As promised, I want to look further into banks that have seen heavy buying by insiders recently.

All because of the banking “crisis” that’s been all over the news lately. Now, look. This isn’t a real banking crisis. This is just the banking industry deciding to have a “crisis” thanks to some horrific decisions made at Silicon Valley Bancshares and regulators’ intense dislike of cryptocurrency.

I understand the issues behind Silvergate and why the bank voluntarily liquidated. I do not understand why the various regulatory bodies ever let the bank get that deep into the cryptocurrency industry in the first place.

The questions around the Signature Bank seizure are much more interesting and will be fascinating to watch.

But the bottom line is this: these three banks were in unique situations that should have had little to no connection with the rest of the banking industry.

However, all this talk of a wider “banking crisis” has created some great opportunities for us…

In the world of social media and click-hungry wannabe financial influencers, the world cannot let a good potential crisis pass by quietly.

Every single banking-related issue that is being discussed now, including things like the level of insured deposits, cash balances, the timing of securities purchases, mark-to-market losses, and other headline grabbers, have existed for some time now. Uninsured deposits have always been a part of the banking system. Banks have always owned a lot of securities.

And yet, headlines are screaming about the potential for a banking crisis worse than what we experienced in 2008–2010. Hegde, mutual, and exchange-traded funds are dumping bank stocks as fast as possible. Bank ETFs that hold less liquid community banks are likely starting to deal with uninformed forced selling because of retail and institutional dumping.

It has felt like the media and investment communities were trying to turn the possibility of a crisis into a reality.

It does not have to happen.

The vast majority of banks in the United States are in fantastic shape. They have adequate capital, no credit problems, and are prepared to hold securities to maturity, thereby eliminating the paper loss caused by rising rates.

While the headlines and talking heads have screamed of potential catastrophe, bankers themselves have started buying up shares of the bank they manage.

Community banks are not seeing panicked depositors lining up to demand their deposits. They are not seeing wholesale transfers to money market funds. Instead, smaller banks seeing insider buying as the bad news circulates will likely offer massive returns for patient-aggressive investors.

I will share one example of the type of small bank that insiders have been buying that has the potential to get huge returns over the next several years. Keep in mind that this is a smaller bank and does not trade hundreds of thousands of shares a day. If you use a market order to buy shares, you would be buying lunch and possibly drinks for a trading desk at whatever brokerages are market makers in the stock.

The bank is National Bankshares (NKSH), the holding company for the National Bank of Blacksburg in the booming metropolis of Blacksburg, Virginia, a college town about 45 minutes from Roanoke. Blacksburg is the home of Virginia Tech University and its approximately 34,000 students.

I have been to Blacksburg a few times and enjoyed the town immensely. In addition, I have a good friend who lives there and spends all his time driving Uber, panning for gold in the nearby mountains, or attending college sporting events. As lifestyle choices go, that one is hard to criticize.

The National Bank of Blacksburg has 24 branches with about $1.6 billion in assets. The bank has almost 40% of its assets in securities, and executives do not appear to be losing a moment of sleep over that fact.

Roughly 58% of the bank’s deposits are insured under the FDIC rules. Insiders are not too concerned about that fact, either—nor does not appear to be a need for concern. About 45% of the bank’s deposits are transaction accounts for individuals and businesses—mostly checking accounts. And about 21% of the accounts are transactional accounts for municipalities, which are unlikely to go anywhere.

In recent weeks several directors and the chief operating officer have the bank have made open-market purchases of the stock as prices fell.

They are not large purchases by Wall Street standards, but the directors are not cashing huge checks for their services either. Each director is paid $1250 per board meeting and $800 for each committee meeting they attend. The COO made $134,000 in 2022, a rounding error on most big bank paychecks.

The bank hiked its dividend this past year from $1.44 to $1.50 per share and bought back almost 175,000 shares. National Bankshares also paid a special dividend of $1 per share in February. Currently, the shares are yielding 4.53% at the current price.

The National Bank of Blacksburg is a well-run, small-town bank with close relationships with its depositors. The insiders have skin in the game as the board members and executives all own stock.

The bank has been around since 1891 and has faced many crises much worse than the current difficulties. Buying shares at the current PE ratio of 7 will likely pay off handsomely for patient-aggressive investors.

— Tim Melvin

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Source: Investors Alley