no place i’d rather be. - kootenay savings 2013 full... · mnp llp is appointed by the members to...

No place I’d rather be.

c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t sD e c e m b e r 3 1 , 2 0 1 3

Kootenay Savings Credit UnionContents

For the year ended December 31, 2013

Page

Management's Responsibility

Independent Auditors' Report

Consolidated Financial Statements

Consolidated Statement of Financial Position................................................................................................................................1

Consolidated Statement of Income...................................................................................................................................................2

Consolidated Statement of Other Comprehensive Income...............................................................................................................3

Consolidated Statement of Changes in Members' Equity .................................................................................................................4

Consolidated Statement of Cash Flows............................................................................................................................................5

Notes to the Consolidated Financial Statements .............................................................................................................................6

Management's Responsibility

To the Members of Kootenay Savings Credit Union:

Management is responsible for the preparation and presentation of the accompanying consolidated financial statements, includingresponsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards andensuring that all information in the annual report is consistent with the statements. This responsibility includes selecting appropriateaccounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgment isrequired.

In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs andmaintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions areauthorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation ofconsolidated financial statements.

The Board of Directors and Audit Committee are composed primarily of Directors who are neither management nor employees of theCredit Union. The Board is responsible for overseeing management in the performance of its financial reporting responsibilities, and forapproving the financial information included in the annual report. The Board fulfils these responsibilities by reviewing the financialinformation prepared by management and discussing relevant matters with management, internal auditors, and external auditors. TheCommittee is also responsible for recommending the appointment of the Credit Union's external auditors.

MNP LLP is appointed by the members to audit the consolidated financial statements and report directly to them; their report follows. Theexternal auditors have full and free access to, and meet periodically and separately with, both the Committee and management todiscuss their audit findings.

March 6, 2014

President & CEO VP: Finance & CFO

600 - 1628 Dickson Avenue, Kelowna, British Columbia, V1Y 9X1, Phone: (250) 763-8919, 1 (877) 766-9735

Independent Auditors’ Report

To the Members of Kootenay Savings Credit Union:

We have audited the accompanying consolidated financial statements of Kootenay Savings Credit Union, which comprise theconsolidated statement of financial position as at December 31, 2013, and the consolidated statements of income, other comprehensiveincome, changes in members' equity and cash flows for the year then ended, and a summary of significant accounting policies and otherexplanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance withInternational Financial Reporting Standards, and for such internal control as management determines is necessary to enable thepreparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit inaccordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements andplan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financialstatements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement ofthe consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internalcontrol relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’sinternal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Kootenay SavingsCredit Union as at December 31, 2013 and its financial performance and its cash flows for the year then ended in accordance withInternational Financial Reporting Standards.

Kelowna, British Columbia

March 6, 2014 Chartered Accountants

The accompanying notes are an integral part of these financial statements

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Kootenay Savings Credit UnionConsolidated Statement of Financial Position

As at December 31, 2013($ in thousands)

2013 2012

AssetsCash and interest-bearing deposits with Central 1 (Note 5) 95,824 101,099Member loans receivable (Note 6) 861,819 807,286Property, plant and equipment (Note 7) 18,660 19,552Intangible assets (Note 8) 1,343 1,122Investment property (Note 9) 10,040 9,512Other assets (Note 10) 8,537 10,081Investment in associates (Note 11) 2,701 2,528Other investments (Note 12) 6,746 5,810Income taxes receivable 438 1,120

1,006,108 958,110

LiabilitiesMember deposits (Note 13) 882,990 831,648Borrowings (Note 14) 37,109 37,692Other liabilities (Note 16) 10,605 11,847Deferred tax liability (Note 17) 907 1,058Patronage payable (Note 18) 707 2,768Member shares (Note 19) 4,960 5,147

937,278 890,160

Members' equityMember equity shares (Note 19) 20,743 21,504Retained earnings 47,811 45,975Accumulated other comprehensive income 276 471

68,830 67,950

1,006,108 958,110

Approved on behalf of the Board

Director Director


2

Kootenay Savings Credit UnionConsolidated Statement of Income

For the year ended December 31, 2013($ in thousands)

2013 2012

Interest incomeMember loans 35,237 35,007Investments 2,043 2,286

37,280 37,293

Interest expenseMember deposits 12,283 12,017Borrowings 966 1,565

13,249 13,582

Net interest income 24,031 23,711Provision for loan losses 572 1,341Securitized loan income (loss) (352) 3,567Other income 7,321 6,448

Net interest and other income, after provision 30,428 32,385

Operating ExpensesPersonnel 18,131 18,739General business 5,956 5,860Occupancy 3,383 3,068

27,470 27,667

Net income, before patronage and taxes 2,958 4,718Patronage and dividends (Note 18) 434 2,484

Net income before taxes 2,524 2,234

Income taxes (Note 17)Current 619 (595)Deferred (150) 540

469 (55)

Net income 2,055 2,289


3

Kootenay Savings Credit UnionConsolidated Statement of Other Comprehensive Income


2013 2012

Net income2,055 2,289

Other comprehensive incomeItems that will not be reclassified subsequently to profit or loss

Revaluation of intangible assets - 276Items that will be reclassified subsequently to profit or loss

Change in unrealized gains (losses) (195) 167

Other comprehensive income (loss) for the year, net of income tax (195) 443

Total comprehensive income for the year 1,860 2,732

Kootenay Savings Credit UnionConsolidated Statement of Changes in Members' Equity



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Memberequityshares

Retainedearnings

Accumulatedother

comprehensiveincome Total equity

Balance December 31, 2011 21,360 43,913 28 65,301

Net income - 2,289 - 2,289

Patronage - (227) - (227)

Issuance of member shares 144 - - 144

Change in unrealized gains (losses) - - 443 443


Net income - 2,055 - 2,055

Patronage - (219) - (219)

Redemption of member shares (761) - - (761)

Change in unrealized gains (losses) - - (195) (195)



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Kootenay Savings Credit UnionConsolidated Statement of Cash Flows


2013 2012

Cash provided by (used for) the following activitiesOperating activities

Net income 2,055 2,289Interest revenue (37,280) (37,293)Interest expense 13,301 13,640Depreciation 1,674 1,583Decrease (increase) in fair value of interest rate swaps 1,238 (1,157)Increase in fair value of investment properties - (110)Deferred income taxes (151) 541Provision for loan losses 126 260Provision for (recovery of) current income taxes 619 (597)Securitization of loans (221) 442

(18,639) (20,402)Accounts receivable (5,053) (7)Prepaid expenses 34 155Patronage payable (2,061) (928)Loan pool asset and liability accounts 684 2,112Other current assets/liabilities 3,961 4,387Interest received on member loans 34,888 34,833Interest received on investments 1,907 2,348Interest paid (13,382) (13,624)Income taxes paid (recovered) 95 (595)

2,434 8,279

Financing activitiesIncrease in deposits from members 51,342 47,907Net proceeds from securitization of mortgages 12,299 51,544Increase in member shares (948) 178Equity portion of patronage dividends, net of income tax (220) (227)Decrease in borrowings (583) (55,293)

61,890 44,109

Investing activitiesAdditions to property, plant and equipment (576) (1,736)Additions to intangible assets (428) (285)Additions to investment properties (528) (652)Increase in loans to members (66,958) (93,983)Increase in other investments (1,109) (4,938)

(69,599) (101,594)

Decrease in cash and cash equivalents (5,275) (49,206)

Cash and cash equivalents, beginning of year 101,099 150,305

Cash and cash equivalents, end of year 95,824 101,099

Cash and cash equivalents are composed of:Cash and interest-bearing deposits with Central 1, under 90 days 19,097 14,311Cash and interest-bearing deposits with Central 1, over 90 days 76,727 86,788

95,824 101,099

Kootenay Savings Credit UnionNotes to the Consolidated Financial Statements


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1. Reporting entity information

Entity information

Kootenay Savings Credit Union (the “Credit Union”) is incorporated under the laws of British Columbia and is regulatedunder the Financial Institutions Act of British Columbia and is a member of Central 1 Credit Union Limited ("Central 1"). TheCredit Union serves members in the Kootenay region and provides financial services through 13 branches, telephone andon-line banking. The address of the Credit Union's registered office is 220-1101 Dewdney Avenue, Trail, British Columbia.

Basis of presentation

These consolidated financial statements include the accounts of Kootenay Savings Insurance Services Ltd. ("KSIS") andKootenay Savings MoneyWorks Ltd. ("KSMW") which are wholly-owned subsidiaries of Kootenay Savings Credit Union. Allinter-entity balances and transactions are eliminated on consolidation.

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards(“IFRSs”) and interpretations adopted by the International Accounting Standards Board (“IASB”). The financial statementshave been prepared in accordance with all IFRS issued and in effect as at December 31, 2013.

These financial statements for the year ended December 31, 2013 were approved and authorized for issue by the Board ofDirectors on March 6, 2014.

Basis of measurement

The consolidated financial statements have been prepared using the historical basis except for the revaluation of certainfinancial instruments.

Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the Credit Union’s functional currency.

2. Change in accounting policies

Standards and Interpretations effective in the current period

The accounting policies adopted are consistent with those of the previous financial year except as follows:

Change in accounting policies

The following new or amended standards, and their resulting consequential amendments, were applied for the first time inthe current year:

IAS 1 Presentation of Financial Statements

The amendments to IAS 1 introduced a grouping of items presented in other comprehensive income. Items that could bereclassified to profit or loss at a future point in time (e.g., net gain on hedge of net investment, net movement on cash flowhedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that willnever be reclassified (e.g., actuarial gains and losses on defined benefit plans and revaluation of land and buildings). Theamendment affected presentation only and had no impact on the Credit Union’s financial results.



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IAS 19 Employee Benefits

The amendments to IAS 19 significantly impacted the accounting for defined benefit plans by:

Eliminating the option to defer recognition of actuarial gains and losses (the “corridor approach”) by recognizingthese in other comprehensive income as they occur;

Requiring the immediate recognition of all past service costs;

Replacing interest cost and expected return on plan assets with a net interest amount that is calculated by applyingthe discount rate to the net defined benefit liability (asset); and

Revising the disclosure requirements for defined benefit plans.

As the Credit Union accounts for its multi-employer defined benefit plans using the defined contribution method, thisamendment made no impact on its reporting.

IFRS 7 Financial Instruments: Disclosure

The amendment to IFRS 7 introduced disclosure on financial assets that were offset in accordance with IAS 32 and masternetting or similar arrangements. The revised IFRS 7 had no impact on the Credit Union’s financial results.

IFRS 13 Fair Value Measurement

IFRS 13 improves consistency and reduces complexity of fair value measurements by providing a precise definition of fairvalue and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirementsdo not extend the use of fair value accounting but provide guidance on how it should be applied where its use is alreadyrequired or permitted by other standards within IFRS. In accordance with the transitional provisions, IFRS 13 has beenapplied prospectively from January 1, 2013. The adoption of IFRS 13 did not have an impact on the measurement of theCredit Union’s assets and liabilities but has resulted in additional disclosures (Note 25).

3. Significant accounting policies

Investments

Investments which meet the definition of financial instruments are measured and recorded on a basis consistent with theappropriate financial instrument designation.

Investments in equity investments that do not have a quoted market price in an active market are measured at cost.

Investment in an associate

The Credit Union's investment in its associate, Kootenay Insurance Services Ltd. ("KIS"), is accounted for using the equitymethod. An associate is an entity in which the Credit Union has significant influence.

Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus postacquisition changes in the Credit Union's share of net assets of the associate. The income statement reflects the share ofthe results of operations of the associate. Where there has been a change recognized directly in the equity of theassociate, the Credit Union recognizes its share of any changes. Unrealized gains and losses resulting from transactionsbetween the Credit Union and the associate are eliminated to the extent of the interest in the associate.

After application of the equity method, the Credit Union determines whether it is necessary to recognize an additionalimpairment loss on the Credit Union's investment in its associate. The Credit Union determines at each reporting datewhether there is objective evidence that the investment in the associate is impaired. If this is the case, the Credit Unioncalculates the amount of impairment as the difference between the recoverable amount of the associate and its carryingvalue and recognizes the amount in earnings.

Upon loss of significant influence over the associate, the Credit Union measures and recognizes any retaining investment atits fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fairvalue of the retaining investment and proceeds from disposal is recognized in earnings.



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Member loans receivable

Loans are initially recognized at their fair value and subsequently measured at amortized cost. Amortized cost is calculatedas the loans’ principal amount, less any allowance for anticipated losses, plus accrued interest. Interest revenue is recordedon the accrual basis using the effective interest method. Loan administration fees are amortized over the term of the loanusing the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cashreceipts through the expected life of the financial asset to the carrying amount of the financial asset.

Impairment of financial assets

For financial assets carried at amortized cost, the Credit Union first assesses individually whether objective evidence ofimpairment exists for financial assets that are significant, or collectively for financial assets that are not individuallysignificant. If the Credit Union determines that no objective evidence of impairment exists for an individually assessedfinancial asset, it includes the financial asset in a group of financial assets with similar credit risk characteristics andcollectively assessed them for impairment. Financial assets that are individually assessed for impairment and for which animpairment loss is, or continues to be, recognized are not included in a collective assessment for impairment.

If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the differencebetween the loan’s carrying amount and the present value of estimated future cash flows. The carrying amount of thefinancial asset is reduced through the use of the provision for impaired financial assets and the amount of the impairmentloss is recognized in earnings.

Financial assets, together with the associated provision for impairment are reported as a credit loss when there is no realisticprospect of future recovery and when the Credit Union is in possession of the loan. Interest income is accrued until thefinancial asset becomes a credit loss. Impaired financial assets become a credit loss when in arrears in excess of 90 days.

The present value of the estimated future cash flows is discounted at the financial assets' original effective interest rate. Thecalculation of the present value of estimated future cash flows reflects the projected cash flows including provisions forimpaired financial assets, prepayment losses, and costs to securitize and service financial assets.

For the purpose of the collective evaluation of loan impairment, financial assets are grouped on the basis of the CreditUnion’s internal system that considers credit risk, characteristics such as asset type, industry, geographical location,collateral, delinquency status and other relevant economic factors.

Future cash flows on the group of financial assets that are collectively evaluated for impairment are estimated on the basis ofhistorical loss experience for assets with credit risk characteristics similar to those in the group. Historical credit lossexperience is adjusted on the basis of current observable data to reflect the effects of current conditions on which thehistorical credit loss experience is based and to remove the effects of conditions in the historical period that do not existcurrently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in relatedobservable data from year to year such as changes in unemployment rates, inflation, borrowing rates, consumer fuel prices,vehicle auction values or other factors that are indicative of incurred losses in the group and their magnitude.

Investment property

The Credit Union’s investment property consists of land and building held to earn rental income or for capital appreciation.Investment property is initially recognized at cost, including directly attributable transaction costs. Subsequent to initialrecognition, investment property is carried at fair value which reflects market conditions at each reporting date, with any gainor loss arising from a change in fair value recognized in earnings in the period.

Acquisition of property in settlement of loans

Property acquired in settlement of loans is recorded at the lower of estimated net realizable value and the amount owing onthe loan. Losses arising on realization or reduction of the realizable value of such property are charged to losses on loansand gains reduce loan losses.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includesexpenditures that are directly attributable to the acquisition of the asset. When parts of an item of property, plant andequipment have different useful lives, they are accounted for as separate items of property, plant and equipment.



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Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method at rates intendedto depreciate the cost of the assets over their estimated useful lives:

Rate

Buildings 50 yearsBuildings - HVAC 25 yearsBuilding - improvements/renovations 15 yearsBuilding - roof 25 yearsParking lot 25 yearsFurniture 15 yearsOffice equipment 8 yearsComputer equipment 4-10 yearsVehicles 5 years

The useful lives of items of property, plant and equipment are reviewed on an annual basis and the useful life is altered ifestimates have changed significantly. Gains or losses on the disposal of property, plant and equipment are determined asthe difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the incomestatement as other operating income or other operating costs, respectively.

Intangible assets

Depreciation of limited life intangible assets is charged to earnings on a straight-line basis over the estimated useful lives ofintangible assets from the date they are available for use. The estimated useful lives for intangibles with definite lives are asfollows:

Computer software 4 - 10 years

The useful lives of the intangible assets are reviewed on an annual basis and the useful life is altered if estimates havechanged significantly. Gains or losses on the disposal of intangible assets are determined as the difference between the netdisposal proceeds and the carrying amount of the asset, and are recognized in earnings.

Intangible assets with finite useful lives are amortized on a systematic basis over their useful lives. The amortization periodand amortization method for an intangible asset with a finite useful life reflects the pattern in which the assets' futureeconomic benefits are expected to be consumed. Where the pattern cannot be reliably determined, the straight-line methodis used. The amortization period and method is reviewed at least at each financial year end.

Impairment of non-financial assets

At the end of each reporting period, the Credit Union reviews the carrying amounts of its tangible and intangible assets todetermine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it isnot possible to estimate the recoverable amount of an individual asset, the Credit Union estimates the recoverable amount ofthe cash-generating units (“CGU”) to which the asset belongs. Where a reasonable and consistent basis of allocation can beidentified, corporate assets are also allocated to individual CGU’s, or otherwise they are allocated to the smallest group ofCGU’s for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful livesand intangible assets not yet available for use are tested for impairment at least annually, and whenever there is anindication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimatedfuture cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessmentsof the time value of money and the risks specific to the asset for which the estimates of future cash flows have not beenadjusted.

If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of theasset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in earnings.

Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revisedestimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount thatwould have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of animpairment loss is recognized immediately in earnings.



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Accounts payable

Accounts payable are stated at amortized cost, which approximates fair value due to the short term nature of these liabilities.

Member deposits

Member deposits are initially recognized at fair value and are subsequently measured at amortized cost using the effectiveinterest rate method.

Securitization

For securitization transactions initiated prior to the date of transition to IFRS, in accordance with pre-changeover CanadianGAAP, loan securitizations were treated as a sale, provided that control over the transferred loans have been surrenderedand consideration other than beneficial interests in the transferred loans has been received in exchange. Gains on thesetransactions were reported as other income. The amount of these gains are based on the present value of expected futurecash flows using management’s best estimates and key assumptions such as prepayment rates, excess spread, credit(losses) and discount rates. The Credit Union has a contractual obligation to service the loans on behalf of the transferee.

For securitization transactions initiated after the date of transition to IFRS, loans are derecognized only when the contractualrights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loanshave been transferred. If the criteria for derecognition have not been met, the securitization is reflected as a financingtransaction and the related liability is initially recorded at fair value and subsequently measured at amortized costs, using theeffective interest rate method.

Member shares

Shares are classified as liabilities or member equity in accordance with their terms. Shares redeemable at the option of themember, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at thediscretion of the Credit Union board of directors are classified as equity. Shares redeemable subject to regulatory restrictionsare accounted for using the criteria set out in IFRIC 2 Members' Shares in Cooperative Entities and Similar Instruments.

Revenue recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Credit Union and therevenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

Interest income is recognized in profit or loss for all financial assets measured at amortized cost using the effectiveinterest rate method. The effective interest rate is the rate that discounts estimated future cash flows through theexpected life of the financial instrument back to the net carrying amount of the financial asset. The application of themethod has the effect of recognizing revenue of the financial instrument evenly in proportion to the amount outstandingover the period to maturity or repayment.

Interest penalties received as a result of loan prepayments by members are recognized as income in the year in whichthe prepayment is made, unless only minor modifications (based on a present value of future cash flows test) were madeto the loan in which case they are deferred and amortized using the effective interest method.

Fees related to the origination or renewal of a loan are considered an integral part of the yield earned on a loan and arerecognized using the effective interest method over the estimated repayment term of the related loan.

Income taxes

Current tax and deferred tax are recognized in profit or loss except to the extent that the tax is recognized either in othercomprehensive income or directly in equity, or the tax arises from a business combination.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered fromor paid to the taxation authorities. The calculation of current tax is based on the tax rates and tax laws that have beenenacted or substantively enacted by the end of the reporting period.



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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the assets arerealized or the liabilities are settled. The calculation of deferred tax is based on the tax rates and tax laws that have beenenacted or substantively enacted by the end of the reporting year. Deferred tax assets are recognized to the extent that it isprobable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base,except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on theinitial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transactionaffects neither accounting or taxable income.

Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted tothose instances where it is probable that future taxable profit will be available which allow the deferred tax asset to beutilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probablethat the related tax benefit will be realized.

Foreign currency translation

Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchangerates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at thebalance sheet date. Translation gains and losses are included in other income.

Pensions and post retirement benefits

The Credit Union has both defined contribution and defined benefit pension plans, including participation in a multi employerdefined benefit plan.

In defined contribution plans, the Credit Union pays contributions to separate legal entities, and the risk of a change in valuerests with the employee. Thus, the Credit Union has no further obligations once the fees are paid. Premiums for definedcontribution plans are expensed when an employee has rendered his/her services. The multi employer defined benefitpension plan is accounted for using defined contribution accounting as sufficient information is not available to apply definedbenefit accounting.

In the other defined benefit plan, a liability is recognized as the present value of the defined benefit obligation at the end ofthe reporting period less the fair value of plan assets, adjusted for any actuarial gains or losses and past service costs.Actuarial gains and losses have been recognized in other comprehensive income in the period in which they occur. Pastservice costs are recognized immediately in earnings. Contributions are recognized as employee benefit expense when theyare due. Excess (shortfall) of contribution payments over the contribution due for service, is recorded as an asset (liability).

Financial instruments

All financial instruments are initially recognized at fair value at acquisition. Measurement in subsequent periods depends onwhether the financial instrument has been classified as fair value through profit or loss, available-for-sale, held-to-maturity,loans and receivables, or other financial liabilities as described below. During the year, there has been no reclassification offinancial instruments.

Financial instruments classified as fair value through profit or loss are measured at fair value with unrealized gains andlosses recognized through profit or loss. The Credit Union's financial instruments classified as fair value through profit or lossinclude cash and cash equivalents, derivatives, variable rate borrowings and certain investments.

Available-for-sale financial assets are measured at fair value with unrealized gains and losses recognized in othercomprehensive income. The Credit Union's investments held with Central 1 and retained interests in securitized loans havebeen classified as available-for-sale.

The financial assets classified as held-to-maturity are initially measured at fair value, then subsequently carried at amortizedcost. The Credit Union does not have any held to maturity financial assets.

The financial assets classified as loans and receivables are initially measured at fair value, then subsequently carried atamortized cost. The Credit Union's financial instruments classified as loans and receivables include term deposits withCentral 1, all member loans receivable, accrued interest and other receivable balances.



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Financial instruments classified as other financial liabilities include all member deposits, fixed rate borrowings, non-equitymembership shares, and payables and accruals. Other financial liabilities are initially measured at fair value, thensubsequently carried at amortized cost.

Derecognition of financial assets

Derecognition of a financial asset occurs when: The Credit Union does not have rights to receive cash flows from the asset; The Credit Union has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay

the received cash flows in full without material delay to a third party under a “pass-through" arrangement; andeither:

The Credit Union has transferred substantially all the risks and rewards of the asset, or The Credit Union has neither transferred nor retained substantially all the risks and rewards of the asset, but has

transferred control of the asset.

When the Credit Union has transferred its rights to receive cash flows from an asset or has entered into a pass-througharrangement, and has neither transferred or retained substantially all of the risks and rewards of the asset nor transferredcontrol of the asset, the asset is recognized to the extent of the Credit Union’s continuing involvement in the asset. In thatcase, the Credit Union also recognizes an associated liability. The transferred asset and the associated liability aremeasured on a basis that reflects the rights and obligations that the Credit Union has retained.

A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where anexisting financial liability is replaced by another from the same lender on substantially different terms, or the terms of theexisting liability are substantially modified, such an exchange or modification is treated as a derecognition of the originalliability and the recognition of a new liability, and the difference in the respective carrying amount is recognized in earnings.

The Credit Union securitizes loan assets, generally through the sale of these assets to third parties. Where the Credit Unionremains exposed to the residual risk, which is mitigated by the Credit Union's interest rate risk policy, these assets have notbeen derecognized as the derecognition criteria has not been met and they are continued to be reported in the consolidatedstatement of financial position.

The Credit Union also securitizes loan assets through a loan securitization program where housing mortgage loans are soldas securities. The contractual arrangements of the program meet the criteria for derecognition, thus removing the asset fromthe consolidated statement of financial position.

Derivative financial instruments

The Credit Union designates certain financial assets upon initial recognition as fair value through profit or loss (fair valueoptions). Financial instruments included in this category are the embedded derivatives and derivatives related to indexlinked term deposits and interest rate swaps not designated as hedging instruments. The Credit Union has entered intointerest rate swap contracts with Central 1 to hedge the Credit Union's exposure to interest rate risks.

These instruments are measured at fair value, both initially and subsequently. The related transaction costs are expensed.Gains and losses arising from changes in fair value of these instruments are recorded in net income.

Fair value measurements

The Credit Union classifies fair value measurements recognized in the consolidated statement of financial position using athree-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices (unadjusted) are available in active markets for identical assets or liabilities;

Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability, either directlyor indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the Credit Union to develop itsown assumptions.

Fair value measurements are classified in the fair value hierarchy based on the lowest level input that is significant to that fairvalue measurement. This assessment requires judgment, considering factors specific to an asset or a liability and may affectplacement within the fair value hierarchy.



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Standards issued but not yet effective

Certain new standards have been published that are mandatory for the Credit Union's accounting periods beginning on orafter January 1, 2014 or later that the Credit Union has not decided to early adopt. The new IFRS standards not yet appliedinclude:

IFRS 9 Financial instruments

IFRS 9 was issued in November 2009 and subsequently amended as part of an ongoing project to replace IAS 39 Financialinstruments: Recognition and measurement. The standard requires classification of financial assets into two measurementcategories based on the entity’s business model for managing its financial instruments and the contractual cash flowcharacteristics of the instrument. The categories are those measured at fair value and those measured at amortized cost.The classification and measurement of financial liabilities is primary unchanged from IAS 39, other than the fair valuemeasurement option which now addresses an entity’s own credit risk. Additional amendments are expected with respect toderecognition of financial instruments, impairment and hedge accounting. This new standard will also impact disclosuresprovided under IFRS 7 Financial instruments: disclosures. IFRS 9 is effective for annual periods beginning on or afterJanuary 1, 2015.

In November 2013, the IASB amended IFRS 9 for the significant changes to hedge accounting. In addition, an entity cannow apply the “own credit requirement” in isolation without the need to change any other accounting for financialinstruments. The mandatory effective date of January 1, 2015 has been removed to provide sufficient time for preparers offinancial statements to make the transition to the new requirements.

The Credit Union has not yet determined the impact of this amendment on its consolidated financial statements.

IFRS 13 Fair value measurement

The Credit Union applies the “portfolio exception”. Accordingly, it measures the fair value of financial assets and liabilities,with offsetting positions in market or counterparty credit risk, consistently with how market participants would price the netrisk exposure. The amendments to IFRS 13, issued in December 2013, clarify that the portfolio exception applies to allcontracts within the scope of IFRS 9 Financial instruments or IAS 39 Financial instruments: Recognition and measurement,regardless of whether they meet the definitions of financial assets or financial liabilities in IAS 32 Financial instruments:Presentation. The amendments are effective for annual periods beginning on or after July 1, 2014. The Credit Union iscurrently assessing the impact of this amendment on its financial statements.

4. Significant accounting judgments, estimates and assumptions

As the precise determination of many assets and liabilities is dependent upon future events, the preparation of consolidatedfinancial statements for a period necessarily involves the use of estimates and approximations which have been made usingcareful judgment. These estimates are based on management's best knowledge of current events and actions that theCredit Union may undertake in the future.

Allowance for impaired loans

The Credit Union reviews its individually significant loans at each reporting date to assess whether an impairment lossshould be recognized. In particular, judgment by management is required in the estimation of the amount and timing of futurecash flows when determining the impairment loss.

In estimating these cash flows, the Credit Union makes judgments about the borrower’s financial situation and the netrealizable value of collateral. These estimates are based on assumptions about a number of factors and actual results maydiffer, resulting in future changes to the allowance.

Members loans receivable that have been assessed individually and found not to be impaired and all individually insignificantloans are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provisionshould be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. Thecollective provision assessment takes account of data from the loan portfolio such as credit quality, delinquency, historicalperformance and industry economic outlook. The impairment loss on member loans receivable is disclosed in more detail inNote 6.



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Financial instruments not traded on active markets

For financial instruments not traded in active markets, fair values are determined using valuation techniques such as thediscounted cash flow model that rely on assumptions that are based on observable active markets or rates. Certainassumptions take into consideration liquidity risk, credit risk and volatility.

5. Cash and interest-bearing deposits with Central 1

2013 2012

Cash 8,622 18,179Interest-bearing deposits with Central 1 87,202 82,920

95,824 101,099

6. Member loans receivable

Principal and allowance by loan type:

2013

Principalperforming

Principalimpaired

Allowancespecific

Allowancecollective

Net carryingvalue

Personal and other 641,568 8,767 868 747 648,720Commercial 206,208 8,535 871 773 213,099

Total 847,776 17,302 1,739 1,520 861,819

2012

Principalperforming

Principalimpaired

Allowancespecific

Allowancecollective

Net carryingvalue

Personal and other 600,497 1,985 679 781 601,022Commercial 206,943 994 347 1,326 206,264

Total 807,440 2,979 1,026 2,107 807,286

The Credit Union has securitized member loans receivable under the National Housing Authority Mortgage Backed Securityprogram in the amount of $35,835 (2012 - $36,731) which do not qualify for derecognition and are therefore included in thePersonal and other balances above.

The allowance for loan impairment changed as follows:2013 2012

Balance, beginning of year 3,133 2,873Provision for impaired loans 572 619

3,705 3,492Less: accounts written off, net of recoveries 446 359

Balance, end of year 3,259 3,133



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Loans past due but not impaired

A loan is considered past due when a counterparty has not made a payment by the contractual due date. The table thatfollows presents the carrying value of loans at year-end that are past due but not classified as impaired because they areeither i) less than 90 days past due, or ii) fully secured and collection efforts are reasonably expected to result in repayment.

1-29 days 30-59 days 60-89 days 90 days andgreater

2013

Personal 13,250 2,011 1,727 5,131 22,119Commercial 474 2,505 10 324 3,313

Total 13,724 4,516 1,737 5,455 25,432

1-29 days 30-59 days 60-89 days 90 days andgreater

2012

Personal 19,196 3,774 1,945 443 25,358Commercial 1,515 2,916 5 7,251 11,687

Total 20,711 6,690 1,950 7,694 37,045

The principal collateral and other credit enhancements the Credit Union holds as security for loans include (i) insurance,mortgages over residential lots and properties, (ii) recourse to business assets such as real estate, equipment, inventory andaccounts receivable, (iii) recourse to commercial real estate properties being financed, and (iv) recourse to liquid assets,guarantees and securities. Valuations of collateral are updated periodically depending on the nature of the collateral. TheCredit Union has policies in place to monitor the existence of undesirable concentration in the collateral supporting its creditexposure. In management's estimation, the fair value of the collateral is sufficient to offset the risk of loss on the loans pastdue but not impaired.



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7. Property, plant and equipment

Land BuildingsBuildings

HVACBuilding

improvementsBuilding

roof Equipment Furniture Vehicles Total

Cost

Balance at December 31, 2011 1,605 13,337 1,820 6,796 729 5,602 2,366 64 32,319

Additions - 29 56 464 - 1,162 25 - 1,736

Disposals - (60) - - - (137) (34) - (231)

Transfer to investment property - (916) - - (42) - - - (958)


Additions - 152 - - - 424 - - 576

Disposals - - - - - (315) - - (315)


Depreciation

Balance at December 31, 2011 - 3,330 463 2,728 409 3,749 1,583 48 12,310

Depreciation - 274 78 401 16 532 94 16 1,411

Disposals - (2) - - - (137) (34) - (173)

Transfer to investment property - (204) - - (30) - - - (234)


Depreciation - 274 80 397 26 559 91 - 1,427

Disposals - - - - - (274) - - (274)


Net book value

At December 31, 2012 1,605 8,992 1,335 4,131 292 2,483 714 - 19,552

At December 31, 2013 1,605 8,870 1,255 3,734 266 2,307 623 - 18,660



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8. Intangible assets

Computersoftware

Cost

Balance at December 31, 2011 3,281

Additions 209


Additions 428


Amortization and impairment losses


Amortization 80


Amortization 207


Net book value

At December 31, 2012 1,122

At December 31, 2013 1,343

9. Investment properties

2013 2012

At fair value

Carrying amount, beginning of year 9,512 7,987Additions 528 812Transfer from buildings - 603Fair value adjustments - 110

Balance at December 31, 2013 10,040 9,512

Investment properties are subject to external valuation performed by qualified valuation professionals on a regular basis. Thefair value of investment property is determined by discounting the expected cash flows of the parties based upon internalplans and assumptions and comparable market transactions.

During the year, $598 of rental income from investment properties were recognized in earnings (2012 - $547) with directoperating expenses of $240 (2012 - $227).



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10. Other assets

2013 2012

Accrued interest receivable 3,936 3,451Deferred expenses 1,773 1,457Property held for resale 1,078 1,078Accounts receivable 873 984Prepaid expenses 387 421Retained interest - loan pools 317 1,250Interest rate swaps 150 1,259Other 23 181

8,537 10,081

11. Investment in an associate

The Credit Union has a 33% interest in Kootenay Insurance Services Ltd. ("KIS"). The following table illustrates summarizedfinancial information of the Credit Union's investment in KIS:

2013 2012Share of the associate's statement of financial position:Current assets 505 634Non-current assets 2,783 2,223Current liabilities (314) (185)Non-current liabilities (273) (144)

Equity 2,701 2,528

Share of the associate’s revenue and profit:Revenue 1,262 1,037

Profit 173 385

Carrying amount of the investment 2,701 2,528

12. Other investments

2013 2012

Other investmentsShares, Central 1 3,342 3,394Other investments 1,985 1,016Units of Southern Interior Innovation Fund 1,419 1,400

6,746 5,810



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13. Member deposits

2013 2012

Demand deposits 395,139 354,840Term deposits 324,672 325,349Registered savings plans 163,179 151,459

882,990 831,648

14. Borrowings

The Credit Union has loan payables and an operating line of credit in favour of Central 1. The Credit Union may borrow amaximum of $140,000 utilizing an operating line of credit and term loan facilities. As at December 31, 2013, the CreditUnion's borrowings with Central 1 amounted to $nil (2012 - $nil). In addition, in accordance with the IAS 39 derecognitionrequirements, $37,109 (2012 - $37,692) of securitized debt obligations were recorded in relation to MBS/CHT programsecuritizations (Note 6 and 15).

15. Securitization

The Credit Union has entered into agreements with Central 1 to sell mortgages for participation in the Canada MortgageBond Program ("CMB Program") which are used by Central 1 to create mortgage-backed securities sold to CanadaMortgage Housing Trust, an independent special purpose entity. In October 2010, the Credit Union became an approvedMBS Issuer/CHT Seller as defined under the National Housing Act, whereby the Credit Union sells mortgages directly to theCanada Housing Trust or other financial institutions ("MBS/CHT Program"). The balance outstanding of mortgages sold intoboth the CMB Program and the MBS/CHT Program as at December 31, 2013 was $64,105 (2012 - $86,022).

For securitization agreements initiated prior to the date of transition to IFRS, the Credit Union's retained interests insecuritized loans consist of a right to receive future cash flows arising after the investors in the special purpose entity havereceived the return for which they contracted and from credit enhancement provided to the special purpose entity in the formof cash collateral accounts. The investors and special purpose entities, as holders of the securitized mortgages, haverecourse only to a cash collateral account, the mortgage securitized and cash flows from the securitized mortgages. Theinvestors and the third parties have no recourse to the Credit Union's other assets for failure of debtors to pay when due. TheCredit Union's retained interests are subject to credit, prepayment and interest rate risks on the securitized mortgages andthe variability of funding costs of the Canada Housing Trust.

As part of these securitizations of mortgage receivables, the Credit Union retained servicing responsibilities. A servicingliability of $41 existed at December 31, 2013 (2012 – $152) .

The fair value of retained interests amounts to $317 at December 31, 2013 (2012 - $1,250). An amount of $51 (2012 – $189)is recorded as a deferred premium liability and is amortized over the remaining term to maturity of the securitized loan pool.

Key assumptions used in measuring the Credit Union’s retained interests in securitized residential mortgages at the periodend date include the following:

Average prepayment rate – 1.52% per month (2012 – 1.52% per month)

Weighted average time to maturity – 22.65 months (2012 – 15.46 months)

Prepayment - The Credit Union periodically carries out an analysis of actual prepayment experience for homogenous poolsof mortgages in its portfolio and uses this information as one of the inputs in its estimation of the expected rate ofprepayment of mortgage receivables securitized through the CMB Program. The expected rate of prepayment is used in thecalculation of the retained interest and servicing liability which arises from the securitization of mortgages through the CMBProgram.



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Credit risk – As the mortgages securitized into the CMB Program and MBS/CHT Program are insured with a highly, creditrated insurer, the credit union does not incorporate any credit risk assumptions into its measurement of the retained interest.

Cost of funds – The Credit Union pays a funding cost for the securitization transaction which is calculated based upon theoutstanding principal balance of the securitized mortgage receivables at CDOR one month interest rate. The cost of fundsover the remaining term of the securitization arrangement is estimated using a CDOR yield curve.

Private sale of mortgage pools

The Credit Union also enters into agreements with other financial institutions to sell mortgage pools. Unlike the mortgagesales through the CMB and MBS/CHT Programs, the Credit Union does not retain any financial interest in these soldmortgages and substantially all of the risks and rewards are transferred. As part of the agreements, the Credit Unioncontinues to act as administrative agent on these mortgages.

During the year the Credit Union sold $56,229 (2012 – $92,457) in mortgages through these private sales, against which again of $149 (2012 – $2,056) was recorded.

16. Other liabilities

2013 2012

Accrued liabilities and accounts payable 4,846 5,757Accrued interest payable 5,666 5,748Servicing and premium liability 93 342

10,605 11,847

17. Income tax

The total provision for income taxes in the income statement is at a rate below the combined federal and provincial statutoryincome tax rates for the following reasons:

2013 2012

Amount% of Pre-tax

income Amount% of Pre-tax

incomeCombined federal and provincial statutory incometax rates

630 26.0% 559 25.0%

Reduction for Credit Unions (290) (12.5%) (257) (11.5%)Non-deductible and other items 129 8.6% (357) (16.0%)

Income taxes as reported 469 24.8% (55) (2.5%)

The tax effects of temporary differences which give rise to the deferred tax liability reported on the statement of financialposition is from differences between amounts deducted for accounting and income tax purposes.



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Net deferred income tax is comprised of the following:

2013 2012

Deferred tax liabilityProperty and equipment (1,094) (482)Securitization adjustments (489) (1,024)Other temporary differences (192) (191)

(1,775) (1,697)

Deferred tax assetIntangible assets 116 71Allowance for impaired loans 229 298Post retirement benefits 483 231Securitization adjustments 39 39Other temporary differences 1 -

868 639

Net deferred tax liability (907) (1,058)

18. Distributions to members

2013 2012Net income Equity Net income Equity

Patronage distributions 373 - 2,421 -Dividends on patronage shares 59 246 61 256Dividends on equity shares 2 7 2 7Less: related income taxes - (34) - (36)

434 219 2,484 227

19. Member equity shares

Authorized:

Unlimited number of Class A shares, at an issue price of $1Unlimited number of Class B shares, at an issue price of $1Unlimited number of Class B (registered) shares, at an issue price of $1

Member shares issued:2013 2012

Class A, par value $1 each 903 916Class B, par value $1 each 7,232 7,389Class B (registered), par value $1 each 17,568 18,346Less: Member shares classified as liabilities (4,960) (5,147)

20,743 21,504



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Class A Class BClass B

(registered) 2013 2012

Balance, beginning of year 916 7,389 18,346 26,651 26,472

New shares issued 65 - - 65 103

Transfer between share classes - (809) 809 - -

Shares redeemed (78) (1,668) (2,021) (3,767) (3,592)

Dividends paid to members* - 2,319 435 2,754 3,668

Balance, end of year 903 7,231 17,569 25,703 26,651

Shares included in liabilities - 1,445 3,515 4,960 5,147

Shares included in equity 903 5,786 14,054 20,743 21,504

903 7,231 17,569 25,703 26,651

* Class A share dividends are paid in the form of Class B shares. Class B registered share redemptions are net of transfersfrom Class B non-registered and Class B registered redemptions.

The Credit Union has two classes of equity shares. Class A equity shares are a membership requirement with a minimum of5 shares per junior member and 25 shares for all other members. Class A shares may be withdrawn only upon close ofmembership. Class B shares are patronage shares received by the membership through patronage refunds and dividends.Up to 20% of the total Class B shares held by a member may be withdrawn. Full redemption of a member's Class B sharesis allowed if the member is 65 years of age or older, upon the death of the member, or upon close of membership due to amove to an area not serviced by the Credit Union.

Class B shares may be registered in a RRSP, RRIF or TFSA. In addition to the previous Class B withdrawal restrictions, fullredemption is allowed upon marital breakdown and in cases of over contribution, transferred back to non-registered Class Bshares.

As an overall restriction, in a given year, the maximum aggregate withdrawal cannot exceed 40% of the total Class B shareswithin the Credit Union, unless approved by the Board. Funds invested in Class A and Class B shares are not insured byCredit Union Deposit Insurance Corporation ("CUDIC").

20. Related party transactions

Directors and key management personnel

Key management personnel ("KMP") are defined by IAS 24 Related Party Disclosures as those persons having authority andresponsibility for planning, directing and controlling the activities of the Credit Union, including the Board of Directors, ALCOCommittee, executives and senior management.

Loans made to directors and KMP are approved under the same lending criteria applicable to members. KMP may receiveconcessional rates of interest on their loans and facilities. There are no loans that are impaired in relation to loan balanceswith Directors and KMP.

There are no benefits or concessional terms and conditions applicable to the family members of Directors and KMP. Thereare no loans that are impaired in relation to the loan balances with family or relatives of Directors and KMP.



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2013 2012

Aggregate of loans to Directors and KMP 4,347 3,956Total value of revolving credit facilities to Directors and KMP 1,731 840Less: Member shares included as liabilities (2) (2)

6,076 4,794

2013 2012

During the year the aggregate value of loans disbursed to Directors and KMPamounted to:

Mortgages 302 905Loans 74 43Lines of Credit 169 -

545 948

2013 2012

Interest and other revenue earned on loans to Directors and KMP 155 107Total interest paid on deposits to Directors and KMP 158 65

2013 2012

The total value of member deposits from the Directors and KMP as at the year-end:Chequing and demand deposits 4,675 514Term deposits 3,535 366Registered plans 889 600

Total value of member deposits due to Directors and KMP 9,099 1,480

2013 2012Aggregate compensation of KMP during the year consisted of:

Salary and short term benefits 2,057 1,980Long-term benefits - 81

2,057 2,061

Aggregate payments paid to directors in their capacity as directors, including honoraria, amounted to $100 (2012 - $100).Reimbursement of expenses related to meeting, training and conference costs amounted to $58 (2012 - $58) for the year.

21. Capital management

The Financial Institutions Act requires the Credit Union to maintain, at all times, a capital base which is adequate in relationto the business carried on. The level of capital required is based on a prescribed percentage of the total value ofrisk-weighted assets, each asset of the Credit Union being assigned a risk factor based on the probability that a loss may beincurred on the ultimate realization of that asset. Management considers capital to be comprised of the net assets of theCredit Union and all components of members’ equity on the same risk weighted basis as is prescribed by the FinancialInstitutions Act and which amounts to $78,522 as at December 31, 2013 (2012 – $78,901).



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The Financial Institutions Act regulations prescribe that the minimum required capital base ratio is 8%. As at December 31,2013, the Credit Union has a capital base of 16% (2012 – 17%).

Capital is managed in accordance with policies established by the Board. Management regards a strong capital base as anintegral part of the Credit Union's strategy. The Credit Union has a capital plan to provide a long-term forecast of capitalrequirements. All of the elements of capital are monitored throughout the year, and modifications of capital managementstrategies are made as appropriate. In addition, the Credit Union develops and works within a 5-Year Capital Plan. TheCredit Union makes periodic dividend payments on eligible member shares, within the context of its overall capitalmanagement plan.

22. Pension plan and other employee benefits

The Credit Union has a Supplemental Employee Retirement Plan ("SERP") and a Retiree Benefits Plan covering certainemployees of the Credit Union and its subsidiaries. The annual cost of the pension benefits has been determined by anindependent actuary based on the accrued benefit actuarial cost method.

The Credit Union principally provides pension benefits to its eligible employees through a multi-employer defined benefitpension plan and a money purchase plan, administered by Central 1. The annual contribution rates are actuariallydetermined and reported to member credit unions by Central 1. The defined benefit plan (the "Plan") is governed by a 12member Board of Trustees. The Board of Trustees is responsible for overseeing the management of the Plan, includinginvestment of the assets and administration of the benefits. The Plan, as at December 31, 2012, has about 3,100 activeemployees and approximately 550 retired plan members. Total plan assets are $354,000. Every three years, an actuarialvaluation is performed to assess the financial position of the Plan and the adequacy of the funding level. The most recentactuarial valuation, which was conducted as at December 31, 2012, indicated a going concern unfunded liability of $32,300and a solvency deficiency of $129,900. As this is a multi employer plan, the assets and liabilities of the Plan are pooled andnot tracked separately by employer group, and therefore the actuary does not determine an individual employer's ownunfunded liability. The deficit is targeted to be financed over time through increased contributions. The next actuarialvaluation is scheduled for December 31, 2015 with results available in mid 2016. The Trustees of the Plan may, however,decide to conduct a valuation sooner than December 31, 2015. The pension expense for the year ended December 31,2013 amounted to $1,372 (2012 - $1,185) which has been recorded as an expense in earnings.

The Credit Union also provides additional pension benefits to certain eligible employees who are members of aSupplemental Pension Plan. These non-pension benefits consist of contributions up to certain annual maximum limitsoutlined in the plan agreement with respect to medical and dental benefits. Both plans are unfunded defined benefit plans.

Funding of the registered retirement plans complies with applicable regulations that require actuarial valuations of thepension funds at least once every three years in Canada, depending on the funding status. The most recent actuarialvaluations were as of December 31, 2013 for the Retiree Benefits Plan and for the SERP.

Accrued benefit obligationSupplementalPension plan

2013

SupplementalPension plan

2012

Post retirementBenefit plan

2013


2012Benefit obligation, opening 84 67 1,512 1,112Current service costs 9 7 68 57Interest costs 4 4 70 63Benefits paid - - (32) (30)Actuarial losses 8 6 4 310

Benefit obligation, end of year 105 84 1,622 1,512

The Credit Union reported a Supplemental Pension Plan expense in 2013 of $21 (2012 - $17) and a Post Retirement BenefitPlan expense of $110 (2012 - $373).



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Significant assumptions:

Weighted average:SupplementalPension plan

2013

SupplementalPension plan

2012


2013


2012Discount rate 4.75% 4.50% 4.75% 4.50%Rate of compensation increase 3.75% 3.25% 3.75% 3.25%Inflation 2.50% 2.50% 2.50% 2.50%

23. Derivative financial instruments and hedging activities

Notionalamount

Interestreceivable/

(payable)Risk weighted

balanceForeign exchange forward contract 5,318 - -Interest rate swaps - - -Index-linked options 1,187 58 12

Equity options are transactions in which the Credit Union manages its exposure to changes in the value of index-linkeddeposit products. Equity options purchased by the Credit Union, for a premium, provide the right, but not the obligation, tobuy or sell to the writer of the option, an underlying stock index. These options contracts are transacted on anover-the-counter basis. Two parties exchange cash flows on a specified notional amount for a predetermined period basedon the increase or decrease in an underlying stock market index versus a fixed interest rate. Notional amounts are notexchanged.

Interest rate swaps are transactions in which two parties exchange interest cash flows on a specified notional amount, basedon agreed upon fixed and floating rates for a specified time period. Notional amounts are the contract amounts used tocalculate the cash flows to be exchanged. The Credit Union did not have any interest rate swaps outstanding at December31, 2013.

Foreign exchange forward contracts are used to hedge the Credit Union's exposure to foreign exchange risk.

24. Financial instrument risk management

Risk management policy

The Credit Union’s risk management policies are designed to identify and analyze risks, to set appropriate risk limits andcontrols, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. TheCredit Union follows an enterprise risk management framework which involves identifying particular events or circumstancesrelevant to its objectives, assessing them in terms of probability and magnitude, determining a response strategy andmonitoring progress. The Credit Union regularly reviews its risk management policies and systems to take account ofchanges in markets, products and emerging best practice.

Risk management is carried out by a number of delegated committees reporting to the Board of Directors. The Boardprovides written principles for risk tolerance and overall risk management and management report to the Board oncompliance with the risk management policies of the Credit Union. In addition, the Credit Union maintains an Internal Auditfunction which is responsible for independent review of risk management and the Credit Union’s control environment.

Financial instruments comprise the majority of the Credit Union’s assets and liabilities. The Credit Union accepts depositsfrom members at both fixed and floating rates for various periods and seeks to earn an interest rate margin by investingthese funds in high quality financial instruments – principally mortgages. The primary types of financial risk which arise fromthis activity are interest rate risk, credit risk, liquidity risk, price risk and foreign exchange risk.



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The following table describes the significant financial instrument activity undertaken by the Credit Union, the risks associatedwith such activities and the types of methods used in managing those risks.

Activity Risk Method

Fixed rate savings products and fundingactivities involving fixed rate instruments

Sensitivity to changes in interest rates Sensitivity Analysis and Stress-testing

Fixed rate mortgages Sensitivity to changes in interest rates Sensitivity Analysis and Stress-testing

Equity linked deposit products Sensitivity to changes in Canadian equityindices

Options

Foreign currencies Sensitivity to changes in foreign currency Minimize overall credit unionexposure

Investment of liquid resources in fixedincome securities

Sensitivity to changes in obligor creditrisk leading to default

Monitoring of investment restrictionsand counterparty risk

The main financial risks inherent in the Credit Union environment are credit, liquidity and interest rate risks.

Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of the Credit Union’s financial instruments will fluctuate due tochanges in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuatebecause of changes in prevailing market interest rates. Interest margins reported in the profit or loss may increase ordecrease in response to changes in market interest rates.

In managing interest rate risk, the Credit Union relies primarily upon use of asset - liability and interest rate sensitivitysimulation models, which is monitored by the Credit Union's Treasury department and reported to the Asset and LiabilitiesCommittee ("ALCO") which is responsible for managing interest rate risk. Periodically, the Credit Union may enter intointerest rate swaps to adjust the exposure to interest rate risk by modifying the re-pricing of the Credit Union's financialinstruments.

Sensitivity analysis is used to assess the change in value of the Credit Union's financial instruments against a range ofincremental basis point changes in interest rates over a twelve month period. Interest rate shock analysis is calculated in asimilar manner to sensitivity analysis but involves a more significant change of 100 basis points or greater in interest rates.Sensitivity analysis and interest rate shock analysis are calculated on a monthly basis and are reported to the ALCOcommittee. Based on current differences between financial assets and financial liabilities as at December 31, 2013, theCredit Union estimates that an immediate and sustained 100 basis point increase in interest rates would decrease netinterest income by $513 over the next 12 months while an immediate and sustained 100 basis point decrease in interest ratewould increase net interest income by $21 over the next 12 months.

Other types of interest rate risk are basis risk (the risk of loss arising from changes in the relationship of interest rates whichhave similar but not identical characteristic; for example, the difference between prime rates and the Canadian DepositOffering Rate) and prepayment risk (the risk of loss of interest income arising from the early repayment of fixed ratemortgages and loans), both of which are monitored on a regular basis and are reported to ALCO.

Interest rate risk is the sensitivity of the Credit Union's financial condition to movements in interest. The carrying amounts offinancial instruments are presented in the periods in which they next re-price to market rates or mature and are summed toshow the net interest rate sensitivity gap.



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Variablerate

Within oneyear

One to twoyears

Two to threeyears

Three to fouryears

Over fouryears

Non-InterestSensitive

2013Total

2012Total

Financial assetsCash and investments - 36,225 13,050 14,680 11,937 11,310 8,622 95,824 101,099Loans 334,697 123,444 92,080 66,479 81,467 163,652 - 861,819 807,286Other - 3,403 - - - 3,342 8,439 15,184 16,583

334,697 163,072 105,130 81,159 93,404 178,304 17,061 972,827 924,968

Financial liabilitiesDemand deposits 395,139 - - - - - - 395,139 354,840Terms deposits - 214,216 59,717 44,104 4,098 2,537 - 324,672 325,349Registered plans 14,960 80,758 36,947 21,410 4,975 3,948 181 163,179 151,459Member shares - - - - - - 4,960 4,960 5,147Borrowings - - - - 37,109 - - 39,109 37,692Other - - - - - - 11,312 11,312 14,615

410,099 294,974 96,664 65,514 46,182 6,485 16,453 938,371 889,102

On balance sheet mismatch (75,402) (131,902) 8,466 15,645 47,222 171,819 608 36,456 35,866Off balance sheet - - - - - - - - -

Net sensitivity (75,402) (131,902) 8,466 15,645 47,222 171,819 608 36,456 35,866



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Credit risk

Credit risk is the risk that a Credit Union member or counterparty will be unable to pay amounts in full when due. Impairmentprovisions are provided for losses that have been incurred at the balance sheet date. Significant changes in the economy ofBC and the Kootenay region of British Columbia or deteriorations in lending sectors which represent a concentration withinthe Credit Union’s loan portfolio may result in losses that are different from those provided for at year end.

At December 31, 2013, the maximum credit risk exposure of the Credit Union approximates the carrying value of all assetsexcept for undrawn lines of credit which amounted to $124,003 (2012 – $128,942). The classes of financial instrument towhich the Credit Union is most exposed are loans to members, cash resources and derivatives.

2013 2012Outstanding Undrawn commitments

Credit risk exposureCash resources and other interest-bearing assets 95,824 - 95,824 101,099Personal mortgages 463,450 - 463,450 415,693Commercial mortgages 198,767 18,796 217,563 212,250Personal loans 39,890 12,873 52,763 55,084Commercial loans 4,778 - 4,778 4,373Personal line of credit and overdraft 111,159 85,914 197,073 196,598Commercial line of credit and overdraft 11,198 6,420 17,618 18,602Derivative financial instruments 21 - 21 1,259

925,087 124,003 1,049,090 1,004,958

Management of credit risk is an integral part of the Credit Union's activities. Management carefully monitors and managesthe Credit Union's exposure to credit risk by a combination of methods. Credit risk arises principally as a result of the CreditUnion's lending activities that result in member loans and advances and Treasury activities that result in investments in cashresources. There is also credit risk in unfunded loan commitments. The overall management of credit risk is centralized inthe Credit Market Risk Committee which reports to the Board of Directors and the respective operating units of the CreditUnion.

Concentration of loans is managed by the implementation of sectoral and member specific limits as well as the periodic useof syndication with other financial institutions to limit the potential exposure to any one member. The Credit Market RiskCommittee is responsible for approving and monitoring the Credit Union's tolerance for credit exposures which it doesthrough review and approval of the Credit Union's lending policies and credit scoring system and through setting limits oncredit exposures to individual members and across sectors. The Credit Union maintains levels of borrowing approval limitsand prior to advancing funds to a member, an assessment of the credit quality of that member is made. The Credit Unionemphasizes responsible lending in its relationships with members and to establish that loans are within the member's abilityto repay, rather than relying exclusively on collateral.

Loans to members

Loans to members consist of $793,614 (2012 - $742,072) residential and commercial loans/mortgages which are fullysecured against residential property with a further $46,620 (2012 - $42,700) secured by other collateral. Loans to membersalso include $24,842 (2012 - $25,646) of unsecured loans/lines of credit which consists of personal and commercial loansand lines of credit.

The Credit Union often takes security as collateral in common with other lending institutions. The Credit Union maintainsguidelines on the acceptability of specific types of collateral. Collateral may include mortgages over residential propertiesand charges over business assets such as premises, inventory and accounts receivable. Where significant impairmentindicators are identified, the Credit Union takes additional measures to manage the risk of default, which may includeseeking additional collateral.



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The credit quality of the loan portfolio for those loans which are neither past due or impaired can be assessed by referenceto the Credit Union's internal rating system. The Credit Union assesses the probability of a default using internal rating toolsand takes into account both statistical analysis as well as the experience and judgment of the Credit department. Retailmember loans are assessed based on a comparison of the loan-to-value ratio of the loan principal compared to theestimated fair value of collateral. Commercial member loans are divided into five segments and are regularly reviewed andupdated as appropriate. Commercial member loans in the lower classes are not considered to be impaired taking intoaccount the repayment status of the loans and the estimated fair value of collateral, except where indicated as impaired.

Liquidity risk

Liquidity risk is the risk that the Credit Union will encounter difficulty in raising funds to meet its obligations to members andother liabilities. To mitigate this risk, the Credit Union is required to maintain, in the form of cash and term deposits, aminimum of 8% liquidity at all times, based on total members’ deposits and non equity shares. At December 31, 2013, theCredit Union’s liquidity exceeded the required level.

The level of restricted cash resources required is based on total deposits and other debt liabilities. Included in cashresources are restricted cash resources of $87,201 (2012 – $82,919). The Credit Union’s own risk management policiesrequire it to maintain sufficient liquid resources to cover cash flow imbalances, to retain member confidence in the CreditUnion and to enable the Credit Union to meet all financial obligations. This is achieved through maintaining a prudent level ofliquid assets, through management control of the growth of the loan portfolio, securitizations and asset liability maturitymanagement techniques. Management monitors rolling forecasts of the Credit Union’s liquidity requirements on the basis ofexpected cash flows as part of its liquidity management. The Credit Union also maintains total borrowing facilities withCentral 1 of $140,000 as an integral part of its liquidity management strategy.

Foreign currency risk

Foreign currency risk is not considered significant at this time as the Credit Union does not engage in any active trading offoreign currency positions or hold significant excess foreign currency denominated financed investments for an extendedperiod. Based on current differences between foreign currency financial assets and financial liabilities as at December 31,2013, the Credit Union estimates that if a positive/adverse change in the US – Canadian foreign currency exchanges rates of1% would result in a change in the post tax income of $1 principally as a result of the re translation of foreign currencydenominated cash resources.

Price risk

The Credit Union is exposed to price risk on retained interests on securitized residential mortgage pools where the CreditUnion’s residual interest in those pools consist of an exchange of fixed interest cash flows of the Trust with floating rate cashflows based on the Trust’s overall cost of funds. The Credit Union manages its exposure to price risk as an integral part of itsasset-liability matching risk management. Disclosures of the potential exposures on the amount of retained interests beingamortized through earnings are included in Note 15.



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25. Fair value measurements

Recurring fair value measurements

The Credit Union’s assets and liabilities measured at fair value on a recurring basis have been categorized into the fair valuehierarchy as follows:

2013Fair Value Level 1 Level 2 Level 3

AssetsFinancial assets at fair value through profit or lossCash 8,622 8,622 - -Retained interest 317 - - 317Derivative financial instruments 150 - 150 -

Total assets 9,089 8,622 150 317

LiabilitiesFinancial liabilities at fair value through profit or lossIndex-linked deposits 1,187 - 1,187 -Other liabilities

Total liabilities 1,187 - 1,187 -

Total recurring fair value measurements 7,902 8,622 (1,037) 317


AssetsFinancial assets at fair value through profit or lossCash 18,179 18,179 - -Retained interest 1,250 - - 1,250Derivative financial instruments 1,259 - 1,259 -

Total assets 20,688 18,179 1,259 1,250

LiabilitiesFinancial liabilities at fair value through profit or lossIndex-linked deposits 1,167 - 1,167 -Other liabilities

Total liabilities 1,167 - 1,167 -

Total recurring fair value measurements 19,521 18,179 92 1,250



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Valuation techniques and inputs for recurring and non-recurring level 2 fair value measurements is as follows:

2013Fair value measurement Fair Value Valuation techniques Inputs

Derivative financial instruments 150

Fair value is determinedusing the net presentvalue of cash flowsattributable to thederivative financialasset.

Discount rates based onCDOR and swap rates.

Index-linked deposits 1,187

Fair value is determinedusing the net presentvalue of cash flowsattributable to theinvestments.

Discount rates based oncurrent investmentrates.

2012Fair value measurement Fair Value Valuation techniques Inputs

Derivative financial instruments 1,259

Fair value is determinedusing the net presentvalue of cash flowsattributable to thederivative financialasset.

Discount rates based onCDOR and swap rates.

Index-linked deposits 1,167

Fair value is determinedusing the net presentvalue of cash flowsattributable to theinvestments.

Discount rates based oncurrent investmentrates.

Transfers between levels of the fair value hierarchy

The Credit Union‘s policy for when transfers between the levels of the fair value hierarchy are deemed to have occurred, is atthe date of the event or change in circumstances that caused the transfer. No such transfers occurred during the year.



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Asset and liabilities for which fair value is only disclosed

The following table analyses within the fair value hierarchy the Credit Union’s assets and liabilities (by class) not measuredat fair value at December 31, 2013 but for which fair value is disclosed:


AssetsInterest bearing deposits with Central 1 88,882 - 88,882 -Member loans receivable 862,520 - 862,520 -Other investments 6,874 - - 6,874Other assets 5,269 - 5,269 -

Total assets 963,545 - 956,671 6,874

LiabilitiesMember deposits 870,167 - 870,167 -Borrowings 38,349 - 38,349 -Other liabilities 11,312 - 11,312 -Member shares - liability 4,960 - - 4,960

Total liabilities 924,788 - 919,828 4,960


AssetsInterest bearing deposits with Central 1 85,056 - 85,056 -Member loans receivable 814,440 - 814,440 -Other investments 5,983 - - 5,983Other assets 5,736 - 5,736 -

Total assets 911,215 - 905,232 5,983

LiabilitiesMember deposits 843,156 - 843,156 -Borrowings 38,919 - 38,919 -Other liabilities 14,615 - 14,615 -Member shares - liability 5,147 - - 5,147

Total liabilities 901,837 - 896,690 5,147



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26. Commitments and contingencies

Letters of credit

As of December 31, 2013, the Credit Union had issued letters of credit on behalf of members in the amount of $1,191(2012 - $1,168). Of these letters of credit, $1,118 (2012 - $1,091) are secured by securities and/or monies on deposit; theremainder by indemnities or personal guarantees.

Commitments

The Credit Union has entered in various agreements for services with estimated minimum annual payments as follows:

2014 646,2842015 572,5242016 254,7632017 194,9022018 68,116

Contingencies

From time to time, various claims and legal proceedings may arise against the Credit Union. The Credit Union vigorouslydefends itself where appropriate and in instances where it considers it more likely than not to prevail, no provision isrecorded in the financial statements.

The Credit Union has been named in a class action suit, along with seven other British Columbia credit unions. No claimantshave come forward that are actual members of the Credit Union. The Credit Union feels that they are in a strong position tosuccessfully defend the suit, and as such, no provision is recorded in the financial statements.

27. Comparative figures

Certain prior year figures have been reclassified to conform to the current year's presentation.

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