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Mortgage specialist Bradford & Bingley has posted pre-tax profits of £126 million for 2007, down from £246.7 million in 2006.

Bradford & Bingley said the drop in profits was a result of losses made from assets the group held which had exposure to the US subprime market.

The UK-based financial services provider said underlying business progressed well in 2007 despite turmoil in the financial markets and said dividend per share would increase five per cent to 21p.

Residential lending balances increased by 27 per cent to £39.4 billion and savings balances increased by seven per cent to £21 billion over the year.

Bradford & Bingley said its conservatism, combined with a policy to pre-fund its new business pipeline and the decision to dispose of non-core mortgage portfolios, meant the group weathered the liquidity problems in the financial markets.

But the Bank of England's five 0.25 per cent base-rate increases since August 2006 has led to an increase in arrears.

The total number of cases three months or more in arrears and in possession has jumped 42 per cent to 6,170, up from 4,337 in 2006, equating to 1.63 per cent of the total book.

However, the bank has recently begun to reverse this trend, with 0.25 per cent cuts in December and February.

In a statement, Bradford & Bingley said: "We are satisfied with the way in which we have, as a company, dealt with the extreme liquidity problems which emerged in the wholesale markets in the second half of 2007.

"We had been careful to retain our conservative approach to our funding and, in particular, had continued to invest in our branch network and build up the amount of our retail deposits."