While Todd Combs has been at the center of a frenzy of speculation regarding Berkshire Hathaway’s succession planning this week, longtime Berkshire shareholders understand that the choice of a future Chief Executive Officer is a far more important question. The investment managers at Berkshire, including Mr. Combs, will all report to the future CEO who will have ultimate accountability for all capital allocation decisions.
We have carefully monitored David Sokol’s actions at Berkshire as he has been entrusted with increasingly important responsibilities. Many observers consider Mr. Sokol to be the most likely candidate for the CEO position. Since it provides a window into his capital allocation skills, it has also been interesting to follow Mr. Sokol’s personal investment in Middleburg Financial, a small Virginia-based bank.
Ownership Limit Raised from 20% to 30%
As we first reported in late March, Mr. Sokol is the largest shareholder of Middleburg Financial with close to 20 percent of outstanding shares which were acquired from late 2008 to early 2010.
On October 28, Middleburg Financial filed a 8-K report with the SEC indicating that a prior agreement that capped Mr. Sokol’s ownership at 20 percent has been raised to 30 percent. As a result, Mr. Sokol is now able to make additional purchases of stock, although there have been no regulatory filings indicating that any purchases have been made.
Recent Results
Middleburg Financial recently reported third quarter and year-to-date results. The company posted a loss of $5.8 million for the quarter and $4.3 million for the first nine months of the year. The quarterly dividend was cut by half and is now five cents per share. Management added $9.1 million to the loan loss reserve reflecting an increase in non-performing loans and $3.3 million of loans that were charged off during the quarter. The loss was also impacted by the write-down of two properties that the company previously intended to use for branch expansion. Non-performing assets have increased substantially from $18.1 million, or 1.9 percent of total assets at December 31, 2009 to $38.5 million, or 3.5 percent of total assets as of September 30, 2010.
At a recent price of $14.14 per share, Middleburg Financial is trading at a level that is higher than all of Mr. Sokol’s previous stock purchases, although shares have fallen from fifty-two week highs near $18 in late April. The company’s market capitalization is $98 million.
Is This Relevant?
In response to our original article on Mr. Sokol’s investment in Middleburg Financial, some readers stated that this personal investment has no bearing on Berkshire Hathaway or the succession issue. While it is true that Mr. Sokol’s investment has nothing to do with his role at Berkshire, it is still interesting to carefully examine these public regulatory filings given the level of conviction demonstrated by taking a significant stake in a financial institution during very unstable economic times.
Disclosure: No position in Middleburg Financial.