SCHEDULE 13D/A: Activist Investor Stilwell Group Boosts Kingsway Financial Stake to 25.2%, Signals Continued Push for Shareholder Value

Stilwell Activist Fund and its affiliates have increased their beneficial ownership in Kingsway Financial Services Inc. to 25.2% through the acquisition of Class C Preferred Stock, reaffirming their strategy of asserting shareholder rights to drive value appreciation.

Summary

• Stilwell Activist Fund and its affiliates (the 'Group') have increased their beneficial ownership in Kingsway Financial Services Inc. (KFS) to 25.2% of common shares outstanding.
• This increase includes 105,263 common shares issuable upon conversion of newly acquired Class C Preferred Stock.
• The Group acquired Class C Preferred Stock with a total stated value of $1,000,000 ($160,000 by Stilwell Activist Fund and $840,000 by Stilwell Activist Investments).
• The Class C Preferred Stock has a stated value of $25 per share and is convertible into common stock at a basis of 2.63158 common shares per preferred share.
• All outstanding Class C Preferred Stock will be redeemed by the Issuer on February 12, 2032.
• The Group's stated purpose is to profit from the appreciation in KFS's market price by asserting shareholder rights, believing the current market price does not adequately reflect asset value.
• Joseph Stilwell, a member of the Group, has continuously served on KFS's board of directors since April 23, 2009.
• The filing includes a detailed history of the Stilwell Group's activist positions in 76 other publicly-traded companies since 2000, categorized by outcome (sale/merger, seated directors leading to sale/merger, exited activist position after value maximization, exited without maximizing value, currently serving directors, hoping to work with management, intending to gain board representation).
• The Group's activist strategies typically involve advocating for sales/mergers, share repurchases, special dividends, board representation, and addressing corporate governance issues.

Sentiment

Score: 7

Explanation: The document reflects a generally positive outlook from the activist investor's perspective, highlighting their successful track record in driving shareholder value through various strategies, including sales, mergers, and share repurchases. While it details past conflicts and current intentions to assert rights, the overall tone is one of proactive engagement aimed at unlocking perceived undervaluation.

Positives

• The Stilwell Group has a long history of activist investing, with many instances leading to company sales/mergers or increased shareholder value through share repurchases and improved capital allocation.
• The Group's willingness to engage with management and boards to achieve shareholder-friendly outcomes is evident.
• The Group has a track record of successfully seating directors on boards, often leading to strategic changes and eventual sales.
• The Group's focus on maximizing shareholder value, often through accretive share repurchases or strategic sales, aligns with shareholder interests.

Negatives

• The Stilwell Group believes that Kingsway Financial Services Inc.'s asset value is 'not adequately reflected in the current market price,' suggesting potential undervaluation or underperformance.
• The need for an activist investor to intervene often indicates underlying issues with company performance or governance.
• Past instances of management resistance, litigation, and proxy contests detailed in the filing suggest potential for contentious relationships and operational disruption.
• The Group has exited some activist positions without maximizing shareholder value, as noted with Garrison Capital, Inc. due to external factors like the global pandemic.
• Some past engagements involved significant legal battles and disputes with management/boards, such as with HopFed Bancorp, Prudential Bancorp, and Silvergate Capital.

Risks

• Shareholder Activism: The Group's stated purpose is to assert shareholder rights, which could lead to significant changes in company strategy, management, or even a sale, potentially disrupting current operations.
• Management/Board Conflict: The Group's history indicates a willingness to engage in proxy contests and litigation if their demands are not met, which could create internal conflict and divert resources.
• Regulatory Scrutiny: Stilwell Value LLC, a member of the Group, has faced an SEC administrative order for failing to timely file beneficial ownership reports, indicating past compliance issues.
• Strategic Uncertainty: The Group's objective to maximize shareholder value, potentially through a sale, introduces uncertainty regarding the company's long-term strategic direction.
• Litigation Risk: The Group has a history of initiating lawsuits against companies and their boards to enforce shareholder rights or compel actions, which could be costly and time-consuming for the Issuer.

Future Outlook

The Stilwell Group's stated purpose in acquiring shares of Kingsway Financial Services Inc. is to profit from the appreciation in the market price by asserting shareholder rights, believing the current market price does not adequately reflect asset value. They may seek additional purchases or sales of shares. The Group hopes to work with management and the board to maximize shareholder value, and in some cases, they intend to gain board representation and work towards this goal, potentially through a sale of the company if other measures are insufficient.

Management Comments

• "Our purpose in acquiring shares of Common Stock of the Issuer is to profit from the appreciation in the market price of the shares of Common Stock through asserting shareholder rights."
• "We do not believe the value of the Issuer's assets is adequately reflected in the current market price of the Issuer's Common Stock."
• "In each instance [of activist positions], our purpose has been to profit from the appreciation in the market price of the shares we held by asserting shareholder rights. In addition, we believed that the values of the companies' assets were not adequately reflected in the market prices of their shares."
• "We hope to work with management and the board of directors to maximize shareholder value at SFBC."
• "We hope to work with management and the board of directors to maximize shareholder value at PVBC."
• "We believe management and the board are acting in good faith to maximize shareholder value [at CIBH]."
• "We hope to work with management and the board to maximize shareholder value [at CPBI]."
• "We believe management and the directors have ill served PFBXs shareholders, and PFBX should explore all possibilities to maximize shareholder value."
• "If the proposal does not lead to IROQs prompt sale, we intend to seek board representation at IROQ."
• "We intend to work to maximize value for all common shareholders at SICP."

Industry Context

This filing highlights the ongoing trend of activist investing, particularly within the financial services and banking sectors. The Stilwell Group's extensive history demonstrates a consistent strategy of targeting undervalued companies, often community banks or those with mutual holding company structures, to unlock shareholder value through strategic sales, mergers, or capital allocation improvements like share repurchases and special dividends. Their approach often involves direct engagement with management, seeking board representation, and, if necessary, resorting to proxy contests and litigation to drive change. This reflects a broader industry dynamic where institutional investors actively push for corporate governance reforms and strategic shifts to enhance shareholder returns.

Comparison to Industry Standards

• Community Bancshares, Inc. (COMB)'s return on equity was likely to remain below average for the foreseeable future, prompting the activist to push for a sale.
• HopFed Bancorp, Inc. (HFBC) adopted revised compensation policies requiring it to reach at least average annual performance relative to that of its peer group, or executive officers would not receive salary raises, bonuses, or perquisites.
• The document lists numerous specific companies that were targets of Stilwell's activism, primarily in the banking and financial services sector, including: Security of Pennsylvania Financial Corp., Cameron Financial Corporation, Community Financial Corp., Montgomery Financial Corporation, Community Bancshares, Inc., Jefferson Bancshares, Inc., FedFirst Financial Corporation, SP Bancorp, Inc., TF Financial Corporation, Fairmount Bancorp, Inc., Harvard Illinois Bancorp, Inc., Eureka Financial Corp., United-American Savings Bank, Polonia Bancorp, Inc., Georgetown Bancorp, Inc., Wolverine Bancorp, Inc., First Federal of Northern Michigan Bancorp, Inc., Jacksonville Bancorp, Inc., Anchor Bancorp, Hamilton Bancorp, Inc., Ben Franklin Financial, Inc., Alcentra Capital Corp, First Advantage Bancorp, Central Federal Bancshares, Inc., Carroll Bancorp, Inc., Brunswick Bancorp, ICC Holdings, Inc., Seneca-Cayuga Bancorp, Inc., Generations Bancorp NY, Inc., Oregon Trail Financial Corp., HCB Bancshares, Inc., SCPIE Holdings Inc., American Physicians Capital, Inc., Colonial Financial Services, Inc., Naugatuck Valley Financial Corporation, Fraternity Community Bancorp, Inc., Sunshine Financial, Inc., Delanco Bancorp, Inc., Poage Bankshares, Inc., HopFed Bancorp, Inc., MB Bancorp, Inc., FPIC Insurance Group, Inc., Roma Financial Corp., First Savings Financial Group, Inc., Prudential Bancorp, Inc. of Pennsylvania, United Insurance Holdings Corp., Home Federal Bancorp, Inc. of Louisiana, Standard Financial Corp., Alliance Bancorp, Inc. of Pennsylvania, ASB Bancorp, Inc., United Community Bancorp, West End Indiana Bancshares, Inc., William Penn Bancorp, Inc., First Financial Northwest, Inc., Alamogordo Financial Corp., Malvern Bancorp, Inc., FSB Community Bankshares, Inc., Pinnacle Bancshares, Inc., Sugar Creek Financial Corp., Provident Financial Holdings, Inc., West Town Bancorp, Inc., IF Bancorp, Inc., NorthEast Community Bancorp, Inc., Parkway Acquisition Corp., Wayne Savings Bancshares, Inc., Cincinnati Bancorp, Inc., Garrison Capital, Inc., Sound Financial, Inc., Sound Financial Bancorp, Inc., Wheeler Real Estate Investment Trust, Inc., Ottawa Bancorp, Inc., Provident Bancorp, Inc., Silvergate Capital Corporation, CIB Marine Bancshares, Inc., U & I Financial Corp., Central Plains Bancshares, Inc., Peoples Financial Corporation.

Management Changes

Corporate Governance

Legal Proceedings

• Stilwell Value LLC consented to an SEC administrative cease and desist order on September 25, 2024, for failing to timely file certain beneficial ownership reports on Schedule 13D and 13G, resulting in a $75,000 civil monetary penalty.
• Stilwell sued Oregon Trail Financial Corp. (OTFC) in Baker County, Oregon, over a shareholder list demand; the court ruled in Stilwell's favor and sanctioned OTFC.
• Stilwell sued two OTFC directors alleging residency violation and perjury; both suits were dismissed pre-trial, but one was appealed and the other re-filed.
• OTFC sued Stilwell in Portland, Oregon, and moved to invalidate proxies; the court denied OTFC's motion.
• Stilwell sued SCPIE Holdings Inc. (SKP) in Delaware Chancery Court to compel shareholder list production; SKP produced the list after the suit.
• Stilwell sued Prudential Bancorp, Inc. of Pennsylvania (PBIP), its MHC, and directors in federal court in Philadelphia to prevent the MHC from voting on management stock benefit plans; some claims were dismissed, but a cause of action against the MHC for breach of fiduciary duties was sustained, and the case was ordered to trial before being voluntarily discontinued.
• Stilwell filed an appeal regarding certain portions of the lower court's order dismissing parts of the PBIP lawsuit, which was later settled.
• Stilwell sued NorthEast Community Bancorp, Inc. (NECB) in federal court in New York seeking an order to compel compliance with a shareholder list demand; NECB produced the list.
• Stilwell filed a lawsuit in New York state court against NECB, its mutual holding company, and their boards for breach of fiduciary duty; the trial court partially granted summary judgment, but the decision was reversed on other grounds, and the New York Court of Appeals declined to hear the appeal.
• Stilwell sued Malvern Bancorp, Inc. (MLVF) directors in Chester County, Pennsylvania, demanding the court order directors to properly consider pursuing a second-step conversion; preliminary objections were overruled, and the lawsuit was withdrawn after MLVF announced its intention to undertake a second-step conversion.
• Stilwell filed two additional lawsuits against First Financial Northwest, Inc. (FFNW) arising from the invalidation of votes at the 2012 election, both of which were settled.
• Stilwell filed a complaint against HopFed Bancorp, Inc. (HFBC) in the Delaware Court of Chancery asking the Court to declare HFBC's prejudicial bylaw invalid and that directors breached their fiduciary duties; the bylaw was amended, mooting the case.
• A motion to recover attorneys fees and expenses in the HFBC case was granted, awarding Stilwell $610,312.
• Stilwell filed a motion to compel the production of books and records from Seneca-Cayuga Bancorp, Inc. (SCAY) in U.S. District Court for the Western District of New York after SCAY refused inspection; the judge denied SCAY's motion to dismiss and ordered production.
• Stilwell filed suit against Silvergate Capital Corporation (SICP) in the Superior Court of California (San Diego County) seeking to enforce inspection rights after SICP refused to produce documents; the Court ordered production.
• Stilwell filed suit against SICP in Maryland Circuit Court seeking to compel an annual meeting after SICP's failure to hold one in 2023; the Circuit Court granted the petition and ordered a meeting, which SICP appealed, but motions to stay were denied.
• SICP moved the Bankruptcy Court for a temporary restraining order seeking to enjoin the Maryland Circuit Court order compelling the annual meeting; the Bankruptcy Court denied the request.
• Stilwell filed a complaint against Peoples Financial Corporation (PFBX) in the Chancery Court of Harrison County, Mississippi, to compel the production of books and records; the Special Chancellor partially granted Stilwell's motion for summary judgment.
• Stilwell filed a derivative complaint on behalf of PFBX against PFBX's directors in the Chancery Court of Harrison County, Mississippi, for breach of fiduciary duty, seeking damages in excess of $50 million; the Court denied the directors' motion to dismiss and allowed discovery to move forward.

Related Party Transactions

• Stilwell Value LLC, as general partner of Stilwell Activist Fund, Stilwell Activist Investments, Stilwell Associates, and Stilwell Value Partners VII, and Joseph Stilwell, as managing member and owner of Stilwell Value LLC, are entitled to an allocation of a portion of profits.
• Joseph Stilwell, a member of the Group, has continuously served as a director on the board of Kingsway Financial Services Inc. since April 23, 2009.

Stakeholder Impact

• Shareholders: Potential for increased share price appreciation through strategic changes (sales, mergers, share repurchases), improved capital allocation, and enhanced corporate governance. Risk of prolonged proxy contests or litigation.
• Management/Board: Increased scrutiny, potential for removal or changes in compensation policies, and diversion of resources to address activist demands or litigation.
• Employees: Potential for job changes or uncertainty if a company is sold or merged.
• Customers/Suppliers/Creditors: Potential for changes in business operations or relationships depending on strategic shifts or ownership changes.

Next Steps

• The Group may seek to make additional purchases or sales of Kingsway Financial Services Inc. common shares.
• The Group hopes to work with Kingsway Financial Services Inc. management and board to maximize shareholder value.
• For IF Bancorp, Inc. (IROQ), if the shareholder proposal for sale does not lead to prompt sale, the Group intends to seek board representation.
• For Silvergate Capital Corporation (SICP), the Group intends to work to maximize value for all common shareholders.
• For Peoples Financial Corporation (PFBX), discovery is moving forward in the derivative lawsuit, and the Group announced a nominee for the 2025 annual meeting.

Key Dates

Keywords

Stilwell Activist Fund, Kingsway Financial Services Inc., KFS, Schedule 13D/A, Activist Investing, Shareholder Rights, Corporate Governance, Mergers and Acquisitions, Share Repurchases, Class C Preferred Stock, Financial Services, Banking Sector, Proxy Contest, SEC Filing, Beneficial Ownership, Value Investing