Half-Year Results

West Bromwich Building Society

Announcement of half-year results for the six months ended 30 September 2010

Introduction

The West Bromwich Building Society is pleased to report its half-year results, which show how the Society, against a background of general economic uncertainty and challenging trading conditions, has continued the impressive progress previously outlined in its performance for the twelve months to March 2010.

Such progress can be seen in the marked reduction in the Society's loss from continuing operations, which is down to £3.9m from £8.3m for the corresponding period last year. This was achieved despite the need to provide £1.3m in relation to the ongoing claims of the Financial Services Compensation Scheme, which reflected the continuing costs of protecting depositors in those financial institutions that failed during 2008 and 2009.

At the same time, the Society has again strengthened its capital position, demonstrating how the West Brom represents a secure and safe home for members' funds.

This focus on providing for the financial needs of its members was evident in the Society's commitment to maintaining competitive interest rates, even though the pressure on interest margins was unrelenting and Bank Rate remained at an all-time low. Indeed, during this half-year, as it had done for the previous six months to March 2010, the Society featured in the Best Buy tables every week.

In the context of this sustained pressure on interest margins, the 24% increase in net interest income to £20.9m, compared with the £16.8m in the half-year to 30September 2009, was satisfactory. This more than compensated for a fall in other income, which primarily related to the low levels of new lending business currently being undertaken. Accordingly, total income has risen 4% year on year.

The positive image portrayed by the half-year results reflects the West Brom's decision in 2009 to adopt a Back to Basics strategy based on the traditional building society model of retail savings and prime residential mortgages. By carefully managing the balance sheet, attending closely to risk, keeping high levels of Prudential Liquidity, controlling costs and reducing dependence on wholesale funding markets, the benefits of this strategy are now clearly visible.

Key highlights

The improved performance in the half-year to 30 September 2010 was underpinned by a number of notable achievements. In particular, the Society:

·; Strengthened its capital position with the Core Tier 1 ratio increasing from 11.8% to 12.2% and Tier 1 ratio from 13.9% to 14.3%.

·; Provided members with a consistent range of market-leading savings products. During this period, the average rate paid to savers exceeded the Bank Rate by 2.07%

·; Attracted circa 21,600 new customers, contributing to retail balance inflows of £1.05bn.

·; Reduced its reliance on the wholesale funding market still further, with the funding ratio reducing to 10.8%. This means residential lending continues to be fully funded by retail balances.

·; Maintained its arrears position for residential lending at 1.27%, which is well below the Council of Mortgage Lenders average of 1.55%.

·; Improved cost efficiency with an annualised management expense ratio down to 0.51% from 0.53% for the year to March 2010.

Robert Sharpe, the Society's Chief Executive, commented:

"The Society can take considerable encouragement from these half-year results, which again confirm the validity and direction of our Back to Basics strategy, as well as representing another major step in returning the Society to profit. What they also reveal is our unwavering determination to expedite the orderly run-off of the non-core activities, which have been the source of the losses over the last two years.

We have again attracted new members - over 21,000 in the six months up to 30 September 2010 - indicating how the West Brom is consistently able to provide products attuned to the financial needs of customers. Indeed, the ability to offer the right proposition for savers will be the key to attracting funds to support our intention to re-enter the prime residential lending market in 2011.

Our strong capital position offers a really promising platform for future progress. The Society is about to embark on a range of exciting developments - a revitalised brand, an extensive branch modernisation programme and a new Head Office - which will enhance the services we provide to our customers and communities, signifying the West Brom's growing confidence as the leading building society in Birmingham and the Black Country, and the 6th biggest in the UK.

As part of these developments, the Society's Board is also pleased to announce today important changes to its Executive Director team, which will again strengthen and enhance our position as we look to the future."

24 November 2010

Enquiries:

West Bromwich Building Society 0870 220 7785

Robert Sharpe - Chief Executive

Jonathan Westhoff - Deputy Chief Executive

College Hill 0207 457 2020

Tony Friend

West Bromwich Building Society

Condensed consolidated half-yearly financial information

30 September 2010

Chief Executive's BUSINESS Review

Performance

The first half of the 2011 financial year demonstrates that the Society is making yet further progress in delivering on its plans to ensure that it emerges from the current economic turmoil in a strong and profitable position. Against a backdrop of subdued economic activity and continued interest margin pressure, the Society has more than halved the loss from continuing operations, down to £3.9m from £8.3m for the same period last year. This is despite the latest period incurring further costs in respect of the Financial Services Compensation Scheme (£1.3m) reflecting the continuing cost of protecting depositors in those institutions that failed during 2008 and 2009.

This improvement is primarily as a result of the stabilisation of the net interest margin and a significant fall in the charges made to cover potential credit losses. Slow economic growth, limited market activity and the planned contraction of the balance sheet to conserve capital for the benefit of the security of members' funds have resulted in a fall in other income that has partially offset these improvements.

Despite the detrimental impact on margin, the Society has upheld the income of its savings members by maintaining highly competitive interest rates throughout the period whilst the interest charged to the majority of its mortgage customers has reflected the continued low Bank Rate. This pressure on the interest margin was partly offset by taking a number of opportunities that arose through the active management of the Society's funding and liquidity positions, resulting in an increase in net interest income of 24% to £20.9m, compared with the same period for last year and a 62% improvement on the second half of 2009/10.

The rigorous cost management approach implemented over the last 18 months led to the management expense ratio improving to 0.51% (annualised). This was despite total assets reducing by 8% over the last 12 months.

Residential mortgage arrears remained well below the industry average. Accounts which are 2.5% or more in arrears represent just 1.27% of total residential mortgage accounts. Arrears on the core residential mortgage portfolio (excluding the closed 2nd charge mortgage book which has shown an increase since the year end) have reduced from 1.05% at the end of the last financial year to 1.03%.

For those borrowers who are experiencing a period of financial difficulty, we continue to offer support to ensure that, wherever possible, they can remain in their homes. This is evidenced by the number of properties in possession, which have reduced in the last 6 months by 25% (from 104 to 78), representing just 0.15% of residential loans.

The level of arrears (accounts which are 1.5% or more in arrears) experienced in the buy to let loans originated by the Group also remained very low, at just 0.88% (March 2010: 0.96%), which is considerably better than the levels experienced by other lenders with similar buy to let portfolios, with the market average position at 30 September 2010 being 1.45%.

The commercial property sector continues to experience a very challenging operating environment, and we have continued to make prudent provisions where we have identified any emerging difficulties. However, heavy investment in our commercial lending "work-out" teams and risk division during 2009 and 2010 has resulted in the charge against commercial loans reducing to £4.8m (30 September 2009: £10.8m). At the end of the period, the Group had £61.5m (£58.4m as at 31 March 2010) set aside for potential losses from exposures to the commercial property sector.

Liquidity

The Group has maintained high levels of liquid assets throughout the economic downturn, resulting in a Prudential Liquidity ratio of 23.1% at 30 September 2010. Although this is a small reduction since the year end (31 March 2010: 25.5%), the prime focus has been on enhancing the quality of the liquid assets held, to ensure they are realisable in times of market stress. To this end, the Society's liquidity portfolio has no exposures to the emerging markets or any mortgage market other than the UK, and as at 30 September 2010 some 99.4% (31 March 2010: 96.3%) was rated single A or better.

Capital

Capital is held as the ultimate protection for depositors. The Board sets its risk appetite such that the Society's capital will exceed regulatory requirements.

At 30 September 2010 the Society's Core Tier 1 ratio was 12.2% (31 March 2010: 11.8%), one of the highest ratios in the sector, and the Tier 1 ratio was 14.3% (31 March 2010: 13.9%). Both ratios remain well above the regulatory minimum that the Society is required to hold by the Financial Services Authority. This has been achieved as a result of our ongoing strategy to deliver a managed reduction in risk weighted assets, down 4.0% to £3.5bn.

Principal Risks and Uncertainties

Across the Group, strategic, operational and financial risks are identified and, where necessary, actions are taken to mitigate those risks. The Group Risk Committee, which meets at least quarterly, is responsible for reviewing these risks. The principal risks and uncertainties, which could have an impact on the Group's long-term performance, remain those outlined on pages 13 to 17 of the 2010 Annual Report and Accounts.

For the remainder of the current financial year, the principal risks and uncertainties faced by the Group are associated with the current condition of the financial markets and the outlook for the economy as a whole. The key risks are the continuing difficulties in the commercial property sector, the potential impact on impairment charges of a sudden further downturn in this sector and the impact on the net interest margin of rates offered to attract and retain retail savers at a time when a large element of our residential loans are linked to the historically low level of the Bank Rate.

Given the risk of competition for retail savings balances intensifying in 2012, due to some financial institutions being scheduled to repay the Special Liquidity Scheme introduced by the Bank of England as a temporary support to many banks and building societies, the Society has focused on achieving the majority of its funding needs in the first half of the year. The £1.05bn already attracted in the first 6 months of the year means that the requirements for the second half are modest.

In respect of residential housing, evidence appears to suggest that the initial recovery in the housing market may have stalled. In its planning, the Board has remained cautious as to the sustainability of the earlier signs of improvement.

Prospects 

We face a future which, in the short term, continues to present uncertainty as the economy strives to emerge from the deepest recession of modern times. Consequently, we do not place a high probability on interest rates increasing in the near future and the recovery of the property market remains uncertain, with increases in unemployment expected well into 2011. Whilst low interest rates will offer some protection to residential mortgage borrowers who find their incomes under pressure, there is an adverse impact on the Society's earnings through the interest margin.

The Board's medium term plan focuses on improving the Society's resilience and stability and maintaining a low cost base, thereby ensuring that we are able to respond quickly to any changes in the environment in which we operate. The progress made over the period in establishing the right basis for this future is pleasing and over the next 12 months the required investment will be made to enhance this still further and ensure that the Society is well positioned to respond effectively to current and future market conditions.

Robert Sharpe

Chief Executive

Certain statements in this half year report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

IAS34.21 is not of relevance to the Group activities, as these activities are not highly seasonal.

There were no material related party transactions during the reporting period covered by this document.

Note 1: Under the terms of the Profit Participating Deferred Shares ('PPDS'), 25% of the annual post tax profits or (losses) will be allocated against the PPDS reserve.

1 General information

These half year financial results do not constitute statutory accounts as defined in Section 81A of the Building Societies Act 1986. A copy of the statutory accounts for the year to 31 March 2010 has been delivered to the Registrar of Companies and the information in this report has been extracted from these statutory accounts. Those accounts have been reported on by the Group's auditors and the report of the auditors was (i) unqualified, and (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report.

The consolidated half year financial information for the six months to 30 September 2010 and 30 September 2009 is unaudited and has not been reviewed by the Group's auditors.

2 Basis of preparation

This condensed consolidated half-yearly statement of comprehensive income for the half-year ended 30 September 2010 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the annual financial statements for the year ended 31 March 2010, which have been prepared in accordance with IFRSs as adopted by the European Union.

3 Accounting policies

Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2010, as described in those annual financial statements. Taxes on income and losses for the period to 30 September 2010 are accrued using the tax rate that would be applicable to expected total annual earnings.

IFRS 3 (revised), 'Business combinations', and consequential amendments to IAS 27, 'Consolidated and separate financial statements' and IAS 28, 'Investments in associates', are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Eligible Hedged Items (Amendment to IAS39, Financial Instruments: Recognition and Measurement) is effective prospectively for annual periods beginning on or after 1 July 2009.

IFRS 3 (revised) continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs are expensed.

As the Group has adopted IFRS 3 (revised), it is required to adopt IAS 27 (revised), 'Consolidated and separate financial statements', at the same time. IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. There has been no impact of IAS 27 (revised) on the current period, as none of the non-controlling interests have a deficit balance. During the period, there have been no transactions whereby an interest in an entity is retained after the loss of control of that entity; there have been no transactions with non-controlling interests.

Eligible Hedged Items (Amendment to IAS39 Financial Instruments: Recognition and Measurement). The amendment clarifies how the existing principles underlying hedge accounting should be applied in the designation of a one-sided risk in a hedged item and inflation in a financial hedged item. The amendment has no material impact on the Group.

4 Business Segments

Operating segments are reported in accordance with the internal reporting provided to the Group Board (the chief operating decision-maker), which is responsible for allocating resources to the reportable segments and assesses its performance. All operating segments used by the Group meet the definition of a reportable segment under IFRS 8.

The Group has three main business segments:

- Retail - incorporating residential lending, savings, investment and protection;

- Commercial - primarily representing loans for commercial property investment;

- Property - a portfolio of residential properties for rent; and

- Mortgage Broking (discontinued).

Central Group operations have been included in Retail and comprise risk management, funding, treasury services, human resources and the internal computer services function, none of which constitute a separately reportable segment and business activity.

Given the Group's business segments are all financial operations, with a majority of revenues deriving from interest and the Group Board relies primarily on net interest revenue to assess the performance of the segment, the total interest income and expense for all reportable segments is presented on a net basis. There were no changes in the reportable segments during the year.

Transactions between the business segments are carried out at arm's length. The revenue from external parties reported to the Group Board is measured in a manner consistent with that in the consolidated income statement.

Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is based on the Group's overall funding costs including allowance for the cost of capital. Central administrative costs are also allocated between segments and are disclosed in inter-segment admin expenses. There are no other material items of income or expense between the business segments.

The Group's management reporting is based on a measure of operating profit comprising net interest income, loan impairment charges, net fee and commission income, other income, depreciation and administrative expenses. This measurement basis excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs, legal expenses and goodwill impairments when the impairment is the result of an isolated, non-recurring event.

The information provided about each segment is based on the internal reports about segment income or expense, assets and liabilities and other information, which are regularly reviewed by the Group Board. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the Statement of Financial Position, but exclude items such as taxation.

These provisions are deducted from the appropriate asset values in the balance sheet

Financial Services Compensation Scheme ("FSCS")

In common with all regulated UK deposit takers, the Society pays levies to the Financial Services Compensation Scheme (FSCS) to enable the FSCS to meet claims against it. The FSCS levy consists of two parts - a management expenses levy and a compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.

We understand that the FSCS has met, or will meet, the claims by way of loans received from HM Treasury. The terms of these loans are interest only for the first three years, and the FSCS will seek to recover the interest cost, together with ongoing management expenses, through levies on member firms over this period. Subsequently, should there be insufficient funds from the realisation of the failed banks' assets to fully extinguish the FSCS' loans from HM Treasury, this may result in the FSCS raising a compensation levy on member firms.

The Society holds a provision for FSCS management expenses and levies of £1.3m being a 6 month accrual for the Society's contribution to the FSCS for its financial year 2010/11, which will be calculated based on the Society's protected deposits as at 31 December 2010. This accrual does not take into account the FSA's estimate of total management expense levies or future market participation.

Onerous contracts

The provision for onerous contracts established during the year to 31 March 2010 covers the loss anticipated in connection with future lease expenses from non-cancellable lease commitments in branches that the Society has, as part of its branch restructure, decided are no longer required. The Society utilised £0.2m of the brought forward provision during the 6 months to 30 September 2010.