West Bromwich Building Society has announced a deal with debt investors which is expected to secure its financial future.

There had been fears the mortgage lender would have to be split up and that the Financial Services Authority (FSA) was looking for a ‘white knight’ to step in and save the building society due to losses from commercial property and a high level of buy-to-let mortgages.

West Bromwich today announced an agreement to convert its debt of £182.5 million into shares that will qualify as capital.

It claimed this would mean it could pass the FSA’s stress tests.

Debtors will become holders of profit participating deferred shares (PPDS), entitling them to a dividend of up to 25 per cent of profits.

However, the creation of shares has led doubts over how it still labels itself as a mutual.

The building society also reported “very disappointing” post-tax losses of £39.3 million, compared to a profit the year before of £33 million.

Provisions for bad debts were put at £65.2 million and a £10.9 million write down was recorded on property portfolios. West Bromwich also had to pay £12.2 million towards the Financial Services Compensation Scheme (FSCS).

However, it did report over £3.2 billion of new savings balances coming in, resulting in a net increase of £1.0 billion.

West Bromwich chief executive Robert Sharpe said the mutual had “the core principle of putting the safety of members first” and it had “the right strategy and strength of capital position to enable us to look to the future”.

Under the new strategy West Bromwich is to cut lending not funded by retail savings, and withdraw from the commercial mortgage, buy-to-let and second charge markets.

It is also to “focus on prime residential lending within its heartland of the West Midlands”.

Rachel Le Brocq, at the Building Societies Association (BSA), explained members of West Bromwich should consider the deal as meaning “business as usual”.

“They are not offering shares in a traditional sense, but it is a useful tool to have additional capital.”

The creation of PPDSs has been developed by the FSA, working with the Treasury.

“Building societies have been affected by the adverse economic and financial market conditions in different ways,” an FSA spokesperson said.

“Prior to this the only source of core tier 1 available to building societies under the FSA’s rules was reserves grown from internally generated profits. Now building societies, like banks, have the option of raising core tier 1 capital from external sources.”