amount in cash in lieu of share options. Share options are issued annually in the amount of up to maximum 2% of the total number of LHV shares. LHV has the right to refuse to exercise and issue equity options to the

entitled person, in whole or in part, if:

• LHV General Meeting or the Supervisory Board under the instructions from the General Meeting does not adopt the decision on the increase of LHV share capital and issuance of shares;
• the Management Board member agreement or the employment relationship of the person entitled to receive options has ceased at the initiative of the person entitled to receive options or in pursuant to § 88 of the Employment Contracts Act or, if the Employment Contracts Act is amended, on an analogous basis, however, based on the decision of the Supervisory Board it is possible to make exceptions to the applicability of this paragraph;
• the financial results of LHV or its relevant subsidiary have substantially deteriorated compared to the previous period;
• the person entitled to receive options no longer meets the performance criteria or does not meet the requirements prescribed by law to the head or an employee of a credit institution or a fund management company;
• LHV or its relevant subsidiary no longer meets the prudential regulations or the company's business risks are not adequately covered by own funds;
• the issuance of options has been determined based on information, which proved to be substantially misstated or incorrect.

The share options have been annually issued from 2015 to 2021. In 2021, the options issued in 2018 were fully exercised. Next share options issue could be in 2022 based on Supervisory Board decision.

The granting and size of share options was dependent upon the successful achievement of operational targets of the overall company and the targets of individual Management Board members and employees. In 2021 the share options were granted for 138 people in the amount of EUR 3,684 thousand. In 2020 the share options were granted for 106 people in the amount of EUR 2,443 thousand. In 2019 the share options were granted for 86 people in the amount of EUR 2,209 thousand. The company entered into share option agreements with the members of the Management Boards and employees for a three-year term for the granting of share options.

Share options issued in 2019 can be exercised between the period of 01.04.2022 – 30.04.2022 and shares with nominal value of EUR 1 can be acquired for EUR 4.9 per share. Share options issued in 2020 can be exercised between the period of 01.04.2023 – 30.04.2023 and shares with nominal value of EUR 1 can be acquired for EUR 5.96 per share. Share options issued in 2021 can be exercised between the period of 01.04.2024 – 30.04.2024 and shares with nominal value of EUR 1 can be acquired for EUR 9.23 per share.

3.5 Risk and Capital Committee

The Risk and Capital Committee, which has been formed at the level of AS LHV Pank Supervisory Board, is a functional body responsible for advising the Supervisory Board and Management Board of LHV in matters related to risk management principles and risk tolerance, assessing the risks taken by LHV and monitoring implementation of the risk policy at the group companies. The Risk and Capital Committee also exercises oversight over the implementation of risk management principles by the Management Board in accordance with the instructions given by the Supervisory Board, checks that the probability and timing of risk, capital, liquidity and revenue is taken into account in remuneration principles and that the business model and risk management principles are taken into account in the fees established for customers.

The Risk and Capital Committee has at least three members who are elected from among the members of the Supervisory Board of LHV. The committee members must include the Chairman of the Supervisory Board of LHV. The persons elected to the Risk and Capital Committee must have sufficient knowledge, skills, and experience to understand and continuously monitor the risk management principles and risk tolerance at the group companies. The powers, rights, operating principles and remuneration of the members of the Risk and Capital Committee are determined by the Supervisory Board of LHV.

Rain Lõhmus (Chairman), Andres Viisemann, Madis Toomsalu and Tiina Mõis serve as members of the Risk and Capital Committee. Their term of office lasts until 18 December 2022. Further information on the members of the Risk and Capital Committee is presented in the annual report, in the section Corporate Governance of LHV. Members of the Risk and Capital Committee are not remunerated.

Four regular meetings of the Risk and Capital Committee were held in 2021, during which regular risk reports and high-risk loans were reviewed. During the meetings, overviews were given of matters related to anti-money laundering and terrorist financing, LHV's liquidity and capitalisation. During the year the committee focused on the impact of the pandemic on LHV's loan portfolios and high-risk customer segments, such as offshore and banking services customers and relevant AML measures.

3.6 Nominating Committee

The purpose of the Nominating Committee is to support the supervisory boards of LHV, AS LHV Pank and AS LHV Finance in matters related to the selection process and eligibility requirements. The responsibilities of the Nominating Committee include individual assessment of the suitability of candidates for members of governing bodies and key personnel, collective suitability assessment of governing bodies, assessment of the composition, structure and activities of the governing bodies, continuous monitoring of the decision-making process by the governing bodies, periodical review and decision-making on the content, format and frequency of the risk information received, ensuring the involvement of risk management, compliance testing, internal audit and other department managers where appropriate in relevant matters.

The Nominating Committee is comprised of at least three members, who are selected from among the matching members of LHV and AS LHV Pank supervisory boards. The persons elected to the Nominating Committee must have individually and collectively sufficient and relevant knowledge, expertise, and experience in the area of the selection process and eligibility requirements, including knowledge of the requirements provided in the EBA and ESMA guidelines for assessing the suitability of members of management bodies and key function holders. The responsibilities, rights and operating principles of the committee and the remuneration of committee members are decided by the Supervisory Board of LHV.

Madis Toomsalu (Chairman), Rain Lõhmus and Andres Viisemann are the members of the Nominating Committee and their term of office lasts until 18 December 2022. Further information on the members of the Nominating Committee is presented in the annual report, in the section Corporate Governance of LHV. Members of the Nominating Committee are not remunerated.

Three regular meetings of the Nominating Committee were held in 2021 during which the suitability of the members of the Management Board and the Supervisory Board, and if necessary, of key personnel, of LHV, AS LHV Pank and AS LHV Finance was individually and collectively assessed, criteria for selecting the new Member of the Management Board and a new Member of Supervisory Board of AS LHV Finance were determined and potential candidates for the positions were assessed and relevant proposals presented to the competent appointing bodies.

4. Cooperation of Management Board and Supervisory Board

The Management Board and Supervisory Board work in close co-operation in order to best protect the interests of LHV. The co-operation is, above all, based on an open exchange of views between and within the Management Board and the Supervisory Board.

The Management Board and the Supervisory Board collaborate in developing the goals and strategy of LHV. In managing LHV, the Management Board observes the strategic instructions of the Supervisory Board. The Management Board discusses strategic management issues with the Supervisory Board regularly, honestly and openly. The Management Board is invited to participate in the monthly meetings of the Supervisory Board.

The Management Board regularly informs the Supervisory Board of all significant circumstances related to LHV's business planning, operations and performance, risk exposures and risk management.

There were no conflicts of interest in the financial year 2021 and accordingly, no corrective measures have been applied.

5. Disclosure of information

LHV treats all shareholders equally and notifies all shareholders of significant circumstances equitably, ensuring quick and equal access to relevant information. Information is disclosed in accordance with the rules established for publicly traded companies.

LHV contributes actively to the development of good relations with the investor community and to raising the awareness of investors. LHV has set up an investor relations website, where it makes all documents and information available to shareholders in accordance with the CGR and legal requirements. LHV is the biggest and the only member of the Baltic market that publishes monthly financial results as well as next-year and five-year financial forecasts. Relevant information has also been disclosed for 2021 and in 2021. The website of LHV includes the financial calendar of the current and the next year, which outlines the publication dates of the annual report and interim reports and the date of the Annual General Meeting. The disclosed information is available on the website in Estonian, English and Russian. LHV also discloses its annual plans and monthly results in its stock exchange announcements.

LHV organises quarterly investor meetings and webinars, the summaries of which can be reviewed on the website of LHV. Additional meetings with analysts and presentations and press conferences for analysts, investors or institutional investors are arranged according to need and the wishes of stakeholder groups. On its website, LHV explains its goals, directions and opinions of possible trends and changes in the regulatory and business environment. LHV strives to be approachable, transparent and accountable to investors. In 2019, LHV was named the winner of the Nasdaq Baltic Awards, which recognises the best Baltic listed companies in the area of transparency, sound corporate governance and investor relations, in the main category Investor Relations of the Year. In 2021, AS LHV Pank was named the Stock Exchange Member of the Year, for the seventh time, for most actively contributing to capital market development initiatives.

LHV's dividend policy, which is available on LHV's website, sets out the dividend distribution principles, according to which the key precondition for dividend distribution is sustainable compliance with both external and internal regulatory capital requirements. LHV may decide not to pay a dividend if this is required by its growth and/or investment plans. Provided the preconditions are met, LHV will distribute at least 25% of profit before tax attributable to LHV shareholders as dividends together with related income tax.

6. Financial reporting and auditing

LHV publishes its annual report on an annual basis. The annual report is audited, approved by the Supervisory Board and ultimately approved by the General Meeting.

The number of auditors is determined and auditors are appointed by the General Meeting that also determines the auditors' remuneration procedure. The key criteria that the Audit Committee considers in making a proposal to the General Meeting for the appointment of an auditor include the auditor's prior experience in the financial services sector and auditing public interest entities, teamwork skills, expertise and ability to involve experts and, in the case of significant differences, the audit fee. Auditors are appointed for a single audit or for a specified term.

In 2021, the auditor provided the group companies with contractual services, including audits of the annual accounts of group companies and reviews of the profits reported in quarterly financial statements, translation services, and other assurance services, which are required the Credit Institutions Act, the Securities Market Act and the Investment Funds Act.

Transactions with related parties are disclosed in Note 25 to the financial statements.

In 2019, the Management Board and the Audit Committee organised a competition for selecting an auditor for the audit of the annual reports for the years 2020 – 2022. In the framework of the competition, the four biggest internationally recognised audit firms were asked to submit their offer and meetings with their representatives were held. In selecting the auditor, the candidates' previous professional experience, competence, expertise, reliability, transparency of communication and terms offered compared to market terms as well as LHV's business-specific criteria were assessed. In the framework of the competition, an invitation was sent to the three largest audit firms and from the two firms that submitted an offer KPMG Baltics OÜ was selected and appointed as the auditor of group companies for the financial years 2020 – 2022 at the Annual General Meeting of 2019. In 2021, the fees paid or payable for the services provided by the auditor amounted to EUR 210 thousand of which EUR 178 thousand was for audits and EUR 32 thousand was for other services.

7. Declaration of conformity

LHV complies with the Corporate Governance Recommendations, with the exception of the following instructions and recommendations for the reasons stated below:

"2.2.1. The Management Board shall have more than one (1) member and a Chairman elected by its members.

The Management Board or Supervisory Board shall establish an area of responsibility for each member of the Management Board, defining as clearly as possible the duties and powers of each board member. The principles for co-operation between members of the board shall also be established.

The Chairman of the Supervisory Board shall conclude a contract of service with each member of the board for discharge of their functions."

The Management Board of LHV has one member. LHV is a holding company without any day-to-day business activities. Thus, a single member of the Management Board ensures sufficient and comprehensive management of LHV. The major subsidiaries of LHV have Management Boards consisting of several members.

"3.2.2. At least half of the members of the Supervisory Board of the Issuer shall be independent. If the Supervisory Board has an odd number of members, then there may be one independent member less than the number dependent members."

The Supervisory Board of LHV has no independent members. LHV is still in the stage of active development and growth, where it has preferred people with long-term management and banking experience as members of the Supervisory Board. These people are also the largest shareholders of LHV. LHV believes that in their capacity as members of the Supervisory Board the largest shareholders are best motivated to contribute to the management and long-term development of LHV. Based on objective and verifiable data, only one of the seven members of the Supervisory Board has a significant ownership interest (Rain Lõhmus and related persons hold 22.68% of share capital) and no member of the Supervisory Board has the power to appoint, by any means, the majority of the members of the Management Board or Supervisory Board of LHV or to control LHV in some other manner, they are not connected with LHV through a material business interest, they are not related to a shareholder of LHV that exercises control over LHV, they are not employees or business partners of LHV or members of the key personnel of a business partner.

Accordingly, LHV does not consider it necessary to apply any corrective measures and considers the Supervisory Board of LHV in its present composition to be suitable, including in terms of independence. Furthermore, when assessing the independence of the Members of the Supervisory Board, it has been concluded that their behavioural skills include courage, conviction and strength to effectively assess and challenge the proposed decisions of other Members of the Supervisory Board and being able to resist group-thinking.

"Pursuant to subsection 24² (4) of the Accounting Act, a large undertaking whose securities granting voting rights have been admitted for trading on a regulated securities market of Estonia or another Contracting State shall describe in the corporate governance report the diversity policies carried out in the company's Management Board and senior management and the results of the implementation thereof during the accounting year. If no diversity policies have been implemented during the accounting year, the reasons for this should be explained in the corporate governance report."

LHV has not deemed it necessary to implement a diversity policy because in recruiting staff and selecting management members, LHV is guided by the best interests of the company and, therefore, selects people in a gender neutral and non-discriminating manner based on their education, skills, previous experience and, where necessary, legal and regulatory requirements.

Tiina Mõis is a member of the Supervisory Board of LHV and a member of the Risk and Capital Committee and Kristel Aarna is a member of the Audit Committee. LHV's Estonian subsidiaries employ a total of 102 middle-level managers of whom 51 are women; and in addition, there are thirteen Management Board Members one of whom two are women.

Financial results

1. Activities of business areas

Looking backwards, year 2021 was an extremely good year for LHV Group. All financial targets were achieved, customer satisfaction was best in banking sector etc. Still, it was a difficult year, by mentioning just a couple of phrases: COVID-19, MREL regulations and issuing first international MREL bond under holding company level from Baltics, pension II pillar reform, establishment of LHV UK, heavy competition in local market and changing regulatory views regarding payment intermediators.

Corporate banking had typical LHV year in 2021, the portfolio increased "only" 24% yoy. This despite several sectors having troubles dues to COVID virus and several Scandinavian owned banks becoming more active in lending. Our market share thus reached 18% of the corporate loan market volume by the end of the year. By the end of the year, the corporate loan portfolio amounted to EUR 1,494 million. Loan portfolio remains strong, with a very low share of outstanding debts.

In retail banking, we focused on home loans, raising awareness of investment services and developing customer-tailored services. Regarding home loans, we focused on process automation and introduced fully automated decision-making. As at the end of the year, the retail loan portfolio totalled EUR 1,203 million, equalling 12% of market share.

In addition to lending there has been growing investment activities in Estonia. It started from 2 banks lowering the fees for investments in local stock exchanges and continued with II pillar pension reform, bringing EUR 1 billion to private individuals accounts. There has been around 10 new IPO's done in 2021 and LHV has been actively participating in all of them. In general, LHV is able to provide 50-70% of retail sale.

In financial intermediation, we focused on searching new customers and expanding the product portfolio. We launched several additional services and continued building our customer base the market of FinTech companies is highly active and the demand for services is growing. Our business in United Kingdom is profitable and the revenue base is growing, with revenue generated mainly from payments, currency exchange, card payment mediation, credit services and maintenance fees.

The total volume of investment funds under the management of LHV Varahaldus reached EUR 1.35 billion in 2021, lowering by 14% yoy due to II pillar pension reform, where almost 25% of people decided to leave the pension system. LHV Varahaldus keeps around 26% market share. In 2021 LHV Varahaldus managed to earn success fee for second year in succession, the fee we plan to earn also in future. When making investments, more and more attention must be paid to the potential shrinking of fund volumes and the consequent need for liquidity.

EUR million	2015*	2016*	2017*	2018*	2019	2020	2021
Volume of deposits and loans received	633	778	1,543	1,444	2,727	4,588	6,354
incl. financial intermediaries' deposits	0	32	607	194	376	1,054	2,246
Volume of net loans	410	538	732	919	1,687	2,209	2,677
Volume of assets	757	935	1,773	1,677	3,032	4,971	6,845
Volume of funds	570	974	1,103	1,214	1,374	1,537	1,349
Volume of custody accounts	1,253	1,072	1,287	1,486	1,565	2,066	3,866
Net interest income	23.2	30.0	35.5	39.8	47.3	68.5	97.3
Net fee income	14.7	19.2	22.2	26.0	25.7	33.3	42.6
Net financial income	0.4	1.3	1.0	3.4	0.7	1.6	-0.9
Net income	38.3	50.5	58.7	70.0	73.8	103.4	140.4
Expenses	24.1	28.9	31.9	33.8	39.3	44.0	65.2
Profit before credit losses	14.3	21.7	26.6	36.2	34.6	59.6	75.2
Loan provision	1.4	1.5	3.2	5.3	3.2	10.9	3.9
Tax expense	0.9	0.3	1.2	3.8	4.2	8.8	11.0
Profit	14.8	19.9	22.2	27.2	27.1	39.8	60.3
net profit attributable to owners of the parent	13.7	17.8	19.6	25.2	24.8	38.0	58.3
*includes discontinued operations

The Group's pre-tax profit for 2021 amounted to EUR 71.2 million and net profit totalled EUR 60.3 million. Pre-tax profit is 46% more than a year before. Net interest income grew 42% and net fee income increased 30%. The Group's net income was EUR 140.4 million and increased by 36% compared to the previous year. Operating expenses amounted to 65.2 million euros and increased by 48% over the year. Most of the cost increase has been related higher business volumes and increased number of employees to offer that. The Group achieved the financial forecast published at the beginning of 2021 and also the updated ones published in July 2021.

By the end of December, the total volume of the Group's loan portfolio less impairments amounted to EUR 2,677 million (December 2020: EUR 2,209 million). The volume of portfolio increased 21% in a year. In the loan portfolio, the majority is corporate loans that increased 24% in a year to EUR 1,493 million (2020: EUR 1,204 million). Retail loans increased 18% in a year, amounting to EUR 1,203 million (2020: EUR 1,021 million).

The volume of Group's deposits increased 41% in a year and totalled EUR 5,807 million by the year-end (2020: EUR 4,588 million). The share of demand deposits of all deposits increased and was 97% (31.12.2020: 88%), as LHV stopped attracting the more expensive deposits from deposit platforms and repaid everything matured.

AS LHV Pank's as largest business units' net profit for 2021 was EUR 64.1 million, growing 29.5 million compared with previous year. Loans to customers increased by EUR 469 million reaching EUR 2,677 million. During the year, payment intermediates deposits increased by EUR 1,194 million, whereby core banking customers' deposits increased by EUR 514 million. Total deposits reached EUR 5,847 million by the end of year.

In 2021 LHV Varahaldus earned net profit in amount of EUR 0.7 million, which is EUR 7.6 million less than previous year. Comparing the numbers needs to take into account also the changes in legislation changing the LHV Varahaldus business model. The II Pillar pension reform generated one-time write off of immaterial assets in the amount of EUR 3.5 million. In addition, the success fee earned in 2021 was EUR 2.6 million, compared to EUR 6.2 million last year. The main reason behind the lower success fee is related to much higher reference rate. LHV Varahaldus paid dividends in the amount of EUR 6.5 (2020: 4.4) million.

LHV Kindlustus was in start-up phase, setting up the products. Yet, company earned EUR 1.1 million of gross income in 2021. The company had a loss of EUR 823 thousand in 2021.

LHV UK did not have any income in 2021 as the company deals with receiving the banking licence in end of 2022. Main activities were related to hiring and discussions with local FSA. Overall, the loss was EUR 3.0 million.

LHV Group as a separate entity earned a profit of EUR 8.9 (2020: 5.7) million, due to the fact that the subsidiary LHV Varahaldus and LHV Pank paid dividends to LHV Group.

	2015	2016	2017	2018	2019	2020	2021
Common equity Tier 1 %	15.97	15.10	14.02	13.65	12.39	13.26	13.32
Tier 1 %	15.97	15.10	14.02	13.65	13.88	15.56	15.13
CAD %	23.36	20.70	18.30	20.91	17.97	20.50	19.02
MREL %	14.49	12.25	7.78	11.43	8.70	6.38	-
MREL-TREA %	-	-	-	-	-	-	24.00
MREL-LRE %	-	-	-	-	-	-	6.90
leverage ratio %	6.84	6.96	5.01	6.56	6.18	4.40	4.32
LCR %	271.6	221.5	121.3	148.5	144.8	147.9	142.7
NSFR %	-	-	140.8	147.6	152.9	152.6	163.4
return on equity (ROE) %*	21.8	20.7	17.6	18.4	14.0	17.3	21.1
return on assets (ROA) %	2.3	2.4	1.6	1.6	1.2	1.0	1.0
CFROI %	25.9	23.9	22.6	25.4	19.0	26.4	26.4
cost to income ratio %	62.8	57.2	54.4	48.3	53.2	42.5	46.4
net interest margin (NIM) %	3.62	3.60	2.66	2.34	2.04	1.73	1.66
spread %	3.55	3.52	2.62	2.32	1.99	1.70	1.63
loan to asset %	54.54	57.86	41.61	55.24	55.64	44.43	39.11
loan to deposit %	66.91	69.68	48.00	65.14	62.52	53.63	46.10
price to earnings ratio	-	13.29	13.56	9.75	13.77	14.81	22.14
dividend to net profit ratio %	-	26.70	21.00	21.60	20.17	13.57	13.87
dividend per share	-	-	0.15	0.16	0.21	0.19	0.29

2. Key figures

3. Explanations

* Return on equity is calculated based on LHV Group net profit and equity attributable to owners of the parent and does not include non-controlling interest.

capital adequacy levels are calculated as reported in COREP report as at end of each year

MREL = (own funds + qualifying liabilities) / total liabilities * 100

LCR, NSFR are calculates as reported in COREP report as of end of each year

return on equity (ROE) = net profit (attributable to owners of the parent) / average equity (attributable to owners of the parent) * 100

return on assets (ROA) = net profit / average assets * 100

CFROI = Operating profit / capital (average)

cost to income ratio = total operating expenses / total income * 100

net interest margin (NIM) = net interest income/average interest earning assets * 100

spread = yield on interest earning assets – cost of interest bearing liabilities

loan to asset = net loans / total assets * 100

loan to deposits = net loans / deposits * 100

price to earnings ratio = share price/net profit/number of shares (average)

dividend to net profit ratio = dividend/net profit

dividend per share = dividend payment during calendar year / number of shares at moment of payment

4. Sensitivity analyses

LHV has three major business lines: universal banking in Estonia, servicing payment intermediates in UK and asset management. These business lines are very different in their sensitivities to different risk factors.

Universal banking is clearly procyclical, meaning that it's results are directly affected by macroeconomic developments. In general, there are three major components effecting Bank's results:

• Interest rate
• Credit losses
• Personnel cost

Every 100 bps increase in interest rates will increase LHV interest income by EUR 1.5 million within first 12 months. Interest rate decrease by similar level will reduce LHV interest income by EUR 0.5 million.

Credit losses are dependent on economic situation. LHV has knowledable credit risk management and does not allow excess risk in any of the economic sectors. Still quick growth hides the credit losses as significant part of portfolio is not matured yet. For understanding the actual levels of credit losses, LHV calculates the credit risk in addition to current portfolio also to 12 month old portfolio. LHV has had very few defaults in history and only real credit losses bank has had have been related rather with fraud, not with wrong credit decisions.

Personnel cost is the biggest cost base for the bank and equals around 50% of the total costs. LHV has the internal policy to follow the market leveles in compensation packages. LHV offers its services mainly through electronic channels. To offer these services effectively LHV has made a decision to develop systems in-house. As a result the IT team is almost 25% of the total personnel. Salary levels for IT personnel has been increasing and seems to increase in nearest future more than for other personnel segments, then LHV has forecasted higher salary growth than competitors.

Servicing payment intermediates is volume business and it is sensitive to macroeconomic developments, but quite differently compared to banking. In general, there are three major components effecting payment intermediates business results:

• Trading activities between countries
• FX rates volatility
• Regulations

First two are very much similar, most payment intermediates offer transferring/converting certain currency to another region/currency within short time frame. The need for such business grows when there are either solid business relationships between countries or quite opposite one currency becomes very volatile and businesses need to hedge their positions quickly. The third area is related to regulations, the financial intermediaries business models are moving towards more regulations, which affect most of the participants.

Asset management is almost insensitive to macroeconomic developments. The results are depending on two major items:

• Pension fund manangement
• Political risk

Pension fund manangement is key for results. Starting from Q4 2019 the calculation of fund manangement fees changed to performance bonus principle. LHV has targeted to beat the agreed benchmark over longer period, but not in nearest years. LHV has outperformed all our competitors over the last 10 years.

Another large risk side of the asset management is political risk. In every year during the last 5 years there has been some changes in the pension funds management fee calculation. LHV has been successful of managing these changes and being able to deliver good result despite of the constant changes in legislation.

5. Liquidity and funding

The Group is mainly funded by deposits on the level of LHV Pank. Customer deposits are complemented by covered bonds, unsecured bonds and secured funding from the European Central Bank's TLTRO facility.

In June 2021, the Group received its minimum own funds and eligible liabilities (MREL) requirement decision from the Estonian Financial Supervision and Resolution Authority. The MREL decision sets out the following MREL requirements for LHV Group at the consolidated level:

• MREL should make up at least 19.08% of total risk exposure amount starting from January 2022 and 21.42% of total risk exposure amount starting from January 2024 (MREL-TREA)
• MREL should make up at least 5.91% of the leverage ratio exposure measure starting from January 2022 (MREL-LRE).

In order to comply with the phasing in of the MREL requirements, LHV Group issued in September 2021 senior preferred unsecured bonds in the amount of EUR 100 million. The Group's MREL-TREA and MREL-LRE ratios stood at 24.00% and 6.90% as of 31 December 2021, respectively.

LHV Pank had been rated by Moody's already earlier, but the issue of the MREL bonds was preceded by obtaining a rating also for LHV Group. As at the end of 2021, LHV Group had a long-term debt rating of Baa3 with a positive outlook. LHV Pank had a long-term deposit rating of Baa1 as at the end of 2021 and the outlook of the rating was changed to positive in May 2021. The covered bonds issued by LHV Pank were rated Aa1.

LHV Group runs a conservative liquidity risk profile. The main liquidity risk inherent in the Group's business is the risk of deposit outflows in LHV Pank. The Group monitors a number of internally defined and regulatory liquidity risk metrics on a regular basis. The liquidity coverage ratio (LCR) of the Group amounted to 142.7% at the end of December (31.12.2020: 147.9%), well exceeding the regulatory requirement of 100%. The Group's liquid assets (including cash in the central bank and in other credit institutions and bond portfolios) accounted for 60% of the Group's total assets (31.12.2020: 55%). The Group's regulatory net stable funding ratio (NSFR) equalled 163.4% as at the end of December 2021 (31:12:2020: 152.6%).

The Group has a relatively low loan-to-deposit ratio which reflects the fact that the deposits collected from financial intermediaries are matched with a liquidity buffer and are not used for the lending business. The Group's loan-to-deposit ratio at the end of 2021 was 46% (31.12.2020: 54%).

6. Capital management

The Group's level of own funds as at 31.12.2021 was EUR 367.0 million (31.12.2020: EUR 311.3 million). Compared to the internal capital adequacy target of 16.00%, the Group is well capitalized as at the end of the reporting period. The level of capital adequacy was 19.02% (31.12.2020: 20.50%) and Tier 1 capital ratio was 15.13% (31.12.2020: 15.56%), well above the regulatory requirement of 10.16%.

The Group uses the standard method for the calculation of credit risk and market risk capital requirements and the basic indicator approach for the calculation of operational risk capital requirements. The Group has complied with all capital requirements during the financial year and in previous year.

Each year, an internal capital adequacy assessment process (ICAAP) is performed, the goal of which is to identify potential capital needs in addition to regulatory capital requirements.

Leverage ratio, calculated according to Basel Committee on Banking Supervision requirements, as at 31.12.2021 was 4.32% (31.12.2020: 4.75%). Leverage ratio is calculated as Group's total Tier 1 own funds divided by Group's total risk exposure measure (incl. risk position on assets and off the balance sheet liabilities). As at the end of the reporting period, the leverage ratio is the arithmetic mean of the monthly leverage ratios over the last quarter.

Capital base

(in EUR thousands)	31.12.2021	31.12.2020
Paid-in share capital	29,864	28,819
Share premium	97,361	71,468
Statutory reserves transferred from net profit	4,713	4,713
Other reserves	47	0
Accumulated profit/(deficit)	121,485	90,434
Intangible assets (subtracted)	-14,473	-18,528
Profit for accounting period (COREP)	28,868	37,950
Deductions	-128	-323
CET1 capital elements or deductions	-1,189	-8,358
CET1 instruments of financial sector entities where the institution does not have significant investment	-5,236	0
CET1 instruments of financial sector entities where the institution has a significant investment	-4,328	-4,842
Tier 1 capital	256,984	201,333
Additional Tier 1 capital	35,000	35,000
Total Tier 1 capital	291,984	236,333
Subordinated debt	75,000	75,000
Total Tier 2 capital	75,000	75,000
Exceeding limitations of subordinated debts and preference shares	0	0
Net own funds for capital adequacy calculation	366,984	311,333
Capital requirements
Central governments and central bank under standard method	0	363
Credit institutions and investment companies under standard method	10,465	8,060
Companies under standard method	1,141,853	865,624
Retail claims under standard method	212,860	197,849
Public sector under standard method	6	3,250
Housing real estate under standard method	291,338	243,971
Overdue claims under standard method	19,332	13,362
Investment funds' shares under standard method	190	7,145
Other assets under standard method	93,939	49,321
Total capital requirements for covering the credit risk and counterparty credit risk	1,769,983	1,388,945
Capital requirement against foreign currency risk under standard method	3,489	3,950
Capital requirement against interest position risk under standard method	0	0
Capital requirement against equity portfolio risks under standard method	2,079	972
Capital requirement against credit valuation adjustment risks under standard method	1,211	82
Capital requirement for operational risk under base method	152,778	124,638
Total capital requirements for adequacy calculation	1,929,540	1,518,587
Capital adequacy (%)	19.02	20.50
Tier 1 Capital Ratio (%)	15.13	15.56
Core Tier 1 Capital Ratio (%)	13.32	13.26

6. Shares and bonds issued by LHV

Over the last years LHV has been capitalized, being a rapidly growing local retail bank with clear niche towards financial intermediaries. The profits and investments of LHV are not only contributable to the share price, but also part of the dividends and interest paid to subordinated bonds. LHV has several securities outstanding:

Name	ISIN		Issuer Outstanding amount	Maturity	Listing
Common share	EE3100073644	AS LHV Group	29,864,167		- Nasdaq Tallinn main list
Tier 1 subordinated bond	EE3300111780	AS LHV Group	20,000,000	perpetual
Tier 1 subordinated bond	EE3300001668	AS LHV Group	15,000,000	perpetual
Subordinated bond	EE3300001791	AS LHV Group	35,000,000	30.09.2030	Nasdaq Baltic bond list
Subordinated bond	EE3300111558	AS LHV Group	40,000,000	28.11.2028	Nasdaq Baltic bond list

There is only one class of shares with nominal value of 1 EUR issued by LHV, each share gives 1 voting right. The shares of LHV Group are traded on NASDAQ Tallinn main list since May 2016.

Number of shareholders	20,404
Number of countries represented	44
Share of Estonian residents	79.20%
Share of Estonian residents including two founders 95.31%
Share of private individuals	26.27%
Share of legal entities	69.91%
Share of institutional investors	1.89%
Share of nominee accounts	1.93%
Share of LHV clients	84.74%

Geographical distribution of shareholders

Residency	Percentage
Estonia	79.20%
Switzerland	17.03%
Latvia	2.38%
United States	0.71%
United Kingdom	0.29%
Portugal	0.14%
Lithuania	0.11%
Finland	0.03%
Russian Federation	0.03%
Germany	0.02%
Other	0.06%

List of ten largest shareholders:

Name of the shareholder	Number of shares	Percentage
AS Lõhmus Holdings	3,633,625	12.17%
RAIN LÕHMUS	2,544,947	8.52%
Viisemann Investments AG	2,266,829	7.59%
Ambient Sound Investments OÜ	1,697,993	5.69%
Krenno OÜ	1,215,509	4.07%
AS Genteel	1,110,744	3.72%
AS AMALFI	1,061,390	3.55%
SIA KRUGMANS	704,199	2.36%
Bonaares OÜ	654,233	2.19%
OÜ Merona Systems	593,759	1.99%

• 13,908,669 shares (48%) belonged to the members of the Supervisory Board and Management Board and to their related parties.
• 14,910,423 shares (52%) belonged to Estonian entrepreneurs and investors and to their related parties.

Starting from 2021, when LHV and one other bank significantly lowered prices for trading Baltic equities, the number of new investors has growing rapidly. LHV investor base has almost doubled within a year.

7. Share price

Year 2021 share started with price of EUR 20. During the year the share price has risen by 121%, reaching EUR 43.2 by the end of 2021 outperforming the OMX general indexes.

In 2021, the lowest traded price was 20 euros and the highest 48.5 euros. The weighted average price was 34.33 euros. In total 2.89 million shares were traded. Based on the year-end stock price, LHV's market value was EUR 1,245 million, which is EUR 683 higher than last year. During a year LHV successfully raised 745 thousand new shares to current and new shareholders.

In respect of dividend policy, LHV strives to achieve long-term dividend growth without negatively impacting the group's targeted capital ratios. The annual dividend together with dividend related taxes shall correspond to 25 per cent of pre-tax profit including dividend related taxes. Each year's dividend is assessed in the light of prevailing economic conditions and the Group's earnings, growth possibilities, regulatory requirements, and capital position. In addition, LHV has made a conservative decision not to have trading positions in LHV shares nor take them as collateral. In case of exercising share option programs, the shareholders have delegated the right of issuing new shares to the Supervisory Board.

LHV Group share performance

LHV has had two subordinated lower Tier 2 debt issues listed on Nasdaq Tallinn Stock Exchange in amount of EUR 75 million. The maturity of the first bond is in 2028, another with maturity in 2030. In addition to these there are also 2 additional Tier 2 bonds, which are outstanding, but due to specific requirements for investor base, these bonds are only registered in Nasdaq, but not listed. AT1 bonds are in amount of EUR 35 million in total.

Regarding bond listings LHV wants to state that bond trading in Nasdaq Baltics bond list is very limited, as most investors have "invest and keep" strategy.

At the end of the year 2021, LHV Group had more than 4,900 bondholders with more than 1,100 investors having positions in more than one bond. 81% of investors are customers of LHV Pank. They were followed by the customers of Swedbank at 13% and SEB at 5%. 66% of bonds were hold by legal entities.

There are investors from 16 different countries invested into LHV bonds, still 97% of bonds were held by Estonian residents.

Overview of the Group's subsidiaries in 2021

1. AS LHV Pank (group)

LHV's mission is to provide better access to financial services and capital. LHV's vision is helping people and businesses dare to think big and act big, set ambitious goals, and invest in the future. LHV's values are simple, supportive, and effective.

LHV Pank ('the Bank') is the largest domestic bank in Estonia. We focus on active and independent customers with an entrepreneurial mindset. Our services for private customers include management of daily financial affairs and home loans. LHV's competitive edge is best customer experience and offering customers the best options for growing their money. Our services for business customers include flexible and tailored financing solutions and management of daily financial affairs and our services for financial intermediaries include a single banking platform for both EUR and GBP payments. LHV Pank's products and services are simple, transparent and relevant. We communicate with customers mainly through modern digital channels and use the resulting cost savings for the benefit of our customers by setting affordable prices for our everyday banking services.

LHV Pank has more than 10% market share in the Estonian daily banking, deposit and business loan segments and is currently the third largest in the daily banking and deposit segments. Estonia is our home market where we wish to be as strong as possible. Our long-term goal is to become the largest and most profitable bank in Estonia, while focusing on efficiency, innovation and best-in-class service. By offering the best market expertise, a proactive approach and services, which are innovative and the fastest in the market, we influence entrepreneurship and people's financial behaviour. The Bank defines itself as a local bank offering the full range of services to customers that keep their funds at the Bank and actively use the Bank's services.

The Bank has offices in Tallinn, Tartu and London. The London office is in a form of branch. In the first quarter of 2022, the Bank will also open an office in Pärnu. The Bank has close to 600 employees and more than 320,000 customers. The Bank's consolidated financial statements comprise the accounts of the Bank and its 65% subsidiary AS LHV Finance ('LHV Finance'), which specialises in consumer finance (together referred to as 'the Group').

1.1 Business activities

The Bank continued to grow rapidly in 2021. The number of customers increased by 63,000 to 321,000, i.e., by 24%. Customer activity and business volumes hit new records and the main drive for activity growth was triggered by the activity of retail customers towards investment services. The Bank's UK branch increased its number of customers to 200 financial intermediaries, who in turn have over 10 million end customers across the world.

Deposits from customers grew by 41% to EUR 5,847 million. Deposits from ordinary customers grew by 25% to EUR 3,592 million and deposits from financial intermediaries grew by 113% to EUR 2,248 million. The rise in deposits from financial intermediaries reflects the Q4 surge in the prices of virtual currencies and customers' increased interest in relevant investments. Deposits raised through deposit platforms decreased toto EUR 7 million. In 2021, the Bank did not actively raise funds through deposit platforms as there was no real need for this.

The Bank's loan portfolio grew by 21% to EUR 2,677 million during the year. Corporate loans grew by 24% to EUR 1,479 million and retail loans by 18% to EUR 1,199 million. The retail loan portfolio broke down as follows: home loans 74%, leases 12% and other loans 14%.

The Bank's net profit for the year grew by 85% to EUR 64.1 million. Income grew by 44%, expenses grew by 36%. Net interest income increased mainly through growth in corporate and home loans and earlier conversion of the impairment of loans in the Danske portfolio on the modification of agreements. The rise in net fee and commission income was largely driven by growth in investment services and services provided to financial intermediaries. Credit losses decreased by EUR 7 million over the year. Results for the year include deferred income tax expense for 2021 of EUR 10.6 million payable on the expected future dividend, which has to be recognised in accordance with the IFRS (EU) accounting rules (IAS 12.40). The Bank's performance indicators were solid: return on equity (on net profit attributable to owners of the parent company) was 26.2%, the cost/income ratio was 38.6% and credit costs were 0.2%.

From April to the end of September in 2020, banks in Estonia applied a common policy on payment holidays. Customer requests for payment holidays surged in April, began to decrease in May and dropped to a minimum by the end of June. A major share of payment holidays expired already by the year-end of 2020 and the total amount of loans on payment holiday had dropped to EUR 30 million by the end of 2021. Although the credit ratings of some corporate customers directly affected by the crisis have been downgraded and we have had to recognise some additional loss allowances, the quality of the Bank's loan portfolio as a whole has remained extremely high and the share of overdue loans is very small. Most of the customers are servicing their loans according to the agreements and remain strong.

The Bank's total assets grew by 38% to EUR 6,809 million in 2021. Deposits growth has been the major factor behind the total assets' growth. All client groups balances increased.

1.2 Development activities

Numerous new products were introduced during the year. Since the beginning of the year, customers have been able to activate LHV permanent donation function in internet bank and mobile app and do a good deed with each payment. Opportunity was created for debit card holders and intended for all private individuals. Since March customers can view the PIN of a bank card in the LHV mobile app and we no longer send PIN codes to customers via post in an envelope. In April we introduced refinancing loan and started to provide LHV insurance products to customers. Since September smaller business customers can also open bank accounts in the LHV internet bank and mobile app and Kasvukonto investments can be used free of charge for home loan down payment.

Payments products and infrastructure developments in 2021 brought significant improvements to the LHV Banking Services product portfolio and further expanded the depth of the services that LHV can provide to the growing number of fintech customers. At the beginning of the year, we launched a new Anti-Money Laundering platform Salv which delivers state of art risk management and transaction monitoring capabilities. We have launched currency exchange functionality in LHV Connect API, which allows our customers to access currency exchange services fully automated way. Selection of the payment methods grew by adding the SEPA scheme direct debits, alongside SEPA direct debit we have made preparations for launching direct debits in the UK in 2022. Cards received several important updates first by enabling charity micropayments and rolling out functionality to receive and view PIN-code through internet bank and mobile app. Several updates were done to improve the feature set for open banking acquiring, most importantly simple refunding feature for e-commerce merchants.

From the beginning of 2020, users of our investment services are not charged service fees for trades in Baltic stocks. By abolishing the fees, we made investing accessible to everyone. The Mobile Bank app offers a convenient opportunity to open an account, sign an investment services agreement and start trading with Baltic stocks free of charge. Abolishment of the fees along with the volatility of stock markets boosted the volume of customers' securities transactions, which generated more fee income than expected. In addition, the Bank lowered the fees for holding foreign securities and trading in foreign stocks by 50% from the beginning of 2021. In connection with the amendment of the Funded Pensions Act, in January 2021 the Bank launched a pension investment account and a related marketing campaign. We have become the market leader in investment services: customer assets managed by us extend to EUR 3.7 billion and increased by 92% in 2021. As a bank with a technological and innovative mindset we introduced crypto trading to our customer in mobile app in November. Customers can buy and sell 10 most popular crypto assets, including Bitcoin and Ethereum cost-effectively and in fractions of units. In the beginning of 2022 income tax returns for private investors are made easy by declaring gains for each instrument not by each transaction to the tax office separately through summarized tax report.

We integrated new Estonian technology Salv to our systems for improving screening and monitoring of payments.

1.3 Organisation

The Bank is divided into six functional areas, each with its own departments. Business areas include Retail Banking, Corporate Banking and Financial Intermediation, support areas include IT, Financial Management and Support Services, and Risk Management. Human Resource Management, Marketing and Communication, Compliance and Environmental, Social and Corporate Governance (ESG) are bankwide activities. The Bank's UK branch is part of the Financial Intermediation area.

On 20 January 2021, the Supervisory Board of LHV Finance passed a resolution to remove Kadri Kiisel as Chairman of the Management Board as from 29 January 2021 and to appoint Mari-Liis Stalde as a new Member and Chairman of the Board. On the same day the shareholders passed a resolution to remove Erki Kilu as Chairman of the Supervisory Board as from 29 January 2021 and to appoint Kadri Kiisel as a new member of the Supervisory Board.

On 29 January 2021, the Supervisory Board passed a resolution to appoint Kadri Kiisel as the new Chairman of the Supervisory Board.

In 2021, the number of the Bank's staff increased by 115 to 622, including inactive and part-time staff and the 20 employees of LHV Finance. The number of active staff converted to the full-time equivalent was 571.

The year brought several awards and accolades. Once again, LHV Pank was named the bank with the best customer service in Estonia in a survey conducted by the market research company Dive. The Bank ranked second in the Most Attractive Employers survey conducted by the job portal CVKeskus.ee and first in financial sector in the survey conducted by the job portal CV-Online Estonia. The Bank's staff satisfaction survey Q12 reflected a very high level of satisfaction. City Plaza building, where Bank's Tallinn office is established, received BREEAM (Building Research Establish Environmental Assessment Method) certificate. Both Euromoney and The Banker magazine of The Financial Times named LHV Pank the best bank in Estonia, for the fourth and third year in a row, respectively.

1.4 Sustainability at LHV Pank

Estonia has decided to support the EU climate strategy and has made commitments that can be achieved only with the united effort of the whole society and all sectors. The financial sector plays a central role in the adjustment of the economy – through lending and investing banks can channel cash flows into sustainable activities that support transition to a climate-neutral economy.

LHV has taken the approach to support the strategic approach towards a more sustainable and inclusive economy. In March 2020, LHV Group officially joined the United Nations (UN) Principles for Responsible Banking and prepared an action plan for delivering on the promises made.

The UN Principles for Responsible Banking provide a single framework for sustainable banking, developed through a partnership between banks worldwide and the UN Environment Programme Finance Initiative. The Principles for Responsible Banking set out the banking industry's role and responsibility in shaping a sustainable future, and in aligning the banking sector with the objectives of the UN Sustainable Development Goals and the Paris Climate Agreement. They also enable banks to embed sustainability across all its business areas, and to identity where it has the potential to make the most impact in its contributions to sustainable development. They also position financial institutions to leverage new business opportunities with the emergence of a sustainable economy.

In 2021, the Bank moved a considerable step closer to our suitability goals in regard to metrics, regulatory understanding as well as ESG governance, credit portfolio analysis and risk management processes. While in recent years the bank has already evaluated the environmental impacts of its products and services, updated its credit policy and started to offer sustainable financial products, 2021 took us deeper into integrating ESG into our business. We made significant progress in our ESG data gathering and analysis processes, improved sustainability governance by launching a group wide ESG steering committee and started integrating ESG into our credit decision-making process. A sustainability related questionnaire was added into our credit application in the Summer of 2021 and to date, we have completed the first phase of ESG risk management framework by building an ESG risk assessment tool for the credit area.

The methodology will help us determine more sensitive sectors in our portfolio and move toward a more sector-specific approach in assessing our customers ESG efforts as well as impact and risk level. The next step will be to build a comprehensive ESG score for our credit business line.

LHV is committed to its positive social impact and responsibility. We continue to be one of the most attractive employers in Estonia and take seriously our responsibility to focus on organizational development and employee well-being even through the uncertainties and physical limitations the past few years have brought about. Where possible, the Bank supports enterprises and initiatives that contribute to the development of the Estonian society. In leading the discussions on inclusive economies and supporting various culturally and socially important initiatives, LHV continues to contribute to the pursuit of innovative ideas and projects which improve life in Estonia.

Financial results

EUR million	2021	2020	change
Net interest income	97.66	69.05	41%
Net fee and commission income 31.17		18.38	70%
Net gains from financial assets	-1.54	0.88	-276%
Total net operating income	127.29	88.31	44%
Other income	0.60	0.21	185%
Operating expenses	-49.34	-36.27	36%
Income tax expense	-10.56	-6.75	56%
Credit losses	-3.95	-10.90	-64%
Net profit	64.05	34.60	85%

Volumes
EUR million	31.12.2021	31.12.2020	change
Loan portfolio	2,677	2,209	21%
Deposits	5,847	4,141	41%
Equity	280	215	30%
Number of bank customers (thousands)	321	258	24%

2. AS LHV Varahaldus (group)

AS LHV Varahaldus is a fund management company with emphasis on active investment strategies. As of the end of 2021, funds under management consist of one UCITS fund, seven II pillar and three III pillar pension funds. Investment management unit is supported by risk management, operations and sales units.

In 2021, LHV Varahaldus established a 100% subsidiary VH Incorporation Entity OÜ. The purpose of VH Incorporation Entity OÜ is to establish companies for real estate transactions of pension funds.

2021 was a good year for financial markets. Biggest stock market indices in the developed world showed very strong returns, as negative interest rate environment coupled with stronger than expected economic growth meant solid inflows to listed equities. MSCI World, S&P500 and Euro Stoxx 50 all experienced double-digit growth, increasing in euro denominated value by 31.1%, 36.2% and 23.3% respectively.

LHV offers a wide range of investment strategies to its customers within II pillar pension system, including passively managed index fund, one ESG/green fund and five actively managed funds with varying risk classes. In recent years actively managed funds have concentrated more on alternative asset classes and non-listed securities with the belief that over long investment horizon average annual expected return will exceed that of publicly traded securities. Size of funds as well as changes in regulation have allowed LHV to invest more into local non-listed assets, such as real estate, as well as provide financing to Estonian companies through debt securities. LHV pension funds are among the biggest and most active institutional investors in Estonia in recent years.

For actively managed pension funds investing in Estonian companies, economic growth and asset appreciation of the local market is also beneficial. Estonia showed very strong economic rebound in 2021, with GDP growth of about 8% annually. There was also a significant increased interest in real estate market, especially in retail sector regarding apartments.

Economic growth as well as appreciation of real estate was partially helped by implemented regulatory changes to pension system, wherein 2021 was the first year where people could opt out and withdraw all their collected savings from the previously mandatory II pillar pension system. Close to 150 thousand people, slightly less than a quarter of the whole market, used this opportunity and withdrew their funds in the beginning of September. Total amount withdrawn from the pension funds was around EUR 1.3 billion, from which 20% was income tax and collected by state.

Compared to its biggest competitors, outflow of customers for AS LHV Varahaldus was more modest, close to 20% in September.

It was less than initially expected, but still significant and with material effect to both total assets under management as well as profitability. Given that biggest asset in the balance sheet of AS LHV Varahaldus is the value of customer contracts that in 2021 had to be partially written off, it had a strong negative, albeit cash flow neutral, impact on net profit. It should still be noted that within every age and income group, large majority of the customer base decided to remain in the II pillar system.

Despite generating close to EUR 131 million total net returns in aggregate to all customers in 2021, assets under management fell from EUR 1,537 million to EUR 1,349 EUR million. Reduction in assets under management was due to withdrawals from II pillar funds, but where partially offset by strong investment returns to existing customers. 2021 was again a good year for LHV III pillar funds, as assets under management grew from EUR 31 million to EUR 51 million.

Largest actively managed pension funds all showed positive returns in 2021, while having a more guarded view and thus lower exposure to public equity. Pension funds M, L and XL had net returns of 5.3%, 9.0% and 10.0% respectively; pension fund Roheline, which invests solely to greener ESG focused assets, had a net return of 2.9%, LHV pension fund Index increased in value by 22.8%.

LHV with its seven funds in the II pillar pension system is the chosen fund manager for close to 140 thousand people. Company manages the savings for 25.1% of II pillar pension system participants and holds market share of 28.8% in terms of assets under management. By the end of the year three LHV III pillar pension funds had more than 30 thousand customers.

Net profit of LHV Varahaldus was EUR 0.7 million in 2021, a result strongly affected by the higher amortization cost related to withdrawals from the II pillar. LHV II pillar funds L and XL both outperformed the benchmark index, resulting in combined performance fee of EUR 2.6 million.

Financial results

EUR million	2021	2020	change
Net fee income	11.4	15.0	-24%
Other financial income	0.6	0.6	-6%
Total net operating income	12.0	15.6	-23%
Operating expenses	-10.0	-6.4	57%
Income tax expenses	-1.2	-0.8	47%
Net profit	0.7	8.3	-92%
Assets under management	1,349	1,537	-12%
Number of customers in pension funds (thousands)	170	215	-21%

3. AS LHV Kindlustus

AS LHV Kindlustus is a non-life insurance company, which was founded in May 2020. The shareholders of LHV Kindlustus are LHV Group (65%) and AS Toveko (35%). The company received the licence for insurance activities from Estonian Financial Supervisory Authority on 29.12.2020 and started selling the insurance policies as of 01.01.2021. Thus, the year 2021 was the first year for active business for LHV Kindlustus.

LHV Kindlustus launched 12 product solutions in 2021. The main products are motor own damage, third-party liability insurance and extended warranty insurance for private and commercial customers. The product range also includes property and liability insurance, travel insurance, purchase insurance and payment protection insurance for private customers and residential property and liability insurance for commercial customers. LHV Kindlustus works on amending the product range for both private and commercial customers.

LHV Kindlustus implements multi-channel sales strategy by using online, insurance intermediaries, brokers, and direct sales. The main focus is on supporting LHV Pank and Euronics with best insurance solutions.

As of 31.12.2021 LHV Kindlustus had 211 thousand active insurance contracts and 143 thousand customers. The biggest share of active contracts and customers is related to the extended warranty insurance portfolio followed by the LHV Pank credit card travel and purchase insurance. The share of other products, especially motor and private property insurance is growing rapidly on monthly basis.

The annual GWP amount for LHV Kindlustus was EUR 6.7 million. On annual basis, the biggest share of this amount forms the extended warranty insurance. The share of motor insurance forms 25% on annual basis, however the trend is rapidly growing.

Net earned premiums amounted to EUR 2.3 million

Net incurred losses incurred amounted to EUR 1.1 million. There were registered 1,310 claims in 2021, out of which 289 are still open as of 31.12.2021. The gross claim provisions including IBNR and UALE formed EUR 0,4 million as of 31.12.2021.

Net loss for 2021 amounted to EUR 0.8 million, which was expected result for the first active year.

4. LHV UK Ltd

LHV UK Limited was founded in February 2021 with the aim of becoming a separate and independent bank in the UK within the LHV Group. After the bank has been established and has received the necessary regulatory permissions, all existing business of LHV Pank UK Branch is planned to be transferred to LHV UK Limited.

LHV Group has decided to establish a bank in the UK to separate LHV Pank's current business activities in Estonia and the UK. LHV UK Limited will focus on servicing international payment intermediaries, for whom it is often important to communicate with the local bank and people. Unbundling also allows for better compliance with regulatory and supervisory requirements. A clear separation will also make it possible to better highlight the results and value to be created for investors.

In 2021, LHV UK Limited was focusing on setting up the company and capitalising it with £10 million; building up the organisation and hiring the key executives; relocating the office; starting the information systems and IT infrastructure separation project and finding the new outsourcing partner for the core banking system; and preparing the documentation for the credit institution license application.

In 2022, LHV UK Limited will focus on staffing the company; capitalising it; building up the information systems and IT infrastructure; and applying for the credit institution license with the aim of obtaining the license by the end of 2022.

LHV UK Limited will offer single platform enabling banking services in GBP and EUR. Under its long-term vision, LHV UK Limited sees itself as a bank that is one of the leaders in modern banking in Europe, contributing to the development of financial services without borders. The company positions itself as a new generation bank that is able to integrate and be the link between traditional banking and the new generation of financial services through the use of open banking. The company focuses on greater integration with Europe's banking infrastructure. The company's existing services and technological standards allow it to provide services to international customers and financial technology companies, including major payment institutions.

• Leader in Open Banking. LHV UK Limited will be a full-service banking services provider for businesses. With a well-established presence in the UK, LHV Pank UK Branch has been a trusted partner for payment services providers for years, granting access to payments infrastructure to a variety of companies, from fintech unicorns and digital asset companies to established financial institutions with a global reach. LHV Pank UK Branch has been the only provider capable of granting customers direct access to both instant GBP and EUR payments. LHV UK Limited sees itself as an innovative link between businesses and the banking infrastructure and believes it is a prime example of how open banking can work for businesses. LHV Pank UK Branch has rapidly become one of the largest Banking as a Service players in the UK and Europe. As a next step, LHV UK Limited will open its banking services for all businesses in the UK.
• Digital. LHV UK Limited will be a digital bank for the modern digital society and businesses that adopt e-commerce solutions. LHV UK Limited's banking services will use cutting-edge modern technology that allows its customers to incorporate innovative and unique products that fit their goals.
• User experience driven. LHV UK Limited will be customer centric, focused on putting the customer at the heart of every product and creating a better user experience. The company believes in incremental improvements at every step of the customer service process. It will be easy to communicate with LHV UK Limited – open an account, access the account through e-channels or API connection, and make transactions.

Remuneration report

This remuneration report has been prepared in accordance with the Estonian Securities Market Act and provides an overview of the remuneration paid to the Head of AS LHV Group (hereinafter 'LHV Group') according to the remuneration principles for the 2021 financial year. In the context of the Estonian Securities Market Act, the Head of LHV Group is Member of the Management Board Madis Toomsalu. The remuneration principles of LHV Group are described in the internal rules of LHV Group titled 'Remuneration policy' and in the section of the annual report titled 'Corporate governance report'.

1. Remuneration of the member of the management board

1.1 Overview

Under the terms of the contract of the Member of the Management, Madis Toomsalu has been paid monthly basic remuneration of EUR 13 thousand and annual remuneration of EUR 156 thousand in total in 2021. The amount and payment procedure of the basic remuneration to the member of the management board are determined by a resolution of the Supervisory Board.

LHV Group implements a long-term plan for the payment of performance fees, or the option scheme, which is approved by the Annual General Meeting (AGM) of the shareholders. Madis Toomsalu is subject to the option schemes approved by the resolution of the General Meeting of LHV Group of 29 April 2015 and the resolution of the General Meeting of 13 March 2020. These option schemes also set out the conditions for reducing or cancelling options.

In accordance with the resolutions of the Supervisory Board adopted on the basis of the above-mentioned option plans and the option contracts concluded, it is possible for the Member of the Management Board of LHV Group Madis Toomsalu to subscribe to a total of 104,419 shares of LHV Group as a performance fee for options issued in 2019, 2020, and 2021, of which the options issued in 2021 amount to a total of 34,054 shares of LHV Group in the amount of EUR 288 thousand. As a result of the option scheme, Madis Toomsalu is subject to a retention period of at least one year from the date of realisation of the options, during which Madis Toomsalu undertakes to hold the shares of LHV Group underlying the options in his ownership and not to transfer or encumber them in any form.

Taking the fact that options are granted for the results of the previous financial year into account, the options were granted in 2021 for the results of the 2020 financial year. Due to the fact that the deadline of options is at least three years from the date of granting the options, the options granted in 2018 for the 2017 results were realised in 2021. In 2021, the right to reduce or cancel options under the option scheme established by the shareholders was not exercised.

An overview of the key performance indicators, the remuneration paid to Madis Toomsalu, and the performance indicators of LHV Group over the last five financial years is presented in the table below, while other performance indicators are disclosed in the consolidated accounts of LHV Group:

(in thousands of euros)	2017	2018	2019	2020	2021
Total amount of the
annual basic remuneration	101	136	144	144	156
of Madis Toomsalu
Options of LHV Group	18,569 options,	20,555 options,	33,305 options,	37,060 options,	34,054 options,
issued to Madis	in the total	in the total	in the total	in the total	in the total
Toomsalu	amount of EUR	amount of EUR	amount of EUR	amount of EUR	amount of EUR
	80 thousand	100 thousand	144 thousand	200 thousand	288 thousand
Consolidated profit
of LHV Group	22,176	27,190	27,092	39,846	60,263
Return on equity (ROE)	17.6%	18.4%	14.0%	17.3%	22.1%

Since LHV Group has not entered into employment contracts with any persons and the only person performing official duties in the company is Madis Toomsalu, who is performing the duties of a Member of the Management Board on the basis of the contract of the Member of the Management Board, the average remuneration of a full-time employee of the relevant company can be considered to be the remuneration of Madis Toomsalu by analogy.

Madis Toomsalu has not been exempt from the remuneration principles in 2021. No financial benefits other than those described in this section will be offered to them for the performance of their duties in LHV Group or its subsidiaries.

1.2 Compatibility of remuneration with the remuneration principles

According to the contract of the Member of the Management Board, the Member of the Management Board of LHV Group, Madis Toomsalu, has been paid monthly remuneration of EUR 13 thousand in 2021 as the basic remuneration, which constitutes annual basic remuneration of EUR 156 thousand. As a performance fee, the Member of the Management Board of LHV Group has the right to subscribe to a total of 34,054 shares of LHV Group in the amount of EUR 288 thousand for options issued in 2021. In 2021, the Member of the Management Board of LHV Group was paid a performance fee for the results of the 2017 financial year, whereby Madis Toomsalu subscribed to all 20,555 options granted to him in 2018 for the results of the previous financial year in the amount of EUR 100 thousand.

On the proposal of the Remuneration Committee, the Supervisory Board of LHV Group has set the basic remuneration of Madis Toomsalu for 2021 at EUR 13 thousand per month, while taking into account, among other things, the dedication and results of the respective Member of the Management Board, his entrepreneurial spirit, the scope, responsibility, and intensity of his duties, the situation on the labour market, the remuneration level and urgency of the position in the geographical location, the economic situation of LHV Group, the current and future business performance and trends in comparison with the companies in the same economic sector, as well as the changed and continuously changing environment. The establishment of the basic remuneration also considered the principle that the basic remuneration should represent a sufficiently large part of the total remuneration to allow, where appropriate, for not determining or paying the performance fee in accordance with the option scheme established by the shareholders. Further, considering the fact that LHV Group is the largest domestic financial group and capital provider in Estonia, and in view of the strategic trends and long-term objectives of LHV Group, the Supervisory Board of LHV Group deemed the monthly remuneration set for Madis Toomsalu for 2021 to be such as to motivate Madis Toomsalu to act in the best interests of LHV Group and to refrain from acting in personal or other persons' interests, and to be fair, transparent, and in compliance with the law.

At the beginning of 2021, the Remuneration Committee, which was established at the level of the Supervisory Board, also held an active discussion on the objectives set for the Member of the Management Board of LHV Group for 2020, in order to assess their performance in 2020 and determine their performance fee accordingly. The COVID-19 pandemic and the specific measures implemented to mitigate the pandemic, which had an impact on the business activities, financial position, and operating results of LHV Group in 2020 and will continue to have an impact in 2021, featured prominently in the discussions. As a result of the achievement of the previously agreed objectives set for Madis Toomsalu on an individual basis and the performance in the difficult year affected by COVID-19, the Supervisory Board, on the proposal of the Remuneration Committee, decided to use the approval of the shareholders of LHV Group to set the performance fee at the maximum amount and to approve the amount of the performance fee to be determined for Madis Toomsalu in 2021 at 200% of his annual remuneration in 2020, i.e., in 2021, a total of 34,054 options to subscribe to the shares of LHV Group in the amount of EUR 288 thousand were set as his performance fee.

The Remuneration Committee also discussed and found, in connection with the realisation of the options in 2021, that there have been no subsequent changes to the 2017 financial results and no subsequent material weaknesses have been identified that would indicate that Madis Toomsalu has been compromised in the proper performance of his duties in meeting his objectives. As there were no additional details on his contribution to the 2017 accrual period, as a result of which it would be necessary to revise the estimate of the number of options to be realised in 2021 and reduce the number of instruments granted, the Supervisory Board approved the remuneration of the Member of the Management Board of LHV Group in 2021 for the results of the 2017 financial year and the right of Madis Toomsalu to subscribe to all 20,555 options granted to him in 2018 for the results of the previous financial year in the amount of EUR 100 thousand, and Madis Toomsalu also exercised this right.

In 2021, the implementation of the remuneration principles was also reviewed by the Remuneration Committee of LHV Group, whose members have sufficient knowledge and experience in risk management and remuneration. In addition, LHV Group Internal Audit and Compliance Control monitored the compliance of the remuneration policy established in the internal rules with the legislation on remuneration and other internal rules of LHV Group. There were no observations about non-compliance in 2021.

In the light of the above, in 2021 the remuneration of Madis Toomsalu of LHV Group complies with the executive remuneration principles of LHV Group, which are described in the internal rules of LHV Group titled 'Remuneration policy' and in the section of the annual report titled 'Corporate governance report'.

Consolidated financial statements

Risk management

Risk is defined as a potential negative deviation from expected financial results. LHV encounters several risks in its day-to-day operations. The objective of risk management at LHV is to recognise these risks, to measure them appropriately, to manage and to report them. More broadly, the aim of risk management is to increase the value of LHV by minimising losses and reducing the volatility of results. Risk management at LHV is based on a strong risk culture and is built on the principle of three lines of defence where the first line of defence, the business units, are responsible for taking risk and for day-to-day management. The second line of defence, responsible for ownership, continuous review and implementation of a robust risk management framework in the Group, including ownership of the relevant methodologies defined in the policies and holistically ensuring identifying, assessing, measuring, managing, mitigating, and monitoring and reporting on risks is well executed in the Group.

The third line of defence, the internal audit, conducts independent supervision over the entire group. Risk management principles, requirements and areas of responsibility are described in risk management policy. The principles and objectives of capital management are described in internal documents (capital management policy and capital objectives). More detailed risk management processes are described in the policies of the respective field.

Under the leadership of the independent Risk Management Unit, LHV has developed a group-wide risk appetite framework, approved by the Supervisory Board. The risk appetite reflects LHV readiness to take certain kinds of risks. The larger the risk appetite, the more risk can be assumed. The risk appetite is set to reflect the desired risk profile, reflecting the nature of the LHV business model.

Risk framework

Risk management principles, roles and responsibilities

• Risk management and control principles
• Ethics principles
• Remuneration principles • Organizational structure
• Roles and responsibilities
• Goals, measures and controls
  • Risk tolerance levels
  • Measurement of risks
  • Rights and limits

Internal and external reporting, disclosure

Risk appetite is defined as a Risk Appetite Statement for all risks that the LHV is materially exposed to. Risk appetite is defined both by qualitative guidance and quantitative limits, considering the following principles:

• The qualitative guidance is worded in simple terms and in close connection with the terminology commonly used in the organization and in the business plan.
• The quantitative limits as a part of risk appetite are set at a sufficiently detailed level, to capture key sub-categories of addressed risks, but at a sufficiently aggregated level to maintain each metric of importance to the group-wide risk profile of LHV. Where it is possible to quantify the risk, there is accordingly defined the acceptable, tolerable, and intolerable amount of risk.
• Acceptable level is the amount of risk that is allowed to be taken under normal business conditions.
• Tolerable is the amount of risk that represents a warning indicator, the increase of risk must be properly assessed, and action plan defined to return to the acceptable area; the assessment and action plan reported at least to the Management Board of LHV.
• Intolerable limit reflects the amount of the risk LHV does not want to breach under any circumstances, that represents a hard limit violation, immediate action must be taken to return at least to the tolerable area; violation, assessment and action plan reported to the Supervisory Board of LHV.

Risk capacity – is the maximum amount of risk LHV is capable to take given its capital base, its risk management and control capabilities, and its regulatory constraints.

Risk appetite means the aggregate level and types of risk LHV is willing to assume within its risk capacity, in line with its business model, to achieve its strategic objectives.

Risk profile – combination of the real risks of LHV resulting from the nature, scale and complexity of our activities and operation environment.

As seen from the figure, if the actual risk profile remains within the limits of the acceptable risk appetite range, it is a foreseeable situation and no further action is needed. If the actual risk profile is inside tolerable risk appetite range, it is an early warning signal and an action plan is put in place to reduce the risk profile. It is also necessary to inform the Management Board in that case. If the actual risk profile is above tolerable level, it indicates that risk appetite level is exceeded and an action plan has been put in place to reduce the risk profile. It is also necessary to inform the Supervisory Board in that case. The management of LHV risk profile and ensuring it stays within the limits of the risk appetite is the responsibility of the first line of defence, while independent monitoring and reporting is the responsibility of the risk management unit. Within the framework of the financial recovery plan, LHV has developed early warning indicators with thresholds and corresponding measures.

In accordance with risk management policy, the quantitative risk appetite levels must be specified at minimum for capital risk, credit risk, market risk, operational risk, liquidity risk and money laundering risk. The limits of risk appetite are described in each of the respective risk policies, which are approved at Supervisory Board level. Detailed instructions and guidelines are described in the policies. LHV has a system of committees and decision-making competencies. The functions of the main committees are shown in the figure below.

As part of the risk policy framework, LHV has developed a risk reporting process. The table below gives an overview of the main reports prepared by the risk management department, which are presented to the governing bodies and their reporting frequency.

Governing body	Members	Title of the report	Report frequency	Coverage of risks
Supervisory board of the Group	All the members of the supervisory board of the Group	Risk report	Quarterly	Credit risk, market risk, interest risk, liquidity risk, operational risk, anti- money laundering risk, monitoring of legislation
		Compliance overview	Monthly	Compliance risk
		ICAAP report, ICAAP macro scenario, SREP report	Once a year	All the risks
Supervisory board of the Bank	All the members of the supervisory board of the Bank	Risk report	Monthly	Credit risk, market risk, interest risk, liquidity risk, operational risk, anti- money laundering risk, monitoring of legislation
		Risk management overviews	Once a year	All the risks
		ICAAP report, ICAAP macro scenario, SREP report	Once a year	All the risks
Risk and Capital Committee of the Bank	Rain Lõhmus, Andres Viisemann, Tiina Mõis Madis Toomsalu	Risk report	Quarterly	Credit risk, market risk, interest risk, liquidity risk, operational risk, anti money laundering risk, monitoring of legislation
		Problematic loan customers	Quarterly	Credit risk
Audit committee	Kristel Aarna, Urmas Peiker, Tauno Tats	Risk report	Quarterly	Credit risk, market risk, interest risk, liquidity risk, operational risk, anti money laundering risk, monitoring of legislation
CEO of the Group, Chairman of the Supervisory Board of the Bank	Madis Toomsalu	Risk report	Monthly	Credit risk, market risk, interest risk, The liquidity risk, operational risk, anti money laundering risk, compliance risk, monitoring of legislation
Asset and Liability Committee of the Bank	Management board members of the Bank, Kadri Haldre	Risk report	Monthly	Credit risk, market risk, interest risk, liquidity risk, operational risk, anti money laundering risk, compliance risk, monitoring of legislation
		Business continuity test and planning	After every test	Operational risks
		Risk self-assessment	After assessment	Operational risks
Management Board	Management	Compliance overview	Once in a year	Compliance risks
of the Bank	board members of the Bank	Anti-money laundering overview	Once in a year	Anti-money laundering risks
		Monitoring of legislation Monthly		Compliance risks
		Compliance audit	After every audit	Compliance risks
		ICAAP report, ICAAP macro scenario, SREP report	Once a year	All the risks

LHV has established a risk management policy, which sets the risk management framework. Separate policies are set for major risk categories. The risks are analysed and monitored and reported to different levels on a monthly and quarterly basis. The risk report, which is compiled on a monthly basis, presents information by type of risk. The risk report also includes information on capital adequacy. It allows getting a regular overview of all the important risks at the company level and to monitor their development, identify bottlenecks, and react promptly.

Within the overall risk management framework, separate risk types are managed via dedicated frameworks. As the

business model of LHV and the external environment is continuously developing, the type and size of LHV's risk exposures is continuously changing. Accordingly, the risk management framework is continuously adapted as well.

Specifically, the risk management framework is created in consideration of the relative materiality of the current and estimated future risk exposures, as illustrated in the risk heat map on the right. Risk types where exposures are material, i.e. the possible losses are substantial and the likelihood of such losses materializing is higher, are managed more closely. The specific framework elements, including methodology, processes, tools, people, and perimeter of application, reflect the specific nature of these risks.

The frameworks for addressing the main risk types the Group is more materially exposed to, including solvency risk, credit risk, market risk, liquidity risk, and operational risk, are in detail described in the following sections.

Within the overall risk management framework, dedicated attention is devoted also to ESG risk management, i.e., managing the risk of losses resulting from current or prospective impacts from environmental, social and/or governance factors. LHV recognizes the growing materiality of this risk going forwards and is strengthening its risk management framework accordingly.

Forward looking relative impact

This includes, similarly to all material risk categories, definition of risk appetite and ensuring the Group stays within that risk appetite. Where appropriate, ESG perspective is included in the aspects of risk management framework directly addressing credit, market, operational, liquidity and funding, and strategic risk. Definition of a common taxonomy and consideration of emerging regulation and best practice are parts of strengthening this framework. LHV maintains a no-go list of industries and types of transactions that are not eligible for financing due to negative environmental or social impact.

The net capital of a credit institution at any time shall be equal to or exceed the minimum amount of share capital prescribed in the Credit Institutions Act. The capital of banks and investment firms in the European Union are subject to a legal framework (CRD IV/CRR), largely based on the Basel III framework that was agreed in the Basel Committee on Banking Supervision. The objective of the framework is to strengthen the resilience of the financial sector to adverse economic shocks and thereby ensure an adequate and sustainable financing of the economy. Significant changes implemented by the new requirements include the requirement for credit institutions to maintain a higher level and quality of capital than before and a unified framework for designing liquidity buffers. The capital requirements directive also defines measures for macro-financial supervision that member states can use to control the behaviour of credit institutions in amplifying the cycles and to alleviate risks arising from market structure. Every year additional smaller changes have been implemented in the regulations. Due to COVID-19 pandemic the implementation has partially been postponed and now completely updated regulation will be valid started from 2025.

The goal of the Group's capital management is to:

• ensure continuity of the Group's business and ability to generate return for its shareholders;
• maintain a strong capital base supporting the development of business;
• comply with capital requirements as established by supervision authorities.

The Group considers net own funds valid according to capital adequacy regulation as capital. The amount of net own funds that the Group managed as at 31.12.2021 was EUR 366,984 thousand (31.12.2020: EUR 311,333 thousand). The goals of the Group's capital management are set based on both the regulative requirements and additional internal buffer.

The Group follows the general principles in its capital management:

• The Group must be adequately capitalized at all times, having necessary capital to ensure economic preservation and enabling financing of new profitable growth opportunities;
• The main focus of the capital management is on core tier 1 own funds, because only core tier 1 own funds can absorb losses. All other capital layers in use are dependent of core tier 1 own funds volume;
• Capital of the Group can be divided into: 1) regulated minimum capital and 2) capital buffer held by the Group.
• MREL ratios can be fulfilled with suitable liabilities instead of own funds.

In order to reach its long-term economic goals the Group

must on one hand strive towards proportional lowering of the regulated minimum capital (through minimizing risks and high transparency). On the other hand, the Group must strive towards sufficient and conservative capital reserve, which will ensure economic preservation even in the event of severe negative risk scenario.

Own funds

(in thousands of euros)	31.12.2021	31.12.2020
Paid-in share capital	29,864	28,819
Share premium	97,361	71,468
Statutory reserves transferred from net profit	4,713	4,713
Other reserves	47	0
Accumulated profit/(deficit)	121,485	90,434
Intangible assets (subtracted)	-14,473	-18,528
Net profit for accounting period (COREP)	28,868	37,950
Deductions	-128	-323
CET1 capital elements or deductions	-1,189	-8,358
CET1 instruments of financial sector entities where the institution does not have significant investment	-5,236	0
CET1 instruments of financial sector entities where the institution has a significant investment	-4,328	-4,842
Tier 1 own funds	256,984	201,333
Additional Tier 1 capital	35,000	35,000
Total Tier 1 capital	291,984	236,333
Subordinated debt	75,000	75,000
Total Tier 2 own funds	75,000	75,000
Total net own funds	366,984	311,333

buffer.

The regulation, which is directly applicable in the member states, obligates all credit institutions operating in the European Union (including their consolidating holding companies) and investment firms to maintain 4.5% of Common Equity Tier 1 (CET 1) and 6.0% of Tier 1 Capital against risk assets. The overall Capital Adequacy Requirement (CAD), including both Tier 1 and Tier 2 capital, remains at the existing 8.0% level.

In addition to the main requirements based on uniform rules, the directive defines the principles for forming capital buffers. In Estonia, in addition to the baseline capital requirements, credit institutions have been subjected to capital maintenance and systemic risk buffers, which are 2.5% (imposed by the Financial Supervisory Authority), systematically importance buffer 1.5% (imposed by Bank of Estonia). Another two buffers systematic risk buffer and contra-cyclical buffer imposed by Bank of Estonia are currently set at 0,0% and (imposed by Financial Supervisory Authority), respectively. In addition, grouping of the capital requirements has changed and SREP buffers were moved to higher capital buffers, meaning that first bank will breach other buffers before SREP buffers. Breaching each buffer triggers different actions from regulators side and first one in list is set by Estonian Central Bank triggering limitation of ECB transactions.

The risk appetite set by the Group is an important input to capital management planning and capital goal setting. Higher risk appetite requires maintaining higher capital

LHV has received the SREP report in early 2022. An overview of capital requirements based on that report is provided in the table below:

Requirements	CET1	Tier 1	CAD
Base capital requirement	4.50%	6.00%	8.00%
Pillar 2 capital charge	1.54%	2.06%	2.74%
Total SREP capital requirement	6.04%	8.06%	10.74%
Capital conservation buffer	2.50%	2.50%	2.50%
Systemically importance buffer	1.50%	1.50%	1.50%
Systemic risk buffer	0.00%	0.00%	0.00%
Contra cyclical buffer	0.00%	0.00%	0.00%
Capital requirements total	10.04%	12.06%	14.74%

In addition to Capital requirement FSA has set Pillar 2 guidance for LHV at 1.00% on each capitalization level. LHV is fulfilling this as part of internal buffers.

LHV has been keeping conservative approach in capital management and keeps additional internal buffers compared to regulatory ones. Capitalization requirements have been increased mainly due to increasing market share of the Bank. In 2018 LHV was considered as one of four systematically important bank in Estonia and in 2021 Bank of Estonia increased the systematically importance buffer from 1.00% to 1.50% for LHV.

Starting from 2022 LHV has to fulfil om group consolidated level two separate MREL requirements, one against risk weighted assets and the other against total assets. The first one MREL-TREA has been calibrated to 19.08% level and second one to 5.91% level. Each year FSA will recalibrate the MREL requirements.

Internal capital adequacy targets for 2022 are as follows:

• Core Tier 1 capital adequacy 11.50% (11.40% in 2021)
• Tier 1 capital adequacy 13.50% (12.10% in 2021)
• Total capital adequacy 16.50% (16.00% in 2021)
• Leverage ratio 3.50% (not changed)
• MREL-TREA ratio 19.50% (new ratio starting from 2022)
• MREL-LRE ratio 6.20% (new ratio starting from 2022)

The Group uses standard method for calculating capital requirements for credit and market risk and basic indicator approach calculating operational risk capital requirement. The Group and its subsidiaries have complied with all capital requirements during the financial year and in previous years.

Each year, the Group's Supervisory Board confirms the goals of capitalization and the target level of capital adequacy to cover potential risks arising from fast growth. Each year, an internal capital adequacy assessment process (ICAAP) is performed, the goal of which is to identify potential internal capital needs in addition to regulatory capital requirements.

Capital adequacy and the use of regulatory capital are managed by the Finance Department based on the prudential reporting for capital requirements submitted regularly to supervision. In addition to LHV Group there are separate regulative capital requirements for several subsidiaries: LHV Pank on solo level, LHV Varahaldus and LHV Kindlustus. All these companies follow both regulatory requirements and Group capitalization targets in daily capital management.

2. Credit risk

Credit risk is the risk of suffering financial loss, should any of the Group's customers, customers or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk arises from cash and cash equivalents, derivatives and deposits with banks and other financial institutions, debt securities, but mainly from credit exposures to customers, including outstanding loans, given guarantees, other receivables, and commitments.

Credit risk is one of the largest risks for the Group's business; management therefore carefully manages its exposure to credit risk. A central principle for LHV is that each of LHV´s credit business units have full responsibility for their credit risks, that credit decisions adhere to the credit process and decisions are in line with LHV`s business and credit strategies. The credit risk management and control are distributed across the three lines of defence, including concentration of responsibilities in a dedicated independent credit risk management unit which reports regularly to the Management Board and Supervisory Board. Since 01.01.2022 the dedicated credit risk management unit directly reports to the CEO of LHV Pank. The responsibilities of the dedicated credit risk management unit include debt and risk assets management, real estate collateral assessment, corporate (exposure to LHV > EURt 500) credit risk analysis and first line credit control and monitoring units.

Depending on the size and nature of each credit the credit process is performed based on the principle that low-risk credits can be approved through more cost efficient and faster credit process and for riskier and larger exposures more in-depth analysis and process is carried out. Accordingly, the lending decisions are made by credit committee (exposures > EURt 500), by retail banking credit committee or by lower decision level which includes decisions made by credit officers or fully automated decisions made by system for small financing. For credit decisions either rating or scoring systems are used to assess customer credit risk (see sub paragraph 2.1 credit risk measurement). In the credit decision-making process LHV considers important to take into account the principles of responsible lending and sustainability, including environmental considerations, social responsibility, and business ethics (see also sub paragraph General ESG principles).

For early identification of significant increase in credit risk a continuous monitoring is carried out after issuing the credit. Quarterly monitoring is performed based on the customer´s financial position for corporate customers (exposure to LHV > EURt 500). In addition to that also information from external sources like credit bureaus, tax office and other public registers are used. At least annually all ratings of corporate customers, financial institutions

and sovereigns are individually reviewed. Customers with significant increase in credit risks are listed in watchlist. The financial position, liquidity and collateral value of watchlist customers is thoroughly monitored and overview is given to credit committee on a monthly basis. For retail business, after the date of initial recognition the payment behaviour of the borrower is monitored on a periodic basis to develop a behavioural score. Any other known information about the borrower which impacts their creditworthiness – such as unemployment and previous delinquency history – is also incorporated into the behavioural score. The management of customers with increased credit risk in retail portfolio is generally based on the customer´s payment behaviour.

The Group employs a range of policies and practices to mitigate credit risk. The Group has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. The Group prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed periodically. The valuations of the market value of collaterals are based on the principle of conservatism, which takes into account the type of collateral, the location, the likelihood of realization and liquidity. Expert evaluations are used to evaluate immovables. In order to ensure that market values are up to date, the individual assessments of commercial real estate are updated at least once a year. In the case of residential and other homogeneous types of real estate, statistical indexation models are also used for regular re-evaluation. Collaterals for loans with higher credit risk is more frequently revalued.

Covid-19 impact

The coronavirus outbreak, which started 2020, had significant impact both on LHV and its customers in 2020. A swift and coordinated response from monetary, fiscal and regulatory authorities substantially smoothed the potential impact for the whole economy.

The measures included, in many instances, some forms of moratorium on payments of credit obligations, with the aim of supporting the short-term operational and liquidity challenges faced by borrowers.

On the onslaught of the Covid-19 crisis, LHV quickly and proactively offered to its customers moratoria on payments which took away the immediate pressure from the customers and offered them to pile up the necessary reserves. The peak of payment holidays was reached in summer 2020 and almost all customers have returned to scheduled repayments and which has not led to deterioration of credit quality.

From credit risk measurement side, LHV continued using conservative approach in credit risk measurement. LHV decided not to use any of the temporary regulatory measures allowing not changing customer risk treatment for the customers to whom payment holidays were given within the framework of a public payment moratorium. Which means that most of these customers were classified as forborne or default (distressed restructuring) exposures and which had significant impact on the increase in the share of IFRS 9 stage 2. Despite of the fact that almost all customers have returned to scheduled repayments without having any difficulties to servicing their obligations, then as the minimum probation period of forborne exposures is 2 years after the end of payment holiday, then the earliest reclassification for these exposures can take place in 2022 and 2023 depending on the initial length of the payment holiday (3-12 months). This decision was based on the fact that LHV Group shares are listed and it would have made more difficult for investors to understand the actual financial results.

ESG risks in credit risk

There is increasing evidence that ESG factors can affect credit risk and therefore ESG considerations have become increasingly important in Bank's credit risk decision processes including risk appetite principles, policies, and procedures.

ESG risks are defined in the context of this chapter as risks of any negative financial impact on the group stemming from the current or prospective impacts of ESG factors on its counterparties or invested assets. Environmental risk drivers are categorised as physical risks and transition risks. Physical risks are direct negative impacts proceeding from climate change and environmental degradation, which could result in reduced production capacity, increased raw material costs, asset impairment, increased labour, and capital costs, etc. Transition risks refer to the uncertainty related to the timing and speed of the process of adjustment to an environmentally sustainable economy. This process may be affected by three drivers: policy, technology, and consumer preferences. The main changes in this field are happening in carbon-intensive sectors (e.g. climate-related policy actions may have impact on asset prices). Social risks involve social factors that may have a positive or negative impact on the financial performance or solvency of a counterparty such as the rights, well-being and interests of people and communities including (in)equality, health, inclusiveness, labour relations, workplace health and safety, human capital, and communities.

ESG risks can materialise in two ways, reflecting their potential double materiality. Financial institutions can be impacted by (outside-in perspective) ESG risks through their counterparties and invested assets, as these may be impacted by (outside-in perspective) or have an impact on (inside-out perspective) ESG factors. For example, a counterparty's environmentally harmful business activities (negative

inside-out impact on environmental factors) might make it more vulnerable to the implementation of transition policies targeting environmental degradation (negative outside-in impact of environmental factors).

Considering the impact of its business activity, LHV has set a goal to promote an environmentally and socially sustainable and responsible economy and expedite progress toward solutions to key environmental and climate problems, by motivating customers to make more sustainable choices in their business activities and investment decisions.

Areas of activity that conflict with the principles of environmental and social responsibility, LHV will refrain from knowingly offering credit products to customers whose activities bear clear evidence of human rights violations and serious environmental harm. Based on the principles of sustainable and responsible activity, it is against credit policy to credit customers whose volume of credit products from LHV exceeds EUR 500 thousand and whose operating activity is related to any of the areas listed in Exclusion list in the table below.

Field of activity	Description
Forestry	Those engaged in illegal logging
Well-being of endangered plant and animal species, animals	• Those engaged in trading in endangered or Red List plant and animal; • Those engaged in illegal animal testing as defined by European Union legal acts;
	• Activities related to the forcible feeding of ducks and geese;
	• Keeping of animals for the purpose of fur production
Arms industry	Those whose area of activity is the production or distribution of weapons or weapons components prohibited under international law (cluster bombs, infantry mines, biological and chemical weapons, nuclear weapons, laser weapons designed to cause permanent blindness)
Energy industry	• Coal and oil shale mining and generation of electricity from them;
	• Activities in the preliminary phase of the oil production chain
Hazardous materials	• Asbestos mining and production, marketing and use of asbestos fibres and products and compounds containing these fibres;
	• Export of mercury and mercury compounds and the production, export and import of many mercury containing products
Tobacco	Distribution of tobacco products or e-cigarettes if it is the primary area of activity of the company (>50% of revenue)
Fishing	Practising ecologically unsustainable fishing methods, such as drifting nets, deep sea bottom trawls, use of explosives or cyanide
Transport	• Transport of oil or other hazardous materials on ships that do not meet the requirements of the International Maritime Organization;

• Financing new diesel-powered passenger cars in 2030 or later

General ESG principles

• production and trading of all goods that are illegal under the laws and regulations of the Republic of Estonia or international conventions and agreements;
• use of forced labour or human rights violations;
• facilitation of prostitution or production of pornographic material;
• distribution of prohibited substances and trading without required export or import licences;
• activities that have a negative impact on UNESCO World Heritage sites;
• activities that have a negative impact on national parks and natural protection areas or wetlands covered by the Ramsar Convention;
• activities prohibited under the legal acts of the Republic of Estonia or international conventions related to protection of biological diversity resources or cultural heritage;
• illegal forced expulsion of persons, groups of communities

In the lending process ESG risks are taken into consideration in loan reviews. A detailed ESG risks analysis is done for corporate loan applications over EUR 0.5 million. For other

customers a basic assessment of ESG factors is made based on the nature and complexity of the loan product and customer's activity. In order to identify borrowers that are exposed, directly or indirectly, to increased risk associated with ESG factors, comprehensive heat map of ESG risks for individual economic (sub)sectors was developed in cooperation with environmental and social field experts. The heat map highlights environmental and social risks assessment for each individual economic sector taking into account corresponding risk classifications of rating agencies and international financial institutions as well as local and EU regulations and Estonian national dimension there relevant.

Overview of LHV credit portfolio by E&S risks classification of economic sectors is given in the table below.

Focus area	Risk level	2021
Environmental and climate
change risk (E)	High	14.4%
	Medium	52.7%
	Low	32.9%
Social (S)	High	15.2%
	Medium	54.8%
	Low	30.0%

Development of the Bank's ESG analysis procedures and tools for corporate customers took place during the year and is expected to carry over into next year.

2.1 Credit risk measurement and distribution

The Group classifies the financial assets exposed to credit risk in the following key categories:

• a) due from central bank and credit institutions (referred to as "banks" in the tables) and investment companies
• b) debt securities and derivatives
• c) loans to legal entities, including
• d) loans to individuals, including

a) Due from banks and investment companies

Management estimates that the credit risk exposure from cash and cash equivalents, held at the central bank, other correspondent banks and investment institutions has inherently low credit risk. Loans and advances to central bank, credit institutions and investments companies are not overdue, and are also unsecured. The funds of the Group according to ratings given by Standard & Poor's or equivalent (central bank without a rating). In case there are ratings available from more than one rating agency, the average, or the most conservative rating is used.

If Estonian local credit institutions do not have the external rating and they are subsidiaries of large EU banks, then the rating of the parent company is used. Management has assessed that the ECL from credit institutions and investment companies' exposures is immaterial due to the strong ratings of corresponding parties and as the Group holds only very liquid positions with the counterparties.

b) Debt securities and derivatives

The Credit Committee sets limits for taking credit risk associated with debt securities considering the issuer's rating.

No principal and accrued interest receivables arising from debt securities are overdue. The bonds have no collateral.

c) Loans to legal entities

Loan portfolio of legal entities includes credit to companies, local governments, non-profit association (incl. apartment associations) etc, including the following products:

• corporate loans (corporate lending)
• leasing
• overdraft (corporate lending)
• trade finance (corporate lending)
• leveraged loans (investment financing)
• credit cards and hire-purchase (consumer financing)
• apartment association loans (corporate lending)
• credit letters (consumer financing)

Credits to legal entities (except apartment association loans) with total exposure to LHV more than EUR 500 thousand are evaluated on individual basis. Each customer is assigned a credit rating between 1 and 13, where 1 means the lowest probability of default (PD) and 13 indicates insolvency. Credit rating is assigned to a customer considering combination of financial status and business risk. The specific financial ratios and business risk aspects considered depend on the rating model used: corporate, commercial real estate, residential development, local government, and commodity. Credit rating is assigned by credit analyst and confirmed by Head of Credit Analysis Department, but final decision of risk taking is the unanimous decision by the credit committee. After issuing the loan, follow-up monitoring is performed usually at least quarterly for each customer's financial position. At least annually all customer ratings are reviewed. Customers with significant increase in credit risks are listed in watchlist. The financial position, liquidity and collateral value of watchlist customers is thoroughly monitored more frequently.

Credits below EUR 500 thousand to legal entities and loans to apartment association irrespective of loan amount are analysed with a more cost-efficient scoring process. The scoring process is carried out at the time of loan application and it is one of the criteria for issuing the loan. Financial data

and information on payment behaviour of the company is used when calculating the probability of default (PD). The structure of assets and liabilities are taken into account, also the profitability and cash flow ratios.

d) Loans to private individuals

Loan portfolio to private individuals includes secured, unsecured credit and leasing products to private individuals, including following products:

Product	Explanation
mortgage loans (private lending)	secured loan for acquiring an apartment, house (home loan)
private loans (private lending)	secured loan for free use (investment activity, renovation etc)
consumer loans (consumer financing)	unsecured consumer loan (issuer subsidiary LHV Finance AS)
hire-purchase (consumer financing)	unsecured instalment payment product offered by merchants (credit issuer subsidiary LHV Finance AS)
leasing	leasing for the purchase of vehicles
leveraged loans (investment financing)	loan against the collateral of publicly traded securities
credit card loans (consumer financing)	unsecured credit card loan
overdraft (private lending)	unsecured overdraft
study loan (private lending)	loan to students with state guarantee
real estate leasing (private lending)	mortgage loan (property is owned by LHV)

Credits to private individuals are also analysed with a cost-efficient scoring process (please see sub-chapter "Credit risk grading" for input of the private PD models). The scoring process is carried out at the time of loan application and it is one of the criteria for issuing the credit. Credit decisions are made by the Retail Banking Credit Committee or by lower decision level. The maximum loan amount of mortgage loans is in line with the regulations set by Central Bank of Estonia. Consumer financing products to private individuals are offered through its subsidiary LHV Finance in Estonia. The Group has entered into agreements where most overdue consumer loans and hire purchase agreements are sold – usually when loans reaching overdue at least of 79 days.

Credit risk measurement

For all loan products, except leverage loans, LHV uses either rating or scoring systems to assess customer credit risk, as outlined in the table below. For credit decisions in corporate segment (exposure to LHV > EURt 500) customer rating is used and in retail application scoring PD models are used, while portfolio scoring PD models are developed for existing contracts. There are also separate models to cover the dimensions of Loss Given Default (LGD) and Credit Conversion Factor (CCF).

Portfolio	Segment	Definition	PD	LGD	CCF/EAD
Corporate	Corporate exposures	Loans to companies with	Rating models	Model	Model
		total exposure to LHV
		> EUR 500 thousand
Retail	SME, incl. micro	Loans to companies with total	Scoring models
	enterprises	exposure to LHV <= EUR 500
		thousand, loans to apartment
		association irrespective of total
		exposure to LHV
	Private mortgage	All mortgage loans to	Scoring models
		private individuals
	Private non-mortgage	All consumer financing	Scoring models
		products and car leasing
		to private individuals

Credit risk grading

The Group uses internal credit risk grading that reflect the assessment of the probability of default of individual counterparties. The Group use internal rating or scoring models tailored to the various categories of counterparty. Different risk characteristics are used for different types of exposures to assess the borrower's credit risk:

• 1) obligor risk characteristics
• for corporate exposures: financial statements, industry type, support from parent company etc.
• for retail exposures: financial statements or personal income information, socio-demographic information, behavioural information etc.
• 2) transactional risk characteristics type of product, type of collateral etc.
• 3) delinquency characteristics from internal and external sources.

In addition, the models enable expert judgement from the Credit Risk Officer to be fed into the final internal credit rating for each counterparty. This allows for considerations which may not be captured as part of the other data inputs into the model.

The credit grades are calibrated such that the risk of default increases exponentially at each higher risk grade. For example, this means that the difference in the PD between rating grade 4 and 5 is lower than the difference in the PD between a 7 and 8.

The following are additional considerations for each type of portfolio held by the Group:

• Retail

In retail portfolio, risk assessment is done on credit facility level and final scoring is mapped to PD. After the date of initial recognition, for retail business, the payment behaviour of the borrower is monitored on a periodic basis to develop a behavioural score. Any other known information about the borrower which impacts their creditworthiness – such as unemployment and previous delinquency history – is also incorporated into the behavioural score.

• Corporate

For corporate business, the rating is determined at the borrower level. A credit analyst will incorporate any updated or new information/credit assessments into the credit system on an ongoing basis. In addition, the analyst will also update information about the creditworthiness of the borrower at least every year from sources such as public financial statements. This will determine the updated internal credit rating and PD.

• Treasury

For debt securities in the Treasury portfolio, the credit standing of the security is determined based on the ratings of external rating agencies. These ratings are continuously monitored and updated. The PD's associated with each rating are mapped to LHV's rating scale.

• Credit Risk

The Group's rating method used for evaluating the PD of corporate loans consists of a total of 13 credit ratings where 1 stands for the lowest and 13 for the highest credit risk (default). Ratings 1 and 2 are attributed only based on average ratings of rating agencies Fitch, Moody's, and Standard & Poor's, and are subject to the Group's financial analysis as necessary.

Thus, ratings 1 and 2 are attributed only to international enterprises, organisations, local governments, and countries whose solvency has been confirmed by the rating agencies with their investment grade rating. Also rating classes 3 -13 are partly based on the evaluation of rating agencies, although this category includes mainly Estonian enterprises that do not have an international rating.

The group's internal rating scale for corporate loans and mapping of external ratings:

LHV rating	LHV description	PD%	S&P	Moody's
1		0.03	AAA	Aaa
2		0.05	AA+	Aa1
3		0.10	AA, AA-	Aa2, Aa3
4		0.20	A+,A,A-	A1,A2,A3
5	Investment grade	0.30	BBB+	Baa1
6		0.40	BBB	Baa2
7		0.50	BBB-	Baa3
8		1.00	BB+,BB	Ba1,Ba2
9		2.50	BB-	Ba3
10	Non-investment grade	5.00	B+	B1
11	(including special monitoring)	10.00	B,B-	B2,B3
12		30.00	CCC/C	Caa
13	Default	100.00	D	C

The rating methods are subject to an annual validation and recalibration so that they reflect the latest projections in the light of all actually observed defaults.

Ratings are divided into three groups: investment grade, special monitoring, and default. Investment grade is allocated when the counterparty is not overdue as at balance sheet date. Special monitoring status is allocated when the rating of the counterparty is 10-13. Rating 13 (default status) is based on the definition of default principle.

Collateral

The Group employs a range of policies and practices to mitigate credit risk. The Group has internal policies on the acceptability of specific classes of collateral or credit risk mitigation.

The Group prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed periodically. The valuations of the market value of collaterals are based on the principle of conservatism, which takes into account the type of collateral, the location, the likelihood of realization and liquidity.

Expert evaluations are used to evaluate immovables. To ensure that market values are up to date, the individual assessments of commercial real estate are updated at least once a year. In the case of residential and other homogeneous types of real estate, statistical indexation models are also used for regular re-evaluation.

The principal collateral types for loans and advances are:

• Mortgage
• Commercial pledge
• Commodity pledge
• Deposit
• Credit insurance
• Marketable securities
• Unlisted securities
• Pledge over the right of claim
• Guarantee of KredEx Fund, Rural Development Foundation or European Investment Fund
• Letter of credit
• Surety of private person or legal entity
• Vehicle, machinery, aircraft, equipment etc.

The preferred collateral is where there is no strong correlation between the customer's default risk and value of the collateral. In general, the pledged assets need to be secured, the life of the collateral needs to be longer than the due date of the loan and the market value of the collateral needs to exceed the outstanding loan balance.

Unsecured loan can be issued to private customers up to a specified amount. For corporate customers this is only allowed when cash flow forecast shows stable and significantly strong cash flows and/or customer's credit risk is valued to be low.

The Group's policies regarding obtaining collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of the collateral held by the Group since the prior period.

Collaterals for leveraged loans are monitored on a daily basis and, if collateral value is falling, immediate measures are taken to avoid credit losses. Consumer loans and credit card loans are issued without collateral and risk mitigation is done by regular monitoring of customers payment behaviour. Leasing and mortgage loans are all over-collateralized. The Group monitors customers in arrears of leasing, hire purchase, mortgage loans and overdraft to private individuals on regular basis.

In relation to under-collateralized corporate loans, it should be taken into consideration, that the Group has assessed the market value of certain collaterals conservatively (personal sureties, commercial pledges). Under-collateralized loans are mainly considered to bear higher risk, for which the Group carries out monthly monitoring in credit committee, in order to mitigate potential credit losses.

2.2 Expected credit loss measurement

IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit quality since initial recognition as summarised below:

A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Group.

If a significant increase in credit risk (SICR) since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit impaired. Please refer to point 2.2.1 for a description of how the Group determines when a significant increase in credit risk has occurred.

If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Please refer to section 2.2.2 for a description of how the Group defines credit-impaired and default.

Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECLs that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on ECLs on a lifetime basis. Please refer to section

2.2.3 for a description of inputs, assumptions and estimation techniques used in measuring the ECL.

A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information. Section 2.2.4 includes an explanation of how the Group has incorporated this in its ECL models.

Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):

Change in credit quality since initial recognition

Stage 1	Stage 2	Stage 3
(Initial recognition)	(Significant increase in credit risk since initial recognition)	(Credit-impaired assets)
12-month expected credit losses	Lifetime expected credit losses	Lifetime expected credit losses

The key judgements and assumptions adopted by the Group in addressing the requirements of the standard are discussed below.

2.2.1 Significant increase in credit risk

The Group considers a financial instrument to have experienced a significant increase in credit risk (SICR) when one or more of the following quantitative, qualitative or backstop criteria have been met:

Quantitative criteria

Quantitative criteria are applied to all credit contracts initiated since 2018 in the current portfolio and wholesale legacy portfolio, for which a rating-based Lifetime PD is used.

The remaining Lifetime PD at the reporting date has increased, compared to the Lifetime PD expected at the reporting date when the exposure was first recognised, if it exceeds the relevant threshold per the table below:

Current portfolio – contracts initiated from 1st January 2018

Increase in Lifetime PD at reporting date which is considered significant
≥100 bps
Current PD_life/Initial PD_life > 1.4885+exp(0,9549-54,173*Initial PD_life)

To illustrate the formula, see SICR curve graphic below. In addition to the curve, the PD increase has to be at least 100 bps. SICR curve shows the relation between the Origination PD and the significance threshold (PD increase in number of times) for identifying significant increase in default risk

To illustrate the application of these thresholds, take for example a 3-year retail business loan agreement initiated on 13th February 2018 which at initial recognition had a Lifetime PD of 3.36 % and was expected to have a residual Lifetime PD of 2.76% ten months later at the current reporting date. If at the current reporting date the loan has a current lifetime PD of 8.86% then this exceeds the expected PD of 2.76% by more than the threshold shown above. Therefore, a SICR has occurred.

Legacy portfolio – corporate contracts initiated before 1st January 2018

These thresholds have been determined by assessing how the Lifetime PD moves prior to an instrument becoming delinquent. The Lifetime PD movements on instruments which do not subsequently become delinquent have also

Qualitative criteria

Qualitative criteria are applied in SICR calculation to legacy retail portfolio that was initiated before 2018. For the current portfolio, the qualitative criteria are included in the PD calculation and therefore included in the SICR calculation through Lifetime PD.

Due to the average short maturity of the legacy portfolio (1.75 years) it was not practical to go back to history to predict initial PDs for the contracts initiated before the of 01 December 2017 and therefore the application PD or rating PD were used as initial PDs for legacy portfolio.

Retail legacy portfolio – private person contracts initiated before 1st January 2018

If the borrower meets one or more of the following conditions, then there is SICR:

• At the report date the contract is over 30 days past due with more than 10 euros
• The contract has been overdue over 30 days and in the amount of more than 10 euros more than once over the last 12 months or

been assessed, to identify the "natural" movement in Lifetime PD, which is not considered indicative of a SICR. The average maturity of the corporate portfolio is short, namely 2.5 years.

• The customer has had more than one payment alert or tax debt over the last 12 months
• In case of home or private loan the contract LTV >100% is also considered.

Retail legacy portfolio – business contracts initiated before 1st January 2018

If the borrower meets one or more of the following conditions, then there is SICR:

• At the report date the contract is over 30 days past due with more than 10 euros
• The contract has been overdue over 30 days and in the amount of more than 10 euros more than once over the last 12 months or
• The customer has had more than one payment alert or has had at least four incidents of tax debt over the last 12 months.

The assessment of SICR incorporates forward-looking information is performed on a quarterly basis. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the independent member of Credit Risk team.

Backstop

A backstop is applied and the financial instrument considered to have experienced a SICR if the borrower is more than 30 days past due on its contractual payments.

Low credit risk exemption

The Group has used the low credit risk exemption for cash and nostro accounts fulfilling the liquidity portfolio criteria in the year ended 31 December 2021 and 31 December 2020.

2.2.2 Definition of default and credit-impaired assets

The Group defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired, when it meets one or more of the following criteria:

Quantitative criteria

The borrower has breached materiality threshold in 90 consecutive days.

Qualitative criteria

The following circumstances are considered as indicators for the customer not to pay the debt in full:

• there are indications of unlikeliness to pay, which indicates the borrower is in significant financial difficulty
• distressed restructuring has occurred
• additional forbearance measures have been applied on probation period for existing forbearance measures
• contract is terminated.

The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the PD, EAD and LGD throughout the Group's expected loss calculations.

For applying the default status, a customer-based approach is used for wholesale and contract-based approach is used for the retail portfolio.

An instrument is considered to no longer be in default when it no longer meets any of the default criteria for the probation period of corresponding to the reason of default. The probation period should not be shorter than 3 months from the moment that the default criteria cease to be exist.

Loans under distressed restructuring are considered to require particular attention in the reclassification to non-defaulted status because the assessment of days past due is based on the modified payment arrangement and the exposure cannot stop being restructured by the time it is fully repaid. Therefore, the probation period for these loans is defined as at least 1 year from the latter of:

• the moment of extending the restructuring measures;
• the moment when the exposure has been classified as defaulted;
• other end of grace period included in the restructuring arrangements.

2.2.3 Measuring ECL - Explanation of inputs, assumptions, and estimation techniques

The aim of the ECL model is to calculate the 12-month and lifetime expected credit losses that:

• are unbiased, i.e. do not include any conservatism or optimism;
• are probability-weighted amounts that are determined by evaluating three provisioning scenarios (base scenario, upside scenario and downside scenario);
• reflect the time value of money;
• use reasonable and supportable information about past events, current conditions, and forecasts of future economic conditions.

The Group's ECL model follows widely accepted sum of marginal losses approach, whereby ECLs are calculated as the sum of the marginal losses occurring in each period (month) from the reporting date. The marginal losses are derived from individual risk parameters (PD, LGD, EAD) that estimate exposures and losses in the case of default and the marginal PD for each period (the probability of a default between time periods t and t+1.

ECL calculations are based on four components:

• PD is an estimate of the likelihood of default over a given time horizon.
• EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities.
• LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that LHV would expect to receive, including from any collateral. LGD is expressed as a percentage of the EAD.
• Discount factor is used to discount an expected loss to a present value at the reporting date.

Mathematically, the ECL amount for prediction horizon T (12 months or lifetime, depending on whether 12-month or lifetime ECL estimates are concerned) is expressed as follows:

$$ECL_T = \sum_{t=1}^{T} PD_t \ast LGD_t \ast EAD_t \ast d_t$$

Where:

t = 0 T – a one month period within the prediction horizon T; for a 12-month ECL estimate T = 12 months; for a lifetime ECL estimate T = expected life of the lending exposure PDt – marginal PD for month t LGDt – LGD as estimated for month t EADt – exposure amount, incl. expected drawdowns of undrawn commitments, at month t dt – discount factor for month t

The discount rate represents the effective interest rate ("EIR") for the financial instrument or an approximation thereof.

A simplified example of the calculation logic is illustrated in table below. Note that in this example for secured loans, LGD is directly derived from the collateral value and as a simplification, fair value is assumed to be constant. However, ECL model takes into account the possible decrease of collateral fair value over time through different scenarios.

ECL	31.01.22	28.02.22	31.03.22	30.04.22	31.05.22	30.06.22	31.07.22	31.08.22	30.09.22
(1) Exposure (EAD)	4,000	3,500	3,000	2,500	2,000	1,500	1,000	500	0
(2) Marginal PD	0.40%	0.38%	0.36%	0.34%	0.32%	0.30%	0.28%	0.26%	0.24%
(3) Collateral value	2,000	2,000	2,000	2,000	2,000	2,000	2,000	2,000	2,000
(4) Potential loss amount [Max(0:1-3)]	2,000	1,500	1,000	500	0	0	0	0	0
(5) Expected marginal loss [2*4]	8.00	5.70	3.60	1.70	0.00	0.00	0.00	0.00	0.00
(6) Expected marginal loss, discounted	7.97	5.65	3.56	1.67	0.00	0.00	0.00	0.00	0.00
Lifetime ECL at 31/12/2021 [Sum (6)]	18.85

Note. Discounting is done, assuming current reporting date 31.12.2020 and a 5% discount rate.

For the defaulted exposures, ECL is computed as:

$$\mathop{ECL}_{T} \sum_{t=1}^{r} \mathop{LGD}_{t} \bullet \mathop{Exposure}_{t} \star d_{t}$$

Each of the risk dimensions (PD, LGD, EAD) is covered with the internally developed rating- and scoring models. These models have been developed for the business- and credit management.

As can be concluded, the key issue in ECL modelling is to transform the available risk parameter values into forward looking PiT estimates and 'feed' them into the expected credit loss calculation formula.

	IFRS 9 parameters
PD	• 12-month PD; lifetime PD broken down further into marginal probabilities for sub-periods
	• Forward looking PiT estimate, reflecting assessment of current and future economic conditions, and
	a range of possible future outcomes
	• No regulatory floors or margins of conservatism applied
LGD	• Neutral PiT projections
	• Consider current and future economic conditions, and a range of possible future outcomes
	• Recoveries discounted, using EIR as discount rate
	• No regulatory floors or margins of conservatism applied
CCF/EAD	• Reflects expected changes in the balance outstanding over the lifetime of the lending exposure, incl.

ECL • PV of cash shortfalls. For Stage 1 exposures, 12-month PD is used. For stage 2 exposures, lifetime PD is used. For Stage 3 exposures, PD = 100%

scheduled loan payments and prepayments

The following paragraphs outline how the existing underlying models are leveraged off for the ECL measurement. Each risk dimension in detail is discussed in the following chapters.

'Feeding' PDs from underlying rating and scoring models into ECL model

Instead of the historically based or long run average 12-month PDs (model PDs), forward looking 12-month and lifetime PiT estimates and marginal PDs are required for the IFRS 9 expected credit loss calculation.

The transformation of the model PD (PDmodel) is performed in the following flow:

The transformation of the model PD (PDmodel) is performed in the following flow:

Next, forward looking 12-month PiT estimate is converted to lifetime PD and marginal PDs. This is done using the segment-specific standard default curve which gives the timing of the expected defaults for the remaining life of an exposure.

Lastly, lifetime PDs for each of the future points in time till the end of the expected life of the exposure are calculated.

'Feeding' LGDs from underlying models into ECL model

In LGD dimension, the use of the underlying LGD models differs for secured and unsecured lending exposures.

As IFRS 9 parameter should take into account the expected drop in the exposure amount over time, LGD for the secured part of the secured loans is directly calculated from the estimated fire-sale price of the collateral; no input from the underlying LGD models is used.

LGDs from the underlying LGD models 'feed' into the ECL calculation for the unsecured exposures and unsecured parts of the secured exposures.

Further, macroeconomic scenarios are incorporated into both secured and unsecured LGDs as applicable for the defined provisioning scenarios.

'Feeding' CCF estimates from underlying models into ECL model

Internal CCF estimates feed directly to the ECL model and are used in the EAD. No further adjustments are needed for the CCF as the internal estimates do not include margins of conservatism, or through the cycle (TtC) or downturn adjustments.

2.2.4 Forward-looking information incorporated in the ECL model

In order to incorporate forward looking information into the ECL measurements and capture a range of possible outcomes for the future conditions, probability weighted

ECL amounts based on the three provisioning scenarios (base, upside and downside) are calculated. Among others, this approach enables to reflect non-linear relationships between alternative scenarios and the ECL.

Mathematically:

$$ECL = \mathfrak{p}_{base} \ast ECL_{base} + \mathfrak{p}_{up} \ast ECL_{up} + \mathfrak{p}_{down} \ast ECL_{down}$$

Where:

pbase, pup, pdown – probabilities of the base, upside and downside scenarios respectively ECLbase, ECLup, ECLdown – expected credit loss amounts calculated for each of the defined scenarios

ECLs for each of the defined scenarios are derived based on the general formula, using scenario specific risk parameter values.

Probability-weighted lifetime PD estimates for the purpose of assessing significant increase in credit risk are calculated in the same way:

$$PD = p_{base} \ast P D_{base} + p_{up} \ast P D_{up} + p_{down} \ast P D_{down}$$

Where:

PDbase, PDup, PDdown – lifetime PD estimates corresponding to each of the defined scenarios

Selected indicators for private person credit portfolios

Selected macro indicators for private person credit portfolios and relative importance of each of the indicators are shown in table below:

	Mortgage	Consumer financing, fixed rate	Consumer financing, floating (incl. leasing)
Wage growth, %	17%	22%	18%
Unemployment rate, %	33%	44%	36%
House price index growth, %	8%	0%	0%
Inflation rate, %	8%	11%	9%
Euribor, 6m	17%	0%	18%
Bank lending margins	17%	22%	18%
Total	100%	100%	100%

Note. Relative importance of each of the indicators is calculated based on the indicator 'weights'.

Selected indicators for companies

A wide range of macroeconomic and industry sector-specific indicators was considered for companies. The analysis was conducted based on the two industry breakdowns:

• 1) broad industry sector level based on letter codes / alphabetical branch of the NACE Rev.2 classification, and
• 2) sub-sectors based on lower-level numerical codes of the NACE Rev.2 classification.

The following conclusions were drawn from the analysis:

• All sectors have been affected by the same credit cycle and have experienced major sector-wide financial difficulties at the same time. Despite of that, there are certain idiosyncratic differences between the industry sub-sectors e.g. in manufacturing
• There are only a few variables that 'work'; the variables that have explanatory power, tend to 'work' similarly for most of the industry sectors:
• GDP growth which explains the general state of economy,
• Change in turnover,
• Change in number of persons employed.
• Change in an industry sector's profit/loss was also tested but tends to be too volatile for drawing conclusions on substantial change in default risk.
• A few macro indicators are significant to certain industry sectors, sub-sectors and/or groupings of sub-sectors even if correlations are difficult to show due to low numbers of observations and/or because of relatively short observation period. E.g.:
• Export conditions for export-oriented industries such as: metal products, chemical products and electrical equipment;
• Population growth and income growth for residential real estate;
• Household consumption growth for industries that are oriented to internal consumption such as retail trade;
• In conclusion, gross value added by industry sectors was selected as the indicator for companies, this given several considerations;
• Observed correlation with the considered proxies for default rates;
• GDP, which is close indicator to the gross value added, is the preferred approach for the industry;
• It is easier to project for a macro economist than alternative indicators.
• Economic variable assumptions

Macroeconomic scenarios (forecasts) and its indicators (incl. corporate portfolio PD and LGD estimates) are developed at least once a year and which are developed internally in the Credit Management Department that consults with the macro analysts and experts from Risk Control, business and finance units.

Macro developments are monitored on a quarterly basis as new macroeconomic data becomes available. Forecasts are updated as necessary in order to ensure timely inclusion of new forward-looking information into the ECL estimates.

Developed provisioning scenarios and significant updates to the scenarios are approved in the Risk and Capital Committee.

The most significant period-end assumptions used for the ECL estimate as at 31 December 2021 are set out below. The scenarios "base", "upside" and "downside" were used for all portfolios.

Valid at 31.12.2021

		Base scenario		Downside scenario		Upside scenario
General macro-financial indicators	2022E	2023E	2022E	2023E	2022E	2023E
Real GDP growth, %	2.8%	3.9%	2.0%	3.0%	3.7%	4.1%
Household consumption, %	4.0%	3.6%	3.5%	2.5%	6.0%	3.5%
Government consumption, %	-0.9%	-1.3%	0.0%	-0.4%	-1.2%	-0.8%
Gross fixed capital formation, %	-14.5%	6.9%	-15.0%	6.0%	-10.0%	8.0%
Exports of goods and services, %	4.9%	4.8%	3.0%	5.3%	6.5%	6.0%
Imports of goods and services, %	-0.9%	4.8%	-2.0%	5.3%	4.0%	4.2%
Nominal GDP, EURm	33,020	35,480	32,681	34,941	33,068 35,595
GDP deflator, % change	5.8%	3.4%	5.5%	3.8%	5.0%	3.4%
Consumer price growth, %	6.9%	3.0%	6.5%	3.5%	6.0%	3.0%
Unemployment rate, %	5.5%	5.3%	6.0%	5.8%	5.5%	5.0%
Change in employment, %	1.1%	0.6%	0.5%	0.8%	1.5%	0.2%
Net monthly wage growth, %	8.3%	8.0%	6.7%	6.0%	8.5%	8.0%
House price index growth, %	8.5%	8.0%	3.0%	5.0%	8.8%	8.2%
Euribor 6m	-0.5%	-0.2%	-0.5%	-0.5%	-0.5%	-0.2%
Bank lending margins on new loans (NFC)	2.5%	2.5%	2.5%	2.5%	2.5%	2.5%

Nominal growth

		Base scenario		Downside scenario		Upside scenario
Gross value added by sectors, y-o-y growth rates	2022E	2023E	2022E	2023E	2022E	2023E
Total - all NACE activities	8.7%	7.5%	7.6%	6.9%	8.9%	7.6%
Agriculture, forestry, and fishing	8.0%	0.1%	6.9%	-0.4%	8.2%	0.3%
Industry (except construction)	8.9%	7.5%	7.8%	6.9%	10.4%	6.4%
Industry, except construction and manufacturing (mostly energy related)	-0.1%	1.6%	-1.1%	1.1%	0.0%	1.8%
Manufacturing	11.8%	9.1%	10.6%	8.6%	13.6%	7.6%
Construction	5.4%	9.4%	4.3%	8.9%	5.5%	9.6%
Wholesale and retail trade, transport, accommodation, and food service activities	15.1%	7.5%	13.3%	7.5%	18.3%	4.9%
Information and communication	20.9%	10.0%	12.5%	11.0%	21.0%	12.8%
Financial and insurance activities	6.1%	7.5%	5.0%	6.9%	6.3%	7.6%
Real estate activities	10.0%	6.2%	8.9%	5.6%	10.2%	6.4%
Professional, scientific, and technical activities; administrative and support service activities	7.1%	7.5%	6.0%	6.9%	5.9%	9.0%
Public administration, defence, education, human health and social work activities	1.6%	7.5%	4.3%	3.0%	0.2%	9.3%
Arts, entertainment, and recreation; other service activities; activities of household and extra-territorial organizations and bodies 9.8%		7.5%	8.7%	6.9%	10.0%	7.6%

The weightings assigned to each economic scenario on 31 December 2021 were as follows:

Valid at 31.12.2021

	Base scenario	Downside scenario Upside scenario
Weights of
economic scenarios	60%	25%	15%

The weightings assigned to each economic scenario on 31 December 2020 were as follows:

Valid at 31.12.2020

	Base scenario		Downside scenario Upside scenario
Weights of
economic scenarios		60%	30%	10%

The most significant period-end assumptions used for the ECL estimate as at 31 December 2020 are set out below. The scenarios "base", "upside" and "downside" were used

ECL estimate as at 31 December 2020 are set out below.
The scenarios "base", "upside" and "downside" were used
for all portfolios.

Valid at 31.12.2020
		Base scenario		Downside scenario	Upside scenario
General macro-financial indicators	2021E	2022E	2021E	2022E	2021E	2022E
Real GDP growth, %	2.4%	4.5%	-1.1%	6.6%	4.5%	3.5%
Household consumption, %	2.3%	4.1%	-1.1%	5.0%	4.5%	4.6%
Government consumption, %	-1.9%	0.6%	2.3%	0.8%	2.0%	1.5%
Gross fixed capital formation, %	3.2%	7.5%	-5.0%	9.0%	8.0%	4.5%
Exports of goods and services, %	3.5%	6.6%	-3.8%	9.3%	6.0%	3.5%
Imports of goods and services, %	4.2%	6.5%	-5.0%	9.0%	7.0%	4.5%
Nominal GDP, EURm	27,658	29,481	26,764	28,945	28,364	30,120
GDP deflator, % change	1.3%	2.1%	1.1%	1.7%	1.7%	2.6%
Consumer price growth, %	1.0%	1.9%	0.5%	1.5%	1.5%	2.3%
Unemployment rate, %	9.1%	8.2%	12.0%	10.0%	8.5%	7.5%
Change in employment, %	-1.1%	1.0%	-3.7%	2.2%	1.7%	1.0%
Net monthly wage growth, %	-0.6%	2.6%	-1.0%	1.6%	3.0%	4.2%
House price index growth, %	-5.0%	3.5%	-10.0%	2.1%	-3.0%	4.5%
Euribor 6m	-0.5%	-0.5%	-0.5%	-0.5%	-0.5%	-0.5%
Bank lending margins on new loans	3.1%	3.3%	3.3%	3.5%	3.0%	3.1%

Nominal growth

	Base scenario Downside scenario			Upside scenario
Gross value added by sectors, y-o-y growth rates	2021E	2022E	2021E	2022E	2021E	2022E
Total - all NACE activities	2.6%	5.8%	-0.2%	6.8%	5.2%	5.4%
Agriculture, forestry and fishing	4.1%	6.6%	0.3%	8.7%	6.8%	6.2%
Industry (except construction)	4.3%	7.3%	-0.3%	9.6%	7.6%	7.5%
Industry, except construction and manufacturing (mostly energy related)	0.8%	6.6%	-2.5%	8.1%	3.3%	6.2%
Manufacturing	5.3%	7.5%	0.3%	10.0%	8.8%	7.9%
Construction	-0.1%	8.0%	-3.3%	10.2%	2.5%	7.6%
Wholesale and retail trade, transport, accommodation, and food service activities	5.5%	8.3%	0.3%	10.7%	9.9%	7.3%
Information and communication	1.0%	3.8%	0.3%	6.8%	4.9%	3.5%
Financial and insurance activities	1.3%	1.6%	0.3%	5.7%	3.9%	1.3%
Real estate activities	2.8%	9.2%	-1.8%	9.5%	6.3%	8.8%
Professional, scientific, and technical activities; administrative and support service activities	-2.3%	2.7%	-5.5%	8.1%	0.2%	2.3%
Public administration, defence, education, human health and social work activities	0.0%	2.2%	1.6%	-2.6%	-3.0%	6.2%
Arts, entertainment, and recreation; other service activities; activities of household and extra-territorial organizations and bodies 8.0%		6.6%	-4.5%	18.4%	10.8%	6.2%

2.2.5 Loss allowance

The loss allowance recognised in the period is impacted by a variety of factors, as described below:

• Transfers between Stage 1 and Stages 2 or 3 due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent "step up" (or "step down") between 12-month and Lifetime ECL;
• Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments de-recognised in the period;
• Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular update of inputs to models;
• Impacts on the measurement of ECL due to changes made to models and assumptions;
• Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis;
• Foreign exchange retranslations for assets denominated in foreign currencies and other movements; and

• Financial assets derecognised during the period and write-offs of allowances related to assets that were written off during the period (see point 2.2.6).

Allowances based on individual assessments

Allowances based on individual assessments are formed, using discounted cash flow approach. The amount of the loan loss allowance is measured as the difference between the lending exposure's carrying amount and the estimated future cash flows discounted at the effective interest rate. Individual loss allowance assessments are formed on a conservative basis to exposures of corporate customers which are classified as non-performing (default, rating 13) customers when the loan payments have not been collected by the due date and/or there is high uncertainty that expected cash flows from the realization of collateral are not sufficient for covering the carrying amount of the loan principal and interest payments.

Minimum provisioning level for loans that become non-performing

All non-performing exposures where the expose was originated later than 26 April 2019 should have following minimum provisioning levels (percentage from exposure):

At the beginning of year	1	2	3	4	5	6	7	8	9	10
Unsecured exposure	0	0	35	100
Secured (immovable property collateral)	0	0	0	25	35	55	70	80	85	100
Secured (other collateral)	0	0	0	25	35	55	80	100
Export credit guarantee/insurance	0	0	0	0	0	0	0	100

Where the terms and conditions of an exposure which was originated prior to 26 April 2019 are modified in a way that increases the exposure to the obligor, the exposure shall be considered as having been originated on the date when the modification applies.

In case non-performing exposure is only partly secured, then the unsecured part of non-performing exposure is considered as unsecured exposure and the provision level of unsecured exposure should is used for this part of non-performing exposure.

2.2.6 Write-off policy

The Group writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write-off represents a derecognition event.

Indicators that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Group's recovery method is foreclosing on collateral and the value of the collateral is such that there is no reasonable expectation of recovery.

If it is not feasible or economically reasonable for the Group to take measures to recover the claims that are being discounted, the claim is assessed as non-performing and is removed from the statement of financial position. If an irrecoverable claim is received subsequently, receipts are recognized as income.

At least one of the conditions has to be filled to declare claim irredeemable based on the product class.

Credit cards, consumer loan and hire purchase

• There has been no significant contribution in 12 months since the customer's insolvency (default) and the court proceedings relating to arrears have terminated to the Group's detriment or the customer fails to comply with the court decision
• A bankruptcy has been announced to the customer or the customer has been declared insolvent

• The court confirms the debt restructuring plan (the claim recognized in the plan is less and the actual claim)
• Criminal proceedings have been initiated in relation to issued credit or fraud has been used to obtain credit
• The customer is dead and after the inventory of the estate bankruptcy is declared
• The customer forwarded to the bailiff has a foreign address or none at all.

Leasing, private and business loans

• The customer does not voluntarily reimburse the Group's claim risen from the difference of original claim and the realization of the collateral.

2.2.7 Modifications of financial assets

The Group sometimes modifies the terms of loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximising recovery.

Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans.

The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original asset (refer to note 2.6). The Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly improved after restructuring, so that the assets are moved from Stage 3 or Stage 2 (Lifetime ECL) to Stage 1 (12-month ECL). This is only the case for assets which have performed in accordance with the new terms for six consecutive months or more.

2.3 Credit risk exposure

The following tables contain an analysis of the credit risk exposure of financial instruments for which an ECL allowance is recognised. The gross carrying amount of financial assets below also represents the Group's maximum exposure to credit risk on these assets. Information on how the Expected Credit Loss (ECL) is measured and how the three stages above are determined is included in Risk management section point 2.2. "Expected credit loss measurement".

2.3.1 Risk concentration

Distribution of assets and liabilities by geographic region is presented below.

31.12.2021

(in thousands of euros)	Note	Estonia	Germany	Other EU	USA	UK	Other	Total
Due from banks and investment companies	10	3,611,765	0	76,010	29,900	269,593		42 3,987,310
Financial assets at fair value	11	55,949	6	79,709	30	2	159	135,855
Loans and advances to customers	12	2,652,960	781	17,292	903	849		4,375 2,677,160
Receivables from customers	13	9,752	0	0	0	0	0	9,752
Other financial assets	14	117	0	0	2,119	0	0	2,236
Total financial assets		6,330,543	787	173,011	32,952	270,444		4,576 6,812,313
Amounts owed to central banks (TLTRO)	16	197,461	0	0	0	0	0	197,461
Deposits from customers	16	3,449,803	113,798	1,484,106	62,541	631,356		66,013 5,807,617
Loans received and senior bonds	16	349,146	0	0	0	0	0	349,146
Subordinated debt	19	110,378	0	0	0	0	0	110,378
Accounts payable and other financial liabilities	17	49,262	0	0	0	0	0	49,262
Financial liabilities at fair value	11	157	0	0	0	0	0	157
Total financial liabilities		4,156,207	113,798	1,484,106	62,541	631,356		66,013 6,514,021

31.12.2020

(in thousands of euros)	Note	Estonia	Germany	Other EU	USA	UK	Other	Total
Due from banks and investment companies	10	2,175,286	0	84,264	17,566	116,222		199 2,393,537
Financial assets at fair value	11	319,828	2	10,219	5	0	1	330,055
Loans and advances to customers	12	2,180,999	823	14,577	360	7,954		4,110 2,208,823
Receivables from customers	13	9,391	0	0	0	0	0	9,391
Other financial assets	14	122	0	0	1,951	0	0	2,073
Total financial assets		4,685,626	825	109,060	19,882	124,176		4,310 4,943,879
Amounts owed to central banks (TLTRO)	16	200,000	0	0	0	0	0	200,000
Deposits from customers	16	2,778,307	216,261	705,206	1,633	375,657		42,707 4,119,771
Loans received and senior bonds	16	268,584	0	0	0	0	0	268,584
Subordinated debt	19	110,000	0	0	0	0	0	110,000
Accounts payable and other financial liabilities	17	22,995	0	0	0	0	0	22,995
Financial liabilities at fair value	11	221	0	0	0	0	0	221
Total financial liabilities		3,380,107	216,261	705,206	1,633	375,657		42,707 4,721,571

2.3.2 Distribution of loans granted by industry

Distribution of net loans granted by industry is presented in the table below.

Distribution of legal entity financing by internal ratings

(in thousands of euros)	31.12.2021	%	31.12.2020	%
Individuals	1,009,927	37.7%	856,124	38.8%
Agriculture	68,459	2.6%	2,841	0.1%
Mining and Quarrying	2,019	0.1%	67,306	3.0%
Manufacturing	151,638	5.7%	73,123	3.3%
Energy	58,504	2.2%	57,737	2.6%
Water and Utilities	23,505	0.9%	495,953	22.5%
Construction	83,011	3.1%	16,336	0.7%
Wholesale and retail	131,630	4.9%	72,099	3.3%
Transport and logistics	28,752	1.1%	2,478	0.1%
Hotels and Restaurants	28,680	1.1%	151,668	6.9%
Information and communication	10,878	0.4%	43,129	2.0%
Financial services	85,505	3.2%	45,012	2.0%
Real estate	654,325	24.4%	87,714	4.0%
Professional, scientific, and technical activities	44,669	1.7%	27,413	1.2%
Administrative activities	114,446	4.3%	14,095	0.6%
Public management	97,622	3.6%	12,656	0.6%
Education	4,328	0.2%	41,153	1.9%
Health	13,139	0.5%	120,805	5.5%
Art and entertainment	48,832	1.8%	13230	0.6%
Other servicing activities	17,291	0.6%	7,952	0.4%
Total (Note 13)	2,677,160	100.0%	2,208,823	100.0%

2.3.3 Loan portfolio by ratings

Distribution of legal entity financing by internal ratings

(in thousands of euros)	31.12.2021	31.12.2020	Grading
3 low credit risk	0	5,696	Investment Grade
4 low credit risk	49,031	54,338
5 low credit risk	64,896	96,302
6 low credit risk	277,748	122,918
7 medium credit risk	369,284	241,813
8 medium credit risk	479,112	445,858
9 heightened credit risk	184,268	167,041
10 high credit risk	32,516	61,029	Non-investment grade (incl. special monitoring)
11 high credit risk	48,780	14,534
12 non-satisfactory rating	19,111	20,379
13 insolvent	1,619	6,311	Default
Total Corporates	1,526,365	1,236,219
Retail SMEs	135,361	143,017
Total	1,661,726	1,379,236

Unused portions of corporate loans and financial guarantee limits are presented in the following table.

Credit quality of off-balance sheet liabilities

(unused loan commitments for corporate loans and financial guarantees)

(in thousands of euros)	31.12.2021	31.12.2020
3 very low risk	100,000	100,000
4 low credit risk	32,091	0
5 low credit risk	8,425	2,735
6 low credit risk	80,577	35,402
7 medium credit risk	143,825	37,332
8 medium credit risk	192,424	176,195
9 heightened credit risk	80,244	16,628
10 high credit risk	4,491	4,039
11 high credit risk	6,833	1,003
12 payments are delayed	103	747
13 insolvent	214	0
Non-rated (retail clients)	96,387	10,204
Total	745,614	384,285

2.4 Quality of credit portfolio

2.4.1 Distribution of loans by economic sectors and stages

The following tables present a breakdown of total loan port-

folio by economic sectors and stages.

31.12.2021 (in thousands of euros)	Stage 1	Stage 2	Stage 3	Provision	Total
Individuals	886,127	114,863	11,328	-2,392	1,009,926
Agriculture	63,843	4,809	21	-214	68,459
Mining and Quarrying	923	1,114	0	-18	2,019
Manufacturing	125,985	26,328	255	-930	151,638
Energy	57,403	1,729	0	-627	58,505
Water and Utilities	23,172	573	0	-240	23,505
Construction	80,323	3,990	477	-1,778	83,012
Wholesale and retail	126,082	5,186	848	-486	131,630
Transport and logistics	25,730	3,057	101	-136	28,752
Hotels and Restaurants	5,526	25,036	159	-2,041	28,680
Information and communication	10,600	294	8	-24	10,878
Financial services	85,481	327	0	-303	85,505
Real estate	569,902	85,688	1,995	-3,260	654,325
Professional, scientific, and technical activities	39,062	5,344	482	-219	44,669
Administrative activities	113,860	3,698	155	-3,268	114,445
Public management	97,307	315	0	0	97,622
Education	4,035	275	31	-14	4,327
Health	9,766	3,441	3	-71	13,139
Art and entertainment	24,155	27,576	64	-2,963	48,832
Other servicing activities	16,463	856	38	-65	17,292
Total	2,365,745	314,499	15,965	-19,049
Provision	-9,472	-7,444	-2,133
Total loan portfolio	2,356,273	307,055	13,832		2,677,160

31.12.2020 (in thousands of euros)	Stage 1	Stage 2	Stage 3	Provision	Total
Individuals	761,422	92,491	4,228	-2,018	856,123
Agriculture	65,985	6,339	74	-299	72,099
Mining and Quarrying	2,082	420	0	-25	2,477
Manufacturing	116,695	36,075	198	-1,300	151,668
Energy	43,367	284	0	-522	43,129
Water and Utilites	2,014	824	9	-6	2,841
Construction	41,909	3,366	39	-303	45,011
Wholesale and retail	73,652	14,280	711	-928	87,715
Transport and logistics	24,844	2,679	11	-122	27,412
Hotels and Restaurants	5,554	10,918	0	-2,377	14,095
Information and communication	12,174	514	17	-49	12,656
Financial services	61,919	7,775	0	-2,388	67,306
Real estate	380,660	114,224	4,042	-2,974	495,952
Professional, scientific, and technical activities	30,025	11,205	448	-525	41,153
Administrative activities	57,513	14,155	2,799	-1,343	73,124
Public management	120,805	0	0	0	120,805
Education	16,072	332	0	-67	16,337
Health	7,037	6,298	1	-105	13,231
Art and entertainment	18,637	40,480	67	-1,447	57,737
Other servicing activities	7,535	450	27	-60	7,952
Total	1,849,901	363,109	12,671	-16,858
Provision	-4,830	-10,011	-2,017
Total loan portfolio	1,845,071	353,098	10,654		2,208,823

2.4.2 Distribution of loans by loan types and stages

The following tables explain the changes in the loss allowances as well as changes in stages by loan types between the beginning and the end of the annual period due to factors described in Risk management section point 2.2.

Total net loan portfolio by loan types and stages				Purchased or Initiated Credit
(in thousands of euros)	Stage 1	Stage 2	Stage 3	Impaired	Provision	Total
Corporate Lending	1,382,162	182,476	2,377	0	-15,288	1,551,727
Private Lending	777,868	107,810	9,949	0	-1,062	894,565
Leasing	120,117	18,848	2,162	0	-1,250	139,877
Consumer Financing	71,408	5,367	1,353	0	-1,320	76,808
Investment Financing	14,189	0	123	0	-129	14,183
Total as at 31.12.2021	2,365,744	314,501	15,964	0	-19,049	2,677,160
Corporate Lending	1,005,632	245,475	8,067	0	-13,447	1,245,727
Private Lending	665,989	80,705	3,674	1,124	-822	750,670
Leasing	101,187	27,269	395	0	-1,385	127,466
Consumer Financing	64,051	9,661	535	0	-1,179	73,068
Investment Financing	11,917	0	0	0	-25	11,892
Total as at 31.12.2020	1,848,776	363,110	12,671	1,124	-16,858	2,208,823

Stage 1

(in thousands of euros)	Initial	New	Unwind	Migration	Provision	Total
Corporate Lending	1,005,632	565,264	-216,800	28,066	-8,594	1,373,568
Private Lending	667,113	184,799	-66,357	-7,687	-221	777,647
Leasing	101,187	57,750	-37,613	-1,204	-281	119,839
Consumer Financing	64,051	39,037	-31,922	242	-364	71,044
Investment Financing	11,917	5,026	-2,754	0	-11	14,178
Total	1,849,900	851,876	-355,446	19,417	-9,471	2,356,276

Stage 2

(in thousands of euros)	Initial	New	Unwind	Migration	Provision	Total
Corporate Lending	245,475	10,721	-44,402	-29,318	-6,387	176,089
Private Lending	80,705	37,239	-10,719	585	-506	107,304
Leasing	27,269	4,512	-12,045	-888	-286	18,562
Consumer Financing	9,661	1,539	-4,549	-1,284	-266	5,101
Investment Financing	0	0	0	0	0	0
Total	363,110	54,011	-71,715	-30,905	-7,445	307,056

Stage 3
(in thousands of euros)	Initial	New	Unwind	Migration	Provision	Total
Corporate Lending	8,067	88	-7,030	1,252	-307	2,070
Private Lending	3,674	97	-924	7,102	-335	9,614
Leasing	395	14	-342	2,092	-683	1,476
Consumer Financing	535	111	-335	1,042	-690	663
Investment Financing	0	123	0	0	-118	5
Total	12,671	433	-8,631	11,488	-2,133	13,828

2.4.3 Transfers between stages

The following table explains the changes in the loan stages between the beginning and the end of the annual period due to factors described in Risk management section point 2.2.

Inter-stage transfers

(in thousands of euros)	1 > 2	1 > 3	2 > 1	2 > 3	3 > 1	3 > 2
Corporate Lending	34,149	144	62,359	1,108	0	0
Leasing	27,293	503	19,997	7,474	112	763
Private Lending	4,353	1	3,150	2,091	0	0
Consumer Financing	1,421	243	1,900	822	6	17
Investment Financing	0	0	0	0	0	0
Total	67,216	891	87,406	11,495	118	780

2.4.4 Loans against collateral

In the table below, collateral information of loans and advances are disclosed based on the collateral type and carrying value or fair value of collateral held if it is lower. The under-collateralised amount is presented as "Unsecured loans".

Loans against collateral as at 31.12.2021 (in thousands of euros) Listed securities 0 0 14,312 0 0 14,312 Unlisted equity securities 22,593 0 0 0 2,003 24,596 Mortgages, real estate 839,363 0 0 0 872,835 1,712,198 Guarantee of KredEx and Rural Development Foundation 42,578 0 0 0 9,812 52,390 Pledges of rights of claim 91,421 0 0 0 0 91,421 Deposits 3,176 0 0 0 2,000 5,176 Leased assets 0 0 0 77,857 0 77,857 Others 76,983 0 0 0 1178 78,161 Unsecured loans 490,900 78,128 0 63,271 7,799 640,098 Total 1,567,014 78,128 14,312 141,128 895,627 2,696,209 Corporate Lending Consumer Financing Investment financing Leasing Private Lending Total

Loans against collateral as at 31.12.2020
(in thousands of euros)	Corporate Lending	Consumer Financing	Investment financing	Leasing	Private Lending	Total
Listed Securities	0	0	11,917	0	0	11,917
Unlisted equity securities	14,888	0	0	0	1,024	15,912
Mortgages, real estate	670,484	0	0	0		735,067 1,405,551
Guarantee of KredEx and Rural Development Foundation	38,232	0	0	0	9,537	47,769
Pledges of rights of claim	63,810	0	0	0	0	63,810
Deposits	3,469	0	0	0	2,000	5,469
Leased assets	0	0	0	88,309	0	88,309
Others	78,018	0	0	0	0	78,018
Unsecured loans	390,272	74,247	0	40,543	3,864	508,926
Total	1,259,173	74,247	11,917	128,852		751,492 2,225,681

	Over-collateralised loans		Under-collateralised loans		Total
(in thousands of euros)	Carrying value	Fair value of collateral	Carrying value	Fair value of collateral	Carrying value	Fair value of collateral
As at 31.12.2021		1,273,470 2,445,616	1,422,740	782,907	2,696,210 3,228,523
Corporate Lending	472,856	880,020	1,094,160	603,640	1,567,016	1,483,660
Consumer Financing	0	0	78,128	0	78,128	0
Investment Financing	14,189	150,842	123	0	14,312	150,842
Leasing	17,607	31,903	123,521	60,251	141,128	92,154
Private Lending	768,818	1,382,851	126,808	119,016	895,626	1,501,867
As at 31.12.2020	964,450	351,235	1,261,231	448,867	2,225,681	800,102
Corporate Lending	371,650	794,170	887,523	328,285	1,259,173	1,122,455
Consumer Financing	0	0	74,247	0	74,247	0
Investment Financing	11,917	233,811	0	0	11,917	233,811
Leasing	16,625	26,134	112,226	59,575	128,851	85,709
Private Lending	564,257	1,254,497	187,235	61,007	751,492	1,315,504

As at 31.12.2021	Over-collateralised loans		Under-collateralised loans		Total
(in thousands of euros)	Carrying value	Fair value of collateral	Carrying value	Fair value of collateral	Carrying value	Fair value of collateral
Stage 1	1,106,892	2,175,002	1,258,854	675,832		2,365,746 2,850,834
Corporate Lending	410,800	782,179	971,362	521,248	1,382,162	1,303,427
Consumer Financing	0	0	71,408	0	71,408	0
Investment Financing	14,189	150,842	0	0	14189	150842
Leasing	14,069	25,801	106,049	51,226	120,118	77,027
Private Lending	667,834	1,216,180	110,035	103,358	777,869	1,319,538
Stage 2	154,808	246,017	159,693	105,495	314,501	351,512
Corporate Lending	60,502	94,752	121,974	81,813	182,476	176,565
Consumer Financing	0	0	5,367	0	5,367	0
Investment Financing	0	0	0	0	0	0
Leasing	3,229	5,522	15,619	8,029	18,848	13,551
Private Lending	91,077	145,743	16,733	15,653	107,810	161,396
Stage 3	11,771	24,597	4,193	1,580	15,964	26,177
Corporate Lending	1,554	3,089	823	579	2,377	3,668
Consumer Financing	0	0	1,353	0	1,353	0
Investment Financing	0	0	123	0	123	0
Leasing	309	579	1,853	996	2,162	1,575
Private Lending	9,908	20,929	41	5	9,949	20,934

2.4.5 ECL sensitivity analysis

The following tables show the impact on the 31 December 2021 and 31 December 2020 ECL allowance of changing the PD thresholds for SICR. Increases in ECL (positive amounts) represent higher impairment allowances that would be recognised.

Loan portfolio

2021
(in thousands of euros)	Effect on impairment
+10% Change in SICR	-158
-10% Change in SICR	482
SICR with 0.5% threshold	1
SICR with 1.5% threshold	-1

Loan portfolio 2020

Effect on impairment
155
127
0
-1

As evidenced by above tables, changing SICR by +/- 10% or changing the 100bps threshold to 50bps or 150bps have limited impact to the overall ECL of the Group.

The most significant assumptions affecting the ECL allowance are as follows:

Retail portfolio

• Unemployment rate
• Wage growth
• Euribor
• Bank lending margins
• GDP

Corporate portfolio

• Estimated portfolio PiT PD values for each scenario
• Estimated LGD impact on downside scenario

The purpose of the sensitivity tests is to show the effect of changing the weights of positive and negative scenarios. Thus, in the sensitivity tests, the weight of the baseline scenario is retained and two tests have been carried out, where the weights of the positive and negative scenarios have been changed by +/- 5% respectively. The table below illustrates the impact of changing scenario weights of positive and negative scenarios to the portfolio as it was at 31 December 2021 and 31 December 2020.

31.12.2021	60-10-30	60-20-20
(in thousands of euros)	(base/up/down)	(base/up/down)
Change in scenario weights	671	-724
31.12.2020	65-5-30	65-15-20
(in thousands of euros)	(base/up/down)	(base/up/down)
Change in scenario weights	1,048	-1,127

Set out below are the changes to the ECL as at 31 December 2020 and 31 December 2021 that would result from reasonably possible changes in these parameters from the actual assumptions used in the Group's economic variable assumptions (for example, the impact on ECL of increasing the estimated unemployment rate by X% in each of the base, upside, downside scenarios):

31.12.2021 (in thousands of euros)	Impact of increase	Impact of decrease
Unemployment rate +/-1%	115	-84
Wage growth +/- 5%	-112	111
Euribor +/-0.5%	26	-15
Bank lending margins +/-0.5%	165	-136
Consumer price growth +/-1%	-12	32
House price index +/- 2%	-5	3
Gross value added by sectors, yoy growth rates +/- 5%	-109	139

31.12.2020 (in thousands of euros)	Impact of increase	Impact of decrease
Unemployment rate +/-1%	51	-66
Wage growth +/- 5%	-99	38
Euribor +/-0.5%	9	-15
Bank lending margins +/-0.5%	39	-129
Consumer price growth +/-1%	-41	24
House price index +/- 2%	-3	2
Gross value added by sectors, yoy growth rates +/- 5%	-52	48

The Group has performed stress test scenarios when PD and LGD estimations will both increase by 0.5. The impact of the described stress test to impairments is aggregated in the table below. The table includes loans, which have collective impairment and which have material balances and potential impact.

2021

(in thousands of euros)	Impact on loss allowances
LGD negative 0.85	603
LGD negative 0.95	-686
Average PiT PD -0.5%	-3,042
Average PiT PD +0.5%	3,321

2020

(in thousands of euros)	Impact on loss allowances
LGD negative 0.9	812
LGD negative 1.0	-756
Average PiT PD -0.5%	-2,267
Average PiT PD +0.5%	2,719

3. Market risk

Market risk is the risk of losses caused by adverse movements in market prices, including market prices of foreign currencies, interest rates, and securities. Market risk arises from both on and off-balance sheet positions and can arise from positions from both the banking and trading book. The purpose of market risk management in the Group is to correctly identify and quantify market risk and ensure risk conscious decisions are taken on market risk.

Among others, market risk must be managed as originating from the following sources:

• Currency risk from the Group's positions in foreign currencies;
• Price risk from all the Group's positions in securities and derivatives, including those taken for the purposes of investment, risk management and brokerage;
• Interest rate risk from the Group's interest revenues, interest expenses, and sensitivity of the Group's positions to the change in interest rates.

The Group's market risk management is documented in the Market Risk Management Policy and other internal rules, which set out the Group's risk appetite for foreign currency risk, price risk and interest rate risk in the banking book. Based on the Market Risk Management Policy, the Group's appetite for market risk is low.

The Treasury unit of LHV Pank, the Assets and Liabilities Management Committee (ALCO) formed in the Bank and the Management Boards of the Group's other subsidiaries have key roles in managing market risk as the first line of defence. The Risk Control Unit and the Internal Audit Unit are responsible for the second line of defence and third line of defence functions, respectively.

3.1 Foreign currency risk

Foreign currency risk arises from the mismatch of the Group's foreign currency assets and liabilities. The majority of the Group's balance sheet is euro denominated but a mismatch could result from the foreign currency transactions of the Bank's customers. Additionally, there is some foreign currency risk inherent in the fund units of own managed pension funds that must be held by LHV Varahaldus as prescribed by legislation.

Foreign currency risk is measured by estimating the potential loss to the Group from its net open foreign currency position in a stress scenario. The loss from foreign currency risk should not exceed a prescribed level of the Group's net own funds.

In addition to the risk appetite levels approved on the Group level, the Bank's ALCO has implemented additional risk limits for various types of market risks in the Bank. Foreign currency risk limits in the Bank are fixed as maximum nominal open net position limits in euro equivalent for each currency. If the open currency position exceeds the limits set by the ALCO, measures must be implemented to close or reduce such positions.

A sensitivity analysis has been performed to show the effect of movements in foreign currency exchange rates on the statement of profit or loss, with the assumption of other conditions remaining constant. The sensitivity has been measured against a potential exchange rate movement of +/- 7% which is in line with the stress scenario used by the Group for measuring foreign currency risk of its net open positions. The Group's foreign currency risk exposure is very low.

Impact on statement of profit or loss

(in thousands of euros)	2021	2020
USD exchange rate +/- 7%	+/- 204	+/- 8
SEK exchange rate +/- 7%	+/-6	+/5
GBP exchange rate +/- 7%	+/-17	+/-10
CHF exchange rate +/- 7%	+/-0	+/-0

Open currency exposures

The following tables present the risks arising from open currency exposures. Assets and liabilities denominated in foreign currencies have been presented in euro equivalent in respective columns, according to the exchange rate prevailing at the end of the reporting period. Derivatives reported at fair value in the statement of financial position have been included at contractual amounts under off-balance sheet assets and liabilities. Open currency exposure and the volume of financial assets and liabilities of the Group at the end of the reporting period do not significantly differ from the average exposure during the year. Foreign exchange forwards are shown in the table at their full contractual cash flow amounts as off-balance sheet assets and liabilities. The table does not include the assets (tangible and intangible assets) and liabilities (provisions) not bearing currency risk, or equity.

It can be seen based on the table that as mentioned above, the majority of the Group's business in conducted in euro currency.

31.12.2021

	(in thousands of euros)
--	-------------------------	--	--	--

	Note	EUR	CHF	GBP	SEK	USD	Other	Total
Assets bearing currency risk
Due from banks and
investment companies	10	3,687,255	1,367	277,043	1,075	18,433	2,137	3,987,310
Investments in debt and equity securities	11	135,812	0	1	0	37	4	135,855
Loans and advances to customers	12	2,669,321	18	463	396	6,616	346	2,677,160
Receivables from customers	13	7,818	0	491	226	167	1,050	9,752
Other financial assets	14	117	0	0	0	2,119	0	2,236
Total assets bearing currency risk		6,500,323	1,385	277,998	1,697	27,372	3,538	6,812,313
Liabilities bearing currency risk
Amounts owed to central banks (TLTRO)	16	197,461	0	0	0	0	0	197,461
Deposits from customers	16	5,409,103	5,037	271,784	7,837	101,149	12,708	5,807,617
Loans received and debt securities in issue 16		349,146	0	0	0	0	0	349,146
Financial liabilities at fair value	11	0	0	0	16	123	18	157
Accounts payable and other financial liabilities 17		36,376	218	6,456	217	5,676	319	49,262
Subordinated debt	19	110,378	0	0	0	0	0	110,378
Total liabilities bearing currency risk		6,102,464	5,254	278,240		8,070 106,948	13,045	6,514,021
Open gross position derivative assets
at contractual value		0	3,872	0	6,454	82,496	9,026	101,848
Open gross position derivative liabilities
at contractual value		101,848	0	0	0	0	0	101,848
Open foreign currency position		296,011	3	-242	81	2,920	-481	298,292
31.12.2020
(in thousands of euros)	Note	EUR	CHF	GBP	SEK	USD	Other	Total
Assets bearing currency risk
Due from banks and investment companies 10		2,251,556	1,164	119,368	1,944	12,295		7,212 2,393,537
Investments in debt and equity securities	11	329,959	7	0	8	52	28	330,055
Loans and advances to customers	12	2,195,132	24	7,016	484	5,997		169 2,208,823
Receivables from customers	13	7,779	0	350	10	464	788	9,391
Other financial assets	14	117	0	0	0	1,956	0	2,073
Total assets bearing currency risk		4,784,544	1,194	126,734	2,445	20,764		8,197 4,943,879
Liabilities bearing currency risk
Amounts owed to central banks (TLTRO)	16	200,000	0	0	0	0	0	200,000
Deposits from customers	16	3,886,049	3,951	125,267	7,292	85,616	11,597	4,119,771
Loans received	16	268,584	0	0	0	0	0	268,584
Financial liabilities at fair value	11	221	0	0	0	0	0	221
Accounts payable and other financial liabilities 17		14,723	21	1,610	661	4,343	1,637	22,995
Subordinated debt	19	110,000	0	0	0	0	0	110,000
Total liabilities bearing currency risk		4,479,577	3,971	126,877	7,953	89,959	13,234	4 721 571
Open gross position derivative assets
at contractual value		0	2,778	0	5,581	69,080	4,350	81,789
Open gross position derivative liabilities
at contractual value		81,789	0	0	0	0	0	81,789
Open foreign currency position		223,178	1	-143	74	-114	-687	222,308

3.2 Price risk

Price risk arises from securities held by the Group in the liquidity portfolio, trading portfolio and investment portfolios (Note 11, 12). The portfolios mainly comprise securities held by LHV Pank. Additionally, the pension fund units held by LHV Varahaldus are subject to price risk. The investment portfolio of LHV Kindlustus is immaterial.

Price risk is measured by estimating the potential loss that can be incurred by the Group in a stress scenario. The loss from price risk in the stress scenario should not exceed a prescribed percentage of the Group's net own funds. In LHV Pank the ALCO has set additional limits on the size of the trading and investment portfolios. There are criteria in place for acceptable credit ratings as well as other parameters of the debt securities that can be held by the Bank. In LHV Kindlustus, there are also criteria in place for the securities that can be included in the investment portfolio. Pursuant to the Investment Funds Act, LHV Varahaldus as a pension fund management company is obliged to hold a minimum of 0.5% of the number of units in each of the mandatory pension funds managed by it.

A sensitivity analysis has been performed to show the effect of movements in securities prices on the net result of the Group. The potential securities price movements used in the sensitivity analysis are in line with the stress scenarios used by the Group for measuring price risk and have been derived from actual historical volatility of the instruments included in the relevant portfolios.

Impact on statement of profit or loss (profit after tax)

(in thousands of euros)	2021	2020
Equity securities and fund units +/-25%	+/-182	+/-120
Mandatory pension fund units +/-5%	+/-381	+/-339
Debt securities (FVTPL) +/-2.0% (+/-2.0%) +/-2,550 +/-6,454

It can be seen that the majority of the Group's price risk results from the debt securities held in the Bank's liquidity portfolio. The Bank does not hold significant amounts of equity securities (see Note 12), accordingly the sensitivity to change in the market price of these positions is marginal. Some price risk is also contributed from holdings of mandatory pension fund units by LHV Varahaldus.

3.3 Interest rate risk

Interest rate risk arises from the mismatch of the term structure of interest rate sensitive assets and liabilities (gap risk), mismatch of base rates (basis risk), the optionality inherent in the interest rate sensitive instruments (option risk) and the change in credit spreads (credit spread risk). Interest rate risk can arise both from balance sheet and off-balance sheet items. In the context of the Group, interest rate risk is relevant for the banking portfolio of LHV Pank.

Interest rate risk in the banking book is measured by estimating the change of net interest income (NII) and the economic value of equity (EVE) in a number of stress scenarios compared to the base scenario. The Group's risk appetite prescribes that the negative impact on NII or EVE in stress scenarios should not exceed a certain level of the Bank's net own funds.

The Bank's ALCO has approved the stress scenarios and other inputs and methodologies for calculating the change in NII and change in EVE. Market inferred interest rate curve is used as the base scenario. Six stress scenarios are used:

• parallel shock up;
• parallel shock down;
• steepener shock (short rates down and long rates up);
• flattener shock (short rates up and long rates down);
• short rates shock up; and
• short rates shock down.

Interest rate floors are applied for deeply negative rates where applicable based on regulatory guidance.

The analysis of the change in the economic value of equity (change in EVE) aims to assess the change in the economic value of the assets, liabilities, and equity in different interest rate scenarios. The measure of interest rate risk is the change in EVE in interest rate shock scenario compared to the base scenario. In order to calculate the change in EVE, the net present value of the cash flows arising from the assets, liabilities and off-balance sheet items of the banking book are found under each scenario. The cash flows are calculated based on the assumptions detailed below, using a run-off balance sheet. All cash flows from the assets, liabilities and off-balance sheet items are discounted using the same interest rate curve (swap curve depending on the scenario).

The analysis of the change in net interest income (change in NII) assesses the impact of interest rate changes on net interest income in the next 12-month period. In order to calculate the change in NII, all interest-bearing assets, liabilities and off-balance-sheet items are split into different time buckets according to their repricing date. Following repricing dates, interest sensitive assets and liabilities are assumed to reprice at new interest rates specific to the scenario and change in NII in different scenarios can be determined. The NII analysis is performed on a constant balance sheet.

The main assumptions for the calculation of the change in EVE and change in NII are as follows:

• The repricing term of demand deposits of households and non-financial corporations vary between 1 day and 5 years, depending on their interest rate sensitivity.
• For deposits of financial institution, immediate repricing is assumed.
• A 0% interest rate floor is applied to deposits of households.
• For loans as well as term deposits, contractual maturities are used.
• For loans, contract-specific interest rate floors are used.
• In the case of off-balance sheet items (e.g. loan commitments and credit limits), the credit conversion factor is included in the model and it is assumed that the use of the limit will increase linearly until the expiry date.
• Non-performing exposures are taken into account after the deductions of provisions. The maturity of such items are 2 years from the date of default.

The following table presents the of the changes in EVE and next 12 months NII that have been estimated in the six stress scenarios compared to base scenario.

31.12.2021

(in thousands of euros)	Change in the economic value of equity	Change in the next 12 months net interest income
Parallel shock up	85,367	33,935
Parallel shock down	23,806	-1,522
Steepener shock	-14,461	-1,519
Flattener shock	57,061	17,489
Short rates shock up	66,572	28,568
Short rates shock down	4,338	-1,523

31.12.2020

(in thousands of euros)	Change in the economic value of equity	Change in the next 12 months net interest income
Parallel shock up	102,454	35,587
Parallel shock down	-7,228	-4,094
Steepener shock	9,443	-4,103
Flattener shock	19,664	19,951
Short rates shock up	47,077	31,430
Short rates shock down	-8,039	-4,095

The table below shows the structure of the interest-bearing assets and interest-bearing liabilities of LHV Group grouped by the recalculation dates of interest rates at the principal amounts of receivables and liabilities.

31.12.2021 (in thousands of euros)	Note	Up to 3 months	3-12 months	1-5 years	Over 5 years	Subtotal	Accrued interest	Impair- ments	Total
Financial assets
Due from banks and
investment companies	10	3,987,310	0	0	0	3,987,310	0	0	3,987,310
Financial assets at fair
value (debt securities)	11	46,000	3,350	77,218	152	126,720	784	0	127,504
Loans and advances
to customers	13		1,214,410 1,375,207	85,595	15,869	2,691,081		5,128 -19,049	2,677,160
Total			5,247,720 1,378,557	162,813	16,021	6,805,111		5,912 -19,049	6,791,974
Financial liabilities
Amounts owed to
central banks (TLTRO)	16	0	0	200,000	0	200,000	-2,539	0	197,461
Deposits from customers	16	2,249,662	101,744	3,457,466	0	5,808,872	-1,255	0	5,807,617
Loans received and debt
securities in issue	16	0	0	350,000	0	350,000	-854	0	349,146
Subordinated debt	19	0	0	0	110,000	110,000	378	0	110,378
Total		2,249,662	101,744	4,007,466	110,000	6,468,872	-4,270	0	6,464,602
Net interest sensitivity gap				2,998,058 1,276,813 -3,844,653	-93,979	336,239
31.12.2020 (in thousands of euros)
Financial assets
Due from banks and
investment companies	10	2,393,537	0	0	0	2,393,537	0	0	2,393,537
Financial assets at fair
value (debt securities)	11	200,045	117,300	4,280	0	321,625	1,074	0	322,699
Loans and advances
to customers	12	993,697	1,113,053	103,141	10,616	2,220,507		5,174 -16,858	2,208,823
Total			3,587,279 1,230,353	107,421	10,616	4,935,669		6,248 -16,858	4,925,059
Financial liabilities
Deposits from customers	16	952,575	378,926	2,785,625	28	4,117,154	2,617	0	4,119,771
Loans received	16	0	19,757	450,000	0	469,757	-1,173	0	468,584
Subordinated debt	19	0	0	0	110,000	110 000	603	0	110,603
Total		952,575		398,683 3,235,625	110,028	4,696,911	2,047	0	4,698,958
Net interest sensitivity gap		2,634,704		831,670 -3,128,204	-99,412	238,758

3.4 Credit valuation adjustment risk

Credit valuation adjustment (CVA) risk can be defined as the risk of losses arising from changing CVA values in response to movements in counterparty credit spreads and market risk factors that drive prices of derivative transactions. The Bank applies the standardised approach to calculate the capital charge for CVA risk. The Bank's capital requirement for CVA risk as of 31.12.2021 amounted to EUR 97 thousand (2020: EUR 7 thousand).

4. Liquidity risk

Liquidity risk is the risk that the Group is unable to fund increases in the Group's assets or pay its liabilities in a timely manner and full amount, without incurring material losses or disrupting its normal business operations. Liquidity risk arises from both on and off-balance sheet positions. The purpose of the Group's liquidity risk management is to correctly identify, measure, control and monitor liquidity risk, to ensure timely decisions can be taken so that sufficient liquidity with adequate margin can be maintained at all times.

The Group assesses liquidity risk from the following separate perspectives:

• Funding risk is the risk that the Group is unable to attract funding in a timely way, in necessary amount and at acceptable cost without a negative impact to its daily activities or financial position. Funding risk also encompasses the risk related to liquidity outflows from withdrawal of deposits or redemption of wholesale funding. Intraday liquidity risk is also evaluated in this perspective.
• Market liquidity risk is the risk that it is not possible to execute a transaction such as selling of a security or pledging of an asset in a timely manner without incurring unacceptable losses, due to low trading activity, market disruption or limitations set by other market participants.
• Asset encumbrance risk is the risk that due to an excessive share of assets being encumbered as collateral the Group harms its ability to attract further unsecured or secured funding, due to unsecured creditors becoming effectively subordinated or due to the shortage of assets available to be pledged as collateral.

LHV Pank is most relevant in the context of liquidity risk management out of all Group companies, as the largest share of the Group's funding is raised by the Bank (mostly through deposits) that are used for funding long term assets (mostly loans).

The Group's liquidity risk management is documented in the Liquidity Risk Management Policy, Group Funding Policy and other internal rules, which set out the Group's funding strategy and liquidity risk appetite, early warning indicators and various internal procedures such as reporting routines and contingency plans. The Treasury unit of LHV Pank and the Assets and Liabilities Management Committee (ALCO) formed in the Bank have key roles in managing liquidity risk as the first line of defence. Risk Control Unit and the Internal Audit Unit are responsible for the second line of defence and third line of defence functions, respectively.

The key quantitative metrics which are used for limiting the Group's liquidity risk appetite include:

• minimum survival period in a stress scenario,
• Liquidity Coverage Ratio (LCR),
• Net Stable Funding Ratio (NSFR),
• metric for assessing the concentration of large depositors,
• encumbrance ratio.

Limits have been set for each of the above risk appetite metrics with buffers over regulatory requirements (if applicable). These metrics are calculated and reported on a monthly basis.

The regulatory LCR and the minimum survival period in stress scenario both assess the risk of liquidity outflows in a relatively short-term time horizon. In order to survive such possible stress scenario and expected deposit outflows, the Group keeps a counterbalancing buffer of liquid highquality assets that can be used in either a market wide or idiosyncratic stress scenario. The liquidity buffer of the Group consists of cash and deposits with the central bank and liquid securities, which can be readily sold or used as collateral in funding operations. For calculating the survival horizon, behavioural assumptions are used for modelling liquidity outflows and inflows.

The regulatory NSFR and depositor concentration metric are used for assessing longer term structural funding risk. The Group should have an appropriate funding structure where long term assets are matched with sufficient stable and well diversified funding sources. Encumbrance ratio is observed to ensure that the Group is not exposed to excessive asset encumbrance that could limit its access to funding markets.

The following table presents the values of the LCR and NSFR ratios in comparison to regulatory thresholds. It can be seen that both ratios exceeded regulatory requirement with a healthy buffer characterising the Group's conservative approach to managing liquidity risk.

	Regulatory requirement	31.12.2021	31.12.2020
LCR	Minimum 100%	142.7%	147.9%
NSFR	Minimum 100%	163.4%	152.6%

As set out in the Group's Funding Policy, diversification of the funding profile is an important element of the Group's liquidity risk management framework. The Group's most stable funding source is retail deposits from its Estonian customers. Other deposits and wholesale unsecured and secured funding are used as additional sources of funding. The Group has issued covered bonds to raise targeted funding for its residential mortgage loans portfolio. It has also issued unsecured bonds which are used both for funding as well as for complying with the regulatory MREL requirement. The Group has also used the TLTRO facility offered by the European Central Bank in order to take advantage of the current attractive cost of this source of funding.

In order to manage longer term funding risk, Treasury drafts funding plans as part of the Group's financial planning cycle. The funding plan presents a longer-term view of the funding required to support the Group's business along with key liquidity metrics for the Group.

The following tables present the distribution of financial assets and liabilities, excl. derivatives, by due dates and by future contractual undiscounted cash flows. In a separate column the statement of financial position balance is disclosed. In the maturity analysis, the cash flows are split into the maturity buckets in which the cash flows occur (including interest cash flows).

On Up to 3 3-12 1-5 Over Carrying (in thousands of euros) Note demand months Months Years 5 years Total amount Liabilities by contractual maturity dates Amounts owed to central banks (TLTRO) 0 0 0 197,000 0 197,000 197,461 Deposits from customers 16 5,648,302 55,271 101,784 2,288 0 5,807,645 5,807,617 Loans received and debt securities in issue 0 0 1,140 352,538 0 353,678 349,146 Subordinated debt 19 0 1,903 5,727 124,341 0 131,971 110,378 Accounts payable and other financial liabilities 17 0 49,262 0 0 0 49,262 49,262 Unused loan commitments 22 0 679,579 0 0 0 679,579 0 Financial guarantees by contractual amounts 22 0 49,409 0 0 0 49,409 0 Foreign exchange derivatives (gross settled) 0 101,848 0 0 0 101,848 0 Financial liabilities at fair value 11 0 157 0 0 0 157 157 Total liabilities 5,648,302 937,429 108,651 676,167 0 7,370,549 6,514,021 Assets held for managing liquidity risk by contractual maturity dates Due from banks and investment companies 10 3,987,310 0 0 0 0 3,987,310 3,987,310 Financial assets at fair value (debt securities) 11 0 46,047 3,387 77,915 155 127,504 127,876 Loans and advances to customers 12 0 173,534 431,582 1,661,341 924,419 3,190,876 2,677,160 Receivables from customers 13 0 9,752 0 0 0 9,752 9,752 Other financial assets 14 2,236 0 0 0 0 2,236 2,236 Foreign exchange derivatives (gross settled) 0 101,848 0 0 0 101,848 0 Total assets held for managing liquidity risk 3,989,546 331,181 434,969 1,739,256 924,574 7,419,526 6,804,334 Maturity gap from assets and liabilities -1,658,756 -606,248 326,318 1,063,089 924,574 48,977 31.12.2020 On Up to 3 3-12 1-5 Over Carrying (in thousands of euros) Note demand months Months Years 5 years Total amount Liabilities by contractual maturity dates Deposits from customers and loans received 16 3,635,403 99,647 386,654 465,776 1,473 4,588,953 4,588,355 Subordinated debt 19 0 1,881 5,644 29,744 127,175 164,444 110,000 Accounts payable and other financial liabilities 17 0 22,995 0 0 0 22,995 22,995 Unused loan commitments 22 0 413,818 0 0 0 413,818 0 Financial guarantees by contractual amounts 22 0 36,492 0 0 0 36,492 0 Foreign exchange derivatives (gross settled) 0 81,180 0 609 0 81,789 0 Financial liabilities at fair value 11 0 89 0 0 0 89 89	31.12.2021
Total liabilities 3,635,403 656,102 392,298 496,129 128,648 5,308,580 4,722,037

Assets held for managing liquidity risk by contractual maturity dates

Due from banks and
investment companies		10 2,396,404	0	0	0		0 2,396,404 2,396,404
Financial assets at fair value
(debt securities)	11	0	200,448	117,716	4,534	0	322,698	322,699
Loans and advances to customers	12	0	146,192	329,310	1,375,417		741,393 2,592,312 2,208,823
Receivables from customers	13	0	9,391	0	0	0	9,391	9,391
Other financial assets	14	2,073	0	0	0	0	2,073	2,073
Foreign exchange derivatives
(gross settled)		0	81,789	0	0	0	81,789	0
Total assets held for managing liquidity risk 2,398,477			437,820		447,026 1,379,951		741,393 5,404,667 4,939,390
Maturity gap from assets and liabilities		-1,236,926	-218,282	54,728	883,822	612,745	96,087

The following table presents the distribution of assets and liabilities by classification of current and non-current.

(in thousands of euros)	Note	31.12.2021	31.12.2022
Current assets
Due from central bank	10	3,874,284	2,213,211
Due from credit institutions	10	106,838	170,341
Due from investment companies	10	6,188	9,985
Financial assets at fair value through profit or loss	11	128,235	323,267
Loans and advances to customers	12	455,929	395,341
Receivables from customers	13	9,752	9,391
Other assets	14	3,471	2,182
Total current assets		4,584,697	3,123,718
Non-current assets
Financial assets at fair value through profit or loss	11	7,620	6,788
Loans and advances to customers	13	2,221,231	1,813,482
Other financial assets	14	2,236	2,073
Tangible assets	15	8,474	6,585
Intangible assets	15	11,825	15,147
Financial investment		5,236	0
Goodwill	6	3,614	3,614
Total non-current assets		2,260,236	1,847,689
Total assets	5	6,844,933	4,971,407
Liabilities
Current liabilities
Deposits from customers	16	5,805,336	4,101,347
Loans received	16	0	19,759
Financial liabilities at fair value through profit or loss	11	157	221
Accounts payable and other liabilities	17	55,751	27,555
Total current liabilities		5,861,244	4,148,882
Non-current liabilities
Amounts owed to central banks (TLTRO)	16	197,461	200,000
Deposits from customers	16	2,281	18,424
Loans received and debt securities in issue	16	349,146	248,825
Subordinated debt	19	110,000	110,000
Total non-current liabilities		658,888	577,249
Total liabilities	5	6,520,132	4,726,131

5. Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk and ICT risk but excludes strategic and reputational risk. Operational risk is inherent in all products, activities, processes and systems.

Each manager in LHV is responsible to manage operational risk within its responsibility area. Risk Division is acting as the second line of defence and providing both proper trainings and guidance to implement the Operational Risk Framework, as well as an oversight to ensure the risk profile is within the desired level as described in Risk Appetite statements.

Operational Risk Framework is described in Operational Risk Policy, Operational Resilience Policy, ICT and Information Security Policy and in other relevant operational risk management documents. Main processes and tools to manage, i.e. to identify, assess, mitigate and monitor operational risks are as follows.

Risk and control self-assessment

There is a unified process and method across LHV to assess operational risks within all products and processes. The regularity of the self-assessment depends on the criticality level of the product and the process and shall ensure all managers are aware of the risks they are responsible of and are applying relevant mitigating and monitoring tools to keep the risk profile within the desired risk level.

New Product Approval process (NPAP) in case of new or significant changes in products, IT systems, processes, organization, partners (incl. outsourcing) or in case of exceptional transactions

NPAP is designed to ensure all significant changes in products, IT systems, processes, organization, partners (incl. outsourcing) or significant exceptional transactions are managed with due care and no change is approved before all risk considerations are taken into account. For this objective pre-described risk management rules shall be implemented accompanied with independent opinions both from Risk and Compliance Divisions.

Operational risk event and business continuity management

The objective of the operational risk event management is to ensure all events are managed in proper manner, as well as to learn from the events and use the lessons to prevent similar cases happen in the future.

Event management activities depend on the event type and severity level. For the critical processes Business Continuity Plans are in place and shall be activated in the case there is a disruption in the critical process. Critical IT systems have Recovery Plans in place for the same reasons. If needed, crisis management shall be applied steered by the crisis committee.

All events shall be reported centrally and kept in a central database for further analysis purposes conducted by the Risk Division. Event data shall also be used for capital calculation purposes within ICAAP.

Key risk indicators

Key risk indicators (KRI) are the main tools to monitor if the risks are in a desired level and controls are working effectively. KRI's are used to monitor risks in different levels, i.e. across LHV as well as in concrete unit's level. Action plan shall follow if KRI reflects not-desired changes in risk level, as well as deficiencies in existing controls.

Capital calculation

Operational risk capital requirements are calculated based on the basic indicator approach and constitutes as of 31 December 2021 EUR 12,222 thousand.

ICT and information security risk management

One of our main goals is to be trustworthy banking partner to our customers with the focus on providing customer-friendly, secure and resilient digital banking services. Secure and resilient IT systems are the key for this objective.

We have defined our ICT and information security related risk appetite as:

• low for risks with high potential (financial or reputational) impact which are most cybersecurity risks (e.g., cyber-attacks or data loss): unnecessary security-related risks are not accepted and shall be mitigate promptly.
• medium for such technology-related risks where potential impact can be effectively controlled, which allows us to use new and innovative technology or agile development approach to be more efficient and secure.

In addition to general Operational Risk Framework, dedicated ICT and information security risk management tools and methods are being applied to protect the information and customers' assets and ensure the IT systems are available, for example:

• Reasonable conservatism is being applied when implementing new configurations to the production services.
• Regular security monitoring.
• Vulnerability management process.
• Security controls in the Software Development Lifecycle.
• Training and awareness to our personnel to prevent actions that may cause security incidents on IT systems and services.

• Up-to-date information about the developments in the security scene to understand potential weaknesses the trends might bring to us.

We take seriously and reach to all malicious attempts both towards our own infrastructure and customer data under our possession, as well as towards attempts against customers themselves.

In 2021 an increase of different social engineering attacks towards customers, incl. Phishing, Smishing and Vhishing, was identified. Such attacks take advantage of customers trust by using LHV brand. These campaigns were mainly investment fraud or impersonated a bank employee to manipulate their targets to disclose their authentication information (e.g. username and social security number) and enter their PIN-code to the 2FA device in to confirm a malicious transaction.

Even though the liability lies on the customers side and such transactions are considered as strong authentication, we address such social engineering campaigns promptly, cooperate actively with law-enforcement agencies and educate our customers to fight such campaigns targeting our customers or miss-using our brand.

6. Compliance risk

Considering the complexity and volume of regulations, the constant amendments thereto, the heightened attention of supervisory authorities towards meeting requirements and the compliance control function, society's quickly changing value judgements and expectations in different fields, including the prevention of money laundering, fraud prevention and ensuring sustainability, and the role of financial institutions in performing these tasks, the compliance risk is significant in today's environment.

The consequences of realisation of compliance risk are also felt more strongly, whether through the actual implementation of sanctions, the planned increase of sanction rates, establishment of the simplified sanction implementation procedure, or the effect of disclosure of breaches on the share price, contractual relations, employee recruitment and retention or the validity of the activity licence. Based on the previous period, it can clearly be seen that the Financial Supervision Authority increasingly applies enforcement measures, incl. making the breaches public, making precepts for the remediation of these, and requiring the development, presentation, and performance of detailed action plans.

The purpose of compliance control is the management of compliance risk, including identifying amendments to legislation and standards, assessing the effect thereof, consultation regarding measures that need to be applied to ensure compliance with new and existing legislation and standards, assessing the significant changes of new and existing products and processes and conducting risk-based compliance audits, performing internal monitoring activities, and reporting to management bodies.

In addition, compliance control turns additional attention to compliance risk related to money laundering and terrorist financing prevention and the implementation of international sanctions. For more efficient risk management, LHV has decided to separate this field from the compliance function and create it as a distinct internal control function.

In addition to practical daily activities, compliance control is also the cultural leader and moral compass of the organisation. Creating a culture that supports the meeting of all requirements is one of the most efficient ways of managing compliance risk. Every organisation is distinct, but the number of employees must be sufficient to ensure compliance in all fields, considering the complexity of business, including the structure of the organisation and the services provided. This means the capability to manage risks related to the provision of services, but also to operating as a credit institution. As a result, Compliance Control has increased the number of employees and constantly takes this need into account.

In the upcoming period, developing the principles of and cooperation in compliance risk management across the Group will remain important, including with the compliance control function of money laundering prevention created as an independent function of internal control. Applying for the licence of an individual bank in the United Kingdom and developing the functions of compliance, as well as fighting against financial crime, demand increased attention.

The compliance control function continues to have an important role in ensuring that operations meet the current legislation. The role and expectations of the compliance control function are also reflected by the performed and planned changes on the legislative level regarding the mandatory nature of the function, its tasks, the suitability of the one performing the function, as well as reporting requirements.

Although ensuring compliance starts with the top management and all employees must contribute to it, expectations of the compliance control function and its performer have also grown. While the whole organisation is liable for non-compliance, compliance control and its performer are expected to implement effective measures in managing the risk. For the efficient management of compliance risk, compliance control will continue with its current activities, to make decisions that consider the interests of the customer, the supervisory authority, the society in the wider sense, and LHV.

7. Anti-money laundering

7.1 AML/CTF Governance

The internal governance of LHV is based on the Three Lines of Defence model. In 2021 Bank`s AML internal governance was updated and demarcation lines between first and second line defence were introduced. AML department was reorganized to AML Compliance Department reporting directly to CEO. Previously AML Department was part of Risk Management reporting to CRO. KYC and EDD functions (e.g. screening) which were previously carried out by AML Department are now located within business units relevant AML departments.

AML Compliance is the second line of defence which is established to ensure the first line of defence (i.e. operational management) is properly designed, in place, and operating as intended. As management functions, they provide framework and guidance for developing and modifying risk management and internal controls.

All lines of defence follow a risk-based approach in assessing products, services, customers, and countries. Proper risk mitigating measures (incl. CDD and EDD) are applied on the basis of the risk-based screening and monitoring activities and defined risk levels. A high level of awareness and commitment towards risk management and AML issues is the foundation of a strong AML culture which is further supported by continuous activities of awareness raising, information and dissemination, networking and exchange of best practices, training and reporting.

The Management Board and the Supervisory Board of LHV Group and LHV Pank have a strong commitment towards implementing, maintaining and developing AML/ KYC regime all over the group entities. AML/ CTF policies and procedures are updated yearly. In 2021 the development of new risk assessment methodology was initiated in co-operation with Ernst & Young Baltics.

Analytical and technical capabilities of the group entities are the key elements of building a solid AML/KYC system. In 2021 previous vendors providing AML screening and monitoring software were replaced by new tool by OÜ Salv Technology. New technology provides better capabilities and flexibility of screening and monitoring systems.

In addition to the investments in IT systems, the number of employees directly and indirectly involved in AML has significantly raised. New positions were created both in the AML Compliance department and business unit AML functions. Strong focus is in improving of analytical competence.

7.2 AML Governance structure

	Supervisory Board	• Adopts AML Policy • Supervisory role
	Management Board	• Adopts AML procedures and Risk Assessment • Sets Risk Appetite • Accepts high risk customers
High Risk Customer Acceptance Committee	Financial Intermediaries Assessment Committee	AML Committee
• Acceptance of high risk customers	• Assessment of Financial Intermediaries prior Management Board	• Provides information to Management Board • Advises on risk assessment and appetite

First Line of Defence		Second Line of Defence	Third Line of Defence
Customer relations • Implementation of KYC	High Risk Customer Department • On-boarding higher risk clients • Liaison to AML department • EDD measures and data quality	AML Department • Coordinates AML procedures and processes • Risk assessment of higher risk factors • AML monitoring and screening • Coordinating EDD measures • Reports to the board and FIU	Compliance • Advises management bodies on AML compliance • Performas AML inspections and compliance audits • Reports to governing bodies	Internal Audit • Carries out independent assessment of AML measures • Reports to Supervisory Board and Audit Committee

7.3 AML/KYC measures

Main AML/CTF measures (incl. KYC) in LHV are as follows:

• comprehensive risk assessment and risk segmentation;
• strong on-boarding CDD supported by the Customers Acceptance Principles;
• regular CDD and EDD;
• robust risk-based monitoring;
• screening customers and transactions against international financial sanctions lists and other similar lists (incl. UN and EU lists, but also US OFAC list and UK HM Treasury list);
• strong commitment of the senior and middle managers;
• regular training of employees;
• ongoing communication and cooperation with FIU and other relevant stakeholders;
• active participation in setting up industry best practices.

LHV has implemented a four-level decision making process for customer acceptance at the on-boarding stage. Depending on the risk indicators of the customer, the decision for a customer acceptance is made at the following level:

• The Customer Relationship Manager
• The Customer Relationship Manager together with a senior manager (so called 4-eyes principle)
• Risk Customer Acceptance Committee
• The Management Board

In addition to the conservative and risk-based approach and procedures followed at the on-boarding stage, risk-based monitoring and screening activities are implemented and regular KYC updates are carried out.

7.4 Banking Services

LHV is providing services to FinTech companies that provide financial services to their customers. Compared to servicing regular customers, different risks are involved in servicing the FinTech companies. Therefore, LHV has paid special attention to and applied additional measures to mitigating the risks related to the FinTech companies. LHV has dedicated Customer Relationship Managers with vast FinTech sector competence. Specific first line and second line units are monitoring industry trends, developments and threats related to the FinTech sector and update AML/KYC measures accordingly. LHV applies the same AML/KYC measures to all customers from the FinTech sector as to the correspondent service provider. LHV expects FinTech customers have same level of AML/KYC measures in place as banks do. During the on-boarding process and continuous KYC of the FinTech companies, LHV assesses their business model, ownership structure, team and managers, AML/KYC measures, technical capabilities for screening and monitoring, customer focus, customer risk segmentation, limit policy, source of funds, etc. LHV carries out regular on-site visits to ensure that the appropriate policies, processes, and procedures are in place and are working as intended. LHV pays special and continuous attention to the financial activities of the FinTech companies through robust monitoring. If there are doubts that customer does not comply to AML/KYC regulations and best practice, remediation actions are taken. If those customers do not increase their capacity, then off-boarding of those customer follows. Same applies in case where customers are not within risk appetite of the Bank.

7.5 Estonian AML system and perspectives

New National Risk Assessment was introduced by state. World Bank methodology updated by PWC was basis for NRA. Main identified risks are related to the Virtual Asset Service Providers sector, mainly related to domestic companies having VASP licence by FIU. In 2021 started Estonian assessment towards FATF recommendations carried out by FATF reginal body Moneyval (established in European Council). On-site visit and report are expected in 2022. The banking sector has heavily invested in human capital both in quantitative terms and from the competence perspective. All market participants are continuously improving the usage of modern information technology in relation to AML in order to improve their technical and analytical capabilities. From a regulatory point of view, many legislative initiatives are ongoing and aimed at improving the Estonian AML system and cooperation between all stakeholders.

7.6 Regulatory proceedings

FSA concluded several on- and off-site controls in various areas throughout the period. This is a common regulatory practice. During the period among others the onsite control concerning banking services business line and application of international financial sanctions was examined. To eliminate identified shortcomings LHV introduced and carried out a detailed action plan results of which were reported back to FSA.

As a good practice LHV has also requested external audits to be performed in the area of AML. Latest audit performed by FSCom to assess AML/KYC compliance framework and practice did not reveal significant shortcomings. However, recommendations to enhance processes were issued.

8. Other risks

8.1 Underwriting risk

Underwriting risk is one of the most important risks for the insurance subsidiary reflecting the core business of insurance, i.e. taking and managing insurance risk. The most important aspect of underwriting risk is the insurance premium and reserve risk deriving from the possible inadequacy of the pricing of insurance contracts and the assumptions used in the assessment of contractual liabilities.

Underwriting risk includes catastrophe accumulation risk deriving from extreme or extraordinary events (e.g. hurricanes, floods, damage attributable to human causes) during which the materialization of risks insured under individual insurance contracts accumulate extraordinarily.

Above all, underwriting risk involves risks associated with pricing, technical provisions and adequacy of the reinsurance cover.

Underwriting risk is managed and controlled via the following processes:

• Establishment of insurance subsidiary's risk strategy in accordance with the business strategy;
• Using actuarial analysis and sound assumptions in pricing of insurance contracts;
• Calculation of technical provisions and Solvency Capital Requirement (SCR) by using Solvency II standard formula and holding the necessary liquid assets accordingly;
• Assessment of loss reserving assumptions, performing liability adequacy tests and monitoring of the profitability of the insurance portfolio;
• Conduct regular/irregular own risk and solvency assessment (ORSA);
• Use of the reinsurance program for reinsuring major risks.

8.2 Strategic and business risk

Strategic risk is expressed mainly in wrong strategic decisions. Strategic risk is mitigated through well-considered business plans and analyses. In addition, members of both LHV Pank's and LHV Group's management (both Management Board and Supervisory Board) have long-term experience in the banking sector and/or entrepreneurship. Prior to entering new markets and sectors, professionals in the field will always be involved and a thorough analysis will be carried out.

8.3 Risk on reputation

Risk on reputation is defined as a risk, which arises from a loss of reputation for customers, business partners, owners, investors or supervisors. Risk on reputation is usually a result from realization of other risks (for example operational risk or strategic risk). In order to mitigate the risk on reputation, LHV regularly carries out risk management trainings and also the framework of risk management is constantly improved which will provide a strong risk culture.

8.4 Country risk

Similarly to the risk on reputation, the country risk is usually expressed through another risk (operational risk, credit risk, strategic risk). In addition to Estonia, LHV is conducting business activities in the United Kingdom.

Consolidated statement of profit or loss and other comprehensive income

(in thousands of euros)	Note	2021	2020
Interest income		124,641	88,373
incl interest income based on EIR		118,990	84,479
Interest expense		-27,322	-19,881
Net interest income	5,7	97,319	68,492
Fee and commission income		60,824	46,118
Fee and commission expense		-17,345	-12,769
Net fee and commission income	5,8	43,479	33,349
Net gains from financial assets measured at fair value	5,11	-924	1,541
Foreign exchange rate gains/losses		-22	43
Net gains from financial assets	5	-946	1,584
Other income		534	146
Other expense		-4	-27
Net other income		530	119
Net income		140,382	103,544
Staff costs	9	-31,322	-23,910
Administrative and other operating expenses	9	-33,863	-20,064
Profit before credit losses		75,197	59,570
Impairment losses on loans and advances	5,12	-3,948	-10,898
Profit before income tax		71,249	48,672
Income tax expense	5,6,25	-10,986	-8,826
Net profit for the year	5	60,263	39,846
Other comprehensive income/loss:
Items that may be reclassified subsequently to profit or loss:
Unrealized exchange differences arising on the translation
of the financial statements of foreign operations		48	0
Total profit and other comprehensive income for the year		60,311	39,846
Total profit attributable to:
Owners of the parent		58,261	37,950
Non-controlling interest		2,002	1,896
Total profit for the year	5	60,263	39,846
Total profit and other comprehensive income attributable to:
Owners of the parent		58,309	37,950
Non-controlling interest		2,002	1,896
Total profit and other comprehensive income for the year		60,311	39,846
Basic earnings per share (in euros)	24	1.99	1.32
Diluted earnings per share (in euros)	24	1.94	1.29

Consolidated statement of financial position

(in thousands of euros)	Note	31.12.2021	31.12.2020
Assets
Due from central bank	10	3,874,284	2,213,211
Due from credit institutions	10	106,838	170,341
Due from investment companies	10	6,188	9,985
Financial assets at fair value through profit or loss	11	135,855	330,055
Loans and advances to customers	12	2,677,160	2,208,823
Receivables from customers	13	9,752	9,391
Other financial assets	14	2,236	2,073
Other assets	14	3,471	2,182
Strategical financial investments	11	5,236	0
Tangible assets	15	4,517	2,780
Right-of-use assets	15	3,957	3,805
Intangible assets	15	11,825	15,147
Goodwill	6	3,614	3,614
Total assets	5	6,844,933	4,971,407
Liabilities
Amounts owed to central banks (TLTRO)	16	197,461	200,000
Deposits from customers	16	5,807,617	4,119,771
Loans received and debt securities in issue	16	349,146	268,584
Financial liabilities at fair value through profit or loss	11	157	221
Accounts payable and other liabilities	17	55,373	26,952
Subordinated debt Total liabilities	19 5	110,378 6,520,132	110,603 4,726,131
Equity
Share capital	20	29,864	28,819
Share premium	20	97,361	71,468
Statutory legal reserve	20	4,713	4,713
Other reserves	20	4,733	3,409
Retained earnings		179,746	128,385
Total equity attributable to owners of the parent		316,417	236,794
Non-controlling interest	6	8,384	8,482
Total equity		324,801	245,276
Total liabilities and equity		6,844,933	4,971,407

Consolidated statement of cash flows

(in thousands of euros)	Note	2021	2020
Cash flows from operating activities
Interest received		124,692	87,144
Interest paid		-29,888	-21,286
Fees and commissions received		59,904	46,118
Fees and commissions paid		-17,345	-12,769
Other income received		-845	-93
Staff costs paid		-27,104	-21,553
Administrative and other operating expenses paid		-23,816	-14,427
Income tax paid		-10,798	-5,002
Cash flows from operating activities before change in operating assets and liabilities		74,800	58,132
Net increase/(decrease) in operating assets:
Net increase/(decrease) in financial assets at fair value through profit or loss		-140	-64
Loans and advances to customers		-475,118	-531,929
Mandatory reserve at central bank		-16,045	-14,827
Security deposits		-164	173
Other assets		1,426	-5,483
Net increase/(decrease) in operating liabilities:
Demand deposits of customers		2,014,423	1,445,689
Term deposits of customers		-324,019	-25,248
Loans received		0	448,685
Repayments of loans received		-21,764	-5,886
Financial liabilities held for trading at fair value through profit or loss		-64	212
Other liabilities		28,244	-1,124
Net cash from/ (used in) operating activities		1,281,579	1,368,330
Cash flows from investing activities
Purchase of tangible and intangible assets	15	-6,688	-4,699
Acquisition of strategical financial investment		-5,237	0
Proceeds from disposal and redemption of investment securities at fair value
through other comprehensive income		0	432
Net changes of investment securities at fair value through profit or loss	11	193,394	-287,930
Net cash from/ (used in) investing activities		181,469	-292,197
Cash flows from financing activities
Paid in share capital (incl. share premium)	20	26,938	1,697
Acquisition of non-controlling interest in subsidiaries		0	2,800
Paid dividends	20	-10,458	-6,838
Subordinated loans received	19	139,388	50,000
Subordinated loans redeemed	19	-40,000	-15,000
Repayment of principal of lease liabilities	18	-1,254	-1,278
Net cash from (used in) financing activities		114,614	31,381
Effect of exchange rate changes on cash and cash equivalents		66	43
Net increase/(decrease) in cash and cash equivalents		1,577,728	1,107,557
Cash and cash equivalents at the beginning of the year	10	2,352,284	1,244,727
Cash and cash equivalents at the end of the year	10	3,930,012	2,352,284

Consolidated statement of changes in equity

(in thousands of euros)	Share capital	Share premium	Statutory reserve capital	Other reserves	Retained earnings	Total	Non controlling interest	Total equity
Balance as at 01.01.2020	28,454	70,136	4,713	3,280	94,228	200,811	5,217	206,028
Paid in share capital	365	1,332	0	0	0	1,697	2,800	4,497
Dividends paid	0	0	0	0	-5,406	-5,406	-1,431	-6,837
Share options	0	0	0	129	1,613	1,742	0	1,742
Profit for the year	0	0	0	0	37,950	37,950	1,896	39,846
Other comprehensive income	0	0	0	0	0	0	0	0
Total profit and other
comprehensive income for 2020	0	0	0	0	37,950	37,950	1,896	39,846
Balance as at 31.12.2020	28,819	71,468	4,713	3,409	128,385	236,794	8,482	245,276
Balance as at 01.01.2021	28,819	71,468	4,713	3,409	128,385	236,794	8,482	245,276
Paid in share capital	1,045	25,893	0	0	0	26,938	0	26,938
Dividends paid	0	0	0	0	-8,358	-8,358	-2,100	-10,458
Share options	0	0	0	1,276	1,458	2,734	0	2,734
Profit for the year	0	0	0	0	58,261	58,261	2,002	60,263
Other comprehensive income	0	0	0	48	0	48	0	48
Total profit and other
comprehensive income for 2021	0	0	0	48	58,261	58,309	2,002	60,311
Balance as at 31.12.2021	29,864	97,361	4,713	4,733	179,746	316,417	8,384	324,801

Additional information on equity is provided in Note 20.

Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented and to all the consolidated group entities, unless otherwise stated.

1. Basis of preparation

The consolidated financial statements of the Group for the financial year 2021 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union. The financial statements have been prepared under the historical cost convention, except as disclosed in some of the accounting policies below, such as: "financial assets and liabilities at fair value through profit or loss", including derivatives and financial assets at fair value through OCI.

The preparation of consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 2.

The financial year started at 1 January 2021 and ended at 31 December 2021. The financial figures have been presented in thousands of euros unless referred differently in specific disclosures.

Certain new IFRS amendments to existing standards and the interpretations of the standards have been published by the time of compiling these financial statements, which became mandatory for the Group's reporting periods beginning on or after 1 January 2021. The overview of these standards and the potential impact of applying the new standards and interpretations are stated below.

1.1 Summary of significant accounting policies

A number of new standards are effective for annual periods beginning on or after 1 January 2021, but do not have a material impact on the Group's financial statements.

The following new standards, interpretations and amendments are not yet effective for the annual reporting period ended 31 December 2021 and have not been applied in preparing these consolidated financial statements. The Group plans to adopt these pronouncements when they become effective.

Amendments to IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2023; to be applied retrospectively. Early application is permitted) These amendments are not yet endorsed by the EU.

The amendments clarify that the classification of liabilities as current or non-current is based solely on the entity's right to defer settlement at the end of the reporting period. The company's right to defer settlement for at least 12 months from the reporting date need not be unconditional but must have substance. The classification is not affected by management's intentions or expectations about whether and when the entity will exercise its right. The amendments also clarify the situations that are considered settlement of a liability.

The Group does not expect the amendments to have a material impact on its financial statements when initially applied.

Annual improvements to IFRS standards 2018-2020 (Effective for annual periods beginning on or after 1 January 2022. Early application is permitted). These amendments are not yet endorsed by the EU.

Improvements to IFRS (2018-2020) include three amendments to the standards:

• the amendments to IFRS 9 Financial instruments clarify that, when assessing whether an exchange of debt instruments between an existing borrower and lender is on terms that are substantially different, the fees to include together with the discounted present value of the cash flows under the new terms include only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other's behalf.
• the amendments IFRS 16 Leases remove illustrative example 13 accompanying IFRS 16, which in practice creates confusion in accounting for leasehold improvements for both lessee and lessor. The purpose of the amendment is to remove the illustrative example that creates confusion.
• the amendments to IAS 41 Agriculture remove the requirement to use pre-tax cash flows to measure fair value of agriculture assets. Previously, IAS 41 had required an entity to use pre-tax cash flows when measuring fair value but did not require the use of a pre-tax discount rate to discount those cash flows.

The Group does not expect the amendments to have a material impact on its financial statements when initially applied.

IFRS 17, Insurance Contracts (effective for annual periods beginning on or after 1 January 2023; to be applied prospectively. Early application is permitted.)

IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare the financial performance of similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of

insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. The Group is currently assessing the impact of the standard to its financial statements.

Amendment to IFRS 16 COVID-19-Related Rent Concessions beyond 30 June 2021 (effective for annual periods beginning on or after 1 April 2021)

The pronouncement amended IFRS16 Leases to provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification.

2. Consolidation

The 2021 consolidated financial statements include the financial statements of AS LHV Group (parent company) and its subsidiaries AS LHV Pank, AS LHV Finance (subsidiary of AS LHV Pank), AS LHV Varahaldus, AS LHV Kindlustus and LHV UK Ltd (established in 2021). OÜ Cuber Technology was subsidiary of LHV Group during the accounting period, but it was liquidated at the very end of 2021. AS LHV Group holds 65% interest in LHV Finance through AS LHV Pank. AS LHV Group holds 65% interest in LHV Kindlustus.

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group 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 acquisition method of accounting is used to account for the acquisition of subsidiaries (except for acquisitions among enterprises under common control) and business operations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued, and liabilities incurred or assumed at the date of exchange.

Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed. According to the acquisition method, the identifiable assets, liabilities, and contingent liabilities of the acquired subsidiary are recognized at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount ("bargain purchase gain") is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement.

Intercompany transactions balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless transaction provides evidence of an impairment of the asset transferred.

Revenues and expenses of the subsidiaries acquired within the financial year are consolidated into the Group's statement of profit or loss and other comprehensive income starting from the date of acquisition to the end of the financial year. Result of operations of subsidiaries disposed of during the year are consolidated into Group's statement of profit or loss and other comprehensive income from the beginning of the financial year until the date of disposal.

Pursuant to the Accounting Act of the Republic of Estonia, information of the unconsolidated financial statements (primary statements) of the consolidating entity (parent company) shall be disclosed in the notes to the consolidated financial statements. In preparing the primary financial statements of the parent company, the same accounting policies have been used as in preparing the consolidated financial statements. The accounting policy for accounting subsidiaries has been amended in the separate primary financial statements disclosed as supplementary information in the Annual Report in conjunction with lAS 27 "Separate Financial Statements".

In the parent separate primary financial statements, disclosed in these consolidated financial statements (see Note 27), the investments into the shares of subsidiaries are accounted for at cost less any impairment recognized.

Non-controlling interest is that part of the net results and of the net assets of a subsidiary, which is attributable to interests, which are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Group's equity. Non-controlling interest in the consolidated statement of financial position is disclosed separately from the equity attributable to the shareholders of the parent company. In consolidated statement of profit or loss and other comprehensive income, non-controlling interest share of profit is disclosed separately from owners of the parent.

3. Associates

An associate is an entity over which the Group has significant influence but which it does not control. Generally, significant influence is assumed to exist when the Group holds between 20% and 50% of the voting rights. The Group does not have any associate as at 31.12.2021 and 31.12.2020

In the consolidated financial statements, investments in associates are accounted for using the equity method. Under this method, the investment is initially recognized at cost which is thereafter adjusted for post-acquisition changes in the investor's share of the investee's equity (changes both in the profit/ loss of the associate as well as other equity items) and with elimination or depreciation/amortisation of the differences between fair values and carrying amounts of the investee's assets, liabilities and contingent liabilities as determined in the purchase analysis. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of impairment of the assets.

When the Group's share of losses in the associate accounted under the equity method exceeds the carrying amount of the associate, the carrying amount of the investment is reduced to zero and such long-term loans granted to the associate that in substance form a part of the investment are written down. Further losses are carried off-balance sheet. When the Group has guaranteed or incurred obligations on behalf of the associate, the respective liability as well as the loss under the equity method are recorded in the statement of financial position. Other receivables from the associate are recorded at amortised cost less a provision for impairment.

An investment in the assets and liabilities of the acquired associate and goodwill that arose on acquisition is presented as a net amount in the statement of financial position line "Investments in associates".

At the end of each reporting period, it is assessed whether there is any indication that the recoverable amount of the investment has fallen below its carrying amount. If any such indications exist, an impairment test is performed. To determine the recoverable amount of the investment, the principles described in section 2.9 are used.

4. Foreign currency translation

4.1 Functional and presentation currency

The functional and presentation currency of entities in the Group is euro except the LHV UK Ltd in UK which has pound as functional currency As the LHV UK Ltd had limited activities and transactions in 2021, the effect to Group financial statements is immaterial.

4.2 Foreign currency transactions and balances

Foreign currency transactions are recorded based on the foreign currency exchange rates of the European Central Bank prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into euros based on the foreign currency exchange rates of the European Central Bank prevailing at the end of the reporting period. Non-monetary financial assets and liabilities measured at fair value denominated in foreign currencies are translated into euros based on the foreign currency exchange rates of the European Central Bank prevailing at the fair value measurement date. Gains and losses on translation from monetary assets and liabilities are recorded in the statement of profit or loss under the line "Foreign exchange rate gains/losses". Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss in the statement of profit or loss under the line "Net gains from financial assets measured at fair value".

5. Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, demand deposits with central bank and other banks and investment companies, term deposits with original maturities of three months or less, that are available for use without any restrictions and which are subject to an insignificant risk of changes in value.

6. Financial assets

6.1 Initial recognition and derecognition

Financial assets are recognised on the statement of financial position when the Group becomes a party to the contractual provisions of the instrument and are measured at fair value on initial recognition. Transaction costs are included in the fair value on initial recognition except for financial assets at fair value through profit or loss where transaction costs are expensed in profit or loss. Financial assets at fair value are recognised on the statement of financial position on trade date. Financial assets measured at amortised cost are recognised on trade date.

Financial assets are derecognised when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control.

Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale.

6.2 Subsequent measurement

The Group classifies and subsequently measures its financial assets in the following categories: financial instruments at fair value through profit or loss; fair value through other

comprehensive income and amortised cost. The classification will depend on if the financial asset is a debt instrument, an equity instrument or a derivative.

6.3 Debt instruments (Loans and debt securities)

The classification is based on a combination of assessing the business model for managing the financial assets and whether the contractual cash flows consist of solely payments of principal and interest ('SPPI'). The business model assessment is performed for homogenous portfolios/ products identified based on how the business is managed in the divisions of the Group. The assessment is based on reasonable scenarios taking into consideration how the portfolio is evaluated and reported to management; the risks affecting the performance of the portfolio and how these risks are managed; how managers are compensated; and the frequency, value and timing of sales including the reasons for the sales. In determining if the cash flows consist solely of principal and interest, the principal is defined as the fair value of the debt instrument at initial recognition, which can change over the life if there are repayments or capitalisation of interest. Interest cash flows are consistent with components per a basic lending arrangement including consideration for time value of money, credit risk, liquidity risk as well as administrative costs and profit margin. If there are contractual features introducing an exposure to other risks or volatility, it is not considered to consist of solely payments of principal and interest. SPPI tests are performed as a part of new product approval tests. In implementation of IFRS 9 in 2018 SPPI was applied to 22 larger products carried at amortised cost.

Debt instruments are presented in the statement of financial position line items: Due from central banks, credit institutions and investment companies; Loans and advances to customers; Financial assets at fair value through other comprehensive income; Financial assets at fair value through profit or loss; Receivables from customers and Other financial assets and include instruments in the following measurement categories.

Fair value through profit or loss: Debt instruments are classified in this category if not meeting the criteria for amortised cost or fair value through other comprehensive income. This is the case if the business model is held for trading; where financial assets are considered held for trading if they are held with the intention to be sold in the short-term and for the purpose of generating profits. Debt instruments are mandatorily measured at fair value through profit or loss if the assets are managed and evaluated on a fair value basis or the assets are held with an intention to sell, or alternatively, if the cash flows do not consist of solely payments of principal and interest.

Fair value through other comprehensive income: Debt instruments are classified in this category if both of the following criteria are met (a) the business model objective is to both hold assets to collect contractual cash flows and to sell the assets (b) the contractual cash flows consist of solely payments of principal and interest. The assets are measured at fair value and gains and losses arising from changes in fair value are reported in other comprehensive income and accumulated in equity. The cumulative gain or loss is reclassified from equity to profit or loss upon derecognition of the debt instrument. Interest is calculated by applying the effective interest method on interest-bearing financial assets and expected credit losses are recognised in profit or loss.

Amortised cost: Debt instruments are classified in this category if both of the following criteria are met (a) the business model objective is to hold assets to collect contractual cash flows and (b) the contractual cash flow characteristics consist of solely payments of principal and interest. The gross carrying amount of these assets is measured using the effective interest method and adjusted for expected credit losses.

6.4 Equity instruments

Equity instruments are per default classified as financial assets at fair value through profit or loss. An irrevocable election can be made on initial recognition to classify equity instruments (not held for trading) at fair value through other comprehensive income.

6.5 Derivatives

Derivatives are classified as fair value through profit or loss (held for trading).

6.6 Modification

The Group may renegotiate loans and modify contractual terms. If the new terms are substantially different from the original terms, the Group derecognises the original financial asset and recognises a new asset. The Group also assesses whether the new financial asset is credit-impaired at initial recognition. If the terms are not substantially different, the modification does not result in derecognition and the Group recalculates the gross carrying amount based on the new cash flows using the original effective interest rate of the financial asset and recognises a modification gain or loss.

6.7 Reclassification

In rare circumstances debt instruments (financial assets) excluding those designated at fair value through profit or loss on initial recognition, can be reclassified if there has been a change in the business model for managing the financial asset.

6.8 Write-off

The Group writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write-off represents a derecognition event.

Indicators that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Group's recovery method is foreclosing on collateral and

the value of the collateral is such that there is no reasonable expectation of recovery.

If it is not feasible or economically reasonable for the Group to take measures to recover the claims that are being discounted, the claim is assessed as non-performing and is removed from the statement of financial position. If an irrecoverable claim is received subsequently, receipts are recognized as income.

At least one of the conditions has to be filled to declare claim irredeemable based on the product class.

IFRS 9 category		Class (applied by the Group)	31.12.2021	31.12.2020
		Due from banks and investment companies	3,987,310	2,393,537
	Amortised cost		Loans to legal entities	1,667,234	1,352,700
		Loans and advances to customers	Loans to individuals	1,009,926	856,123
		Receivables from customers	9,752	9,391
Financial assets fair value through		Other financial assets	2,236	2,073
	Financial assets at		Shares and fund units	727	479
		Mandatory measurement at	Listed bonds	127,504	322,699
	profit and loss	fair value through profit or loss	Derivatives	4	89
			Pension fund units	7,620	6,788
	Equity instruments at fair value through other comprehen sive income	Investment securities	Unlisted shares	0	0

7. Impairment of financial assets carried at amortised cost

7.1 Measurement

The impairment requirements are based on an expected credit loss (ECL) model. The guiding principle of the ECL model is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments.

All debt financial assets measured at amortised cost and fair value through other comprehensive income, as well as lease receivables, financial guarantees contracts, contract assets and certain loan commitments are in scope for expected credit loss.

ECLs on financial assets measured at amortised cost and lease receivables are presented as allowances, i.e., as an integral part of the measurement of those assets in the statement of financial position. The allowance reduces the gross carrying amount. ECLs on loan commitments and financial guarantee contracts are presented as provisions, i.e., as a liability, in the statement of financial position. Adjustment to the loss allowance and provision due to changes in ECLs is recognised in the statement of profit or loss as net expected credit losses.

The assessment of credit risk, and the estimation of ECL, shall be unbiased and probability-weighted, and shall incorporate all available information which is relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. LHV uses both models and expert based individual assessments for calculating ECLs.

The ECL model has a three-stage approach based on changes in the credit risk. A 12-month ECL (Stage 1) applies to all items unless there is a significant increase in credit risk since initial recognition. For items where there is a significant increase in credit risk (Stage 2) or in default (Stage 3), lifetime ECL applies.

7.2 Significant increase in credit risk

At the end of each reporting period the Group performs an assessment of whether credit risk has increased significantly since initial recognition. The assessment of whether there has been a significant change in credit risk is based on quantitative and qualitative indicators. Indicators include payments that are past due >30 days and <90 days and financial assets that have been classified as watch-list or with forbearance measures (loans whose contractual terms have been revised due to the customer's financial difficulties). A quantitative indicator is calculated based on the change in lifetime probability of default (PD) by comparing the scenario-weighted lifetime PD at the reporting date with the scenario-weighted lifetime PD at initial recognition. In case there has been a significant increase in credit risk since initial recognition, an allowance for lifetime ECL shall be recognised and the financial instrument is transferred

to Stage 2. The approach is symmetrical, meaning that in subsequent reporting periods, if the credit quality of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the financial asset moves back to Stage 1.

7.3 Definition of default

The Group defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired, when it meets one or more of the following criteria:

1) Quantitative criteria

The borrower is more than 90 days and over 10 euros past due on its contractual payments. The threshold of 10 euros is put in place with debt management procedures that is a trigger for debt collection activities and also indicated as materiality threshold in Definition of Default.

2) Qualitative criteria

The borrower meets unlikeliness to pay criteria, which indicates the borrower is in significant financial difficulty. The following circumstances are considered as indicators for the customer not to pay the debt in full:

• Non-accrued status is applied to the contract
• Specific credit adjustments have been formed due to the decline in the credit quality
• Sale of credit obligation with economic loss higher than 5 %
• Distressed restructuring measures have been applied to the contract resulting with diminished financial obligation higher than 1 %
• It is becoming probable that the borrower will enter bankruptcy or has filed for bankruptcy
• a customer's resources of cash flow are no longer available to meet the payments of instalments
• The Group has called any collateral including a guarantee.

The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default used for internal credit risk management purposes. Financial instruments in default are in Stage 3. All financial assets in Stage 3 are considered credit impaired.

7.4 Modelling

The ECL is calculated as a function of the probability of default (PD), the exposure at default (EAD) and the loss given default (LGD), as well as the timing of the loss. The Group's IFRS 9 methodology for ECL measurement is based on existing internal scoring and rating models.

PD represents the likelihood that a loan will not be repaid and will go into default in either a 12-month or lifetime horizon. The expected PD for each individual instrument incorporates a consideration of past events, current market conditions and reasonable and supportable information about future economic conditions. LHV uses existing scoring and rating models that are adjusted according to specific IFRS 9 requirements. The models are calibrated based on a combination of asset class and product type.

EAD represents an estimate of the outstanding amount of credit exposure at the time a default may occur. For off-balance sheet amounts, EAD includes an estimate of any further amounts to be drawn at the time of default. LGD is the amount that may not be recovered in the event of default. LGD takes into consideration the amount and quality of any collateral held. LHV uses existing LGD models adjusted to meet IFRS 9 requirements. When measuring ECL, LHV uses the maximum contractual period during which LHV is exposed to risk.

7.5 Forward-looking information

The Group uses internally developed macroeconomic forecasts as the basis for the forward-looking information incorporated in the ECL measurement. In order to ensure an unbiased estimation of credit losses under IFRS 9, at least three scenarios shall be used. One of the scenarios shall be the base case scenario, representing the most likely outcome, which is also applied in the regular financial planning and budgeting process, while other case scenarios shall represent more optimistic or pessimistic outcomes.

Forecasts are developed internally in the Credit Management Department that consults with the experts from Risk Control Unit, business and finance. As available without undue cost, external experts and externally developed 'benchmark forecasts' should be consulted. The referred benchmark forecasts include but are not limited to World Economic Outlook by the IMF, European Economic Forecasts by the European Commission and Economic Forecasts by Bank of Estonia. The scenarios shall be approved by the Risk and Capital Committee.

Scenarios are be developed for a time horizon over which reliable projections can be made, typically for a time horizon of 3 years. At minimum, selected macro indicators have to be forecasted for a period of two years following the current year. In general, scenarios are reviewed on a quarterly basis. In case of significant changes in the macroeconomic environment and outlook, the scenarios shall be updated.

7.6 Individual assessments and Management´s judgement

The Group uses both models and expert-based judgement in order to determine ECLs. The degree of judgement that is required to estimate ECL depends on the model outcome, materiality and the availability of detailed information. The model provides guidance and transparency as to how economic events could affect the impairment of financial assets. Expert based judgement may be applied to the modelled outcome to incorporate an estimated impact of factors not captured by the model. Such individual ECL assessments may be applied to significant exposures at a counterparty level. These assessments are decided by the Credit Committee. In addition, there may be a need for adjustments at a portfolio level, which is decided by the Risk and Capital Committee.

8. Tangible fixed assets

Tangible fixed assets are non-current assets used in the operating activities of the Group with a useful life of over one year. An item of tangible fixed assets is initially recognised at its cost which consists of the purchase price (incl. customs duties and other non-refundable taxes) and other expenditures directly related to the acquisition that are necessary for bringing the asset to its operating condition and location. Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to operating expenses during the reporting period in which they are incurred.

An item of tangible fixed assets is carried in the statement of financial position at cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis. The annual depreciation rate for computers, furniture and fixtures is 33%, for improvements of rental space either 20% p.a. or amortization throughout the rental period, depending on which is shorter. Depreciation is calculated starting from the month of acquisition until the carrying amount reaches the residual value of the asset. In case the residual value is greater than the carrying amount of the asset, no further depreciation expense is calculated.

The appropriateness of the assets´ residual values, depreciation methods used, and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. The Group performs an impairment test when there are circumstances indicating impairment. Where an asset's carrying amount is greater than its estimated recoverable amount (higher of an asset's fair value less costs to sell or its value in use), it is written down immediately to its recoverable amount recognising an impairment loss in the statement of profit or loss for the reporting period.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in operating expenses or other income in the statement of profit or loss for the reporting period.

9. Intangible assets

Intangible assets are identifiable, non-monetary assets without physical substance and currently comprise of acquired software licences. An intangible asset is initially measured at cost, comprising of its purchase price and any directly attributable expenditure on preparing the asset for its intended use. After initial recognition, an intangible asset is carried at its cost less any accumulated amortisation and any accumulated impairment losses. Amortisation is calculated on a straight-line basis, except customer agreements (see below). The annual amortisation rate for purchased licenses is 33%.

Sales costs for the acquisition of new customers are capitalised. The amortisation method for customer agreements is the diminishing balance method. The annual amortisation rate for purchased customer agreements is 12% of the residual value of those assets. At the end of each reporting period, the appropriateness of amortization rates, methods and residual values is assessed. The Group reviews intangible assets for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset's fair value less costs to sell and value in use.

10. Impairment of assets

Assets that have indefinite useful lives (including goodwill) are not subject to amortization, but they are tested annually for impairment, by comparing their carrying amounts with their recoverable amounts.

Assets with an unlimited useful life and depreciable assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. In the event of such circumstances, the recoverable amount of the asset is assessed and is compared with the carrying amount.

An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount of the asset is the higher of an asset's fair value less costs to sell and value in use. For

the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit).

Impairment losses are recognized in statement of profit or loss.

At the end of each following reporting period, assets that have been written down are assessed to determine whether their recoverable amount has increased (except for impairment losses of goodwill that are not reversed). If the impairment test indicates that the recoverable amount of an asset or asset group (cash-generating unit) has increased above its carrying amount, the previous impairment loss is reversed up to the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognised for the asset in prior years. Reversals of impairment losses are recognized in the statement of profit or loss as a reduction of the impairment loss.

11. Loan commitments, financial guarantees, and performance guarantees

The Group issues commitments to provide loans. These commitments are irrevocable or revocable only in response to a material adverse change. Such commitments are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at (i) the remaining unamortised balance of the amount at initial recognition, plus (ii) the amount of the loss allowance determined based on the expected credit loss model, unless the commitment is to provide a loan at a below market interest rate, in which case the measurement is at the higher of these two amounts. The carrying amount of the loan commitments represents a liability. For contracts that include both a loan and an undrawn commitment and where the Group cannot separately distinguish the ECL on the undrawn loan component from the loan component, the ECL on the undrawn commitment is recognised together with the loss allowance for the loan. To the extent that the combined ECLs exceed the gross carrying amount of the loan, they are recognised as a liability.

The Group issues financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight-line basis over the life of the financial guarantee. At the end of each reporting period, the financial guarantees are measured at the higher of (i) the amount of the loss allowance for the guaranteed exposure determined based on the expected loss model and (ii) the remaining unamortised balance of the amount at initial recognition. In addition, an ECL loss allowance is recognised for fees receivable that are recognised in the statement of financial position as an asset.

Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight-line basis over the life of the contract. At the end of each reporting period, the performance guarantee contracts are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the contract at the end of each reporting period, discounted to present value. Where the Group has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts, such amounts will be recognised as loans and receivables upon transfer of the loss compensation to the guarantee's beneficiary.

12. Financial liabilities

The Group classifies financial liabilities either:

• a) financial liabilities measured at fair value through profit or loss
• b) financial liabilities measured at amortised cost
• c) financial guarantee contracts and loan commitments

Recognition of a financial liability (derivative) at fair value through profit or loss is disclosed under accounting policy 2. 6.. All other financial liabilities are subsequently measured at amortised cost using the effective interest method. Transaction costs are included in the calculation of the effective interest rate. The difference between the proceeds (less transaction costs) and redemption value are recognised in the statement of profit or loss during the term of the instrument, using the effective interest rate. Interest costs are included in the statement of profit or loss line "Interest expenses".

Deposits from customers are initially recorded on their settlement date at their fair value less transaction costs and are subsequently measured at amortised cost using effective interest method in the statement of financial position line "Deposits from customers and loans received", accrued

interest liabilities are included in the same line. Interest expense is recognised in the statement of profit or loss line "Interest expense" on the accrual basis.

Loans received, debt securities issued, and similar subordinated debts are initially recognised at fair value, less transaction costs (cash received less transaction costs). The subordinated debts are those liabilities, which in case of a liquidation of a credit institution or declaration of bankruptcy, are settled after the satisfaction of the justifiable claims of other creditors. Other financial liabilities (trade payables, accrued expenses and other borrowings) are initially recognised at fair value less transaction costs and are subsequently carried at amortised cost.

LHV entered into one new type of funding transaction in 2021:

• preferred bonds;

These instruments are accounted as other loans received using effective interest rates, similarly as year 2020 new fundings TLTRO III and covered bonds. Covered bonds are secured by mortgage book and issues are rated by Moody's and listed in Dublin stock exchange. TLTRO III is secured by mortgage bonds and loans given to local municipalities. Preferred bonds are issued with a four-year maturity, which includes the option to call back the transaction after the third year. The issue received a Baa3 rating and was listed on the Dublin Stock Exchange.

TLTRO III has conditional interest rate, where interest rate depends based on the fulfilment of conditions. LHV has taken conservative approach and calculates the effective interest without taking positive potential uplift of interest into account. In case the conditions will be fulfilled, then LHV will recalculate interest income and book difference into running period without restating the previous accounting periods.

Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expired).

13. Payables to employees

Payables to employees include unpaid salary accruals and a vacation pay accrual calculated in accordance with employment contracts and the laws in force in employee residential country as at the end of the reporting period. The liability related to the payment of a vacation pay accrual together with social security and unemployment insurance payments is included within current liabilities in the statement of financial position and as staff costs in the statement of profit or loss.

Social security tax includes payments to the state pension fund. Group has neither existing legal nor constructive obligations to make pension or similar payments supplementary to social security tax.

14. Share-based payments

AS LHV Group operates a share-based compensation plan, under which the company receives services from group employees as consideration for equity instruments (options) of LHV Group. The fair value of the employee services received in exchange for the grant of the options is recognised during the shared-based compensation program as group's staff expense and as an increase in the equity (other reserves). The total amount to be expensed is determined by the fair value at the time of issuing the options. The fair value of the options granted:

• including any market performance conditions influencing the share price (e.g. LHV Group share price);
• excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period).

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the vesting conditions (other than market conditions). It recognises the impact of the revision to original estimates, if any, in the statement of profit or loss, with a corresponding adjustment to equity.

When the options are exercised, LHV Group issues new shares.

The grant by LHV Group of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts. According to the contractual conditions of the share options there are no social security tax charges when exercising the options after the 3-year period.

15. Provisions and contingent liabilities

Liabilities arising from an obligating event before the end of the reporting period that have either a legal basis or that have arisen from the Group's current operating practice (legal or constructive obligation) that require probable outflow of resources, the realisation of which is probable (it is more likely than not that an outflow of resources will be required to settle the obligation) and the amount of which can reliably be estimated but for which the timing or amount are not definitely known are recognised as provisions in the

statement of financial position. The provisions are recognised based on the management's estimates regarding the amount and timing of the expected outflows. A provision is recognised in the statement of financial position in the amount which according to the management is necessary as at the end of the reporting period for the meeting of the obligation arising from the provision or transfer to the third party. The provision expense and an expense from the change in the carrying amount of provisions are included within expenses in the reporting period. Provisions are not set up to cover future operating losses.

When it is probable that a provision will be realised later than 12 months after the end of the reporting period it is recorded at discounted value (present value of expected outflows) unless the discounting effect is immaterial.

Other contingent liabilities (guarantees, except financial guarantees, and other commitments) the realisation of which is less probable than non-realisation or related costs cannot be determined reliably, that in certain circumstances may become obligations, are disclosed in the notes to the financial statements as contingent liabilities. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable on a portfolio basis. If it becomes probable that an outflow of future economic benefits will be required for an item or portfolio of items previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).

16. Distinction between short- and long-term assets and liabilities

Assets from which resources are expected to flow to the Group within 12 months are recognised as current assets. The portion of assets with expected inflows later than 12 months after the end of the reporting period is recognised as non-current assets (see Risk management section point 4).

Liabilities are classified as current when they are due within twelve months after the end of the reporting period or if the Group does not have an unconditional right to defer the payment for later than 12 months after the end of the reporting period. Loans received with due date within 12 months after the end of the reporting period which are refinanced as non-current after the end of the reporting period but before the financial statements are authorised for issue, are recognised as current. Loans received that the lender has the right to recall at the end of the reporting period due to breaches of contractual terms are also classified as current.

For all long-term assets and liabilities, the long-term portion is separately disclosed in respective disclosure to these financial statements (see Risk Management section point 4).

17. Revenues and expenses

The effective interest method is applied to recognise interest income and interest expenses in profit or loss for financial assets and financial liabilities measured at amortised cost or debt investments at fair value through other comprehensive income.

The effective interest method is a method of calculating the gross carrying amount of a financial asset or the amortised cost of a financial liability and of allocating interest income and interest expenses. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial instrument. When calculating future payments, all payments included in the terms and conditions of the contracts, such as advance payments, are taken into consideration. The calculation of the effective interest rate includes fees that are an integral part of the effective interest rate. However, expected credit losses are not taken into account.

If a financial asset subsequently has become credit impaired the interest income is recognised applying the effective interest rate to the amortised cost, i.e. gross carrying amount adjusted for the loss allowance. In case a financial asset is credit-impaired at initial recognition, the expected credit losses are included in the estimated cash flows to calculate a credit adjusted effective interest rate which then is applied to recognise the interest income.

17.1 Fee and commission income

The recognition of revenue from contracts with customers is reported as fee and commission income. This does not apply for revenue from leasing contracts or financial instruments and other contractual obligations within the scope of IFRS 9 Financial Instruments.

Fees that are included in the calculation of the effective interest rate of a financial instrument measured at amortised cost, such as loan origination fees, are allocated over the expected tenor of the instrument applying the effective interest method and presented in Net interest income.

Fee and commission income is recognised to depict the transfer of promised services to the customers in an amount that reflects the consideration to which LHV expects to be entitled in exchange for the service.

Fee and commission income is recognised over time on a straight line basis as the services are rendered, when the customer simultaneously receives and consumes the bene-

fits provided by the Group's performance. Variable fees are recognised only to the extent that management determines that it is highly probable that a significant reversal will not occur.

Other fee and commission income is recognised at a point in time when the Group satisfies its performance obligation, usually upon execution of the underlying transaction. The amount of fee or commission received or receivable represents the transaction price for the services identified as distinct performance obligations.

The major types of fees are described below.

Fee and commission income for asset custody and asset management to customers is recognised as revenue over the period in which the services are provided. Performance based fees are recognised when it is highly probable that a significant reversal of recognised revenue will not occur, which is most often when the performance criteria are fulfilled.

Brokerage fees, commission and fees from negotiating a transaction for a third party, such as arrangement of acquisitions or purchase or sale of a business, are recognised on completion of the transaction.

Expenses that are directly related to the generation of fee and commission income are recognised as fee and commission expense.

17.2 Net financial income

Gains and losses arising from changes in fair value of financial assets and liabilities measured at fair value through profit or loss are reported under the item Net gains from financial assets. For financial liabilities designated at fair value through profit or loss the change in fair value relating to change in own credit risk is accounted for in other comprehensive income.

17.3 Dividend income

Dividends are recognised when the entity's legal right to receive payment is established.

18. Asset management services

The Group is engaged in providing asset management services (Note 21). Such assets have been given to the Group to be managed by third parties and these assets are recorded off-balance sheet. Service fees are derived from management of such assets and no associated credit and market risks arise for the Group.

19. Leases - Group as the lessee

Since 1 January 2019 the IFRS 16 Leases are recognised in the Group's financial reporting.

Lessees are required to recognise:

(a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and

(b) depreciation of lease assets separately from interest on lease liabilities in the income statement.

The Group leases various properties. Rental contracts are typically made for fixed periods of up to 5 years but as a rule, include extension and termination options. Lease terms are negotiated on an individual basis and may contain a wide range of different terms and conditions.

The Group recognises leases as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use.

Lease liabilities were recognized as present value of lease payments. The right-of use assets were measured at the amount equal to the lease liability, as no adjustments to right of use assets were necessary. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The rightof-use asset is depreciated over the shorter of the asset's useful life or the lease term on a straight-line basis.

Lease liabilities include the net present value of the following lease payments:

• fixed payments, less any lease incentives receivable.
• variable lease payment that are based on some kind an index (for example inflation, Euribor)
• amounts expected to be payable by the lessee under residual value guarantees.
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option.

The lease payments are discounted using the interest rate implicit in the lease, if it is readily determinable, or the Group's incremental borrowing rate. The alternative interest rate is the rate of interest that a lessee would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Short-term leases are leases with a lease term of 12 months or less. Low value assets comprise IT-equipment and small items of office furniture. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an exten-

sion option or not to exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The management reviews the assessment if a significant event or a significant change in circumstances occurs which affects the probability of using options and that is within the control of the management. Alternatively, the extension period of the contract has changed (for example, Group has exercised an option, which initially was considered reasonably uncertain or has not exercised an option, which was initially considered reasonably certain).

According to the contracts, Group has not granted any residual value guarantees in the end of the contract.

The Group has used the following practical expedients permitted by the standard:

• the accounting for operating leases with a remaining lease term of less than 12 months as at the reporting date as short-term leases.
• lease agreements for low value assets are excluded.
• the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application.

See also Note 15, 17 and 18 for more details.

20. Taxation and deferred income tax

20.1 Corporate income tax in Estonia

Estonian companies generally do not pay corporate income tax on profits on a current basis. Tax is paid on distributions of profit, either formal (dividends, other payments from equity) or deemed (non-business expenses, transfer pricing adjustments, certain payments to tax havens, etc.). Dividends and other profit distributions are subject to corporate income tax at the rate of 20/80 on the net amount. Starting from 2019, regular dividend payments will be subject to corporate income tax at the reduced rate of 14/86 to the extent of the average dividend distribution of three preceding years. The first year to be taken into account is 2018. Corporate income tax arising from dividend distributions is recorded as a liability and income tax expense when the dividends are declared. The tax becomes due to the tax authorities on the 10th day of the month following the dividend payment.

Starting from second quarter of 2018 credit institutions are obliged to pay advance income tax of 14% on quarterly profits under IFRS (Note 26). The tax becomes due to the tax authorities on the 10th day of the third month following the quarter. Advance income tax paid is non-refundable and thus recorded as expense but can be used to reduce income tax payable on future dividend distributions.

20.2 Corporate income tax in other countries

In accordance with the local income tax laws, the net profit of the company located in United Kingdom that has been adjusted for the permanent and temporary differences as stipulated by law is subject to corporate income tax.

Corporate income tax rates	2021	2020
United Kingdom	19%	19%

Deferred income tax is calculated on all significant temporary differences between the tax bases of assets and liabilities and their carrying values in the consolidated statement of financial position. The main temporary differences arise from depreciation and tax loss carry-forwards. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry-forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

A deferred income tax liability in respect of the Group's available equity which would accompany the payment of available equity as dividends, is not reported in the statement of financial position. The maximum amount of income tax payable, which would arise from paying out the retained earnings as dividends, is disclosed in the Note 20 to the financial statements.

21. Classification of insurance contracts

An insurance contract is a written agreement between the insurer and the policyholder under which the policyholder undertakes to pay the insurance premiums specified the contract, and the insurer undertakes to pay the insured amount or the insurance benefits or to fulfil other contractual obligations when the insured event occurs. All contracts concluded between the insurance company and its customers qualify as insurance contracts

The contracts issued by the company are non-life insurance contracts and in most cases the contract term is one year. Exceptions include short-term travel insurance contracts, which provide cover for one trip and are entered into for the

duration of the trip, and equipment insurance and extended warranty contracts, which may have a term exceeding one year.

Premiums are recognised at the commencement date of the contract in their gross amount without deducting brokerage fees. Premiums are considered to be fully earned when the insurance cover expires.

Reinsurance

Reinsurance is partial transfer of the insurance risks taken by the insurer to a reinsurer under a reinsurance contract. Reinsurance contracts are usually signed for a term of one year. As an exception, proportional reinsurance contracts in motor third party liability insurance are signed for a term of three years.

Reinsurers' share of the provision for unearned premiums and the provisions for claims outstanding is recognised in accordance with the reinsurance contracts.

Provision for unearned premiums

The unearned premiums provision is calculated in all lines of business using the 365-day pro rata temporis method. The calculations are made separately for each contract. The unearned premiums provision for a contract makes up the same percentage of gross written premiums under the contract as the post-reporting date term of the contract makes up of the entire term of the contract.

Reinsurers' share of the unearned premiums provision is calculated only for those contracts that are covered by a proportional reinsurance contract.

Provision for claims outstanding

The claims outstanding provision is recognised to cover claims incurred but not settled by the reporting date and corresponding claims handling costs. The provision for claims outstanding comprises provisions for:

• handled but not yet settled;
• claims reported but not settled;
• claims incurred but not reported (IBNR).

Claims handling professionals estimate the amount of claims incurred but not settled on a case-by-case basis, taking into account all available information.

Reinsurers' share of the provision for claims outstanding is calculated in accordance with contracts covered by a reinsurance contract.

22. Offsetting

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously. More detailed information in Risk management section.

23. Statutory legal reserve

Statutory legal reserve is formed from annual net profit allocations to comply with the requirements of the Commercial Code. During each financial year, at least one-twentieth of the net profit shall be transferred to the statutory legal reserve, until the reserve reaches one-tenth of share capital. Statutory legal reserve may be used to cover a loss, or to increase share capital. Payments to shareholders from statutory legal reserve are not allowed.

Notes to the consolidated financial statements

NOTE 1 General information

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by European Union for the year ended 31 December 2021 for AS LHV Group and its subsidiaries AS LHV Pank (hereinafter referred to as "the Bank"), AS LHV Finance (subsidiary of AS LHV Pank), AS LHV Varahaldus, AS LHV Kindlustus and LHV UK Ltd (hereinafter referred together as "the Group" or "LHV"). AS LHV Group holds 65% interest in LHV Finance through AS LHV Pank. AS LHV Group holds 65% interest in LHV Kindlustus.

AS LHV Group is a limited liability company incorporated in and domiciled in Estonia. The address of its registered office is Tartu mnt 2, Tallinn. AS LHV Group is a holding company, whose subsidiary AS LHV Pank provides banking, financial advisory and securities brokerage services to customers in Estonia and in UK. There are offices for customer servicing in Tallinn and Tartu and also London branch was opened in 2018. LHV UK Ltd was established in 2021 and it is also based in UK. AS LHV Finance offers hire-purchase services to merchants and consumer finance. AS LHV Varahaldus offers fund management services for pension funds and other funds to customers in Estonia. AS LHV Kindlustus offers different insurances. As at 31.12.2021 the Group employed 652 full-time employees, incl. 43 non-active (31.12.2020: 518 employees, incl. 27 non-active).

The consolidated annual report (incl. financial statements) was approved by the Management Board on 16 February 2022. Rain Lõhmus, who owns 22.7% of the voting rights and Andres Viisemann, who owns 9.6% of the voting rights (see also Note 20), have significant influence over AS LHV Group.

The consolidated annual report approved by the Management Board shall be authorised for approval by the Supervisory Board and shareholders. The shareholders have the right not to approve the consolidated annual report.

NOTE 2 Significant management estimates and assumptions

In accordance with IFRS, several financial figures presented in the financial statements are strictly based on critical accounting estimates and assumptions made by management, which affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities presented in the financial statements at the end of the reporting period, and the reported amounts of income and expenses of subsequent reporting periods. Although these estimates have been made to the best of management's knowledge and their judgement of current events, the actual outcome may ultimately not coincide with them and may significantly differ from these estimates. Management's estimates have been applied to valuation of loans, receivables, and investments (Notes 10, 11, 12 and 13) and the determination of useful lives of tangible and intangible assets (Note 15).

Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Changes in management's estimates are reported prospectively.

The most significant management estimates and assumptions are related with the financial instrument standard IFRS 9, namely the criteria for SICR, calculation of PD and LGD, business model and SPPI assessment for classification of financial assets. Please see more information in Risk management section point 2. and below. There were no significant other changes in management estimates and assumptions in 2021.

When calculating expected credit loss (ECL) there are a number of key concepts that require a high level of judgement. Estimating expected credit loss is, by its very nature, uncertain and the accuracy of these estimates depends on many factors, e.g. macroeconomic forecasts and involves complex modelling and judgements. The assessment of significant increase in credit risk is a concept under IFRS 9 Financial Instruments and requires significant judgement. At the end of each reporting period the Group performs an assessment of whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument, using key risk indicators that are used in the Group's existing risk management processes. Another area requiring significant judgement is the incorporation of forward-looking information and macroeconomic scenarios. IFRS 9 requires an unbiased and probability-weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts of future economic conditions. LHV uses internally developed macroeconomic forecasts as the basis for the forwardlooking information in the ECL measurement. LHV uses both models and expert-based judgement in order to determine ECLs. The objective of applying expert-based judgement is to incorporate the estimated impact of factors not captured in the modelled ECL. The degree of judgement that is required to estimate expected credit losses depends on the outcome from calculations, materiality, and the availability of detailed information. The models, assessment and assumptions are regularly reviewed by the risk organisation of the Group and approved by the Asset and Liability Management Committee.

NOTE 3 Offsetting assets and liabilities

The group has offset the following assets and liabilities.

31.12.2021	Gross amounts before offset		Net amount of exposure	Related arrangements not set off in the statement of financial position
	ting in the statement of financial position	Offsetting	presented in the statement of financial position	Financial instruments	Cash collateral received	Net amounts
ASSETS
Derivatives	4	0	4	0	0	0
LIABILITIES
Derivatives	157	0	157	0	0	0
31.12.2020
ASSETS
Derivatives	89	0	89	0	0	0
LIABILITIES
Derivatives	221	0	221	0	0	0

NOTE 4 Fair value of financial assets and financial liabilities

(in thousands of euros)	Note	Level 1	Level 2	Level 3	Total fair value 31.12.2021	Carrying value 31.12.2021	Difference
Financial assets at fair value through profit or loss
Shares and fund units*	11	727	7,620	0	8,347	8,347	0
Debt securities at fair value through
profit or loss		11 127,504	0	0	127,504	127,504	0
Interest rate swaps and foreign
exchange forwards	11	0	4	0	4	4	0
Total financial assets at fair value
through profit or loss		128,231	7,624	0	135,855	135,855	0
Financial liabilities at fair value through profit or loss
Interest rate swaps and foreign
exchange forwards	11	0	157	0	157	157	0
Total financial liabilities at fair value
through profit or loss		0	157	0	157	157	0
Financial assets at amortised cost
Due from central banks	10		0 3,874,284	0	3,874,284	3,874,284	0
Due from credit institutions	10	0	106,838	0	106,838	106,838	0
Due from investment companies	10	0	6,188	0	6,188	6,188	0
Loans and advances to customers	12	0		0 2,717,991	2,717,991	2,677,160	40,831
Receivables from customers	13	0	9,752	0	9,752	9,752	0
Other financial assets	14	0	2,236	0	2,236	2,236	0
Total financial assets at amortised cost			0 3,999,298 2,717,991		6,717,289	6,676,458	40,831
Financial liabilities at amortised cost
Amounts owed to central banks (TRTLO)	16	0	197,461	0	197,461	197,461	0
Deposits from customers	16		0 5,646,953	159,277	5,806,230	5,807,617	-1,387
Loans received and debt securities in issue		16 350,220	0	0	350,220	349,146	1,074
Subordinated debt	19	0	111,813	0	111,813	110,378	1,435
Accounts payable and other liabilities	17	0	49,262	0	49,262	49,262	0
Total financial liabilities at amortised cost			350,220 6,005,489	159,277	6,514,986	6,513,864	1,122

Total net gain recognised in OCI for level 3 financial assets amounted to EUR 0 thousand.

(in thousands of euros)	Note	Level 1	Level 2	Level 3	Total fair value 31.12.2020	Carrying value 31.12.2020	Difference
Financial assets at fair value through profit or loss
Shares and fund units*	11	479	6,788	0	7,267	7,267	0
Debt securities at fair value
through profit or loss		11 322,699	0	0	322,699	322,699	0
Interest rate swaps and foreign
exchange forwards	11	0	89	0	89	89	0
Total financial assets at fair value
through profit or loss		323,178	6,877	0	330,055	330,055	0
Financial liabilities at fair value through profit or loss
Interest rate swaps and foreign exchange forwards 11		0	221	0	221	221	0
Total financial liabilities at fair value
through profit or loss		0	221	0	221	221	0
Financial assets at amortised cost
Due from central banks	10		0 2,213,211	0	2,213,211	2,213,211	0
Due from credit institutions	10	0	170,341	0	170,341	170,341	0
Due from investment companies	10	0	9,985	0	9,985	9,985	0
Loans and advances to customers	12	0		0 2,239,759	2,239,759	2,208,823	30,936
Receivables from customers	13	0	9,391	0	9,391	9,391	0
Other financial assets	14	0	2,073	0	2,073	2,073	0
Total financial assets at amortised cost				2,405,001 2,239,759	4,844,760	4,613,824	30,936
Financial liabilities at amortised cost
Amounts owed to central banks (TLTRO)	16	0	199,744	0	199,744	200,000	-256
Deposits from customers	16		0 3,636,156	484,736	4,120,892	4,119,771	1,121
Loans received and senior bonds		16 249,208	19,759	0	268,967	268,584	383
Subordinated debt	19	0	110,545	0	110,545	110,603	-58
Accounts payable and other liabilities	17	0	22,995	0	22,995	22,995	0
Total financial liabilities at amortised cost			249,208 3,989,199	484,736	4,723,143	4,721,953	1,190

*Shares and fund units include the Group's subsidiary AS LHV Varahaldus investment into pension fund units in the amount of EUR 7,620 thousand (31.12.2020: EUR 6,788 thousand) euros. Pursuant to the Investment Funds Act, the mandatory shares of LHV Varahaldus as the management company is 0.5% of the number of units in each of the mandatory pension fund managed by it.

The Management Board of the Group has assessed the fair value of assets and liabilities carried at amortized cost in the statement of financial position. For estimating fair value, the future cash flows are discounted based on the market interest yield curve.

Levels used in hierarchy:

• 1. Level 1 quoted prices in active market
• 1. Level 2 valuation technique based on observable market data as inputs (rates and interest curves from similar transactions)
• 1. Level 3 other valuation techniques (a) Quantitative information about the significant unobservable inputs used in fair value measurement (if developed and available for the entity); b) a narrative description of the sensitivity of FV measurement to changes in unobservable inputs (if the change might result in a significant change in FV measurement); c) effect of reasonable possible changes to unobservable inputs

For the term structure of financial assets and financial liabilities, refer to Risk management section point 4.

NOTE 5 Operating segments

Group divides its business activities by 7 main business segments: retail banking, corporate banking, asset management, hire purchase, financial intermediaries, insurance, LHV UK Ltd. The business segments form a part of the Group, with a separate access to financial data and which are subject to regular monitoring of operating result by the Group's decision-maker. The full planning and KPI setting is done on segments level. For each of the segment full statement of financial position and profit and loss statement is prepared. In addition to these high-level segments, Group has planning/measurement on department level. Grouping is done based on the customer/product base, where similar departments are grouped under one segment.

Retail banking segment covers all private individuals and small legal entities with credit exposure under EUR 500 thousand. This is the regular universal banking segment offering payments, cards, credits etc.

Corporate banking segment covers all corporate customers and other legal entities with credit exposure over EUR 500 thousand. The main products are credits and payments.

Asset management is the pension management segment covering pension second and third pillar.

Hire-purchase and consumer finance unit in Estonia is separate legal entity covering small loan business to private individuals. These portfolios are relatively small, but due to customers different payment history these segments have to be looked separately.

Financial intermediates cover fintech companies with large volume of payments both in Estonia and in United Kingdom. Under that segment LHV reports also regular payment services.

Insurance segment covers LHV Kindlustus activities in servicing clients in non-life insurance segment.

LHV UK Ltd is UK based company, which is applying for banking licence in the UK. After receiving the licence, the company will take over most of the financial intermediaries' business segment.

Other activities include treasury activities through providing internal bank function to segments and AS LHV Group solo based activities, which are mostly capital and funding related.

The Management Board of AS LHV Group has been designated as the decision-maker responsible for allocation of funds and assessment of the profitability of the business activities. The result posted by a segment includes revenue and expenditure directly related to the segment. The revenue of a reported segment is based on the revenue per financial statements and includes gains from transactions between the segments, i.e. loans granted by AS LHV Pank to other group companies. The division of interest income and fee and commission income by customer location has been presented in Notes 7 and 8. The Group does not have any customers, whose income would account for more than 10% of the corresponding type of revenue.

31.12.2021 (in thousands of euros)	Retail banking	Corporate banking	Asset manage ment	Hire-purc hase and consumer finance	Financial intermedi ates	Insurance	LHV UK Ltd	Other activities	Total
Interest income incl.	36,226	59,564	0	11,577	5,107	4	0	12,163	124,641
External interest income	36,226	59,564	0	11,577	43	4	0	17,227	124,641
Internal interest income	0	0	0	0	5,064	0	0	-5,064	0
Interest expense	-1,066	-10,172	-14	-1,791	0	0		0 -14,279	-27,322
Net interest income	35,160	49,392	-14	9,786	5,107	4	0	-2,116	97,319
Fee and commission income	10,003	2,515	11,374	768	34,647	919	0	598	60,824
Fee and commission expense	-1,831	-354	0	-667	-14,946	0	0	453	-17,345
Net fee and commission income	8,172	2,161	11,374	101	19,701	919	0	1,051	43,479
Net gains from financial assets	-97	0	591	0	-436	0	4	-1,008	-946
Net other income	15	397	0	0	96	0	0	22	530
Net income	43,250	51,950	11,951	9,887	24,468	923	4	-2,051	140,382
Administrative and other operating
expenses, staff costs	-15,788		-9,853 -10,015	-1,868	-14,732		-1,895 -2,995	-8,039	-65,185
Profit before credit losses	27,462	42,097	1,936	8,019	9,736			-972 -2,991 -10,090	75,197
Impairment losses on loans and
advances	-475	-3,110	0	-293	-43	0	0	-27	-3,948
Profit before tax	26,987	38,987	1,936	7,726	9,693			-972 -2,991 -10,117	71,249
Income tax	-3,120	-4,544	-1,241	-1,184	-1,670	-1	0	774	-10,986
Net profit for the reporting period	23,867	34,443	695	6,542	8,023		-973 -2,991	-9,343	60,263
Total assets		2,885,760 3,905,861	28,185	69,089		0 14,859			9,009 -67,830 6,844,933
Total liabilities	3,297,057	711,642	544		50,417 2,520,127	8,212			143 -68,010 6,520,132

31.12.2020 (in thousands of euros)	Retail banking	Corporate banking	Asset manage ment	Hire-purc hase and consumer finance	Financial intermedi ates	Other activities	Total
Interest income incl.	28,867	44,659	0	12,022	941	1,884	88,373
External interest income	28,867	42,779	0	12,022	0	4,705	88,373
Internal interest income	0	1,880	0	0	941	-2,821	0
Interest expense	-2,072	-6,246	-95	-1,880	0	-9,588	-19,881
Net interest income	26,795	38,413	-95	10,142	941	-7,704	68,492
Fee and commission income	8,284	1,000	14,966	708	21,160	0	46,118
Fee and commission expense	-1,042	-44	0	-635	-11,032	-16	-12,769
Net fee and commission income	7,242	956	14,966	73	10,128	-16	33,349
Net gains from financial assets	-50	-1	707	0	17	911	1,584
Net income	33,987	39,368	15,578	10,215	11,086	-6,809	103,425
Administrative and other operating expenses,
staff costs	-13,213	-7,691	-6,389	-1,703	-9,588	-5,271	-43,855
Profit before credit losses	20,774	31,677	9,189	8,512		1,498 -12,080	59,570
Impairment losses on loans and advances	-976	-9,363	0	-533	-26	0	-10,898
Profit before tax	19,798	22,314	9,189	7,979		1,472 -12,080	48,672
Income tax	-1,825	-2,394	-844	-826	-521	-2,416	-8,826
Net profit for the reporting period	17,973	19,920	8,345	7,153		951 -14,496	39,846
Total assets	1,722,042	3,050,474	34,352	65,851			147,604 -48,916 4,971,407
Total liabilities	2,172,121	1,274,941	1,109		47,778 1,274,941 -44,759 4,726,131

The geographical distribution of Group's interest income and its breakdown by products are presented in Note 7.

NOTE 6 Subsidiaries and goodwill

As at 31.12.2021, the Group's subsidiaries, which have been consolidated in these financial statements include:

• AS LHV Pank (Estonia, ownership interest 100%)
• AS LHV Varahaldus (Estonia, ownership interest 100%)
• AS LHV Finance (Estonia, ownership interest 65% through AS LHV Pank)
• AS LHV Kindlustus (Estonia, ownership interest 65%)
• LHV UK Ltd (Great Britain, ownership interest 100%)

At the end of 2021 Cuber Technology OÜ was liquidated (2020: ownership interest 100%).

In 2021 LHV UK Ltd was established in Great Britain.

AS LHV Pank established LHV Finance in 2013 and owns 65% of it. The contribution of the non-controlling interest of 35% has been reflected in the consolidated statement of financial position on the line "Non-controlling interest".

AS LHV Group paid in 2020 EUR 5,200 thousand of monetary contribution for 65% of ownership in LHV Kindlustus and a non-controlling interest paid EUR 2,800 thousand of monetary contribution for 35% of ownership. The contribution of the non-controlling interest has been reflected in the consolidated statement of financial position on the line "Non-controlling interest".

As at 31.12.2021 and 31.12.2020, the Group does not have any associates.

As at 31.12.2021, goodwill in amount EUR 3,614 thousand in the consolidated financial statements of AS LHV Group consists of:

• goodwill which had arisen on the acquisition of the ownership in AS LHV Varahaldus in the amount of EUR 1,044 thousand;
• goodwill which had arisen on the acquisition of the ownership interests in Danske Capital AS by AS LHV Varahaldus in the amount of EUR 2,570 thousand

Impairment tests were performed as at 31.12.2021 and as at 31.12.2020. The cash-generating unit of goodwill is AS LHV Varahaldus. The calculation of the value in use is based on the following assumptions based on 5-year forecast:

• the volume of assets under management is expected to increase by 7% per annum (2021: by 3%). The reform of Pension Pillar II is negatively affecting 2022, but volumes are expected to reach end of 2020 by 2024;
• In 2020 and 2021 LHV Varahaldus managed to earn success fee, which is not included into future forecasts. All internal targets are set to the levels that fulfilling them will allow LHV Varahaldus to earn success fee also in upcoming years. Excluding success fee, the increase of income of fund manager is expected to be average of -4% per annum (2021: -4%);
• due to the economic environment, growth of 2% in indirect costs is expected per annum (2021: 5%);
• the discount rate used is 16% (2021: 15%).

When using the main assumptions, the management used previous years' experience and its best estimate in respect of probable expectations. Expectations are more conservative due to the changes in the market situation and legislation. Based on the results of the impairment test performed as at 31.12.2021 and 31.12.2020, the recoverable amount of cash generating unit is higher than its carrying amount, as a result of which no impairment losses have been recognized. As at 31.12.2021, the Group has two (31.12.2020: two) subsidiaries that have non-controlling interests, AS LHV Kindlustus and AS LHV Finance.

Set out below are the summarised financial information for AS LHV Finance and AS LHV Kindlustus. The information disclosed is the amount before inter-company eliminations.

Summarised statement of Financial Position	AS LHV Finance		AS LHV Kindlustus
(in thousands of euros)	31.12.2021	31.12.2020	31.12.2021	31.12.2020
Loans and advances to customers and other current assets	69,079	65,804	13,893	0
Non-current assets	10	45	966	233
Current liabilities	1,968	1,808	8,212	133
Non-current liabilities	48,449	45,970	0	0
Total net assets	18,672	18,071	6,647	100
Summarised statement of Profit or Loss
and Other Comprehensive Income
Total net interest and fee income	9,807	10,215	1,073	0
Profit/(loss) before income tax	7,726	7,979	-822	-551
Income tax expense	-1,184	-826	-1	0
Net profit	6,542	7,153	-833	-551
Total comprehensive income	6,542	7,153	-833	-551
Profit/(loss) and other comprehensive income allocated to
non-controlling interests	2,291	2,089	-288	-193
Summarised statement of Cash Flows
Cash generated from operations	6,494	9,411	3,168	-407
Interest paid	-1,797	-1,899	0	0
Income tax paid	-1,184	-826	-1	0
Net cash generated from/ (used in) operating activities	3,513	6,686	3,167	-407
Net cash generated from/ (used in) investing activities	0	0	-1,157	2,556
Net cash generated from/ (used in) financing activities	-3,515	-6,684	0	5,200
Net increase/(decrease) in cash and cash equivalents	-2	2	2,010	7,349
Cash and cash equivalents at beginning of year	2	0	7,349	0
Cash and cash equivalents at end of year	0	2	9,359	7,349

NOTE 7 Net interest income

Interest income (in thousands of euros)	Note	2021	2020
Interest income using effective interest calculation
Corporate loans		62,213	46,834
incl. loans to related parties	23	54	31
incl. stage 3 interests*		303	129
Hire purchase		3,409	3,708
Consumer loans		8,156	8,314
Private loans		2,299	2,109
Mortgage loans		21,441	18,170
Leveraged loans and lending of securities		1,742	753
Credit card loans		834	849
From balances with credit institutions and investment companies		281	33
From balances with central bank		2,283	0
Other loans		16,332	3709
Subtotal		118,990	84,479
Other similar interest income
Leasing		6,000	4,329
incl. loans to related parties	23	9	4
From debt securities		-349	-435
incl. debt securities at fair value through profit or loss	11	-349	-435
Subtotal		5,651	3,894
Total	5	124,641	88,373
Interest expense
Deposits from customers and loans received		-5,323	-7,570
incl. deposits from related parties	23	-27	-17
From balances with central bank		-14,170	-5,966
Subordinated debt	19	-7,829	-6,345
incl. loans from related parties	23	-323	-342
Total	5	-27,322	-19,881
Net interest income	5	97,319	68,492
Interest income of loans by customer location		2021	2020
(interests from bank balances and debt securities not included):
(in thousands of euros)
Estonia		121,461	87,420
Other		965	1,355
Total		122,426	88,775

*As most of the stage 3 loans are sold to debt collectors, the stage 3 interests are marginal in all loan portfolios except corporate loans.

The distribution of Group's interest income by operating segments is presented in Note 5. Loan portfolio is presented in Note 12.

NOTE 8 Net fee and commission income

Fee and commission income	Note	2021	2020
Security brokerage and commission fees		6,159	4,825
incl. related parties	23	0	13
Asset management and related fees		16,540	18,629
incl. funds managed by the Group*	23	11,215	14,958
Currency exchange fees		8,618	3,406
Fees from cards and settlements		23,635	15,171
Fees from consumer loans and hire purchase		768	709
Fees from insurance services		919	0
Other fee and commission income		4,185	3,378
Total	5	60,824	46,118
Fee and commission expense
Security brokerage and commission fees paid		-1,778	-1,062
Expenses related to cards		-5,734	-4,722
Expenses related to card payments acquiring		-7,104	-4,498
Transaction costs		-1,135	-788
Costs related to ATM-s		-748	-1,058
Other fee expense		-846	-641
Total	5	-17,345	-12,769
Net fee and commission income	5	43,479	33,349

* Commission fees from pension and investment funds are calculated as a fixed percentage of total assets of the fund and varies between 0.39% -1.2% p.a.

Fee and commission income by customer location:	2021	2020
Estonia	53,527	42,523
Other	7,297	3,595
Total	60,824	46,118

NOTE 9 Operating expenses

(in thousands of euros)	Note	2021	2020
Wages, salaries and bonuses		23,888	18,380
Social security and other taxes*		7,433	5,530
Total staff costs		31,322	23,910
IT expenses		4,467	3,403
Information services and banking services		1,343	1,005
Marketing expenses		2,511	1,822
Office expenses		1,030	672
Transportation and communication costs		318	279
Training and travelling expenses of employees		450	317
Other outsourced services		6,432	3,847
Other administrative expenses		7,654	3,879
Depreciation and amortisation	15	8,204	4,359
Rental payments		807	125
Other operating expenses		648	356
Total other operating expenses		33,863	20,064
Total operating expenses		65,185	43,974

* lump-sum payment of social, health and other contributions

The average number of employees working for LHV Group in 2021 was 597 (2020:473).

From 2018, the sales costs of pension fund customer agreements have been capitalised as intangible assets based on their expected lifetime of customer relationship, i.e. 20 years

If these sales costs would have recorded as costs and not capitalised, the "Marketing expenses" would have been EUR 749 (2020: 1,584) thousand higher.

NOTE 10 Due from central bank, credit institutions and investment companies

(in thousands of euros)	31.12.2021	31.12.2020
Demand and term deposits with maturity of less than 3 months*	113,026	180,326
Statutory reserve capital at central bank	57,298	41,253
Demand deposit from central bank*	3,816,986	2,171,958
Total	3,987,310	2,393,537
*cash and cash equivalents in the statement of cash flows	3,930,012	2,352,284

Distribution of receivables by countries is presented in Risk management section point 2. Mandatory banking reserve as at 31.12.2021 was 1% (2020: 1%) of all financial resources collected (deposits from customers and loans received). The reserve requirement is to be fulfilled as a monthly average in euros or in the foreign securities preapproved by the central bank.

NOTE 11 Investments in debt and equity securities

Mandatory measurement as fair value through profit or loss	31.12.2021
Shares and fund units	727
Debt securities	127,504
Fund units	7,620
incl. investments in managed pension funds	7,620
Foreign exchange forwards	4
Total financial assets	135,855
Interest rate swaps and foreign exchange forwards	157
Total financial liabilities	157
Mandatory measurement as fair value through profit or loss	31.12.2020
Shares and fund units	479
Debt securities	322,699
Fund units	6,788
incl. investments in managed pension funds	6,788
Foreign exchange forwards	89
Total financial assets	330,055
Interest rate swaps and foreign exchange forwards	221
Total financial liabilities	221
Financial assets at fair value through profit or loss 31.12.2019	40,530
Net changes of investment securities at fair value through profit or loss	287,498
Negative interest income (Note 7)	-435
Revaluation	2,462
Financial assets at fair value through profit or loss 31.12.2020	330,055
Net changes of investment securities at fair value through profit or loss	-193,626
Negative interest income (Note 7)	-349
Revaluation	-225
Financial assets at fair value through profit or loss 31.12.2021	135,855

Strategical financial investment

AS LHV Group has an investment of EUR 5,236 thousand (£4.455 million) in Bank North (previously B-North). AS LHV Group has 9.9% share in the company. Bank North's delivery mechanism offers rapid initial credit decisions and simultaneous full approval, valuation and legal processes, which will provide customers with certainty, flexibility and fast access to funds, with time to cash predicted to be days or weeks rather than months.

Bid price is the fair value of investments in the case of publicly listed securities. In 2021, a loss of EUR 1,142 thousand was recognised on the revaluation of debt securities (2020: EUR 865 thousand gain). No profit or loss arose on the revaluation of interest rate swaps in 2021 and in 2020.

The volume of pension and investment fund assets managed by the Group as at 31.12.2021 was EUR 1,349 million (31.12.2020: EUR 1,537 million).

NOTE 12 Loans and advances to customers

(in thousands of euros)	31.12.2021	31.12.2020
Loans to legal entities	1,683,891	1,367,540
incl. corporate loans	1,469,216	1,192,803
incl. leasing	111,001	102,297
incl. overdraft	32,327	30,338
incl. trade finance	37,162	20,497
incl. leveraged loans	5,304	5,551
incl. credit cards and hire-purchase	570	519
incl. apartment association loans	10,929	7,135
incl. factoring	17,382	8,400
Loans to individuals	1,012,318	858,141
incl. hire-purchase	13,081	14,294
incl. mortgage loans	840,736	695,204
incl. consumer loans	56,936	52,202
incl. private loans	49,683	50,264
incl. leasing	30,127	26,554
incl. leveraged loans	9,008	6,366
incl. credit card loans	7,540	7,232
incl. overdraft	19	23
incl. study loan	1,213	974
incl. real estate leasing	3,975	5,028
Total	2,696,209	2,225,681
incl. related parties (Note 23)	6,047	4,096
Impairment provisions	-19,049	-16,858
Total	2,677,160	2,208,823

Changes in impairments	Balance as at 1 January	Impairment provisions / reversals set up during the year	Written off during the reporting period	Balance as at 31 December
Corporate Lending	-13,449	-9,707	7,867	-15,289
Consumer Financing	-1,178	-1,318	1,177	-1,320
Investment Financing	-25	-130	25	-130
Leasing	-1,385	-1,226	1,361	-1,250
Private Lending	-821	-707	466	-1,061
Total 2021	-16,858	-13,087	10,896	-19,049
Corporate Lending	-3,819	-11,345	1,714	-13,449
Consumer Financing	-789	-923	534	-1,178
Investment Financing	-6	-21	2	-25
Leasing	-639	-981	235	-1,385
Private Lending	-851	-498	528	-821
Total 2020	-6,104	-13,767	3,013	-16,858

Impairment losses accumulated during the year differ from the amount of impairment losses recognized in the statement of profit or loss, that have been written off earlier as uncollectible claims. These receipts were recorded among impairment losses in the statement of profit or loss.

For credit risk exposures and loan collateral, see Risk management section point 2.

Distribution of loans granted by currencies is disclosed in Risk management section point 3.

Distribution of loans granted by maturity is disclosed in Risk management section point 4.

The geographical distribution of loans granted is disclosed in Risk management section point 2.

For interest income on loans granted, see Note 7

NOTE 13 Receivables from customers

(in thousands of euros)	31.12.2021	31.12.2020
Asset management fees from customers	3,990	8,152
incl. related parties (Note 23)	3,252	6,949
Other fees for providing services to customers	794	1,230
Receivables from insurance activities	3,717	0
Payments in transit	1,251	9
Total	9,752	9,391

All fees, are collected within 12 months of the end of the reporting period and are considered as current asset.

NOTE 14 Other assets

(in thousands of euros)	31.12.2021	31.12.2020
Financial assets
Guarantee deposits of Baltic stock exchanges	17	15
Guarantee deposits of VISA and MasterCard	2,220	2,058
Subtotal	2,237	2,073
Non-financial assets
Prepayments to Financial Supervision Authority	1,112	831
Prepayments from insurance activities	564	0
Other prepayments*	1,794	1,351
Subtotal	3,470	2,182
Total	5,707	4,255

* Prepayments include office rent, insurance, communication services, periodicals and training

Prepayments are expected to be received or used within 12 months of the end of the reporting period and are therefore considered current assets. Guarantee deposits on the Baltic stock exchanges are held to guarantee securities trading activity on the stock exchanges of Tallinn, Riga and Vilnius and the deposits of VISA and MasterCard to guarantee credit card transactions and should therefore both be considered non-current assets.

NOTE 15 Tangible and intangible assets

(in thousands of euros)	Tangible assets	Right-of-use assets	Total tangible assets	Intangible assets	Expenditures incurred for the acquisition of customer contracts	Total intangible assets	Total
Balance as at 31.12.2019
Cost	5,112	5676	10,788	8,352	14,020	22,372	33,160
Accumulated depreciation and amortisation	-3,203	-899	-4,102	-4,775	-2,892	-7,667	-11,769
Carrying amount 31.12.2019	1,909	4777	6,686	3,577	11,128	14,705	21,391
Purchase of non-current assets	1,651	0	1,651	1105	0	1105	2,756
Capitalized selling costs	0	0	0	0	1,944	1,944	1,944
Write-off of non-current assets	0	-230	-230	0	0	0	-230
Depreciation/amortisation charge (Note 9)	-780	-972	-1,752	-804	-1803	-2,607	-4,359
Balance as at 31.12.2020
Cost	6,763	5,446	12,209	9,457	15,964	25,421	37,630
Accumulated depreciation and amortisation	-3,983	-1641	-5,624	-5,579	-4,695	-10,274	-15,898
Carrying amount 31.12.2020	2,780	3,805	6,585	3,878	11,269	15,147	21,732
Purchase of non-current assets	2,515	1077	3,592	2,496	0	2,496	6,088
Capitalized selling costs	0	0	0	0	750	750	750
Write-off of non-current assets	0	-67	-67	-807	0	-807	-874
Depreciation/amortisation charge (Note 9)	-863	-773	-1,636	-2610	-3,958	-6,568	-8,204
Balance as at 31.12.2021
Cost	9,278	6,523	15,801	11,146	16,714	27,860	43,661
Accumulated depreciation and amortisation	-4,846	-2,481	-7,327	-7,382	-8,653	-16,035	-23,362
Carrying amount 31.12.2021	4,432	4,042	8,474	3,764	8,061	11,825	20,299

Tangible assets include computer technology and office equipment, furniture, capitalized costs of office renovation. Intangible assets include licences, customer contracts and development costs.

In 2021 and 2020, there was no indication of impairment of tangible and intangible assets. The reconciliation of the operating balance of right-of-use assets and changes during the year are disclosed in Note 18.

NOTE 16 Deposits from customers and loans received

31.12.2021
(in thousands of euros)	Individuals		Financial entities		Non-financial entities	Public sector	Total
Demand deposits	1,005,757		2,473,973		2,008,349	161,510	5,649,589
Term deposits	39,209		15,679		81,808	22,587	159,283
Accrued interest liability	285		-1,537		-5	2	-1,255
Total	1,045,251		2,488,115		2,090,152	184,099	5,807,617
incl. related parties (Note 23)	2,349		0		28,290	0	30,639
31.12.2020 (in thousands of euros)
Demand deposits	745,304		1,213,543		1,284,186	392,134	3,635,167
Term deposits	256,764		38,895		172,406	15,237	483,302
Accrued interest liability	1,208		24		68	2	1,302
Total	1,003,276		1,252,462		1,456,660	407,373	4,119,771
incl. related parties (Note 23)	1,791		0		19,527	0	21,318
				31.12.2021			31.12.2020
(in thousands of euros)		Loan principal		Accrued interest		Loan principal	Accrued interest
Loan received from EIF and NIB		0		0		19,757	2
Debt securities in issue		100,000		26		0	0
Covered bonds		248,980		140		248,685	140
Total		348,980		166		268,442	142
				31.12.2021			31.12.2020
(in thousands of euros)		Loan principal		Accrued interest		Loan principal	Accrued interest
Received loan from central banks (TLTRO)		200,000		-2,539		200,000	0
Total		200,000		-2,539		200,000	0

LHV Pank had an unsecured 10-year loan agreement with the European Investment Fund (EIF) in the amount of EUR 12.5 million to increase the credit facilities of small and medium-sized enterprises. As at 31.12.2020, the Bank had used EUR 12 250 thousand of the loan amount and repaid the principal in the amount of EUR 3,604 thousand. The outstanding balance as at 31.12.2020 is EUR 8,646 thousand. As at 31 12 2020, the Bank has received EUR 20,000 thousand loan from Nordic Investment Bank (NIB) and repaid the principal in the amount of EUR 8,889 thousand. As at 31.12.2020 the balance of the loan received from NIB is EUR 11,111 thousand.

At the end of 2021 loans received from European Investment Fund and Nordic Investment Bank were fully repaid.

In June 2020, LHV Pank made a successful debut issue of EUR 250 million in covered bonds to international investors. 31 institutional investors participated in the 5-year issue and the interest rate was 0.12%. The issue by LHV Pank was the first debut issue since the beginning of the COVID-19 crisis. The issue received an Aa1 rating from Moody's and was listed on the Dublin Stock Exchange.

In the third quarter of 2021, the Bank raised EUR 200 million in negative interest funds through the TLTRO III program offered by the European Central Bank.

The nominal interest rates of most deposits from customers and loans received equal their effective interest rates as no other significant fees have been paid.

Distribution of deposits from customers and loans received by currency is presented in Risk management section point 3.

Distribution of deposits from customers and loans received by maturity is presented in Risk management section point 4.

Geographical distribution of deposits from customers and loans received and Risk concentration is presented in Risk management section point 2.

NOTE 17 Accounts payable and other liabilities

(in thousands of euros)	Note	31.12.2021	31.12.2020
Financial liabilities
Trade payables		2,779	2,058
Other short-term financial liabilities		6,904	5,591
Lease liabilities	18	3,350	3,394
Payments in transit		27,202	10,952
Insurance payables		7,926	0
Financial guarantee contracts issued		1,101	397
Subtotal		49,262	22,392
Non-financial liabilities
Performance guarantee contracts issued		543	299
Tax liabilities		2,207	1,820
Payables to employees		2,545	2,202
incl. related parties	23	107	91
Other short-term liabilities		816	239
Subtotal		6,111	4,560
Total		55,373	26,952

Payables to employees consist of unpaid salaries, bonus accruals and vacation pay accrual for the reporting period and the increase in liabilities is caused by the increase in the number of employees during the year. Payments in transit consist of foreign payments and payables to customers related to intermediation of securities transactions, for which the customer's current account have been debited. All liabilities, except for financial guarantees, are payable within 12 months and are therefore recognised as current liabilities.

Deferred income tax calculated on future dividends in the amount of EUR 1,603 (2020: 2,416) thousand is included in other short term financial liabilities.

NOTE 18 Right of use assets and lease liabilities

The Group leases office premises. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability from the date when the leased asset becomes available for use by the Group. All lease agreements are cancellable upon the consent of both parties.

The Group's total right of use assets are the statement of financial position as at 31.12.2021 is EUR 4,042 (31.12.2020: 3,805) thousand and the lease liabilities are EUR 3,350 (31.12.2020: 3,394) thousand. The increase in 2021 was related to the new lease properties and also due to prolonging the agreements. During the year 2020 EUR 315 thousand was deducted from right-of-use assets and lease liability which was related to the new lease properties. The right of use assets balance is disclosed in the Note 16. The lease liability balance is disclosed in the Note 17. Interest expense on lease liabilities was EUR 101 (2020: 144) thousand and the depreciation of the right of use assets was EUR 840 (2020: 971) thousand (Note 15). The repayments of principal of lease liabilities were EUR 963 (2020: 963) thousand.

NOTE 19 Subordinated debts

According to the Groups operations, only subordinated debts are recognized as loans received in the statement of cash flows, as other loans are received as part of ordinary business operations. The current note contains changes in subordinated debts, including monetary or non-monetary movements and effects of foreign exchange rates, if they have occurred during the reporting period or the reference period.

The Group has received subordinated debts in order to increase long-term capital. In the case of default of the Group, the subordinated debts are repayable after all other debts have been paid, but before debts to shareholders are paid. The balances of subordinated debt as at the end of each reporting period is disclosed in the table below.

Subordinated debts

(in thousands of euros)	Amount	Interest rate	Maturity date
Subordinated bond	40,000	6.0%	28 November 2028
Subordinated bond	35,000	6.0%	30 September 2030
Tier 1 subordinated bond	20,000	8.0%	perpetual
Tier 1 subordinated bond	15,000	9.5%	perpetual
Subordinated debt as at 31.12.2020	110,000
Subordinated debt as at 31.12.2021	110,000

Interest expenses on subordinated bonds for each reporting period and accrued interest liabilities as at the end of each reporting period is disclosed in the table below. Interest liabilities are accounted in the statement of financial position using the effective interest rate.

Interest liability from subordinated debt (in thousands of euros)

Accrued interest on subordinated debt as at 01.01.2020 (Note 18)	444
Interest calculated for 2020 (Note 7)	6,345
Paid out during 2020	-6,186
Accrued interest on subordinated debt as at 31.12.2020 (Note 18)	603
Interest calculated for 2021 (Note 7)	7,266
Paid out during 2021	-7,491
Accrued interest on subordinated debt as at 31.12.2021 (Note 18)	378

NOTE 20 Shareholders' equity in the public limited company

Transactions with share capital and share premium (in thousands of euros)	Time	Share price	Number of shares (thousands)	Share premium (thousands)	Total (thousands)
Share capital as at 01.01.2020			28,454	70,136
Paid in share capital	Apr 2020	4.65	365	1,332	1,697
Share capital as at 31.12.2020			28,819	71,468
Paid in share capital	Apr 2021	5.33	300	1,298	1,598
Paid in share capital	Oct 2021	34.00	745	24,595	25,340
Share capital as at 31.12.2021			29,864	97,361

Share capital is paid in full through cash contributions. The nominal value of the shares is 1 euro and as at 31.12.2021 the number of shares amounted to 29,864,167 (31.12.2020: 28,819,092). Each share gives one vote to the shareholder at the General Meeting.

According to AS LHV Group's articles of association, the minimum share capital is EUR 15 million and the maximum share capital is EUR 60 million (31.12.2020: EUR 15 and EUR 60 million).

Rain Lõhmus who owns 22.7% of the voting rights and Andres Viisemann who owns 9.6% of the voting rights in AS LHV Group have significant influence over the company (31.12.2020: 23.4% and 9.7%).

In the reporting year, the Group paid dividends to shareholders of 0.29 (2020: 0.19) EUR per share, amounting to a total of EUR 8,358 (2020: 5,406) thousand.

As at 31.12.2021, the retained earnings of the Group totalled

EUR 179,746 thousand (31.12.2020: EUR 128,385 thousand). As of 31.12.2021 it is possible to pay out dividends in amount EUR 144 244 (2020: 103,057) thousand. Part of the potential dividends (1/3 from dividends paid out in 2019- 2021) would be taxed at a preferential rate of 14/86 and the remaining part 20/80. The related income tax charge would be EUR 35,502 (2020: 25,328 with 20/80 tax rate) thousand.

Statutory reserve capital in equity is as follows:

(in thousands of euros)
Statutory legal reserve as at 01.01.2020	4,713
Statutory legal reserve as at 31.12.2020	4,713
Statutory legal reserve as at 31.12.2021	4,713

Other reserves in the consolidated statement of Changes in Equity consist of:

(in thousands of euros)	31.12.2021	31.12.2020
Reserve of share options granted to staff	4,685	3,409
Total	4,685	3,409

The Group is granting share options to the members of the Management Board and employees considered as such and department managers and employees considered as such of group companies that are part of AS LHV Group.

	Number of shares	Strike price per share (EUR)	Expiry year	Number of people to whom the share options were granted
Outstanding amount of share options at 01.01.2020	1,175,722
Granted amount during the period	452,781	5.96	2023	107
Exercised amount during the period	-364,990
Outstanding amount of share options at 31.12.2020	1,263,513
Granted amount during the period	435,606	9.23	2024	138
Exercised amount during the period	-299,781
Outstanding amount of share options at 31.12.2021	1,399,338

The Group may issue share options for the results of 2021. The vesting period for all share options in the option program is 3 years. The right to subscribe will occur on the first day of the exercising period. The option strike price is calculated using Black-Scholes model based on LHV Group share price in Q4 2021 and volatility, risk free rate Latvian and Lithuanian government bonds used as proxy and dividends yield as inputs. In 2021, share options issued in 2018 were fully exercised.

The members of the Management Board and employees do not have the possibility to take the specified amount in cash in lieu of the share options. Share options cannot be exchanged, sold, pledged, or encumbered. Share options can be inherited. The contract for share options will expire upon premature termination of the employment contract on the employee's initiative, for which exceptions can be made by the Supervisory Board of AS LHV Group or the Remuneration Committee based on the decision of the Supervisory Board, and upon extraordinary termination of the employment contract by the employer due to reasons resulting from the employee. According to the Credit Institutions Act the Supervisory Board of AS LHV Group can reduce the number of share options issued or cancel the share options if the overall financial results of the Company have significantly deteriorated compared to the previous period, the member of the Management Board or employee no longer meets the performance criteria, the Company no longer meets the prudential regulations or the Company's business risks are not adequately covered by Company's own funds or the performance fee has been determined based on information, which proved to be substantially misstated or incorrect.

Total expenses arising from share-based payment transactions amounted to EUR 2,734 (2020: 1,953) thousand.

NOTE 21 Assets under management

has custody of or intermediates the following customer assets:
(in thousands of euros)	31.12.2021	31.12.2020
Cash balance of customers	3,806	7,938
Securities of customers	3,392,585	1,856,104
incl. shareholders of the parent company and related entities (Note 23)	660,351	306,625
Total	3,396,391	1,864,042

AS LHV Pank, operating as an account manager for its customers,

Asset management fees for the management of these assets have been in the range of 0.01 – 0.02 % p.a. (2020: 0.015 – 0.025% p.a.) (for respective income, see Note 8).

The monetary funds of the customers who use the platform of an active securities trader or the trading system LHV Trader offered by the Bank, have been recognised as off-balance sheet assets. Due to the nature of the system, the Bank has deposited these funds in personalised accounts with its partner and as the monetary funds of these customers are not used for business purposes by the Bank (they cannot be lent to other customers or used as collateral), therefore the monetary funds are recognised as off-balance sheet assets. The Bank earns commission and interest income on intermediation of transactions in these accounts similarly to customers' accounts reflected in the Group's financial statement. The Bank has provided contractual guarantees to its partner in respect of LHV Trader accounts, guaranteeing potential losses to be incurred from financing of the transactions executed by customers intermediated by itself (leveraging), with the primary collateral being the securities used as collateral for leveraged loans. The customer has similar guarantee to the Bank and therefore, the Bank has in substance transferred the guarantee to end customer. To avoid potential losses, the Bank has a daily practice to monitor the potential decrease of collateral and deficiency of customer accounts. In its current practice, no such losses in respect of which the guarantee provided by the Bank would apply have incurred and the Bank has not paid any compensation relating to the guarantee.

NOTE 22 Contingent assets and liabilities

Non-cancellable agreements	Performance guarantees	Financial guarantees	Letters of credit	Unused loan commitments	Total
Liability in contractual amount 31.12.2021	19,919	49,409	1,438	679,579	750,345
Liability in contractual amount 31.12.2020	15,217	36,492	8	413,818	465,535

Income tax from potential future dividends is disclosed in Note 20.

With the initial application of IFRS 9, financial guarantees and unused loan commitments are subject to ECL, see also note Risk management section point 2 for more information.

Tax authorities have the right to review the company's tax records for up to 5 years after submitting the tax declaration and upon finding errors, impose additional taxes, interest and fines. The tax authorities have not performed any tax audits at the Group during 2020-2021. The Group's management estimates that in 2022 there are no such circumstances which may lead the tax authorities to impose significant additional taxes on the Group.

Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. The risk under performance guarantee contracts is the possibility that the insured event (i.e. the failure to perform the contractual obligation by another party) occurs. The key risks the Group faces are significant fluctuations in the frequency and severity of payments incurred on such contracts relative to expectations. The Group uses historical data and statistical techniques to predict levels of such payments. Claims must be made before the contract matures and most claims are settled within short term. This allows the Group to achieve a high degree of certainty about the estimated payments and therefore future cash flows. The Group manages such risks by constantly monitoring the level of payments for such products and has the ability to adjust its fees in the future to reflect any change in claim payments experience. The Group has a claim payment requests handling process, which includes the right to review the claim and reject fraudulent or non-compliant requests. The exposure and concentration of performance guarantees expressed at the amounts guaranteed is as follows:

According to sectors	31.12.2021	31.12.2020
Construction	11,404	9,302
Water and utilities	3,186	950
Manufacturing	2,758	1,879
Administrative activities	691	1,235
Professional, scientific and technical activities	651	523
Other areas at activities	1,229	1,328
Total	19,919	15,217
Breakdown by internal ratings
5 low credit risk	1,141	1,878
6 low credit risk	898	4,228
7 medium credit risk	5,127	2,267
8 medium credit risk	7,648	1,630
9 heightened credit risk	1,309	1,220
10 high credit risk	671	414
11 high credit risk	0	218
12 non-satisfactory rating	0	0
13 non-satisfactory rating	214	0
Non-rated	2,911	3,362
Total	19,919	15,217

Performance guarantees are over-collateralised as at each reporting date. Therefore, the Group has not borne any losses from performance guarantee contracts neither in 2021 nor in previous period.

NOTE 23 Transactions with related parties

In preparing the consolidated financial statements of the Group, the following entities have been considered related parties:

• owners that have significant impact on the Group and the entities related to them;
• members of the Management Board and legal entities controlled by them (together referred to as management);
• members of the Supervisory Board;
• close relatives of the persons mentioned above and the entities related to them.

Transactions	Note	2021	2020
Interest income	7	144	54
incl. management		63	22
incl. shareholders, their related entities and close relatives that have significant influence		81	32
Fee and commission income	8	12	13
incl. management		8	7
incl. shareholders, their related entities and close relatives that have significant influence		5	6
Interest expenses from deposits	7	27	17
incl. management		7	4
incl. shareholders, their related entities and close relatives that have significant influence		20	13
Interest expenses from subordinated debt	7	323	342
incl. management		9	9
incl. shareholders, their related entities and close relatives that have significant influence		314	333
Balances	Note	31.12.2021	31.12.2020
Loans and receivables as at the year-end		6,047	4,096
incl. management	14	2,887	2,462
incl. shareholders, their related entities and close relatives that have significant influence	14	3,160	1,634
Deposits as at the year-end		30,639	21,318
incl. management	17	788	642
incl. shareholders, their related entities and close relatives that have significant influence	17	29,851	20,676
Subordinated debt as at the year-end		4,134	4,134
incl. management	20	148	148
incl. shareholders, their related entities and close relatives that have significant influence	20	3,986	3,986

The table provides an overview of the material balances and transactions involving related parties. All other transactions involving the close relatives and the entities related to members of the Management Board and Supervisory Board and the minority shareholders of the parent company AS LHV Group have occurred in the course and on the terms of ordinary business. There are no doubtful debts or provisions recorded for related parties.

Loans granted to related parties are issued at market conditions.

As at 31.12.2021 and 31.12.2020, the management did not have term deposits and the interest rate on demand deposits corresponds to the terms applicable to customers.

The subordinated debts received in November 2018 have the interest rate of 6.0%. The subordinated debts received in June 2019 have the interest rate of 8.0%. The subordinated debts received in May 2020 have the interest rate of 9.5% and the subordinated debts received in September 2020 have the interest rate of 6%.

In 2021, salaries and other compensations paid to the management of the parent AS LHV Group and its subsidiaries totalled EUR 2,101 thousand (2020: EUR 1,768 thousand), including all taxes. As at 31.12.2021, remuneration for December and accrued holiday pay in the amount of EUR 107 thousand (31.12.2020: EUR 91 thousand) is reported as a payable to management (Note 17). The Group did not have any long-term payables or commitments to the members of the Management Board and the Supervisory Board as at 31.12.2021 and 31.12.2020 (pension liabilities, termination benefits, etc.). In 2021, the remuneration paid to the members of the Group's Supervisory Board totalled EUR 114 thousand (2020: EUR 116 thousand).

The Group has signed contracts with the members of the Management Board, which do not provide for severance benefits upon termination of the contract. In any matters not regulated by the contract, the parties adhere to the procedure specified in the legislation of the Republic of Estonia.

Management is involved with share option program. In 2021, the share options were granted to the members of the Management Board in the amount of EUR 1,102 thousand (2020: EUR 784 thousand).

Information on assets of related parties held as an account manager is presented in Note 21.

NOTE 24 Basic earnings and diluted earnings per share

In order to calculate basic earnings per share, net profit attributable to owners of the parent has been divided by the weighted average number of shares issued.

	2021	2020
Profit (incl. discontinued operations) attributable to owners of the parent (in thousands of euros)	58,261	37,950
Weighted average number of shares (in thousands of units)	29,230	28,728
Basic earnings per share (EUR)	1.99	1.32
Weighted average number of shares used for calculating the diluted earnings per shares (in thousands of units)	29,967	29,404
Diluted earnings per share (EUR)	1.94	1.29
Weighted average number of shares used as the denominator (in thousands of shares)	2021	2020
Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share	29,230	28,728
Adjustments for calculation of diluted earnings per share:
Share options	737	676
Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share	29,967	29,404

NOTE 25 Income tax expense

The Bank is calculating 14% advance income tax. Advance corporate income tax for the year 2021 was EUR 9,338 thousand (2020: EUR 4 740 thousand).

(in thousands of euros)	2021	2020
Advance corporate income tax	9,338	4,740
Corporate income tax	1,648	4,086
Total income tax expense	10,986	8,826

NOTE 26 Separate primary financial statements of parent company

In accordance with the Estonian Accounting Act, information on the separate primary financial statements of the parent of the consolidation group shall be disclosed in the notes to the financial statements.

Statement of profit or loss and other comprehensive income of the parent

(in thousands of euros)	2021	2020
Interest income	7,494	5,886
Interest expense	-7,829	-6,345
Net interest expense	-335	-459
Dividends received	10,400	7,059
Net gains from investments to associates	-26	0
Net gains/losses from financial assets	10,374	7,059
Operating expenses	-1,146	-858
Profit for the year	8,893	5,742
Total profit and other comprehensive income for the year	8,893	5,742

Statement of financial position of the parent

(in thousands of euros)	Note	31.12.2021	31.12.2020
Assets
Due from banks and investment companies		16,941	11,240
Loans granted		189,260	89,595
Other receivables and assets		85	3
Investments in subsidiaries		142,496	118,028
Total assets		348,782	218,866
Liabilities
Accrued expenses and other liabilities		55	146
Debt securities in issue		100,026
Subordinated debt		110,378	101,603
Total liabilities		210,459	110,749
Equity
Share capital	20	29,864	28,819
Share premium	20	97,361	71,468
Statutory legal reserve		4,713	4,713
Other reserves		4,685	3,409
Retained earnings/ (accumulated deficit)		1,700	-292
Total shareholders' equity		138,323	108,117
Total liabilities and equity		348,782	218,866

Statement of cash flows of the parent

(in thousands of euros)	2021	2020
Cash flows from operating activities
Interest received	7,494	5,886
Interest paid	-7,829	-6,345
Administrative and other operating expenses paid	-863	-714
Cash flows from operating activities before change in operating assets and liabilities	-1,198	-1,173
Adjustments
Investments in subsidiaries from share options	-2,451	-1,810
Net increase/(decrease) in operating assets and liabilities:
Net increase/(decrease) of other receivables	-347	11
Net increase/(decrease) of other liabilities	2,406	2,037
Net cash from/(used in) operating activities	-392	238
Cash flows from investing activities
Loans granted	-140,000	-25,000
Loan repaymens	40,600	7,950
Capital repayments from subsidiaries and associates	2	0
Capital contributions to financial investments	-5,236	0
Capital contributions to subsidiaries and associates	-16,810	-16,200
Net cash from/(used in) investing activities	-121,444	-33,250
Cash flows from financing activities
Subordinated loans received	139,755	50,000
Subordinated loans repaid	-40,000	-15,000
Paid in to share capital (incl. share premium)	26,938	1,697
Dividends received	10,400	7,059
Dividends paid	-8,358	-5,406
Net cash from financing activities	128,735	38,350
Increase/(decrease) in cash and cash equivalents	5,701	4,165
Cash and cash equivalents at the beginning of the financial year	11,240	7,072
Cash and cash equivalents at the end of the financial year	16,941	11,240

Statement of changes in shareholders' equity

(in thousands of euros)	Share capital	Share premium	Statutory reserve capital	Other reserves	Accumulated loss/retained earnings	Total
Balance as at 01.01.2020	28,454	70,136	4,713	3,146	-2,353	104,096
Paid in share capital	365	1,332	0	0	0	1,697
Dividends paid	0	0	0	0	-5,406	-5,406
Transfer to statutory reserve capital	0	0	0	0	0	0
Share options	0	0	0	475	1,613	2,088
Total other comprehensive income for 2020	0	0	0	-212	5,742	5,530
Balance as at 31.12.2020	28,819	71,468	4,713	3,409	-404	108,005
Carrying amount of holdings under control and
significant influence	0	0	0	0	-116,634	-116,634
Value of holdings under control and significant
influence under equity method	0	0	0	0	245,423	245,423
Adjusted unconsolidated equity as at 31.12.2020	28,819	71,468	4,713	3,409	128,385	236,794
Balance as at 01.01.2021	28,819	71,468	4,713	3,409	-404	108,005
Paid in share capital	1,045	25,893	0	0	0	26,938
Dividends paid	0	0	0	0	-8,358	-8,358
Transfer to statutory reserve capital	0	0	0	0	0	0
Share options	0	0	0	1,276	1,457	2,733
Total other comprehensive income for 2021	0	0	0	0	8,893	8,893
Balance as at 31.12.2021	29,864	97,361	4,713	4,685	1,588	138,211
Carrying amount of holdings under control and
significant influence	0	0	0	0	-135,842	-135,842
Value of holdings under control and significant
influence under equity method	0	0	0	0	314,048	314,048
Adjusted unconsolidated equity as at 31.12.2021	29,864	97,361	4,713	4,685	179,794	316,417

Adjusted unconsolidated equity is the maximum amount that can be distributed to shareholders' according to Estonian legislation.

Signatures of the Management Board to the consolidated annual report

The Management Board has prepared the management report and the consolidated financial statements of AS LHV Group for the financial year ended 31 December 2021.

The Management Board confirms that the management report on pages 6 to 73 provides a true and fair view of the business operations, financial results and financial condition of the parent company and the entities included in consolidation as a whole.

The Management Board confirms that according to their best knowledge the consolidated financial report on pages 74 to 163 presents a fair view of the assets, liabilities, financial position and profit or loss of the issuer and the entities involved in the consolidation as a whole according to the International Financial Reporting Standards as they are adopted by the European Union and contains a description of the main risks and doubts.

01.03.2022

Madis Toomsalu

Independent auditors' report

To the Shareholders of AS LHV Group

(Translation of the Estonian original)

Report on the Audit of the Consolidated Financial Statements

— x x — x x x x
— x x

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Report on Other Legal and Regulatory Requirements

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KPMG Baltics OÜ

Proposal for profit distribution

The Management Board of LHV Group proposes to the General Meeting of shareholders to distribute the profit of the financial year 2021 as follows:

• pay dividends EUR 0.40 per share in the total amount of EUR 11,946 thousand; related income tax would be EUR 2,986 thousand
• transfer the profit for reporting period attributable to shareholders of the parent in the amount of EUR 46,363 thousand to retained earnings.

Signatures of the Supervisory Board to the annual report

The Supervisory Board has reviewed the annual report which consists of the management report and the financial statements, the independent auditor's report and the profit distribution proposal, and approved it for presentation at the General Meeting of shareholders.

01.03.2022

Chairman of the Supervisory Board:

Rain Lõhmus

Members of the Supervisory Board:

Tiina Mõis Sten Tamkivi

Raivo Hein Heldur Meerits

Tauno Tats Andres Viisemann

Allocation of income according to EMTAK classificators

Consolidated:

EMTAK	Activity	2021	2020
66121	Security and commodity contracts brokerage	9,787	6,919
64191	Credit institutions (banks) (granting loans)	157,415	108,276
64911	Finance lease	6,000	4,329
66301	Fund management	11,374	14,967
	Total income	184,546	134,491

Unconsolidated:

EMTAK	Activity	2021	2020
64201	Activities of holding companies	7,494	5,886
	Total income	7,494	5,886