Bank Of America Corp (BAC) Helps Fernbank Trump Market (Again)

June 9, 2014

Dear Partners:

In 2013, the Fund earned a 43% gross and 36% net return. In comparison, the S&P 500 delivered approximately 32% (dividends included) during the same period. Under stable domestic economic conditions, the S&P 500 will not generate long-term percentage gains commensurate with those experienced in 2013. Similarly, we do not expect to earn our partners such high returns each year, however we believe that we will be able to consistently generate returns in excess of most people’s next best alternative over three or more year periods.

Bank Of America

2013 Highlights:

Realized Gains

• MBIA. Our largest holding, MBIA Inc. (NYSE:MBI) settled its longstanding litigation resulting in a significant gain for Fernbank (more details below).

• AIG. We bought American International Group Inc (NYSE:AIG) at a significant discount to what we conservatively calculated to be approximate book value. We closed the position around approximate book value. This resulted in significant gain for Fernbank.

• Bank of America Corp (NYSE:BAC). We bought BAC well below our adjusted book value and closed the position around this approximate book value, which yielded a return in excess of 100%.

Current Holdings

We became the largest shareholder of a company that we anticipate will provide Fernbank with considerable returns in the future, particularly in the medium to long term. Our intention is to continue to increase our position in this company. In fact, we welcome additional capital to Fernbank in order to seize this unique opportunity. It would be sinful to not maximize on this opportunity. Whatever happens with the economy, markets or interest rates, this is an excellent opportunity to allocate money to today at its current price.

MBIA Revisited:

We bought MBIA Inc. (NYSE:MBI) believing that it was selling for a significant discount to our estimate of underlying value and that MBIA would unlock this value following a multibillion dollar settlement with Countrywide/Bank of America. Ultimately this is exactly what happened.

MBIA Inc. (NYSE:MBI) entered into a comprehensive settlement agreement with Bank of America consisting of over a billion dollars and other concessions in May 2013, which fell within our range of expected outcomes detailed in our 2011 and 2012 annual letters. This resulted in significant gains for Fernbank. To further demonstrate the comparison between our analysis and the outcomes, here are some highlights from those letters:

EXPECTATION: “We are highly confident that the Transformation [litigation over the splitting of MBIA’s subsidiaries] will be upheld.” – 2011 Annual Letter

OUTCOME: In a court ruling, the Transformation was upheld in favor of MBIA.

EXPECTATION: “If Bank of America decides to go through… the evidence accumulated by MBIA will most likely become publicly available.” – 2011 Annual Letter

OUTCOME: The court ordered Bank of America Corp (NYSE:BAC) to publicly release tens of thousands of pages of internal documents relating to its Countrywide acquisition. This order provided to MBIA Inc. (NYSE:MBI) considerable evidence in support of its Put-Back litigation for contractual misrepresentations.

EXPECTATION: “The very last thing the ‘Banks’ (with emphasis on Bank of America) should want is additional exposure to a massive number of new legal liabilities, but we believe that is exactly what they will get if they decide to defend themselves in court against MBIA Inc. (NYSE:MBI)’s Put-Back litigation claims.” -2011 Annual Letter

OUTCOME: Bank of America continued pursuing litigation, but recognized the value of settling in light of damaging evidence being disseminated in a public forum, additional lawsuits brought forth by the government and the need to shift its focus to its core banking business. Accordingly, Bank of America Corp (NYSE:BAC) settled with MBIA Inc. (NYSE:MBI).

EXPECTATION: “We believe MBIA’s catalyst, a comprehensive settlement package, is rapidly approaching.” – 2011 Annual Letter

OUTCOME: The parties settled in May 2013.

EXPECTATION: “…we expect Fernbank to report returns for 2012 ranging from 30%- 60% just from MBIA alone.” – 2011 Annual Letter

OUTCOME: In 2013 we achieved those returns on MBIA alone.

EXPECTATION: “You will see how developments in both cases lead to a reasonable expectation of a comprehensive settlement in 2013, or ultimately a trial decision by 2014. Either way, MBIA is holding a winning hand.” – 2012 Annual Letter

OUTCOME: MBIA had a winning hand.

After resolution of this longstanding litigation, MBIA’s price increased substantially. We sold out of MBIA at a significant profit to allocate our capital to more attractive investments-discussed in the following section.

2014 Activity:

Our portfolio currently consists of a number of companies that we believe will do quite well over the long-term through all economic environments. In addition, we continue to hold significant amounts of cash to deploy as opportunities arise. Fernbank has a significant advantage over fund’s that manage several billion dollars of assets, in part because we have a larger investment universe from which to choose. For instance, a 10 billion dollar fund will not benefit very much from a 10 million dollar investment even if that investment quickly doubles in price. We, on the other hand, are happy to take advantage of such situations that are unavailable to our competitors. We continue to find a number of gems even in the face of a much less bargain friendly environment than we have seen over the last several years.

Of the handful of gems referenced in the foregoing, two are of particular interest and made up most of the funds purchase activity in 2013 and early 2014. These two companies operate very profitably, can reinvest back in their businesses at high rates of return, are run by capable managers, and are, in essence, unknown to the investment world. While many people prefer to see the price of their investments go immediately up, this is not a happy result when you intend to continue buying interests in a company. Therefore, to avoid unwelcomed price increases from the presence of additional buyers wishing to ride Fernbank’s coat tail, we will continue in the same fashion as last year and to refer to them as companies Y and X.

Company Y is an absolutely incredible opportunity. The economics are as good as they come; in fact we’ve never seen better. Additionally, the company’s management team has recently implemented strategic programs to ensure future growth. We have met with management on multiple occasions to discuss ideas, and are pleased to report they are receptive and open to advice. We will continue to purchase shares in the open market as the company currently sells for a good discount to what we believe the company is conservatively worth. This is particularly exciting given the company’s outstanding economics and incredible prospects.

In a lifetime, you only get a handful of opportunities to buy, at a reasonable price, a company of this character. Fortunately, we have acquired a significant amount of the company’s shares in the open market and are now the largest shareholder. If our assessment about this company is correct, this investment will provide significantly returns to Fernbank investors for many years to come. We will increase our ownership interest in this wonderful company as our capital base increases. Therefore we welcome additional capital so we can comfortably increase our position in Company Y without decreasing our cash below a comfortable threshold. Accordingly, this is a time sensitive opportunity as the price is currently cheap, but will increase as the company grows and

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