Middleburg Financial, a small bank holding company with a base of operations in the prosperous suburbs of Northern Virginia, has been in the news over the past few days due to David Sokol’s comments on CNBC indicating that he plans to build a “mini-Berkshire” after resigning from Berkshire Hathaway in the wake of revelations regarding his trading in shares of Lubrizol Corporation.
We previously published our thoughts on Mr. Sokol’s actions with respect to Lubrizol including a timeline of events, an account of Mr. Sokol’s statements after his resignation, and apparent inconsistencies between his statements and information appearing in the Lubrizol proxy statement. We will not rehash these subjects in this article. Instead, we wish to revisit Mr. Sokol’s investment in Middleburg Financial.
Although various newspapers have covered Mr. Sokol’s investment in Middleburg Financial in recent months, we believe that the Rational Walk’s article published on March 26, 2010 was the first detailed report of the investment. We followed up on the story in late October 2010 when Mr. Sokol received approval from Middleburg’s Board of Directors to increase his stake from 20 percent to a maximum of 30 percent.
A review of Mr. Sokol’s filings on the SEC website indicate that he has been buying additional shares of Middleburg Financial with a small purchase of 300 shares on March 29 being the most recent transaction. Mr. Sokol currently owns slightly over 1.4 million shares, or 20.2 percent of the company. His ownership interest is worth approximately $22.5 million as of April 1, 2011.
Did Sokol Pitch Middleburg to Buffett?
In his recent CNBC appearance, Mr. Sokol made the following comments in response to questions from Becky Quick:
BECKY: So does this, is this a pattern of trading activity like this that has happened with other deals that you’ve brought to Berkshire’s attention?
SOKOL: Ah. No, ’cause the other deals that I’ve brought to Warren, he hasn’t had an interest in. But, you know, Berkshire furnishes us a list of companies that Berkshire has a conflict in —
BECKY: Sorry, just to go back to that. You looked at other companies before, bought a stake in it, mentioned it to Berkshire, Warren wasn’t interested, but you still maintained those stakes in those companies?
SOKOL: Um. Well, only one which is a small bank but it never would have been of interest to Berkshire.
With a market capitalization of $111 million, it seems obvious that Middleburg Financial is far too small for Berkshire to invest in, but it is interesting that Mr. Sokol appears to have mentioned the bank to Mr. Buffett. It may have been another bank, although it seems more likely than not that Mr. Sokol was referring to Middleburg Financial. It seems doubtful that Mr. Sokol seriously “pitched” Middleburg Financial to Mr. Buffett and we see no conflict of interest between his ownership of the bank and his position at Berkshire, in stark contrast to his actions with respect to Lubrizol.
A Foundation for Sokol’s “Mini Berkshire”
It seems highly doubtful that Mr. Sokol plans to use Middleburg Financial as a basis for building a “mini Berkshire”. The bank’s recent financial results have not been particularly strong and there does not seem to be much advantage in using the bank as a basis for acquiring stakes in non-financial companies. In addition, there are many problematic aspects associated with banks owning non financial companies.
However, this does not mean that Mr. Sokol may not attempt to exert more influence over the operations of Middleburg Financial. In a recent article in the Washington Business Journal (in which The Rational Walk is quoted), Middleburg’s management stated that Mr. Sokol is a “great source of advice” but is “too busy” to serve on the board. The bank recently changed its bylaws to allow non-Virginia residents to serve on the Board and presumably Mr. Sokol now has more time on his hands to provide management with more “great advice”.
Bottom Line: Not a “Mini-Berkshire” But Sokol May Get More Involved
Middleburg Financial’s shares jumped sharply on Thursday, March 31 after Mr. Sokol’s comments on CNBC led to speculation that Middleburg Financial would serve as his base for future business activities. This seems almost entirely unwarranted. Investors may wish to examine Middleburg Financial as a potential bet on the recovery of a small bank in a prosperous area of the country but the company is not going to become the next Berkshire Hathaway.
The media frenzy over David Sokol’s potential involvement will probably prompt enterprising reporters to descend on the small town of Middleburg on April 27 for the company’s annual meeting. Perhaps Mr. Sokol will be there and will make a move to become Chairman or at least to join the board. Or this could be an entirely wasted exercise and reporters could be left covering the minutiae of a relatively unknown and not particularly cheap regional bank.
If there turns out to not be much of a story at the annual meeting, not all is lost. Middleburg is located in a spectacular small town country setting, spring is one of the nicest seasons in Virginia, The Red Fox Inn serves a lovely brunch, and Market Salamander has wonderful dessert. It could be a great boondoggle for reporters, although we warn that typical per-diems may be insufficient to fully enjoy all the town has to offer.
Disclosure: No position in Middleburg Financial, Long Berkshire Hathaway.