CWB failed the "Full, True and Plain Disclosure" test

A future case study for the Rotman Management School's ICD course

No one will cry for the arbitrage hedge funds who took a 5% market-to-market loss on their Canadian Western Bank (CWB:TSX) position last Friday, but CWB management’s mishandling of what appears to be a pretty straightforward disclosure item is our daily reminder that judgment still matters in the executive suite.

If you hadn’t heard, CWB was to announce quarterly results on Friday morning, as part of the quarterly bank earnings parade. Although CWB management was prepared to announce next month’s $0.36 dividend payment, that was it:

CWB Financial Group (TSX: CWB) (“CWB”) today announced that the release of its fourth quarter and fiscal 2024 financial results will be rescheduled. CWB deferred the release of its results from the originally planned date of December 6, 2024. CWB expects to issue the results by mid-December 2024.

CWB’s conference call to review the fourth quarter and fiscal 2024 financial results will be rescheduled to follow the release of the results.

The Globe put it best when it reported that “the lender abruptly delayed the earnings publication to a later date this month without explanation.” As is required under the Bank Act, National Bank’s (NA:TSX) acquisition of CWB is currently going through the public consultation process phase of their proposed marriage. The Competition Bureau has already given the green light, which means this step would be expected to be the perfunctory one.

In the absence of any detail as to why the earnings release was being delayed by a week (at least), many investors followed the tried-and-true market tradition of “buy the rumour, sell the news.” Who can argue? If the delay was at all related to a hiccup with National’s takeover of CWB, or even a restatement of prior financial statements, investors had every reason to exit a $59 stock that was trading at a decent 1.4x book value. Not that long ago, prior to the takeover announcement, you could back-up the truck on CWB for $27 at a valuation of just 0.8x book value. Something that I actually recommended to Tony Lacavera, instead of continuing what must be a painful pursuit of Wealth One Bank (see prior post “Careful what you wish for, Tony” Feb 13-24).

For the arbitrage funds that bought CWB at a bit of a discount to the implied takeover price, they need the acquisition to close to make their 5-7% bump (plus the dividend while they wait for Finance Minister Chrystia Freeland’s approval of the deal). With the end of 2024 nearly upon us, some may have feared that the NA/CWB deal was on the ropes. Annoying as it would have been to unwind what should be a pretty standard takeover play — whether they went long CWB, or shorted NA and bought CWB to amp the return — some PMs may not have wanted to explain to their LPs what was going on with these positions at their coming annual review.

Some ~24 hours later, long after more than 3 million CWB shares had been traded (9x average daily volume), bank management provided an update via a rare Saturday press release:

CWB Financial Group (CWB) is providing an update concerning its announcement that the release of its fourth quarter and fiscal 2024 financial results were rescheduled to mid-December 2024.

The decision to reschedule is unrelated to CWB’s potential acquisition by National Bank of Canada. We continue to expect forward progress of the transaction and expect it to close as planned and within previously announced timelines.

The decision was triggered by our receipt of a legal claim against CWB Maxium Financial Ltd. (Maxium), a wholly owned subsidiary of CWB, very late in our process to approve and disclose our annual financial results that by its nature required prudent investigation. The self-represented claimant seeks damages in the amount of $18 Million, as well as general and punitive damages, and costs, related to the provision of certain loans to corporations affiliated with the claimant and the resolution of these loans, which is occurring through a court-approved receivership process.

The claim contains several allegations, including allegations of unethical conduct by a named individual. CWB has rigorous ethical and professional standards in place, and we are undertaking a full investigation. The investigation to date has confirmed that the named individual is a sales agent of Maxium with no lending approval authority. Our investigation also supports that the loans in question were appropriately authorized within our credit approval process, including a thorough review and approval of each loan by our credit risk management team, which is a centralized control function independent of our business lines. Our investigation is ongoing, and we are committed to taking any appropriate action based on our findings.

Based on current knowledge, we do not expect the outcome of this claim to have a material effect on the consolidated financial statements.

While I sympathize with CWB management’s desire to get to the bottom of the claim, the meaty part of the press release (I’ve highlighted above) could and should have been included at the outset. Raymond James Equity Analyst Stephen Boland spoke for most on Bay Street with this note this morning:

Delay of Filings Creates Unnecessary Speculation

On the morning of December 6, CWB announced it was delaying the issuance of its 4Q and F2024 results. This led to material speculation that there was a key matter that could impact the closing of its acquisition by National Bank. This would have been surprising considering National Bank reported that the regulatory approvals were progressing and the deal should close earlier than expected.

Then, in a press release issued December 7, CWB announced that it delayed reporting due to receiving a late legal claim delivered to CWB Maxium for $18 million. Again, this is not material to the overall future results.

Overall, we do not believe the initial press release was as thorough as it could have been. This delay created material volatility in the stock which could have been avoided. Additionally, management was not available during the day.

Agreed — it would have been easy to advise investors that the $5 billion pending takeover wasn’t at issue. As for the materiality of an $18 million legal claim, unless it involves alleged malfeasance by CWB’s most senior management, the bank’s legal counsel (internal?/external?) was far too conservative in this case. Something that National Bank should be particularly conscious of from a culture standpoint (see prior post “Does ‘Courage’ create shareholder value?” April 22-24).

On the bright side, Lecturers at the Rotman School of Management’s Directors Education Program have a new case study to teach in their “What Not To Do” course.

MRM

(note: this post, like all blogs, is an Opinion Piece)

(photo credit: Fishmonger, London, 1950 by Irving Penn)