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Consolidated Financial Statements of

ALTERNA SAVINGS

December 31, 2008

AUDITORS' REPORT To the Members of Alterna Savings and Credit Union Limited: We have audited the consolidated balance sheet of Alterna Savings and Credit Union Limited (“Alterna Savings”) as at December 31, 2008 and the consolidated statements of income, comprehensive income, changes in members’ equity and cash flows for the year then ended. These financial statements are the responsibility of the management of Alterna Savings. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Alterna Savings as at December 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Ottawa, Canada February 13, 2009

ALTERNA SAVINGS Consolidated Balance Sheet (in thousands of dollars) As at December 31

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2008 2007

ASSETS

Cash and cash equivalents 59,833$ 56,801$ Investments (note 3) 159,038 150,174 Loans, net of allowance for impaired loans (notes 5 and 6) 1,708,118 1,529,150 Property and equipment (note 8) 19,971 25,692 Derivative financial instruments (note 22) 16,959 14,676 Other assets (note 9) 15,038 13,670

1,978,957$ 1,790,163$

LIABILITIES AND MEMBERS' EQUITY

Liabilities: Deposits (note 10) 1,776,589$ 1,574,662$ Borrowings (note 11) 34,700 50,000 Future income tax liability (note 19) 2,628 1,274 Derivative financial instruments (note 22) 3,560 12,858 Other liabilities (note 12) 27,837 25,952 Membership shares (note 14) 1,898 2,530

1,847,212 1,667,276 Members' equity: Special shares (note 14) 24,545 26,143 Contributed surplus 19,282 19,247 Retained earnings 86,459 76,982 Accumulated other comprehensive income 1,459 515

131,745 122,887 1,978,957$ 1,790,163$

Commitments and contingencies (note 24)

On behalf of the Board:

Director Director

(See accompanying notes to the consolidated financial statements)

ALTERNA SAVINGS Consolidated Statement of Income (in thousands of dollars) Year ended December 31

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2008 2007

Interest income (note 15) 91,079$ 86,860$ Investment income (note 4) 2,109 7,491

93,188 94,351 Interest expense (note 15) 46,278 41,134 Net interest income 46,910 53,217 Loan costs 767 1,738

46,143 51,479 Other income (note 16) 27,455 14,196

73,598 65,675 Operating expenses (note 17) 60,319 61,396 Income before integration costs and income taxes 13,279 4,279 Integration costs 385 3,261 Income before income taxes 12,894 1,018

Provision for income taxes (note 19) Current 741 90 Future 1,528 184

2,269 274 Net income 10,625$ 744$


ALTERNA SAVINGS Consolidated Statement of Comprehensive Income (in thousands of dollars) Year ended December 31

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2008 2007

Net income 10,625$ 744$

Other comprehensive income (loss), net of tax:Change in unrealized gains and losses on available-for-sale securities (1) 1,507 5 Reclassification of realized gains and losses on available-for-sale securities to net income (2) - (17) Change in gains and losses on derivatives designated as cash flow hedges (3) (563) (146)

944 (158)

Comprehensive income 11,569$ 586$

(1) Net of income tax expense of $193 (2007 - $2)(2) Net of income tax recovery of $nil (2007 - $4)(3) Net of income tax recovery of $118 (2007 - $26)


ALTERNA SAVINGS Consolidated Statement of Changes in Members’ Equity (in thousands of dollars) Year ended December 31

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2008 2007

Special shares:Balance, beginning of year 26,143$ 28,111$ Net shares redeemed (note 14) (1,598) (1,968) Balance, end of year 24,545 26,143

Contributed surplus:Balance, beginning of year 19,247 19,053 Income tax adjustment on integration costs 35 194 Balance, end of year 19,282 19,247

Retained earnings, net of tax:Balance at beginning of year, as previously reported 76,982 77,981 Transitional adjustment on adoption of new accounting policies - (762) Balance at beginning of year, as restated 76,982 77,219 Net income 10,625 744 Dividend on special shares (note 14) (1,098) (981) Issuance costs (50) - Balance, end of year 86,459 76,982

Accumulated other comprehensive income (loss), net of tax:Balance at beginning of year 515 - Transitional adjustment on adoption of new accounting policies - 673 Other comprehensive income (loss) 944 (158) Balance, end of year 1,459 515

Members' equity 131,745$ 122,887$


ALTERNA SAVINGS Consolidated Statement of Cash Flows (in thousands of dollars) Year Ended December 31

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2008 2007

Operating activities:Net income 10,625$ 744$ Add (deduct) non-cash items:

(Gain) loss on disposal of property and equipment (1,995) 292 Net (gains) losses on sale and securitization of loans (1,075) 112 Amortization of property and equipment 5,618 5,885 Net loss on sale of investments - 17 Amortization of deferred charges 725 867 Allowance for impaired loans 292 1,255 Future income taxes 1,278 (215) (Increase) decrease in interest receivable (671) 1,368 Change in assets relating to derivative financial instruments (2,964) (12,075) Decrease in interest payable (10) (809) Change in liabilities relating to derivative financial instruments (9,298) 12,644 Other items, net 571 (6,526)

Cash provided by operating activities 3,096 3,559

Investing activities:Proceeds from maturity and sale of investments 282,776 122,039 Purchase of investments (289,940) (123,969) Proceeds from loan sales 39,922 60,885 Net increase in loans (217,962) (91,968) Proceeds from sale of property and equipment 3,307 - Acquisition of property and equipment (808) (1,994)

Cash applied to investing activities (182,705) (35,007)

Financing activities:Net increase (decrease) in deposits 201,927 (6,370) Net decrease in membership shares (632) (1) Net decrease in special shares (1,598) (1,968) Net increase in contributed surplus 35 194 Issuance costs (50) - Dividend on special shares (1,098) (981) Capital lease repayments (643) (1,333) Net (decrease) increase in borrowings (15,300) 31,600

Cash provided by financing activities 182,641 21,141

Increase (decrease) in cash and cash equivalents during the year 3,032 (10,307) Cash and cash equivalents, beginning of year 56,801 67,108 Cash and cash equivalents, end of year 59,833$ 56,801$

Supplemental information:Interest paid 46,288$ 41,943$ Income taxes paid 225$ 644$ Property and equipment acquired through capital leases 401$ 695$


ALTERNA SAVINGS Notes to the Consolidated Financial Statements December 31, 2008

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1. NATURE OF OPERATIONS

Alterna Savings is a credit union incorporated under The Credit Unions and Caisses Populaires Act (Ontario) (the “Act”) as Alterna Savings and Credit Union Limited and is a member of the Deposit Insurance Corporation of Ontario (“DICO”) and Central 1 Credit Union (“Central 1”), successor to Credit Union Central of Ontario (“CUCO”).

2. SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make assumptions that affect the estimates of reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies are as follows: a) Changes in Accounting Policies Section 1535 Capital Disclosures Effective January 1, 2008, Alterna Savings prospectively adopted the CICA Handbook Section 1535 Capital Disclosures, which requires an entity to disclose its objectives, policies, and processes for managing capital. The section also requires disclosure of summary quantitative information about capital components. The new guidance did not have an effect on Alterna Savings’ financial position or earnings. See note 23 for additional details. Section 3862 Financial Instruments–Disclosures and Section 3863, Financial Instruments–Presentation Effective January 1, 2008, Alterna Savings prospectively adopted the CICA Handbook Sections 3862 Financial Instruments – Disclosures and 3863 Financial Instruments – Presentation. These sections replace the CICA Handbook Section 3861 Financial Instruments – Disclosure and Presentation, and enhance disclosure requirements on the nature and extent of risks arising from financial instruments and how the entity manages those risks. The new guidance did not have an effect on Alterna Savings’ financial position or earnings. See note 21 for additional details. b) Basis of Consolidation The consolidated financial statements include the accounts and results of operations of CS Alterna Bank (“Alterna Bank”), a wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated on consolidation. c) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash on deposit with other financial institutions, cheques and other items in transit, and marketable securities with original maturities at acquisition of 90 days or less. Interest income on deposits with other financial institutions as well as marketable securities is included in investment income. d) Financial Instruments Commencing January 1, 2007, all financial assets and liabilities are required to be classified at initial recognition based on management’s intention as held-for-trading (“HFT”), designated at fair value (“FVO”), available-for-sale (“AFS”), held-to-maturity (“HTM”), loans and receivables or other financial liabilities. In addition, the standards require that all financial instruments, including all derivatives, be measured at fair value with the exception of loans and receivables, HTM assets, other financial liabilities and AFS equities that do not have quoted market values in an active market. The fair value of a financial instrument on initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. Subsequent to initial recognition, the fair values of financial instruments that are quoted in active markets are generally based on bid prices for financial assets held and offer prices for financial liabilities. When independent prices are not available, fair values are estimated using valuation techniques and models. Transaction costs related to HFT are expensed as incurred. Transaction costs related to AFS and HTM securities and fees and costs related to loans and receivables are generally capitalized and amortized over the expected life of the instrument using the effective interest rate method. Settlement date accounting continues to be used for all securities. Classification of financial instruments Held-for-trading financial instruments are financial assets and liabilities held for trading activities and are measured at fair value at the balance sheet date. Gains and losses realized on disposition and unrealized gains and losses from market fluctuations are reported in investment income.


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Available-for-sale financial assets are those non-derivative financial assets that are designated as AFS, or that are not classified as loans and receivables, HTM or HFT. Except for equities that do not have a quoted market value in an active market, AFS securities are carried at fair value whereby the unrealized gains and losses are included in “Accumulated other comprehensive income (“AOCI”)” as discussed below until sale or other-than-temporary impairment when the cumulative gain or loss is transferred to the consolidated statement of income. AFS assets are written down to fair value through income whenever it is necessary to reflect an other-than-temporary impairment. Equities that do not have quoted market values in an active market are carried at cost. Realized gains and losses on sale as well as income from these securities are included in investment income. Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities, other than loans or receivables that an entity has the positive intention and ability to hold to maturity. These financial assets are accounted for at amortized cost. Alterna Savings has not designated any financial assets as HTM. Loans and receivables are accounted for at amortized cost using the effective interest rate method. Financial liabilities, other than derivative financial instruments, are recorded at amortized cost using the effective interest rate method. All derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value as “Derivative financial instruments” on the consolidated balance sheet. Derivatives may be embedded in other financial instruments. Derivatives embedded in other financial instruments are valued as separate derivatives when their economic characteristics and risks are not considered to be closely related to the host contract. These embedded derivatives are classified as part of the host instrument and measured at fair value with changes therein recognized in the consolidated statement of income. Alterna Savings selected January 1, 2003 as its transition date for embedded derivatives. The only embedded derivatives are the options embedded in Alterna Savings’ indexed term deposits offered to members (note 22b). Hedges Alterna Savings uses derivative financial instruments such as swaps and options in its management of interest rate exposure. Derivative financial instruments are not used for trading or speculative purposes. In order for derivatives to qualify for hedge accounting under Section 3865, the hedge relationship must be designated and formally documented at its inception, outlining the particular risk management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how hedge effectiveness will be assessed. The assessment of the effectiveness of the derivatives that are used in hedging transactions in offsetting changes in cash flows of the hedged items both at the hedge inception and on an ongoing basis must be documented. Ineffectiveness results to the extent that the cumulative change in the fair value of the hedging derivative differs from the cumulative change in the fair value of expected future cash flows of the hedged item. Effectiveness requires a high correlation of changes in cash flows. The amount of ineffectiveness, provided that it is not to the extent to disqualify the entire hedge from hedge accounting, is recognized immediately in income. Cash flow hedges Effective January 1, 2008, Alterna Savings terminated its designations of the hedging relationships for its interest rate swaps and discontinued the use of hedge accounting. While Alterna Savings continues to use interest rate swaps as part of risk management strategies that use derivatives to mitigate the risk from variable cash flows by converting certain variable rate financial instruments to fixed rate financial instruments, hedge accounting is no longer followed. Prior to January 1, 2008, the effective portion of the change in fair value of the derivative instrument was offset through “Other comprehensive income (“OCI”)” as discussed below until the variability in cash flows being hedged was recognized in earnings in future accounting periods, at which time the amount that was in the AOCI was reclassified into income. The ineffective portion of the change in fair value of the hedging derivative was recognized in interest income immediately as it arose. After January 1, 2008, all subsequent changes in unrealized gains and losses on the interest rate swaps were recorded in other income (note 16).


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Comprehensive Income The presentation of accumulated other comprehensive income (“AOCI”) is required as a separate component of members’ equity (net of tax) on the consolidated balance sheet. AOCI includes net unrealized gains and losses on AFS securities. Prior to January 1, 2008, AOCI also included the effective portion of gains and losses on derivative financial instruments designated as cash flow hedges. Impact of Adopting Sections 3855 Financial Instruments – Recognition and Measurement, 3865 Hedges and 1530 Comprehensive Income These standards were applied as an adjustment to opening retained earnings and AOCI on January 1, 2007. Opening retained earnings decreased by $762,000 and AOCI of $673,000 was recorded on January 1, 2007. e) Loans Personal loans, residential mortgage loans and commercial loans are recorded at principal amounts less an allowance for impaired loans. Loan Interest Interest income from loans is recorded on an accrual basis except for loans classified as impaired. When a loan is classified as impaired, no further interest income is recognized and all accrued but uncollected interest is provided for in the allowance for impaired loans. Until such time as collectibility is assured, subsequent interest receipts are applied to reduce the recorded investment in the loans. Loan Fees Commercial lending application fees and mortgage brokerage and incentive fees are deferred and amortized to interest income over the term of the loan using the effective interest rate method. Legal fees and appraisal fees are expensed as incurred. Mortgage prepayment penalties are recorded in income when charged. The net unamortized fees are included in the related loan balance in accordance with CICA’s Accounting Guideline 4 (AcG-4), Fees and Costs Associated with Lending Activities. Impaired Loans Alterna Savings classifies loans as impaired when, in management’s opinion, there is no longer reasonable assurance that the full amount of principal and interest will be collected. Generally loans on which repayment of principal or payment of interest is contractually 90 days past due are automatically considered impaired unless they are fully secured and in the process of collection. Notwithstanding management’s assertion of collectibility, such loans are considered impaired if payments are 180 days in arrears. Alterna Savings establishes and maintains an allowance for impaired loans that is considered the best estimate of probable credit-related losses existing in its loan portfolio giving due regard to current conditions. The allowance includes both specific and general provisions, reviewed on a regular basis by management. The allowance is increased by provisions for impaired loans which are charged to earnings and reduced by write-offs, net of recoveries. Specific allowances are established on individual loans in accordance with DICO By-law #6 and the Office of the Superintendent of Financial Institutions (“OSFI”) regulations. The specific allowance is the amount that is required to write down the loan to the discounted expected future cash flows at the effective interest rate and, if not measurable, to the fair value of any security, net of expected costs of realization. The general allowance is established in accordance with DICO By-law #6 and OSFI regulations. Factors considered when determining the general allowance include reviewing the credit portfolio’s inherent risks, economic conditions and trends. A general allowance is established when evidence of impairment losses within groups or classifications of loans exists but is not sufficient to allow the determination of specific allowances. Loan Costs Loan costs include the provision for loan losses and collection costs.


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f) Mortgage Sales Alterna Savings may from time to time sell a portion of its residential and commercial mortgage loan portfolio to diversify its funding sources and enhance its liquidity position. These transactions are accounted for in accordance with CICA’s Accounting Guideline 12 (AcG-12) Transfers of Receivables and as such have been recorded as sales, and the related loans have been removed from the balance sheet as control over the loans has been surrendered. Gains or losses on these transactions are reported as interest income on the consolidated statement of income. Alterna Savings has not retained any interests in these mortgages sold.

g) Securitizations Securitizations are accounted for as sales when Alterna Savings surrenders control of the transferred assets and receives consideration other than retained interests in the transferred assets. Upon the sale of these assets, a net gain or loss is recognized in the consolidated income statement under interest income. The amount of the gain or loss recognized depends on the previous carrying values of the receivables involved in the transfer, allocated between the assets sold and retained interests based on their relative fair values at the date of transfer. As market prices are generally not available for retained interests, Alterna Savings estimates fair value based on the present value of expected future cash flows. Retained interests are recorded on the consolidated balance sheet under other assets and are reviewed for impairment on an annual basis. Income from securitized assets comprises income from retained interests and servicing income, and is reported in the consolidated income statement under other income. h) Property and Equipment Property and equipment is presented at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings 10 years Furniture and equipment 5 to 10 years Computer hardware and software 3 to 7 years Leasehold improvements Term of lease plus one option period Investment tax credits related to the acquisition of property and equipment are accounted for using the cost reduction approach and are deducted from the cost of the related asset. Investment tax credits are recorded when Alterna Savings has made the qualifying expenditures and there is reasonable assurance that the credits will be realized. i) Employee Benefit Plans Alterna Savings maintains three pension plans for current employees and retirees, and one post-retirement benefits program. The pension plans consist of a Defined Benefit Plan (“DB”), a Supplementary Retirement Income Plan (“SRIP”), and a Defined Contribution Plan (“DC”). For the DB pension plan, the SRIP and the post-retirement benefits program, plan assets are valued at fair values. Benefits costs and accrued benefits are determined based upon actuarial valuations using the projected benefit method prorated on service and management’s best estimates. The expected return on plan assets is based on the fair value of plan assets. Actuarial gains and losses as well as past service costs are deferred and amortized over the expected average remaining service life of the employee group covered under the plans. The benefit plan expense is the net of the cost of the post-employment benefits for the current year’s service, interest expense on plan liabilities, interest revenue on plan assets, and the amortization of pension adjustments on a straight-line basis over the expected average remaining service life of the employee group covered under the plan. For the DC pension plan, annual pension expense is equal to Alterna Savings’ contribution to the plan.


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j) Income Taxes Alterna Savings uses the liability method of income tax allocation where temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes give rise to future income taxes. k) Other Income Service charges, ABM networks, commissions and revenue from other sources are recognized as revenue when the related services are performed or are provided. l) Foreign Currency Monetary assets and liabilities denominated in a foreign currency are translated into Canadian dollars at the rate of exchange prevailing at year end; income and expenses are translated at the annual average rate. Foreign currency exchange gains and losses are recognized in other income during the year. m) Future Accounting Policy Changes International Financial Reporting Standards (“IFRS”) The Accounting Standards Board confirmed in February 2008 that IFRS will replace current Canadian GAAP for publicly accountable enterprises for financial periods beginning on or after January 1, 2011. As such, Alterna Savings will be required to prepare its first consolidated financial statements under IFRS for the year ended December 31, 2011 including comparative information for the year ended December 31, 2010.

IFRS standards are premised on a conceptual framework similar to existing Canadian GAAP. Despite this similarity, significant differences can exist in certain matters of recognition, measurement and disclosure. While the adoption of IFRS will not change the actual cash flows of the organization, the adoption will result in changes to Alterna Savings’ financial position and the results of its operations, the effects of which could be material. A detailed analysis of the differences between IFRS and Alterna Savings’ current accounting policies under existing Canadian GAAP is currently underway.

3. INVESTMENTS 2008

(000’s) 2007

(000’s)

Central 1 liquidity deposits $122,166 $120,617 Central 1 shares 14,690 13,729 ABCP LP (note 4) 8,986 - Residential mortgages purchased as investments 7,747 9,246 Other 5,449 5,563 Bonds - 1,019 $159,038 $150,174 As at December 31, 2008, the carrying amount of the US dollar investments was $nil (2007 - $nil). Alterna Savings’ investment in ABCP LP has been classified as held-for-trading and has been measured and recorded at fair value. All remaining investments have been classified as available-for-sale and have been measured and recorded at fair value except for Central 1 shares and other shares which are carried at cost as they are not actively traded and have no established market value. As a condition of maintaining membership in Central 1 in good standing, Alterna Savings is required to maintain on deposit in Central 1’s liquidity pool an amount equal to 7% of its total assets adjusted at each calendar quarter end (2007 – 7% of its own membership shares and deposits as at the preceding calendar year end). The deposits bear interest at variable rates.


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At a special general meeting held on May 31, 2008, members of CUCO approved a resolution to facilitate a sale of CUCO to Credit Union Central of British Columbia (“CUCBC”) to form a new national financial services entity named Central 1 Credit Union. Prior to the sale, members of CUCO were required to hold an investment equal to 0.80% of its total assets in CUCO shares to remain a member in good standing (2007- 0.60%). At the time of the acquisition by CUCBC, the value of these shares was impaired and Alterna Savings wrote them down by $782,000. On December 31, 2008, 4,608,000 of these shares were converted into Class A shares of Central 1. The remaining shares will be distributed in February 2009.

4. ASSET-BACKED COMMERCIAL PAPER LIMITED PARTNERSHIP As a pre-condition of the sale of the assets of CUCO to CUCBC, CUCO was required to divest itself of investments in certain third-party sponsored asset-backed commercial paper (“ABCP”). A resolution was approved to facilitate the sale, which created a limited partnership (“ABCP LP”) (note 3) to acquire these investments funded by member credit unions in proportion to their share investment in CUCO. This limited partnership meets the accounting definition of a variable interest entity. On July 1, 2008, immediately prior to the sale, the excluded ABCP with a total par value of $186,916,000 was acquired by the ABCP LP at its estimated fair value of $133,564,000 including accrued interest, net of expenses, and other assets. Alterna Savings was required to purchase 12,535,000 units in the ABCP LP. As there was no active market for these ABCP investments, the fair values used to determine the acquisition price were provided by a specialized asset management firm engaged by CUCO to provide an independent valuation of the underlying assets. In November 2008, $942,000 of Alterna Savings’ initial investment was repaid following the maturity of $10,000,000 in investments held by the ABCP LP. The majority of the assets owned by the limited partnership are subject to the Montreal Accord, which was established by a group of major investors in third-party sponsored ABCP after the market for these investments became illiquid in August 2007. The purpose of the Accord was to restructure the investments into new Master Asset Vehicles (MAV’s), with longer term maturities. The restructuring was completed in January 2009 and the transfers of the new notes are expected to be completed by the end of February 2009. It is expected that the market for these notes will slowly return to more normal conditions after the restructuring has occurred. Due to the lack of liquidity and the consequent lack of market prices of third-party sponsored ABCP that is held by the limited partnership, Alterna Savings has relied upon the independent valuation provided to the ABCP LP. Alterna Savings agrees with the significant assumptions and estimates used in that valuation, including the probability of success or failure of restructuring based on the outcome of the Montreal Accord and the risk of default in the underlying assets. The valuation used a discounted cash flow model that valued the underlying assets based on asset spreads and timing of payments on the restructured notes. It was based on an assessment as at December 30, 2008, of estimates and circumstances that may change in subsequent periods. Items that may have a material impact on the fair value include further delays in the restructuring process under the Montreal Accord, further changes in the value of the underlying assets, developments related to the liquidity of the third-party sponsored ABCP market and further changes in economic conditions, which could therefore affect the carrying value of the ABCP LP units. At December 31, 2008, the carrying value of these assets on the Alterna Savings’ consolidated balance sheet under investments (note 3) amounted to $8,986,000, which represents 50.6% of the original par value of the instruments and the maximum exposure to credit risk for this investment. The amount of incremental write-down for impairment of $2,607,000 was included under investment income on the consolidated statement of income. The ABCP LP is governed by a Board of Directors that was elected by Ontario member credit unions and each limited partner will record its proportionate share of net income or loss in the ABCP LP as determined by Canadian generally accepted accounting principles and subject to an annual external audit.


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5. LOANS 2008

(000’s) 2007

(000’s)

Personal loans $265,127 $271,872 Residential mortgage loans 842,388 837,024 Commercial loans 604,479 424,700 1,711,994 1,533,596

Less allowance for impaired loans (note 6) (3,876) (4,446) $1,708,118 $1,529,150 During the year, Alterna Savings sold residential mortgage loans amounting to $39,458,000 (2007 - $45,997,000) and commercial mortgage loans amounting to $nil (2007 - $15,000,000), generating net gains on sale of $1,075,000 (2007 - net loss of $109,000) and $nil (2007 – net loss of $3,000), respectively. These gains have been recorded in interest income on the consolidated statement of income. Alterna Savings has retained interests in the residential mortgages sold under the Canada Mortgage Bond Program (note 7).

6. ALLOWANCE FOR IMPAIRED LOANS AND IMPAIRED LOANS a) Allowance for Impaired Loans

2008

(000's) 2007

(000's)

Personal

Loans

Residential Mortgage

Loans Commercial

Loans Total Total

Balance, beginning of year $1,533 $- $2,913 $4,446 $4,177 Less: Loans written off (1,104) - (107) (1,211) (1,334)Add: Recoveries on loans previously

written off 349 - - 349 348 Add: Allowance charged to operations 195 289 (192) 292 1,255 Balance, end of year $973 $289 $2,614 $3,876 $4,446 The allowance for impaired loans includes a general allowance of $2,521,000 (2007 - $2,775,000) pertaining to commercial loans, $285,000 (2007 - $nil) pertaining to residential mortgage loans and $38,000 pertaining to personal loans (2007 - $nil). b) Impaired Loans The balance of loans identified as impaired, prior to any recovery from collateral on these loans, at the end of the year was as follows: 2008 2007 (000's) (000's)

Personal loans $934 $1,661 Residential mortgage loans 222 - Commercial loans 93 337

$1,249 $1,998


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c) 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 following table presents the carrying value of the loans that are past due but not classified as impaired because they are either (i) less than 90 days past due, or (ii) fully secured and collection efforts are reasonably expected to result in repayment.

2008 (000's)

2007 (000's)

1-29 days 30-89 days 90 days and

greater Total Total Personal loans $10,757 $2,000 $- $12,757 $16,239 Residential mortgage loans 28,801 3,871 653 33,325 35,780 Commercial loans 10,467 2,067 172 12,706 25,749 $50,025 $7,938 $825 $58,788 $77,768 As of December 31, 2008, 97% of the loans were neither past due nor impaired (2007 - 95%). During the year, $59,000 of mortgages or loans that would otherwise be past due or impaired were restructured. The credit enhancements Alterna Savings holds as security for loans include i) residential lots and properties, ii) recourse to business assets such as real estate, equipment, inventory and accounts receivable, iii) recourse to the commercial real estate properties being financed, and iv) recourse to liquid assets, guarantees and securities.

7. LOAN SECURITIZATION Alterna Savings securitizes fixed-rate residential mortgages through the creation of mortgage-backed securities under the Canada Mortgage Bond Program (“CMB Program”) through Central 1. Alterna Savings retains an excess-spread interest in these transferred mortgages and responsibility for servicing them for which no explicit servicing fee is received. As Alterna Savings has an obligation to service the mortgages, a servicing liability of $79,000 has been recorded and is included in other liabilities on its consolidated balance sheet. The following table summarizes Alterna’s securitization activity during the year ended December 31:

2008 (000's)

Amount securitized/sold $11,742 Net cash proceeds received 11,831 Retained interests 929 Pre-tax gain on sale 764 Servicing liabilities 80 Outstanding balances of securitized loans at December 31, 2008 11,725 Retained interests are classified as available-for-sale and are included in other assets on the consolidated balance sheet (note 9).


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The following table summarizes the weighted average key assumptions (%) at the date of securitization:

2008 (%)

Weighted-average remaining life (in years) 4.75 Prepayment rate 15.00 Excess spread 2.61 Discount rate 3.32 Expected credit losses - As the mortgages are fully insured, there are no expected credit losses. The following summarizes the sensitivity of the fair value of retained interests to two adverse changes in key assumptions as at December 31, 2008:

2008 (000’s)

Carrying value of retained interests 924 Prepayment rate assumption Impact of a 10% adverse change (29) Impact of a 20% adverse change (55) Residual cash flow discount rate (annual rate) Impact of a 10% adverse change (4) Impact of a 20% adverse change (9) The sensitivity analysis is hypothetical and should be viewed with caution, as changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumptions. Changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

8. PROPERTY AND EQUIPMENT

2008 (000’s)

2007 (000’s)

Cost

Accumulated Depreciation

Net Book Value Cost

Accumulated Depreciation

Net Book Value

Land $3,517 $- $3,517 $4,369 $- $4,369 Buildings 9,126 7,980 1,146 9,578 7,296 2,282 Furniture and equipment 7,910 4,920 2,990 9,879 5,795 4,084 Computer hardware and software 19,314 10,563 8,751 28,741 18,105 10,636 Leasehold improvements 8,814 5,247 3,567 8,719 4,398 4,321

$48,681 $28,710 $19,971 $61,286 $35,594 $25,692 Assets under capital leases totaling $4,980,000 (2007 - $4,578,000) are included in computer hardware and software as well as furniture and equipment. Amortization expense and accumulated amortization on capital leases were $725,000 and $3,945,000, respectively (2007 - $873,000 and $3,219,000, respectively). Assets acquired by means of capital leases are non-cash transactions for purposes of the cash flow statement, and consequently have not been presented as either a financing or an investing activity. Total amortization charged to income in 2008, including the foregoing capital lease amortization, was $5,618,000 (2007 - $5,885,000) and is included in administration and occupancy costs under operating expenses on the consolidated statement of income.


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9. OTHER ASSETS 2008

(000’s) 2007

(000’s)

Accrued employee benefit plan asset (note 18) $7,433 $6,642 Accrued interest receivable 4,484 3,813 Retained interests (note 7) 845 - Income tax receivable - 1,137 Other 2,276 2,078 $15,038 $13,670

10. DEPOSITS 2008

(000’s) 2007

(000’s)

Demand deposits $747,398 $571,992 Term deposits 428,582 412,527 Registered plans 600,609 590,143 $1,776,589 $1,574,662 As at December 31, 2008, the carrying amount of the US dollar deposits from members was $13,511,000 (2007 - $14,416,000).

11. BORROWING FACILITIES Alterna Savings has access to a $171,600,000 credit facility with Central 1 consisting of operating lines of credit of CDN $7,000,000 and U.S. $500,000, term loans of CDN $120,600,000 and additional uncommitted term loan funds of CDN $43,000,000 plus CDN $500,000 for capital markets. The lines of credit are payable on demand within 30 days, bear interest at prime and are secured by a pledge of certain assets under a general security agreement. There was a $nil balance on these lines of credit at the end of the year (2007 - $nil). The operating term loans are payable at maturity or at call period (7 days), bear interest at Central 1 cost of fund rate plus 20 to 50 basis points and are secured by a pledge of certain assets under a general security agreement. There was a $34,700,000 balance on the operating term loans at the end of the year (2007 - $50,000,000). The borrowings against the uncommitted funds are payable at maturity, bear interest at Central 1 cost of fund rate plus a variable spread plus a 5 to 10 basis points standby fee. The carrying values of assets pledged under the general security agreement, excluding assets of Alterna Bank, are as follows: 2008

(000’s) 2007

(000’s)

Loans, net of allowance for impaired loans $1,554,857 $1,412,088 Property and equipment 19,626 25,576 Other assets 16,901 15,745 $1,591,384 $1,453,409


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12. OTHER LIABILITIES 2008

(000’s) 2007

(000’s)

Accrued interest payable $15,251 $15,261 Trade payables and accrued expenses 6,719 4,703 Salaries and benefits payable 1,767 1,641 Capital lease obligations (note 13) 1,111 1,353 Certified and official cheques 989 1,471 Deferred revenue 929 756 Income tax payable 549 - Dividend payable 522 554 Acquisition costs payable - 213 $27,837 $25,952

13. CAPITAL LEASE OBLIGATIONS 2008

(000’s) 2007

(000’s) Capital lease obligations repayable monthly and maturing at various dates up

to October 2011, secured by the lessors’ title to the leased property and equipment with implicit interest rates from 1.28% to 11.25% (see note 8). $1,111 $1,353

Future minimum lease payments are as follows (in 000’s): 2009 $754 2010 264 2011 112 1,130 Less implicit interest included above (19) $1,111


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14. MEMBERS’ SHARE ACCOUNTS a) Authorized: The authorized share capital of Alterna Savings consists of the following:

i. an unlimited number of Class A special shares, issuable in series ii. an unlimited number of Class B special shares, issuable in series iii. an unlimited number of Class C special shares, issuable in series iv. an unlimited number of membership shares

The shares have no par value. b) Share Features: The rights, privileges, restrictions, terms and conditions attaching to the shares are as follows: Voting All Class A, Class B and Class C shares are non-voting. Membership shares are voting with each member being entitled to one vote, regardless of the number of membership shares held by the member, provided that the member is at least eighteen years of age. Each member under the age of eighteen is required, as a condition of membership, to own one membership share with an issue price of $1. All other members are required, as a condition of membership, to own one membership share with an issue price of $15. Dividends Holders of Class A, Class B, Class C and membership shares are entitled to non-cumulative dividends, when and if declared by the Board of Directors, in order of priority with Class A to receive dividends first, followed by in order Class B, Class C and membership shares. All Series holders will rank equally within their class in terms of priority in payment of dividends. The dividend rate for both Class A, Series 1 and Class A, Series 2 was approved by the Board of Directors at 5.63% for the period of September 1, 2007 to August 31, 2008 and January 1, 2008 to December 31, 2008, respectively. Transferability No Class A, Class B, Class C or membership share is transferable to any person, other than a person who is a member of Alterna Savings, and then only on the approval of the Board of Directors. Participation upon Liquidation, Dissolution or Winding-Up Class A, Class B and Class C shareholders, in order of priority, are entitled to redeem their shares on liquidation, dissolution or wind-up. Holders of membership shares are entitled to the remaining property of Alterna Savings. Redemption or Cancellation Class A, Series 1 holders were not permitted to redeem their shares prior to the fifth anniversary of the 1st issuance of shares or August 2007. All redemptions are subject to the discretion of the Board of Directors and are limited annually to a maximum of 10% of the Class A, Series 1 shares outstanding at the end of the immediately preceding fiscal year. The redemption price equals the shares’ face value, plus all declared and unpaid dividends thereon. Alterna Savings also has the option to purchase for cancellation all or any part of the outstanding Class A, Series 1 shares at any time after the expiry of the five years from the issue date. Class A, Series 2 holders may request redemption of their shares on June 30th or December 31st annually. The Board of Directors considers, approves, and if necessary prorates requests for redemption, with redemption requests of the estate of deceased members, expelled members, members who must withdraw a minimum annual amount from their shares held in a Registered Retirement Income Fund and members who must transfer their shares held in a Registered Retirement Savings Plan to a Registered Retirement Income Fund taking priority. All redemption requests are at the discretion of the Board. Redemptions are limited semi-annually to a maximum of 5% and annually to a maximum of 10% of the Class A, Series 2 shares outstanding at the end of the immediately preceding fiscal year. The redemption


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price equals the shares’ face value, plus all declared and unpaid dividends thereon. Alterna Savings also has the option to purchase for cancellation all or any part of the outstanding Class A, Series 2 shares at any time. Class B, Series 1 holders can request redemption of their shares. However, all redemptions are at the discretion of the Board of Directors and are limited annually to a maximum of 10% of the Class B, Series 1 shares outstanding at the end of the immediately preceding fiscal year. The redemption price equals the shares’ face value, plus all declared and unpaid dividends thereon. Alterna Savings also has the option to purchase for cancellation all or any part of the outstanding Class B, Series 1 shares held by the estates of deceased members or expelled members at any time. As no Class C shares have been issued, no redemption rights or restrictions are attached to the shares at this time. Membership shares are redeemable at their issue price only when the member withdraws from membership in Alterna Savings. They are considered liabilities for accounting purposes because they are redeemable at the option of the holder. c) Issued and Outstanding: The continuity of the members’ share accounts presented as special shares in members’ equity and as membership shares in liabilities for the year ended December 31, 2008 is as follows (in 000’s):

Class A Special Shares

Class B Special Shares

Membership Shares

Series 1 Series 2 Series 1 Number

of Shares $

Number of

Shares $

Number of

Shares $

Number of

Shares $ Issued and outstanding as at December 31, 2006 15,621 $15,358 9,410 $9,410 3,343 $3,343 2,531 $2,531

Net shares redeemed (1,557) (1,557) (108) (108) (303) (303) (1) (1)Issued and outstanding as at December 31, 2007 14,064 13,801 9,302 9,302 3,040 3,040 2,530 2,530

Net shares redeemed (1,398) (1,348) (32) (32) (218) (218) (632) (632)Issued and outstanding as at December 31, 2008 12,666 $12,453 9,270 $9,270 2,822 $2,822 1,898 $1,898 d) Dividends Declared: In August 2008, the Board of Directors approved a $793,000 cash dividend to the shareholders of record of 14,064,000 Class A, Series 1 shares as of August 31, 2008 which was paid in September 2008. These dividends are presented in members’ equity net of income taxes of $131,000 in the consolidated financial statements, for a balance of $662,000 (2007 - $530,000). In November 2008, the Board of Directors approved a $522,000 cash dividend to holders of record of 9,270,000 Class A, Series 2 shares as of December 31, 2008 to be paid in January 2009 (2007 – $524,000). No dividend was issued for Class B, Series 1 shares during the year 2008 (2007 - $30,000). As at December 31, 2008, these dividends are accrued for and presented in members’ equity net of income taxes of $86,000 in the consolidated financial statements, for a balance of $436,000 (2007 - $451,000).


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15. INTEREST INCOME AND INTEREST EXPENSE 2008

(000’s) 2007

(000’s)

Interest Income: Personal loans $16,473 $20,956 Residential mortgage loans 44,249 43,118 Commercial loans 28,558 23,485 Swap agreements 1,799 (699)

$91,079 $86,860 Interest Expense:

Demand deposits $8,364 $3,784 Term deposits 15,068 15,104 Registered plans 21,324 20,550 Borrowings 1,522 1,696

$46,278 $41,134

16. OTHER INCOME 2008

(000’s) 2007

(000’s) Change in net unrealized gains on interest rate swaps $11,153 $- Service charges 6,328 6,977 Commissions 4,373 4,999 Gain on sale of property 2,024 - ABM networks 1,461 1,504 Other 2,116 716 $27,455 $14,196

17. OPERATING EXPENSES 2008

(000’s) 2007

(000’s) Salaries and benefits $30,780 $31,011 Administration 14,243 14,537 Data processing 5,097 5,807 Occupancy 6,673 6,625 Marketing and community relations 1,776 1,652 Deposit insurance premiums 1,750 1,764 $60,319 $61,396


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18. EMPLOYEE BENEFIT PLANS Alterna Savings maintains three pension plans for current employees and retirees, and one post-retirement benefits program. Until March 31, 2006, some employees were eligible to join in the Alterna Savings DB plan that provides for an early retirement incentive for eligible employees as noted below; and, the senior executives who participate in the DB plan were provided with a SRIP. Both plans provide for pensions based on length of service and career average earnings. Other employees are eligible to participate in the DC plan which prescribes both employer and employee contributions. An early retirement incentive is also provided for eligible employees as noted below, as well as a post-retirement benefits program to certain eligible employees and retirees. Effective January 1, 2008, pension benefits for employees participating in an Alterna Savings pension plan began to accrue under the DC plan and all benefits ceased to accrue under the existing DB pension plan and SRIP. Early retirement benefits have been removed for all employees who were not eligible for retirement prior to January 1, 2008. Post-retirement benefits ceased as of March 1, 2006 for employees retiring after February 28, 2006 and not eligible to retire at that date. Existing retirees will continue to receive benefits under the plans in which they had been enrolled. Defined Pension and Benefits Plans The assets and accrued benefit obligation of the defined benefits pension plans (DB pension plan and SRIP) and the post-retirement benefits program were measured as at December 31, 2008, and are detailed as follows:

2008

(000’s) 2007

(000’s)

Pension Benefits Total Total

Accrued benefit obligation:

Balance, beginning of year $22,989 $472 $23,461 $23,333 Current service cost - 10 10 353 Interest cost 1,213 24 1,237 1,221 Employee contributions 18 - 18 483 Benefits paid (1,888) (92) (1,980) (1,330) Actuarial gains (4,804) (24) (4,828) (599) Balance, end of year $17,528 $390 $17,918 $23,461

Plans’ assets:

Fair value, beginning of year $28,260 $- $28,260 $27,241 Actual return on plan assets (3,328) - (3,328) 977 Employer contributions - 92 92 889 Employee contributions 18 - 18 483 Benefits paid (1,888) (92) (1,980) (1,330) Fair value, end of year $23,062 $- $23,062 $28,260

Overfunded (underfunded) status of plans $5,534 ($390) $5,144 $4,799 Unamortized net actuarial losses (gains) 2,669 (29) 2,640 2,304 Unamortized transitional gains (351) - (351) (461) Accrued benefit asset (liability) $7,852 ($419) $7,433 $6,642

As at December 31, 2008, the over funded status of the DB pension plan was $4,063,000 (2007 - $3,968,000) and the over funded status of the SRIP was $1,471,000 (2007 - $1,303,000). The accrued benefit asset of $7,433,000 (2007 - $6,642,000) is included in other assets on the balance sheet.


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The following is a summary of the weighted average significant actuarial assumptions used in measuring the plans’ accrued pension benefit obligation: 2008 2007 Pension Benefits Pension Benefits Discount rate for accrued benefit obligation 7.50% 7.50% 5.50% 5.50% Discount rate for pension expense 5.50% 5.50% 5.25% 5.25% Rate of compensation increase 4.00% 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 6.63% n/a 6.89% n/a The health care cost trend rate is expected to be 12% in 2009 decreasing by 1.00% per year until the rate reaches 4.00% in 2017. Assumed health care cost trend rates have an impact on the amounts reported for the health care and dental plans post-retirement benefits program. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 2008: Increase Decrease Total of service and interest cost $371 $357 Accrued benefit obligation $6,793 $6,519 As at December 31, 2008, the weighted average percentage of market value of the pension plans’ assets for each major asset class was as follows:

Fixed Income: Cash equivalents 6% Bonds 36%

42% Equities:

Canadian 29% United States 13% Other international 16%

58% 100%

The net defined benefit plans and post-retirement benefit program’s recovery included in operating expenses on the consolidated statement of income is as follows: 2008

(000’s) 2007

(000’s) Current service cost $10 $353 Interest cost 1,237 1,221 Expected return on plan assets (1,837) (1,876) Amortization of transitional gains (110) (79) Amortization of net actuarial losses and other 1 93 ($699) ($288)


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The actual return on plan assets was $5,165,000 (2007 - $899,000) lower than expected return on plan assets for the year ended December 31, 2008. The next actuarial valuation for funding purposes of the DB pension plan is to be performed effective January 1, 2010 (the most recent valuation was performed as at December 31, 2006). There are no required funding valuation dates for the SRIP or the post-retirement benefits program as they are not registered plans. The most recent valuation prepared for accounting purposes was December 31, 2007 for the defined benefit plans and post-retirement benefit program. Defined Contribution Pension Plan The pension expense for the DC pension plan for the year ended December 31, 2008 was $873,000 (2007 - $540,000). Total Cash Payments Total cash payments for employee benefit plans for 2008, consisting of cash contributed by Alterna Savings to its funded defined benefits pension plans, cash payments directly to beneficiaries for its unfunded post-retirement benefits program and cash contributed to its defined contribution pension plan was $965,000 (2007 - $1,429,000).


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19. INCOME TAXES

Significant components of the future income tax liability of Alterna Savings are as follows: 2008

(000’s) 2007

(000’s) Property and equipment $737 $1,200 Deferred pension expense 1,226 1,109 Corporate minimum tax (753) (544) Allowance for impaired loans (524) (486) Derivatives 1,840 - Fair value increment due to business combination - 62 Loss carryforward (165) (260) Accumulated other comprehensive income 289 210 Other (22) (17) $2,628 $1,274 The reconciliation of income tax computed at the statutory rates to income tax expense is as follows:

2008 2007 Amount

(000’s) Percent Amount (000’s) Percent

Tax at combined federal and provincial rates $5,414 42% $438 43% Credit Union deduction (3,064) (24%) (151) (15%) Non-taxable portion of gain (190) (1%) - -% Provincial small business incentives (12) (1%) (25) (2%) Permanent differences 139 1% 12 1% Other - net (18) -% - -% $2,269 17% $274 27% The Ontario Corporate Minimum tax credits carried forward will also expire as follows (in 000’s):

2012 $45 2013 169 2015 80 2016 36 2028 423 $753

The non-capital loss carried forward of $1,002,000 will expire in 2027.


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20. FAIR VALUE OF FINANCIAL INSTRUMENTS

The amounts set out in the table below represent the estimated fair values of the financial instruments of Alterna Savings, including the fair values of loans calculated before allowance for impaired loans, using the valuation methods and assumptions described below.

2008

(000’s) 2007

(000’s) Carrying

value Fair value Carrying

value Fair value Financial assets: Cash and cash equivalents $59,833 $59,833 $56,801 $56,801 Investments 159,038 159,038 150,174 150,174 Loans - personal loans 265,127 266,328 271,872 272,867 - residential mortgage loans 842,388 918,983 837,024 854,004 - commercial loans 604,479 672,383 424,700 438,784 Derivative financial instruments - swaps 11,697 11,697 432 432 - purchased options 5,262 5,262 14,244 14,244 Financial liabilities: Deposits - demand deposits ($747,398) ($747,398) ($571,992) ($571,992) - term deposits (428,582) (442,285) (412,527) (409,864) - registered plans (600,609) (623,530) (590,143) (579,567) Borrowings (34,700) (34,700) (50,000) (50,000) Derivative financial instruments - embedded options (3,560) (3,560) (12,858) (12,858) The estimated fair value amounts approximate the amounts at which instruments could be exchanged in a current transaction between willing parties who are under no compulsion to act. Fair values are based on estimates using present value and other valuation techniques, which are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates. Because of the estimation process and the need to use judgment, the aggregate fair value amounts should not be interpreted as being necessarily realizable in an immediate settlement of instruments. The fair values of financial instruments are generally determined as follows: Investments (excluding Central 1 shares, other shares and investment in ABCP LP) - at discounted cash flows using prevailing interest rates. Personal loans, residential mortgage loans, commercial loans and deposits - at discounted cash flows using prevailing interest rates of instruments with similar remaining terms. The fair values of all types of loans are calculated before allowance for impaired loans. Derivative financial instruments – determined through valuation models based on the derivative notional amounts, maturity dates and rates. The fair values of financial instruments with a term of less than one year approximate their carrying values, due to their short term nature, except where otherwise indicated.


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21. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS Alterna Savings is exposed to the following risks as a result of holding financial instruments: credit risk, market risk and liquidity risk. The following is a description of those risks and how Alterna Savings manages the exposure to them. a) Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. For Alterna Savings, the three main asset classes exposed to credit risk are loans, investments and derivative financial instruments under assets on the consolidated balance sheet. Alterna Savings’ credit risk objective is to minimize this financial loss. Credit risk is managed in accordance with the Credit Policy for loans and the Investment Policy for investments. These policies are reviewed and approved annually by the Board of Directors. For loans, Alterna Savings mitigates its credit risk exposure by:

• defining its target market area; • limiting the principal amount of credit to a borrower at any given time: $250,000 in personal loans per

borrower, $1,500,000 in residential mortgage loans per borrower, $20,000,000 in commercial loans per borrower and $25,000,000 in aggregate loans per borrower and connected persons;

• performing a credit analysis prior to the approval of a loan; • obtaining collateral when appropriate; • employing risk based pricing; and • limiting the concentration by industry and geographic location for commercial loans.

Loan exposures are managed and monitored through facility limits for individual borrowers and a credit review process. This review ensures that the borrower complies with internal policy and underwriting standards. Alterna Savings relies on collateral security typically in the form of a fixed and floating charge over the assets of its borrowers. Credit risk is also managed through regular analysis of the ability of members to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Alterna Savings invests surplus liquidity in the short-term money market, securities that are secured by mortgages and in the bond market. All investments held in short-term instruments must be rated R1-L or better by Dominion Bond Rating Service (DBRS) and A-3 or better by Standard & Poor’s (S&P). All securities that are secured by mortgages are guaranteed under the National Housing Act. All investments in bonds must be rated A or better by both DBRS and S&P. Investments, other than those issued by the Government of Canada and its Crown Corporations, are diversified by limiting investments in any one issuer to a maximum of 25% of the total portfolio for deposits and a maximum dollar value of $5,000,000 to $50,000,000 is applied to the aggregate credit exposure to groupings of issuers with similar credit risk. Alterna Savings does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Alterna Savings defines counterparties as having similar characteristics if they are related entities or operate in similar industries. The concentration risk is limited for residential mortgages as 37% of the residential mortgages are insured by mortgage insurance companies (2007 - 36%). Alterna Savings monitors the concentration risk from commercial loans by setting maximum exposure limits for total loan balances for each industry. The carrying amount of financial assets recorded in the financial statements excluding the amount of the insured mortgages, net of impairment losses, represents Alterna Savings’ maximum exposure to credit risk without taking account of the value of any collateral obtained. The maximum exposure to credit risk at Alterna Savings was $1,393,428,000 at December 31, 2008 (2007 - $1,227,265,000). For investments and derivatives, risk is measured by reviewing exposure to individual counterparties to ensure total investments and derivatives are within the policy limit by issuer weightings and by dollar amount. This also mitigates concentration risk in the portfolio. The quality of the counterparties is assessed through two published credit rating agencies, DBRS and S&P, as indicated above.


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b) Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: interest rate risk and currency risk. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Alterna Savings’ consolidated net income is exposed to interest rate risk because of the mismatches in maturities and interest rate types (fixed vs. variable) of its financial assets and financial liabilities. Alterna Savings’ interest rate risk objective is to maximize interest margin while complying with the approved interest rate risk policy limits. Alterna Savings uses interest rate derivatives such as swaps and options to manage interest rate risk. Interest rate risk is managed in accordance with the Structural Risk Management Policy. This policy is reviewed and approved annually by the Board. Alterna Savings reports the interest rate risk against policy limits to the Asset Liability Committee (“ALCO”) on a monthly basis and to the Board at its regular meetings. Alterna Savings’ maximum tolerance exposure to interest rate risk for the net income over twelve months is restricted to 3% of average forecasted net interest income with a 95% confidence interval. Its maximum tolerable exposure to interest rate risk on the entire balance sheet is restricted to 4% of equity. As of December 31, 2008, the results for these measures were 0.46% and 2.28%, respectively.


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The following table sets out the carrying amount (before allowance for impaired loans) and weighted average interest rates of rate sensitive financial instruments:

2008 (000’s)

2007 (000’s)

Maturity Non-

interest rate

sensitive

Variable rate

demand Under 3 months

3 to 12 months 1 to 5 years

Over 5 years Total Total

Cash and cash equivalents: Carrying Amount $29,039 $- $30,794 $- $- $- $59,833 $56,801 Interest Rates -% -% 1.51% -% -% -% 0.78% 2.43% Investments: Carrying Amount $24,023 $- $38,747 $48,424 $47,844 $- $159,038 $150,174 Interest Rates -% -% 2.90% 3.01% 2.72% -% 2.46% 3.84% Personal loans: Carrying Amount $- $257,304 $1,745 $1,405 $4,673 $- $265,127 $271,872 Interest Rates -% 4.69% 7.15% 7.05% 8.47% -% 4.79% 7.42% Residential mortgage loans: Carrying Amount $- $99,560 $19,689 $103,151 $619,988 $- $842,388 $837,024 Interest Rates -% 3.11% 4.83% 4.86% 5.22% -% 4.93% 5.12% Commercial loans: Carrying Amount $- $69,291 $13,716 $32,455 $418,955 $70,062 $604,479 $424,700 Interest Rates -% 4.72% 6.15% 6.07% 5.72% 5.56% 5.61% 5.94%

TOTAL $53,062 $426,155 $104,691 $185,435 $1,091,460 $70,062 $1,930,865 $1,740,571

Deposits: Carrying Amount $- $805,349 $126,311 $307,727 $537,202 $- $1,776,589 $1,574,662 Interest Rates -% 1.14% 3.70% 3.29% 3.78% -% 2.49% 2.54% Borrowings: Carrying Amount $- $34,700 $- $- $- $- $34,700 $50,000 Interest Rates -% 2.32% -% -% -% -% 2.32% 5.16%

TOTAL $- $840,049 $126,311 $307,727 $537,202 $- $1,811,289 $1,624,662 MATCHING GAP $53,062 ($413,894) ($21,620) ($122,292) $554,258 $70,062 $119,576 $115,909

Sensitivity Analysis Based on Alterna Savings’ interest rate positions as of December 31, 2008, an immediate and sustained 100 basis point increase in interest rates across all maturities would decrease net interest income and other comprehensive income by approximately $364,000 and $2,396,000 over the next 12 months, respectively. An immediate and sustained 100 basis point decrease in interest rates would decrease net interest income and increase other comprehensive income by approximately $228,000 and $2,454,000, respectively.


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Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Alterna Savings’ consolidated net income is exposed to currency risk because of members’ US dollar deposits. Alterna Savings mitigates currency risk by investing in offsetting foreign denominated financial instruments of similar terms. Currency risk is managed in accordance with the Structural Risk Management Policy. The policy is reviewed and approved annually by the Board. Alterna Savings measures currency risk based on the percentage of foreign denominated financial assets against similar foreign denominated financial liabilities on a daily basis. As of December 31, 2008, the percentage of foreign denominated financial assets is within 90% - 110% of foreign denominated financial liabilities. For a 1% instantaneous exchange rate increase, Alterna Savings’ consolidated net income would increase by $16,000. For a 1% instantaneous exchange rate decrease, Alterna Savings’ consolidated net income would decrease by $31,000. c) Liquidity Risk Liquidity risk is the risk that Alterna Savings will encounter difficulty in meeting obligations associated with financial liabilities. Alterna Savings is exposed to liquidity risk due to the mismatch in financial asset and financial liability maturities and the uncertainty of daily cash inflows and outflows. Liquidity risk is managed in accordance with the Liquidity Management and Funding Policy. The policy is reviewed and approved annually by the Board. Alterna Savings manages liquidity risk by monitoring cashflows and cash forecasts, maintaining a pool of high quality liquid financial assets, maintaining a stable base of core and term deposits, monitoring concentration limits on single sources of deposits, and diversifying funding sources. In addition, in the event of a liquidity crisis affecting Central 1, Alterna Savings’ credit facilities with Central 1 are supported by Central 1’s access to the National Liquidity Fund through Credit Union Central of Canada. Alterna Savings reports the liquidity risk against policy limits to ALCO on a monthly basis and to the Board at its regular meetings. Alterna Savings maintains a minimum of 8% of the amount of deposits, shares and borrowings in liquid assets such as cash, Treasury bills, Central 1 liquidity deposits and other highly marketable securities. As of December 31, 2008, the percentage of liquid assets to total assets was 9.38% (2007 – 10.99%). For the contractual maturities of assets and liabilities, please refer to the table under note 21(b) Interest Rate Risk.


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22. DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the carrying values of the derivative financial instruments held by Alterna Savings:

2008 2007 Carrying Value (000’s) Carrying Value (000’s) Assets Liabilities Assets Liabilities

Swaps $11,697 $- $432 $- Options 5,262 3,560 14,244 12,858 $16,959 $3,560 $14,676 $12,858 a) Swap Agreements Alterna Savings uses interest rate swap agreements to mitigate risks associated with interest rate fluctuations and to control the matching of the cash flow maturities and interest adjustment dates of its assets and liabilities. A summary of the fair values and fixed notional principal amounts on Alterna Savings’ swap agreements is given below:

2008 2007

Maturity

Fair Value

(000’s)

Notional Principal

(000’s) Fixed Rate

Year End Floating

Rate

Fair Value

(000’s)

Notional Principal

(000’s) Fixed Rate

Year End Floating

Rate 2008 $- $- -% -% $(51) 10,000 3.68% 4.73% 2009 293 50,000 3.97% 1.70% (318) 50,000 3.97% 4.62% 2009 611 50,000 4.00% 1.63% (149) 50,000 4.00% 4.73% 2011 5,971 65,000 4.80% 1.64% 950 65,000 4.80% 4.60% 2013 4,931 50,000 3.73% 1.97% - - -% -% 2013 (109) 11,742 1.60% 1.64% - - -% -%

$11,697 $226,742 4.04% 1.73% $432 $175,000 4.27% 4.65% Alterna Savings is obligated to pay a floating rate of interest and receive a fixed rate on all swap agreements other than the swap agreement with a notional amount of $11,742,000 that matures in 2013. This swap obligates Alterna Savings to receive a floating rate of interest and pay a fixed rate. During the year, one swap agreement with notional principal of $10,000,000 matured. No swaps were disposed of in 2008 (2007 – none). b) Call Options

2008 2007 Issued

(000’s) Fair Value

(000’s) Issued

(000’s) Fair Value

(000’s) Purchased options (asset) $31,143 $5,262 $32,469 $14,244 Embedded options (liabilities) $31,143 $3,560 $32,469 $12,858 Alterna Savings has issued $31,143,000 of indexed term deposits to its members as of December 31, 2008 (2007 - $32,469,000). These term deposits have maturities of 3 to 5 years at issuance and pay interest to the depositors, at the end of the term, based on the performance of the S&P/TSX60 Index, the proprietary G7 Equity Index, or the Euro North America Equity Index. Alterna Savings uses purchased call options on the above indices with equivalent maturities to offset the exposure associated with these products.


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23. CAPITAL MANAGEMENT Alterna Savings’ capital management objective is to ensure the long term viability of the company and the security of member deposits by holding a level of capital deemed sufficient to protect against unanticipated losses and to comply with the capital requirements set out in the Credit Unions and Caisses Populaires Act (Ontario) (the “Act”). Alterna Savings defines capital to include retained earnings, contributed surplus, accumulated other comprehensive income, membership shares and special shares. Alterna Savings manages its capital in accordance with the Capital Management Policy, which is reviewed and approved annually by the Board. The policy requires Alterna Savings to hold capital equal to or exceeding the following limits:

Regulatory Minimum Alterna Savings Policy Capital to total assets 4.25% 4.25% Capital to risk weighted assets 8.00% 8.00%

In addition, Alterna Savings established an Internal Capital Adequacy Assessment Process (ICAAP) and provided capital for other major enterprise risks not required by the Act. The processes for managing capital include setting policies for capital management, monitoring and reporting, setting policies for related areas such as asset liability management, reporting to the Board regarding financial results and capital adequacy, and setting budgets and reporting variances to those budgets. Alterna Savings may not pay dividends on membership shares or special shares if there are reasonable grounds for believing that Alterna Savings is, or would by that payment become, insolvent, or that regulatory liquidity or capital levels would not be met after payment. Capital Summary As at December 31, 2008, Alterna Savings was in compliance with the policy, the Act and regulations with total capital as a percent of assets of 6.47% (2007 – 6.32%) and the total capital as a percent of risk weighted assets of 10.65% (2007 – 11.80%). In addition, Alterna Savings complied with this requirement throughout the year. Elements of risk weighted capital as of December 31, 2008 are:

2008

(000’s) 2007

(000’s) Retained earnings $86,459 $76,982 Special shares 24,545 26,143 Contributed surplus 19,282 19,247 Membership shares 1,898 2,530 Accumulated other comprehensive income 1,459 515

$133,643 $125,417


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24. COMMITMENTS AND CONTINGENCIES a) Operating Leases Alterna Savings has minimum annual payment obligations under operating leases as follows (in 000’s):

2009 $1,899 2010 1,609 2011 1,419 2012 1,160 2013 1,011 Thereafter 2,126 $9,224 b) Credit Instruments As at December 31, 2008, the credit instruments approved but not yet disbursed were as follows:

Total (000’s) Average term Average rate

Personal loans $111 3.27 years 5.96% Residential mortgage loans $8,942 4.45 years 5.23% Commercial term loans $300 5.00 years Prevailing rates on date disbursed Commercial mortgage loans $7,222 4.09 years Prevailing rates on date disbursed Lines of credit unfunded $463,565 - Prevailing rates on date disbursed c) Contingencies In the normal course of operations, Alterna Savings becomes involved in various claims and legal proceedings. While the final outcome with respect of claims and legal proceedings pending at December 31, 2008 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on Alterna Savings’ financial position or results of operations. d) Guarantees Letters of Credit Arising through the normal course of business, Alterna Savings has guaranteed $2,009,000, representing the maximum potential amount of future payments it would be required to make under the guarantees, in support of commercial loans to members. Letters of credit are issued at the request of members in order to secure their payment or performance obligations to a third party. These guarantees represent an irrevocable obligation of Alterna Savings to pay the third party beneficiary upon presentation of the guarantee and satisfaction of the documentary requirements stipulated therein. In the event of a call on such commitments, Alterna Savings has recourse against the member. Generally the term of these guarantees do not exceed one year. The types and amount of collateral security held by Alterna Savings in support of guarantees and letters of credit is the same as is held for loans. As at December 31, 2008, no liability has been recorded on the balance sheet as no letters of credit have been called upon.

Credit Card Agreement In accordance with a credit card service agreement entered into in May 2005, Alterna Savings has guaranteed the credit card debt of its business account holders such that if a business account falls into arrears, the credit card service provider may request that Alterna Savings pay the amount due. Alterna Savings has legal recourse against the business account holder if required to pay any amounts in arrears. All credit decisions with respect to business accounts are made by Alterna Savings. As of December 31, 2008, no business accounts have been submitted to Alterna Savings for reimbursement by the credit card service provider.


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Other Indemnification Agreements In the normal course of its operations, Alterna Savings provides indemnification agreements to counterparties in certain transactions such as purchase contracts, service agreements and sales of assets. These indemnification agreements require Alterna Savings to compensate the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. Alterna Savings also indemnifies directors and officers, to the extent permitted by law, against certain claims that may be made against them as a result of their being, or having been, directors or officers. The terms of these indemnification agreements vary based on the contract. The nature of the indemnification agreements prevents Alterna Savings from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, Alterna Savings has not made any significant payments under such indemnification agreements. No amount has been accrued with respect to these indemnification agreements.

25. SEGMENT DISCLOSURES Alterna Savings manages its business as one integrated operating segment as it operates principally in personal and commercial banking in the provinces of Ontario and Quebec. Accordingly, it has only one reporting segment for financial reporting purposes.

26. OTHER INFORMATION a) Restricted Party Transactions Alterna Savings employs the definition of restricted party contained in section 82 of Regulation 76/95 to the Credit Unions and Caisses Populaires Act. A restricted party includes a person who is, or has been within the preceding twelve months, a director, officer, committee member, or any corporation in which the person owns more than 10% of the voting shares, his or her spouse, their dependent relatives who live in the same household as the person, and any corporation controlled by such spouse or dependent relative. Loans to officers consist mainly of residential mortgages at posted rates less 2.25%, as well as personal loans and personal lines of credit at market rates less a discount based on the type and risk of the loan. Loans to other restricted parties are granted under market conditions for similar risks. At the end of the year, the total amount of loans related to restricted parties, as defined, was approximately $2,133,000 (2007 - $2,327,000). There was approximately $83,000 (2007 - $118,000) in interest earned for the year which is recorded under interest income on the consolidated statement of income. b) Expenses Relative to Board of Directors The Directors of Alterna Savings and Alterna Bank are remunerated at rates to be fixed annually at the beginning of each year by their respective Boards, and are also entitled to be paid their travelling and other expenses properly incurred by them in connection with the affairs of Alterna Savings and Alterna Bank. During the year, remuneration paid to Directors of Alterna Savings and Alterna Bank amounted $224,000 (2007 - $226,000) and other expenses incurred totalled $71,000 (2007 - $52,000). As at December 31, 2008, Alterna Savings’ Board consisted of 15 Directors (2007 – 16 Directors) and Alterna Bank’s Board consisted of 9 Directors (2007 – 9 Directors).


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c) Executive Remuneration Executives include the President & CEO (vacant for March 1 to July 8, 2007), Senior VP Personal and Business Services, Senior VP & CFO, Senior VP Service Delivery and Operations (until February 22, 2008), Senior VP & COO (Alterna Bank), Senior VP Marketing, Communications and Corporate Social Responsibility, Senior VP HR (effective July 3, 2007 to August 11, 2008), VP Information Technology (from February 22, 2008), VP Centre for Business Excellence & Program Management Office (from February 22, 2008) and VP Corporate Affairs. Remuneration earned by executives during the year included the following: 2008

(000’s) 2007

(000’s) Remuneration $2,112 $1,865 Taxable benefits 79 85 $2,191 $1,950

27. COMPARATIVE AMOUNTS Certain 2007 comparative amounts have been reclassified to conform to the consolidated financial statement presentation adopted in 2008.

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