Ongoing margin compression drove down second quarter profits at Canadian Western Bank by 15%, the bank announced on Thursday.

In the three months ended April 30, Canadian Western Bank net income was $21.6 million, down from $25.3 million in the same quarter last year. Total revenues increased 2% to $73.7 million from $73.4 million in the second quarter of last year.

The recessionary economic environment and challenging operating conditions for the financial services sector impacted performance, the bank said. In addition, both revenues and overall profitability continued to be adversely affected by a significantly lower net interest margin thanks to consecutive reductions in the prime lending rate, the company said.

The bank’s second quarter net interest margin was 1.93%, down 35 basis points compared to a year earlier and six basis points lower than the previous quarter.

“Our second quarter results were as expected given the significant negative earnings impact from ongoing margin compression,” said Larry Pollock, president and CEO of Canadian Western Bank. But he added that margins began to improve in the latter part of the second quarter.

“Interest rates have bottomed, market spreads appear to be normalizing and deposit costs are trending downwards. These factors, combined with our ongoing success in repricing new and renewal loan accounts to reflect current market conditions are very positive indicators as we move forward,” Pollock said.

Banking and trust earnings for the quarter were $19.4 million, down 16% compared to one year ago. On a year-to-date basis, banking and trust earnings of $44.2 million were down 7% from 2008.

Wealth management services fee income increased 31% to $3.9 million in the quarter, mainly due to contributions from the bank’s stake in Adroit Investment Management Ltd.

Net income from insurance operations was $2.2 million in the second quarter, relatively unchanged from the year earlier. Year-to-date, net income from insurance operations was down a sharp 20% to $3 million from last year, reflecting higher claims activity in the British Columbia home product line due to severe weather conditions.

Quarterly results also included $1.7 million of additional non-cash, stock-based compensation expense reflecting required accounting treatment for stock options voluntarily forfeited by certain CWB management.

Second quarter return on equity was 11%, down 510 basis points compared to the same period last year.

Total loans at Canadian Western Bank increased 1% in the quarter, and are up 5% year-to-date. The level of gross impaired loans decreased slightly from the prior quarter. The bank’s quarterly provision for credit losses was $3.4 million.

“Gross impaired loans were relatively flat for the quarter due to the successful resolution of some accounts. Remaining problem accounts are in various stages of being worked out, which should help stabilize the level of impaired loans over time,” said Pollock. “However, it’s likely we will see further increases as we progress through the economic cycle.”