EBS BUILDING society has said it owes €2.2 billion under the European Central Bank (ECB) funding system but expects to reduce this over the remainder of the year.

The building society reported a 37 per cent drop in pretax profits to €27 million in the first six months of the year as the credit crisis raised funding costs substantially, costs that the society was slower to pass on to customers.

Total income fell 17 per cent to €83.8 million in the first half.

EBS chief financial officer Alan Merriman said the building society had raised €1 billion in term funding over the first six months. He added that there had been "a substantial reduction" in the society's net interest margin to 0.75 per cent from 0.9 per cent due to the higher cost of wholesale money.

Funding costs had risen from "historic lows" in the first half of last year to "historic highs" over the same period this year, he said.

He said the society had to raise a further €430 million in two or three more deals due to term-funding maturing over the second half of this year. The society has €815 million in debt maturing over the course of next year.

Mr Merriman said the EBS had reduced its ECB funding from €2.3 billion at the end of last year to €1.9 billion at the end of June but that the building society had borrowed more since then.

Banks and building societies can borrow from the ECB's funding system to finance their day to day operations using their mortgage books as collateral. The rates they pay through public auctions are lower than the borrowing rates in the wholesale markets.

Mr Merriman said the building society was "doing more" financing of long-term debt with short-term funding which was "not sustainable in the long term".

The society grew its loan book by 4.5 per cent to €16.5 billion, compared with growth of 9 per cent for the whole of last year as demand for mortgages slowed due to higher borrowing costs and weaker sentiment among buyers.

Mr Merriman said that the building society was trying to tie new lending to deposit growth, so new loans would be covered by cash flowing into the business.

He said that net deposits grew by €395 million or 3.8 per cent in the first half of the year as the society offered competitive rates on lump-sum term deposits and regular savings. Deposit growth would cover new lending for this year as a whole.

Mr Merriman said the building society's mortgage arrears had "deteriorated" and that the loanloss charge had almost doubled to €5 million at the end of June from €2.6 million a year earlier.

He said there were 200 additional cases of arrears of more than three months at the end of June compared with six months earlier - an increase of 12 per cent.

"A continuation of these higher loan-loss charges is likely if the property market and economy remains stressed," the society said.

"People are struggling a little bit and we have to be more active on that front than we were six months ago," said Mr Merriman.

However, he said the deterioration was "far from being material".

Some 3 per cent of the building society's loans are to property developers, while 13 per cent of loans are buy-to-let mortgages.

The society cut costs by 6.2 per cent to €51.8 million over the six months, reducing staff numbers by 30 to some 700 employees.

"Despite the credit crunch . . . EBS continues to punch above its weight in the Irish market," chief executive Fergus Murphy said in a statement.