EXHIBIT C(1.1)
NOVEMBER 3, 2004 CONFIDENTIAL
COMMERCIAL NATIONAL FINANCIAL
CORPORATION
Parent of
[COMMERCIAL BANK LOGO]
VALUATION AS OF NOVEMBER 3, 2004 - DRAFT
DONNELLY PENMAN & PARTNERS
--------------------------
INVESTMENT BANKING
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
TABLE OF CONTENTS
1. Valuation Opinion Letter
2. Valuation Summary
3. Discounted Cash Flow Analysis
4. Recent Trading Analysis
5. Analysis of Comparable Companies
6. Analysis of Comparable Acquisitions
DONNELLY PENMAN & PARTNERS
--------------------------
INVESTMENT BANKING
Page 2
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
1. VALUATION OPINION LETTER
DONNELLY PENMAN & PARTNERS
--------------------------
INVESTMENT BANKING
Page 3
November 3, 2004
Board of Directors
Commercial National Financial Corporation
101 North Pine River Street
P.O. Box 280
Ithaca, MI 48847-0280
Attention: Jeffrey S. Barker - President and CEO
Dear Board of Directors: PRIVATE & CONFIDENTIAL
Commercial National Financial Corporation ("Commercial National" or the
"Company") has engaged Donnelly Penman & Partners ("DP&P") to render its opinion
(the "Opinion") with respect to the fair market per share value of the Company's
common stock as of November 3, 2004 in the event of a recapitalization through a
reverse stock split or "squeeze out" merger transaction.
DP&P is a regional investment banking firm of recognized standing. As part of
our investment banking services, we are regularly engaged in the valuation of
corporate entities on a stand-alone basis or in connection with capital raising
and merger and acquisition transactions. No limitations were imposed by the
Company upon DP&P with respect to the investigations made or procedures followed
by DP&P in rendering its Opinion.
In arriving at our Opinion, we have:
I. Reviewed the Annual Reports of the Company for the years ended December
31, 2002 through 2003 as well as interim financials through October 31,
2004;
II. Reviewed the September 30, 2004 Board of Directors Report;
III. Compared certain financial characteristics of the Company to certain
publicly held companies we deemed relevant;
IV. Reviewed current banking industry conditions and trends concerning the
valuation of recent mergers and acquisitions;
V. Conducted discussions with the senior management of the Company concerning
the business and future prospects of the Company;
Board of Directors
November 3, 2004
Page 2
VI. Prepared a discounted cash flow analysis of the Company based on
projections derived from discussions with and deemed reasonable by
management of the Company; and
VII. Reviewed such other data, including financial and industry data, performed
such other analyses and taken into account such other matters as we deemed
necessary or appropriate.
In connection with rendering its Opinion to Commercial National, DP&P performed
a variety of financial analyses, which are summarized below. DP&P believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without consideration of all factors
and analyses, could create a misleading view of the analyses and the processes
underlying DP&P's Opinion. DP&P arrived at its Opinion based on the results of
all the analyses it undertook, assessed as a whole, and it did not draw
conclusions from or with regard to any one method of analysis. The preparation
of a valuation is a complex process involving subjective judgments, and is not
necessarily susceptible to partial analysis or summary description.
DP&P did not make or obtain any independent evaluation, valuation or appraisal
of the assets or liabilities of Commercial National, nor were we furnished with
such materials. DP&P has not reviewed any individual credit files of the Company
and has assumed, without independent verification, that the reported allowances
for credit losses are adequate to cover such losses.
With respect to the comparable company analysis and comparable merger
transaction analysis summarized below, no public company utilized as a
comparison is identical to Commercial National, and such analyses necessarily
involves complex considerations and judgments concerning the differences in
financial and operating characteristics of the financial institutions and other
factors that could affect the acquisition or public trading values of the
financial institutions concerned. The forecasted financial information furnished
by the Company's management contained in or underlying DP&P's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such forecasts and estimates. The forecasts and
estimates were based on numerous variables and assumptions that are inherently
uncertain, including without limitation factors related to general economic and
competitive conditions. In that regard, DP&P assumed, with the Company's
consent, that the financial forecasts had been reasonably prepared by management
on a basis reflecting the best currently available judgments of management, and
that such forecasts will be realized in the amounts and at the times
contemplated thereby.
Estimates of values of financial institutions or assets do not purport to be
appraisals or necessarily reflect the prices at which financial institutions or
their securities actually may be sold. Accordingly, actual results could vary
significantly from those assumed in the financial forecasts and related
analyses. The analyses performed by DP&P were assigned a weighting based on
DP&P's opinion of their relative comparability and significance with regard to
the specific characteristics of Commercial National.
Board of Directors
November 3, 2004
Page 3
COMPANY BACKGROUND
Commercial National Financial Corporation, a financial holding company, was
incorporated in Michigan on December 30, 1987. On May 31, 1988, the Corporation
acquired all of the stock of Commercial National Bank, a national banking
association chartered in 1962. On December 30, 1992, Commercial National Bank
converted to a state-chartered bank under the name Commercial Bank (the Bank).
On July 16, 1997, the Bank acquired an inactive insurance agency, Commercial
National Financial Services Incorporated (the Agency). The Agency in turn
purchased a minority interest in Michigan Bankers Title of Northern Michigan,
LLC (the Title Agency). During 2000, Michigan Bankers Title of Northern Michigan
was dissolved. The Agency made a similar investment in Michigan Bankers Title of
Eastern Michigan. The investment in the Title Agency is not material.
The Bank established a relationship with The Centennial Group (Centennial), a
financial planning group headquartered in Lansing, Michigan in 2000. Through
customer referrals to a registered representative of Centennial, the Agency
receives commissions for the placement of products and fee based services.
During 2001, Commercial Bank formed a mortgage company, CNFC Mortgage
Corporation, 100% owned by Commercial Bank. CNFC Mortgage Corporation allows
Commercial to pursue out of market mortgages and offer products and services not
normally provided by community banks.
The Bank concentrates its efforts primarily in two areas, commercial lending and
residential real estate lending. Loan, deposit and other products are designed
to support these market segments. The Bank also provides a full range of
traditional banking services to individuals located in its service area.
Commercial Bank offers a variety of deposit products, including checking,
savings, money market, individual retirement accounts, certificates of deposit
and repurchase agreements.
The principal markets for financial services are the mid-Michigan communities in
which the Bank is located and the areas immediately surrounding these
communities. The Bank serves these markets through nine locations in or near
these communities. Commercial also lends outside the principal geographic market
in support of existing customers. Commercial does not have any material foreign
assets or income.
At December 31, 2003, the Bank had no significant concentrations of loans to any
group of borrowers engaged in similar activities that would be impacted by
economic or other conditions. The Bank employed 96 individuals at September 30,
2004.
Commercial National is traded through the OTC Bulletin Board Exchange under the
symbol CEFC. Its shares are traded on a limited basis through regional and
national brokers and market makers. As of October 1, 2004, there were 696
recorded holders of the Company's common stock. The most recent trade of the
stock was 500 shares at $11.00 on October 21, 2004.
Board of Directors
November 3, 2004
Page 4
The Bank has a main office and branch in Ithaca, Michigan, an additional
administrative facility, residential lending center and branch in Alma, Michigan
along with branches in Alma (2 additional), Middleton, Mt. Pleasant, Pompeii and
St. Louis, Michigan. Commercial Bank-Greenville has a main office and branch and
an additional branch in Greenville, Michigan. Alma, Ithaca, Middleton, Pompeii
and St. Louis are located in Gratiot County; Mt. Pleasant is located in Isabella
County; and Greenville is located in Montcalm County. According to the United
States Census Bureau, the median 2004 household income in Gratiot, Isabella and
Montcalm Counties is $39,447, $37,187, and $40,469 respectively.
INDUSTRY OVERVIEW
Commercial, retail and mortgage banking are highly competitive businesses in
which the Company receives competition from both bank and non-bank institutions.
As a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 and the Gramm-Leach-Bliley Act of 1999, the number and types of
depository institution competitors have substantially increased.
Commercial National faces increased competition from finance companies, credit
unions and bank and non-bank mortgage lenders. These companies may offer higher
lending limits and other non-traditional services that Commercial National does
not currently offer. Some of the Company's competitors also can leverage greater
resources in order to gain a larger business presence within Commercial
National's target service areas.
While being relatively small can be a disadvantage, there are certain potential
benefits as well. Community banks that make customer service a priority may be
able to gain an advantage with customers in their local market that feel
neglected by the larger banks. Because the larger banks often seek large
homogenous markets and products, niche opportunities are created for smaller
institutions that seek to fill the needs of the underserved. Also, the relative
difference in size can often correspond to a more agile management team that can
respond more quickly to the ever changing competitive environment.
ECONOMIC OVERVIEW
Reports from the Federal Reserve Districts, as outlined in the July 28, 2004
Federal Reserve "Beige Book, "(1) indicate that economic growth continued to
expand, although some Districts reported that the rate of growth moderated.
Consumer lending activity rose moderately with reports that mortgage
originations are strong. Five districts reported increases in their banks'
residential real estate lending: Philadelphia, Cleveland, Richmond, Chicago, and
St. Louis. Several of these districts indicated that although overall
residential real estate lending had risen, the volume of refinancings recently
fell further. Both the New York and San Francisco Districts saw borrowing by
homebuyers decline, but San Francisco noted that the levels of residential real
estate lending in its district remained high.
------------------------
(1) Summary of Commentary on Current Economic Conditions by Federal Reserve
District, July 28, 2004.
Board of Directors
November 3, 2004
Page 5
Borrowing by commercial clients rose moderately as reported by most districts,
with the New York, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas
City, Dallas, and San Francisco Districts reporting rising commercial borrowing
in recent weeks. New York, Philadelphia, and Atlanta, however, noted that the
increases in their districts were modest. In the Chicago District, commercial
borrowing was characterized as flat.
Most Districts reported little change in loan delinquencies. The Cleveland
District noted that delinquency rates remained largely unchanged in recent
weeks, and applicant credit quality was characterized as stable or slightly
improving. Likewise, the New York District reported lower delinquency rates
across all loan categories. In the Chicago District, lenders note that household
credit quality continues to improve and there were no changes in loan standards
and terms. Moderate increases in credit card lending were reported in the
Philadelphia District, while the San Francisco District reports good credit
quality on existing loans.
The Livingston Study(2), based on survey responses of 26 participants from
banking, industry, academia and trade associations, forecasts economic growth
and falling unemployment through mid-2005 in its June 2004 report. The results
of this most recent release project real Gross Domestic Product ("GDP") will
rise at an annual rate of 4.5 percent in the first half of 2004, 4.1 percent in
the second half of 2004, and continue at an annual rate of 3.8 percent in the
first half of 2005. The unemployment rate is expected to fall from 5.6 percent
in June 2004 to 5.4 percent in December 2004 and then continue to decline, to
5.2 percent, by the middle of 2005. Interest rates on the three-month Treasuries
are expected to rise from 1.3 percent in June 2004 to 1.8 percent at year-end
2004, then rise throughout 2005, ending the year at 3.4 percent. Long-term
interest rates are also expected to rise over the next two years with a
projection to climb from 4.8 percent in June 2004 to 5.1 percent by year-end. It
is expected to increase further in 2005, finishing the year at 5.6 percent. The
participants' views of long-term inflation and output growth have been fairly
steady over the last year. The panelists think that real GDP will grow 3.5
percent annually over the next 10 years, the same as in the previous survey.
Inflation will average 2.5 percent over the next 10 years, unchanged from the
last five surveys dating back to December 2001. For 2004, after-tax corporate
profits are expected to rise 15.5 percent, an increase from the December
survey's prediction of 14.7 percent. On the other hand, forecasters see
corporate profits rising 13.4 percent in 2005, a decrease from the 19.4 percent
increase forecast in December. Stock prices (as measured by the S&P 500 index)
are forecast to rise in 2004 and 2005. The projection for the S&P 500 at the end
of 2005 is about 2.8 percent higher than the previous prediction.
-----------------------------
(2) www.phil.frb.org/econ/liv/index.html
Board of Directors
November 3, 2004
Page 6
VALUATION METHODOLOGY
The following is a brief summary of the analyses performed by DP&P in connection
with its Opinion:
(a) Discounted Cash Flow Analysis. DP&P prepared a discounted dividend stream
analysis of Commercial National, which estimated the future after tax cash flows
that the Company might produce over a period from November 3, 2004 through
December 31, 2008. These estimates were derived from discussions with and deemed
reasonable by Commercial National's management team. The estimates assumed that
Commercial National's pre-tax earnings would grow at a compound annual growth
rate of approximately 12.8% throughout the projection period. This assumes that
Commercial National continues to grow their business in their home markets with
the majority of deposit growth coming from the Greenville locations and loan
growth driven by the residential mortgage company. DP&P has, with the guidance
of management, used the key assumption that the yields on earning assets grow by
25 basis points in 2005 and 2006 and costs of deposits and borrowings grow by
12.5 basis points in 2005 and 2006. DP&P further assumed, with management's
guidance, that the Company would make dividend payouts equal to 70% of earnings
through the projection period, which is consistent with the historical dividend
policy. The resulting cash flows were then discounted to a present value using a
discount rate of 10.5%, based on Ibbotson Associates(3) build up method with an
industry discount applicable to commercial banks. Based on the most recent
Ibbotson's data the riskless rate is 4.8%, market risk premium is 7.0% and
industry specific premium was -1.3%, resulting in a discount rate of 10.5%,
which DP&P regards as appropriate given the nature of the company, industry risk
and general economic conditions. DP&P also estimated the residual value for
Commercial National's common stock using an earning multiple of 14.8 times
applied to projected 2008 net income of $4,275,502, which is an approximation
derived from the analysis of price to earnings multiples in comparable publicly
traded companies (see paragraph c - Analysis of Selected Comparable Companies).
The discounted dividend analysis implied a value of $12.12 per share for
Commercial National's common stock on a marketable basis. This analysis does not
purport to be indicative of actual values or actual future results and does not
purport to reflect the prices at which any securities may trade at the present
or at any time in the future. DP&P included this analysis because it is a widely
used valuation methodology, but noted that the results of such methodology are
highly dependent upon the numerous assumptions that must be made, including
earnings growth rates, dividend payout rates, terminal values and discount
rates.
(b) Historical Trading Multiples. DP&P analyzed the quoted trades listed on the
OTC Bulletin Board for Commercial National Financial Corporation (CEFC) for
varying historical periods. DP&P used a simple average of the closing stock
price quoted for a period of 30 and 90 trading days and one calendar year. Only
days in which the security actually traded were counted in the simple average.
For the past 30 trading days, as of November 3, 2004, the historical average
price was $11.28 with a period volume of 3,300 compiled over 5 separate trading
days. For the past 90
------------------------
(3) Ibbotson Associates, "Stocks, Bonds, Bills, and Inflation," Valuation
Edition 2003 Yearbook
Board of Directors
November 3, 2004
Page 7
trading days, as of November 3, the historical average price was $11.09 with a
period volume of 24,541 compiled over 23 separate trading days. For the past
calendar year, as of November 3, 2004, the historical average price was $11.38
with a period volume of 295,931 compiled over 188 separate trading days. It
should be noted that volume may reflect "double counting" due to both the buy
and sell side of a transaction being counted. In addition, the prices and
volumes displayed are per the trading information provided on the www.otcbb.com
website and may not reflect all transactions that occurred over the
aforementioned time period.
(c) Analysis of Selected Comparable Companies. DP&P compared selected operating
results of Commercial National to a select group of publicly traded commercial
banks headquartered in Michigan, Indiana and Ohio. The comparable set had total
assets of between $150 and $400 million and last twelve months return on average
equity greater than 10.0%. Some companies meeting these criteria may have been
eliminated based on lack of data as generated by SNL Financial - the source for
the comparable transactions data. The selected group had approximately the
following median values: $284.7 million in total assets, $27.1 million in total
equity, a total risk-based capital ratio of 12.38%, LTM return on average assets
of 1.18%, LTM return on average equity of 12.34% and a LTM efficiency ratio of
62.09%. This analysis provided valuation benchmarks including the median price
multiples of 1.838 times book value, 1.855 times tangible book value and 14.8
times LTM earnings per share. Applying the median price to book value multiple
to Commercial National's book value per share as of September 30, 2004 resulted
in an implied per share value of $11.19 on a marketable basis. Using the same
methodology, the implied values provided by application of the relevant
multiples to Commercial National's September 30, 2004 tangible book value and
LTM fully diluted earnings per share were found to be $11.30 per share and
$10.06 per share, respectively.
No bank used in the above analyses as a comparison is identical to Commercial
National. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading values of the Company and the banks to which it
is being compared.
(d) Analysis of Comparable Acquisition Transactions. DP&P analyzed bank
acquisition transactions announced and/or completed since January 1, 2003. Each
selling bank had total assets less than $500 million, was headquartered in
Michigan, Indiana or Ohio and was profitable in the twelve months prior to the
acquisition announcement. This analysis provided an approximate median multiple
of 2.288 times price to book value, 2.289 times price to tangible book value,
21.4 times LTM earnings per share and a premium to core deposit metric of
17.49%. Applying the median multiple for price to book value of 2.288 times to
Commercial National's September 30, 2004 book value per share of $6.09 results
in an implied value per share of $13.93 on a control, marketable basis. Using
the same methodology, the values implied by applying the relevant multiples to
Commercial National's tangible book value per share at September 30, 2004 of
$6.09 and fully diluted earnings per share for the twelve months ended September
30, 2004 of $.68 were found to be $13.94 per share and $14.55 per share,
respectively. Applying the median premium to core deposits of 17.49% to
Commercial National's $144.3 million in core deposits as of September 30, 2004
resulted in a calculated value of $25.24 million. When added to Commercial
National's book value of $24.94 million as of September
Board of Directors
November 3, 2004
Page 8
30, 2004 and divided by the 4,083,278 shares outstanding at the same date, the
result is an implied value per share of $12.27. Core deposits are defined as all
deposits less CDs over $100,000 and brokered or network deposits.
DP&P notes that no selling bank reviewed was identical to the Company and that,
accordingly, any analysis of comparable transactions necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the parties to the transactions being compared.
(e) Net Book Value. The net book value or net equity method implies that a
company is worth its accumulated retained earnings, or deficit, plus its
original capitalization. Net book value is primarily an amount arrived at over a
company's existence which reflects accounting history expressed in unadjusted
dollars and not the company's potential.
In most going concerns with a viable future it can be demonstrated that these
companies would change hands for more than net book value. Book value is only of
importance to the extent it provides an adequate base for the continuance of
operations. In most instances where a company earns a significant return on its
assets (both tangible and intangible), the net book value approach is not
representative of the company's intrinsic business value. We have reviewed the
book value of the Company's assets in limited detail and have found net book
value to be $24.94 million or $6.09 per share as of September 30, 2004.
CONCLUSION
Our Opinion is directed to the Board of Directors of the Company and does not
constitute a recommendation to the Board of Directors of the Company or the
Company's existing holders of Common Stock. This Opinion has been prepared for
the confidential use of the Board of Directors and senior management of the
Company and may not be reproduced, summarized, described or referred to or given
to any other person without DP&P's prior written consent. Our Opinion is limited
solely to the value of the Company's common stock as of November 3, 2004 given
the relevant market and company specific information available at the present
time.
DP&P will typically utilize either a marketability or minority discount, or
combination thereof, to value a minority share of a relatively illiquid company
on a comparable basis. No such discounts have been applied to Commercial
National's common stock in this valuation. If such a discount were applied, it
would result in valuation that would be significantly lower than the value
assigned on the following page.
Board of Directors
November 3, 2004
Page 9
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of November 3, 2004, the fair market value of the Company's common stock is
$11.98 per share.
Sincerely,
DONNELLY PENMAN & PARTNERS
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
2. VALUATION SUMMARY
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 12
PROJECT ATLAS
VALUATION SUMMARY
VALUE
CONCLUSION VALUATION TECHNIQUE:
---------- -------------------------------------------------------------------------
MGT. PROJECTIONS RECENT TRADING COMPARABLE COMPANY
----------------- --------------------------- -------------------------
30 DAY 90 DAY 1 YEAR
TRADING TRADING TRADING
DCF AVG. AVG. AVG. BV TBV EPS
----------------- ------- ------- ------- ------ ------ -------
VALUE INDICATION PER SHARE: $ 11.98 $ 12.12 $ 11.28 $ 11.09 $11.38 $11.19 $11.30 $ 10.06
Weight 100.0% 28.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
PREMIUM TO CURRENT TRADING PRICE ($11.00) 8.9%
Close as of November 3, 2004 28.0% 24.0% 24.0%
Multiple of Diluted LTM EPS 9/30/2004 ($0.68) 17.6x 17.8x 16.6x 16.3x 16.7x 16.5x 16.6x 14.8x
Percentage of Book Value ($6.09) 196.7% 199.0% 185.1% 182.2% 186.8% 183.7% 185.6% 165.2%
Percentage of Tangible Book Value ($6.09) 196.7% 199.0% 185.1% 182.2% 186.8% 183.7% 185.6% 165.2%
VALUATION TECHNIQUE:
-------------------------------------
COMPARABLE ACQUISITION
-------------------------------------
PREMIUM
TO CORE
BV TBV EPS DEPOSITS
------ ------ -------- --------
VALUE INDICATION PER SHARE: $13.93 $13.94 $ 14.55 $12.27
Weight 6.0% 6.0% 6.0% 6.0%
PREMIUM TO CURRENT TRADING PRICE ($11.00)
Close as of November 3, 2004 24.0%
Multiple of Diluted LTM EPS 9/30/2004 ($0.68) 20.5x 20.5x 21.4x 18.0x
Percentage of Book Value ($6.09) 228.7% 228.9% 238.9% 201.5%
Percentage of Tangible Book Value ($6.09) 228.7% 228.9% 238.9% 201.5%
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
NOVEMBER 3, 2004
Page 13
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
3. DISCOUNTED CASH FLOW ANALYSIS
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 14
PROJECT ATLAS
DISCOUNTED CASH FLOW MODEL
VALUATION DATE: NOVEMBER 3, 2004
($ in thousands - except per share data)
PROJECTED
For the years ended December 31
-----------------------------------------------------------------------------------------
2008
2004 2005 2006 2007 2008 Takeout
------------ ------------ ------------ ------------ ------------ ------------
Net Interest Income After Provision $ 8,930,921 $ 9,383,170 $ 10,354,131 $ 10,888,520 $ 11,558,345
Non-interest Income 1,378,077 1,488,323 1,607,389 1,735,980 1,874,858
------------ ------------ ------------ ------------ ------------
10,308,998 10,871,492 11,961,520 12,624,499 13,433,203
Depreciation (500,991) (507,657) (514,324) (520,991) (527,657)
General & Administrative Expenses (6,039,656) (6,220,846) (6,407,471) (6,599,695) (6,797,686)
------------ ------------ ------------ ------------ ------------
Total Other Expenses (6,540,647) (6,728,503) (6,921,795) (7,120,686) (7,325,343)
------------ ------------ ------------ ------------ ------------
Income Before Taxes 3,768,351 4,142,989 5,039,725 5,503,814 6,107,859
Taxes @ 30% (1,130,505) (1,242,897) (1,511,917) (1,651,144) (1,832,358)
------------ ------------ ------------ ------------ ------------
Net Income 2,637,846 2,900,093 3,527,807 3,852,669 4,275,502
Dividend Payout $ 1,846,492 $ 2,030,065 $ 2,469,465 $ 2,696,869 $ 2,992,851
(% Dividend Payout) 70% 70% 70% 70% 70%
Present Value Factor @ 10.5%(1) 0.9855 0.9240 0.8362 0.7567 0.6848
------------ ------------ ------------ ------------ ------------
Mid-year Discount (1,384,869)
------------ ------------ ------------ ------------ ------------
Present Value of Free Cash Flows $ 454,929 $ 1,875,780 $ 2,064,967 $ 2,040,720 $ 2,049,504
------------ ------------ ------------ ------------ ------------
Total Present Value of Cash Flows
(Years 1 to 5) $ 8,485,901
Plus: Residual Cash Flow Value $ 41,225,242 2008 Net Income $ 4,275,502
------------ ------------
Indicated Equity Value $ 49,711,143 2008 Price to LTM Net Income Ratio(2) 14.8x
------------ ------------
Fully Diluted Shares Outstanding 4,100,541 Residual Cash Flow Value $ 63,277,424
------------
Equity Value Per Share (Marketable) $ 12.12 Present Value Factor 0.6515
============ ------------
Present Value of Residual Cash Flow $ 41,225,242
------------
Footnotes:
(1) Based on the Ibbotson Associates weighted average cost of capital build up
method (riskless rate + market risk premium) utilizing a 1.3% industry discount
for commercial banks (data from Ibbotson Associates 2003 Yearbook - Valuation
Edition)
(2) Based on an average of publicly traded companies in MI, IN and OH
with between $150 and $400 million in assets and LTM ROAE greater than 10%.
DONNELLY PENMAN & PARTNERS November 3, 2004
--------------------------
INVESTMENT BANKING
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
4. RECENT TRADING ANALYSIS
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 16
PROJECT ATLAS
RECENT TRADING ANALYSIS
COMMERCIAL NATIONAL FINANCIAL CORPORATION (OTCBBB: CEFC)
[TRADING ANALYSIS GRAPH]
30 DAY TRADING AVERAGE = $11.28, AVG. DAILY VOLUME = 110(1)
90 DAY TRADING AVERAGE = $11.09, AVG. DAILY VOLUME = 272(1)
1 YEAR TRADING AVERAGE = $11.38, AVG. DAILY VOLUME = 1,184(1)
(1) May include double counting (volume from both the bid and ask side of a
trade)
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
November 3, 2004
Page 17
CONFIDENTIAL
[COMMERCIAL BANK LOGO]
5. ANALYSIS OF COMPARABLE COMPANIES
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 18
COMPARABLE COMPANY ANALYSIS
PUBLICLY TRADED BANKS IN MICHIGAN, INDIANA AND OHIO WITH TOTAL ASSETS BETWEEN
$150 AND $400 MILLION WITH LTM ROAE GREATER THAN 10%
CLOSING PRICE (10/29/2004) TO:
FISCAL CLOSING DIVIDEND ---------------------------------
PERIOD PRICE YIELD BOOK TANG. LTM
COMPANY STATE TICKER ENDED (10/29/2004) (%) (%) BOOK (%) EPS (X)
Century Financial Corporation MI CYFL 03/31/2004 22.55 3.72 153.8 153.8 15.0
Clarkston Financial Corporation MI CKSB 09/30/2004 20.35 0.00 177.6 178.2 14.5
Consumers Bancorp, Inc. OH CBKM 09/30/2004 19.50 1.85 221.1 235.8 18.8
County Bank Corporation MI CYBK 06/30/2004 52.25 2.07 203.5 203.5 17.5
F.S. Bancorp IN FXLG 06/30/2004 52.00 3.46 197.3 197.3 15.2
Futura Banc Corporation OH FUBK 03/31/2004 21.40 2.24 176.9 177.9 14.7
Heartland Banccorp OH HLAN 03/31/2004 39.50 1.42 194.5 197.3 14.6
Middlefield Banc Corp. OH MBCN 09/30/2004 38.00 2.32 183.8 183.8 14.3
Ohio Heritage Bancorp, Inc. OH OHHB 03/31/2004 54.50 2.51 113.7 113.7 8.9
Pavilion Bancorp, Inc. MI PVLN 06/30/2004 59.95 1.61 187.2 187.2 16.0
Southern Michigan Bancorp, Incorporated MI SOMC 06/30/2004 27.30 2.50 189.6 194.9 15.1
United Bancorp, Inc. OH UBCP 06/30/2004 13.24 3.80 149.4 149.6 12.4
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HIGH 59.95 3.80 221.1 235.8 18.8
LOW 13.24 0.00 113.71 113.71 8.95
MEAN 35.05 2.29 179.04 181.09 14.76
MEDIAN 32.65 2.28 183.84 185.50 14.85
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COMMERCIAL NATIONAL FINANCIAL CORPORATION MI CEFC 06/30/2004 11.00 4.36 183.03 183.03 16.67
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COMMERCIAL NATIONAL FINANCIAL CORPORATION (FOR THE LTM ENDED SEPTEMBER 30, 2004)
$ 6.09 $ 6.09 $ 0.68
MEDIAN MULTIPLE 183.8% 185.5% 14.8X
----------------------------------
EQUITY VALUE PER SHARE $ 11.19 $ 11.30 $10.06
TIER 1 RISK LTM
TOTAL TOTAL TOTAL TOTAL NPAS/ BASED LTM LTM LTM EFFICIENCY
ASSETS NET LOANS DEPOSITS EQUITY ASSETS CAPITAL ROAA ROAE NIM RATIO
COMPANY ($000) ($000) ($000) ($000) (%) RATIO (%) (%) (%) (%) (%)
Century Financial Corporation 223,329 140,304 189,282 27,385 0.97 10.78 1.24 10.42 3.74 60.93
Clarkston Financial Corporation 160,650 101,803 135,191 11,956 0.00 10.95 0.99 12.29 3.53 62.49
Consumers Bancorp, Inc. 190,261 141,760 155,857 18,938 NA 12.30 1.20 12.25 NA 63.62
County Bank Corporation 251,937 160,202 217,534 28,706 0.60 11.80 1.40 11.18 4.45 61.69
F.S. Bancorp 321,625 244,622 263,467 29,487 NA 13.26 1.21 13.09 3.98 57.70
Futura Banc Corporation 280,224 217,848 236,219 27,177 0.57 12.74 1.21 12.39 4.50 60.68
Heartland Banccorp 357,107 251,999 316,000 29,469 0.27 14.02 1.17 14.17 4.30 65.91
Middlefield Banc Corp. 289,214 206,630 238,739 25,509 0.16 12.38 1.19 13.58 3.79 59.42
Ohio Heritage Bancorp, Inc. 180,931 138,166 113,162 14,802 0.03 NA 1.05 13.22 3.34 56.08
Pavilion Bancorp, Inc. 328,332 280,133 268,378 27,079 0.51 12.58 0.99 11.65 4.93 73.55
Southern Michigan Bancorp, Incorporated 310,815 236,419 253,831 26,348 1.06 12.69 1.04 12.60 4.13 70.84
United Bancorp, Inc. 393,182 206,721 300,345 30,751 0.32 10.70 0.99 11.54 3.84 64.52
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HIGH 393,182 280,133 316,000 30,751 1.06 14.02 1.40 14.17 4.93 73.55
LOW 160,650 101,803 113,162 11,956 0.00 10.70 0.99 10.42 3.34 56.08
MEAN 273,967 193,884 224,000 24,801 0.45 12.20 1.14 12.37 4.05 63.12
MEDIAN 284,719 206,676 237,479 27,128 0.42 12.38 1.18 12.34 3.98 62.09
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COMMERCIAL NATIONAL FINANCIAL CORPORATION 243,151 198,041 165,612 24,516 1.21 9.21 1.14 11.08 4.49 60.27
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
(FOR THE LTM ENDED SEPTEMBER 30, 2004)
MEDIAN MULTIPLE
EQUITY VALUE PER SHARE
Source: SNL Financial
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 19
CONFIDENTIAL
[COMMERCIAL BNAK LOGO]
6. ANALYSIS OF COMPARABLE TRANSACTIONS
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
Page 20
COMPARABLE ACQUISITION ANALYSIS
COMMERCIAL BANK ACQUISITIONS IN MI, IN AND OH ANNOUNCED SINCE 1/1/02 -
TARGET ASSETS LESS THAN $500 MILLION AND POSITITVE LTM NET INCOME
ANNOUNCE COMPLETION DEAL VALUE
BUYER SELLER SELLER STATE DATE DATE ($M)
----- ------ ------------ ---- ---- ----
Sky Financial Group, Inc. Prospect Bancshares, Inc. OH 09/15/2004 NA 46.90
Croghan Bancshares, Inc. Custar State Bank OH 08/10/2004 NA 13.90
Oak Hill Financial, Inc. Ripley National Bank OH 07/20/2004 10/09/2004 5.50
Camco Financial Corporation London Financial Corporation OH 03/26/2004 08/20/2004 10.10
Lincoln Bancorp First Shares Bancorp, Inc. IN 03/10/2004 08/02/2004 37.30
Independent Bank Corporation Midwest Guaranty Bancorp, Incorporated MI 02/04/2004 05/31/2004 43.00
Harrodsburg First Financial Bancorp, Inc. Independence Bancorp IN 01/22/2004 07/09/2004 17.10
Chemical Financial Corporation Caledonia Financial Corporation MI 09/25/2003 12/01/2003 51.10
Sky Financial Group Inc. GLB Bancorp, Inc. OH 07/16/2003 10/19/2003 39.80
Citizens First Bancorp, Inc. Metro Bancorp, Inc. MI 05/22/2003 01/09/2004 30.00
Wayne Bancorp Inc. Banc Services Corporation OH 12/10/2002 05/31/2003 46.20
MainSource Financial Group First Community Bancshares, Inc. IN 11/20/2002 06/12/2003 23.20
First Capital, Inc. Hometown Bancshares Inc. IN 09/26/2002 03/20/2003 11.30
First Indiana Corporation MetroBanCorp IN 09/04/2002 01/13/2003 39.20
First Merchants Corp. CNBC Bancorp OH 08/28/2002 03/01/2003 58.00
Charter One Financial, Inc. Charter National Bancorp, Inc. MI 01/11/2002 05/24/2002 90.40
-- ---------- ---------- -----
HIGH 90.40
LOW 5.50
MEAN 35.19
MEDIAN 38.25
COMMERCIAL NATIONAL FINANCIAL CORPORATION (FOR THE LTM ENDED SEPTEMBER 30, 2004)
MEDIAN MULTIPLE
EQUITY VALUE PER SHARE
Price at Announcement to:
Target ------------------------------------------ Premium to
Target Equity/ Book TBV LTM EPS Assets Deposits Core Deposits
Buyer Assets ($M) Assets (%) (%) (%) (x) (%) (%) (%)
----- ----------- ---------- --- --- --- --- --- ---
Sky Financial Group, Inc. 202,644 7.21 302.78 302.78 29.98 23.15 25.33 19.30
Croghan Bancshares, Inc. 54,234 17.08 150.01 150.01 19.49 25.62 31.00 11.96
Oak Hill Financial, Inc. 64,157 5.11 167.73 167.73 19.71 8.57 9.57 4.77
Camco Financial Corporation 58,941 8.41 203.31 203.31 18.77 17.10 22.67 13.36
Lincoln Bancorp 175,788 5.14 255.01 255.43 35.52 21.24 26.15 23.49
Independent Bank Corporation 233,580 7.47 246.55 246.55 19.66 18.41 22.24 16.15
Harrodsburg First Financial Bancorp, Inc. 102,749 11.35 260.73 294.66 27.12 21.22 26.48 22.15
Chemical Financial Corporation 206,158 10.04 247.15 247.15 15.83 24.80 29.41 23.30
Sky Financial Group Inc. 207,407 14.32 132.56 133.19 33.54 19.21 23.27 6.47
Citizens First Bancorp, Inc. 146,842 10.90 181.40 181.40 20.15 20.43 23.09 11.40
Wayne Bancorp Inc. 206,341 8.41 266.51 266.51 16.98 22.41 28.10 20.41
MainSource Financial Group 149,258 7.04 208.96 211.06 33.33 15.57 19.14 12.72
First Capital, Inc. 82,323 8.82 155.33 155.33 22.69 13.73 15.13 7.67
First Indiana Corporation 173,753 8.83 228.49 228.49 24.29 22.56 28.91 19.57
First Merchants Corp. 317,329 7.52 229.10 229.29 17.06 18.28 23.42 18.82
Charter One Financial, Inc. 266,915 10.04 337.39 337.39 26.38 33.87 41.83 33.89
------- ----- ------ ------ ------ ------ ------ ------
HIGH 317,329 17.08 337.39 337.39 35.52 33.87 41.83 33.89
LOW 54,234 5.11 132.56 133.19 15.83 8.57 9.57 4.77
MEAN 165,526 9.23 223.31 225.64 23.78 20.39 24.73 16.59
MEDIAN 174,771 8.62 228.80 228.89 21.42 20.83 24.38 17.49
COMMERCIAL NATIONAL FINANCIAL CORPORATION
(FOR THE LTM ENDED SEPTEMBER 30, 2004) 243,869 10.23 $ 6.09 $ 6.09 $ 0.68 $59.72 $40.65 $35.33
MEDIAN MULTIPLE 228.8% 228.9% 21.4X 20.8% 24.4% 17.5%
------ ------ ------ ------ ------ ------
EQUITY VALUE PER SHARE $13.93 $13.94 $14.55 $12.42 $ 9.92 $12.27
Source: SNL Financial LP
DONNELLY PENMAN & PARTNERS
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INVESTMENT BANKING
November 3, 2004