Alterna Bank FINANCIAL STATEMENTS 2003

Alterna Bank FINANCIAL STATEMENTS 2003 GROWING. STRONGER. TOGETHER.

Auditors Report To the Shareholder of CS Alterna Bank: We have audited the balance sheet of CS Alterna Bank ("Alterna Bank") as at December 31, 2003 and the statements of operations and retained earnings (accumulated deficit) and cash flows for the year then ended. These financial statements are the responsibility of the management of Alterna Bank. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of Alterna Bank as at December 31, 2003 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Ottawa, Canada January 23, 2004. Ernst & Young LLP Chartered Accountants 2 _ Alterna Bank FINANCIAL STATEMENTS 2003

Balance Sheet (in thousands of dollars) As at December 31 Assets Cash and cash equivalents: Cash in bank (note 2) $ 1,664 $ 5,042 Investments (note 3): Other short-term investments 2,176 Loans, net of allowance for impaired loans (notes 4 and 5): Residential mortgage loans 63,946 45,191 Personal loans 23,688 22,623 Commercial loans 689 778 88,323 68,592 Other: Capital assets (note 6) 357 393 Deferred charges 1,675 1,545 Other assets 585 130 Future tax asset (note 15) 79 91 2,696 2,159 $ 94,859 $ 75,793 Liabilities and Shareholder s Equity Deposits: Demand deposits $ 4,046 $ 2,510 Term deposits (note 14b) 67,714 58,747 Registered retirement savings plans 5,978 3,671 Registered retirement income funds 1,049 591 78,787 65,519 Other: Other liabilities 1,185 406 Shareholder s equity: Share capital (notes 7 and 8) 15,000 10,000 Accumulated deficit (note 8) (113) (132) 14,887 9,868 $ 94,859 $ 75,793 On behalf of the Board: Richard Bertrand, Director Evelyn Levine, Director (See accompanying notes to the financial statements) Alterna Bank FINANCIAL STATEMENTS 2003 _ 3

Statement of Operations and Retained Earnings (Accumulated Deficit) (in thousands of dollars) Year ended December 31 Interest income (note 10) $ 5,345 $ 3,590 Investment income 169 23 5,514 3,613 Interest expense (note10) 3,141 1,975 Net interest income 2,373 1,638 Loan costs 340 489 2,033 1,149 Other income 290 144 2,323 1,293 Operating expenses (notes 11 and 14a) 2,271 1,832 Income (loss) before income taxes 52 (539) Provision for (recovery of) income taxes: Current 21 21 Future 12 (187) 33 (166) Net income (loss) for the year 19 (373) Retained earnings (accumulated deficit), beginning of year (132) 241 Accumulated deficit, end of year $ (113) $ (132) (See accompanying notes to the financial statements) 4 _ Alterna Bank FINANCIAL STATEMENTS 2003

Statement of Cash Flows (in thousands of dollars) Year ended December 31 Operating activities: Net income (loss) for the year $ 19 $ (373) Add (deduct) non-cash items: Amortization of capital assets and deferred charges 302 285 Allowance for impaired loans 660 487 Future income taxes 12 (187) Increase in interest receivable (45) Increase in interest payable 383 592 Increase in deferred start-up costs (44) Other items, net (36) (388) Cash provided by operating activities 1,295 372 Investing activities: Net increase in loans (20,391) (32,988) Net increase in investments (2,131) Acquisition of capital assets (36) (21) Cash applied to investing activities (22,558) (33,009) Financing activities: Net increase in share capital 5,000 Net increase in deposits 12,885 36,369 Cash provided by financing activities 17,885 36,369 Increase (decrease) in cash and cash equivalents during the year (3,378) 3,732 Cash and cash equivalents, beginning of year 5,042 1,310 Cash and cash equivalents, end of year $ 1,664 $ 5,042 Supplemental information: Interest paid $ 2,758 $ 1,383 Income taxes paid $ 16 $ 20 (See accompanying notes to the financial statements) Alterna Bank FINANCIAL STATEMENTS 2003 _ 5

Notes to the Financial Statements December 31, 2003 Nature of Business CS Alterna Bank, a member of the Canada Deposit Insurance Corporation (CDIC), operates under the name Alterna Bank. It is a Schedule 1 Bank and received letters patent from the Minister of Finance of Canada to operate under the Bank Act on October 2, 2000. 1. Significant Accounting Policies These financial statements have been prepared in accordance with section 308 of the Bank Act which states that the financial statements are to be prepared in accordance with Canadian generally accepted accounting principles. The most significant accounting policies are: a) Management Estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b) 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 short term investments, including accrued interest, with original maturities at acquisition of 90 days or less. c) Loans Personal loans, residential mortgage loans and commercial loans are recorded at principal amounts plus accrued interest, less allowance for impaired loans. The allowance for impaired loans represents specific and general provisions. Specific allowances are established on individual loans by reviewing the credit worthiness of the borrowers and the value of the collateral underlying the loan. General allowances are established by reviewing economic conditions and trends. An allowance for impaired loans is established when there is no longer reasonable assurance that the full amount of principal and interest will be collected. In such cases, a specific provision is established to write down the loan to the discounted expected future cash flows at the effective interest rates and, if not measurable, to the fair value of any security, net of expected costs of realization. 6 _ Alterna Bank FINANCIAL STATEMENTS 2003

1. Significant Accounting Policies (continued) d) Capital Assets Capital assets are presented at cost less accumulated amortization. Amortization is calculated on a straight-line basis at the following rates: Annual Rate Furniture, equipment and software 20% Leasehold improvements Term of lease plus one option period e) Deferred Charges Costs incurred in the start-up of Alterna Bank and of new branches, as well as in deposit and lending attraction programs, are included in deferred charges. They are amortized over a period of up to five years. f) Income Taxes Alterna Bank uses the liability method of income tax allocation where temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes give rise to future income taxes. g) Fair Values The fair values of financial instruments are generally determined as follows: Personal loans, residential mortgage loans and commercial loans, and deposits at discounted cash flows using prevailing interest rates of instruments with similar remaining terms. The fair values of all types of loans are calculated before allowance for impaired loans. The fair values of financial instruments with a term of less than one year approximate their carrying values, due to their short term nature, except where otherwise indicated. 2. Cash in Bank Cash in bank includes demand deposits with Canadian chartered banks earning interest at prime less 2.50%, which at December 31, 2003, was 2.00% (2002 2.00%). 3. Investments Alterna Bank invests surplus liquidity in the short-term money market. All investments held in short-term instruments are rated R1-L or better by the Dominion Bond Rating Service. The investments are diversified by limiting investments in any one issuer, depending on the issuer s credit risk, to a maximum of 20% of the total portfolio or $1,000,000 per issuer, whichever the highest. Exceptions to this rule are investments in Government of Canada and its Crown Corporations. Alterna Bank FINANCIAL STATEMENTS 2003 _ 7

4. Loans a) Personal loans Personal loans consist mostly of consumer instalment loans, lines of credit and other personal loans. These loans may be repaid in full or in part at any time without notice or penalty. Personal loans may be amortized over a maximum of 15 years, unless collateralized by real property in which case the amortization period can be up to 25 years. Interest rates on personal loans and other advances may be fixed for a maximum of 5 years. Loans payable on demand carry floating interest rates. b) Residential Mortgage Loans Residential mortgage loans include first mortgages collateralized by real property such as a principal or seasonal residence. Mortgage loans are repaid by regular instalment payments and are generally amortized over a maximum of 25 years. Open mortgage loans, which represent 11% of total residential mortgage loans, may be prepaid in full at any time without penalty. Closed mortgage loans may be prepaid at the mortgagor s option by a lump sum payment once yearly not exceeding 15% of the original loan amount, and/or by increasing once yearly the instalments by 15% of the previous instalment amount. Closed mortgage loans may also be prepaid twice per year by the equivalent of the mortgagor s bi-weekly net salary. Repayment in full of closed mortgage loans prior to maturity is subject to a maximum penalty equal to the greater of: 3 months interest on the outstanding mortgage balance; and the interest rate differential between the current market rate and effective interest rate applied on the outstanding balance for the remaining term of the mortgage loan. Interest rates on mortgage loans may be fixed for a maximum of 7 years. Conventional mortgage loan advances may be made up to a maximum of 75% of the appraised value of the property. Mortgage loans in excess of 75% of the underlying security are insured with the Canada Mortgage and Housing Corporation or equivalent. As at December 31, 2003 a total of $31,257,000 in mortgage loans were insured under the National Housing Act (2002 $24,651,000). c) Commercial Loans Commercial loans include lines of credit, term loans and mortgage loans to individuals or corporations for business use. Loans secured by mortgages on non-owner occupied properties are also included in this category. Commercial loans may be amortized over a maximum of 25 years. Lines of credit and term loans may be repaid in full or in part at any time without notice or penalty, while mortgage loans are repaid by regular instalment payments and may be subject to prepayment penalty. Interest rates on commercial loans may be fixed for a maximum of 5 years. 8 _ Alterna Bank FINANCIAL STATEMENTS 2003

4. Loans (continued) d) Credit Risk Alterna Bank mitigates its credit risk exposure by defining its target market area and by limiting the aggregate principal amount of credit to a client at any given time: $100,000 in personal loans per client, $500,000 in residential mortgage loans per client, $250,000 in commercial loans per client and $1,250,000 in aggregate loans per client and connected persons; by performing a thorough credit analysis prior to approval of the loan; by obtaining collateral when appropriate; and, for commercial loans, by employing risk based pricing and by limiting the concentration by industry and geographic location. The majority of the loans are issued to various debtors of the National Capital region. 5. Allowance for Impaired Loans (in thousands of dollars) Residential Personal Mortgage Commercial Loans Loans Loans Total Total Balance, beginning of year $ 402 $ 20 $ 27 $ 449 $ 71 Less: Loans written off 272 272 110 130 20 27 177 (39) Add: Recoveries on loans previously written off 7 7 1 Add: Allowance charged to operations 663 7 (10) 660 487 Balance, end of year $ 800 $ 27 $ 17 $ 844 $ 449 The balance of loans identified as impaired, prior to any recovery from collateral on these loans, at the end of the year was as follows: Personal loans $ 493 $ 328 Residential mortgage loans 28 21 Commercial loans 16 26 $ 537 $ 375 Percentage of total loans 0.60% 0.54% No write-downs were made in respect of restructured loans during the year. Alterna Bank FINANCIAL STATEMENTS 2003 _ 9

6. Capital Assets (in thousands of dollars) Accumulated Accumulated Cost Amortization Cost Amortization Furniture, equipment and software $ 228 $ 103 $ 1 92 $ 67 Leasehold improvements 358 126 358 90 586 $ 229 550 $ 157 Accumulated amortization 229 157 Net Book Value $ 357 $ 393 7. Share Capital Authorized Unlimited number of common shares Issued 1,500,000 (2002-1,000,000) common shares with a par value of $10 per share $15,000,000 $ 10,000,000 During the year, 500,000 shares were issued for cash consideration of $5,000,000. 8. Regulatory Capital Regulatory capital comprises share capital and accumulated deficit. The Bank Act requires that Alterna Bank maintain regulatory capital at the following levels as at December 31, 2003: Regulatory capital as a % of total assets 8.0% Regulatory capital as a % of risk weighted assets 8.0% As at December 31, 2003, Alterna Bank met both of these requirements with regulatory capital ratios of 15.81% (2002-13.14%) of total assets and 33.80% (2002-26.52%) of risk weighted assets. 10 _ Alterna Bank FINANCIAL STATEMENTS 2003

8. Interest Rate Sensitivity and Fair Values (in thousands of dollars) The following table sets out the carrying amounts (before allowance for impaired loans) and weighted average interest rates of rate sensitive financial instruments: Maturity Variable rate 1 year Over 1 to Over 2 to Over 3 to Over 4 to demand or less 2 years 3 years 4 years 7 years Total Total Short-term investments: Carrying Amount $ 2,176 $ 2,176 Interest Rates 3.43% 3.43% Personal loans: Carrying Amount $ 9,180 $ 296 $ 849 $ 4,992 $ 6,209 $ 2,962 $24,488 $ 23,024 Interest Rates 6.82% 8.05% 7.81% 8.15% 7.34% 7.55% 7.36% 7.59% Residential mortgage loans: Carrying Amount $ 6,737 $ 3,052 $ 4,429 $10,913 $14,751 $24,091 $63,973 $ 45,212 Interest Rates 4.50% 5.49% 6.58% 6.26% 6.28% 5.72% 5.86% 6.27% Commercial loans: Carrying Amount $ 349 $ 357 $ 706 $ 805 Interest Rates 5.19% 7.12% 6.18% 6.16% TOTAL $16,266 $ 5,524 $ 5,278 $15,905 $21,317 $27,053 $91,343 $ 69,041 Deposits: Carrying Amount $ 4,630 $14,203 $ 9,961 $30,973 $12,360 $ 6,660 $78,787 $ 65,519 Interest Rates 0.26% 3.51% 4.17% 4.83% 4.74% 4.25% 4.18% 4.31% Matching gap $11,636 ($8,679) ($4,683) ($15,068) $8,957 $20,393 $12,556 $ 3,522 In the event of a 1% decrease in interest rates, the expected net interest income would decline by $85,000 over the next twelve months. Alterna Bank FINANCIAL STATEMENTS 2003 _ 11

9. Interest Rate Sensitivity and Fair Values (in thousands of dollars) (continued) The following table presents the estimated fair values of the financial instruments of the Alterna Bank, including the fair values of loans which are calculated before allowance for impaired loans. Book value Fair value Book value Fair value Financial assets: Cash equivalents $ 1,664 $ 1,664 $ 5,042 $ 5,042 Investments 2,176 2,182 Loans 89,167 89,559 69,04169,645 Deferred charges 1,675 1,675 1,545 1,545 Other assets 585 585 130 130 Financial liabilities: Deposits (78,787) (80,814) (65,519) (65,871) Other liabilities (1,185) (1,185) (406) (406) $15,295 $13,666 $ 9,833 $10,085 Excess (deficiency) of fair value over book value ($ 1,629) $ 252 10. Interest Income and Interest Expense (in thousands of dollars) The interest income and interest expense for the year are attributable to the following accounts: Interest Income: Residential mortgage loans $ 3,299 $ 2,144 Personal loans 1,994 1,406 Commercial loans 52 40 $ 5,345 $ 3,590 Interest Expense: Demand deposits $ 12 $ 9 Term deposits 2,898 1,848 Registered retirement savings plans 193 106 Registered retirement income funds 38 12 $ 3,141 $ 1,975 12 _ Alterna Bank FINANCIAL STATEMENTS 2003

11. Operating Expenses (in thousands of dollars) Administration $ 1,994 $ 1,555 Occupancy 179 187 Marketing and community relations 98 90 $ 2,271 $ 1,832 12. Borrowing Facility Alterna Bank has access to a line of credit with the Royal Bank of Canada, the approved limit of which is $500,000. This line of credit is payable on demand within 30 days, bears interest at prime rate and is guaranteed by the Civil Service Co-operative Credit Society, Limited ( CS CO-OP ). There was no outstanding balance against this facility at the end of the year. 13. Commitments and Contingencies (in thousands of dollars) a) Operating Leases Alterna Bank has minimum annual payments under operating leases as follows: 2004 $94 2005 $82 2006 $82 Thereafter nil b) Credit Instruments As at December 31, 2003, the credit instruments approved but not yet disbursed were as follows: Total Average term Average rate Residential mortgage loans $ 463 3.18 years 4.23% Lines of credit unfunded $3,426 Prevailing rates on date disbursed c) Contingencies In the normal course of operations, Alterna Bank becomes involved in various claims and legal proceedings. While the final outcome with respect of claims and legal proceedings pending at December 31, 2003 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on Alterna Bank s financial position or results of operations. 14. Related Party Transactions: CS CO-OP a) Management Services Agreement Alterna Bank, by contract with its parent company, CS CO-OP, makes payments for costs incurred and services rendered relating to the management and administration of Alterna Bank. The management fee paid for 2003 was $838,000 (2002 - $735,000 ). Transactions are recorded in accordance with the agreement negotiated between both entities. During the year, Alterna Bank recovered from CS CO-OP losses in accordance with the management services agreement. A total of $348,000 was charged back to CS CO-OP, $331,000 in loan losses and $17,000 in other related costs. Alterna Bank FINANCIAL STATEMENTS 2003 _ 13

14. Related Party Transactions: CS CO-OP (continued) b) Deposits As at December 31, 2003, deposits included term deposits of CS CO-OP in the amount of $45,417,000 (2002- $44,447,000 ), including accrued interest of $1,070,000 (2002 - $988,000 ). The term deposits bear an average interest rate of 4.61% (2002-4.70%) and mature between 2004 and 2007. The interest incurred on these deposits during the year totalled $2,003,000 (2002 - $1,624,000). 15. Income Taxes (in thousands of dollars) Significant components of the future tax asset of Alterna Bank as of December 31, 2003, are as follows: 1 Book depreciation in excess of capital cost allowance $ 103 $ 4 Deferred start-up costs (163) (238) Allowance for impaired loans 139 48 Non-capital loss carry-forward 167 $ 79 $ 91 The reconciliation of income tax computed at the statutory rates to income tax expense (recovery) is as follows: Amount Per cent Amount Per cent Tax at combined federal and provincial rates $ 17 34% $ (188) (35%) Federal large corporations tax 12 24% 1 Other net 4 8% 214% $ 33 66% $ (166) (31%) 16. Comparative Amounts Certain 2002 comparative amounts have been reclassified to conform to the financial statement presentation adopted in 2003. 14 _ Alterna Bank FINANCIAL STATEMENTS 2003