NEWCASTLE Building Society (NBS) is making "steady progress as it returns to its “building society ideals” in what its chief executive admitted is a “challenging environment” for the financial services sector.

Jim Willens said the policy is working as customers start to look again at the mutual business model following recent mis-selling scandals and failures in the big banking sector.

NBS yesterday reported a rise in operating income to £22.7m in the six months to the end of June, up from £21.8m a year ago, and an increase in operating profits to £4.3m from £4.2m.

But the building society’s success in attracting more deposits resulted in a higher levy from the Financial Services Compensation Scheme, which ate into its pre-tax profits.

They halved to £0.5m compared to £1m last year, but without the additional £0.8m levy they would have increased to £1.3m.

Willens said: “The Financial Services Compensation Scheme levy is the mechanism by which the failed banks’ and building societies’ deposits are protected and covered. The organisation steps in when there’s a failure like Northern Rock or Bradford & Bingley.

“They oversee the repayment owed up to £85,000 so that individuals are protected. The amount a bank or building society pays into the scheme is based on the number of deposits it holds. The more successful you are, the more you pay in levy.

“It has never been about profits [for us] because we are a mutual. The reality is we’ve been successful in funding ourselves from retail deposits.”