In 2021, financials has been one of the best-performing sectors. Year to date, the S&P 500 financials sector has climbed more than 15%. One area of the financials sector, in particular, that has delivered strong returns in 2021 is the smaller US banks. This is illustrated by the fact that both the Dow Jones US Select Regional Banks and the Nasdaq Regional Banking indexes have surged more than 25% to new all-time highs.
Could this strong performance have been predicted by investors? Quite possibly. Looking at insider transaction activity in the sector late last year, there were definitely indicators that this area of the market was set for a period of outperformance.
Source: Spglobal (Dow Jones U.S. Select Regional Banks Index)
Insider Buying at Small US Banks
What’s interesting is that in the fourth quarter of 2020, there was a significant amount of insider buying in smaller US bank stocks. Indeed, over this period, we observed substantial purchases ($100k+) from top-level insiders such as CEOs, CFOs, and Chairmen at around 10 companies.
One example of a smaller US bank stock that had some bullish insider buying activity in Q4 is Southern National Bancorp of Virginia Inc. It’s the holding company for Sonabank, a state-chartered bank headquartered in Glen Allen, Virginia. In mid-December, President and CEO Dennis Zember spent $1.2 million on stock to acquire an additional 100,000 shares at a price of $11.57 per share. This purchase – the largest at Southern National Bancorp for several years – lifted his holding from 50,000 shares to 150,000 shares. This trade was timed very well. Since then, the stock has risen to $15, delivering a return of around 30%.
Another example of a small US bank that saw bullish insider activity in Q4 is Live Oak Bancshares Inc. It’s the holding company for Live Oak Bank, which serves small business owners in 50 US states. In late October, Chairman James Mahan made a number of purchases of stock. Over four days, the insider picked up 178,584 shares near the $35 level, spending about $6.2 million on company shares. This represented the largest amount of insider buying at Live Oak within a quarter for several years. Since this purchase, the stock has risen to $66 – a gain of about 90%.
A third example is Renasant Corporation. It’s the parent of Renasant Bank, which provides banking services across Mississippi, Tennessee, Alabama, Georgia, Florida, North Carolina and South Carolina.
In early November 2020, CFO James Mabry bought 28,000 shares at a price of $28.98, spending $811,000 on stock. This purchase boosted his holding by 87%. Our records show that this was the largest insider purchase at the bank for years. Since this purchase, the stock has climbed to $42, delivering a gain of about 45%.
These are just three examples of small US banks that saw bullish insider buying in the last quarter of 2020. Other smaller US banks that saw significant insider purchases during the quarter included:
- Bank of California (a CEO purchase)
- First Internet Bancorp (two large CEO purchases)
- Triumph Bancorp (purchases from the Chief Lending Officer)
- Capstar Financial Holdings (a CFO purchase)
- Village Bank and Trust Financial Corp (director purchases)
- Century Bancorp (10% owner purchases)
- Enterprise Financial Services Corp (a director purchase)
- BankFinancial Corp (a director purchase)
- Texas Capital Bancshares (director purchases)
- Flagstar Bancorp (a CFO purchase)
- Northwest Bancshares (director purchases)
- First Financial Bankshares (director purchases)
- Guaranty Bancshares (director purchases)
- New Peoples Bankshares (director purchases)
- Sound Financial Bancorp (activist investor purchases)
- First Midwest Bancorp (a director purchase)
- Bank of Hawaii (director purchases)
Cluster Buying in Financial StocksIt’s worth pointing out that during Q4, we also observed cluster buying at several smaller US banks. This pattern is one of the most bullish patterns in insider transaction analysis because it indicates that there’s a consensus of opinion within the business that the company’s share price is set to move higher.
One example here is Premier Financial Corp. It’s the holding company for Premier Bank and First Insurance Group which provides community banking and financial services. In late October, we observed a bullish cluster buying pattern featuring purchases from the CEO, CFO, and two independent directors. Combined, these insiders spent over $550,000 on stock in the space of just a few days near the $18 mark. Since this cluster buy, the stock has risen to $32, registering a gain of nearly 80%.
Insider Buying at Investment Banks
On top of this, we also observed significant insider buying in more specialised US financial services firms. One example is B.Riley Financial, a financial services company which, through its subsidiaries, provides financial solutions to public and private companies and high-net-worth individuals.
Here, Chairman and Co-Chief Executive Officer Bryant R. Riley made two large purchases of RILY stock in November, spending over $2 million on shares at an average price of around $27.80. Meanwhile, Independent Director Randall Paulson also spent over $1.0 million on shares at a price of $26.65 per share. These two insiders also bought a large amount of stock in August and September. Since these purchases, the stock has climbed much higher, rising above $65 at one point.
Insiders Can Predict Future Stock Price Movements
Overall, there was a significant level of insider buying at smaller US financial services firms late last year. While most investors were focusing on the technology sector (which has experienced a large pullback this year) insiders at smaller US banks were busy snapping up stock in their own companies.
Given that research has found that insiders – who are in a unique position in terms of their ability to access, interpret, and act on private information in relation to their businesses – are often contrarian investors and tend to be good at predicting future stock price movements, there were definitely indicators late last year that the financials sector could be set to outperform in 2021.
By keeping a close eye on insider transaction activity, and looking at where the ‘smart money’ was going, investors could have positioned themselves to capitalise on the 2021 rebound in financial stocks.