PEOPLES FINANCIAL SERVICES CORP. (PFIS) stock intrinsic value fair value estimate & owner earnings analysis

Peoples Financial Services is the holding company for Peoples Security Bank and Trust, a community bank that takes deposits and makes loans across northeastern and eastern Pennsylvania (Lackawanna, Luzerne, Lehigh, Montgomery, Bucks, Lancaster and neighboring counties, plus Allegheny), Broome County, New York and Middlesex County, New Jersey. On July 1, 2024 it merged with FNCB Bancorp in an all-stock deal that roughly doubled the bank to about $5.4 billion of assets, $4.26 billion of loans and $4.51 billion of deposits at June 30, 2026. In 2025 it moved its headquarters to Moosic, Pennsylvania. How we measure earnings. We start from the cash the bank's operations generate, strip out short-term swings in receivables and payables, and subtract stock compensation and spending on branches, equipment and technology. On that basis 2025, the first full year of the combined bank, produced $47.3 million, or $4.69 per share. We use 2025 as the starting level because 2024 was a transition year (about $16 million of merger costs and a one-time $14.3 million loan-loss reserve set up on the acquired loans) and years before the merger describe a bank about 40% smaller by share count. The pre-merger bank earned a median $4.49 per share on the same basis in 2019-2023, so $4.69 is in line with its history. Two accounting points matter. First, this cash measure leaves out the $16.3 million of 2025 income that came from marking up the acquired FNCB loans toward face value, and it adds back $6.5 million of amortization of the value assigned to FNCB's deposit relationships. Deposits have held steady to rising since the merger ($4.41 billion at end-2024, $4.43 billion at end-2025, $4.51 billion at mid-2026), so we treated that amortization as bookkeeping rather than real shrinkage of the franchise. Second, 2025 capital spending of $10.9 million was unusually high because of the headquarters move. The first half of 2026 ran at about $7 million a year, but we left the full 2025 amount in the starting level. A correction to our previous estimate. A cash measure like this adds back the loan-loss provision, so it charges nothing for loans that actually go bad. That is a real cost for a bank. Actual losses have been low: net charge-offs were 0.11% of loans in 2017, 0.10% in 2018, 0.13% in 2020, 0.03% in 2021, 0.10% in 2023, 0.03% in 2024 and 0.07% in 2025 ($2.9 million). Our earlier estimate did not charge for these losses. This one does, case by case. Our earlier estimate also assumed the bank could grow forever while paying out all of its earnings. A growing bank has to keep part of its earnings to back each new dollar of loans (tangible equity was about $43 per share, roughly 8% of tangible assets, at June 30, 2026). Our earlier estimate also assumed growth continued after year ten without any specific evidence. We now subtract the capital that growth uses up and hold earnings flat after year ten. Together these changes lower our estimate from $103.50 to $78.92 per share. They are corrections to our method, not a sign that the business has weakened. What the bank owes. For a bank, deposits and borrowings are the raw material of the business, and their interest cost is already deducted from the earnings above. So we value the earnings that remain for shareholders after interest and do not subtract that funding a second time. That includes the $85 million of 7.75% subordinated notes the holding company issued in 2025 (fixed rate until 2030, due 2035), which replaced $33 million of 5.375% notes. Their interest, about $6.6 million a year, is covered more than seven times by 2025 earnings, and even the bear case covers it several times over. The bank's leverage, including $1.5 billion of deposits above the FDIC insurance limit at end-2025 and $152 million of brokered deposits, is reflected in the bear case rather than subtracted as debt. In each case below, the value shown is what the shares are worth after the bank has paid all its depositors and lenders. Recent trend. Our cash earnings for the first half of 2026 were about $2.82 per share, compared with $2.23 a year earlier. Net interest income rose 8% to $88.5 million, and loans grew about $233 million in six months. Reported net income fell to $29.6 million from $32.0 million because the bank set aside more reserves as the loan book grew. In 2025, cash earnings per share rose about 115% (from $2.18 to $4.69), but almost all of that came from the merger and does not reflect normal growth. Our base case assumes 3% growth in year 1, well below that figure. Base case: $78.92 per share (about $792 million for the whole company). Earnings before credit losses grow 3% a year for five years and 2% a year for the next five, from $4.69 to about $6.00 per share by year ten. That is below the legacy bank's record: cash earnings per share grew about 9% a year from 2016 to 2022 and about 3% a year from 2016 to 2023, which includes the 2023 deposit-cost squeeze. That growth is paid for by keeping the capital it requires (about $1.30 per share in year one). Loan losses are charged at 0.11% of loans, the bank's long-run average. After year ten, earnings stay flat. The bank has operated in these communities for more than a century and has kept its deposit base through every cycle since, so we assume the franchise keeps going but give no credit for growth after year ten. About 65% of the value comes from the years after year ten. That is typical for a bank but worth knowing. Bear case: $59.31 per share (about $595 million). This case assumes a repeat of 2023, when rising deposit costs cut the legacy bank's cash earnings per share 26% (from $5.27 to $3.88). The bank also says further rate cuts could compress its net interest margin. So earnings before credit losses fall 20% for two years and settle 10% below the 2025 level with no growth. Loan losses run at 0.35% of loans for three years, well above the bank's worst recent year (about 0.25% in 2019). A loss like the 2024 write-down of a commercial property that lost its anchor tenant shows how that could happen. After that, losses stay at 0.15%. The bank keeps covering its interest and holding-company note payments throughout. Bull case: $90.10 per share (about $904 million). Capital spending returns to its pre-relocation pace, adding about $0.25 per share. Earnings grow 4.5% a year for five years, still below the legacy bank's 2016-2022 record and well below the 26% rise in first-half 2026 cash earnings per share, then 3% a year to year ten. Loan losses stay near the recent 0.07%. Growth is again paid for by keeping capital, and earnings stay flat after year ten. What we did not count. We gave no separate credit for the acquired low-rate loans paying off and being relent at today's rates, for deposit rates falling, or for new lines of business. These are not contracted, and the first is partly already in the earnings. We also did not reduce value for the securities losses recorded directly in shareholders' equity, which reverse as those bonds mature. What could make this wrong. A commercial real estate downturn in the bank's Pennsylvania markets severe enough to push losses well above 0.35% of loans. A run on uninsured deposits like the one the industry saw in 2023. Or growth that requires more capital than the bank keeps, forcing it to issue shares. The margin-of-safety price is about $55 per share. That is about 30% below our base case and a little under the bear case. For a well-capitalized community bank with a century-long record, that margin allows for a bad credit cycle, and from that price the base case implies about 20% a year if the value is recognized.