M3F Inc

Fees and Compensation.

General Fee Information
Pursuant to the investment management agreement with each client, the client will pay M3F a
quarterly management fee based on the net asset value of the assets under M3F’s management (the
“Management Fee”). In addition to the Management Fee, the client is responsible for brokerage
commissions and custodial fees paid to third parties.

Generally, either M3F or a client may terminate an investment management agreement on 30 days’
prior notice. In the event of termination, fees will be prorated. Any paid but unearned fees will be
promptly refunded to the client, and any fees due to M3F from the client will be invoiced or
deducted from the client’s account prior to termination. Pursuant to the terms of each client’s
investment management agreement, fees are deducted from the client’s account. Additional
information related to brokerage is set forth below under “Brokerage Practices”.

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Fees Charged to the Fund
M3F charges the Fund a Management Fee in an amount equal to 1.50% of assets under
management, which is paid quarterly in advance and deducted from the Fund. The Fund is also
responsible for certain of its operating expenses including, without limitation, bank service fees,
taxes and extraordinary expenses, including without limitation, non-ordinary legal expenses, as
outlined in its offering memorandum. The General Partner may also receive a performance
allocation from the Fund, as described below under “Performance-Based Fees and Side-By-Side
Management”.

Individualized Account Advisory Service Fees
As stated above, M3F may offer Individualized Account Advisory Services to managed accounts.
Fee schedules for Individualized Account Advisory Services will be negotiated.

Performance-Based Fees and Side-By-Side Management

The General Partner, an affiliate of M3F, may receive a performance allocation equal to 15% of
the net profits earned by each investor in the Fund. The performance allocation is generally payable
on an annual basis. This arrangement may act as an incentive for M3F to make investments that
are riskier or more speculative than would be the case in the absence of a performance allocation.
This risk is mitigated by the fact that M3F seeks to maximize the performance of the Fund over
time. In addition, the Fund is also subject to a loss carry forward provision (often referred to as a
“high water mark”). This means that if the Fund declines in value and subsequently regains that
loss, the General Partner will not assess a performance allocation on the recovery of value.

Types of Clients

The Fund
As indicated above, M3F provides investment advisory services to the Fund. The investors in the
Fund are generally “qualified purchasers” (as defined in Section 2(a)(51)(A) of the Investment
Company Act of 1940, as amended), which may include high net worth individuals, trusts,
endowments, foundations, funds of funds or pension plans. The minimum investment size in the
Fund is $1 million and the minimum for subsequent subscriptions is $500,000, although these
minimums may be waived at the discretion of M3F.

Individualized Account Services
M3F may provide individualized account services to individuals, pension and profit-sharing plans,
corporations, trusts, estates and charitable organizations. While M3F may make exceptions, the
minimum portfolio value eligible for services is generally $10,000,000.

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Methods of Analysis, Investment Strategies and Risk of Loss

Methods of Analysis and Investment Strategies
M3F attempts to achieve the Fund’s investment objective by making both long and short
investments, primarily in common stocks of companies in the financial services industry. M3F
believes that by focusing primarily on these companies, many attractive investment opportunities
exist that are either under-followed or misunderstood by the institutional investment community.
M3F employs a value-oriented approach, focusing on in-depth “Fundamental Analysis” to identify
and evaluate attractive investment opportunities. For example, in assessing current and potential
investments, M3F may, without limitation:

           •        Analyze interest rates and other key economic data points on a global, national,
                    regional and local level;
           •        Monitor credit trends, which may include debt levels, availability of credit, and credit
                    quality;
           •        Evaluate demographic trends and real estate values;
           •        Utilize regulatory data and financial databases to produce screens and lists;
           •        Attend industry conferences and communicate with key industry contacts;
           •        Travel to local markets to assess economic conditions, meet with bank management
                    teams and collaborate with businesses that serve the community;
           •        Read industry publications; or
           •        Assess merger and acquisition activity to understand demand for various banking
                    markets across the United States.
M3F also evaluates current and potential investments by attempting to understand several facets of
the individual companies’ businesses, generally including:

           •        balance sheets and income statements;
           •        geographic trends;
           •        management’s strategic vision;
           •        liquidity dynamics;
           •        credit risk; and
           •        any other factors determined by M3F to be relevant.

M3F may also give investment advice regarding securities lending, whereby client accounts may
lend portfolio securities to brokers, dealers and financial institutions in exchange for a security
interest in interest-bearing cash collateral accounts.

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Risk of Loss
While M3F seeks to diversify investment portfolios by investing in multiple companies, all
investment portfolios are subject to risks. Accordingly, there can be no assurance that a client
investment portfolio will be able to fully meet its investment objectives and goals, or that
investments will not lose money. Below is a description of several of the principal risks that a
client investment portfolio faces.

Investments in Financial and Banking Sectors. The financial and banking sectors in which client
portfolios invest, like the national economy as a whole, tend to be cyclical and may decline from
time to time or at any time.

Management Style Risks. While M3F manages client investment portfolios based on M3F’s
experience, research and proprietary methods, the value of client investment portfolios will change
daily based on the performance of the underlying stocks and other securities in which they are
invested. Accordingly, client investment portfolios are subject to the risk that M3F’s investment
style is out of favor in the market.

Market Risks. M3F will invest client portfolios into equity securities, such as common stocks,
preferred stocks and short positions on stocks. Investments in stocks and other equity securities
are subject to the risks of declines in these equity markets.

Investments in Small-Cap Companies. Client portfolios may be invested in securities of companies
with small market capitalizations. While certain small-cap companies may offer greater potential
for capital appreciation than larger companies, this potential for greater capital appreciation is
accompanied by a greater risk of loss.

Undervalued Companies. M3F may invest client portfolios in companies that M3F considers to be
“undervalued”. The securities of an undervalued company may be depressed in value due to factors
including, but not limited to, disappointments in recent earnings, diminished expectations regarding
earnings, current or expected adverse economic or industry conditions, or a lack of sufficient
investor interest. Investments in securities that M3F believes are undervalued are accompanied by
a substantial risk of loss because M3F may be mistaken regarding whether particular securities
purchased are undervalued when purchased, and prices for the purchased securities may fall,
resulting in material losses for client portfolios on those investments.

Special Situations. Client portfolios may be invested in a company that M3F believes will
appreciate in value within a reasonable period of time (regardless of general economic conditions
or movements of the market as a whole) because of a development particularly or uniquely
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