FIRST NATIONAL MORTGAGE INVESTMENT FUND UPDATE FOR INVESTORS

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1 TSX: FNM.UN September 3, 2013 FIRST NATIONAL MORTGAGE INVESTMENT FUND UPDATE FOR INVESTORS Investment Characteristics The First National Mortgage Investment Fund (the Fund ) is fully invested in a diversified portfolio of mortgages secured by multi-unit residential, industrial, and retail properties as well as land. To-date, all mortgages are performing and in good standing. To deliver an attractive yield, the Fund invests primarily in short-term bridge mortgages, which typically bear higher rates of interest than traditional debt financing, and the Fund s manager applies leverage. The investment allows unitholders to participate in the debt side of commercial real estate vs. equity REITs such as Riocan, Calloway and real estate companies such as First Capital Realty. Given that debt ranks ahead of equity, the Fund s risk profile should be considered in a comparison of returns/yields across other asset classes. To achieve its objective of preserving capital, the portfolio s weighted average loan-to-value ratio will not exceed 75%. The current LTV of the Fund is 71.7%. The majority of the Fund (59.7%) is invested in mortgages secured by multi-residential assets which are generally considered a stable asset class. The Fund s unitholders benefit from an advantageous tax structure whereby returns are taxed as capital rather than interest or business income until at least until December 2017 (see press release dated September 4, 2013 concerning potential tax changes related to forward contracts). For this reason, it is an investment well-suited for a non tax-sheltered account. Example: An Ontario resident in the highest tax bracket holds an investment taxed as ordinary income yielding 6.0%. If this investor held FNM.UN units instead, a 6.0% yield would behave like an 8.60% ordinary income investment due to the treatment of the yield as capital. Ernst and Young has a useful website which can be used by investors to research their own unique tax situations. The Fund s tax structure should be considered against other investment alternatives. When comparing against equity REIT investments specifically, individual investors should take care to investigate each REIT individually as their tax treatments differ depending on the composition of their distributions which can be found on their respective websites. Categories within a REIT distribution may include: other income, reduction in cost base, foreign non-business income and/or capital gains. Depending on the specific REIT, there may be more or less allocated to any of these categories which will impact the after-tax return. At present, the Fund s units have been trading well below Net Asset Value (NAV). The NAV as Sept 3 was $9.25 per unit vs the trading price of approximately $8.41 on the same day.

2 At $8.41 per unit and given the current distribution, the Fund is yielding 7.13%. If this is compared to an investment taxed as ordinary income, as described in our example above, the comparative yield of the Fund would be 10.22%. This yield is attractive considering that the asset is debt rather than equity. Example: on Sept 3, Riocan was trading at a yield of approximately 5.97%, Calloway was approximately 6.36% and the ishares S&P TSX Capped REIT Index Fund was approximately 5.17%. Approximate gross average yield for mortgages currently in the Fund (including fees before expenses) is currently 9.2%. See website for more statistics: Snapshot of the Fund as at September 3, 2013 Issue Price: $10.00 Total Mortgage Balance: $54,118,242 Current Price: $8.41 Number of Mortgages: 24 NAV per unit: $9.25 Average Mortgage Balance: $2,254,927 Yield per unit: 7.13% Average Mortgage Term: 18 months Weighted LTV: 71.7% Why is the Unit Price Below NAV? Our speculation is that mortgage funds have been caught in the downdraft of REITs and real estate equity investments. The chart below showing the ishares S&P TSX Capped REIT Index (in blue) and the Fund (red) demonstrates how this downdraft has had a wide-ranging impact. Source: Google Finance REITs have been under pressure since the end of April in part due to the expectation that rising interest rates will affect their payouts as the cost of their debt presumably increases.

3 To illustrate the bond yield movements, consider that at the beginning of April, the 5 year Government of Canada bond yield was below 1.20%. By September, this yield was hovering around 2.00% (see chart below). Given the yield is increasing, so presumably will the cost of debt to these REITs as they refinance maturing mortgages at higher rates. This hypothesis assumes lender spreads stay the same or increase. Source: Investing.com While, ultimately, rising interest rates may be a concern for equity REITs, we feel this concern is misplaced for the First National Mortgage Investment Fund as it is a debt-related Fund, not equity. If the concern is that the Fund will be locked in at lower rates in a rising rate environment consider that the maximum weighted term for the Fund is 36 months however the majority of mortgages are less than this and many of the mortgages repay early. Currently the weighted average term of mortgages in the Fund is 18 months. Given that many mortgages repay early, the effective term is even shorter, allowing the Fund to adjust to interest rate movements. In addition, 56.2% (by dollar volume) of the Fund consists of variable-rate mortgages so as the prime rate rises, so does the coupon. The Fund employs Floor Rates (minimum rates) which limit the downside should the prime rate decline. A rising rate environment for the Fund is a positive as we will issue debt at higher rates; this is in direct contrast to the effect on equity REITs.

4 The Fund s price movements are not unique among other mortgage related investments. The chart below illustrates the price movements of the Trez Capital Mortgage Investment Corp (TZZ in red), the Timbercreek Mortgage Investment Corp (TMC in orange) and the Fund (FNM.UN in blue). The Trez and Timbercreek funds are larger funds with greater liquidity which may in part explain their performance in August. Given the price point of our Fund, there has been little volume and the price declines may be somewhat exaggerated (e.g. recent volume has often been under 1,000 units per day much lower than average). Source: Google Finance Will First National Pursue a Normal Course Issuer Bid or Other Activities to Support the Unit Price? At this time, First National does not plan to pursue any unit price support activities as we are already a significant investor.

5 Summary Many investors today are seeking investment products that provide i) income and ii) preservation of capital. In our opinion, the First National Mortgage Investment Fund s unit price has been pressured by the general view that rising interest rates are bad for commercial real estate investments. In our opinion, this viewpoint does not apply to the Fund as short-term mortgages allow us to regularly adjust to the going interest rates; a rising rate environment should benefit the Fund rather than impair it. Given the dislocation of the unit price vs. its NAV (at a minimum) and considering its risk profile and efficient tax structure, we feel that the current unit price offers an attractive yield and room for upside in valuation. 1. Income Monthly pay Commercial mortgages provide a predictable cashflow The structure of the Fund allows income to be treated as capital for the next four years (until the forward expires in December 2017) which is tax-efficient and generates a higher after-tax yield (in a non tax-sheltered account) than investments that are treated as interest or general income 2. Preservation of Capital The Fund s assets are commercial mortgages which rank ahead of equity in their respective commercial assets The LTV of the Fund is currently a modest 71.7% The mortgages in the Fund all feature recourse to guarantors meaning that the Fund has additional guarantees to go after beyond the property should any default on a mortgage occur The Fund benefits from First National s extensive experience and relationships in the industry which ensures that the borrowers of mortgages in the Fund are of good caliber The majority of mortgages in the Fund are multi-residential assets which are generally considered a more stable asset class The manager of the Fund holds a significant stake in the Fund and has its interests aligned with unitholders in terms of risk / reward Over the next few weeks we will endeavour to include some transaction examples on the Fund website to give you a better feel for the types of investments contained in the Fund.

6 About First National The Mortgage Investment Advisor for the Fund is First National Financial LP ( FNLP ), a wholly owned subsidiary of First National Financial Corporation (TSX: FN). FNLP is a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multi-unit) and commercial mortgages. With over $71 billion in mortgages under administration, First National is Canada s largest nonbank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel. For more information, please visit FNLP has been in business for 25 years and has developed excellent relationships with property owners as well as considerable knowledge of the Canadian commercial lending landscape. The Fund allows unitholders to benefit from these relationships and expertise. FNLP is a significant investor in the Fund and having contributed 15.8% of the initial raise which it continues to hold; our goals are aligned with those of investors. About Stone Asset Management Limited Stone Asset Management Limited ( SAM ) manages the Fund. Established in 1999, SAM is an independent, Canadian-owned asset management company that specializes in structuring and managing high quality investment products. Its professionals are well regarded in the Canadian investment community for their disciplined investment process. Forward-Looking Information Certain information included in this update may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will, "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. This forward-looking information should not be read as providing guarantees of future performance or results, and will not necessarily be an accurate indication of whether or not, or the times by which, those results will be achieved. While management considers these assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties. This forward-looking information is as of the date of this update, and is subject to change after such date. However, management and First National Mortgage Investment Fund disclaim any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required under applicable securities regulations. Contacts Robert Inglis Ernie Stapleton Chief Financial Officer Fundamental First National Financial Corporation Tel: ernie@fundamental.ca rob.inglis@firstnational.ca