Special Situations. Portfolio Update: First Quarter Contributors and Detractors

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1 Portfolio Update: First Quarter 2018 The strategy (the Portfolio ) decreased -3.6% gross of fees (-3.9% net of fees) during the first quarter of 2018, trailing both the -0.1% return of the Russell 2000 Index and -0.8% total return of the S&P 500 Index. We were disappointed with the absolute and relative performance in the quarter, but the nature of the strategy will produce a fair amount of quarterly deviation around passive benchmarks. As we have penned in the past, the Portfolio s strategy doesn t have a great singular benchmark, so some blend of the Russell 2000 Index and S&P 500 Index is appropriate for long-term performance measurement given our all-cap strategy, with a bias towards small caps. From a traditional attribution perspective, the first quarter underperformance relative to the Russell 2000 Index was driven by roughly 2/3 stock selection and 1/3 sector allocation with particular underperformance in the Industrial sector. With a small decline in the overall market for the quarter, one might think it was a fairly uneventful quarter, but that was certainly not the case. The stock market s slow and steady upward momentum of 2017 continued into late January, before a very abrupt change that saw a substantial increase in market volatility in February and March, albeit off extremely low levels. While it s hard to predict, we think a much choppier and volatile market environment could be with us for a while, which is not unusual in the latter stages of a bull market. March of 2018 marked the nine-year anniversary of the bear market bottom, which reminds us that very few bull markets have historically lasted this long. On the domestic front, news flow in the first quarter continued to be dominated by the ebbs and flows coming from Washington after the passage of the tax bill at year end. We moved on from tax reform to potentially major changes in foreign trade policy with the implementation of steel and aluminum tariffs and strong rhetoric of more aggressive negotiation tactics. The fear of an escalating trade war with China along with a bump in inflation expectations and longer-term interest rates provided much of the fuel for the big increase in market volatility. The 10-year Treasury increased about 30 basis points from year end, but has pulled back from its intra-quarter high of just under the 3% level. The message from the Fed s March meeting is that it remains fairly hawkish with a bias towards more rate hikes than previously expected through Technology shares, particularly some of the high-profile mega-cap companies, which had been such strong performers over the past couple of years, also saw meaningful declines from recent highs during the first quarter. Despite the heightened level of market volatility, fourth-quarter earnings that were reported in the first quarter of 2018 continued to be strong. We believe that first-quarter earnings, which are about to be reported as we pen this letter, will continue to show strong growth and the outlook for 2018 will likely remain quite positive. For 2018, estimates currently are for nearly 20% operating earnings growth with a benefit of several percentage points from the lower tax rate. Domestic economic growth has accelerated in the past several months with signs that U.S. GDP growth could potentially hit the 3% mark for Fiscal stimulus from lower tax rates should filter in as a nice tailwind over the course of the year. The question is, can near-term momentum be sustained in 2019 or are we getting to the later stages of the economic cycle? Outside the U.S., we ve also seen an upturn in growth in most of the major economies around the world, providing a more synchronized global economy, but sustainability is also highly questionable. Protectionist trade policies are clearly not positive for global growth in the short or long run. Our message about equity valuations remains consistent with what we have been writing about the last few quarters as valuations still appear fairly full today, even after a modest pullback in the market and rising earnings estimates. We have a hard time seeing meaningful P/E multiple expansion from current levels given where we are in the economic and market cycle, such that earnings growth will have to be the dominant driver of additional stock appreciation going forward. The good news is that earnings growth does look to be quite strong over the next few quarters. As always, macro market predictions are very difficult to make and we remain focused on opportunistic, bottom-up stock selection and less on the macro backdrop, looking for strong dislocations in individual stock prices that create distinct investment opportunities for the Portfolio. Contributors and Detractors For the second consecutive quarter, the Portfolio s largest basis points contributor in the first quarter was GTT Communications, a cloud networking services provider that we originally purchased under the transformational acquisition theme. The stock performed well as it announced its largest transaction to date with the purchase of Interoute. The market is growing more comfortable with the benefits of GTT s longer-term plan for ongoing consolidation in the industry. We still think 1

2 our thesis for ownership remains valid although we did continue to trim back the position size as the stock moved higher and our risk-reward became less favorable. After being the Portfolio s largest positon at the beginning of the quarter, we moved it to be more average sized by quarter end. Universal Electronics, a developer and manufacturer of a broad line of preprogrammed universal remote controls, audio-video accessories, and intelligent wireless security and automation components, was the second-best contributor. The stock rose after a strong first-quarter earnings report, which revealed the strongest revenue growth rate in six quarters and a path towards improving margins in upcoming quarters. We initially bought the stock last year as an overreaction to some short-term revenue and margin issues and we feel like we may be at the start of our thesis playing out. The stock is our fifth-largest position at quarter end. Positions that detracted from the Portfolio s investment returns in the first quarter are shown in the table to the right. Kornit Digital, a leading developer of industrial and commercial printing solutions for the garment, apparel, and textile industries, was the largest detractor. The stock drifted lower despite an inline fourth-quarter earnings report as worries about key customer Amazon (AMZN) remained front and center. We initially purchased the stock last year as an overreaction to some near-term sales and margin concerns and believe that our thesis remains relevant. Kornit has a longer-term opportunity to vastly change how an old analog industry produces product, which could make it somewhat of an undiscovered small-cap growth stock. Newell Brands, a manufacturer of a diversified portfolio of household consumer products, was the second-largest detractor. The stock declined after another weak fourth-quarter earnings report and 2018 guidance that was below the Street. We clearly underestimated Newell s short- and longer-term issues and admitted our investment thesis was shot. We exited the stock at a loss and reallocated sales proceeds. Subsequent to our sale, Newell has become a battleground name with major shareholder activist firms battling for control of the Board of Directors. Portfolio Activity 2018 First Quarter Contributors Ranked by Basis Point Contribution Top 5 Basis Point Contribution Return GTT Communications Inc. (GTT) % Universal Electronics Inc. (UEIC) % Skyline Corp. (SKY) % Neogenomics Inc. (NEO) % Envision Healthcare Corp. (EVHC) % 2018 First Quarter Detractors Ranked by Basis Point Contribution Bottom 5 Basis Point Contribution Return Kornit Digital Ltd. (KRNT) % Newell Brands Inc. (NWL) % Kinder Morgan Inc. (KMI) % Hudson Technologies Inc. (HDSN) % Maxlinear Inc. (MXL) % Past performance is not indicative of future performance, and there is a possibility of loss. The above does not represent all holdings in the Portfolio. To obtain a copy of RMBs calculation methodology and a list of all holdings with contribution analysis, please contact your service team. The data provided is supplemental. Please see important disclosures at the end of this document. During the first quarter, the Portfolio added eight new names and exited five, a fairly active quarter. We initiated positions in Skyline (SKY), Dave and Busters (PLAY), Apogee (APOG), Marvell Technology (MRVL), Sina (SINA), Neogenomics (NEO), D.R. Horton (DHI), and Fidelity National Financial (FNF). Skyline, a manufactured housing provider, is a transformative acquisition story as it merges with Champion, a much larger private competitor. We think the combined company, which will remain pubic, can extract significant synergies and move the industry towards a more attractive triopoly structure with three major players. Apogee, an architectural glass company, was purchased after a significant selloff in the stock in We think some of the issues that have hurt profitability in recent quarters are fixable and earnings (and the stock) can recover in 2018 along with a tailwind from a healthy commercial construction market. Marvell Technology, a semiconductor manufacturer, is a transformative acquisition play as its pending merger with Cavium (CAVM) could be very meaningfully accretive to earnings 2

3 power over the next couple of years. Neogenomics, a provider of cancer diagnostic testing, is a name we ve followed internally at RMB for years and we used the recent selloff in the stock to establish a position under an oversold thesis. D.R. Horton, a residential home builder, was purchased under a business transformation thesis as it looks to become more land light like its much higher-quality peer NVR Inc (NVR), a name we ve owned in the past. Home builders were under pressure in the quarter as interest rates rose, giving us an opportunity to purchase the stock at an attractive risk-reward. Title insurer Fidelity National Financial was a successful holding for us in 2017 and we re-entered the stock when they announced the acquisition of competitor Stewart (STC). We think the combined companies can extract significant cost synergies and it moves the industry closer to a duopoly. TOP FIVE HOLDINGS AS OF 3/31/18 % of Assets Gibraltar Industries Inc. (ROCK) 5.8% First Foundation Inc. (FFWM) 5.4% Signature Bank (SBNY) 5.3% PayPal Holdings Inc. (PYPL) 5.0% Universal Electronics Inc. (UEIC) 4.8% The data provided is supplemental. Please see important disclosures at the end of this document. During the quarter, we exited our positions in Newell Brands (NWL), Park Hotels (PK), IMAX Corp. (IMAX), Acuity Brands (AYI), and Adtalem (ATGE). Park Hotel s investment thesis its valuation gap to some of its peers would close over time never really played out and the stock was sold to make room for other, more compelling ideas. IMAX was sold for similar reasons; our investment thesis that centered on an overreaction was slow to play out and we could reallocate the capital elsewhere. Neither Park nor IMAX was sold at a material gain or loss. Interior lighting provider Acuity Brands, a turnaround idea, was sold as we lost confidence in fundamentals. It proved to be a good sale given forward earnings estimates have continued to decline post our sale. Educational service provider Adtalem was exited after our investment thesis around exiting its least-attractive business successfully played out and we sold our position at a nice profit. Outlook From when we last wrote you three months ago, market conditions have changed quite dramatically. We ve gone from low volatility and complacency to much higher volatility and far greater sensitivity. The upcoming corporate earnings report season will be very telling as to whether investors focus returns to individual company fundamentals or the macro environment continues to dominate. Stepping back from the noise of day-to-day market moves, near-term U.S. economic data points have remained quite positive. The U.S. employment market continues to be healthy with unemployment very low and many employers reporting difficulty in finding skilled labor. Labor inflation has been minimal over the last several years, but supply is getting tighter and there are pockets of real scarcity. We may finally be getting to a point where real wage growth accelerates, which is positive for consumer spending, but negative for corporate profitability. Business and consumer confidence remain at historically high levels and real capital investment may pick up, aided by underlying demand and the new tax benefits. The housing market recovery appears to be steadily on track and we believe the U.S. is still not building enough new homes to help balance longer-term supply and demand and an aging housing stock. Confidence in an extended economic cycle has been quite high, although rising interest rates along with a flattening yield curve and trade war risk seem to have somewhat dampened bullish consensus on the economy over the past couple of months. Economic cycles usually don t simply die of old age, rather it s typically an unforeseen shock that tips the scales. That said, we don t foresee a significant economic slowdown or recession on the intermediate horizon. Outside the U.S., the overall economic picture appears to be fairly healthy in many developed and emerging economies as we move closer to synchronous global growth in China s economy has slowed over the past couple of years but appears to be stable now; however, the escalating trade dispute with the U.S. is unhealthy. No one wins a trade war and this isn t good for either country in the short or long run. Europe is also experiencing more consistent, albeit slow growth after several years of very low or negative growth. Brexit remains a wildcard and it feels like there is too much complacency around the ultimate impact of this massive change for the European Union (EU). Overall, we continue to be quite constructive on the momentum in U.S. corporate earnings growth, which is the biggest longterm driver of stock prices. However, we don t see much margin of safety should earnings disappoint, even though the market multiple has compressed somewhat to slightly above its long-term average. As always, we don t pretend to have any ability to predict where the market is heading in the short- or intermediate-term. Even with a generally favorable macro backdrop, we 3

4 spend most of our time looking for highly opportunistic individual opportunities. A more volatile market can produce more of these on both the buy and sell side of the equation, thus the recent increase in overall volatility could improve opportunities for the Portfolio this year. Our strategy has several types of special situations that it gravitates towards and it remains a good environment to look at corporate spin-offs and transformative mergers, which have remained abundant. We expect more of these to develop this year. Wall Street research breadth continues to shrink, helping create some more opportunities in underfollowed securities; however, deep value and corporate restructuring opportunities have been less abundant. As always, we will stick to a disciplined investment process and look for individual securities in many areas of the market that we feel are temporarily mispriced, offering us good risk-reward opportunities. Thank you for the continued trust you place in us to manage your assets. If you have any questions, please do not hesitate to contact us. Past performance is not indicative of future performance, and there is a possibility of loss. The opinions and analyses expressed in this newsletter are based on RMB Capital Management, LLC s ( RMB Capital ) research and professional experience, and are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future performance, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment, or other professional advice. The information provided in this newsletter should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in the Portfolio at the time you receive this newsletter or that securities sold have not been repurchased. The securities discussed do not represent the entire Portfolio and in the aggregate may represent only a small percentage of their holdings. It should not be assumed that any securities transaction or holding discussed was or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. A complete list of security recommendations made during the past 12 months is available upon request. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not account for fees, taxes, or transaction costs. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest U.S. equity securities in the Russell 3000 Index, based on a combination of market capitalization and current index membership. The Russell 2000 Index represents approximately 10% of the total market capitalization of the Russell 3000 Index. The S&P 500 includes 500 leading companies in leading industries of the U.S. economy. The S&P 500 focuses on the large-cap segment of the market and covers approximately 75% of U.S. equities. 4

5 RMB Capital Management, LLC Strategy // Annual Disclosure Presentation Organization RMB Capital Management, LLC ( RMB ) is an independent investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of RMB was established in RMB claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. RMB has been independently verified for the period April 1, 2005 through December 31, Verification assesses whether: (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis; and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Strategy composite has been examined for the period January 1, 2010 through December 31, The verification and performance examination reports are available upon request. RMB maintains a complete list and description of composites, which are also available upon request. Description The ( SS ) strategy reflects the performance of fully discretionary fee-paying equity accounts and is designed to capitalize on stock market inefficiencies in addition to conventional buy-and-hold strategies. are defined as those that have extraordinarily favorable risk/reward characteristics and, for comparison purposes, are measured against the Russell 2000 and S&P 500 indices. The Strategy was created on January 1, The strategy evolved from a Small-Cap Investment Strategy which began January 1, 2008 and became the SS on January 1, An account is included in the on the first day of the first full month following becoming fully invested. An account is removed from the as of the last day of its last full month. Account performance is based on total assets in the account, including cash and cash equivalents. Results are based on fully discretionary accounts under management, including those accounts no longer managed by RMB. Valuations and returns are computed and stated in U.S. Dollars. ANNUAL PERFORMANCE RELATIVE TO STATED BENCHMARK Year End Total Firm Assets as of 12/31 (M) Assets USD (M) # of Accounts Managed Annual Performance Results Gross-of- Fees Netof-Fees Russell 2000 S&P YR ST DEV (%) Russel YR ST DEV (%) % Non- S&P 500 Fee 3-YR ST Paying DEV (%) Assets , % 7.65% -4.41% 1.38% 13.74% 13.96% 10.47% 0.17% 0.62% , % -6.00% 4.89% 13.69% 14.09% 13.12% 8.97% 0.12% 0.96% , % 20.40% 38.82% 32.39% 15.74% 16.45% 11.94% 0.20% 0.81% , % 19.61% 16.35% 16.00% 19.45% 20.20% 15.09% 0.19% 1.17% , % 5.60% -4.18% 2.11% N/A N/A N/A 0.00% N/A , % 45.71% 26.86% 15.06% N/A N/A N/A 0.00% N/A *The 3-year annualized standard deviation is not presented for 2011 because 3-year monthly composite and benchmark returns are not available. Dispersion Fees Effective January 1, 2011, RMB s management fee schedule is as follows: 1.50% on assets between $250,000-$499,999; 1.250% on assets between $500,000-$999,999, and 1% on assets of over $1 million. Actual investment advisory fees incurred by clients may vary. performance is presented on a gross-of-fees and net-of-fees basis and includes the reinvestment of all income. Gross-of-fees returns are reduced by the portion of bundled fee that includes trading costs and all fees other than portfolio management. The net returns are reduced by all actual fees and transactions costs incurred. In addition to a management fee, some accounts pay a bundled fee based on the percentage of assets under management. Other than brokerage commissions, this fee covers all charges for trading, custody, and other administrative expenses. The annual composite dispersion is an asset-weighted standard deviation calculated for the accounts in the the entire year. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Minimum Value Threshold The account minimum in the product is currently $250.0 thousand. Comparison with Market Indices RMB compares its returns to a variety of market indices such as the Russell 2000 and the S&P 500. These indices represent unmanaged portfolios whose characteristics differ from the portfolios; however, they tend to represent the investment environment existing during the time period shown. The returns of the indices do not include any transaction costs, management fees, or other costs. Benchmark returns presented are not covered by the report of independent verifiers. Other Past performance is no guarantee of future performance. Historical rates of return may not be indicative of future rates of return. Individual client performance returns may be different than the composite returns listed. Total Firm Assets as of 12/31 for the years 2010, 2011, and 2012 have been revised to exclude assets from personal trading accounts that were included in previously reported figures. 5