Management Discussion and AnalysisRespectively Submitted by Lynnette Houston, General Manager

This Management Discussion and Analysis (MDA) is presented to enable readers to assess material changes in the financial condition and operating results of Earl Grey Credit Union Limited for the year ended December 31, 2013, compared with prior years, planned results and future strategies. This MDA is prepared in conjunction with the Consolidated Financial Statements and related Notes for the year ended December 31, 2013 and should be read together.

Planning for the future

Our credit union had humble beginnings in December 1953 with Assets of $10 thousand and ten chartered members. 2013 marked a significant event in our history – Earl Grey Credit Union Limited 60 th Anniversary of incorporation. The full day of anniversary celebrations held on June 15, 2013 was enjoyed by members of all ages. The day’s activities were even more special with entertainment in the afternoon being provided by the Fuller and Nixon families who are the decedents of two of the chartered members. Mr. Keith Nixon, CEO, SaskCentral and former Earl Grey Credit Union employee participated in the day’s festivities as part of the entertainment provided by the Nixon family and provided words of congratulations to the membership on behalf of SaskCentral.

The vision of Earl Grey Credit Union limited is to be a leading provider of financial services for our members. With the leadership of the board and the support of our members and employees, 2013 was another stepping stone in positioning our credit union for the future. We continue to strive to be the financial service provider of choice for our members by providing products and services with personalized professional service at a low cost, while also recognizing the commitment to our values and co-operative principles. Today’s members are indeed fortunate to belong to such a strong and stable organization. Our growth and success are due to the commitment of the people who started with a dream, believed and through dedication and hard work laid the foundation for our credit union. Today with assets of just over $31.5 Million, a strong capital base of $2.3 Million and 896 members we are well positioned for the future.

Just like all financial institutions, Earl Grey Credit Union Limited is faced with a variety of business risks. Our continued viability depends on proper management of these risks. Our risk management strategy is three fold: to identify and assess these risks on an ongoing basis; to evaluate the controls we have in place to minimize our exposure risk; and to implement risk mitigation techniques as appropriate. Risk is managed through established policies, procedures, controls and monitoring. To enhance this management, we contracted an annual independent audit of our control processes. In addition, our credit union has an annual strategic planning session for the board and general manager to set the strategic direction of the Earl Grey Credit Union Limited. Strategic objectives, performance measures and key initiatives are identified based on the risks faced by the credit union and development objectives for enhanced products and services. To monitor specific objectives throughout the year that support this vision, we have developed a balanced scorecard framework that establishes measures and monitors our progress toward achieving our goals. Our balanced scorecard is the working plan and used to measure organizational performance. The balanced scorecard is communicated to all staff, who all have a stake in delivering the strategy. The General Manager is responsible to execute business plans and monthly monitor progress reports to the board track performance. This approach ensures that our business practices align with the strategy outlined in the corporate plan.

Credit Union Deposit Guarantee has prescribed each credit union to have an internal capital adequacy assessment process (ICAPP) to determine and maintain the appropriate level of additional capital required to support operations, risk and growth. It is the responsibility of the board of directors of each credit union to evaluate the situation of their own credit union and set capital targets that are appropriate for their operations. Our current loan portfolio to asset ratio is 66.70% and our objective is to increase the loan portfolio so that ratio is 70% to enhance profitability.

Since loans carry a higher risk weighting than investments, more capital is required to support a future increase in loan volume. To meet our current member borrowing needs and with the opportunity to lend to future members we need to be well positioned to serve that growth. Capital accumulation and overall capital adequacy levels, are expected to see continual improvements as Earl Grey Credit Union Limited earnings improve and both risk and growth are balanced. Increased profitability will allow the board to resume Patronage Dividend Allocations in the

future while still building capital.

The board’s continued attention to proper capital management over the years has ensured that your credit union has been able to grow and thrive. A strong capital bases reduces the threat of our future autonomous viability from risks outlined in this report. This stewardship has contributed to our ability to remain autonomous entity when so many other credit unions are merging. Our commitment is to ensure that the needs of our members and our community come first by retaining local decision making. Throughout our credit union’s history we have stayed true to the co-operative principles. One thing that remains the constant with our success is the people. We would not exist without the support of our members. It is they who embody the co-operative spirit and share the credit union values. Meeting the goal of our vision requires that Earl Grey Credit Union Limited not only attract new members, but preserve existing memberships as well. Due to our asset growth since the last credit union office renovation in1992, a renovation is scheduled for early 2014 within the existing building space that will accommodate a second office for loans personnel. The renovation will also cover a number of maintenance items such as the replacement of : front &back doors; all windows; window coverings; rugged area of the building ;and a fresh coat of paint throughout. The front exterior will be given a 2014 “facelift” and the remaining exterior walls will be given a fresh coat of paint. The work is expected to be completed over the course of a couple of months. We plan to have all services of the credit union, including access to the ATM, to continue business as usual during the renovation project. We appreciate your patience during the renovation project and apologize in advance for any inconvenience caused when you enter our “construction zone”. We appreciate the staffs patience while working in a construction zone and their dedication to ensuring day to day member service is not affected.

Technology is one of the key service delivery channels for Earl Grey Credit Union Limited. Our technology plans for 2014 includes an upgrade to Member Direct home banking and a revised website to enhance our members Online Banking experience. Mobile Banking for smart phones enables members access to their accounts to perform everyday financial transactions. We see a greater role for electronic transactions in all aspects of our lives.

Our members are our best form of ambassadors for future growth of our membership. The testimonials provided in our “I Love My CU” campaign and new member referral program have been great tools to get the word out to future members of your credit union.

Our success is not only dependent on our members’ support, but also our employee’s commitment. Our employees work hard to ensure our members are treated with respect, integrity, professionalism and with a smile. To support our objective of increased customer loyalty, training to front-line employees continues to be provided, with special emphasis on product knowledge.

Our employees pitch in and help out their communities by donating hours of their own time to a number of worthwhile causes. Their dedication to member service and their commitment to the community bode well for our credit union as we look to the future.

As an organization, our annual financial commitment to community-based, chartable and volunteer organizations is made by a provision in the annual budget for a donations budget of 5% of budgeted net income, for 2013 - $5,700.

Thank you for your continued support and trust in Earl Grey Credit Union Limited. We look forward to serving you for many years to come. It is our privilege to have you as a member.

Success for Earl Grey Credit Union Limited can be measured by our financial bottom line as well as our commitment to our members and the community we serve. The following 2013 balanced scorecard provides a snap shot of the results in the four strategic perspectives People; Learning & Growth; Financial; and Process.

Enterprise Risk Management

The concept of risk management is founded on the premise that as a financial institution, Earl Grey Credit Union Limited accepts risk as part of our normal operation. This risk is offset by capital and management practices to ensure the continued operation of Earl Grey Credit Union Limited. Each year our credit union spends significant resources measuring and assessing risks and ensuring we are adequately prepared to serve our members now and in the future. This process is called enterprise risk management or ERM for short, and is a requirement of credit unions in Saskatchewan as laid out by Credit Union Deposit Guarantee Corporation. Ultimately the objective of risk management is to identify, measure, aggregate and manage risks effectively, and to allocate resources appropriately.

Strategic Risk is the risk that adverse decisions, ineffective or inappropriate business plans or failure to respond to changes in the competitive environment, customer preferences, product obsolescence or resource allocation will impact our ability to meet our objectives. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve these goals, the resources deployed against these goals and the quality of implementation.

Market Risk is the exposure to potential loss from changes in market prices or rates. Losses can occur when values of assets and liabilities or revenues are adversely affected by changes in market conditions, such as interest rate or foreign exchange movement which influence the development of profits.

Liquidity Risk is the potential inability to meet payment obligations with punctuality, such as liability maturities, deposit withdrawals, or funding loans without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. It also covers potential losses from being forced to take in deposits at excessive interest rates or to invest surplus funds at rates below market.

Credit Risk is the risk of loss arising from a borrower or counterparty’s inability to meet its obligations. Credit risk is found in all activities that include direct lending activities where such activities where success depends on borrower or counterparty performance.

Legal and Regulatory Risk is the risk arising from potential violation of, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards.

Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. Exposures to this risk arise from deficiencies in internal controls, technology failures, human error, employee integrity or natural disasters.

Board Risk Management Process

The board over sight of the risk management process is through: annually holding a special meeting to identify risks and develop a plan to mitigate risks; monthly review of all related financial targets; ongoing review of progress to plan; annual review of risk philosophy and tolerance. In addition, an annual ERM report is provided to the full board.

The risk identification process resulted in the following being identified as the current key risks based on Earl Grey Credit Union’s current situation. Risk management action plans were developed for these key risks with target completion dates.

Credit Risk The risk that members will not fulfil their contractual payment obligations.

Market Risk The risk of not maintaining adequate capital.

Liquidity Risk Failure to properly manage liquidity.

Strategic Risk Inability to fulfil governance responsibilities

Legal and Regulatory Risk Failure to comply with compliance/regulatory requirements.

Operational Risk Failure to acquire/implement/sustain effective technology solutions with integrity and/or availability.

Inability to attract and retain qualified employees.

Capital Management

Credit Union Deposit Guarantee Corporation (CUDGC), the regulator of Saskatchewan credit unions, has prescribed capital adequacy measures and minimum capital requirements. The capital adequacy rules issued by CUDGC have been established based on the Basel II capital standards framework established by the Bank for International Settlements and adopted by financial institutions around the globe, including Canadian banks.

Total capital as a percentage of risk weighted assets and total capital as a percentage of total assets (capital adequacy) is one of individual Saskatchewan credit unions primary measures of financial strength. Failure to comply with regulatory limits may result in regulator intervention. Earl Grey Credit Union is in compliance with regulated limits.

Achieving minimum regulatory capital levels are paramount to Earl Grey Credit Union Limited Board and Management. The board has set minimum capital level standards for the future that are well in excess of regulatory minimums. Our long term targets are attainable in the future and are our current focus.

This standard setting is the first line of defense to ensure capital levels exceed regulatory minimums even in times of significant loss or unplanned growth. Capital planning is integral to Earl Grey Credit Union Limited business planning. Balance sheet operating strategies are designed to ensure these capital levels are achieved in addition to achieving other strategies, such as growth and profitability targets.

Earl Grey Credit Union Limited framework is designed to maintain an optimal level of capital. Accordingly, capital policies and capital plan are reviewed annually. The capital plan includes a short and long term targets that are approved by the board.

Earl Grey Credit Union Limited retains a portion of its annual earnings in order to meet these capital objectives. Once these capital objectives are met, additional earnings are allocated to members through Earl Grey Credit Union Limited member patronage program.

CUDGC prescribes three tests to assess the capital adequacy of credit unions: risk-weighted capital ratio (eligible capital to risk-weighted assets); tier 1 capital to total asset ratio; and tier 2 to tier 1 capital ratio. Tier 1 capital is defined as a credit union’s primary capital and comprises the highest quality of capital elements. Tier 1 capital for Earl Grey Credit Union Limited includes retained earnings and membership shares. Earl Grey Credit Union Limited does not have Tier 2 Capital (i.e. member investment shares, general allowance, etc). The risk weighted capital ratio is calculated as the sum of Tier 1 capital divided by risk-weighted assets. The tier 1 capital ratio is defined as tier 1 capital divided by total assets.

Regulatory standards require Saskatchewan credit unions to maintain a minimum risk-weighted capital ratio of 8%, a minimum tier 1 capital to assets of 5.00%. In October 2009, CUDGC issued an advisory indicating that a well-capitalized credit union should have risk-weighted capital of 10% and a tier 1 capital to total assets ratio of 7% to meet operational requirements, support growth projections, absorb unexpected losses and signal financial strength to stakeholders. Credit unions with declining risk-weighted capital below the 10% will be subject to increased regulatory monitoring by CUDGC.

In November 2010, CUDGC issued a new regulatory guideline respecting capital. The guideline requires credit unions to implement an internal capital adequacy assessment process (ICAAP). The requirements are based on the international standards set out in Pillar 2 of Basel II. ICAAP is an integrated process that evaluates capital adequacy, and is used to establish capital targets and capital strategies that take into consideration the strategic direction and risk appetite of a credit union.

Beginning in 2012, CUDGC’s regular supervisory review process looks for evidence that credit unions have begun to incorporate principles of ICAAP in their governance, planning and capital management processes. Earl

Grey Credit Union Limited implemented ICAAP in 2011.

Earl Grey Credit Union Limited experienced capital growth in 2013, adding to its sound financial position.

In 2013 the capital of Earl Grey Credit Union Limited increased by $130,675 from $2,150,608 in 2012 to $2,281,283.

Total capital of Earl Grey Credit Union Limited consists of: membership shares required for membership ($4,470) and retained earnings($2,281,283). Retained earnings remain the key source of capital for Earl Grey Credit Union Limited.

For the year ending 2013, Earl Grey Credit Union Limited regulatory capital as a percentage of risk weighted assets was 14.65% (2012 – 13.90%), well above the regulatory minimum of 8% and in excess of the 10% prescribed by the regulator as a level to be considered well capitalized.

The tier 1 capital to total assets ratio in 2013 is 7.23% as compared to 7.96% in 2012, well above the 5% regulatory minimum and slightly above the 7% regulatory standard for being regarded as well capitalized.

Capital adequacy levels have experienced moderate increases over our recent historical levels. Capital adequacy levels have come under pressure in recent years as interest margin fell in the wake of the global financial crisis. The growth in capital adequacy levels in 20123is a function of earnings. It is prudent during this exceptionally low interest rate environment to continue to build our Tier 1 Capital through retained earnings, increased profitability will allow the board to resume Patronage Dividend Allocations in the future while still building capital. Capital accumulation and overall capital adequacy levels, are expected to see continual improvements as Earl Grey Credit Union Limited earnings improve while both risk and growth are balanced.

Financial Performance Review

The following review provides an analysis of our 2013 financial performance. Financially 2013 was a good year for Earl Grey Credit Union Limited with a net profit of $130,675.

Although the recession is officially over, the current interest rate environment stemming from the global financial crisis continues to impact the earning performance of Earl Grey Credit Union Limited as a result our financial ratios have been slow to build. This is due to the dramatic drop in the prime lending rate leading up to 2009 and continued into 2013. For 2013 our total annualized return on assets (ROA) before income tax was 0.51% as compared to 1.02% in 2012. Our assets grew significantly, with a net growth of $4,489,485 or 16.59% as compared to a four year average growth of 3.19%.

Earl Grey Credit Union Limited achieves revenue from two main sources: net interest earnings and non-interest

sources.

Net income is comprised of the following: Net interest margin – is total interest revenue less total interest expenses and patronage allocation while

factoring in any provisions for credit and investment impairment. Net interest margin improved over the prior year as term deposits matured and re-priced at lower rates to a margin of 3.11% which is short of the 3.25% targets prior to the 2008 global financial crisis. Net earnings are forecasted to increase in 2014 as net interest margins improve given an anticipated growth in assets due to loan demand and the purchase of syndicated loans.

Non-interest revenue – is further broken into two main groups; first is the fees, secondly the commission and third the sale of fixed assets. Commission is earned from the sale of services rendered. In 2010 we implemented changes to our fees. As interest rates declined and net margins also declined, fee income was required to offset the revenue loss. It is our goal to remain competitive in our fees and no changes to fees were made for 2013. The 2013 non-interest revenue was 11.22% of total revenue or $144,093.

Non-interest expense – includes various operating costs such as general business, occupancy, organizational, personnel and security.

Retained earnings are a result of the profit over time. It is paramount to an effective risk management program, where we retain the funds for the adverse effects of losses. In 2013, two loans for a total of $29,748 were written off against current year‘s profit. To date, Earl Grey Credit Union Limited has not had to use retained earnings in an emergency, but there is always the potential of loss. Prudent management means we manage our risk and protect the future earning of our credit union.

The efficiency ratio measures the percentage of income earned that is spent on the operation of the business. The ratio is calculated as non-interest expenses divided by the sum of the following: net interest margin plus non-interest revenue and provision for credit losses. The 2013 efficiency is 85.82% .

The board of directors of Earl Grey Credit Union did not declare a patronage dividend for 2013 as the net income was directed to retained earnings to build the capital position of the credit union. This meets the objective of the targets set out in the capital plan of the credit union based on the requirements of the regulator, Credit Union Deposit Guarantee Corporation. As the capital targets are met, the board of directors will review service charge fees and the patronage dividend program for payments in future years.

Asset growth since our inception in 1953 is illustrated in the following chart.

YEAR-END

ASSET GROWTH 1953-2013