alterna savings and credit union limited · north bay, pembroke, peterborough, northwestern and...

This offering statement must be delivered to every purchaser of the securities described herein prior to the purchaser becoming obligated to complete the purchase and, upon request, to any prospective purchasing member.

No official of the Government of the Province of Ontario has considered the merits of the matters addressed in this offering statement.

The securities being offered are not guaranteed by the Deposit Insurance Corporation of Ontario or any similar public agency.

The prospective purchaser of these securities should carefully review the offering statement and any other documents it refers to, examine in particular the section on risk factors beginning on page 32 and, further, may wish to consult his/her financial and tax advisor about this investment.

ALTERNA SAVINGS AND CREDIT UNION LIMITED

OFFERING STATEMENT dated March 29, 2019

MINIMUM $500,000 -- MAXIMUM $50,000,000 CLASS A SPECIAL SHARES, SERIES 6 (NON-CUMULATIVE, NON-VOTING,

NON-PARTICIPATING SPECIAL SHARES)

(“CLASS A INVESTMENT SHARES, SERIES 6”)

The subscription price for each Class A Investment Share, Series 6 will be $1.00 per share, with a minimum of 1,000 shares per member which may be subscribed for $1,000.00, to a maximum of 200,000 shares per member which may be subscribed for $200,000.00, irrespective of any Class A Investment Shares, Series 1 to Series 5, the member may already hold.

There is no market through which these securities may be sold.

The purchaser of these securities may reverse his/her decision to purchase the securities if he/she provides notice in writing, or by facsimile, or by e-mail in combination with a telephone call, to the person from whom the purchaser purchases the security, within two days, excluding weekends and holidays, of having signed a subscription form.

The Class A Investment Shares, Series 6 are subject to the transfer and redemption restrictions under the Credit Unions and Caisses Populaires Act, 1994 and the restrictions under this offering statement as set out on page 24.

THE SECURITIES OFFERED ARE NOT DEPOSITS. THE SECURITIES OFFERED ARE NOT INSURED. THE DIVIDENDS ON THE SECURITIES ARE NOT GUARANTEED.

Aussi disponible en français

TABLE OF CONTENTS OFFERING STATEMENT SUMMARY ..................................................................................................................... 1

Alterna Savings and Credit Union Limited ............................................................................................................... 1 The Offering .............................................................................................................................................................. 1 Dividend Policy ......................................................................................................................................................... 2 Use of Proceeds ......................................................................................................................................................... 3 Risk Factors ............................................................................................................................................................... 3 Summary Financial Information ................................................................................................................................ 3

GLOSSARY OF TERMS .............................................................................................................................................. 5 DETAILED OFFERING STATEMENT ...................................................................................................................... 9

A. GENERAL ............................................................................................................................................................ 9 The Credit Union ....................................................................................................................................................... 9

B. DESCRIPTION OF BUSINESS ............................................................................................................................. 10 Deposit Services .................................................................................................................................................. 10 Card Services ....................................................................................................................................................... 10 Lending Services ................................................................................................................................................. 10 Vision, Mission and Values Statement ................................................................................................................ 10 Bond of Association and Membership ................................................................................................................. 10 Corporate Governance ......................................................................................................................................... 11 Business Strategy ................................................................................................................................................. 12 Strategic Plan ....................................................................................................................................................... 12 Capital Plan ......................................................................................................................................................... 12 The Regulatory Framework ................................................................................................................................. 12 Central 1 Credit Union......................................................................................................................................... 13 Tier 1 and Tier 2 Regulatory Capital ................................................................................................................... 13 Capital Adequacy ................................................................................................................................................ 14 Additional Information ........................................................................................................................................ 14

C. CAPITAL STRUCTURE OF THE CREDIT UNION ............................................................................................ 14 Membership Shares ................................................................................................................................................. 14 Class A Investment Shares, Series 1 ........................................................................................................................ 15 Class A Investment Shares, Series 2 ........................................................................................................................ 16 Class A Investment Shares, Series 3 ........................................................................................................................ 17 Class A Investment Shares, Series 4 ........................................................................................................................ 18 Class A Investment Shares, Series 5 ........................................................................................................................ 18 Class B Shares, Series 1........................................................................................................................................... 19 Class B Shares, Series 2........................................................................................................................................... 20

Capital Structure of Alterna Savings’ Subsidiaries ..................................................................................................... 21 D. DESCRIPTION OF SECURITIES BEING OFFERED ......................................................................................... 21

Class A Investment Shares, Series 6 ........................................................................................................................ 21 Issue ..................................................................................................................................................................... 21 Dividends ............................................................................................................................................................. 22 Canadian Federal Income Tax Considerations .................................................................................................... 22 RRSP and TFSA-Eligible .................................................................................................................................... 23 Rights on Distributions of Capital ....................................................................................................................... 24 Voting Rights ....................................................................................................................................................... 24 Redemption Provisions and Restrictions ............................................................................................................. 24 Restrictions on Transfer ....................................................................................................................................... 25 Articles of Amalgamation .................................................................................................................................... 25

E. USE OF PROCEEDS FROM SALE OF SECURITIES ......................................................................................... 25 F. PLAN OF DISTRIBUTION .................................................................................................................................... 25 G. MARKET FOR THE SECURITIES ...................................................................................................................... 27 H. REGISTRAR AND TRANSFER AGENT ............................................................................................................. 27 I. SENIOR DEBT (RANKING AHEAD OF CLASS A INVESTMENT SHARES, SERIES 6) ............................... 27 Directors and Executive Leadership Team .................................................................................................................. 28

Board of Directors ................................................................................................................................................... 28 Executive Leadership Team .................................................................................................................................... 28

J. LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS ........................................................... 30 K. MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES .................................................. 30 L. MATERIAL CONTRACTS ................................................................................................................................... 30 M. RISK FACTORS.................................................................................................................................................... 32

Enterprise Risk Management ................................................................................................................................... 32 Transfer and Redemption Restrictions .................................................................................................................... 32 Capital Adequacy .................................................................................................................................................... 33 Payment of Dividends.............................................................................................................................................. 33 Credit Risk ............................................................................................................................................................... 33 Market Risk ............................................................................................................................................................. 33 Liquidity Risk .......................................................................................................................................................... 34 Structural Risk ......................................................................................................................................................... 34 Operational Risk ...................................................................................................................................................... 35 Regulatory Action .................................................................................................................................................... 36 Reliance on Key Management ................................................................................................................................. 36 Economic Risk ......................................................................................................................................................... 37 Competitive Risk ..................................................................................................................................................... 37

N. OPERATING RESULTS AND VARIATIONS ..................................................................................................... 37 O. DIVIDEND RECORD AND POLICY ................................................................................................................... 37 P. AUDITORS ............................................................................................................................................................. 38 APPENDIX 1 - MANAGEMENT DISCUSSION AND ANALYSIS ........................................................................ 40 Financial Performance Indicators ................................................................................................................................ 43

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION ........................................................ 44 APPENDIX 2 - AUDITORS’ CONSENT .................................................................................................................. 45 APPENDIX 3 - BOARD RESOLUTION ................................................................................................................... 45 APPENDIX 4 - CERTIFICATE .................................................................................................................................. 47 RELATED FORMS .................................................................................................................................................... 48

Sample Member Subscription, Transfer and Redemption Form ............................................................................. 48 Authorization to Place Funds in Escrow .................................................................................................................. 49

SCHEDULE A ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 ................................................................................................................................................ 50 1. CORPORATE INFORMATION ............................................................................................................................. 59 2. SIGNIFICANT ACCOUNTING POLICIES .......................................................................................................... 59 STATEMENT OF COMPLIANCE ............................................................................................................................ 59 3. ADOPTION OF IFRS 9 .......................................................................................................................................... 75 4. LOANS AND ADVANCES .................................................................................................................................... 76 5. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS .................................... 76 6. INVESTMENTS ..................................................................................................................................................... 87 7. PROPERTY AND EQUIPMENT ........................................................................................................................... 88 8. INTANGIBLE ASSETS .......................................................................................................................................... 89 9. OTHER ASSETS .................................................................................................................................................... 89 10. DEPOSITS ............................................................................................................................................................ 89 11. BORROWINGS .................................................................................................................................................... 90 12. MORTGAGE SECURITIZATION LIABILITIES ............................................................................................... 90 13. OTHER LIABILITIES .......................................................................................................................................... 91 14. LEASES ................................................................................................................................................................ 91 15. MEMBERS’ SHARE ACCOUNTS ...................................................................................................................... 92 16. INTEREST INCOME AND INTEREST EXPENSE ............................................................................................ 95 17. INVESTMENT INCOME ..................................................................................................................................... 96 18. SECURITIZATION INCOME .............................................................................................................................. 97 19. EMPLOYEE BENEFIT PLANS ........................................................................................................................... 97 21. FAIR VALUE OF FINANCIAL INSTRUMENTS ............................................................................................ 102 22. DERIVATIVE FINANCIAL INSTRUMENTS .................................................................................................. 106 23. CAPITAL MANAGEMENT ............................................................................................................................... 108 24. BUSINESS COMBINATIONS ........................................................................................................................... 109 25. COMMITMENTS AND CONTINGENCIES ..................................................................................................... 110 26. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS ....................................................... 111 27. RELATED PARTY TRANSACTIONS .............................................................................................................. 111 28. SELECTED DISCLOSURES ............................................................................................................................. 113 29. EVENTS AFTER THE CONSOLIDATED BALANCE SHEET DATE ........................................................... 114

Alterna Savings and Credit Union Limited Offering Statement, Class A Investment Shares, Series 6

Page 1

OFFERING STATEMENT SUMMARY

The following is a summary only and is qualified in its entirety by the more detailed information appearing elsewhere in this offering statement. A “Glossary of Terms” can be found at the end of this summary, prior to the detailed offering statement.

Alterna Savings and Credit Union Limited

Alterna Savings and Credit Union Limited (“Alterna Savings”) was created on April 1, 2005, as a result of the amalgamation of Metro Credit Union Limited (“Metro”) and The Civil Service Co-operative Credit Society, Limited (“CS CO-OP”).

CS CO-OP began operating in 1908 first as a credit union for federal government employees. Later CS CO-OP evolved into a full service credit union with a broad bond of association and branches in Ontario in the National Capital Region, Kingston, the greater Toronto area, North Bay and Pembroke.

Metro was incorporated in August, 1949, as University of Toronto Employees’ Credit Union Limited, and, in 1973, it changed its name to Universities and Colleges (Toronto) Credit Union Limited. In 1994, after additional acquisitions resulted in an expanded bond covering any resident or employee in Metropolitan Toronto, it changed its name to Metro Credit Union Limited.

Alterna Savings acquired the Ottawa Women’s Credit Union (OWCU) in 2013, and Peterborough Community Credit Union, Nexus Community Credit Union in 2016 and the Toronto Municipal Employees’ Credit Union in 2018.

Alterna Savings is the sole owner of Alterna Holdings Inc., a holding company that owns Alterna Savings’ investment in CS Alterna Bank, a Schedule I Bank under the Bank Act. As of December 31, 2018, CS Alterna Bank had assets of $810,423,000, constituting 14% of the consolidated assets of Alterna Savings, and the results of CS Alterna Bank’s operations have been consolidated with those of Alterna Savings.

Alterna Savings offers a full range of financial services and products to 143,801 members (as of December 31, 2018) through 34 branches, located in the Greater Toronto Area (“GTA”), the National Capital Region (“NCR”), Kingston, North Bay, Pembroke, Peterborough, Northwestern and Southwestern Ontario, and its contact centre, Internet, mobile and telephone banking systems. Alterna Savings provides a full range of retail and commercial credit and non-credit financial services and products. See also “Business of the Credit Union”, on page 10.

The Offering

Alterna Savings offers for sale to its members, at $1.00 per share, Class A Non-Cumulative, Non-Voting, Non-Participating, Redeemable Special Shares, Series 6 (“Class A Investment Shares, Series 6”), in the capital of Alterna Savings. Class A Investment Shares, Series 6, are special, non-membership shares and constitute part of the authorized capital of Alterna Savings. Subscriptions will be accepted from members of Alterna Savings for a minimum of 1,000 Class A Investment Shares, Series 6, and a maximum of 200,000 Class A Investment Shares, Series 6, irrespective of any Class A Investment Shares, Series 1 to Series 5, the member may hold. No member will be allowed to subscribe for Class A Investment Shares, Series 6 where, upon issuance of the shares subscribed for, a member would acquire Beneficial Ownership of more than the maximum of 200,000 Class A Investment Shares, Series 6. Subscription, purchase and redemption of these shares are exclusively through Alterna Savings’ offices. Class A Investment Shares, Series 6, are not redeemable at the shareholder’s option until the fifth fiscal year following the fiscal year in which the Class A Investment Shares, Series 6 were issued. The Board will consider such redemption requests at the end of each fiscal year once redemptions can legally occur. Alterna Savings will consider all requests made by the estates of deceased shareholders, before considering requests made by shareholders who have been expelled from membership in Alterna Savings, and only then all other requests. Requests in each category will be considered on a first come, first served basis. Redemptions at the shareholders’ option in a particular fiscal year are also subject to a limit of 10% of the number of the Class A Investment Shares, Series 6, issued and outstanding at the beginning of that fiscal year. Purchasers of Class A Investment Shares, Series 6, who are intending to hold such shares in a trust governed by a RRSP should carefully review the redemption restrictions on page 24 before proceeding. Transfer of such shares will only be effected through Alterna Savings, and transfers are restricted to other members of Alterna Savings. Alterna


Page 2

Savings, at its option, may redeem the Class A Investment Shares, Series 6, at the Redemption Amount, after a period of five years following Series 6 Offering Close Date; ie earlier of either (1) September 27, 2019; (2) the time that the aggregate amount of subscriptions received for Class A Investment Shares, Series 6 is equal to the maximum of $50,000,000; and (3) the date on which the Board, having not received subscriptions for the maximum $50,000,000 Class A Investment Shares, Series 6, and noting that six months has not yet passed since the date of this offering statement, resolves to close the offering. See “Description of Securities Being Offered” on page 21.

It is intended that the Class A Investment Shares, Series 6 will be issued on multiple closing dates. Subscriptions for each closing of Class A Investment Shares, Series 6 shall be accepted from the offer date for that offer noted in the table below (the “Offer Date”) until the earlier of: (1) the corresponding closing date noted in the table below (the “Closing Date”); (2) the time that the aggregate amount of subscriptions received for Class A Investment Shares, Series 6 is equal to the maximum of $50,000,000; and (3) the date on which the Board, having not received subscriptions for the maximum $50,000,000 Class A Investment Shares, Series 6, and noting that six months has not yet passed since the date of this offering statement, resolves to close the offering. The shares so subscribed shall be issued on the issuance dates noted in the table below (the “Issue Date”).

Closing No. Offer Date Closing Date Issue Date

1 Offering Statement Date May 25, 2019 May 31, 2019 2 May 26, 2019 June 25, 2019 June 28, 2019 3 June 26, 2019 July 26, 2019 July 31, 2019 4 July 27, 2019 August 26, 2019 August 30, 2019 5 August 27, 2019 September 27, 2019 September 30, 2019

No Class A Investment Share, Series 6, will be issued until the minimum aggregate subscription amount received in respect of such shares is equal to at least $500,000. Should the minimum subscription amount of $500,000 not be received by a particular Closing Date, then subscriptions for Class A Investment Share, Series 6 received will be deferred until the next Closing Date, and the Class A Investment Shares, Series 6 subscribed for will be issued at the next applicable Issue Date, subject to the minimum subscription amount of $500,000 having been met by such next Closing Date. If the aggregate subscription amount received by the final Closing Date of September 27, 2019 is less than $500,000, then this offering for Class A Investment Shares, Series 6, will be cancelled and withdrawn without shares being issued (in which case all funds “frozen” or held in Escrow to support subscriptions will be returned to the applicable members within 30 days thereof, with applicable interest) unless this offering has been renewed with the approval of the Superintendent of Financial Services.

The securities to be issued under this offering statement are not secured by any assets of Alterna Savings, and are not covered by deposit insurance or any other form of guarantee as to repayment of the principal amount or dividends. The Class A Investment Shares, Series 6, will qualify as Regulatory Capital, to the extent permitted and as defined in the Act.

Dividend Policy

The dividend policy of Alterna Savings’ Board, as it relates to Class A Investment Shares, Series 6, shall be to pay a dividend or dividends in every year in which there are sufficient profits to do so while still fulfilling all other Regulatory Capital, liquidity, and operational requirements. The dividends on the Class A Investment Shares, Series 6, are Non-Cumulative, with the dividend rate to be set annually by the Board if and when the dividend is declared, subject to the provisions detailed on page 21 regarding the minimum dividend rate if such a dividend is declared (i.e., not less than 4.0% for fiscal years commencing prior to the fifth anniversary of the issuance of the shares).

Dividends paid on Class A Investment Shares, Series 6, will be deemed to be interest and not dividends for tax purposes, and are therefore not eligible for the tax treatment given to dividends from taxable Canadian corporations, commonly referred to as the “dividend tax credit”.


Page 3

Use of Proceeds

If fully subscribed, the gross proceeds of this issue will be $50,000,000. If the minimum is subscribed for, the gross proceeds of this issue will be $500,000. The costs of issuing these securities are not expected to exceed $500,000, and these costs, approximating $407,500 after applicable tax savings, will be netted against the shares’ value in members’ equity. The estimated maximum net proceeds of this offering are $49,592,500. Based on the total assets and regulatory capital at December 31, 2018, the Alterna Savings’ Leverage Ratio would increase to 5.55% if this offering is minimally subscribed and to 6.50% if fully subscribed, well above the regulatory minimum requirement of 4%. Based upon the Alterna Savings’ consolidated balance sheet at December 31, 2018, this offering would support additional growth of approximately $1.5 million if minimally subscribed, and approximately $850 million if fully subscribed, The principal use of the net proceeds, and the purpose of this offering, is to add to Alterna Savings’ Regulatory Capital in order to provide for the future growth, development and stability of Alterna Savings, while maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements.

Risk Factors

Investments in the Class A Investment Shares, Series 6, are subject to a number of risks, including regulatory redemption restrictions, the continuous need to maintain minimum Regulatory Capital levels, the uncertainty of payment of dividends, credit risk, market risk, liquidity risk, structural risk, operational risk, potential regulatory actions, reliance on key management, economic risk, and competitive risk. See “Risk Factors” on 32.

Summary Financial Information

This summary financial information has been derived from and should be read in conjunction with the more detailed consolidated financial statements attached hereto as Schedule A, including the notes to those statements, and the “Management’s Discussion and Analysis” on page 40.

With respect to the summary financial information for the year ended December 31, 2016 contained herein, as they were audited by a previous auditor, PricewaterhouseCoopers LLP has not expressed an opinion or any other form of assurance on such information. PwC’s consent included or incorporated by reference in this document refers exclusively to the historical financial statements for the years ended December 31, 2018 and 2017 described therein and do not extend to the summary financial information included in the document and should not be read to do so.

ALTERNA SAVINGS AND CREDIT UNION LIMITED

SUMMARY CONSOLIDATED BALANCE SHEETS (in thousands of dollars) December 31,

2018 December 31,

2017 December 31,

2016 ASSETS Cash and cash equivalents 160,634 295,769 191,830 Investments 429,302 373,199 385,288 Loans to members, net of allowance for impaired loans 4,924,913 3,937,289 3,161,032 Property and equipment 15,834 16,704 18,431 Intangible assets 11,746 12,967 13,843 Other assets 65,888 59,483 36,154 Total assets 5,608,317 4,695,411 3,806,578 LIABILITIES Members’ deposits 4,312,690 3,679,389 3,262,242 Borrowings 252,010 276,548 - Mortgage securitization liabilities 669,701 397,787 288,438 Other liabilities 50.797 43,854 40,904


Page 4

LIABILITIES QUALIFYING AS REGULATORY CAPITAL

Membership Shares 1,919 1,772 1,781 MEMBERS’ EQUITY Class A Investment Shares, Series 1 12,422 11,534 10,785 Class A Investment Shares, Series 2 9,732 9,804 9,722 Class A Investment Shares, Series 3 34,141 33,317 34,142 Class A Investment Shares, Series 4 1,438 1,586 1,597 Class A Investment Shares, Series 5 74,290 74,295 - Class B Shares, Series 1 2,140 2,234 2,360 Class B Shares, Series 2 277 282 293 Contributed surplus 34,522 30,297 30,297 Retained earnings and accumulated other comprehensive income/loss

152,238 132,712 124,017

Total liabilities and members’ equity 5,608,317 4,695,411 3,806,578

ALTERNA SAVINGS AND CREDIT UNION LIMITED SUMMARY CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars) December 31, 2018 December 31, 2017 December 31, 2016 Interest income 150,121 117,466 94,452 Investment income 9,240 7,712 5,735 Interest expense 68,735 46,784 35,987 Net interest income

90,626 78,394 64,200

Loan costs 2,827 1,603 1,073 Other income 25,339 24,609 29,132 Operating expenses 84,308 84,064 73,653 Income before income taxes 28,830 17,336 18,606 Provision for income taxes 5,758 3,699 2,282 Net income 23,072 13,637 16,324


Page 5

GLOSSARY OF TERMS

“Act” - the Credit Unions and Caisses Populaires Act, 1994, as now enacted or as the same may from time to time be amended, re-enacted or replaced, together with its accompanying regulations and guidelines.

“Agricultural Loan” - a loan to finance the production of cultivated or uncultivated field-grown crops; the production of horticultural crops, the raising of livestock, fish, poultry and fur-bearing animals; or the production of eggs, milk, honey, maple syrup, tobacco, wood from woodlots, and fibre and fodder crops.

“Administration” - a legal status ordered by the DICO in any of the following circumstances: (1) DICO, on reasonable grounds, believes that a credit union is conducting its affairs in a way that might be expected to harm the interests of members, depositors or shareholders or that tends to increase the risk of claims against the deposit insurer, but that Supervision by DICO as stabilization authority would, in this case, not be appropriate; (2) A credit union has failed to comply with an order of DICO made while the credit union was subject to Supervision; (3) DICO is of the opinion that the assets of a credit union are not sufficient to give adequate protection to its depositors; (4) A credit union has failed to pay any liability that is due or, in the opinion of DICO, will not be able to pay its liabilities as they become due; (5) after a general meeting and any adjournment of no more than two weeks, the members of a credit union have failed to elect the minimum number of directors required under the Act (currently five); (6) if a vacancy occurs in the board of a credit union resulting in there not being a quorum of directors in office, and a general meeting is not called promptly to reconstitute the board; or (7) DICO has received a report from the Superintendent of Financial Services that the Superintendent of Financial Services has ordered a credit union to cease operations; under which DICO has the power to: (a) Carry on, manage and conduct the operations of that credit union; (b) Preserve, maintain, realize, dispose of and add to the property of that credit union; (c) Receive the income and revenues of that credit union; (d) Exercise the powers of that credit union and of its directors, officers, and committees; (e) Exclude the directors of that credit union and its officers, committee members, employees and agents from its property and business; and (f) Require that credit union, with or without obtaining member and shareholder consent, to, (i) amalgamate with another credit union, (ii) dispose of its assets and liabilities, or (iii) be wound up.

“Basis Point” - one-hundredth of one percent (0.01%).

“Beneficial Ownership” - ownership by a member of Alterna Savings that is direct or that involves ownership by a third party acting as trustee or nominee for such member.

“Bridge Loan” - a loan to an individual made under the following circumstances:

(a) The loan is for the purchase of residential property in which the purchaser will reside. The property must consist of four units or less.

(b) The term of the loan is not greater than 120 days.

(c) The funds from the sale of another residential property owned by the individual will be used to repay the loan.

(d) The credit union must receive a copy of the executed purchase and sale agreement for both properties before the loan is made.

(e) The conditions of each of the purchase and sale agreements must be satisfied before the loan is made.

(f) The loan is fully secured by a mortgage on the residential property being sold or, before the loan is made, the borrower’s solicitor has given the credit union an irrevocable letter of direction from the borrower stating that the funds from the sale of the residential property being sold will be remitted to the credit union.


Page 6

“Commercial Loan” - a loan, other than any of the following types of loans, made for any purpose: an Agricultural Loan; a Bridge Loan; an Institutional Loan; a Personal Loan; a Mortgage Loan; an Unincorporated Association Loan; a loan that consists of deposits made by the credit union with a financial institution, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan fully secured by a deposit with a financial institution (including the credit union making the loan), Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan fully secured by debt obligations guaranteed by a financial institution other than the credit union making the loan, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; a loan that is fully secured by a guarantee of a financial institution other than the credit union making the loan, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or Credit Union Central of Canada; an investment in a debt obligation that is fully guaranteed by a financial institution other than the credit union making the loan, fully secured by deposits with a financial institution (including the credit union making the loan), or fully secured by debt obligations that are fully guaranteed by a financial institution other than the credit union making the loan; an investment in a debt obligation issued by the federal government, a provincial or territorial government, a municipality, or any agency of such a government or municipality; an investment in a debt obligation guaranteed by, or fully secured by securities issued by, the federal government, a provincial or territorial government, a municipality, or by an agency of such a government or municipality; an investment in a debt obligation issued by a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec; an investment in a debt obligation that is widely-distributed; an investment in shares or ownership interests that are widely-distributed; an investment in a participating share; or an investment in shares of a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec. A Commercial Loan includes the supply of funds for use in automated bank machines not owned and operated by the credit union supplying the funds.

“DICO” - the Deposit Insurance Corporation of Ontario.

“Escrow” - a form of trust agreement in which funds are temporarily placed under the control of a third party (trustee) until specific conditions, set out in advance, are met.

“FSCO” - Financial Services Commission of Ontario.

“Institutional Loan” - a loan given to the federal government or a federal government agency, a provincial or territorial government or an agency of one, a municipality or an agency of one, a school board or college funded primarily by the federal or a provincial or territorial government, or an entity primarily funded by the federal government, a provincial or territorial government, or a municipality.

“Leverage Ratio” - total Regulatory Capital divided by total assets (as “total assets” is defined in section 16(1) of Ontario Regulation 237/09).

“Member” has the meaning assigned to such term on page 10 below under the section “Bond of Association and Membership”

“Membership Shares” - shares required, according to a credit union’s By-Law, to maintain a membership in the credit union.

“Mortgage Loan” - loan that is secured by a mortgage on an individual condominium unit or a building with one to four units where at least one half of the floor area of the building is utilized as one or more private residential dwellings, occupied by the borrower, and to which any of the following apply:

(a) The amount of the loan, together with the amount then outstanding of any mortgage having an equal or prior claim against the mortgaged property, does not exceed 80% of the value of the property when the loan is made.


Page 7

(b) The loan is insured under the National Housing Act (Canada), or guaranteed or insured by a government agency.

(c) The loan is insured by an insurer licensed to undertake mortgage insurance.

“Non-Cumulative” - dividends not declared or paid for one fiscal year are not carried forward or added to the dividend of a following year but are forever extinguished.

“Non-Participating” - in case of dissolution, shareholders receive only the Redemption Amount (see below) and do not participate in receiving any of the residual value of the credit union’s assets.

“Non-Voting” - holders vote only at special meetings as required by the Act.

“Personal Loan” - loan given to an individual for personal, family or household use.

“Redemption Amount” - the amount a shareholder receives on redemption or at which shares are transferred from one member to another; this amount is equal to the issue price of the shares ($1 per share) plus any dividends which have been declared but not yet paid.

“Regulatory Capital” - Membership Shares, Class A Shares, Class B Shares, contributed surplus, retained earnings, and a portion of Alterna Savings’ collective allowance for impaired loans.

“Risk-Weighted Assets” – the absolute value of assets in specified categories is multiplied by a percentage, varying between 0% and 100% depending on the risk attributed to each category. The sum of all the categories is Alterna Savings’ Risk-Weighted Assets.

“Risk-Weighted Assets Ratio” – total Regulatory Capital divided by Risk-Weighted Assets.

“Schedule I Banks” - Schedule I banks are domestic banks and are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit Insurance Corporation.

“Series 6 Offering Close Date” - The earlier of either (1) September 27, 2019; (2) the time that the aggregate amount of subscriptions received for Class A Investment Shares, Series 6 is equal to the maximum of $50,000,000; and (3) the date on which the Board, having not received subscriptions for the maximum $50,000,000 Class A Investment Shares, Series 6, and noting that six months has not yet passed since the date of this offering statement, resolves to close the offering.

“Special Resolution” - a resolution passed by two-thirds or more of the votes cast by or on behalf of the persons who voted in respect of that resolution.

“Substantial Portion” - assets having an aggregate value equal to or greater than 15% of a credit union’s assets at the end of its previous fiscal year.

“Supervision” - a legal status ordered by DICO when: (1) A credit union asks, in writing, that it be subject to supervision; (2) A credit union is not in compliance with prescribed Regulatory Capital or liquidity requirements; (3) DICO has reasonable grounds for believing that a credit union is conducting its affairs in a way that might be expected to harm the interests of members or depositors or that tends to increase the risk of claims against DICO; (4) A credit union or an officer or director of it does not file, submit or deliver a report or document required to be filed, submitted or delivered under this Act within the time limits outlined under this Act; (5) A credit union did not comply with an order of the Superintendent of Financial Services and the Superintendent of Financial Services has requested, in writing, that the credit union be subject to supervision; or (6) A credit union has failed to comply with an order of DICO; under which DICO, acting as stabilization authority, can: (a) order that credit union to correct any practices that the authority feels are contributing to the problem or situation that caused it to be ordered subject to DICO’s supervision; (b) order that credit union and its directors, committee members, officers and employees not to exercise any powers of that credit union or of its directors, committee members, officers and employees; (c) establish guidelines for the operation of that


Page 8

credit union; (d) order that credit union not to declare or pay a dividend or to restrict the amount of a dividend to be paid to a rate or amount set by DICO; (e) attend meetings of that credit union’s board and its credit and audit committees; and (f) propose By-Law amendments for that credit union and amendments to its articles of incorporation.

“Syndicated Loans” – loan, including any related credit facilities made under a syndicated loan agreement, by a credit union acting as the syndicating credit union where:

(a) The parties to the syndicated loan agreement are the borrower, the syndicating lead and one or more of the following:

(i) A credit union or its subsidiary or affiliate.

(ii) A league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec or La Caisse centrale Desjardins du Québec.

(iii) A financial institution other than a securities dealer.

(iv) An extra-provincial credit union registered under clause 332 (6) (a) of the Act.

(b) Each of the parties to the syndicated loan agreement, other than the borrower, agrees to contribute a specified portion of the loan and to be bound by the terms and conditions of the syndicated loan agreement.

(c) The syndicating credit union contributes at least 10 per cent of the loans, including any related credit facilities, and underwrites, disburses and administers them on behalf of the parties to the syndicated loan agreement.

“Unincorporated Association Loan” - loan to an unincorporated association or organization that is not a partnership registered under the Business Names Act, and that is operated on a non-profit basis for educational, benevolent, fraternal, charitable, religious or recreational purposes.


Page 9

DETAILED OFFERING STATEMENT

A. GENERAL

Class A Investment Shares, Series 6, will be issuable at $1.00 each and will only be issued to members of Alterna Savings.

The Credit Union


CS CO-OP began operating in 1908, was incorporated in 1928 and became the first such entity formed under the Co-operative Credit Act, which was revised in 1932 and became the Credit Unions Act (Ontario). From its roots as a credit union for federal government employees, CS CO-OP evolved into a full service credit union with a broad bond of association and branches in Ontario in the National Capital Region, Kingston, the greater Toronto area, North Bay and Pembroke.

Metro was incorporated in August, 1949, as University of Toronto Employees’ Credit Union Limited, a closed-bond credit union to serve all employees of the university. Its bond was expanded, in 1969, 1971, and 1972, to include the employees of the Ontario Institute for Studies in Education, of all post-secondary educational institutions located in Metropolitan Toronto, and of the Clarke Institute of Psychiatry, and, in 1973, it changed its name to Universities and Colleges (Toronto) Credit Union Limited. In 1994, after additional acquisitions resulted in an expanded bond covering any resident or employee in Metropolitan Toronto, it changed its name to Metro Credit Union Limited.

Alterna Savings is the sole owner of Alterna Holdings Inc., a holding company that owns Alterna Savings’ investment in CS Alterna Bank, a Schedule I Bank under the Bank Act.

On October 2, 2000, CS CO-OP continued its indirectly wholly owned subsidiary, Civil Service Loan Corporation, as a Schedule II (i.e., not widely held) bank named CS Alterna Bank. CS Alterna Bank, due to changes in the Bank Act effective October 24, 2001, became a Schedule I (i.e., Canadian, whether or not widely held) bank. As at December 31, 2018, CS Alterna Bank had one branch, located in Gatineau Québec; as well, all Alterna Savings branches are acting as agents for CS Alterna Bank, accepting deposits and granting loans and mortgages on behalf of CS Alterna Bank. The agency agreement is governed by internal policies and procedures which have been shared with regulators of both entities. CS Alterna Bank has outsourced the majority of its processes to Alterna Savings.

The assets, liabilities, equity and operating results of both subsidiaries have been consolidated with Alterna Savings’ consolidated financial statements attached to this offering statement as Schedule A, and all significant inter-company balances and transactions have been eliminated on consolidation. The assets, liabilities, equity and income of the subsidiaries have been excluded from the calculation of the Leverage Ratios, Risk-Weighted Assets Ratios and liquidity ratios presented in this offering statement because their inclusion would reduce the meaningfulness of the ratio or percentage.

Alterna Savings’ head office is located at 319 McRae Avenue, 1st Floor, Ottawa, Ontario K1Z 0B9.

Alterna Savings owns premises in Toronto, Peterborough, Dryden, Fort Frances, Ignace, Rainy River, Sioux Lookout, Thunder Bay, Thamesville, Wardsville, and Dutton, and leases its remaining premises.

Alterna Savings offers a full range of financial services and products to 143,801 members (as of December 31, 2018) through 34 branches, located in the GTA, the NCR, Kingston, North Bay, Pembroke, Peterborough, Northwestern and Southwestern Ontario, and through its contact centre, Internet, mobile and telephone banking systems. Alterna Savings provides a full range of retail and commercial credit and non-credit financial services and products. See also “Business of the Credit Union”, below, on page 10.


Page 10

B. DESCRIPTION OF BUSINESS

An overview of the products and services offered by Alterna Savings follows:

Deposit Services

Alterna Savings provides a broad range of personal deposit accounts and services to its members. Retail financial products for individuals include Canadian-dollar savings and chequing accounts, U.S.-dollar chequing accounts, and an extensive variety of Canadian and U.S. dollar term deposit products in both long terms of one to five years, and short terms of 30 to 364 days. Alterna Savings also offers a full range of business savings and chequing accounts to serve the needs of its small business members. Registered investment options include registered retirement savings plans (“RRSPs”), registered retirement income funds (“RRIFs”), tax-free savings account (“TFSAs”), and registered education savings plans (“RESPs”). All registered plans are trusteed by Concentra Trust (“Concentra Trust”). Wealth Management services are provided through our partnership with Aviso Wealth. Mutual funds and financial planning are offered through Qtrade Asset Management Inc. and mutual funds, financial planning and other securities are offered through Credential Qtrade Securities Inc. Online discount brokerage services are provided through Qtrade Investor and Life Insurance products through Qtrade Insurance Solutions. Credential and Qtrade are registered trademarks of Aviso Wealth Inc., used under license.

Card Services

Alterna Savings has a network of Automated Banking Machines (“ABMs”) located throughout Ontario and Gatineau. Alterna Savings is also linked to the Interac®, Cirrus® System, ACCEL® and ACCULINK® networks and is a member of The Exchange® Network, giving members access to their accounts at point of sale terminals and ABMs well beyond its own branch network and throughout Ontario, Canada, and internationally. In addition, members have the option of conducting transactions using Alterna Savings’ Internet, mobile and telephone banking facilities.

Alterna Savings offers a Visa credit card through an arrangement with a third party. Alterna Savings does not hold the accounts receivable owing from its credit card holders.

Lending Services

Alterna Savings is permitted to offer Personal Loans, Mortgage Loans, Bridge Loans, Commercial Loans, Agricultural Loans, Institutional Loans, Syndicated Loans and Unincorporated Association Loans, up to limits defined in its lending policies, which are required by regulation to meet a “prudent person” standard. Alterna Savings is also subject to a limit on loans to any one person and their “connected persons”, as that phrase is defined in a regulation passed pursuant to the Act, of 25% of its Regulatory Capital. The Board has approved, and management follows, its lending policies in all areas to minimize the risk of loan losses. A variety of loan-related group insurance products are also available to members for all types of loans.

For further information regarding any of these loan portfolios, see the “Loan Composition” heading in the table presented in the “Management Discussion and Analysis” section, on page 40, and note 4 in its annual consolidated financial statements attached hereto as Schedule A.

Vision, Mission and Values Statement

Alterna Savings expresses its vision as being the leader in cooperative financial services. Its mission is to develop and share an exceptional level of financial expertise that is tailored to member needs, accessible to all, supportive of local communities and delivered by caring, professional employees. Alterna Savings’ three core values are people first, excellence and integrity.

Bond of Association and Membership

The Act requires that a bond of association exist among members of a credit union. Typically, such bonds of association may be community-based, employer-based, or otherwise based on a group of members with a form of


Page 11

common association. Alterna Savings’ bond of association is as fully described in section 2.01 of its By-Law, and as summarized below:

• Persons who reside or who work in the Province of Ontario;

• Employees of Alterna Savings; and

• Various specified groups within which were the traditional bond of associations.

Alterna Savings also permits those not otherwise qualifying for membership under its bond of association to become members, but only if the aggregate number of such members does not exceed 3% of the membership of Alterna Savings, the admission to membership of such persons or entities has been specifically approved by the Board, and the names of such persons or entities admitted to membership on this basis are identified as such in the records of Alterna Savings.

Certain entities (i.e., corporations, partnerships, and government ministries and agencies) may also become members.

Membership in Alterna Savings is granted to applicants who are within the bond of association by enabling them to purchase and hold the required number of Membership Shares as specified in paragraphs 2.03 of the By-Law of Alterna Savings. In summary, this section requires those members who are individuals under the age of 18 years to hold one one-dollar membership share of Alterna Savings, and those members who are entities or who are individuals of the age of 18 years or older to hold 15 one-dollar membership shares of Alterna Savings, except if the individual’s only business with Alterna Savings is as an annuitant of a group RRSP contributed to by his or her employer, in which case the individual is required to hold five one-dollar membership shares of Alterna Savings.

Members are also permitted by Alterna Savings’ By-Law to hold up to 1,000 Membership Shares in addition to the requirement outlined above.

Corporate Governance

The business of Alterna Savings is directed and governed by its Board, a group which, according to Alterna Savings’ By-Law, is to consist of 9 individuals who are elected at the annual general meeting of Alterna Savings pursuant to a procedure outlined in Alterna Savings’ By-Law which permits voting both in advance of the annual general meeting, by the members of Alterna Savings in full compliance with Alterna Savings’ Membership Share requirement who have attained the age of 18 years as of the date of the annual general meeting. Each director is elected for a three-year term on a staggered basis to provide for continuity of Board members. No class or series of shares, other than Membership Shares, carries the right to vote for Alterna Savings’ Board.

No person may serve as a director of Alterna Savings, or of its predecessors, for more than 12 years in aggregate.

The Board has established committees to assist in its effective functioning and to comply with the requirements of the Act. A Finance and Audit Committee has been formed and is composed of at least three members of the Board who are qualified to serve on the committee according to Alterna Savings’ policies. Its mandate and duties are set out in the Regulations to the Act. The Finance and Audit Committee is responsible for, among other things, reviewing any financial statements which are presented to the members, either at an annual general meeting or within an offering statement, and making recommendations to the Board as to the approval of such financial statements.

A Nominating Committee has also been formed and is composed of at least three members of the Board who may not seek election to the Board while a member of the Nominating Committee. The mandate of the Nominating Committee is to solicit and receive nominations for election to the Board at the next annual general meeting, and to make recommendations to the membership regarding those candidates. Any two members of Alterna Savings may nominate a candidate for election to the Board.

A Governance Committee, consisting of the Chair, the Vice Chair, a representative from the board of directors of CS Alterna Bank, and at least two other directors, has a mandate to monitor and assess the corporate governance of the


Page 12

Board and the performance and overall compensation of the President and Chief Executive Officer and his direct reports.

Other Board committees formed from time to time are ad hoc, informal and advisory in nature.

The Board has overall responsibility for and authority within Alterna Savings, and directs the activities of Executive Leadership Team, to whom it has delegated certain responsibilities according to Board policies. Alterna Savings has an Executive Leadership Team as outlined on page 28 of the offering statement. Alterna Savings has 563 employees, consisting of 482 full-time and 81 part-time employees. For the names, municipality of residence, offices with Alterna Savings and the present principal occupations of the directors and senior managers of Alterna Savings as of the date of this offering statement, see “Directors and Executive Leadership Team”, beginning on page 28 of the offering statement.

The duties, powers and standards of care and performance for boards of directors, officers and committee members of credit unions are specified in the Act and the regulations passed pursuant to it, and include a duty to act honestly, in good faith, and with a view to the best interest of the credit union, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Business Strategy

The strategic direction of Alterna Savings’ 2019 – 2021 strategic plan is to be differentiated on the basis of service leadership within targeted market segments, to drive profitable growth to deliver quality, sustainable service to the membership, to be a strong regional credit union that enjoys sufficient scale and economies to be sustainable while acting small enough to be relevant to individual communities and segments of members, and to leverage existing infrastructure to create new opportunities. Key performance indicators are member loyalty, operating efficiency, employee engagement, levels of income and growth, and community volunteering.

Alterna Savings’ current strategy for CS Alterna Bank is to focus on the bank’s digital operations across Canada.

Strategic Plan

Our strategic plan will be enabled by gaining insight on our existing and prospective members which will drive resource allocation towards service improvement and activities that are meaningful to those segments. We will increase our rate of growth and revenue which will increase our organizational efficiency and profitability for the benefit of all members.

In the normal course, Alterna Savings monitors and adjusts its strategy as appropriate in response to changes in market conditions.

Capital Plan

In 2018, Alterna Savings developed a three-year growth plan and concluded that our Regulatory Capital was sufficient in the short term, but that a further injection of Regulatory Capital in the form of investment shares would be prudent and would give it additional leverage to move comfortably forward in delivering on its growth strategy. The major action item stemming from this capital plan is the present Class A Investment Shares, Series 6 offering.

The Regulatory Framework

Ontario credit unions are regulated through a comprehensive regulatory framework which involves Ontario’s Ministry of Finance, Financial Services Commission of Ontario (“FSCO”) and the Deposit Insurance Corporation of Ontario (“DICO”).

Credit unions and caisses populaires in Ontario are governed by the Act. The Ministry of Finance is responsible for developing and establishing the legislative and regulatory framework under which credit unions must operate. FSCO is responsible for ensuring that credit unions operate in accordance with the requirements of the Act, particularly with respect to matters involving market conduct issues relating to members and the general public. DICO is responsible


Page 13

for overseeing compliance with solvency rules and for providing deposit insurance protection for deposits held in Ontario credit unions up to prescribed limits. As part of this responsibility, DICO has the authority to issue by-laws to ensure that insured institutions operate in accordance with Sound Business and Financial Practices.

Among DICO’s responsibilities under the Act is monitoring compliance with section 84 of the Act, which requires that adequate and appropriate forms of Regulatory Capital and liquidity be maintained by credit unions. Credit unions that do not meet the minimum Regulatory Capital levels required may be granted a variation of the Regulatory Capital requirements by DICO, subject to such terms and conditions as it may impose. See also “Capital Adequacy” on page 33 hereof.

DICO is an Ontario Provincial Agency established under the Act. DICO is also responsible for insuring deposits made by members in credit unions and caisses populaires, in accordance with the requirements of the Act and the policy of deposit insurance. DICO is also able to impose certain requirements as a condition of continuing its deposit insurance coverage and, in the event that a credit union or caisse populaire fails to comply and is believed to represent a threat to the deposit insurance fund, has broader power to take corrective action, which may include placing the credit union under Supervision or Administration, should circumstances so warrant. DICO has rated Alterna Savings on its differential premium system, enabling calculation of Alterna Savings’ deposit insurance premium for its fiscal year ending December 31, 2018, and its insurance is in place and in good standing regarding that fiscal year. Alterna Savings is required to report to DICO immediately any actual or anticipated event which is likely to have a material impact on Alterna Savings’ financial position and increase DICO’s insurance risk. In that event, DICO reserves the right to impose other terms, conditions, or requirements as DICO deems appropriate.

The regulatory functions of FSCO and DICO will soon be consolidated under the Financial Services Regulatory Authority of Ontario (FSRA). FSRA is a new, Ontario Provincial Regulatory Agency created by the Ontario Legislature under the Financial Services Regulatory Authority of Ontario Act. It is charged with regulating the credit unions and caisses populaires sector among others financial service sectors. For these sectors, FSRA statutory objective is to promote high standards of business conduct; protect the rights and interests of consumers; and foster strong, sustainable, competitive and innovative financial services sectors.

Central 1 Credit Union

Each province in Canada has one or more central credit unions that serve their member credit unions in the province and in Ontario, one of these bodies is Central 1 Credit Union. Central 1 was formed through a merger of Credit Union Central of British Columbia (“CUCBC”) and Credit Union Central of Ontario (“CUCO”) on July 1, 2008. As an incorporated association owned by its member credit unions in Ontario and member credit unions in British Columbia, Central 1 provides liquidity management, payments, Internet and trade association services to its member credit unions.

As the central banker for its member credit unions, Central 1 provides, through an arrangement with a third party, centralized cheque clearing, and itself provides lending services to member credit unions. Lending services include overdraft facilities, demand loans, and term loans at fixed and variable rates.

Central 1 also undertakes government relations, economic forecasting, and market research and planning.

To become a member of Central 1, Alterna Savings must purchase membership shares calculated based on the percentage of its total assets relative to the system’s total assets as of the preceding calendar year end. Alterna Savings must also maintain a liquidity reserve deposit at Central 1 equal to 6% of its total assets, and pay membership dues which are calculated using a formula which is based on Alterna Savings’ membership. As at December 31, 2018, Alterna Savings’ membership in Central 1 is in good standing.

Tier 1 and Tier 2 Regulatory Capital

Capital is defined in the general regulation passed pursuant to the Act as a credit union’s Tier 1 capital and Tier 2 capital. Tier 1 capital, regarded as the most permanent form of capital, includes Alterna Savings’ Membership Shares and retained earnings, and Class A Shares, Series 1, 2, 3, 4 and 5. Alterna Savings’ Tier 2 capital includes any Class B Shares, Series 1 and 2 and a portion of Alterna Savings’ collective loan loss allowance. A credit union, to the extent that its Tier 2 capital exceeds its Tier 1 capital, may not include the excess Tier 2 capital as Regulatory Capital. Since


Page 14

Alterna Savings’ Tier 1 capital at all times exceeds its Tier 2 capital, both its Tier 1 capital and also its Tier 2 capital are included in Regulatory Capital.

Capital Adequacy

As at December 31, 2018 and December 31, 2017 and 2016, Alterna Savings was in compliance with the Regulatory Capital adequacy requirements of the Act.

Additional Information

For more information regarding Alterna Savings’ operations, see “Management Discussion and Analysis” attached hereto on page 40 and the annual consolidated financial statements as at December 31, 2018 attached hereto as Schedule A.

C. CAPITAL STRUCTURE OF THE CREDIT UNION

Alterna Savings has four classes of shares in its capital structure: Membership Shares, Class A Special Shares (the “Class A Shares”), Class B Special Shares (the “Class B Shares”) and Class C Special Shares (the “Class C Shares”), of which the Class A Shares, the Class B Shares, and the Class C Shares are issuable in series. Alterna Savings has created and authorized six series of Class A Shares (the “Class A Investment Shares, Series 1 to Series 6”), and two series of the Class B Shares (the “Class B Shares, Series 1 to Series 2”). No series of Class C Shares has been authorized, and no Class C Shares are outstanding, as of the date hereof. The authorized share capital of Alterna Savings consists of the following:

• an unlimited number of Class A special shares, issuable in series • an unlimited number of Class B special shares, issuable in series • an unlimited number of Class C special shares, issuable in series • an unlimited number of membership shares

For further information in regard to the share capital of Alterna Savings please refer to Note 15 of the audited financial statements.

The following represents a summary of the rights of the Membership Shares, the Class A Investment Shares, Series 1, Class A Investment Shares, Series 2, Class A Investment Shares, Series 3, Class A Investment Shares, Series 4, Class A Investment Shares, Series 5, Class B Shares, Series 1 and Class B Shares, Series 2 in the capital structure of Alterna Savings regarding dividends, return of capital on dissolution, redeemability at the holder’s initiative, redeemability at Alterna Savings’ initiative, voting and treatment of shares as Regulatory Capital. Full copies of the articles of incorporation and any applicable amendments of the Membership Shares, the Class A Shares and the Class B Shares in the capital structure of Alterna Savings are available upon request at any Alterna Savings’ branch or by calling Alterna Savings. Information on the Class A Investment Shares, Series 6 follows on page 21 under the heading “Description of Securities Being Offered”.

Right Membership Shares

Dividends The holders of the Membership Shares are entitled, after payment of dividends to holders of the Class A Investment Shares, Series 1 to Series 6, and the Class B Shares, Series 1 and 2, of Alterna Savings, to receive Non-Cumulative cash or share dividends if, as and when declared by the Board. Dividends may be paid in the form of cash or Class B Shares. Dividends are taxed as interest income and not as dividends.

Return of capital on dissolution

The holders of the Membership Shares are entitled, on dissolution of Alterna Savings, to receive an amount representing equal portions of the assets or property of Alterna Savings remaining after payment of all Alterna Savings’ debts and obligations, including redemption of the Class A Investment Shares, Series 1 to Series 6, and the Class B Shares, Series 1 and 2.


Page 15

Right Membership Shares

Redeemability at the holder’s initiative (Retraction)

The holder of Membership Shares has no ability to redeem his or her Membership Shares held except for as noted in “Redeemability at Alterna Savings’ initiative” section below.

Redeemability at Alterna Savings’ initiative

Upon a member’s death or withdrawal or expulsion from membership in Alterna Savings, Alterna Savings must redeem, and, when Alterna Savings reduces its Membership Share requirement, Alterna Savings may redeem, the Membership Shares held at the amount paid up for each such Membership Share, plus any declared but unpaid dividends thereon, unless such redemption would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.

Voting Each member of Alterna Savings in full compliance with Alterna Savings’ Membership Share requirements and over the age of 18 years has one vote on any matter considered by a membership meeting of Alterna Savings, regardless of the number of Membership Shares held.

Treatment as Regulatory Capital

Alterna Savings includes all of its Membership Shares as Tier I Regulatory Capital.

Right Class A Investment Shares, Series 1

Dividends The holders of Class A Investment Shares, Series 1, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but ranking equally with the Class A Investment Shares, Series 2 to Series 6, to receive Non-Cumulative cash or stock dividends if, as, and when declared by the Board.


The holders of Class A Investment Shares, Series 1, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but equally with the Class A Investment Shares, Series 2 to Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Any holder of Class A Investment Shares, Series 1, may request retraction at any time 5 years or more after the original issuance of these shares. Redemptions are considered and may be approved by the Board, and, if approved, occur during the 60-day period following the anniversary of any Class A Shares.

In no case shall the total number of Class A Investment Shares, Series 1, redeemed in any fiscal year exceed 10% of the issued and outstanding Class A Investment Shares, Series 1, at the beginning of that fiscal year, and in no case shall a redemption occur which would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.


Alterna Savings may at its initiative redeem at the Redemption Amount, subject to continued compliance with Regulatory Capital and liquidity requirements, all or any portion of the Class A Investment Shares, Series 1, outstanding at any time five years or more after the shares were originally issued.

Voting Class A Investment Shares, Series 1, do not carry any voting rights, except when the Act requires that these shares carry voting rights.


Page 16



Alterna Savings includes all of the Class A Investment Shares, Series 1 as Tier I Regulatory Capital.

Restrictions on Transfer

No Class A Series 1, 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.


Dividends The holders of Class A Investment Shares, Series 2, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but ranking equally with the Class A Investment Shares, Series 1 and Series 3 to Series 6, to receive Non-Cumulative cash or stock dividends if, as, and when declared by the Board. Holders of Class A Investment Shares, Series 2, may, however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


The holders of Class A Investment Shares, Series 2, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but equally with the Class A Investment Shares, Series 1 and Series 3 to Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Any holder of Class A Investment Shares, Series 2, may request retraction at any time 5 years or more after the original issuance of these shares. Furthermore, any holder of Class A Investment Shares, Series 2, who holds its shares in an RRIF and requires retraction in order to withdraw the minimum amount required from that RRIF in the year, or who holds those shares in an RRSP and requires retraction to invest the proceeds of that RRSP into a RRIF, may request redemption at any time 5 years or more after the issuance of those shares, but only for the specified purpose. Lastly, the estate of a holder of Class A Investment Shares, Series 2, who has died, and any holder of those shares who has been expelled from membership in Alterna Savings, may request retraction at any time.

Requests are held until June 30 and December 31 of each year, and prioritized based on the nature of the request. In no case shall the total number of Class A Investment Shares, Series 2, redeemed in any fiscal year exceed 10% of the issued and outstanding Class A Investment Shares, Series 2, at the beginning of that fiscal year, and in no case shall a redemption occur which would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.







Page 17





Dividends The holders of Class A Investment Shares, Series 3, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but ranking equally with the Class A Investment Shares, Series 1, Series 2, Series 4 to Series 6, to receive Non-Cumulative cash or stock dividends if, as, and when declared by the Board. Holders of Class A Investment Shares, Series 3, may, however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


The holders of Class A Investment Shares, Series 3, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but equally with the Class A Investment Shares, Class A Investment Shares, Series 1, Series 2, Series 4, Series 5 and Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Any holder of Class A Investment Shares, Series 3, may request retraction at any time 5 years or more after the original issuance of these shares. Furthermore, any holder of Class A Investment Shares, Series 3, who holds its shares in an RRIF and requires retraction in order to withdraw the minimum amount required from that RRIF in the year, or who holds those shares in an RRSP and requires retraction to invest the proceeds of that RRSP into a RRIF, may request redemption at any time 5 years or more after the issuance of those shares, but only for the specified purpose. Lastly, the estate of a holder of Class A Investment Shares, Series 3, who has died, and any holder of those shares who has been expelled from membership in Alterna Savings, may request retraction at any time.

Requests are held until December 31 of each year, and prioritized based on the nature of the request. In no case shall the total number of Class A Investment Shares, Series 3, redeemed in any fiscal year exceed 10% of the issued and outstanding Class A Investment Shares, Series 3, at the beginning of that fiscal year, and in no case shall a redemption occur which would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.









Page 18


Dividends The holders of Class A Investment Shares, Series 4, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but ranking equally with the Class A Investment Shares, Series 1 to Series 3, Series 5 and Series 6, to receive Non-Cumulative cash or stock dividends if, as, and when declared by the Board. Holders of Class A Investment Shares, Series 4, may, however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


The holders of Class A Investment Shares, Series 4, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but equally with the Class A Investment Shares, Class A Investment Shares, Series 1 to Series 3, Series 5 and Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Any holder of Class A Investment Shares, Series 4, may request retraction at any time 5 years or more after the original issuance of its shares. Furthermore, any holder of Class A Investment Shares, Series 4, who holds those shares in an RRIF and requires retraction in order to withdraw the minimum amount required from that RRIF in the year, or who holds those shares in an RRSP and requires retraction to invest the proceeds of that RRSP into a RRIF, may request redemption at any time 5 years or more after the issuance of those shares, but only for the specified purpose. Lastly, the estate of a holder of Class A Investment Shares, Series 4, who has died, and any holder of those shares who has been expelled from membership in Alterna Savings, may request retraction at any time.










Dividends The holders of Class A Investment Shares, Series 5, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but ranking equally with the Class A Investment Shares, Series 1 to Series 4 and Series 6, to receive Non-Cumulative cash or stock dividends if, as, and when declared by the Board. Holders of Class A Investment Shares, Series 5, may,


Page 19

Right Class A Investment Shares, Series 4 however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


The holders of Class A Investment Shares, Series 5, are entitled, in preference to the holders of the Class B Shares, Series 1 and Series 2, the Membership Shares, and any other class of shares ranking junior to the Class A Shares, but equally with the Class A Investment Shares, Class A Investment Shares, Series 1 to Series 4 and Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Any holder of Class A Investment Shares, Series 5, may request retraction at any time 5 years or more after the original issuance of its shares. Furthermore, any holder of Class A Investment Shares, Series 5, who holds those shares in an RRIF and requires retraction in order to withdraw the minimum amount required from that RRIF in the year, or who holds those shares in an RRSP and requires retraction to invest the proceeds of that RRSP into a RRIF, may request redemption at any time 5 years or more after the issuance of those shares, but only for the specified purpose. Lastly, the estate of a holder of Class A Investment Shares, Series 5, who has died, and any holder of those shares who has been expelled from membership in Alterna Savings, may request retraction at any time.






Alterna Savings includes all of the Class A Investment Shares, Series 5, as Tier I Regulatory Capital.


No Class A Series 5, 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

Right Class B Shares, Series 1

Dividends The holders of Class B Shares, Series 1, are entitled, in preference to holders of the Membership Shares and any other class of shares ranking junior to the Class B Shares, Series 2, but junior to the holders of the Class A Investment Shares, Series 1 to Series 6, to receive Non-Cumulative cash or share dividends if, as, and when declared by the Board. Holders of Class B Shares, Series 1, may, however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


Page 20



The holders of Class B Shares, Series 1 are entitled, in preference to the holders of the Membership Shares and any other class of shares ranking junior to the Class B Shares, Series 2, but junior to the holders of the Class A Investment Shares, Series 1 to Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Holders of the Class B Shares, Series 1, are not entitled to require Alterna Savings to redeem its shares, but may request such a redemption at any time. The Board may, at its discretion, approve any requested redemption.

In no case shall the total number of Class B Shares, Series 1, redeemed in any fiscal year exceed 10% of the issued and outstanding Class B Shares, Series 1, at the beginning of that fiscal year, and in no case shall a redemption occur which would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.


Alterna Savings may at its initiative redeem at the Redemption Amount, the Class B Shares, Series 1, held by any shareholder who dies or is expelled from membership in Alterna Savings. In no case shall the total number of Class B Shares, Series 1, redeemed in any fiscal year exceed 10% of the issued and outstanding Class B Shares, Series 1, reported on Alterna Savings’ annual consolidated financial statements for the preceding fiscal year.

Voting Class B Shares, Series 1, do not carry any voting rights, except when the Act requires that these shares carry voting rights.


Alterna Savings includes all of the Class B Shares, Series 1 are included as Tier 2 Regulatory Capital.


No Class B Series 1, 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


Dividends The holders of Class B Shares, Series 2, are entitled, in preference to holders of the Membership Shares and any other class of shares ranking junior to the Class B Shares, Series 1, but junior to the holders of the Class A Investment Shares, Series 1 to Series 6, to receive Non-Cumulative cash or share dividends if, as, and when declared by the Board. Holders of Class B Shares, Series 2, may, however, consent, by majority vote at a meeting of those shareholders, to the prior payment of dividends to holders of a junior class of shares. Dividends are taxed as interest income and not as dividends.


The holders of Class B Shares, Series 2 are entitled, in preference to the holders of the Membership Shares and any other class of shares ranking junior to the Class B Shares, Series 1, but junior to the holders of the Class A Investment Shares, Series 1 to Series 6, to receive the Redemption Amount for each share held upon the liquidation, dissolution, or winding up of Alterna Savings, after payment of all of Alterna Savings’ other debts and obligations.


Holder of the Class B Shares, Series 2, are not entitled to require Alterna Savings to redeem its shares, but may request such a redemption at any time. The Board may, at its discretion, approve any requested redemption.


Page 21


In no case shall the total number of Class B Shares, Series 2, redeemed in any fiscal year exceed 10% of the issued and outstanding Class B Shares, Series 2, at the beginning of that fiscal year, and in no case shall a redemption occur which would cause Alterna Savings to fail to comply with Regulatory Capital and liquidity requirements.


Alterna Savings may at its initiative redeem at the Redemption Amount, subject to continued compliance with Regulatory Capital and liquidity requirements, all or any portion of the Class B Shares, Series 2, outstanding at any time five years or more after the shares were originally issued.

Voting Class B Shares, Series 2, do not carry any voting rights, except when the Act requires that these shares carry voting rights.


Alterna Savings includes all of the Class B Shares, Series 2are included as Tier 2 Regulatory Capital.


No Class B Series 2, 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

Capital Structure of Alterna Savings’ Subsidiaries

The capital structure of Alterna Savings’ subsidiaries is as follows:

The capital of Alterna Holdings Inc. is comprised of an unlimited number of common shares. Alterna Savings owns all of the issued and outstanding shares of this corporation.

The capital of CS Alterna Bank is comprised of an unlimited number of common shares. Alterna Holdings Inc. owns all of the issued and outstanding shares of this corporation.

D. DESCRIPTION OF SECURITIES BEING OFFERED

Class A Investment Shares, Series 6

The following is a summary of the material provisions of the securities being offered. The verbatim provisions attached to the securities being offered are available at every branch of the credit union where the securities can be purchased.

Issue

Class A Investment Shares, Series 6, issuable at $1.00 each, will only be issued to members of Alterna Savings. If the purchaser is a natural person (i.e., an individual), he or she must be at least 18 years of age to purchase Class A Investment Shares, Series 6. Legal persons (e.g., corporations, partnerships, and trusts) may purchase Class A Investment Shares, Series 6.

The maximum issue size will be 50,000,000 Class A Investment Shares, Series 6. No member, through transfers of Class A Investment Shares, Series 6, from other members, will be allowed to hold more Class A Investment Shares, Series 6, than the member would otherwise have been able to subscribe for in this initial offering (200,000 shares, irrespective of any Class A Investment Shares, Series 1 to Series 5, the shareholder may own).


Page 22

Dividends

The holders of Class A Investment Shares, Series 6, are entitled, in preference to holders of the Class B Shares, Series 1 and 2, and of the Membership Shares, but equally with the holders of all other series of Class A Shares, including the Class A Investment Shares, Series 1 to Series 5, to receive dividends if, as and when declared by the Board. Holders of the Class A Investment Shares, Series 6, may, however, by majority vote at a special meeting, consent to the prior payment of dividends to holders of a junior class of shares.

This annual dividend rate, if and when a dividend is declared prior to the first Minimum Dividend Adjustment Date as outlined below, will not be less than 4.0%. This minimum annual dividend rate shall not be construed to prevent the Board from declaring a pro-rated dividend where Class A Investment Shares, Series 6, are outstanding for only a portion of a fiscal year, provided that the annual rate which is pro-rated equals or exceeds the minimum annual dividend rate. This minimum annual rate will remain in effect for fiscal years beginning prior to the fifth anniversary of the initial issuance of the shares. The minimum annual dividend rate will be adjusted at the final Board meeting in the fifth fiscal year following the fiscal year in which the initial issuance of shares hereunder occurs, and each fiscal year thereafter (each such Board meeting a “Minimum Dividend Adjustment Date”). Board policy states that the new minimum annual dividend rate for each one year period following a Minimum Dividend Adjustment Date will not be less than 125 Basis Points above the yield on the monthly series of the Government of Canada five-year benchmark bond, as published by the Bank of Canada Internet site, www.bankofcanada.ca (CANSIM identifier V122540), for the month preceding the month in which the Minimum Dividend Adjustment Date occurs. The Non-Cumulative dividend is payable if and when declared by the Board. It is therefore possible, in spite of the minimum dividend rate as outlined above, that no dividend will be declared and paid regarding a particular fiscal year of Alterna Savings.

The payment of such dividends may be made in cash, in Class A Investment Shares, Series 6, or in a combination of these; Board and management currently anticipate, however, that dividends on the Class A Investment Shares, Series 6, will be paid in cash.

Note that dividends paid by credit unions currently are not treated as dividends, but are instead treated as interest, for Canadian income tax purposes. Dividends paid on the Class A Investment Shares, Series 6, will therefore not be eligible for the tax credit given to shareholders who receive dividends from taxable Canadian corporations.

For a discussion of Alterna Savings’ dividend records and policy regarding Class A Investment Shares, Series 6, see page 37.

Canadian Federal Income Tax Considerations

The following summary has been prepared by management, of the principal Canadian federal income tax consequences applicable to a holder of a Class A Investment Share, Series 6, who acquires the share pursuant to this offering and who, for the purposes of the Income Tax Act (Canada) (the “Income Tax Act”), is resident in Canada and holds the share as capital property.

This summary is based on the facts contained in this offering statement and based upon management’s understanding of the provisions of the Income Tax Act and the regulations thereunder as they currently exist and current published administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”). This summary takes into account specific proposals to amend the Income Tax Act and the regulations thereunder that have been publicly announced by the Minister of Finance (Canada) prior to the date hereof. There can be no assurance that these proposals will be enacted in their current form or at all, or that the CRA will not change its administrative and assessing practices.

This summary does not otherwise take into account or anticipate any changes in law, whether by legislative, governmental or judicial decision or action. This summary does not also take into account provincial, territorial or foreign tax legislation or considerations. No advance income tax ruling has been requested or obtained in connection with this offering statement, and there is a risk that the CRA may have a different view of the income tax consequences to holders from that described herein. INVESTORS ARE CAUTIONED THAT THIS COMMENTARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO CONSTITUTE ADVICE TO ANY


Page 23

PARTICULAR INVESTOR. INVESTORS SHOULD SEEK INDEPENDENT ADVICE FROM THEIR OWN TAX ADVISORS.

Dividends

A holder of a Class A Investment Share, Series 6, will be required to include in computing income the dividends paid on the shares, whether paid in cash or in the form of additional shares. Dividends paid to a holder of a Class A Investment Share, Series 6, are deemed to be interest for Canadian income tax purposes. This income will be subject to income tax in the same manner as other interest income.

Redemption

On a redemption of a Class A Investment Share, Series 6, to the extent that the redemption proceeds exceed the paid-up capital of the share, the excess is deemed to be interest received by the holder of the Class A Investment Share, Series 6. This interest must be included in computing the income of the holder in the year of redemption. The proceeds of disposition under these circumstances are reduced by the amount of deemed interest. To the extent that the proceeds of disposition exceed (or are exceeded by) the adjusted cost base and reasonable disposition costs, a capital gain (or capital loss) may be realized and taxed as described below.

Other Dispositions

The disposition of a Class A Investment Share, Series 6, to another member, may give rise to a capital gain (or capital loss) to the extent that the proceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost base of the Class A Investment Share, Series 6, and reasonable disposition costs. One-half of the capital gain is included in computing the income of the holder of the Class A Investment Share, Series 6, and one-half of any capital loss may be deducted but only against capital gains of the holder. Unused capital losses may be carried back to the three preceding taxation years to offset capital gains in those years, and they may be carried forward indefinitely. Under certain specific circumstances, the capital loss may be denied and therefore not available to offset capital gains of the holder. In addition, if certain criteria are met, an allowable capital loss may be considered a business investment loss and may be applied to reduce other income of the holder. This loss or a portion thereof may be carried back to the three preceding taxation years to reduce income in those years and may be carried forward for 10 taxation years.

The Class A Investment Shares, Series 6, will be a qualified investment for registered plans (i.e., RRSP, TFSA). The transfer of any shares by a holder to a registered plan constitutes a disposition of the shares by the holder for income tax purposes. In such circumstances, the holder is deemed to receive the proceeds of disposition for the shares equal to their fair market value at that time of such transfer, and this amount is included in computing the capital gain or loss from the disposition. Any capital loss arising on such disposition is denied to the shareholder until the share is disposed to an arm’s length person. Interest expense related to shares transferred to an RRSP is not deductible for income tax purposes.

RRSP and TFSA-Eligible

Concentra Trust will accept Class A Investment Shares, Series 6, purchased in this offering to be contributed to a member’s RRSP or TFSA. The proceeds of redemption or transfer of Class A Investment Shares, Series 6, held in an RRSP will remain inside that RRSP unless the annuitant specifically requests otherwise in writing.

Class A Investment Shares, Series 6, are also acceptable investments for RRIFs. Because of potential adverse tax consequences to the holder, however, Alterna Savings will not knowingly sell Class A Investment Shares, Series 6, to be held in the shareholder’s RRIF.

Alterna Savings will permit purchasers to hold Class A Investment Shares, Series 6, inside a RRSP only if they have not yet attained the age of sixty-six years as of the Issue Date. Members intending to hold Class A Investment Shares, Series 6, in a RRSP should carefully review the transfer and redemption restrictions of these shares.


Page 24

Rights on Distributions of Capital

On liquidation or dissolution, holders of Class A Investment Shares, Series 6, will be paid the Redemption Amount for each such share held, in priority to holders of all the Class B Shares, and of the Membership Shares, and rateably with the holders of all other series of Class A Shares, including the Class A Investment Shares, Series 1 to Series 5 but after provision for payment of all Alterna Savings’ other debts and obligations. Holders of Class A Investment Shares, Series 6, shall not thereafter be entitled, as holders of Class A Investment Shares, Series 6, to participate in the distribution of Alterna Savings’ assets then remaining, but will retain any rights they may have to such a distribution as holders of Class B Shares, Series 1, Class A Investment Shares, Series 1 to Series 5 or Membership Shares. Distributions regarding Class A Investment Shares, Series 6, held in an RRSP will remain in that RRSP unless the annuitant specifically requests otherwise in writing.

Voting Rights

The Class A Investment Shares, Series 6, are Non-Voting for the purposes of annual or special meetings of the members of Alterna Savings. In the event of a proposed dissolution, amalgamation, purchase of assets representing a Substantial Portion of Alterna Savings’ assets, the sale, lease or transfer of a Substantial Portion of its assets, a proposed resolution which affects the rights attaching to the Class A Investment Shares, Series 6, or an application for a certificate of approval for its continuance under another statute or jurisdiction, it shall hold a special meeting of the holders of Class A Investment Shares, Series 6, which may be held separately from the special meeting of the holders of any other series of Class A Shares, including the Class A Investment Shares, Series 1 to Series 5, if their rights are affected differently from those of the holders of any other series of Class A Shares. The holders of Class A Investment Shares, Series 6, shall have one vote per Class A Investment Share, Series 6, held at such meetings to consider such an event or resolution, which requires approval by Special Resolution. Approval at a meeting of the members of Alterna Savings, and at meetings of the holders of all other classes of shares in its capital structure, will also be required.

Redemption Provisions and Restrictions

Holders of Class A Investment Shares, Series 6, may not request that Alterna Savings redeem the shares they hold until six months prior to the end of the fifth fiscal year following the fiscal year in which the Class A Investment Shares, Series 6, are issued, and requests may only be made until the end of that fiscal year. A similar process will be followed in each subsequent fiscal year of Alterna Savings. Redemptions will be considered at the first Board meeting of the subsequent fiscal year. Redemptions requests will be processed in the following order, and, within each category of requests, will be considered on a first-come, first-served basis:

1. requests made by the estates of deceased shareholders;

2. requests made by shareholders who have been expelled from membership in Alterna Savings; and

3. all other requests.

Redemptions are subject to the aggregate limits detailed below.

Approval of any redemption request is in the sole and absolute discretion of the Board. The Board may not approve a request if, in the opinion of the Board, honouring such redemption request will cause Alterna Savings to be unable to comply with the Regulatory Capital and liquidity requirements of section 84 of the Act.

In no case shall total redemptions approved for holders of Class A Investment Shares, Series 6, in any fiscal year exceed an amount equal to 10% of the total Class A Investment Shares, Series 6, outstanding at the beginning of that fiscal year.

Alterna Savings has the option of redeeming, at the Redemption Amount, all or any portion of the Class A Investment Shares, Series 6, then outstanding, subject to restrictions in the Act, after giving at least 21 days’ notice of its intent to redeem, at any time after the fifth anniversary of the Series 6 Offering Close Date. If Alterna Savings redeems only a portion of the Class A Investment Shares, Series 6, then outstanding, Alterna Savings must redeem such Class A


Page 25

Investment Shares, Series 6, pro rata from all holders of such shares at that time. The proceeds of any redemption of Class A Investment Shares, Series 6, held inside an RRSP will remain inside the RRSP unless the annuitant specifically requests otherwise in writing.

Purchasers of Class A Investment Shares, Series 6, who are intending to hold such shares in a trust governed by a RRSP should carefully review the above redemption provisions and restrictions before proceeding. Alterna Savings will only permit shareholders who purchase Class A Investment Shares, Series 6, in this offering to hold those shares in a trust governed by a RRSP if the purchaser/annuitant has not attained the age of sixty-six years as of the Issue Date.


Class A Investment Shares, Series 6, may not be transferred except to another member of Alterna Savings. Transfers will be subject to the approval of the Board; the Board has delegated this authority to the President and Chief Executive Officer. Transfer requests must be in writing, using a form approved by the Board. Transfer requests will be tendered to the registered office of Alterna Savings. Class A Investment Shares, Series 6, will be transferred to other members at a price equal to the current Redemption Amount. The proceeds of disposition of Class A Investment Shares, Series 6, held inside an RRSP will remain inside that RRSP unless the annuitant specifically requests otherwise in writing.

No member, through transfers of Class A Investment Shares, Series 6, from other members, will be allowed to hold more Class A Investment Shares, Series 6, than the member would otherwise have been able to subscribe for in this initial offering (200,000 shares, irrespective of any Class A Investment Shares, Series 1 to Series 5, the shareholder may own). There is no market for the Class A Investment Shares, Series 6, issued by Alterna Savings. Alterna Savings may, however, choose to maintain a list of willing buyers, and attempt to facilitate a transfer to a willing buyer rather than process a redemption when a holder of Class A Investment Shares, Series 6, requests redemption; this procedure will not apply when a holder of Class A Investment Shares, Series 6, or his or her estate, is required by law to transfer the shares to another member of Alterna Savings (e.g., by the Will of a deceased shareholder), or has already located a purchaser for his or her Class A Investment Shares, Series 6.

Articles of Amalgamation

Prospective purchasers of Class A Investment Shares, Series 6, may obtain, on request at the registered office of Alterna Savings, a copy of the articles of amalgamation, and the resolutions of the Board which amended its articles of amalgamation. These documents define its share capital structure, including the full terms and conditions of the Class A Investment Shares, Series 6.

E. USE OF PROCEEDS FROM SALE OF SECURITIES

If fully subscribed, the gross proceeds of this issue will be $50,000,000. If the minimum is subscribed for, the gross proceeds of this issue will be $500,000. The costs of issuing these securities are not expected to exceed $500,000, and these costs, approximating $407,500 after applicable tax savings, will be netted against the shares’ value in members’ equity. The estimated maximum net proceeds of this offering are $49,592,500. The principal use of the net proceeds, and the purpose of this offering, is to add to Alterna Savings’ Regulatory Capital in order to provide for the future growth, development and stability of Alterna Savings, while maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements.

The principal use of the net proceeds, and the purpose of this offering, is to add to Alterna Savings’ Regulatory Capital in order to provide for the future growth, development and stability of Alterna Savings while maintaining a prudent cushion in the amount of Regulatory Capital above regulatory requirements.

F. PLAN OF DISTRIBUTION

4. The price to members for each Class A Investment Share, Series 6 will be $1.00.

5. There will be no discounts or commissions paid to anyone for the sale of these securities.


Page 26

6. One hundred percent (100%) of the proceeds of the sale of these securities will go to Alterna Savings, which will then be responsible for the payment of the costs associated with this offering statement.

It is intended that the Class A Investment Shares, Series 6 will be issued on multiple closing dates. Subscriptions for each closing of Class A Investment Shares shall be accepted from the offer date for that noted in the table below (the “Offer Date”) until the earlier of: (1) corresponding closing date noted in the table below (the “Closing Date”); (2) the time that the aggregate amount of subscriptions received for Class A Investment Shares, Series 6 is equal to the maximum of $50,000,000; and (3) the date on which the Board, having not received subscriptions for the maximum $50,000,000 Class A Investment Shares, Series 6, and noting that six months has not yet passed since the date of this offering statement, resolves to close the offering. The shares so subscribed shall be issued on the issuance dates noted in the table below (the “Issue Date”).

Closing No. Offer Date Closing Date Issue Date 1 Offering Statement Date May 25, 2019 May 31, 2019 2 May 26, 2019 June 25, 2019 June 28, 2019 3 June 26, 2019 July 26, 2019 July 31, 2019 4 July 27, 2019 August 26, 2019 August 30, 2019 5 August 27, 2019 September 27, 2019 September 30, 2019

Subscriptions will be accepted on a first come, first served basis, and subscription forms will be marked with the time and date accepted. Alterna Savings will closely monitor subscriptions being received as total subscriptions approach the maximum. Potential purchasers making subscription requests at that time may not be allowed to subscribe for the full number or amount of shares they desire, or their subscription request may be refused. This offering may not be over-subscribed, and subscriptions will not be pro-rated.

If the funds to be used by a subscriber to pay for shares subscribed are on deposit at Alterna Savings, the subscriber will authorize Alterna Savings to place these funds “on hold” in a temporary account bearing interest at the rate outlined for the Escrow arrangement below, to guarantee payment of these shares. If the offering is completed, such hold will be released, and the authorized amount will be used to pay for the shares for which the member subscribed. If the offering is withdrawn, or if the decision to buy is reversed by the subscriber (as described on the cover of this offering statement), the hold on the funds will be released and the funds returned to the subscriber’s account immediately thereafter.

If the funds to be used by a subscriber to pay for shares subscribed are coming from outside Alterna Savings, such funds will be held in Escrow, in accounts to be trusteed by Concentra Trust, until the offering is completed or withdrawn, or until the subscriber exercises the right to reverse the decision to purchase the securities (as described on the cover of this offering statement). If the offering is completed, the proceeds will be released from Escrow and used to pay for the shares for which the member subscribed. If the offering is withdrawn, or if the subscriber reverses the decision to buy as permitted by this offering statement and discussed on the cover of this offering statement, the proceeds will be refunded in full, plus interest calculated at a rate of 4.0%, pro-rated for the number of days the funds were in Escrow, to those who subscribed.

The above-noted terms and conditions regarding holds on subscribers’ deposit accounts and regarding Escrow accounts are detailed on Alterna Savings’ subscription form for Class A Investment Shares, Series 6 and on a separate agreement, to be signed by those subscribers using funds from outside Alterna Savings, authorizing placement of proceeds in Escrow accounts. Copies of the subscription form and the forms for authorization of placement of funds in Escrow accounts are printed on pages 48 and 49.

If fully subscribed, the gross proceeds to be derived by Alterna Savings from the sale of the Class A Investment Shares, Series 6 shall be $50,000,000. If the minimum is subscribed for, the gross proceeds of this issue will be $500,000. The costs of issuing these securities are not expected to exceed $500,000, and these costs, approximating $407,500 after applicable tax savings, will be netted against the shares’ value in members’ equity. As such, the estimated maximum net proceeds of this offering are $49,592,500. Based on the total assets and regulatory capital at December 31, 2018, the Alterna Savings’ Leverage Ratio would increase to 5.55% if this offering is minimally subscribed and to 6.50% if fully subscribed, well above the regulatory minimum requirement of 4%. Based upon the Alterna Savings’


Page 27

consolidated balance sheet at December 31, 2018, this offering would support additional growth of approximately $1.5 million if minimally subscribed, and approximately $850 million if fully subscribed.

No Class A Investment Share, Series 6, will be issued until the minimum aggregate subscription amount received in respect of such shares is equal to at least $500,000. Should the minimum subscription amount of $500,000 not be received by a particular Closing Date, then subscriptions for Class A Investment Share, Series 6 received will be deferred until the next Closing Date, and the Class A Investment Shares, Series 6 subscribed for will be issued at the next applicable Issue Date, subject to the minimum subscription amount of $500,000 having been met by such next Closing Date. If the aggregate subscription amount received by the final Closing Date of September 27, 2019 is less than $500,000, then this offering for Class A Investment Shares, Series 6, will be cancelled and withdrawn without shares being issued (in which case all funds “frozen” or held in Escrow to support subscriptions will be returned to the applicable members within 30 days thereof, with applicable interest) unless this offering has been renewed with the approval of the Superintendent of Financial Services.

The Class A Investment Shares, Series 6, will not be sold by underwriters or other dealers in securities. The minimum subscription per member shall be $1,000 for 1,000 Class A Investment Shares, Series 6. The maximum subscription per member shall be $200,000 for 200,000 Class A Investment Shares, Series 6. No member will be allowed to subscribe for Class A Investment Shares, Series 6 where, upon issuance of the shares subscribed for, a member would acquire Beneficial Ownership of more than the maximum of 200,000 Class A Investment Shares, Series 6. Shares will only be issued subject to the full price of such securities being paid.

G. MARKET FOR THE SECURITIES

There is no market through which the Class A Investment Shares, Series 6 may be sold. These securities may only be transferred to another member of Alterna Savings.

H. REGISTRAR AND TRANSFER AGENT

The registrars and transfer agents for the Class A Investment Shares, Series 6 are designated staff of Alterna Savings. The register of transfers is maintained at Alterna Savings’ head office located at 319 McRae Ave, Ottawa Ontario K1Z 0B9.

I. SENIOR DEBT (RANKING AHEAD OF CLASS A INVESTMENT SHARES, SERIES 6)

Alterna Savings has arranged a credit facility, totalling CDN $458,601,000, consisting of a Canadian-dollar clearing line of credit of CDN $34,700,000, a US-dollar clearing line of credit of US $500,000, demand loans of CDN $314,501,000, CDN $1,000,000 for capital markets, CDN $5,400,000 for letters of credit, CDN $32,500,000 for Financial Guarantee and CDN $70,000,000 for Performance Guarantee, at Central 1. That amount is available to cover fluctuations in daily clearing volume on members’ chequing accounts, and to provide liquidity if warranted. As security for these credit facilities, Alterna Savings has given Central 1 a general security agreement. The credit facility will next be reviewed in August 2019.

Alterna Savings also has access to a $100,000,000 revolving credit facility with a major Schedule 1 Canadian Bank. The facility is secured by insured mortgage collateral.

The credit facilities utilization by Alterna Savings during fiscal years 2018, 2017 and 2016 is outlined below. Fiscal Year Canadian-Dollar Clearing Line US-Dollar Clearing Line Demand & Term Loans

(000’s) High Balance Low

Balance High

Balance Low

Balance High

Balance Low

Balance

2018 $33,600 - - - $313,000 -

2017 $22,775 - - - $200,000 -

2016 $12,071 - - - $68,000 -


Page 28

Fiscal Year Capital Markets Letters of Credit Financial Guarantee

Performance Guarantee

(000’s) High

Balance Low

Balance High

Balance Low

Balance High

Balance Low

Balance High

Balance Low

Balance

2018 $518 - $1,128 - $70,000 - $69,782 -

2017 $786 - $911 $336 $70,000 - $70,000 -

2016 $761 - $983 $836 - - $40,000 $40,000

Members’ deposits in Alterna Savings, as well as its other liabilities, including unsecured creditors and mortgage securitization liabilities, rank prior to Alterna Savings’ obligations to the holders of any class or series of its shares, including the Class A Investment Shares, Series 6.

Directors and Executive Leadership Team

Board of Directors

The following table sets forth the board of directors of Alterna Savings:

Name/Municipality of Residence Principal Occupation Position/Office Norman Ayoub Ottawa, Ontario.

Management Consultant Chair, Chair of the Governance Committee

Andy Cragg Peterborough, Ontario.

Manager Healthcare Director

Richard Neville Ottawa, Ontario.

Retired, former executive, public sector Director, Chair of the Finance and Audit Committee

Maria Barrados Ottawa, Ontario.

Retired, former executive, public sector Director, Vice-Chair & Chair of Alterna Bank

Earl Campbell Toronto, Ontario.

Retired, former executive, education sector

Director

Marianne Johnson Ottawa, Ontario.

Management Consultant Director, Vice Chair of Alterna Bank

Ken Chan Toronto, Ontario.

Assistant Deputy Minister, Ontario Ministry of Tourism, Culture and Sport

Director, Chair of the Nominating Committee

Marilyn Conway Jones Bolton, Ontario.

Lawyer Director

Bianca Garofalo Thunder Bay, Ontario.

Entrepreneur Director

Executive Leadership Team

The following table sets forth the Executive Leadership Team and officers of Alterna Savings:

Name/Municipality of Residence Position/Title Robert Paterson Toronto, Ontario.

President and Chief Executive Officer

José Gallant Ottawa, Ontario.

Senior Vice President and Chief Administrative Officer

Mark Cauchi Toronto, Ontario.

Senior Vice President and Chief Information Officer

Frugina Ball Toronto, Ontario.

Region Head, Member Experience, GTA


Page 29

Name/Municipality of Residence Position/Title Brian Lawson Ottawa, Ontario.

Region Head, Member Experience, NCR

Kim Moseley Toronto, Ontario.

VP, Product and Marcomm

Bill Boni Richmond, British Colombia.

Senior Vice President and Chief Financial Officer

Shawn Khimji Toronto, Ontario.

VP, Wealth Management

Duncan de Chastelain Georgetown, Ontario.

VP, Legal

The following is a brief description of the members of the Executive Leadership Team:

• Robert Paterson is a senior banking executive with more than 20 years of relevant experience. Prior to joining Alterna Savings, Mr. Paterson developed extensive leadership and consulting experience within the financial services industry and has led transformative business strategies at institutions such as CIBC, JP Morgan Chase, McKinsey & Co. and Aon. Mr. Paterson serves on various boards in the credit union industry.

• José Gallant is a senior credit union executive with over 30 years in operations and financial operations of credit unions. Ms. Gallant holds a Chartered Professional Accountant designation and serves on various boards of major organizations.

• Mark Cauchi has 26 years of technology experience that included financial services, telecommunications and management consulting. Mr. Cauchi has expertise in identifying strategic technology opportunities in helping organizations improve profitability and customer experience. Other areas of experience include: acquisition integration, technology operations, IT investment & management governance.

• Frugina Ball is an experienced banking professional with over 25 years of experience with major Canadian banks. Ms. Ball consistently delivers superior business results across multiple disciplines through strong leadership, collaboration and skill at building high performing teams.

• Brain Lawson has close to 20 years of financial services experience with 10 years spent in management and leadership roles at Alterna Savings. Mr. Lawson’s areas of expertise and strengths include leading high performing teams who deliver exceptional service to members, creating collaborative work environments, and coaching others to meet or exceed plans.

• Kim Moseley leads the creation, design and implementation of retail and small business banking products,

as well as marketing and communication strategies and plans for Alterna Savings and Alterna Bank. Kim has progressively held senior positions as a marketing executive in the financial services industry across international markets including Canada, the US and the Caribbean.

• Bill Boni has 25 years of experience in the financial services industry with over 10 years at an executive level. Mr. Boni is a well-rounded progressive executive whose business acumen, leadership abilities, and successful strategic business decisions have led to comprehensive experience in the financial services industry. Mr. Boni has extensive experience and expertise in the areas of treasury management, asset and liability management, asset securitization, financial statements, budgeting and forecasting, credit risk, profitability analysis, and funds transfer pricing. Mr. Boni is a Chartered Investment Manager and a Chartered Professional Accountant.

• Shawn Khimji joined Alterna Savings and Alterna Bank as Vice President, Wealth Management in April 2018. He oversees the wealth management portfolio which includes leading the team of Investment Specialists, Investment Advisors as well as the associated compliance and operations team in addition to managing the partner relationship with Aviso wealth. He has over 20 years industry experience in various


Page 30

capacities with a strong focus in the Wealth and Asset Management sector. Throughout his career, he worked closely with over 100 advisory teams nationally developing scale and efficiencies across multiple distribution channels.

• Duncan de Chastelain is a seasoned legal executive with over 25 years experience in financial services leading legal, compliance and risk management teams. His background includes practice with a nationally recognized law firm and in-house roles as General Counsel, Chief Privacy Officer and Chief Anti-Money Laundering Officer for leading global and North American consumer finance companies and regulated financial institutions. He is a design thinking advocate and a strong believer in a better - agile - legal services delivery model.

J. LAWSUITS AND OTHER MATERIAL OR REGULATORY ACTIONS

As at December 31, 2018, excluding actions that may be used to recover delinquent loans where Alterna Savings is the plaintiff, Alterna Savings is not aware of any material pending or contemplated legal proceedings to which it, or its subsidiaries, is a party.

Alterna Savings is not aware of any regulatory actions pending or contemplated against Alterna Savings or its subsidiaries.

K. MATERIAL INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES

All loans to the directors, officers and employees of Alterna Savings and their spouses and immediate dependent family members are made in the normal course of business, using standard credit granting criteria.

The aggregate value of loans in all categories to restricted parties of Alterna Savings, as of December 31, 2018, amounted to $4,035,000. The allowance on these loans is negligible.

As members of Alterna Savings, directors, officers and employees of Alterna Savings each hold Membership Shares in the number required to maintain membership in Alterna Savings. Accordingly, each director, officer and employee may subscribe for the Class A Investment Shares, Series 6, should any of such persons wish to do so.

L. MATERIAL CONTRACTS

The following material contracts have been entered into by, or have bound, Alterna Savings during the last two years. All material agreements below represent contractual arrangements for important services to Alterna Savings in its daily operations. Alterna Savings has a strong vendor management program that oversees all material vendors including contract management and performance.

ADP Canada Co.

ADP Canada Co. is a payroll company who provides Alterna Savings with payroll services. The agreement governs payroll processing. There is no expiry date for this agreement, it can be cancelled with 90 days’ notice.

Brinks Canada

Brinks Canada provides ATM servicing and cash management for Alterna Savings. This agreement governs ATM cash management, ATM maintenance, warehousing and transport and contains all necessary protections for Alterna Savings as customary in similar commercial agreements. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires May 31, 2022.

Canadian schedule 1 bank

A Canadian schedule 1 bank has provided a revolving credit facility of $100,000,000 secured by insured mortgage collateral.


Page 31

Central 1 Credit Union

Central 1 Credit Union is a wholesale banking and trade association for credit unions in Ontario and British Columbia. This agreement governs online banking services, credit facilities, banking & clearing services and telephone banking services. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements. This agreement can be renewed annually and was renewed for 2019.

Credit Risk Management (CRM)

CRM is a collecting agency that collects overdue accounts on behalf of Alterna Savings. This agreement governs collection of past due accounts. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires on December 31, 2019.

CUMIS Insurance

CUMIS is an insurance company that providers Alterna Savings’ members with creditor insurance products sold on our mortgage, lines of credit and term loans. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires on December 31, 2019 (auto-renewal period).

Doxim – formerly ROLER

Doxim is a company that provides customer management solutions to the credit union and banking industries. This agreement governs production and distribution of All-In-One Statements and eStatements. The agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires August 31, 2020.

Everlink Payment Services Inc.

Everlink Payment Services Inc. is a payments solutions provider to the credit union system. This agreement governs management of debit card & ATM transaction switching. The agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires on December 31, 2021 (management of debit card) and April 30, 2024 (ATM transaction switching).

Collabria Financial Services Inc.

Collabria Financial Services Inc. is the issuer of both consumer and business Visa credit card products to Alterna Savings members. The agreement was signed on March 01, 2018, and the initial term is until December 31, 2022. Collabria provides an end-to-end solution covering card issuance and management.

MNP LLP

MNP LLP is the 5th largest audit and advisory services firm in Canada. This agreement governs the provision of internal audit services to Alterna Savings. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements and expires on December 31, 2021.

NCR Corporation

NCR Corporation is a global technology company providing services to the banking industry. This agreement governs ATM maintenance and software maintenance and support and expires on December 31, 2018. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements.

OXYA

Oxya is a data centre and management company. This agreement governs datacentre hosting and data management and expires April 2019. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements.


Page 32

Aviso Wealth Inc.

Aviso Wealth Inc., is a wealth management company. This agreement governs wealth management services to the members of Alterna Savings. This agreement can be renewed annually and was renewed until 2020. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements.

Telus

Telus is a major telecommunication and technology company in Canada. This agreement governs core banking system managed services and data hosting and expires on November 30, 2019. This agreement contains all necessary protections for Alterna Savings as customary in similar commercial agreements.

M. RISK FACTORS

Enterprise Risk Management

Alterna Savings recognizes there are significant risks inherent in its business activities. It is the policy of Alterna Savings to manage such risks consistently and actively, from the governance level of the Board to the day-to-day operations of all employees, with the intent of delivering on its mission, vision, values and business strategy. Alterna Savings maintains an Enterprise Risk Management (“ERM”) framework appropriate for its size and complexity, which includes enterprise-wide policies, processes, systems and resources to manage the organization’s principal risks within prudent boundaries.

Through Alterna Savings’ flexible ERM approach, and supported by a solid governance framework, management collectively looks out at the market and within the organization to identify, assess, respond, and monitor potential risks.

On an ongoing basis, including formal quarterly discussions by the Executive Leadership Team, enterprise-wide current and emerging risks are reviewed and validated as to the sufficiency of mitigating actions for principal exposures. Regular forward-looking reporting on these risks is provided to the Finance and Audit Committee of the Board, in their oversight capacity on risk management.

The following risk factors should be considered in making a decision to purchase Class A Investment Shares, Series 6.

Transfer and Redemption Restrictions

There is no market through which the Class A Investment Shares, Series 6 may be sold. Further, it is not expected that any market will develop. These securities may only be transferred to another member of Alterna Savings. Note that such a transfer is not treated as redemption, and is therefore not limited as outlined below. See “Restrictions on Transfer”, on page 25, for a further discussion of transfers of Class A Investment Shares, Series 6.

The Act prohibits redemption of shares if the Board of Alterna Savings has reasonable grounds to believe that Alterna Savings is, or the payment would cause it to be, in contravention of prescribed liquidity and Regulatory Capital adequacy tests for credit unions.

Redemptions of Class A Investment Shares, Series 6, are permitted at the sole and absolute discretion of the Board, and are not permitted prior to the end of the fifth fiscal year following the fiscal year in which the shares are issued. Redemptions after that time are limited in any fiscal year to 10% of the Class A Investment Shares, Series 6 outstanding at the beginning of that fiscal year, and are at the discretion of the Board. Consequently, holders of Class A Investment Shares, Series 6 may not be able to sell or redeem their securities when they wish to do so.

Members who intend to hold Class A Investment Shares, Series 6 within a trust governed by a RRSP should carefully review this risk factor before proceeding. Alterna Savings will only permit shareholders who purchase Class A Investment Shares, Series 6, in this offering to hold those shares in a trust governed by a RRSP if the purchaser/annuitant has not attained the age of sixty-six years as of the Issue Date, and will not knowingly sell Class A Investment Shares, Series 6, to be held in the shareholder’s RRIF contract.


Page 33

Capital Adequacy

The Act requires Alterna Savings to maintain a Leverage Ratio and a Risk-Weighted Assets Ratio equal to or greater than a percentage stated in the Regulations passed pursuant to the Act. Alterna Savings is required to maintain a Leverage Ratio of 4.00% and a Risk-Weighted Assets Ratio of 8.00%. Alterna Savings complies with both of these requirements as of the date hereof.

Payment of Dividends

There is no record of dividend payments to the holders of Class A Investment Shares, Series 6, since this is Alterna Savings’ first issuance of such shares. Alterna Savings has, however, established a record for the payment of dividends on its Class A Investment Shares, Series 1 to Series 5, in its last five fiscal years, detailed on page 37.

Past payment of dividends or other distributions in no way indicates the likelihood of future payments of dividends. The payment of dividends to the holders of Class A Investment Shares, Series 6 is dependent on the ability of Alterna Savings to meet the Regulatory Capital requirements of the Act, and on the availability of earnings.

Dividends on Class A Investment Shares, Series 6, are taxed as interest and not as dividends, and are therefore not eligible for the tax treatment given to dividends from taxable Canadian corporations, commonly referred to as the “dividend tax credit”.

The Board has stated a dividend policy for Class A Investment Shares, Series 6, as outlined on page 21 hereof. It is possible that no dividends will be paid regarding any particular fiscal year of Alterna Savings.

Credit Risk

The major activity of Alterna Savings is the lending of money to members and, as a result, there exists the risk of loss from uncollectible loans. The lending policies of Alterna Savings, the care and attention of staff and management in applying such policies to loan applications and loans granted, and the security taken in connection with such applications, will affect the future profitability of Alterna Savings and impact on its ability to pay dividends and redeem Class A Investment Shares, Series 6. Alterna Savings is, as of December 31, 2018, in compliance with its credit policies.

A discussion of Alterna Savings’ accounting policies regarding its loans to its members is found in note 2(g) to the annual consolidated financial statements, included in this offering statement, under the heading “Loans and loan impairment”, on page 60 of Schedule A hereto.

Further discussion of the composition of Alterna Savings’ loan portfolio, and its allowance and provision for impaired loans in note 5 to the annual consolidated financial statements, included in this offering statement, beginning at page 70 of Schedule A hereto and in the table of financial performance indicators on page 40 of the Management Discussion and Analysis hereto.

Market Risk

Alterna Savings is also exposed to risk of loss due to a market value decline in its investments. The Investment/Derivative policy of Alterna Savings addresses the market risks related to counterparties of Alterna Savings, types of investments of Alterna Savings and undue concentration of the investment portfolio to any one single investment or type of investment. The risk of loss due to interest rate, foreign exchange, equity or liquidity risks are addressed within the “Structural Risk” section hereof beginning at page 34, and the “Liquidity Risk” section hereof beginning at page 34.

The Investment/Derivative policy of Alterna Savings, approved by its Board, permits Alterna Savings to invest its capital and deposits in financial instruments, revenue producing capital assets and income generating businesses so long as such investment is undertaken in the best interests of members and Alterna Savings, and in accordance with strict performance tests and prudent standards.


Page 34

Alterna Savings mitigates counterparty credit risk of investments and derivatives by aggregating counterparty exposure for each issuer and adhering to the quality guidelines as noted in its Investment/Derivative policy. Investments other than those issued by the Government of Canada and its Crown Corporations as well as liquidity reserve investments and shares held as a condition of membership with Central 1 Credit Union are diversified by limiting investments in any one issuer to a maximum of 25% of the total portfolio or an authorized limit.

For investments and derivatives, risk is measured by reviewing exposure to individual counterparties to ensure total fair value of investments and derivatives are within the policy limit. 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.

Alterna Savings does not have any significant credit risk exposure to any single counterparty or any group of counterparties by establishing prudent limits.

As of December 31, 2018, Alterna Savings is in compliance with its Investment/Derivative policy.

Liquidity Risk

Liquidity risk is the risk that Alterna Savings will encounter difficulty in meeting its obligations associated with its financial liabilities. Alterna Savings is required to establish and maintain prudent levels and forms of liquidity that are sufficient to meet its cash flow needs.

According to Alterna Savings’ liquidity management and funding policy, adequate liquidity includes cash; deposits in a credit union league, Central 1, La Fédération des Caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec; deposits in deposit-taking financial institutions in Canada; cheques and other items in transit; federal- and provincial-issued securities; securities secured by mortgages and guaranteed by CMHC, Canada Guarantee or GE Capital, commercial paper, banker’s acceptances and similar instruments guaranteed by a deposit-taking institution in Canada; securities issued by a school board, university, or hospital; investments accounted for using the equity method; and league shares.

Alterna Savings’ liquidity management and funding policy provides that it will maintain a minimum stock of liquid assets representing 9% of its member deposits and borrowings. This includes the requirement, pursuant to Central 1’s By-Law, to maintain a liquidity reserve equivalent to 6% of Alterna Savings’ assets with Central 1 in order to maintain its membership in Central 1 in good standing. Alterna Savings measures the adequacy of its liquidity daily.

The policy requires liquidity to be invested in investments which are diversified, have residual maturities appropriate for its specific cash flow, are readily marketable or convertible into cash, and have minimal credit risk.

The policy also requires the hedging of deposits where those deposits may create a significant adverse reputational or financial impact on liquidity.

The liquidity management and funding policy also deals with how Alterna Savings funds its liquidity needs. Alterna Savings is required to maintain access to a variety of appropriate sources of funding, including, without limitation, deposits, asset securitizations, and borrowings.

Alterna Savings is also required to maintain, and to review annually, a liquidity contingency plan.

As of December 31, 2018, Alterna is in compliance with its Liquidity Management and Funding policy.

For further discussion of liquidity risk refer to note 5(c) to the annual consolidated financial statements, included in this offering statement on page 83 of Schedule A hereto

Structural Risk

Alterna Savings’ structural risk management policy requires the management of the balance sheet to diversify and prudently balance financial risk and return. Certain balance sheet categories are limited as a percentage of total assets.


Page 35

Fixed-rate loans are generally limited to terms of ten years, while fixed-rate deposits are generally limited to terms of five years.

Structural risk comprises exposure to interest rate movements (basis risk, mismatch risk, yield curve risk and option risk), and exposure to foreign exchange rate movements.

• Basis risk is the risk to income from variable rate deposits funding variable rate loans that change at different speeds.

• Mismatch risk is the risk to income from variable rate deposits funding fixed rate loans or variable rate loans funded by fixed rate deposits.

• Yield curve risk is the risk to income from fixed rate deposits funding fixed rate loans of a different term.

• Option risk is the risk to income from options embedded in many deposit or loan products.

• Foreign exchange risk is the risk to income that could result from changes to foreign exchange rates.

There are two levels of interest rate risk that Alterna Savings measures and monitors to meet regulatory requirements. Specifically, Alterna Savings must measure interest rate risk as it relates to earnings at risk, and as it relates to equity (economic value at risk). Earnings at risk measures the impact that short term interest rates have on 12 month net interest income. Economic value at risk measures the impact that longer term interest rates have on the equity of Alterna Savings. To measure all structural risks properly, earnings at risk and economic value at risk test must be performed.

Short-term interest rate risk is measured using the standard deviation of linear path space simulations. Alterna Savings limits this risk to 3% of average forecasted net interest income over the subsequent twelve months with a 95% confidence level.

Long-term interest rate risk is measured by calculating the net present value of all future cash flows by discounting them by the Canadian swap curve. Alterna Savings limits this risk to 7% of equity.

Alterna Savings then analyse the sensitivity of those results to parallel and non-parallel shifts in the yield curve and to key rates to which Alterna Savings is particularly sensitive.

Lower limits may be set in any particular annual operating plan.

Alterna Savings is permitted to, and does, use derivative instruments to hedge interest rate risk and to enable particular member product offerings. Alterna Savings is specifically prohibited from using these instruments for speculative investment purposes. See page 81 of Schedule A hereto for further information.

In the event that Alterna Savings’ exposure to interest rate risk were to exceed the policy limits described above, future profitability could become seriously eroded should interest rates move in the direction where Alterna Savings has an exposure, with a resulting negative impact on the ability of Alterna Savings to pay dividends or redeem shares. Management, however, could employ one or more of several techniques to mitigate the potential risk. Alterna Savings takes a conservative view of structural risk, and seeks to achieve steady, predictable income.

For further discussion of structural risk refer to page 81 of Schedule A hereto.

As of December 31, 2018, Alterna Savings is in compliance with its Structural Risk Management policy.

Operational Risk

Operational risk is the risk that, in any operational area of Alterna Savings (i.e., capital, credit, market, structural, and liquidity management), a financial loss will result from fraud, human error, or bad judgement. Alterna Savings’


Page 36

internal control policy provides that management is charged with the responsibility for establishing a network of processes with the objective of controlling the operations of Alterna Savings in a manner that provides the Board with the assurance it requires that:

• Data and information published either internally or externally is accurate, reliable and timely;

• The actions of directors, officers and employees are in compliance with its policies, standards, plans and procedures, and with all relevant laws and regulations;

• Alterna Savings’ resources are adequately protected;

• Resources are acquired economically and employed profitably;

• Quality business processes, controls and continuous improvement are emphasized; and

• Management strives to achieve Alterna Savings’ plans, programs, goals and objectives.

Alterna Savings has a disaster recovery plan in place for its core banking applications and this plan is regularly tested. Alterna Savings has recognized the need for, and is working on, improvements in its business continuity plan to enhance its ability to recommence operations quickly in an extreme disaster. In the short term, focus will be on recovery plans in the event of a temporary or extended shutdown of its head office, and in the linkages between the business continuity plan and Alterna Savings’ information technology.

Alterna Savings has identified the performance of its suppliers, and of the service providers to whom it has outsourced certain functions, as a risk, and has taken steps to mitigate that risk, to the extent reasonably possible, through its contracts and relationships with those suppliers and service providers.

As of December 31, 2018, Alterna is in compliance with its Internal Control policy.

Regulatory Action

Under the Act, DICO has the authority to place a credit union under Supervision or Administration should it believe that there is a potential for that credit union or caisse populaire to encounter financial or management problems which could affect its financial well-being or which could tend to increase the risk of claims by that credit union or caisse populaire against the deposit insurance fund.

Alterna Savings is focused on complying with current and emerging regulatory requirements, and generally applies stricter requirements than those prescribed for credit unions.

Reliance on Key Management

The success of Alterna Savings’ business strategy is dependent on the ability of Alterna Savings to retain its Executive Leadership Team personnel. The inability to retain such persons, or replace them with individuals of equal competence, could adversely affect Alterna Savings’ financial performance.

Alterna Savings has employment contracts with its President and Chief Executive Officer, and with majority of its Executive Leadership Team, that require those senior managers to provide Alterna Savings with notice, longer than that which would be ordinarily required by law, of the termination of his or her employment relationship with Alterna Savings.

Alterna Savings has policies in place regarding both the emergency replacement of its President and Chief Executive Officer, and also regarding succession planning for its executives.


Page 37

Economic Risk

Like every other financial institution, Alterna Savings is affected by periods of economic downturn that may result in a lack of consumer confidence, a drop in demand for loans and mortgages, or a reduction in the level of savings. Alterna Savings, as a community-bond credit union, is dependent to a significant degree on the economic performance of the communities that it serves.

Further discussion of the economic landscape refer to the Management Discussion and Analysis hereto on page 40.

Competitive Risk

The financial services industry continues to be extremely competitive. The major banks have expanded their traditional core banking business into other financial services, where they now dominate the brokerage and trust industries. As a result, the sheer size and increasing scope of their diversified operations represent both a challenge and an opportunity to credit unions. The success of credit unions depends largely on their ability to differentiate themselves from large banks, and on their ability to provide personal service while supplying new products and services to meet their members’ needs, thereby ensuring that they earn sufficient profits to continue to grow and prosper. Alterna Savings offers a full range of products and services.

The financial services industry has also been transformed by the entry of “virtual banks”, which have driven down lending rates and driven up deposit rates, thereby generally compressing the financial margin of all financial institutions.

Management regards this as a significant risk facing Alterna Savings. Alterna Savings seeks to mitigate this risk through its strategy of locating and operating in market niches where it can be competitive, including the expansion of its subsidiaries, CS Alterna Bank, digital operations across Canada.

N. OPERATING RESULTS AND VARIATIONS Please refer to Management and Discussion Analysis starting on page 40 and the Financial Performance Indicators table on page 43.

O. DIVIDEND RECORD AND POLICY

Alterna Savings has paid the following dividends with regard to its last five fiscal years:

Fiscal Year

Class A Investment

Shares, Series 1

Class A Investment

Shares, Series 2

Class A Investment

Shares, Series 3

Class A Investment

Shares, Series 4 (1)

Class A Investment

Shares, Series 5

Class B Shares, Series 1

Class B Shares,

Series 2 (2)

2018 3.50% 3.80% 3.80% 3.80% 4.00% 0.90% 0.90% 2017 3.35% 3.50% 3.50% 3.50% 4.00% 0.75% 0.75% 2016 3.35% 3.35% 4.50% 1.75% - 0.80% 1.00% 2015 3.35% 3.35% 4.50% - - 0.80% - 2014 3.35% 3.35% 4.50% - - 0.90% -

Shares assumed as part of the Nexus Credit Union transaction on December 1, 2016 (1) Former Nexus Credit Union Class B, Series 1 (2) Former Nexus Credit Union Class A, Series 1

Dividends paid on Class A Investment Shares, Series 1 to Series 5 and Class B Shares, Series 1 and Series 2, were paid in the form of cash or additional shares of the same class and series. No dividends were paid on Alterna Savings’ Membership Shares in the last five fiscal years.

Past payment of dividends is in no way an indicator of the likelihood of payment of future dividends.


Page 38

For a discussion of the priority of the various classes of shares in the payment of dividends, and the restrictions placed on the Board in the declaration of dividends, refer to page 21 and the summary of Alterna Savings’ various share rights discussed in the “Capital Structure of the Credit Union” section on page 14.

The dividend rate on Class A Investment Shares, Series 6, will be set annually by the Board. This annual dividend rate, if and when a dividend is declared prior to the first Minimum Dividend Adjustment Date, will not be less than 4.0%. This minimum annual dividend rate shall not be construed to prevent the Board from declaring a pro-rated dividend where Class A Investment Shares, Series 6, are outstanding for only a portion of a fiscal year, provided that the annual rate which is pro-rated equals or exceeds the minimum annual dividend rate. This minimum annual rate will remain in effect for fiscal years beginning prior to the fifth anniversary of the initial issuance of the shares. The minimum annual dividend rate will be adjusted at the final Board meeting in the fifth fiscal year following the fiscal year in which the initial issuance of shares hereunder occurs, and each fiscal year thereafter. Board policy states that the new minimum annual dividend rate for each one year period following a Minimum Dividend Adjustment Date will not be less than 125 Basis Points above the yield on the monthly series of the Government of Canada five-year benchmark bond, as published by the Bank of Canada Internet site, www.bankofcanada.ca (CANSIM identifier V122540), for the month preceding the month in which the Minimum Dividend Adjustment Date occurs. The Non-Cumulative dividend is payable if and when declared by the Board. It is therefore possible, in spite of the minimum dividend rate as outlined above, that no dividend will be declared and paid regarding a particular fiscal year of the Credit Union.

Dividends for the Class A Investment Shares, Series 6, are dependent upon, in part, the earnings of Alterna Savings and on its ability to comply with the Regulatory Capital and liquidity requirements of section 84 of the Act (see also “Capital Adequacy” in the section on “Risk Factors” on page 32). The payment of such dividends will be in such manner and on such terms as may be determined from time to time by the Board. The Board intends to, if thought appropriate, pay such dividends to holders of Class A Investment Shares, Series 6, annually, after the Credit Union’s fiscal year-end and before the annual general meeting of its members.

The dividend policy of the Alterna Savings Board for Class A Investment Shares, Series 6, shall be to pay a dividend in every year in which there is sufficient net income to do so while still fulfilling all other Regulatory Capital, liquidity and operational requirements. The dividend rate shall be established by the Board, in its sole and absolute discretion, within the provisions of the articles of incorporation outlined above regarding the minimum dividend rate, based on financial and other considerations prevailing at the time of the declaration.

Although there is no guarantee that a dividend will be paid in each year, it is contemplated by the Board that a dividend, commensurate with the minimum dividend requirements and policy outlined above, will be declared and paid in each year, provided that Alterna Savings is in compliance with section 84 of the Act. The payment of such dividends may be made in cash, in Class A Investment Shares, Series 6, or in a combination of these; Board and management currently anticipate, however, that dividends on the Class A Investment Shares, Series 6, will be paid in cash.

Note that dividends paid by credit unions are not treated as dividends, but are instead treated as interest, for Canadian income tax purposes. Dividends paid on the Class A Investment Shares, Series 6, will therefore not be eligible for the tax credit given to shareholders who receive dividends from taxable Canadian corporations.

Following consideration and payment of a dividend on the Class A Investment Shares, Series 6, and on the shares ranking equally with the Class A Investment Shares, Series 6 (i.e., the Class A Investment Shares, Series 1 to Series 5), the Board may decide to pay a dividend on shares ranking junior to the Class A Investment Shares, Series 6, and the other series of Class A Investment Shares, including the Class B Shares, Series 1 and Series 2 and the Membership Shares.

P. AUDITORS

The auditors of Alterna Savings are PricewaterhouseCoopers LLP (“PwC”), 99 Bank Street, Suite 710, Ottawa, Ontario K1P 1E4 (phone 613-755-4366, website http://www.pwc.com/ca). PwC was appointed the auditors of Alterna Savings at its most recent annual general meeting on April 16, 2018. Prior to April 2017, the auditors for Alterna Savings were Ernst & Young LLP (“E&Y”). PwC examined Alterna Savings’ consolidated financial statements for


Page 39

the year ended December 31, 2018, attached hereto as Schedule A in accordance with Canadian generally accepted auditing standards and their report is shown as part of those statements.

Q. SIGNED CONSENT

Please see Appendix 2 for Auditors’ Consent.

R. STATEMENT OF MATERIAL FACTS

There are no other material facts relating to the issues of securities in this offering statement which have not been suitably disclosed herein.

S. BOARD RESOLUTION

Please see Appendix 3 for Board Resolution.

T. CERTIFICATE

Please see Appendix 4 for Certificate of Disclosure.


Page 40

APPENDIX 1

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED DECEMBER 31, 2018

This Management’s Discussion and Analysis (MD&A) is presented to enable readers to assess material changes in the financial condition and operating results of Alterna Savings & Credit Union Limited (“AS”, “Alterna”) for the year ended December 31, 2018, compared with the corresponding period in the prior years. This MD&A should be read in conjunction with the audited Consolidated Financial Statements and related Notes for the year ended December 31, 2018. Unless otherwise indicated, all amounts are expressed in Canadian dollars and have been primarily derived from the annual Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Note that certain comparative amounts have been restated/reclassified to conform with the presentation adopted in the current period.

Overview


CS CO-OP began operating in 1908 first as a credit union for federal government employees. Later CS CO-OP evolved into a full service credit union with a broad bond of association and branches in Ontario in the National Capital Region, Kingston, the greater Toronto area, North Bay and Pembroke.

Metro was incorporated in August 1949, as University of Toronto Employees’ Credit Union Limited, and, in 1973, it changed its name to Universities and Colleges (Toronto) Credit Union Limited. In 1994, after additional acquisitions resulted in an expanded bond covering any resident or employee in Metropolitan Toronto, it changed its name to Metro Credit Union Limited.

Alterna Savings acquired the Ottawa Women’s Credit Union (OWCU) in 2013, and Peterborough Community Credit Union, Nexus Community Credit Union in 2016 and the Toronto Municipal Employees’ Credit Union in 2018.

Alterna Savings is the sole owner of Alterna Holdings Inc., a holding company that owns Alterna Savings’ investment in CS Alterna Bank, a Schedule I Bank under the Bank Act. As of December 31, 2018, CS Alterna Bank had assets of $810.4M, constituting 14% of the consolidated assets of Alterna Savings, and the results of CS Alterna Bank’s operations have been consolidated with those of Alterna Savings.

Alterna Savings offers a full range of financial services and products to 143,801 members (as of December 31, 2018) through 34 branches, located in the Greater Toronto Area (“GTA”), the National Capital Region (“NCR”), Kingston, North Bay, Pembroke, Peterborough, Northwestern and Southwestern Ontario, and its contact centre, Internet, mobile and telephone banking systems. Alterna Savings provides a full range of retail and commercial credit and non-credit financial services and products.

Financial Performance Review

FY2018 proved to be another year of solid financial results while achieving various corporate milestones. The company continued to compete effectively by offering very attractive rates despite the challenge of tightening margins, exploring new business segments, and adapting to changes in the competitive landscape. Our membership’s stable employment base, stringent risk management, and an experienced management team further assisted in the financial and corporate success of FY2018.

Overall, Alterna Savings delivered net income and asset growth which will aid the future development of new investment in technologies, member products and services and meaningful investments in our communities. As discussed below, FY2018 was a year of significant growth, while net income of $23.1 million showed notable improvement of $9.4 million over FY2017.


Page 41

Funds Under Management Growth

Despite a slow down in the GTA housing market and an increase in competition, Alterna was able to continue to experience tremendous growth by having a strong loyal member base and integrating key strategic acquisitions to diversify its operating markets coupled with investment in new technologies. The following chart shows the steady pace of growth in total funds under management (“FUM”) over the past three years, highlighting Alterna Savings’ success in building strong relationships with its members and successful acquisitions. FUM include member loans and deposits, off balance sheet member mortgages that are part of our securitization program and that we continue to administer, as well as member mutual funds and securities balances.

Alterna actively monitors the competitive landscape in regard to pricing its products so it can deliver competitive pricing to its members to ensure optimal member experience. As a result of the positive experience from members it has resulted in a strong loyal member base fueling the company’s growth.

For the twelve months ended December 31, 2018, loans to members were $4.925 billion as compared to $3.937 billion, an increase of $988 million or 25%. The increase in loans to members was primarily driven by growth in residential mortgages of approximately $903 million and growth of commercial loans of approximately $66 million. Alterna was able to effectively capture market share in the residential mortgage market despite a slowdown in the GTA market and continuous competitive pressure from other financial institutions.

Alterna Savings’ prudent credit policies and screening processes continued to position our delinquency well below the provincial average. Moreover, delinquencies over 90 days added up to 0.04% of total loans as at December 31, 2018. Alterna Savings’ delinquencies over 90 days continues to be much lower than the average of Ontario credit

Summary Operating Results 2018 2017 2016Net Interest Income 90,626$ 78,394$ 64,200$ Non-interest income 25,339 24,609 29,132 Total Revenue 115,965 103,003 93,332

Loan Costs 2,827 1,603 1,073 Operating Expense 84,308 84,064 73,653

87,135 85,667 74,726

Income before Tax 28,830 17,336 18,606 Provision for income taxes 5,758 3,699 2,282

Net Income 23,072$ 13,637$ 16,324$

-

2

4

6

8

10

12

14

2016 2017 2018

$ B

illio

ns

Funds Under Management


Page 42

unions. The chart below provides a comparison of Alterna’s delinquencies over 90 days to the average of Ontario credit unions:

For the twelve months ended December 31, 2018, members deposits were $4.313 billion as compared to $3.679 billion, an increase of approximately $634 million or 17%. The growth in members deposits was primarily a result of an increase in term deposits of various terms along with an increase in deposits from our digital banking platform that has surpassed management expectations.

Interest and Non-Interest Income

For the twelve months ended December 31, 2018, net interest income was $90.6 million as compared to $78.4 million, an increase of approximately $12.2 million or 16%. The growth in net interest income was a result of diligent management of our investment portfolio, continued growth in loans and deposits, and competitive positioning of our interest rates and pre-payment penalties on residential and commercial mortgages. This growth was partially offset by competitive pressure on pricing and a low interest rate environment for the first half of FY2018.

For the twelve months ended December 31, 2018, other income was $25.3 million as compared to $24.6 million, an increase of approximately $700 thousand or 3%.

Operating Expenses

For the twelve months ended December 31, 2018, operating expense was $84.3 million as compared to $84.1 million, an increase of approximately $0.2 million. Management continued to demonstrate fiscal responsibility through the management of expenses. Furthermore, while working to control expenses, Alterna ensured that our employees were compensated competitively and rewarded for their efforts. Salary increases were provided based on market rates and employee performance, and payments were made out of our Board approved bonus pool. These bonus payments are not considered to be core operating expenses as the design of our program only allows payments when Alterna achieves various corporate metrics.

After-Tax Net Income

For the twelve months ended December 31, 2018, after-tax net income was $23.1 million as compared to $13.6 million, an increase of $9.5 million or 70%. The increase compared to prior year was a result of items discussed above.

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

2016 2017 2018

Delinquencies over 90 days (as a percentage of total loans portfolio)

Alterna Other Credit UnionsSource: DICO reports


Page 43

Financial Performance Indicators

The following table presents financial performance indicators for the fiscal years ended December 31, 2018, 2017 and 2016. These figures are on the annual consolidated financial statements as at each fiscal year-end. (Figures provided as Basis Points (“bp”) are calculated on the basis of average assets held during the fiscal period, calculated as a simple average of the opening and closing total asset balance.)

1 Return on Average Assets

Further analysis is presented in the annual financial statements that are attached hereto as Schedule A.

Financial Performance Indicators 2018 2017 2016ProfitabilityTotal assets ($000’s) $5,608,317 $4,695,411 $3,806,578Net income ($000’s) $23,072 $13,637 $16,324Net income (bp)1 45 32 47 Net interest income (bp) 176 184 187 Loan costs (income) (bp) 5 4 3 Other income (bp) 49 58 85 Operating expenses (bp) 164 198 214 Provision for (recovery of) income taxes (bp) 11 9 7 Compliance with Capital RequirementsRisk-Weighted Assets Ratio requirement (% of Risk-Weighted Assets) 8.00% 8.00% 8.00%

Risk-Weighted Assets Ratio (% of Risk-Weighted Assets) 11.96% 12.17% 10.73%Leverage Ratio requirement (% of total assets) 4.00% 4.00% 4.00%Leverage Ratio (% of total assets) 5.53% 6.10% 5.35%Loan CompositionTotal gross loans outstanding ($000’s) $4,929,375 $3,940,956 $3,165,300Personal Loans (% of gross loans outstanding) 5.83% 6.81% 8.38%Mortgage Loans (% of gross loans outstanding) 66.70% 60.51% 51.91%Commercial Loans (% of gross loans outstanding) 27.47% 32.68% 39.71%Loan QualityAllowance for impaired loans (% of gross loans outstanding) 0.09% 0.09% 0.13%Other FactorsTotal members’ deposits ($000’s) $4,312,690 $3,679,389 $3,262,242Average liquidity (% of members’ deposits and borrowings) 15.82% 17.75% 14.19%Asset growth (% change) 19.44% 23.35% 23.95%Total Regulatory Capital ($000’s) $268,806 $252,848 $191,510Regulatory Capital growth (% change) 6.31% 32.03% 17.66%

Year Ended December 31


Page 44

MAILITY FOR FINANCIAL INFORMATION

The financial disclosure in this document, including the annual financial statements attached hereto as Schedule A, is the responsibility of management.

The audited consolidated financial statements have been prepared in conformity with International Financial Reporting Standards. The consolidated financial statements, out of necessity, contain items that reflect the best estimates and judgments of the expected effects of current events and transactions with appropriate consideration to materiality. All other financial disclosure is derived from the financial statements.

In discharging its responsibility for the integrity and fairness of all financial disclosure, management has developed and maintains a system of internal controls designed to provide reasonable assurance that only valid and authorized transactions are processed, assets are safeguarded and proper records are maintained. Internal audit provides management with information to assess the adequacy of these controls.

reporting and is ultimately responsible for reviewing and approving all published financial statements. The Board of Directors carries out this responsibility principally through its Finance and Audit Committee, which is comprised of directors who are not officers or employees of Alterna Savings. The Finance and Audit Committee reviews any published financial statements and recommends them to the Board of Directors for approval. The Finance and Audit Committee conducts such review and inquiry of management and the internal and external auditors as it deems necessary to establish that the entity employs an appropriate system of internal controls over the financial reporting process, auditing matters and financial reporting issues to satisfy itself that management is properly carrying out its responsibilities. The internal and external auditors have full and unrestricted access to the Finance and Audit Committee with and without the presence of management.

(DICO conducts periodic examinations of the business and affairs of Alterna Savings to determine whether the provisions of the Credit Unions and Caisses Populaires Act, 1994 (Ontario) are being complied with, and that Alterna Savings is in sound financial condition. PricewaterhouseCoopers LLP , the external auditors, have examined the consolidated financial statements attached hereto as Schedule A in accordance with Canadian generally accepted auditing standards and their report is shown as part of those statements.

Robert Paterson Bill Boni President & Chief Executive Officer Senior Vice President & Chief Financial Officer Toronto, Ontario Ottawa, Ontario March 29, 2019 March 29, 2019

grisk

Boni

grisk

Paterson


Page 45

APPENDIX 2


Page 47

APPENDIX 4

CERTIFICATE

Form 1 Credit Unions and Caisses Populaires Act, 1994

CERTIFICATE OF DISCLOSURE (Subsection 77 (4) of the Act)

The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Offering Statement as required by Part V of the Credit Unions and Caisses Populaires Act, 1994, and the regulations thereunder.

Dated at Ottawa, Ontario, March 29, 2019

Robert Paterson, President and Chief Executive Officer

Norm Ayoub, Chair of the Board

grisk

Paterson

grisk

Ayoub


Page 48

RELATED FORMS

Sample Member Subscription, Transfer and Redemption Form

Class A Investment Shares, Series 6 GENERAL SUBSCRIPTION, TRANSFER AND REDEMPTION FORM

1. MEMBER 2. PURCHASE Account # RSP TFSA Non-Reg Purchase Amount /__/__/__/__/__/__/__/ /__/ /__/ /__/ ($1 per share) /__/__/__/__/__/__/ Subscriber: /__/__/__/__/__/__/__/__/__/

Joint Subscriber (if applicable, N/A for TFSA/RSP purchase): S.I.N Date of Birth /__/__/__/__/__/__/__/__/__/

Joint Purchaser Account # /__/__/__/__/__/__/__/ S.I.N Date of Birth Address of Purchaser (Ontario only): OFFICE USE ONLY: Request Received Date: Time:

Home Telephone ( ) - Employee Initials:

Work Telephone ( ) -

3. SOURCE OF FUNDS Please indicate the source of funds to be used to purchase the shares. Funds will be transferred into a special interim term deposit (bearing interest at 4.0% per annum) and held to guarantee availability on the closing date. Holds will be released at the earliest of: (a) the date the offering closes and the shares have been purchased; (b) the date the share offering is withdrawn or cancelled by Alterna Savings or (c) the day you exercise your right not to purchase these shares (see the Offering Statement for details on the date this right expires). Account /__/__/__/__/__/__/__/ Sub Funds to be held $

4. TRANSFERS & REDEMPTIONS All redemptions and transfers of shares are subject to the approval of Alterna Savings’ Board of Directors. Transfers are permitted only to other Alterna Savings’ members. Member Initials: ________ / ________ Redemptions are processed on a first-come first-serve basis, with priority to deceased members and estate accounts, within the 60 day period following the end of the 5th fiscal year following the fiscal year in which the shares are issued, and annually thereafter. The redemption amount will be the paid-up amount thereon plus any declared but unpaid non-cumulative dividend. The total number of shares redeemable in one year is subject to restrictions, and will be limited to a maximum of 10% of the total outstanding shares at the beginning of that fiscal year. If Alterna Savings is unable to honour your request, your request will be carried forward and included in the redemptions to be considered in the applicable 60 day period in the next year. Member Initials: ________ / ________ /__/ Please transfer the following shares as indicated: /__/ Please redeem the following shares as indicated: Total shares to be transferred: $ Total shares to be redeemed: $

Transfer price: RSP/TFSA Contract # (if applicable):

RSP/TFSA Contract # (if applicable): Note: Funds withdrawn from RRSP will occasion withholding taxes. Transfer to: Deposit to:

Member Name: Member Name:

OFFICE USE ONLY OFFICE USE ONLY Account /__/__/__/__/__/__/__/ Sub Account /__/__/__/__/__/__/__/ Sub

5. DIVIDEND PAYMENTS All dividends will be paid in cash to an account of your choosing. Please identify the account to which you would like to have your dividend payments transferred to in the space below. Dividend payments will be made on an annual basis after the end of each fiscal year to the owner on record at fiscal year-end. If they have been declared by the Board, as per the Offering Statement. All payments will be treated as interest income by CRA. /__/ Non-Reg (Deposit to Savings/Chequing account) Sub

/__/ TFSA/RSP (Deposit to Registered Savings account) Sub

6. AUTHORIZATION All Statements as applicable. (1) I/We hereby subscribe for ________________ Class A Investment Shares, Series _____, at a price of $1 per share. (2) I/We acknowledge having received and read the Offering Statement dated March 29, 2019 for Alterna Savings and, in particular, the terms and conditions set out on page 21, and also the Risk Factors starting on page 25. Member Initials: ________/________ (3) I/We understand that, if purchased jointly, shares will be registered to us as joint tenants and right of survivorship applies. (4) I/We hereby authorize the hold on funds set out in Section 3. (5) I/We hereby authorize the transfer of the shares as indicated above or request their redemption as indicated above, as applicable. (6) I/We understand that the securities being purchased are NOT eligible for insurance through the Deposit Insurance Corporation of Ontario or any similar agency. Member Initials: ________/________ (7) In the case of a business purchase we have advised you to review and obtain board approval or approval from all partners Member Initials: ________/________ Note: for transfers and redemption requests, the signature of all registered holders is required. Member’s Signature or Signing Officer for Business Employee Name and Branch (please print) Joint Member’s Signature or Secondary Signing Officer for Business

Date

Original - Deposit Operations during subscription period, then Member file, Copy 1 - Branch (EDP), Copy 2 – Member


Page 49

Authorization to Place Funds in Escrow

AUTHORIZATION TO PLACE FUNDS IN ESCROW Name of Member: Date: I have subscribed today to buy a total of ___________________ Class A Investment Shares, Series 6, of Alterna Savings and Credit Union Limited ( “Alterna Savings”). By signing this form below, I hereby authorize Alterna Savings to place the funds specified below, as soon as such funds are made payable to Alterna Savings, into an Escrow account, to be trusteed by Concentra Trust, to guarantee payment for these shares. These funds will be released from Escrow only in one of the following four manners: 1. Upon the applicable Issue Date for the shares (as shown in the Offering Statement dated March 29,

2019), Concentra Trust will release the funds from Escrow to Alterna Savings to pay for the shares on the Issue Date.

2. If the offering is withdrawn or cancelled for any reason, Concentra Trust will immediately release the

non-RRSP funds from Escrow and pay them to me, together with interest calculated at the rate outlined in paragraph 5 below, pro-rated for the number of days such funds were in Escrow.

3. If I exercise my right to reverse my decision to purchase these shares within two days, excluding

weekends and holidays, following receipt of a copy of the offering statement, dated March 29, 2019, for the Class A Investment Shares, Series 6, Concentra Trust will immediately release the non-RRSP funds from Escrow and pay them to me, together with interest calculated at the rate outlined in paragraph 5 below, prorated for the number of days such funds were in Escrow.

4. If all or part of such funds which are used to purchase shares are identified as being part of a Registered

Retirement Savings Plan (RRSP) contract, the RRSP funds will be transferred directly into a trust governed by a RRSP held in Escrow at Alterna Savings under the control of Concentra Trust. If not used to pay for shares under the terms outlined above, the RRSP funds will stay in such trust governed by a RRSP until I have given Concentra Trust direction as to their disposition.

5. Interest will be calculated at a rate of 4.0%, pro-rated for the number of days the funds were in Escrow.

The source(s) of funds and dollar amount(s) to be placed in Escrow under this agreement is (are):

Source $ Source $

(Credit Union Witness) (Credit Union Member/Share Subscriber) (Credit Union Witness) Joint Subscriber(if any)


Page 50

SCHEDULE A

ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018


Page 51

Consolidated Financial Statements of

ALTERNA SAVINGS

December 31, 2018


Page 52

Independent auditor’s report To the Members of Alterna Savings and Credit Union Limited

Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Alterna Savings and Credit Union Limited and its subsidiary (“Alterna Savings”) as at December 31, 2018 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

What we have audited Alterna Savings’ consolidated financial statements comprise:

• the consolidated balance sheet as at December 31, 2018;

• the consolidated statement of income for the year then ended;

• the consolidated statement of comprehensive income for the year then ended;

• the consolidated statement of changes in members’ equity for the year then ended;

• the consolidated statement of cash flows for the year then ended; and

• the notes to the consolidated financial statements, which include a summary of significant accounting policies.

Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

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

Independence We are independent of Alterna Savings in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing Alterna Savings' ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate Alterna Savings or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing Alterna Savings’ financial reporting process.


Page 53

Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Alterna Savings’ internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Alterna Savings’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause Alterna Savings to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within Alterna Savings to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

(to be signed - PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.)

Chartered Professional Accountants, Licensed Public Accountants

Ottawa, Ontario March 8, 2019

ALTERNA SAVINGS Consolidated Balance Sheets (in thousands of dollars) December 31, 2018


Page 54

(See accompanying notes to the consolidated financial statements)

As at Note 31 December 2018 31 December 2017

ASSETS

Cash and cash equivalents 26 160,634$ 295,769$ Investments 6 429,302 373,199 Loans and advances 4, 5 4,924,913 3,937,289 Property and equipment 7 15,834 16,704 Intangible assets 8 11,746 12,967 Derivative financial instruments 22 3,039 12,430 Deferred income tax asset 20 729 551 Other assets 9 62,120 46,502

5,608,317$ 4,695,411$

LIABILITIES AND MEMBERS' EQUITY

Liabilities:Deposits 10 4,312,690$ 3,679,389$ Borrowings 11 252,010 276,548 Mortgage securitization liabilities 12 669,701 397,787 Derivative financial instruments 22 7,092 4,812 Income tax payable 2,418 1,270 Other liabilities 13 41,287 37,772 Membership shares 15 1,919 1,772

5,287,117$ 4,399,350$ Members' equity:

Special shares 15 134,440 133,052 Contributed surplus 34,522 30,297 Retained earnings 156,732 136,925 Accumulated other comprehensive loss (4,494) (4,213)

321,200 296,061 5,608,317$ 4,695,411$

On behalf of the Board:

______________________________ __________________________

Director Director

ALTERNA SAVINGS Consolidated Statements of Income (in thousands of dollars) December 31, 2018


Page 55


For the years ended Note 31 December 2018 31 December 2017

Interest income 16 150,121$ 117,466$ Investment income 17 9,240 7,712

159,361 125,178 Interest expense 16 68,735 46,784 Net interest income 90,626 78,394 Loan costs 2,827 1,603 Net interest income after loan costs 87,799 76,791

Foreign exchange 8,195 3,665 Commissions 7,171 5,358 Service charges 5,605 5,492 Securitization income 18 2,840 7,623 Other 1,528 2,471 Other income 25,339 24,609

Net interest and other income 113,138 101,400

Salaries and benefits 41,434 40,260 Administration 21,251 21,762 Occupancy 9,763 10,026 Data processing 8,703 8,642 Marketing and community relations 3,157 3,374 Operating expenses 84,308 84,064

Income before income taxes 28,830 17,336

Provision for income taxes 20 5,758 3,699 Net income 23,072$ 13,637$

ALTERNA SAVINGS Consolidated Statements of Comprehensive Income (in thousands of dollars) December 31, 2018


Page 56



Net income 23,072$ 13,637$

Other comprehensive income (loss)Other comprehensive income (loss) to be reclassified to income in subsequent periods:

Available-for-sale securities:Net unrealized losses on available-for-sale securities (1) N/A (858)

Investments in debt instruments measured at fair value through other comprehensive income:Net unrealized gains on debt instruments measured at fair value through other comprehensive income (2)

102 N/A

Cash flow hedges:Changes arising during the year (3) (305) (782) Add: Reclassification adjustments for gains included in the income statement (4) (95) (307) Net loss on cash flow hedges (400) (1,089)

Net other comprehensive loss to be reclassified to income in subsequent periods (298) (1,947)

Other comprehensive income (loss) not to be reclassified to income in subsequent periods:

Defined benefit plan - actuarial gains (losses) (5) 17 (13)

Net other comprehensive income (loss) not to be reclassified to income in subsequent periods

17 (13)

Other comprehensive loss (281) (1,960)

Comprehensive income 22,791$ 11,677$

(1) Net of income tax recovery of $232 in 2017.(2) Net of income tax expense of $23 in 2018.(3) Net of income tax recovery of $71 (2017 - recovery of $192).(4) Net of income tax recovery of $23 (2017 - recovery of $74).(5) Net of income tax expense of $nil (2017 - expense of $nil).

ALTERNA SAVINGS Consolidated Statements of Changes in Members’ Equity (in thousands of dollars) December 31, 2018


Page 57



Special shares:Balance, beginning of year 133,052$ 58,899$ Net shares issued 1,388 74,153 Balance, end of year 134,440 133,052

Contributed surplus:Balance, beginning of year 30,297 30,297 Arising on business combination 24 4,225 - Balance, end of year 34,522 30,297

Retained earnings:Balance, beginning of year 136,925 126,270 Impact of adopting IFRS 9 at January 1, 2018 3 918 N/ABalance, beginning of year, as restated 137,843 126,270 Net income 23,072 13,637 Dividend on special shares (4,183) (2,982) Balance, end of year 156,732 136,925

Accumulated other comprehensive loss, net of tax:Balance, beginning of year (4,213) (2,253) Other comprehensive loss (281) (1,960) Balance, end of year (4,494) (4,213)

Members' equity 321,200$ 296,061$

ALTERNA SAVINGS Consolidated Statements of Cash Flows (in thousands of dollars) December 31, 2018


Page 58


For the years ended 31 December 2018 31 December 2017

Operating activities:Net income 23,072$ 13,637$ Proceeds from the securitization of mortgages 612,340 167,874 Payment of mortgage securitization liabilities (342,011) (68,820) Add (deduct) non-cash items:

Provision for credit losses 2,417 1,097 Depreciation and amortization of

Property and equipment 2,980 3,509 Intangible assets 2,157 1,621 Deferred charges 3,013 5,308

Loss (gain) onDisposal of property and equipment 158 325 Disposal of intangible assets 1 - Disposal of asset held for sale - 174 Sale of investments (10) (239) Gain on sale and securitization of loans 441 (6,401)

Decrease (increase) in assetsFair value of investments 187 (1,090) Fair value of loans held for securitization (5,555) 2,458 Interest receivable (3,191) (2,475) Deferred income taxes 102 784 Loans (984,595) (785,271) Assets relating to derivative financial instruments 8,902 (3,167)

Increase (decrease) in liabilitiesInterest payable 5,442 567 Deposits 633,301 417,147 Liabilities relating to derivative financial instruments 2,280 (159)

Non-cash net assets acquired through business combinations 443 - Other items, net (17,239) 601

Cash used in operating activities (55,365)$ (252,520)$

Investing activities:Proceeds from maturity and sale of investments 207,118 199,064 Purchase of investments (260,061) (186,736) Acquisition of property and equipment (2,268) (2,107) Acquisition of intangible assets (937) (745) Cash acquired through business combinations 3,782 -

Cash (used in) provided by investing activities (52,366)$ 9,476$

Financing activities:Net increase (decrease) in

Membership shares 147 (9) Special shares 1,388 74,153 Borrowings (24,538) 276,548 Capital lease obligations (218) (727)

Dividend on special shares (4,183) (2,982) Cash (used in) provided by financing activities (27,404)$ 346,983$

Net (decrease) increase in cash and cash equivalents during the year (135,135) 103,939 Cash and cash equivalents, beginning of year 295,769 191,830 Cash and cash equivalents, end of year 160,634$ 295,769$

Supplemental information:Interest paid 63,293$ 46,217$ Interest received 153,312$ 114,991$ Dividend received 557$ 566$ Income taxes paid 3,652$ 2,217$ Property and equipment acquired through capital leases -$ 18$

ALTERNA SAVINGS Notes to the Consolidated Financial Statements Year ended December 31


Page 59

1. CORPORATE INFORMATION Alterna Savings is a credit union incorporated and domiciled in Ontario, Canada under The Credit Unions and Caisses Populaires Act (Ontario) (the “Act”) as Alterna Savings and Credit Union Limited and is a member of Central 1 Credit Union (“Central 1”). Qualifying member deposits are insured by the Deposit Insurance Corporation of Ontario (“DICO”). The registered office address of Alterna Savings is 319 McRae Avenue, Ottawa, Ontario, K1Z 0B9. The nature of Alterna Savings’ operations and principal activities are the provision of deposit taking facilities and loan facilities to the members of the credit union in Ontario and Quebec. The consolidated financial statements for the year ended December 31, 2018 were authorized for issue in accordance with a resolution of the Board of Directors on March 8, 2019. The Board of Directors has the power to amend the consolidated financial statements after issuance only in the case of a discovery of an error. 2. SIGNIFICANT ACCOUNTING POLICIES STATEMENT OF COMPLIANCE The consolidated financial statements of Alterna Savings have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Alterna Savings presents its consolidated balance sheets broadly in order of liquidity. Financial assets and liabilities are offset, with the net amount reported in the consolidated balance sheets, only if there is a currently enforceable legal right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously. In all other situations, they are presented gross. BASIS OF PREPARATION The consolidated financial statements have been prepared on a historical cost basis, except for available-for-sale or fair value through other comprehensive income investments, derivative financial instruments and financial assets and financial liabilities held at fair value through profit or loss, which have been measured at fair value. The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, revenues and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from management’s estimates. The significant accounting policies are as follows: A) CHANGES IN ACCOUNTING POLICIES i) IFRS 9, Financial Instruments (“IFRS 9”)

Alterna Savings has adopted IFRS 9 with a date of transition of January 1, 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognized in the consolidated financial statements under IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). Alterna Savings did not early adopt any of IFRS 9 in previous periods. As permitted by the transitional provisions of IFRS 9, Alterna Savings elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and financial liabilities at the date of transition were recognized in the opening retained earnings of the current period. Alterna Savings has also elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9.

ALTERNA SAVINGS Notes to the Consolidated Financial Statements December 31, 2018


Page 60

Consequently, for note disclosure, the amendments to IFRS 7, Financial Instruments: Disclosures (“IFRS 7”) disclosures have also only been applied to the current period. The comparative period note disclosures repeat those disclosures made in the prior year. The adoption of IFRS 9 has resulted in changes in Alterna Savings’ accounting policies for recognition, classification and measurement of financial assets and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7. Set out below in note 3 are disclosures relating to the impact of the adoption of IFRS 9. Further details of the specific IFRS 9 accounting policies applied in the current period (as well as the previous IAS 39 accounting policies applied in the comparative period) are described in more detail in sections (f) through (h) and (r) below. ii) IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

Alterna Savings has adopted IFRS 15 with a date of transition of January 1, 2018. IFRS 15 supersedes previous revenue recognition guidance, which was found across several standards and interpretations. IFRS 15 establishes principles for reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard provides a single, principles based five-step model for revenue recognition to be applied to contracts with customers except for revenue arising from items such as financial instruments, insurance contracts and leases. This adoption resulted in no changes to Alterna Savings’ consolidated financial statements or notes to the consolidated financial statements. b) BASIS OF CONSOLIDATION The consolidated financial statements incorporate on a fully consolidated basis the financial statements of Alterna Savings (the parent entity) and its wholly owned subsidiary CS Alterna Bank (“Alterna Bank”). The consolidated financial statements include the accounts and financial performance of Alterna Bank. All significant intercompany balances and transactions have been eliminated on consolidation. c) BUSINESS COMBINATIONS AND GOODWILL Business combinations are accounted for using the acquisition method of accounting. For every business combination, an acquirer is identified, which is the entity that obtains control of the other entity. The effective date of the business combination is the date the acquirer gains control of the acquired entity. The identifiable assets (including previously unrecognized intangible assets) and identifiable liabilities (including contingent liabilities but excluding future restructuring costs) of the acquired entity are measured at fair value. The excess of the consideration transferred over the fair values of the identifiable net assets is recognized as goodwill; any shortfall is recognized as contributed surplus. Acquisition-related costs are expensed as incurred and are included in operating expenses. d) 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. e) DETERMINATION OF FAIR VALUE The fair value for financial instruments traded in active markets at the consolidated balance sheet dates is based on their quoted market price without any deduction for transaction costs. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar



Page 61

instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models. Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model using the best estimate of the most appropriate model assumptions. f) FINANCIAL INSTRUMENTS i) Initial recognition and measurement Financial instruments are recognized when Alterna Savings becomes party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognized on the date when Alterna Savings commits to purchase or sell the asset. At initial recognition, financial instruments are measured at fair value plus or minus transaction costs that are incremental and directly attributable to the acquisition or issue of the financial instrument, such as fees and commissions (for financial instruments not at fair value through profit or loss). For financial instruments carried at fair value through profit or loss, transaction costs are expensed in income. Amortized cost and effective interest rate The amortized cost is the amount at which the financial instrument is measured at initial recognition minus principal repayment, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument to the gross carrying amount (which is amortized cost before any loss allowance) of the financial asset or to the amortized cost of the financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees paid or received that are integral to the effective interest rate such as origination fees. When Alterna Savings revises the estimates of future cash flows, the carrying amount of the financial instrument is adjusted to reflect the new estimate discounted using the original effective interest rate. Changes are recognized in income. Trade date accounting is used for all financial instruments. ii) Classification

Financial assets Policy applicable from January 1, 2018 From January 1, 2018, Alterna Savings has applied IFRS 9 and classifies its financial assets in the following measurement categories:

• Fair value through profit or loss (“FVTPL”); • Fair value through other comprehensive income (“FVOCI”); or • Amortized cost

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at FVTPL:

• The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and



Page 62

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.

A debt instrument security is measured at FVOCI only if it meets both of the following conditions and is not designated at FVTPL:

• The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

• The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amounts outstanding.

On initial recognition of an equity instrument security that is not held for trading, Alterna Savings may irrevocably elect to present subsequent changes in FVOCI. This election is made on an investment-by-investment basis. When this election is used, fair value gains and losses are recognized in other comprehensive income (loss) (“OCI”) and are not subsequently reclassified to profit or loss, including on disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognized in profit or loss as other income when Alterna Savings’ right to receive payments is established. See note 3 (a) for details on which investments Alterna Savings has taken the election on. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, Alterna Savings may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. The classification requirements for debt and equity instrument securities are described below: Business model: the business model reflects how Alterna Savings manages the assets in order to generate cash flows. That is, whether the objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows from the sale of assets. If neither of these is applicable, then they are classified at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management, and how risks are assessed and managed. SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, Alterna Savings assesses whether the financial asset’s cash flows represent solely payment of principal and interest (the ‘SPPI’ test). In making this assessment, Alterna Savings considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified as FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI. Financial assets are not reclassified subsequent to their initial recognition, except in the period after Alterna Savings changed its business model for managing financial assets. Policy applicable before January 1, 2018 Alterna Savings classified its financial assets into one of the following categories: (i) Fair value through profit or loss Financial assets designated as FVTPL are financial assets held for trading activities and are measured at fair value at the consolidated balance sheet dates. Gains and losses realized on disposition and unrealized gains and losses from market fluctuations are both included in investment income. (ii) Available-for-sale Available-for-sale (“AFS”) financial assets are those non-derivative financial assets that are designated as AFS, or that are not classified as loans and receivables, held-to-maturity (“HTM”) or FVTPL. Financial assets classified as



Page 63

AFS are carried at fair value with the changes in fair value reported in accumulated other comprehensive income (“AOCI”), until sale or impairment occurs at which time the cumulative gain or loss is transferred to the consolidated statements of income. For financial assets classified as AFS, changes in carrying amounts relating to changes in foreign exchange rate are recognized in the consolidated statements of income and other changes in carrying amount are recognized in AOCI as indicated above. Equities that do not have quoted market values in an active market and whose fair value cannot be reliably measured are carried at cost less impairment. Realized gains and losses on sale as well as interest and dividend income from these securities are included in investment income. (iii) Held-to-maturity Financial assets classified as HTM 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. The amortization is included in investment income in the consolidated statements of income. The losses arising from impairment of such investments are recognized in the consolidated statements of income as impairment losses. (iv) Loans and receivables Financial assets classified as loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market except those that are classified as AFS or designated as FVTPL. Refer to note 4 for details of loans designated as FVTPL. Loans and receivables are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest rate method less any impairment losses. Financial Liabilities In both the current and prior period, financial liabilities are classified and subsequently measured at amortized cost, except for derivative liabilities which are classified at FVTPL, where gains and losses realized on disposition and unrealized gains and losses from market fluctuations are both included in net gains on derivative financial instruments. g) IMPAIRMENT OF FINANCIAL ASSETS Policy applicable from January 1, 2018 Alterna Savings recognizes loss allowances for expected credit losses (“ECL”) on the following financial instruments that are not measured at FVTPL:

• Loans and investments at amortized cost; • Financial assets that are debt instrument securities; and • Loan commitments and guarantees.

No loss allowance is recognized on equity instrument securities. Alterna Savings measures loss allowances at an amount equal to the lifetime ECL except for the following, for which they are measured as 12-month ECL:

• Debt instrument securities that are determined to have low credit risk at the reporting date; or • Financial assets at amortized cost on which credit risk has not increased significantly since their initial

recognition.

All debt instrument securities and investments at amortized cost were measured with 12-month ECL as they were determined to have a low credit risk as at the reporting date. The credit risk on debt instrument securities and investments at amortized cost are considered low if there is:

• A low risk of default; • The borrower has a strong capacity to meet contractual cash flow obligations; and



Page 64

• Adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the counterparty to fulfil its contractual cash flow obligations.

Alterna also considers debt instrument securities to have a low credit risk when its creditworthiness is judged to be ‘investment grade’, which Alterna broadly defines as equivalent to a credit rating of A or higher. The 12-month ECL are the portion of ECL that result from default events on a financial instrument that are expected within the 12 months after the reporting date. No loss allowance has been recognized on Alterna’s investments at amortized cost as the contractual cash flow obligations are guaranteed from a Crown Corporation of the Government of Canada which makes the risk of default highly remote. i) Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows:

• Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e., the difference between the cash flows due to the entity in accordance with the contract and the cash flows that Alterna Savings expects to receive);

• Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and

• Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to Alterna Savings if the commitment is drawn down and the cash flows that Alterna Savings expects to receive.

See further discussion in note 5. ii) Credit-impaired financial assets At each reporting date, Alterna Savings assesses whether financial assets carried at amortized cost and debt instrument securities carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data:

• Significant financial difficulty of the borrower or issuer; • A breach of contract such as a default or past due event; • The restructuring of a loan or advance by Alterna Savings on terms that Alterna Savings would not consider

otherwise; or • It is becoming probable that the borrower will enter bankruptcy or other financial reorganization.

A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired. Bad debt written off - When it is considered that there is no realistic prospect of recovery, all efforts have ceased to collect amounts, and all collateral has been realized or transferred to Alterna Savings, the loan and any associated allowance is written off. Subsequent recoveries, if any, are credited to the allowance and recorded in the consolidated statements of income as a component of the loss allowance.



Page 65

Policy applicable before and after January 1, 2018 i) Loans and loan impairment Reversal of impairment losses – If in a subsequent period the amount of a previously recognized impairment loss decreases, the impairment loss is reversed by reducing the allowance account accordingly. Such reversal is recognized in the consolidated statements of income. Loan interest on impaired loans – Once a loan is identified as impaired and the carrying amount is reduced by an impairment loss, interest income is recognized on the new carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Transaction costs – Transaction costs are revenues or expenses that are direct and incremental to the establishment of the loan. Transaction costs (e.g., commercial lending application fees, mortgage brokerage and incentive fees, legal fees, appraisal fees, etc.) are deferred and amortized to interest income over the term of the loan using the effective interest rate method. The net unamortized fees are included in the related loan balance. Loan costs – Loan costs include the loss allowance, bad debt written off and collection costs. Restructured loans - If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognized. Under IAS 39, the loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. Under IFRS 9, the ECL are measured as follows:

• If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset; or

• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

Policy applicable before January 1, 2018 At each consolidated balance sheet date, Alterna Savings assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is impaired and a loss allowance is incurred if there is:

• objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and up to the consolidated balance sheet date (“a loss event”);

• the loss event had an impact on the estimated future cash flows of the financial asset or group of financial assets; and

• a reliable estimate of the amount can be made. A loss event may include indications that the borrower or a group of borrowers is experiencing significant difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. i) Loans and loan impairment Personal loans, residential mortgage loans and commercial loans are recorded at amortized cost less an allowance for impaired loans.



Page 66

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 individual and collective provisions, reviewed on a regular basis by management. The allowance is increased by provisions for impaired loans, which are charged to income and reduced by write-offs, net of recoveries. Alterna Savings first assesses whether objective evidence of impairment exists individually for loans that are individually significant. It then assesses collectively for loans that are not individually significant and loans that are significant but for which there is no objective evidence of impairment under the individual assessment. Bad debt written off - When it is considered that there is no realistic prospect of recovery and all collateral has been realized or transferred to Alterna Savings, the loan and any associated allowance is written off. Subsequent recoveries, if any, are credited to the allowance and recorded in the consolidated statements of income as a component of the loss allowance. Individual allowance – To allow management to determine whether a loss event has occurred on an individual basis, all significant counterparty relationships are reviewed periodically. This evaluation considers current information and events related to the counterparty, such as the counterparty experiencing significant financial difficulty or a breach of contract, for example, default or delinquency in interest or principal payments. If there is evidence of impairment leading to an impairment loss for an individual counterparty relationship, then the amount of the loss is determined as the difference between the carrying amount of the loan, including accrued interest, and the present value of expected future cash flows discounted at the loan’s original effective interest rate, including cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The carrying amount of the loan is reduced by the use of an allowance account and the amount of the loss is recognized in the consolidated statements of income as a component of loan costs. Collective allowance – The collective assessment of impairment is principally to establish an allowance amount relating to loans that are either individually significant but for which there is no objective evidence of impairment, or are not individually significant, but for which there is, on a portfolio basis, a loss amount that is probable of having occurred and is reasonably estimable. The loans are grouped according to similar credit risk characteristics and the allowance for each group is determined using statistical models based on historical experience. Loans that were found not to be impaired when evaluated on an individual basis are included in the scope of this component of the allowance. ii) Impairment of financial assets classified as available-for-sale For financial assets classified as AFS, Alterna Savings assesses at each consolidated balance sheet date whether there is objective evidence that an asset or group of assets is impaired. In the case of equity instrument securities classified as AFS, objective evidence would include either a significant or a prolonged decline in the fair value of the investment below cost. ‘Significant’ is evaluated against the original cost of the investment and ‘prolonged’ against the period in which the fair value has been below its original cost. In the case of debt instrument securities classified as AFS, impairment is assessed based on the same criteria as for loans. Where there is evidence of impairment, the cumulative unrealized loss previously recognized in OCI is removed from OCI and recognized in the consolidated statements of income for the period. This amount is determined as the difference between the acquisition cost (net of any principal repayments and amortization) and current fair value of the asset less any impairment loss on that investment previously recognized in the consolidated statements of income. Impairment losses on equity instrument securities classified as AFS are not reversed through the consolidated statements of income; increases in their fair value after impairment are recognized in OCI. Reversals of impairment of debt instrument securities are recognized in the consolidated statements of income if the recovery is objectively related to a specific event occurring after the impairment loss was recognized in the consolidated statements of income.



Page 67

h) MODIFICATIONS i) Financial assets Policy applicable from January 1, 2018 If the terms of a financial asset are modified, Alterna Savings evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different (at least 10%), then the contractual rights to the cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized and a new financial asset is recognized at fair value. If the cash flows of the modified asset carried at amortized cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, Alterna Savings recalculates the gross carrying amount of the financial asset and recognizes the amount arising from adjusting the gross carrying amount as a modification gain or loss in income. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with the loss allowance. In other cases, it is presented as interest income. ii) Financial liabilities Policy applicable from January 1, 2018 Alterna Savings derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognized at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognized in income. i) DERECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES IFRS 9 does not change the derecognition assessment principles of IAS 39. i) Financial assets A financial asset (or, where applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized when:

• The rights to receive cash flows from the asset have expired; or • Alterna Savings 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; and either:

o Alterna Savings has transferred substantially all the risks and rewards of the asset, or o Alterna Savings has neither transferred nor retained substantially all the risks and rewards of the

asset, but has transferred control of the asset. When Alterna Savings has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement but has neither transferred substantially all the risks and rewards of the asset nor control of the asset, the asset is recognized to the extent of Alterna Savings’ continuing involvement in the asset. In that case, Alterna Savings also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that Alterna Savings has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that Alterna Savings could be required to repay. ii) Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statements of income.



Page 68

iii) Mortgage sales Alterna Savings may from time to time sell a portion of its securitized residential and commercial mortgage loan portfolio to diversify its funding sources and enhance its liquidity position. These transactions are accounted for in accordance with IAS 39 before January 1, 2018 and IFRS 9 as of January 1, 2018 and as such the related loans are derecognized from the balance sheets if the transaction meets the derecognition criteria through the transfer of certain risk and rewards to external parties. Gains or losses on these transactions are reported in other income on the consolidated statements of income. On certain transactions Alterna Savings retains substantially all the risks and rewards of the transferred loans. As a result, these loans remain on the consolidated balance sheets and the proceeds received are recognized as a liability in the consolidated balance sheets. j) DERIVATIVES AND HEDGING Alterna Savings has elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9 as permitted by IFRS 9. The new hedge accounting disclosures required by the related amendments to IFRS 7, however are required for the annual period beginning January 1, 2018. Alterna Savings has not provided comparative information for 2017 of IFRS 9 for the new disclosures as permitted by IFRS 7. 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 sheets. Gains and losses arising from changes in the fair value of a derivative are recognized as they arise in the consolidated statements of income unless the derivative is the hedging instrument in a qualifying hedge (see “hedge accounting” below). i) Embedded derivatives Embedded derivatives are separated from non-financial assets. 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 derivative financial instruments and measured at fair value with changes therein recognized in the consolidated statements of income. The only embedded derivatives are the options embedded in Alterna Savings’ indexed term deposits offered to members (note 22(b)) with respect to which the host deposits are carried at amortized cost. ii) Hedge accounting Alterna Savings uses derivative financial instruments such as swaps in its management of interest rate exposure and foreign currency forward agreements to manage its foreign exchange risk. Derivative financial instruments are not used for trading or speculative purposes but rather as economic hedges, some of which qualify for hedge accounting. Alterna Savings applies hedge accounting for derivative financial instruments that meet the criteria specified in IAS 39. When hedge accounting is not applied, the change in the fair value of the derivative financial instrument is recognized in income. This includes instruments used for economic hedging purposes that do not meet the requirements for hedge accounting. Where hedge accounting can be applied, a hedge relationship is 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. iii) Cash flow hedges Alterna Savings designates cash flow hedges as part of risk management strategies that use derivatives to mitigate its exposure to the changes in cash flows of variable rate instruments. The effective portion of the change in fair value of



Page 69

the derivative instrument is offset through OCI as discussed below until the cash flows being hedged are recognized in income in future accounting periods, at which time the amount that was recognized in OCI is reclassified into income. The ineffective portion of the change in fair value of the hedging derivative is recognized separately in unrealized gains/(losses) on financial instruments immediately as it arises. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated and any remaining amount in OCI is recognized in income over the remaining term of the hedged item. In the event that the hedged transaction is no longer likely of occurring, the OCI balance is then recognized in the consolidated statements of income. iv) Fair value hedges Alterna Savings designates fair value hedges as part of risk management strategies that use derivatives to mitigate its exposure to the changes in a fixed interest rate instrument’s fair value caused by changes in interest rates. In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and recognized in income. Changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognized in income. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated and the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items are recognized to income over the remaining term of the hedged item. k) FOREIGN CURRENCY The consolidated financial statements are presented in Canadian dollars, which is Alterna Savings’ functional and reporting currency. Monetary assets and liabilities denominated in a foreign currency are translated into Canadian dollars at the rate of exchange prevailing at the consolidated balance sheet dates; income and expenses are translated at the annual average rate. Foreign currency exchange gains and losses are recognized in other income during the year. l) PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. The land is not depreciated. Depreciation is generally recognized using the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives of the assets is as follows: Buildings 10 to 35 years Furniture and equipment 5 to 10 years Computer hardware 3 to 7 years Leasehold improvements Term of the lease Depreciation of property and equipment is included in administration and occupancy expenses. Maintenance and repairs are also charged to administration and occupancy expenses. Gains and losses on disposals are included in other income. Property and equipment are tested for impairment at least annually and an impairment charge is recorded to the extent the recoverable amount, which is the higher of fair value less costs to sell and value in use, is less than its carrying amount. Value in use is the present value of the future cash flows expected to be derived from the asset. After the recognition of impairment of an asset, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If impairment is later reversed, the depreciation charge is adjusted prospectively. Property and equipment are derecognized on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in other income in the consolidated statements of income in the year the asset is derecognized.



Page 70

m) INTANGIBLE ASSETS Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with a finite life are amortized on a straight-line basis over the estimated useful lives of the assets. Alterna Savings’ computer software has been identified as having a finite life and is amortized over 2 to 15 years. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Goodwill arising from business combinations has been identified as having an infinite life. Investment tax credits related to the acquisition of computer software 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. n) EMPLOYEE BENEFIT PLANS Alterna Savings maintains three pension plans for current employees and retirees, and two post-retirement benefits programs. The pension plans consist of a Defined Benefit Plan (“DB”), a Supplementary Retirement Income Plan (“SRIP”), and a Defined Contribution Plan (“DC”). Full actuarial valuations of Alterna Savings’ DB, SRIP and the post-retirement benefits programs are carried out not less than every three years. These valuations are updated at each reporting date of December 31, by qualified independent actuaries. i) Defined Benefit Pension Plan For the DB pension plan, the SRIP and the post-retirement benefits programs, plan assets are valued at fair values. Benefit costs and accrued benefits are determined based upon actuarial valuations using the projected benefit method prorated on service and management’s best estimates. The interest income on plan assets is based on the fair value of plan assets. The recognition of actuarial gains and losses is applied through immediate recognition in equity (i.e., OCI), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. ii) Defined Contribution Pension Plan For the DC pension plan, annual pension expense is equal to Alterna Savings’ contribution to the plan. The assets of Alterna Savings’ DC pension plan are held in independently administered funds. o) INCOME TAXES i) Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are substantively enacted by the consolidated balance sheet dates. ii) Deferred income tax Deferred income tax is provided on temporary differences at the consolidated balance sheet dates between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences, except:



Page 71

• Where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable income; and

• In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except:

• Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable income; and

• In respect of deductible temporary differences associated with investments in subsidiaries, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at each consolidated balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each consolidated balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the consolidated balance sheet dates. Current tax and deferred income tax relating to items recognized directly in equity are also recognized in equity and not in the consolidated statements of income except for the tax effects of dividends that are recorded in the consolidated statements of income. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. p) LEASING The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Leases that do not transfer to Alterna Savings substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. Contingent rental payables are recognized as an expense in the period in which they are incurred. Assets held under finance leases are initially recognized on the consolidated balance sheets at an amount equal to the fair value of the leased assets or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheets as a finance lease obligation. The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease.



Page 72

Operating lease costs are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls the physical use of the property. q) RECOGNITION OF INCOME AND EXPENSES Revenue is recognized when the amount of revenue and associated costs can be reliably measured and it is probable that economic benefits associated with the transaction will be realized. The following specific recognition criteria are used for recognition of income and expenses: i) Interest income and interest expense Interest income and interest expense are recognized in the consolidated statements of income for all interest-bearing financial instruments, except for those designated as FVTPL, using the effective interest rate method. The estimated future cash flows used in this calculation include those determined by the contractual terms of the asset or liability, all fees that are considered to be integral to the effective interest rate, direct and incremental transaction costs, and all other premiums or discounts. Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets except for those that have become credit-impaired or that were purchased credit-impaired, for which interest revenue is calculated by applying the effective interest rate to their amortized cost. ii) Other income Service charges, ABM network fees, commissions and revenue from other sources are recognized as revenue when the related services are performed or are provided. r) SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES In the process of applying accounting policies, management has exercised judgment and estimates in determining the amounts recognized in the consolidated financial statements. The most significant uses of judgment and estimates are as follows: i) Fair value of financial instruments Alterna Savings measures financial instruments such as cash and cash equivalents, investments classified as AFS before January 1, 2018, FVOCI after January 1, 2018, or designated as FVTPL and derivatives at fair value at each consolidated balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The fair value of the asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability and assuming they act in their economic best interest. A fair value measurement of a non-financial asset (e.g., property and equipment) takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Alterna Savings uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:



Page 73

Level 1 — Quoted market prices in active markets for identical assets or liabilities. Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, Alterna Savings determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, Alterna Savings relies upon independent valuations provided by a third party. The valuations use a discounted cash flow model that values the underlying assets based on asset spreads and expected timing of payments on the restructured notes. At the end of each reporting period, Alterna Savings reviews the assumptions and estimates used in the valuations for reasonability. For the purposes of fair value disclosure, Alterna Savings has determined the classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. ii) Impairment losses on loans and advances before January 1, 2018 Alterna Savings reviews its individually significant loans and advances at each consolidated balance sheet date to assess whether an impairment loss should be recorded in the consolidated statements of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, Alterna Savings makes judgments about the borrower’s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether a provision should be made due to incurred loss events for which there is objective evidence but of which effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilization, loan to collateral ratios, etc.), concentrations of risks and economic data (including levels of unemployment, real estate prices indices and the performance of different individual groups). The impairment loss on loans and advances is disclosed in more detail in note 5. iii) Impairment of available-for-sale investments before January 1, 2018 Alterna Savings reviews its securities designated as AFS investments at each consolidated balance sheet date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances. Alterna Savings also records impairment charges on AFS equity instrument securities when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is significant or prolonged requires judgment. In making this judgment, Alterna Savings evaluates, among other factors, historical share price movements and duration and the extent to which the fair value of an investment is less than its cost. iv) Measurement of the ECL applicable as of January 1, 2018 Under IFRS 9, the measurement of the ECL provision for financial assets measured at amortized cost and debt instrument securities measured at FVOCI requires the use of complex models and significant assumptions about future economic condition and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).



Page 74

A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:

• Determining criteria for significant increase in credit risk; • Choosing appropriate models and assumptions for the measurement of ECL; and • Establishing the number and relative weightings of forward-looking scenarios for each type of product/market

and the associated ECL.

Explanations of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in note 5 which also sets out key sensitivities of the ECL to changes in these elements. v) Deferred income tax assets Deferred income tax assets are recognized in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. s) NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED A number of new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2018, and have not been applied in preparing these consolidated financial statements. Alterna Savings does not intend to adopt any of these standards early. The standards below are expected to have an impact on the consolidated financial statements of Alterna Savings: IFRS 16, Leases (“IFRS 16”) (replacement of IAS 17) IFRS 16 was issued in 2016 and sets out the principles for recognition, measurement, presentation and disclosure of leases for both parties to a contract. The new standard replaces the previous lease standard, IAS 17, Leases. Changes are primarily to lessee accounting. The new standard calls for all leases with a duration of more than 12 months to be reflected on-balance sheet. A financial liability will be recognized for the lease obligation. A corresponding non-financial asset will be recognized for the right-of-use asset. The obligation covers the full lease term which includes the non-concealable lease period plus any optional renewal periods where there is significant economic incentive for the lessee to exercise. For lessees, all lease liabilities will be recorded at the present value of the minimum lease payments and lease payments will be split between interest expense and principal reductions. The right-of-use asset will be amortized straight-line over the shorter of the useful life of the asset or the term of the lease. In effect, this will result in higher expense in the early years of the lease as interest expense will decrease over time. Alterna Savings has a significant number of operating leases, comprised mostly of property leases, which are accounted for off-balance sheet. The lease payments are reflected in income as incurred. The new standard is effective for annual periods beginning on or after January 1, 2019. The impact of the revised standard on Alterna Savings’ financial position and performance is currently being assessed. IAS 12, Amendment for the treatment of the income tax consequences of payments on financial instruments classified as equity The amendment clarified that the income tax consequences of dividends on financial instruments classified as equity should be recognized according to where the past transactions or events that generated distributable profits were recognized. These requirements apply to all income tax consequences of dividends.

These amendments should be applied for annual periods beginning on or after January 1, 2019 to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period. Earlier application is permitted. The impact of the amendment on Alterna Savings’ financial position and performance is currently being assessed.



Page 75

3. ADOPTION OF IFRS 9 a) Classification and measurement of financial instruments

The measurement category and the carrying amount of financial assets in accordance with IAS 39 at December 31, 2018 and IFRS 9 at January 1, 2018 are compared as follows. All reclassifications are from retired categories with no change in measurement as noted below:

• Those previously classified as AFS are now classified as measured at FVOCI; and • Those previously classified as HTM or loans and receivables are now classified at amortized cost.

There have been no changes to the classification of financial liabilities.

b) Reconciliation of financial instruments from IAS 39 to IFRS 9

The following table reconciles the prior period’s closing loss allowance measured in accordance with the IAS 39 incurred loss model to the new loss allowance measured in accordance with the IFRS 9 expected loss model at January 1, 2018.

(000s) Measurement CategoryCarrying amount

1 Jan 2018 Measurement CategoryCarrying amount

31 Dec 2017Financial assetsCash and cash equivalents Amortized cost 295,769$ Loans and receivables 295,769$ Investments- Other investments FVTPL (Mandatory) 156 FVTPL 156 - Central 1 liquidity deposits FVOCI (Debt) 198,373 Available-for-sale 198,373 - Money market instruments FVOCI (Debt) 86,645 Available-for-sale 86,645 - Central 1 shares FVOCI (Equity) 22,739 Available-for-sale 22,739 - Other investments FVOCI (Equity) 491 Available-for-sale 491 - National Housing Act mortgage-backed securities Amortized cost 41,858 Held to maturity 41,858 - Securities purchased under reverse repurchase agreements Amortized cost 22,937 Held to maturity 22,937 Derivative financial instruments FVTPL (Mandatory) 12,430 FVTPL 12,430 Loans- Personal loans Amortized cost 268,375 Loans and receivables 268,375 - Residential mortgage loans at amortized cost Amortized cost 2,015,231 Loans and receivables 2,015,231 - Residential mortgage loans at fair value FVTPL (Mandatory) 369,569 FVTPL 369,569 - Commercial loans at amortized cost Amortized cost 1,239,818 Loans and receivables 1,239,818 - Commercial loans at fair value FVTPL (Mandatory) 47,963 FVTPL 47,963

4,622,354$ 4,622,354$

IAS 39IFRS 9

(000s) Personal LoansResidential

Mortgage Loans Commercial Loans Total

Loans and advancesClosing loss allowance, IAS 39, 31 Dec 2017 1,428$ 134$ 2,105$ 3,667$ Remeasurement under IFRS 9 (330) 111 (699) (918) Opening loss allowance, IFRS 9, 1 Jan 2018 1,098$ 245$ 1,406$ 2,749$



Page 76

4. LOANS AND ADVANCES

(000s) 31 Dec 2018 31 Dec 2017 Loans and advances at amortized cost: Personal loans $287,550 $268,375 Residential mortgage loans 2,318,459 2,015,231 Commercial loans 1,248,895 1,239,818 $3,854,904 $3,523,424 Less: Loss allowance (note 5) (4,462) (3,667) Total loans and advances at amortized cost $3,850,442 $3,519,757 Loans and advances at FVTPL: Residential mortgage loans $969,275 $369,569 Commercial loans 105,196 47,963 Total loans and advances at FVTPL $1,074,471 $417,532 $4,924,913 $3,937,289

5. 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 on the consolidated balance sheets. 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/Derivative Policy for investments and derivatives. These policies are reviewed and approved annually by the Board of Directors (the “Board”). 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: $100,000 in unsecured personal loans

per borrower, $2,500,000 in residential mortgage loans per borrower, $20,000,000 in commercial mortgage 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 principal repayment obligations and by changing these lending limits where appropriate. Alterna Savings holds collateral against loans and advances to members in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of



Page 77

collateral assessed at the time of borrowing, and generally are not updated except when a loan is either renewed or individually assessed as impaired. Alterna Savings liquidates the collateral asset to recover all or part of the outstanding exposure in cases where the borrower is unable or unwilling to fulfill its primary obligations. Credit risk is limited for mortgages secured by residential properties as 49% (2017 – 39%) of the residential mortgages are fully insured by mortgage insurance companies. 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 consolidated financial statements, net of the loss allowance, represents Alterna Savings’ maximum exposure to credit risk without taking account of the value of any collateral obtained. Alterna Savings mitigates counterparty credit risk of investments and derivatives by aggregating counterparty exposure for each issuer and adhering to the quality guidelines as noted in its Investment/Derivative policy. Investments other than those issued by the Government of Canada and its Crown Corporations as well as liquidity reserve investments and shares held as a condition of membership with Central 1 are diversified by limiting investments in any one issuer to a maximum of 25% of the total portfolio or an authorized limit. For investments and derivatives, risk is measured by reviewing exposure to individual counterparties to ensure total fair value of investments and derivatives are within the policy limit. 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. Alterna Savings does not have any significant credit risk exposure to any single counterparty or any group of counterparties by establishing prudent limits. Policy applicable from January 1, 2018 (i) Amounts arising from ECL Measurement of ECL IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarized below:

• A financial instrument that is not credit-impaired on initial recognition is classified in ‘stage 1’ and has credit risk continuously monitored.

• If there is a significant increase in credit risk (“SICR”) since initial recognition, the financial instrument is moved to ‘stage 2’ but is not yet deemed to be credit-impaired.

• If the financial instrument is credit-impaired, it is moved to ‘stage 3’. • Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL

that result from default events possible within the next 12 months. Instruments in stages 2 or 3 have their ECL measured based on ECL on a lifetime basis.

• Purchased or originated credit-impaired financial assets are those that are credit-impaired on initial recognition. Their ECL are always measured at stage 3.

The key inputs into the measurement of ECL are the term structure of the following variables: • Probability of default (“PD”); • Loss given default (“LGD”); and • Exposure at default (“EAD”).

These parameters are generally derived from externally developed statistical models and purchased market data. They are adjusted to reflect forward-looking information as described above. PD estimates are estimates at a certain date, which are determined based on credit risk rating frameworks, and assessed using rating tools tailored to the various categories of counterparties and exposures. These credit risk ratings are based on externally purchased market data comprising both quantitative and qualitative factors. If a counterparty or exposure



Page 78

migrates between rating classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures and estimated prepayment rates. LGD is the magnitude of the likely loss if there is a default. Alterna Savings estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For loans secured by property, loan-to value ratios are a key parameter in determining LGD. LGD estimates are recalibrated for different economic scenarios and, for real estate lending, to reflect possible changes to property prices. They are calculated using the weighted average of five-year actual loss experiences. EAD represents the expected exposure in the event of a default. Alterna Savings derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of a financial asset is its gross carrying amount. For lending commitments the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. As described above, and subject to using any maximum of a 12-month PD for financial assets for which credit risk has not significantly increased, Alterna Savings measures ECL considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for risk management purposes, Alterna Savings considers a longer period. The maximum contractual period extends to the date at which Alterna Savings has the right to require repayment of an advance or terminate a loan commitment or guarantee. However, for line of credit facilities that include both a loan and an undrawn component, Alterna Savings measures ECL over a period longer than the maximum contractual period. This occurs if Alterna Savings’ contractual ability to demand repayment and cancel the undrawn commitment does not limit Alterna Savings’ exposure to credit losses to the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. Alterna Savings can cancel them with immediate effect but this contractual right is not enforced in the normal day-to-day management, but only when Alterna Savings becomes aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that Alterna Savings expects to take and that serve to mitigate ECL. These include a reduction in limits, cancellation of the facility and/or turning the outstanding balance into a loan with fixed repayment terms. For lines of credit, Alterna Savings will consider an estimation of future draw downs. For retail loans, this has been determined as 85% of the undrawn retail and 5% of the undrawn commercial line of credit in ECL calculation that will be a fair representation of Alterna Savings’ actual loss and LOC limit utilization experience. For measuring ECL, the estimate of expected cash shortfalls includes the cash flows expected from collateral or proceeds from credit insurance that are part of the contractual terms. SICR When determining whether the risk of default on a financial instrument has increased significantly since recognition, Alterna Savings considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on Alterna Savings’ historical experience, expert credit assessment and forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing:

• The remaining lifetime PD as at the reporting date; with • The remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the

exposure (adjusted where relevant for changes in prepayment expectations).

The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in PDs and qualitative factors.



Page 79

Alterna Savings considers that a significant increase in credit risk occurs no later than when a loan is more than 30 days past due. Days past due are determined by counting the number of days since the earliest-elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. Alterna Savings monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that:

• The criteria are capable of identifying significant increases in credit risk before an exposure is in default; and • There is no unwarranted volatility in loss allowance from transfers between 12-month PD (stage 1) and

lifetime PD (stage 2).

Risk ratings Alterna Savings allocates each commercial exposure to a credit risk rating (“risk rating”) based on a variety of data that is determined to be predictive of the risk of default and by applying experienced credit judgment. Risk ratings are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Risk ratings are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between risk rating 1 and 2 is smaller than the difference between the risk rating level 2 and 3. Each exposure is allocated to a risk rating at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different risk rating. The monitoring typically involves use of the following data:

• Information obtained during periodic review of borrower files (e.g. financial statements, budgets and projections). Examples of areas of particular focus are gross profit margins, financial leverage ratios, debt service coverage, compliance with covenants, quality of management, and senior management changes;

• Data from credit reference agencies, press articles, changes in external credit ratings; and • Actual and expected significant changes in the political, regulatory and technological environment of the

borrower or in its business activities.

Beacon Scores For retail, the staging is done at a loan level. Alterna Savings uses quarterly updates of Equifax Risk Score credit scores and a table that translates these scores into PDs. Other factors contributing to a SICR

• Qualitative elements: Alterna Savings monitors qualitative indicators to suggest a significant increase in credit risk such as bankruptcy and consumer proposal.

• Backstop indictors: Financial assets that are more than 30 days past due are assumed to have a SICR and are stage 2 assets. Similarly, financial assets that are more than 90 days past due are assumed to be financial assets with credit risk that has increased to the point that they are considered credit-impaired and stage 3 assets.

Generating the term structure of PD Risk ratings and beacon scores are primary inputs into the determination of PDs for exposures. Alterna Savings collects performance and default information about its credit risk exposures analyzed by type of product, borrower and risk ratings or beacon scores. For some portfolios, information purchased from external credit reference agencies is also used. Forward-looking information Alterna Savings employs statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.



Page 80

This analysis includes the identification and calibration of relationships between changes in default rates, changes in key macro-economic factors and in-depth analysis of the impact of certain other factors on the risk of default. For most exposures, key macro-economic indicators include Canadian equity, unemployment and oil price or Canada BBB spread for the commercial portfolio and Province level Housing Price Index and unemployment for the retail portfolio. Based on assessments from the Credit Risk Management Committee and consideration of a variety of external actual and forecast information, Alterna Savings formulates a ‘base case’ view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios, both negative and positive. Alterna Savings then uses these forecasts to adjust its estimates of PD. Modified financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognized and the renegotiated loan recognized as a new loan at fair value in accordance with the accounting policy set in note 2. When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of:

• Its remaining lifetime PD at the reporting date based on the modified terms; with • The remaining lifetime PD estimated based on data at initial recognition and the original contractual terms.

Alterna Savings renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’) to maximize collection opportunities and minimize the risk of default. Loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms typically include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. This applies to both retail and commercial loans. For financial assets modified as part of Alterna Savings’ forbearance policy, the estimate of PD reflects whether the modification has improved or restored Alterna Savings’ ability to collect interest and principal and Alterna Savings’ previous experience of similar forbearance action. As part of this process, Alterna Savings evaluates the borrower’s payment performance against the modified contractual terms and considers various behavioural indicators. Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired/in default. A customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired/in default or the PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECL. There were no material modifications during the reporting period. Definition of default Alterna Savings defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired, when it meets one or more of the following criteria:

• The borrower is unlikely to pay its credit obligations to Alterna Savings in full, without recourse by Alterna Savings to actions such as realizing security (if any is held); or

• The borrower is past due more than 90 days on any material credit obligation to Alterna Savings. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding.

In assessing whether a borrower is in default, Alterna Savings also considers indicators that are:



Page 81

• Qualitative – e.g., breaches of covenant; • Quantitative – e.g., overdue status and non-payment on another obligation of the same issuer to Alterna; and • Based on data developed internally and/or obtained from external sources.

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by Alterna Savings for regulatory capital purposes. Reconciliation of opening to closing balance of the loss allowance The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instrument. Refer to note 3 for a reconciliation between the opening loss allowance balance under IAS 39 at December 31, 2017 and IFRS 9 at January 1, 2018. Comparative amounts for 2017 represent the allowance account for the loss allowance and reflect the measurement basis under IAS 39.

The 2017 individual allowance was $2,295,000 and the collective allowance was $1,372,000.

(000s) 31 Dec 2017

Stage 112-month ECL

Stage 2Lifetime ECL -

not credit-impaired loans

Stage 3Lifetime ECL - credit-impaired

loans

Stage 3Purchased

credit-impairedTotal Total

Loss allowance on Personal LoansAs at 1 Jan 255$ 197$ 646$ -$ 1,098$ 1,742$

Transfer in on business combinations: 66 55 - 119 240 -$ Amounts written off - - (130) - (130) (996)

Transfers to (from) Stage 1 - 12-month ECL (10) 8 2 - - N/A Transfers to (from) Stage 2 - Lifetime ECL - not credit-impaired loans 28 (34) 6 - - N/A Transfers to (from) Stage 3 - Lifetime ECL - credit-impaired loans 8 13 (21) - - N/A

Recoveries on loans previously written off - - 131 - 131 147 Allowance charged to (recovered from) operations (106) (102) 400 (36) 156 535 As at 31 Dec $ 241 $ 137 $ 1,034 $ 83 1,495$ 1,428$

Loss allowance on Residential MortgagesAs at 1 Jan 64$ 59$ 122$ -$ 245$ 127$ Amounts written off - - (927) - (927) (64)

Transfers to (from) Stage 1 - 12-month ECL - - - - - N/A Transfers to (from) Stage 2 - Lifetime ECL - not credit-impaired loans 24 (37) 13 - - N/A Transfers to (from) Stage 3 - Lifetime ECL - credit-impaired loans 3 7 (10) - - N/A

Recoveries on loans previously written off - - 2 - 2 - Allowance charged to (recovered from) operations (54) 12 922 - 880 71 As at 31 Dec $ 37 $ 41 $ 122 $ - 200$ 134$

Loss allowance on Commercial loansAs at 1 Jan 2$ 4$ 1,400$ -$ 1,406$ 2,399$ Amounts written off - - (20) - (20) (785)

Transfers to (from) Stage 1 - 12-month ECL - - - - - N/A Transfers to (from) Stage 2 - Lifetime ECL - not credit-impaired loans - - - - - N/A Transfers to (from) Stage 3 - Lifetime ECL - credit-impaired loans - - - - - N/A

Recoveries on loans previously written off - - - - - - Allowance charged to (recovered from) operations (1) 1 1,381 - 1,381 491 As at 31 Dec $ 1 $ 5 $ 2,761 $ - $ 2,767 $ 2,105

Total as at 31 Dec 279$ 183$ 3,917$ 83$ 4,462$ 3,667$

31 Dec 2018



Page 82

(ii) Credit-impaired financial assets The table below breaks down all credit-impaired financial assets by asset class under IFRS 9.

(000s)Gross carrying

amountLoss allowance Carrying amount

Personal LoansStage 1 - 12-month ECL 263,204$ 241$ 262,963$ Stage 2 - Lifetime ECL - not credit-impaired loans 17,058 137 16,921 Stage 3 - Lifetime ECL - credit-impaired loans 7,183 1,034 6,149 Stage 3 - Purchased credit-impaired 105 83 22

287,550$ 1,495$ 286,055$

Residential MortgagesStage 1 - 12-month ECL 2,154,105$ 37$ 2,154,068$ Stage 2 - Lifetime ECL - not credit-impaired loans 114,828 41 114,787 Stage 3 - Lifetime ECL - credit-impaired loans 49,526 122 49,404

2,318,459$ 200$ 2,318,259$

Commercial LoansStage 1 - 12-month ECL 886,173$ 1$ 886,172$ Stage 2 - Lifetime ECL - not credit-impaired loans 357,769 5 357,764 Stage 3 - Lifetime ECL - credit-impaired loans 4,953 2,761 2,192

1,248,895$ 2,767$ 1,246,128$

Total 3,854,904$ 4,462$ 3,850,442$

31 Dec 2018



Page 83

Maximum exposure to credit risk on financial instruments subject to impairment The following table contains an analysis of the maximum exposure to credit risk on financial instruments subject to impairment, based on past due information.

Comparative information under IAS 39 The following table shows the balance of loans identified as impaired, prior to any recovery from collateral on these loans, as well as the carrying value of loans that are past due but not classified as impaired because they are either (i) less than 90 days past due, or (ii) less than 180 days past due and fully secured and collections efforts are reasonably expected to result in repayment.

(000s)

Days Overdue Stage 112-month ECL

Stage 2Lifetime ECL -

not credit-impaired loans

Stage 3Lifetime ECL - credit-impaired

loans

Stage 3Purchased

credit-impairedTotal

Personal Loans0 to 29 days 263,086$ 16,165$ 5,378$ -$ 284,629$ 30 to 89 days 118 893 796 42 1,849 90 days and greater - - 1,009 63 1,072

263,204$ 17,058$ 7,183$ 105$ 287,550$

Residential Mortgages0 to 29 days 2,153,983$ 114,082$ 45,769$ -$ 2,313,834$ 30 to 89 days 122 746 3,127 - 3,995 90 days and greater - - 630 - 630

2,154,105$ 114,828$ 49,526$ -$ 2,318,459$

Commercial Loans0 to 29 days 886,173$ 357,395$ 4,657$ -$ 1,248,225$ 30 to 89 days - 374 - - 374 90 days and greater - - 296 - 296

886,173$ 357,769$ 4,953$ -$ 1,248,895$

Total 3,303,482$ 489,655$ 61,662$ 105$ 3,854,904$

31 Dec 2018

(000s)Impaired loans

1-29 days 30-89 days 90 days and greater

Total

Personal loans 1,266$ 10,070$ 1,682$ -$ 13,018$ Residental mortgage loans 1,367 26,350 4,407 573 32,697 Commercial loans 2,207 14,480 2,972 1,653 21,312

4,840$ 50,900$ 9,061$ 2,226$ 67,027$

Loans past due but not impaired31 Dec 2017



Page 84

An individual allowance, which takes in consideration the recovery on collateral, has been recorded on the impaired loans of $2,295,000 in 2017. (iii) Collateral Alterna Savings employs a range of policies and practices to mitigate credit risk, the most common of which is accepting collateral. A valuation of the collateral obtained is prepared as part of the loan origination process and reviewed periodically. 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. The policies regarding obtaining collateral have not significantly changed during the reporting period and there have been no significant changes in the overall quality of the collateral held since the prior period. Alterna Savings closely monitors collateral held for financial assets considered to be credit-impaired, as it becomes more likely Alterna Savings will take possession to mitigate potential credit losses. Below are details of loans neither past due nor impaired as well as collateral repossessed during the period, by asset class.

(iv) Loans with renegotiated terms Loans with renegotiated terms are defined as loans that have been restructured due to deterioration in the borrower’s financial position, for which Alterna Savings has made concessions by agreeing to terms and conditions that are more favorable for the borrower than Alterna Savings had provided initially and that it would not otherwise consider. A loan continues to be presented as part of loans with renegotiated terms until maturity, early repayment or write-off. 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. (i) 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 derivatives such as interest rate swaps 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’ (unconsolidated parent entity) reports the interest rate risk against policy limits to the Asset Liability Committee (“ALCO”) on a monthly basis and the Board on a minimum quarterly basis. Alterna Savings’ (unconsolidated parent entity) maximum tolerance exposure to short-term interest rate risk over 12 months is restricted to 3% of average forecasted net interest income with a 95% confidence level. Its maximum tolerable exposure to interest rate risk on the entire consolidated balance sheet is restricted to a 7% decline in the

31 Dec 2018 31 Dec 2017Personal LoansCollateral repossession: Carrying value at balance sheet date of collateral properties possessed during the period (000s) $ 2 $ - Residential Mortgage LoansCollateral repossession: Carrying value at balance sheet date of collateral properties possessed during the period (000s) $ 250 $ 1,697 Commercial LoansCollateral repossession: Carrying value at balance sheet date of collateral properties possessed during the period (000s) $ 1,939 $ - TotalCollateral repossession: Carrying value at balance sheet date of collateral properties possessed during the period (000s) $ 2,191 $ 1,697



Page 85

market value of equity as a limit to mitigate long-term interest rate risk. As at December 31, 2018, the results for these measures were 1.62% (2017 – 0.89%) and 1.25% (2017 – 2.36%), respectively. The following table details Alterna Savings’ exposure to interest rate risk resulting from the mismatch, or gap, between financial assets and financial liabilities. The financial instruments have been reported on the earlier of their contractual repricing date or maturity date from the date of purchase. Certain contractual repricing dates have been adjusted according to management’s estimates for prepayments and early redemptions. The weighted average interest rates shown represent historical rates for fixed-rate instruments carried at amortized cost and current market rates for variable-rate instruments or instruments carried at fair value. Derivatives are presented in the variable rate category.

Sensitivity Analysis The key metrics that Alterna Savings uses to monitor interest rate risk are earnings at Risk (“EaR”) and Economic Value of Equity at Risk (“EVEaR”). This metric is calculated based on the balance sheet date and only represents cash flow risk. EaR is defined as the change in interest income from a predetermined shock to interest rates. This exposure is measured over a 12-month period. EVEaR is defined as the change in the present value of the asset portfolio resulting from a predetermined shock versus the change in the present value of the liability portfolio resulting from the same predetermined interest rate shock. To mitigate risk, Alterna Savings uses various derivative financial instruments to manage interest rate risk. The estimated impact of a 100 basis point shock on these metrics is presented below.

(000s) 31 Dec 2018 31 Dec 2017 EaR ($1,747) ($640) EVEaR (1.42%) (2.38%)

Non-interest rate

sensitive

Variable rate demand

Under 3 months

3 to 12 months

1 to 5 yearsOver 5 years

Total Total

Cash and cash equivalents $ 160,573 $ 61 $ - $ - $ - $ - $ 160,634 $ 295,769 Interest Rates - 0.87% - - - - - 0.39%Investments $ 32,493 $ - $ 30,477 $ 50,996 $ 315,337 $ - $ 429,302 $ 373,199 Interest Rates - - 1.47% 1.81% 2.23% - 1.96% 2.65%Personal loans $ - $ 260,422 $ 2,262 $ 2,669 $ 6,206 $ 14,496 $ 286,055 $ 266,947 Interest Rates - 4.82% 3.98% 6.96% 6.87% - 4.63% 4.11%Residential mortgage loans $ 8,197 $ 148,342 $ 350,097 $ 495,558 $ 2,278,259 $ 7,080 $ 3,287,534 $ 2,384,666 Interest Rates - 3.48% 3.15% 3.20% 2.99% 3.90% 3.06% 2.83%Commercial loans $ - $ 232,797 $ 142,679 $ 230,880 $ 683,642 $ 61,325 $ 1,351,324 $ 1,285,676 Interest Rates - 2.85% 4.05% 3.96% 3.74% 3.19% 3.63% 3.83%Other $ 90,637 $ 3,039 $ - $ - $ - $ - $ 93,676 $ 89,154 TOTAL ASSETS $ 291,900 $ 644,661 $ 525,515 $ 780,102 $ 3,283,445 $ 82,902 $ 5,608,525 $ 4,695,411

Deposits $ - $ 2,133,990 $ 281,582 $ 1,321,858 $ 575,250 $ 10 $ 4,312,690 $ 3,679,389 Interest Rates - 0.49% 1.76% 2.25% 2.11% - 1.33% 1.00%Mortgage securitization liabilities $ 9,846 $ - $ - $ 39,447 $ 620,408 $ - $ 669,701 $ 397,787 Interest Rates - - - 2.05% 2.18% - 2.17% 1.88%Borrowings $ - $ - $ 252,010 $ - $ - $ - $ 252,010 $ 276,548 Interest Rates - - 2.42% - - - 2.42% 1.69%Other $ 48,235 $ 4,812 $ - $ - $ - $ - $ 53,047 $ 45,626 Members’ equity $ 321,077 $ - $ - $ - $ - $ - $ 321,077 $ 296,061 TOTAL LIABILITIES AND MEMBERS' EQUITY

$ 379,158 $ 2,138,802 $ 533,592 $ 1,361,305 $ 1,195,658 $ 10 $ 5,608,525 $ 4,695,411

MATCHING GAP $ (87,258) $ (1,494,141) $ (8,077) $ (581,203) $ 2,087,787 $ 82,892 $ - $ -

31-Dec-18

Maturity

(000s) 31-Dec-17



Page 86

(ii) 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 US dollar member deposits. Alterna Savings mitigates currency risk by holding cash in US dollars, entering into USD-CAD FX swaps or investing in USD money market instruments. 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 foreign currency denominated financial liabilities on a daily basis. As at December 31, 2018, the percentage of foreign currency denominated financial assets is within 90%–110% of foreign currency denominated financial liabilities. For a 10% instantaneous exchange rate increase (decrease), Alterna Savings’ consolidated net income exposure is minimal. 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 cash flows 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 Inter-Central Liquidity Agreement. Alterna Savings reports the liquidity risk against policy limits to ALCO on a monthly basis and to the Board on a minimum quarterly basis. Alterna Savings (unconsolidated parent entity) maintains a minimum of 9% (2017 – 9%) of the amount of deposits and borrowings in liquid assets. As at December 31, 2018, the percentage of liquid assets to total deposits and borrowings was 14.66% (2017 – 20.40%). For the contractual maturities of assets and liabilities, please refer to the table under note 5b(i) Interest rate risk. In addition to the liquidity ratio, effective December 31, 2017, credit unions with assets in excess of $500 million are also expected to adopt Liquidity Coverage Ratio (“LCR”), Net Stable Funding Ratio (“NSFR”), and Net Cumulative Cash Flow (“NCCF”) metrics to help measure, monitor and manage their level of liquidity. As at December 31, 2018, the LCR and NSFR minimums were met and the NCCF did not show any liquidity deficiencies over the next 12-month period. The following table provides the maturity profile of financial liabilities based on the contractual repayment obligations, and excludes contractual cash flows related to derivative liabilities which are disclosed in note 22.

(000s)

31 Dec 2018

31 Dec 2017

Less than 1

year 1 to 5 years

Over 5 years

No specified maturity Total Total

Deposits $1,603,440 $575,250 $10 $2,133,990 $4,312,690 $3,679,389 Mortgage securitization liabilities 39,447 620,408 - 9,846 669,701 397,787

Borrowings 252,010 - - - 252,010 276,548 $1,894,897 $1,195,658 $10 $2,143,836 $5,234,401 $4,353,724



Page 87

6. INVESTMENTS

(000s) 31 Dec 2018 31 Dec 2017 Designated as FVTPL:

Other $156 $156 Classified as HTM (IAS 39)/ amortized cost (IFRS 9): National Housing Act mortgage-backed securities 9,848 41,858

Securities purchased under reverse repurchase agreements

22,517 22,937

Debt instrument securities designated as AFS (IAS 39)/ FVOCI (IFRS 9):

Central 1 liquidity deposits 284,558 198,373 Money market instruments 84,319 86,645

Equity instrument securities designated as AFS (IAS 39)/ FVOCI (IFRS 9):

Central 1 shares 23,753 22,739 Other 4,151 491

$429,302

$373,199 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 6% (December 31, 2017 – 6%) of its total assets adjusted by the 20th day of each month in accordance with the assets as at the previous month-end. The deposits bear interest at various rates. Except investments at amortized cost, all other investments were measured and recorded at fair value. This includes a nominal investment designated as FVTPL, and all those designated as AFS before January 1, 2018 and as FVOCI from January 1, 2018. Alterna Savings holds National Housing Act mortgage-backed securities, of which $9,848,000 (2017 – $41,783,000) is pledged in trust with Canada Housing Trust for Canada Mortgage Bond program (“CMB”) reinvestment purposes. These securities mature more than 100 days from the date of acquisition. Under the terms of the CMB program agreement, Alterna Savings is not permitted to withdraw the principal held in trust for any purpose other than the contractual settlement of the mortgage securitization liabilities as disclosed in note 12. Alterna Savings also purchases securities eligible for reinvestment in the CMB program under reverse purchase agreements.



Page 88

7. PROPERTY AND EQUIPMENT

Assets under finance leases totalling $1,383,000 (2017 – $1,383,000) are included in both computer hardware and furniture and equipment. Depreciation expense and accumulated depreciation on finance leases were $201,000 (2017 – $388,000) and $1,345,000 (2017 – $1,144,000), respectively. Assets acquired by means of finance leases are non-cash transactions for purposes of the consolidated statements of cash flows, and consequently have not been presented as either a financing or an investing activity. Total depreciation charged to income in 2018, including the foregoing finance lease depreciation, was $2,980,000 (2017 – $3,509,000) and is included in administration and occupancy expenses under operating expenses on the consolidated statements of income. The gross carrying amount of fully depreciated property and equipment that are still in use is $13,323,200 as at December 31, 2018 (2017 – $10,173,000).

Land Buildings Total

Cost:Balance as at January 1, 2018 2,611$ 3,264$ 9,224$ 6,128$ 12,478$ 33,705$ Additions - 96 1,542 526 26 2,190Additions from business combinations (note 24) - - - 78 - 78Disposals - - (110) (67) (104) (281)Balance as at December 31, 2018 2,611 3,360 10,656 6,665 12,400 35,692 Depreciation and impairment:Balance as at January 1, 2018 - 377 5,396 4,436 6,792 17,001Depreciation - 184 1,125 1,100 571 2,980Disposals - - (73) (50) - (123)Balance as at December 31, 2018 - 561 6,448 5,486 7,363 19,858Net book value:Balance as at January 1, 2018 2,611 2,887 3,828 1,692 5,686 16,704 Balance as at December 31, 2018 2,611 2,799 4,208 1,179 5,037 15,834

(000s)Furniture

and Equipment

Computer Hardware

Leasehold

Improvements

Land Buildings Total

Cost:Balance as at January 1, 2017 2,611$ 3,264$ 11,229$ 6,082$ 12,499$ 35,685$ Additions - - 1,579 175 353 2,107Disposals - - (3,584) (129) (374) (4,087)Balance as at December 31, 2017 2,611 3,264 9,224 6,128 12,478 33,705 Depreciation and impairment:Balance as at January 1, 2017 - 199 7,634 2,852 6,569 17,254Depreciation - 178 1,067 1,667 597 3,509Disposals - - (3,305) (83) (374) (3,762)Balance as at December 31, 2017 - 377 5,396 4,436 6,792 17,001Net book value:Balance as at January 1, 2017 2,611 3,065 3,595 3,230 5,930 18,431 Balance as at December 31, 2017 2,611$ 2,887$ 3,828$ 1,692$ 5,686$ 16,704$

(000s)Furniture

and Equipment

Computer Hardware

Leasehold

Improvements



Page 89

8. INTANGIBLE ASSETS

(000s) Computer Software

2018

Goodwill 2018

Total 2018

Computer Software

2017

Goodwill 2017

Total 2017

Cost: Balance as at January 1 $17,914 $604 $18,518 $17,169 $604 17,773 Additions 746 191 937 745 - 745 Disposals (3) - (3) - - - Balance as at December 31

18,657 795 19,452 17,914 604 18,518

Depreciation and impairment:

Balance as at January 1 5,551 - 5,551 3,930 - 3,930 Depreciation 2,157 - 2,157 1,621 - 1,621 Impairment losses - - - - - - Disposals (2) - (2) - - - Balance as at December 31

7,706 - 7,706 5,551 - 5,551

Net book value: Balance as at January 1 12,363 604 12,967 13,239 604 13,843 Balance as at December 31

$10,951 $795 $11,746 $12,363 $604 $12,967

Total amortization charged to income in 2018 was $2,157,000 (2017 – $1,621,000) and is included in administration expenses under operating expenses on the consolidated statements of income. All computer software assets have been acquired, not developed. The gross carrying amount of fully amortized computer software assets that are still in use is $3,158,200 as at December 31, 2018 (2017 – $858,000). 9. OTHER ASSETS

(000s) 31 Dec 2018 31 Dec 2017 Securitization receivables and deferred charges $35,846 $28,126 Prepaid expenses and other deferred charges 11,513 3,934 Accrued interest receivable 11,295 8,104 Other 3,466 6,338 $62,120 $46,502

10. DEPOSITS

(000s) 31 Dec 2018 31 Dec 2017 Demand deposits $1,949,695 $1,891,017 Term deposits 1,399,041 909,298 Registered plans 963,954 879,074 $4,312,690 $3,679,389

As at December 31, 2018, Alterna Savings held US dollar deposits from members of US$124,710,000 (2017 – $34,926,000) with a carrying amount of $170,067,000 (2017 – $43,905,000).



Page 90

11. BORROWINGS

(000s) 31 Dec 2018 31 Dec 2017 Borrowings $145,000 $172,880 Repurchase agreements 107,010 103,668 $252,010 $276,548

Alterna Savings has access to a $458,601,000 credit facility with Central 1 (2017 – $456,600,000) of which the balance outstanding was $145,000,000 as at December 31, 2018 (2017 – $170,000,000). The facilities are secured by a pledge of certain assets under a general security agreement. Alterna Savings must comply with certain financial covenants in order to be in compliance with its borrowings with Central 1. As at December 31, 2018, Alterna Savings is in compliance with all required financial covenants. Alterna Savings also has access to a $100,000,000 revolving credit facility with the Canadian Imperial Bank of Commerce (2017 – $100,000,000) of which the balance outstanding as at December 31, 2018 was $nil (2017 – $2,880,000). The facility is secured by insured mortgage collateral. Borrowings also include $107,010,000 (2017 – $103,668,000) in short-term borrowings in the form of investment repurchase agreements entered into with Central 1. 12. MORTGAGE SECURITIZATION LIABILITIES

(000s) 31 Dec 2018 31 Dec 2017

Mortgage securitization liabilities $669,701 $397,787 As part of its program of liquidity, capital and interest rate risk management, Alterna Savings secures funding for its growth by entering into mortgage securitization arrangements. Alterna Savings securitizes single-family and multi-unit insured mortgages into mortgage-backed securities (“MBS”) and in turn sells the MBS to third parties or Canada Housing Trust (“CHT”). CHT is financed through the issuance of CMBs, which are sold to third party investors under the Canada Mortgage Bond Program. The creation of MBS does not lead to the derecognition of the underlying mortgages as Alterna Savings has retained substantially all the risks and rewards of ownership. However, during the year, Alterna Savings also securitized and sold the MBS of certain insured multi-unit residential mortgages with no prepayment privileges. These mortgages were effectively derecognized as a result of these transactions as there was no prepayment or credit risk associated with the sold MBS. Alterna Savings has entered into certain transactions which allow the transfer of the contractual right to receive the residual cash flows from the mortgages and transfer substantially all of the risks and rewards of ownership, including credit, interest rate, prepayment and other price risks. In these cases, the mortgages are derecognized from the consolidated balance sheets as described in note 2(i)(iii). The present value of the future residual cash flows is recorded on the consolidated balance sheets under other assets. If the criteria are not met, the mortgages remain on the books and a secured borrowing is recorded with respect to any consideration received. In addition to securitizing mortgages for liquidity purposes as described above, Alterna Savings purchases securities eligible for reinvestment in the CMB program under reverse repurchase agreements, and also packages residential insured mortgage loan receivables into MBS and in turn utilizes them to meet the reinvestment needs of the CMB program. These MBS are included in investments on the consolidated balance sheets. Refer to note 18 for income generated from securitization activity.



Page 91

(000s) 31 Dec 2018 31 Dec 2017

Mortgages securitized:

On-balance sheet (and included in loans) $905,662 $516,599

Off-balance sheet 1,199,220 803,142 MBS held in trust and purchased securities per CMB reinvestment

guidelines (included in investments) 9,848 41,783 Securities purchased under reverse purchase agreements (included in

investments) 22,517 22,937 13. OTHER LIABILITIES

(000s) 31 Dec 2018 31 Dec 2017 Accrued interest payable $18,496 $13,054 Trade payables and accrued expenses 10,875 14,429 Salaries and benefits payable 5,654 5,088 Dividend payable 4,737 2,756 Certified cheques 1,106 1,784 Accrued benefit liability (note 19) 378 402 Finance lease obligations (note 14) 41 259 $41,287 $37,772

14. LEASES a) FINANCE LEASE OBLIGATIONS The following table presents the net carrying value for each class of leasing assets held under finance leases.

(000s) 31 Dec 2018 31 Dec 2017 Computer hardware $41 $259

The future minimum lease payments required under Alterna Savings’ finance leases were as follows:

(000s) 31 Dec 2018 31 Dec 2017 Future minimum lease payments Within one year $5 $225 From one to five years 41 41 Later than five years - - Total future minimum lease payments 46 266 Less: Future interest charges (5) (7) Present value of finance lease commitments $41 $259

Finance lease obligations are repayable monthly and mature at various dates up to 2020 secured by the lessors’ title to the leased property and equipment with implicit interest rates from 5.38% to 5.48%.



Page 92

b) OPERATING LEASE OBLIGATIONS The future minimum lease payments required under Alterna Savings’ operating leases were as follows:

(000s) 31 Dec 2018 31 Dec 2017 Future minimum lease payments Within one year $3,906 $3,474 From one to five years 12,350 10,710 Later than five years 15,927 14,984 Total future minimum lease payments $32,183 $29,168

During 2018, $7,154,000 was recognized as an expense, under occupancy expenses in the consolidated statements of income in respect of operating leases (2017 – $7,317,000). Finance and operating leases can generally be renewed, at which time all terms are renegotiated. 15. 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 18 years of age. Each member under the age of 18 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 15 membership shares with an issue price of $1 each. 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. 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 Wind-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.



Page 93

Redemption or Cancellation Class A, Series 1 holders may request redemption of their shares within six months of the shares’ anniversary date of September 1st. 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 of Directors. 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 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 A, Series 3 holders may request redemption of their shares at any time. Requests are held to 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 of Directors. Redemptions are limited annually to a maximum of 10% of the Class A, Series 3 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 3 shares at any time. Class A, Series 4 holders may request redemption of their shares at any time. Requests are held to December 31st annually. The Board of Directors will approve redemption requests once annually, at its first Board meeting in each fiscal year once redemptions can legally occur. All redemptions are at the discretion of the Board of Directors. Redemptions at the shareholder’s option in a particular fiscal year are also subject to a limit of 10% of the number of the Class A, Series 4 shares, issued and outstanding at the end of the prior fiscal year. Alterna Savings, at its option, may reacquire the Class A, Series 4 shares, for cancellation after a period of five years following the issuance of the shares. Class A, Series 5 holders are not permitted to redeem their shares prior to the fifth anniversary of their issuance. The Board will approve redemption requests once annually, at its first Board meeting in each fiscal year once redemptions can legally occur. All redemptions are at the discretion of the Board of Directors. Redemptions at the shareholder’s option in a particular fiscal year are also subject to a limit of 10% of the number of the Class A, Series 5 shares, issued and outstanding at the end of the prior fiscal year. Alterna Savings, at its option, may reacquire the Class A, Series 5 shares, for cancellation after a period of five years following the issuance of the shares. 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. Class B, Series 2 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 2 shares outstanding at the end of the immediately preceding fiscal year. Alterna Savings, at its option, may reacquire the Class B, Series 2 shares, for cancellation after a period of five years following the issuance of the shares.



Page 94

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, 2018 is as follows (in thousands of dollars):

There are no issued shares that have not been fully paid. d) DIVIDENDS DECLARED During 2018, the Board of Directors approved the following dividends:

Number of Shares

$Number of

Shares$

Number of Shares

$Number of

Shares$

Number of Shares

$

Issued and outstanding as at December 31, 2016 10,973 10,785 9,722 9,722 34,533 34,142 1,597 1,597 - -

Net shares issued (redeemed) 750 749 82 82 (824) (825) (11) (11) 75,000 74,295

Issued and outstanding as at December 31, 2017 11,723 11,534 9,804 9,804 33,709 33,317 1,586 1,586 75,000 74,295

Net shares issued (redeemed) 888 888 (72) (72) 824 824 (148) (148) (5) (5)

Issued and outstanding as at December 31, 2018 12,611 12,422 9,732 9,732 34,533 34,141 1,438 1,438 74,995 74,290

Number of Shares

$Number of

Shares$

Number of Shares

$

Issued and outstanding as at December 31, 2016 2,360 2,360 293 293 1,781 1,781

Net shares issued (redeemed) (126) (126) (11) (11) (9) (9)


Issued on business combinations (note 24) - - - - 173 173

Net shares issued (redeemed) (94) (94) (5) (5) (26) (26)


Series 4 Series 5

Class A

Special Shares

Series 1

Class B

Special Shares

Series 2

Membership Shares

Series 1 Series 2 Series 3



Page 95

16. INTEREST INCOME AND INTEREST EXPENSE

(000s) 31 Dec 2018 31 Dec 2017

Class

Number of holders of

record

Dividend Rate $ Period

Class A, Series 1 12,673 3.50% 444 September 1, 2017 to August 31, 2018Class A, Series 2 9,732 3.80% 370 January 1, 2018 to December 31, 2018Class A, Series 3 34,533 3.80% 1,312 January 1, 2018 to December 31, 2018Class A, Series 4 1,438 3.80% 55 January 1, 2018 to December 31, 2018Class A, Series 5 74,995 4.00% 3,000 January 1, 2018 to December 31, 2018Class B, Series 1 2,234 0.90% 20 January 1, 2017 to December 31, 2017Class B, Series 2 282 0.90% 2 January 1, 2017 to December 31, 2017

5,203 Income taxes 1,020 Total dividends paid net of tax 4,183

(000s) 2018

Class

Number of holders of

record

Dividend Rate $ Period

Class A, Series 1 11,466 3.35% 384 September 1, 2016 to August 31, 2017Class A, Series 2 9,803 3.50% 343 January 1, 2017 to December 31, 2017Class A, Series 3 34,534 4.50% 383 January 1, 2017 to March 31, 2017Class A, Series 3 33,709 3.50% 889 April 1, 2017 to December 31, 2017Class A, Series 4 1,586 3.50% 56 January 1, 2017 to December 31, 2017Class A, Series 5 75,000 4.00% 1,640 May 31 - August 31, 2017 to December 31, 2017Class B, Series 1 2,360 0.75% 14 January 1, 2016 to December 31, 2016Class B, Series 2 293 0.75% - January 1, 2016 to December 31, 2016

3,709 Income taxes 727 Total dividends paid net of tax 2,982

(000s) 2017



Page 96

Interest income: Personal loans $13,052 $11,934 Residential mortgage loans 79,507 50,437 Commercial loans 57,163 54,823 Swap agreements 399 272

$150,121 $117,466 Interest expense:

Demand deposits $12,233 $9,366 Term deposits 21,833 16,157 Registered plans 15,206 12,962 Borrowings 3,668 558 Mortgage securitization cost of funds 15,795 7,741

$68,735 $46,784 17. INVESTMENT INCOME

(000s) 31 Dec 2018 31 Dec 2017 Income on financial assets fair valued through profit or loss $956 $663 Income on financial assets available-for-sale (IAS 39)/ fair valued through other comprehensive income (IFRS 9) 8,284 7,049

$9,240 $7,712



Page 97

18. SECURITIZATION INCOME

(000s) 31 Dec 2018 31 Dec 2017 Net gain on sale of mortgages 1 $2,516 $7,166 Net change in unrealized gain or loss on hedging activities (86) 77 Servicing income 410 380 $2,840 $7,623 1 Gain on sale of mortgages is net of hedging impact.

The hedging activities included in the above table hedge interest rate risk on loans held for sale. The derivatives, which are bond forwards, are not designated in hedge accounting relationships. The gains or losses on the derivatives are mainly offset by the fair value change in the loans held for sale. 19. EMPLOYEE BENEFIT PLANS Alterna Savings maintains three pension plans for current employees and retirees, and one post-retirement benefits program, which provide certain post-employment healthcare benefits. Until March 31, 2006, some employees were eligible to join in the Alterna Savings DB pension plan and the senior executives who participated in the DB pension plan were provided with a SRIP. Both plans provide for pensions based on length of service and career average earnings. On January 1, 2008, pension benefits for employees participating in Alterna Savings’ DB pension plan began to accrue under the DC pension plan and all benefits ceased to accrue under the existing DB pension plan and SRIP. The post-retirement benefits program was acquired on business combination and provides certain post-retirement benefits to a closed group of retirees. Existing retirees will continue to receive benefits under the plans in which they had been enrolled. Most employees are eligible to participate in the DC pension plan which prescribes both employer and employee contributions. The DB pension plans are registered under the Income Tax Act (Canada) and the Pension Benefits Act, R.S.O. 1990 (Ontario) (the “PBA”). The Board of Directors of Alterna Savings, through various committees, is responsible for the oversight and supervision of the plans. Contributions are made to these separately administered plans. Every three years, the Board of Directors reviews the level of funding as required by the PBA. This review consists of asset-liability matching strategy and investment risk management policy as well as minimum funding requirements. The PBA requires Alterna to clear any plan deficit based on the actuarial valuation for funding purposes over a period of five years, if any. These DB pension plans are exposed to Canada’s inflation, interest rate risks and changes in the life expectancy for pensioners. Defined Pension and Benefits Plans All defined benefit plans are valued using the projected unit-credit method to determine the present value of the defined benefit obligation and the related service costs. Under this method, the determination is based on actuarial calculations which include assumptions about demographics, salary increases and interest and inflation rates. The assets and accrued benefit obligation of the DB pension plans and the post-retirement benefits program were measured as at December 31, 2018, and are detailed as follows:



Page 98

(000s)

31 Dec 2018

31 Dec 2017

Pension Benefits Total Total

Accrued benefit obligation: Balance, beginning of year $27,141 $402 $27,543 $27,027 Transfer in on business combination 2,059 - 2,059 - Interest cost 905 13 918 996 Re-measurement (gains)/losses - Actuarial gains and losses from experience adjustments - - - - - Actuarial gains and losses from changes in financial assumptions

(1,575) (17) (1,592) 945

- Actuarial changes arising from changes in demographic assumptions

- - - -

Benefits paid (1,373) (20) (1,393) (1,425) Balance, end of year $27,157 $378 $27,535 $27,543

Plans’ assets:

Fair value, beginning of year $31,290 $- $31,290 $30,484 Transfer in on business combination 3,490 - 3,490 - Interest income 1,050 - 1,050 1,127 Re-measurement (gains)/losses - Return on plan assets (excluding amounts included in net

interest expense) (1,837) - (1,837) 1,087

Employer contributions - 20 20 17 Benefits paid (1,373) (20) (1,393) (1,425) Fair value, end of year $32,620 $- $32,620 $31,290

Over funded (under funded) status of plans $5,463 ($378) $5,085 $3,747 Limit on amount recognized (min. funding obligation/unrecognized plan surplus) (5,463) - (5,463) (4,149)

Accrued benefit liability $- ($378) ($378) ($402) As at December 31, 2018, the over funded status of the DB pension plan was $5,020,000 (2017 – $3,675,000 over funded) and the over funded status of the SRIP was $443,000 (2017 – $474,000 over funded). The following is a summary of the weighted average significant actuarial assumptions used in measuring the plans’ accrued pension benefit obligation:

31 Dec 2018 31 Dec 2017 Pension Benefits Pension Benefits Discount rate for accrued benefit obligation 3.45% 3.40% 3.79% 3.70% Discount rate for pension expense 3.48% 3.80% 3.39% 3.40%

The health care cost trend rate is expected to be 4.5% in 2019. A 1% increase in the discount rate would decrease the accrued benefit obligation by $3,069,000 and a 1% decrease in the discount rate would increase the accrued benefit obligation by $3,749,000. Changes in health care rates would impact the accrued benefit obligation by a nominal amount. The sensitivity analyses above have been determined based on a method that extrapolates the impact on net defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period.



Page 99

As at December 31, 2018, the fair value of the pension plans’ assets for each major asset class was as follows:

(000s) 31 Dec 2018 31 Dec 2017 Fixed Income Funds

Cash equivalents

$1,490

$1,144 Bonds 18,479 17,445

19,969 18,589 Equity Funds:

Canadian 6,506 6,620 United States 1,492 1,903 Other international 2,774 2,578 10,772 11,101

Other Funds: Real Estate 1,879 1,600

$32,620 $31,290

The fair values of the above equity and debt instrument securities are classified as Level 1 or Level 2 financial instruments. Amounts recognized in comprehensive income in respect of these defined benefit plans are as follows:

(000s) 31 Dec 2018 31 Dec 2017 Net interest expense $13 $15 Components of defined benefit costs recognized in the income statement $13 $15

(000s) 31 Dec 2018 31 Dec 2017 Re-measurement on the net defined benefit liability: Return on plan assets (excluding amounts included in net interest expense) ($1,837) $1,087 Actuarial gains and losses from experience adjustments - - Actuarial gains and losses from changes in financial assumptions 1,592 (945) Actuarial changes arising from changes in demographic assumptions - - Limit on amount recognized (min. funding obligation/unrecognized plan

surplus) 262 (155) Components of defined benefit cost recognized in other comprehensive income

(loss) $17 ($13) The next actuarial valuation for funding purposes of the DB pension plan is to be performed as at December 31, 2019 (the most recent valuation was performed as at December 31, 2016). 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, 2016 for the DB pension plan, January 1, 2017 for the SRIP and August 31, 2016 for the post-retirement benefits program. Alterna Savings expects to contribute approximately $20,000 to its defined benefit plan in 2019. The average duration of the defined benefit plan obligation at the end of the reporting period is 12.9 years for the DB pension plan, 9.3 years for the SRIP and 11.6 years for the post-retirement benefits program. Defined Contribution Pension Plan The pension expense for the DC pension plan for the year ended December 31, 2018 was $1,303,000 (2017 – $1,311,000).



Page 100

Total Cash Payments Total cash payments for employee benefit plans for 2018, consisting of cash contributed by Alterna Savings to its funded DB pension plans, cash payments directly to beneficiaries for its unfunded post-retirement benefits program and cash contributed to its DC pension plan were $1,323,000 (2017 – $1,328,000). 20. INCOME TAXES The significant components of the deferred income tax asset (liability) of Alterna Savings are as follows:

Consolidated balance sheets (000s) 31 Dec 2018 31 Dec 2017 Property and equipment $(805) ($940) Loss allowance 127 318 Other 51 18 Deferred pension liability 74 78 Derivatives 891 518 Investments 391 559 Net deferred income tax asset (liability) $729

$551

On consolidated balance sheets:

Deferred income tax asset $1,694 $2,105 Deferred income tax liability (965) (1,554) Net deferred income tax $729 $551

The reconciliation of income tax computed at the statutory rates to income tax expense is as follows:

(000s) 31 Dec 2018 31 Dec 2017 Amount Percent Amount Percent

Expected tax provision at combined federal and provincial rates $7,640 27% $4,687 27% Additional credit for Credit Unions (1,881) (7%) (924) (5%) Deferred income tax rate differential (20) -% (12) -% Permanent differences 35 -% 92 1% Other – net (16) -% (144) (1%) $5,758 20% $3,699 22%

The components of income tax expense for the years ended December 31, 2018 and 2017 are as follows:

(000s) 31 Dec 2018 31 Dec 2017 Current income tax $6,023 $3,129 Deferred income tax (265) 570

Income tax expense reported in the consolidated statements of income $5,758 $3,699



Page 101

The income tax related to items charged or credited to other comprehensive income (loss) during the year is as follows:

(000s) 31 Dec 2018 31 Dec 2017 Change in unrealized gains and losses on AFS securities

(IAS 39)/ FVOCI (IFRS 9) $23 ($232) Change in gains and losses on derivatives designated as cash

flow hedges (94) (266) ($71) ($498)

The current and deferred income tax charged or credited to other comprehensive income (loss) during the year is as follows:

(000s) 31 Dec 2018 31 Dec 2017 Current income tax $19 ($232) Deferred income tax (90) (266)

($71) ($498) No deferred income tax liability has been recorded for the temporary difference associated with the investment in subsidiary as it is probable that the temporary difference will not reverse in the foreseeable future.



Page 102

21. 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 for each classification of financial instrument, including the fair values of loans calculated before the loss allowance, using the valuation methods and assumptions described below.

(000s) 31 Dec 2018 31 Dec 2017 Carrying value Fair value Carrying value Fair value Financial assets: Available-for-sale (IAS 39)/ FVOCI (IFRS 9):

Investments $429,146 $429,146 $373,043 $373,043 Fair value through profit and loss: Investments 156 156 156 156 Derivative financial instruments - interest rate swaps 558 558 757 757 - bond forwards - - 1,588 1,588 - foreign currency forward contracts 1,126 1,126 210 210 - purchased options 1,355 1,355 3,654 3,654 - equity options - - 6,221 6,221 Loans and advances - residential mortgage loans 969,275 969,275 369,569 369,569 - commercial loans 105,196 105,196 47,963 47,963 Loans and receivables (IAS 39)/ Amortized cost (IFRS 9):

Cash and cash equivalents 160,634 160,634 295,769 295,769 Loans and advances - personal loans 287,550 302,534 268,375 268,629 - residential mortgage loans 2,318,459 2,370,677 2,015,231 2,043,384 - commercial loans 1,248,895 1,285,220 1,239,818 1,272,296 Total $5,522,350 $5,625,877 $4,622,354 $4,683,239 Financial liabilities: Other liabilities: Deposits - demand deposits $1,949,695 $1,949,695 $1,891,017 $1,891,017 - term deposits 1,399,041 1,397,451 909,298 906,716 - registered plans 963,954 959,721 879,074 876,467 Mortgage securitization liabilities 669,701 675,097 397,787 399,225 Borrowings 252,010 252,010 276,548 276,548 Fair value through profit and loss: Derivative financial instruments - interest rate swaps 1,227 1,227 326 326 - bond forwards 4,517 4,517 514 514 - foreign currency forward contracts - - 327 327 - embedded options 1,348 1,348 3,646 3,646 Total $5,241,493 $5,241,066 $4,358,537 $4,354,786

Management has assessed that cash and cash equivalents, trade receivables, trade payables and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The following methods and assumptions were used to estimate the fair values:



Page 103

(i) Fair values of AFS/FVOCI investments are derived from discounted cash flow valuation models. Discount rates are based on observable market inputs, other than quoted prices, which include relevant interest rates pertaining to the value of the investments. (ii) Alterna Savings enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are interest rate swaps and foreign currency forwards. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. As at December 31, 2018, the marked-to-market value of derivative asset positions is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognized at fair value. (iii) Purchased and embedded options are measured similarly to the interest rate swaps and foreign currency forward contracts. However, as these contracts are not collateralized, Alterna Savings also takes into account the counterparties’ non-performance risks (for the purchased options) or its own non-performance risk (for the embedded derivative liabilities). As at December 31, 2018, Alterna Savings assessed these risks to be insignificant. (iv) 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 any loss allowance.



Page 104

FAIR VALUE HIERARCHY The following tables show the hierarchical classification of financial assets and financial liabilities measured or disclosed at fair value as at December 31, 2018 and 2017:

December 31, 2018 (000s)

Level 1 Level 2 Level 3 Total

Assets measured at fair value: Financial investments FVTPL $- $- $156 $156 Financial investments FVOCI - 429,146 - $429,146 Derivative financial instruments - interest rate swaps - 558 - 558 - bond forwards - - - - - foreign currency forward contract - 1,126 - 1,126 - purchased options - 1,355 - 1,355 - equity options - - - - Loans and advances - residential mortgage loans - 969,275 - 969,275 - commercial loans Assets for which fair values are disclosed:

- 105,196 - 105,196

Loans and advances - personal loans - - 302,534 302,534 - residential mortgage loans - - 2,370,677 2,370,677 - commercial loans - - 1,285,220 1,285,220 Liabilities measured at fair value: Derivative financial instruments - interest rate swaps - 1,227 - 1,227 - bond forwards - 4,517 - 4,517 - embedded options - 1,348 - 1,348 - foreign currency forward contracts - - - - Liabilities for which fair values are disclosed: Deposits - demand deposits - - 1,949,695 1,949,695 - term deposits - - 1,397,451 1,397,451 - registered plans - - 959,721 959,721 Mortgage securitization liabilities - - 675,097 675,097



Page 105

December 31, 2017 (000s)

Level 1 Level 2 Level 3 Total

Assets measured at fair value: Financial investments FVTPL $- $- $156 $156 Financial investments AFS - 373,043 - 373,043 Derivative financial instruments - interest rate swaps - 757 - 757 - bond forwards - 1,588 - 1,588 - foreign currency forward contract - 210 - 210 - purchased options - 3,654 - 3,654 - equity options - 6,221 - 6,221 Loans and advances - residential mortgages - 369,569 - 369,569 - commercial mortgages - 47,963 - 47,963 Assets for which fair values are disclosed: Loans and advances - personal loans - - 268,629 268,629 - residential mortgage loans - - 2,043,384 2,043,384 - commercial loans - - 1,272,296 1,272,296 Liabilities measured at fair value: Derivative financial instruments - interest rate swaps - 326 - 326 - bond forwards - 514 - 514 - embedded options - 3,646 - 3,646 - foreign currency forward contracts - 327 - 327 Liabilities for which fair values are disclosed: Deposits - demand deposits - - 1,891,017 1,891,017 - term deposits - - 906,716 906,716 - registered plans - - 876,467 876,467 Mortgage securitization liabilities - - 399,225 399,225

There were no transfers between Level 1 and Level 2 for the years ended December 31, 2018 and 2017. The table below presents the changes in fair value of Level 3 financial assets and liabilities for the year ended December 31, 2018. These instruments are measured at fair value utilizing non-observable market inputs. The total net losses included in investment income in the consolidated statements of income, on financial instruments for which fair value was estimated using a valuation technique requiring non-observable market inputs was $nil (2017 – net losses of $220,000).

December 31, 2018

Net realized/unrealized gains included in

(000s)

Opening balance

Net (loss) OCI Purchases Settlements

Closing balance

Unrealized (loss) (1)

Financial investments FVTPL

$156 $- $- $- $- $156 $-

$156 $- $- $- $- $156 $-



Page 106

December 31, 2017

Net realized/unrealized gains included in

(000s)

Opening balance

Net income OCI Purchases Settlements

Closing balance

Unrealized gains (1)

Financial investments FVTPL $5,634 ($220) $- $- ($5,258) $156 ($220) $5,634 ($220) $- $- ($5,258) $156 ($220)

(1) Changes in unrealized gains included in earnings for instruments held as at December 31, 2018 and 2017. There were no transfers in or out of Level 3 during the years ended December 31, 2018 and 2017. The table below sets out information about significant unobservable inputs used as at December 31, 2018 in measuring financial instruments categorized as Level 3 in the fair value hierarchy:

Description Fair value as at December 31, 2018

Valuation technique

Unobservable input

Range

Private equity fund investment $156 Net asset

value (2) - -

(2) Alterna Savings has determined that the reported net asset value represents fair value at the end of the reporting period. 22. DERIVATIVE FINANCIAL INSTRUMENTS The tables below provide a summary of Alterna Savings’ derivative portfolio, their notional values and fair values as at December 31, 2018 and 2017:

(000s) 31 Dec 2018

Maturities of derivatives (Notional amounts) Fair Value

Within 1 Year 1 to 5 Years Total

Derivative Instrument

Assets

Derivative Instrument Liabilities

Interest rate contracts

Swaps $61,896 $234,628 $296,524 $558 $1,227 Bond forwards 420,400 - 420,400 - 4,517

482,296 234,628 716,924 558 5,744 Other derivatives

Foreign currency forward contracts 22,000 - 22,000 1,126 - Index-linked call options 9,719 22,719 32,438 1,355 1,348

31,719 22,719 54,438 2,481 1,348 $514,015 $257,347 $771,362 $3,039 $7,092



Page 107

(000s) 31 Dec 2017

Maturities of derivatives (Notional amounts) Fair Value

Within 1

Year 1 to 5 Years Total

Derivative Instrument

Assets

Derivative Instrument Liabilities

Interest rate contracts

Swaps $- $202,607 $202,607 $757 $326 Bond forwards 463,900 - 463,900 1,588 514

463,900 202,607 666,507 2,345 840 Other derivatives

Foreign currency forward contracts 28,250 - 28,250 210 327 Index-linked call options 9,992 26,803 36,795 3,654 3,645 Equity options - - - 6,221 -

38,242 26,803 65,045 10,085 3,972 $502,142 $229,410 $731,552 $12,430 $4,812

The notional amounts are used as the basis for determining payments under the contracts and are not actually exchanged between Alterna Savings and its counterparties. They do not represent credit risk exposure. a) INTEREST RATE CONTRACTS (i) Swaps 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. Designated cash flow hedges are interest rate swap agreements which qualify as hedging relationships for accounting purposes under IAS 39. All other interest rate swap agreements are classified as economic hedges. Alterna Savings has designated certain hedging relationships involving interest rate swaps that convert variable rate loans to fixed rate loans as cash flow hedges. Interest rate swap agreements are valued by netting the discounted variable and fixed cash flows. Variable cash flows are calculated using implied interest rates as determined by current Canadian Dealer Offered Rate (“CDOR”) and swap interest rates, and term relationships. Fixed cash flows are calculated based on the rates stated in the agreements. These notional cash flows are discounted using the relevant points on the zero interest curve plus a Credit Value Adjustment spread as derived from the month-end CDOR and swap rates. (ii) Bond forwards As part of its interest rate risk management process, Alterna Savings utilizes bond forwards to maintain its interest rate exposure on forecasted debt issuance associated with securitization activity. These hedging relationships have not been designated as cash flow hedges. b) OTHER DERIVATIVES (i) Foreign currency forward contracts As part of its program to manage foreign currency exposure, Alterna Savings enters into forward rate agreements to purchase US dollars. These agreements function as an economic hedge against Alterna Savings’ net US dollar denominated member liabilities. Gains/losses on foreign currency forward contracts are included in unrealized gains on financial instruments on the consolidated statements of income. (ii) Index-linked call options Alterna Savings has issued $32,438,000 of indexed term deposits to its members as at December 31, 2018 (2017 – $36,795,000). These term deposits have maturities of three or five years at issuance and pay interest to the depositors,



Page 108

at the end of the term, based on the performance of the S&P/TSX60 Index. Alterna Savings uses purchased call options on the above indices with equivalent maturities to offset the exposure associated with these products. Alterna Savings pays a premium amount based on the notional amount at the inception of the equity index-linked option contract. At the end of the term, Alterna Savings receives from the counterparties payments equal to the amount that will be paid to the depositors based on the performance of the respective indices. (iii) Equity options The fair value of the options outstanding as at December 31, 2017 was based on the most recent audited share value of the company to which the options relate. There are no options outstanding as at December 31, 2018. c) DESIGNATED ACCOUNTING HEDGES The following table discloses the impact of derivatives designated in hedge accounting relationships and the related hedged items, where appropriate, in the consolidated statements of income and in OCI for the years ended December 31, 2018 and 2017.

(000s) 31 Dec 2018 31 Dec 2017

Amounts recognized

in OCI

Amounts reclassified

from OCI into income

Hedge ineffectiveness

recognized in other income

Amounts recognized

in OCI

Amounts reclassified

from OCI into income

Hedge ineffectiveness

recognized in other income

Interest rate contracts Cash flow hedges ($400) ($95) $2 ($1,089) ($307) ($16) Fair value hedges - - (30) - - (146) ($400) ($95) ($28) ($1,089) ($307) ($162)

23. CAPITAL MANAGEMENT Alterna Savings’ (unconsolidated parent entity) 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”). The Act requires credit unions to maintain minimum regulatory capital, as defined by the Act. Regulatory capital is calculated as a percentage of total assets and of risk-weighted assets. Risk-weighted assets are calculated by applying risk-weighted percentages, as prescribed by the Act, to various asset categories, operational and interest rate risk criteria. The prescribed risk weights are dependent on the degree of risk inherent in the asset. Tier 1 capital, otherwise known as core capital, is the highest quality. It is comprised of retained earnings, contributed surplus, membership shares and special shares, excluding Class B, Series 1. Tier 1 capital as at December 31, 2018 was $266,228,000 (2017 – $249,309,000). Tier 2 capital, otherwise known as supplementary capital, contributes to the overall strength of a financial institution as a going concern, but is of a lesser quality than Tier 1 capital relative to both permanence and freedom from charges. It is comprised of the Class B, Series 1 special shares and the eligible portion of the stage 1 and stage 2 loan allowances. Tier 2 capital as at December 31, 2018 was $2,578,000 (2017 – $3,539,000). The Act requires credit unions to maintain a minimum capital leverage ratio of 4% and a risk-weighted capital ratio of 8%. Alterna Savings manages its capital in accordance with the Capital Management Policy, which is reviewed and approved annually by the Board. In addition, Alterna Savings established an Internal Capital Adequacy Assessment Process (“ICAAP”) and provided capital for major enterprise risks in addition to those required by the Act.



Page 109

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, 2018, Alterna Savings (unconsolidated parent entity) was in compliance with the Act and regulations with a capital leverage ratio of 5.53% (2017 – 6.10%) and a risk-weighted capital ratio of 11.96% (2017 – 12.17%). 24. BUSINESS COMBINATIONS Alterna Savings entered into one business combination in 2018:

TORONTO MUNICIPAL EMPLOYEES’ CREDIT UNION

On December 1, 2018, Alterna Savings amalgamated with the Toronto Municipal Employees’ Credit Union (TMECU) and the results of its operations have been included in the consolidated financial statements since that date. Post-amalgamation, TMECU’s name was changed to Toronto Municipal Employees’ Savings (“TME Savings”), a division of Alterna Savings. They joined Alterna under the federated operating model which permits the credit union to continue to operate under its own brand. Alterna Savings acquired 100% of the net assets of TMECU in a share for share exchange. The consideration transferred to acquire the net assets of TMECU was determined by valuing the business acquired using the net asset value approach. Under this approach, the net present value of the business is calculated with the resulting fair value allocated to the net assets acquired less shares issued with any remaining fair value allocated to contributed surplus.

The goodwill represents the synergies to be recognized from the amalgamation of TMECU and Alterna Savings. The total amount of goodwill expected to be deductible for tax purposes is $191,000. The carrying values of cash and cash equivalents and other assets and liabilities approximate their fair value due to their short-term nature.

(000s) Book Value Adjustment Fair ValueCash and cash equivalents 3,782$ -$ 3,782$ Investments 10,450 25 10,475 Loans and advances 77,239 (1,188) 76,051 Property and equipment 78 - 78 Goodwill - 191 191 Derivative financial instruments 75 (59) 16 Other assets 312 - 312 Deposits (85,857) 430 (85,427) Derivative financial instruments (75) 59 (16) Other liabilities (1,064) - (1,064) Membership shares (173) - (173) Net assets 4,767$ (542)$ 4,225$ Contributed surplus 4,225$

TMECU - 1 Dec 2018



Page 110

For variable rate interest loans and deposits that re-price frequently, carrying value is assumed to approximate fair values. Fair value of other loans and deposits is estimated using discounted cash flow techniques based on the contractual repayment of the products. In addition, the fair value of loans is net of a loss allowance of $240,000. The fair value of property and equipment has been assessed using a combination of acquisition date net book value, considered in certain instances to approximate fair value, and an appraisal based on market information. Income and expenses derived from the acquisition of TMECU have been included in the consolidated statements of income from December 1, 2018 onward. It is not practical to disclose the amount of profit or loss attributable to the legacy credit union since this is not identifiable on Alterna Savings’ accounts and would be immaterial in amount. 25. COMMITMENTS AND CONTINGENCIES a) CREDIT INSTRUMENTS As at December 31, 2018, the credit instruments approved but not yet disbursed were as follows:

(000s) Total Residential mortgage loans $31,264 Commercial demand loans $23,826 Commercial mortgage loans $12,481 Lines of credit unfunded $679,341

b) CONTINGENCIES In the normal course of operations, Alterna Savings becomes involved in various claims and legal proceedings. While the final outcome with respect to claims and legal proceedings pending as at December 31, 2018 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. c) GUARANTEES Letters of Credit Arising through the normal course of business, Alterna Savings has guaranteed $12,481,000 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 terms 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 are the same as is held for loans. As at December 31, 2018, no liability has been recorded on the consolidated balance sheet as no letters of credit have been called upon. In addition, under IFRS 9 no ECL or fair value has been recorded for the guarantees as these are immaterial. 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



Page 111

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. 26. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS a) COMPONENTS OF CASH AND CASH EQUIVALENTS

(000s) 31 Dec 2018 31 Dec 2017 Cash on hand $27,556 $28,309 Deposit with other financial institutions 108,453 195,896 Marketable securities (original maturities less than 90 days) 24,625 71,564 $160,634 $295,769

b) CASH FLOWS PRESENTED ON A NET BASIS Cash flows arising from loan advances and repayments, and from member deposits and withdrawals, have been presented on a net basis in the consolidated statements of cash flows. 27. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to directly or indirectly control the other party or exercise significant influence over the other party in making financial or operational decisions. Alterna Savings’ related parties include key management personnel, close family members of key management personnel and entities which are controlled, significantly influenced by, or for which significant voting power is held by key management personnel or their close family members.

Alterna Savings has several business relationships with related parties. Transactions with such parties are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties. These transactions also did not involve more than the normal risk of collectability or present other unfavourable features. a) TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL Key management personnel (“KMP”) are those persons having authority and responsibility for planning, directing and controlling the activities of the credit union, directly or indirectly, including any director (whether executive or otherwise) of that entity. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Alterna Savings considers the members of its Board and the members of executive management to constitute KMP for purposes of IAS 24, Related Party Disclosures. Executive management includes the President & CEO as well as employees in positions titled Vice-President, Senior Vice-President, or Region Head. (i) Key management personnel compensation The aggregate compensation of KMP during the year comprising amounts paid or payable or provided for was as follows:

(000s) 31 Dec 2018 31 Dec 2017 Short-term employee benefits $3,826 $3,552 Post-employment benefits - - Other long-term employee benefits - - Termination benefits - 240 Total KMP compensation $3,826 $3,792



Page 112

(ii) Loans to KMP There are no loans that are impaired in relation to the loan balances with KMP. Loans to KMP consist mainly of residential mortgages as well as personal loans and personal lines of credit.

(000s) 31 Dec 2018 31 Dec 2017 (1) Aggregate value of loans outstanding as at balance sheet dates $4,035 $4,996 (2) Total value of personal lines of credit facilities as at balance sheet dates

1,808 2,183

Less: Amounts drawn down and included in loan values and included in (1) (467) (903) Net balance available $5,376 $6,276 Aggregate value of loans disbursed during the year: Residential mortgages $944 $1,183 Personal loans 254 30 Total $1,198 $1,213

(iii) Deposits from KMP

(000s) 31 Dec 2018 31 Dec 2017 Total value of demand, term and registered plan deposits from KMP $3,041 $5,291 Total amount of interest paid on deposits to KMP $40 $31

b) OTHER RESTRICTED PARTY DISCLOSURES Alterna Savings also employs the definition of restricted party contained in section 75 of Regulation 237/09 to the Act. A restricted party includes a person who is, or has been within the preceding 12 months, a director, officer, 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. (i) Loans Loans to officers consist mainly of residential mortgages offered at preferred rates 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 $4,035,000 (2017 – $4,996,000). There was approximately $86,000 (2017 – $88,000) in interest earned for the year which is recorded under interest income on the consolidated statements of income. (ii) Expenses Relative to the 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, director training 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 to $388,000 (2017 – $297,000) and other expenses incurred totalled $174,000 (2017 – $213,000). As at December 31, 2018, Alterna Savings’ Board consisted of 9 Directors (2017 – 10 Directors) and Alterna Bank’s Board consisted of 7 Directors (2017 – 8 Directors). (iii) Executive Compensation Alterna Savings manages executive compensation in accordance with policies which are reviewed and approved annually by the Board. In accordance with these policies, total cash compensation is targeted to be at the 50th percentile of similar positions in credit unions and banks in geographical markets within which Alterna Savings operates.



Page 113

In reviewing the executive compensation structure on an annual basis, the Board considers market expectations and projections of changes for comparable positions using, where available, independent, competent and relevant sources. The Act requires disclosure of the remuneration paid to the five highest-paid officers and employees of the credit union where remuneration paid during the year exceeded $150,000. The individuals and their respective remuneration (salary, bonus, benefits) included Robert Paterson, President and Chief Executive Officer ($421,000, $400,000, $179,000), Bill Boni, SVP and Chief Financial Officer ($288,000, $122,000, $76,000), Mark Cauchi, SVP and Chief Information Officer ($261,000, $77,000, $36,000), José Gallant, SVP and Chief Administrative Officer ($243,000, $72,000, $35,000) and Constantina Vardounitis, former Chief Marketing Officer ($48,000, $216,000, $24,000). All decisions with respect to base pay, annual increases and short-term incentive award (bonus) payments for individuals reporting directly to the President & CEO are reviewed in advance by the Governance Committee of the Board. Further, all decisions with respect to base pay, annual increases and short-term incentive award payments for the President & CEO must receive prior approval by the Board. 28. SELECTED DISCLOSURES CURRENT AND NON-CURRENT ASSETS AND LIABILITIES The following table presents an analysis of each asset and liability line item by amounts expected to be recovered or settled within one year or after one year as at December 31, 2018 and 2017.

(000s)Within 1 Year After 1 year Total Within 1 Year After 1 year Total

AssetsCash and cash equivalents 160,634$ $ - 160,634$ 295,769$ $ - 295,769$ Investments-FVTPL - - - 156 - 156 Investments- AFS (IAS 39)/ FVOCI (IFRS 9) - 429,302 429,302 - 373,043 373,043 Personal loans 266,848 20,702 287,550 254,166 14,209 268,375 Residential mortgages loans 1,002,395 2,285,339 3,287,734 807,101 1,577,699 2,384,800 Commercial loans 609,123 744,968 1,354,091 552,592 735,189 1,287,781 Loss allowance (4,462) - (4,462) (3,667) - (3,667) Property and equipment - 15,834 15,834 - 16,704 16,704 Intangible assets - 11,746 11,746 - 12,967 12,967 Derivative financial instruments 1,689 1,350 3,039 12,384 46 12,430 Deferred income tax asset - 729 729 - 551 551 Other assets 62,120 - 62,120 46,502 - 46,502

Total assets 2,098,347$ 3,509,970$ 5,608,317$ 1,965,003$ 2,730,408$ 4,695,411$

LiabilitiesDemand deposits 1,949,695$ -$ 1,949,695$ 1,891,017$ -$ 1,891,017$ Term deposits 1,178,719 220,322 1,399,041 515,499 393,799 909,298Registered plans 609,026 354,928 963,954 453,631 425,443 879,074Borrowings 252,010 - 252,010 276,548 - 276,548Mortgage securitization liabilities 49,293 620,408 669,701 99,115 298,672 397,787Derivative financial instruments 5,560 1,532 7,092 - 4,812 4,812Income tax payable 2,418 - 2,418 1,270 - 1,270Other liabilities 41,287 - 41,287 37,772 - 37,772Membership shares - 1,919 1,919 - 1,772 1,772

Total liabilities 4,088,008$ 1,199,109$ 5,287,117$ 3,274,852$ 1,124,498$ 4,399,350$

Net (1,989,661)$ 2,310,861$ 321,200$ (1,309,849)$ 1,605,910$ 296,061$

As at December 31, 2018 As at December 31, 2017



Page 114

29. EVENTS AFTER THE CONSOLIDATED BALANCE SHEET DATE

There have been no events subsequent to the consolidated balance sheet date that would have a material effect on the Alterna Savings consolidated financial statements as at December 31, 2018.

30. COMPARATIVE AMOUNTS Certain 2017 comparative amounts have been reclassified to conform to the consolidated financial statement presentation adopted in 2018. In 2018, securitization activity was moved from financing activities to operating activities on the consolidated statements of cash flows. Also in 2018, within the consolidated statement of income there is a new line under other income called securitization income which includes net gain on sale of mortgages, net change in unrealized gain or loss on hedging activities and servicing income (see details in note 18). In 2017, net change in unrealized gain or loss in hedging activities was part of net gains on derivative financial instruments under other income and servicing income was part of other under other income. Net gain on sale of mortgages was part of other income in 2017 and 2018. Furthermore, deposits were moved to level 3 from level 2 in the fair value hierarchy table in 2018 (see note 21). The consolidated statements of income, consolidated statements of cash flows and related notes to the consolidated financial statements for 2017 comparative purposes have been updated accordingly.

alterna savings and credit union limited · north bay, pembroke, peterborough, northwestern and...

Documents