Community Bank System, Inc.

Not all banks overleveraged themselves or made 100% loan-to-value loans to people with awful credit histories during the zenith of the housing bubble. Community Bank System, Inc. (CBU - Snapshot Report) is one such bank that bucked the trend and, as a result, didn't need a bailout or to slash its dividend during the financial crisis.

The company recently delivered its 8th consecutive positive earnings surprise as second quarter earnings reached a quarterly record. Analysts have been raising their earnings estimates for both 2011 and 2012 off of the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

The company also pays a reliable dividend that yields a hefty 4.5%. Valuation looks attractive too, with shares trading at less than 11x forward earnings.

No Bailout Needed

Community Bank System operates across Upstate New York and Northeastern Pennsylvania, where it conducts business as First Liberty Bank & Trust. The bank chose not to participate in the Troubled Asset Relief Program and remained profitable throughout the financial crisis, even raising its dividend while other banks were going under.

The company was founded in 1983 and is headquartered in DeWitt, New York. It has a market cap of $852 million.

Second Quarter Results

Community Bank recently reported second quarter earnings per share of 56 cents, beating the Zacks Consensus Estimate of 49 cents. It was a 17% increase over the same quarter in 2010.

Revenue was up 13% year-over-year to $76.9 million, due in part to an acquisition. Net interest income rose 18% due to the acquisition and a 3 basis point improvement in the net interest margin to 4.13%. The net interest margin is essentially the spread between the interest a bank collects on loans and what it pays out on deposits.

Credit quality continued to improve, with second quarter net charge-offs at just 0.08% of average loans. As a result, the provision for loan losses declined from $2.1 million to $1.1 million in the quarter.

Non-interest income inched up 2%, driven by an 8% increase in employee benefits administration and consulting revenues. Meanwhile, deposit service fees fell 7%.

Outlook

Following another strong quarter, analysts revised their earnings estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2011 moved from $2.00 before the latest beat to $2.11, where it currently stands now. This corresponds with 11% growth over 2010 EPS. The 2012 consensus estimate rose from $2.09 to $2.19 over the same period, which represents 4% EPS growth.

Dividend

Community Bank pays a dividend that yields an attractive 4.5%. Unlike many banks, CBU did not slash its dividend during the Great Recession. In fact, it was increasing its dividend then and continues to do so. The company recently announced an 8% hike in its quarterly dividend, for instance.

Since 2000, CBU has raised its dividend at a compound annual growth rate of 6.1%.

Valuation

The valuation picture looks attractive with shares trading at just 10.9x 12-month forward earnings, a discount to the industry average of 13.0x and its 10-year median of 13.9x.

Its price to book ratio is just 1.2, but this is still a premium to the industry average of 0.8. Given the company's superior returns on equity and strong credit quality, this premium seems to be justified.

The Bottom Line

Community Bank System is among an elite group of banks with strong credit quality, consistent earnings growth and a solid and steadily rising dividend. Shares look very attractive at just 10.9x forward earnings.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.