The Bank's Investment Department (otherwise know as Savings Department No 3) opened for deposits on January 1st 1967. This new facility, with a higher rate of interest than the No 1 and No 2 Departments but with withdrawals subject to one month's notice, was introduced in order to compete with similar facilities being provided by Building Societies. Initially, the rate of interest paid was 5½%, but this was gradually increased in a period that was subject to increasingly higher interest rates. By March 31st 1972, the interest rate payable had increased to 7%, and balances were approaching £30 million.

 

During 1972, Minimum Lending Rate (MLR) gradually increased from 5% to 9%. During the remainder of the 1970s, MLR was rarely below 10%, and by November 20th 1979 had reached 17%. Interest payable on notice accounts, by Building Societies and Banks, increased accordingly.

 

In order to pay a competitive rate of interest on this type of account, it was necessary for the BMB to improve the yield on its No 3 Department Investment Portfolio - it became essential to switch investments into holdings that would match prevailing interest rate conditions. A similar situation existed in relation to the No 1 Savings Department, which was paying 4½% in 1973.

 

During the year-ending March 31st 1972, in anticipation of this requirement, an Investment Reserve of £950,000 (No 1 Department: £450,000; No 3 Department: £500,000) was created, in order that a provision was available to write-off any losses incurred on switching investments. The majority of this sum was funded by surpluses on sale or maturity of investments of that year amounting to £836,112.

 

In 1972/73, £561,819 net losses were incurred on the sale of investments, of which all but £100,000 was charged to the Income & Expenditure Account. The £100,000 balance was charged to the Investment Reserve, carrying forward a balance of £850,000.

 

In 1973/74, a debit to the Income & Expenditure Account of £238,333 was made in order to increase the balance on the Investment Reserve to £1,088,333. This balance was then transferred to a newly created Investment Amortization Account.

 

The Investment Amortization Account was required to write-off losses that had arisen in pursuing the policy described above, ie to switch into investments producing a higher yield. The book losses incurred on investment switching in 1973/74 amounted to £1,801,536 (No 1 Department: £388,333; No 3 Department: £1,413,203). These losses were offset by the £1,083,333 (No 1 Department: £388,333; No 3 Department: £700,000) transfer from the Investment Reserve to leave a debit balance of £713,203 - entirely relating to the No 3 Department.

 

All these transactions were detailed as NOTE 2 in the 'Notes forming part of the accounts for the year ended 31st March 1974', that is reproduced here. That NOTE also describes the policy that was applied to amortize the loss, ie write-off the loss over a period that matched the remaining life of the new investment - subject to a maximum of ten years. This policy, therefore, attempted to spread the loss incurred in obtaining a higher yield, over a period that matched the benefit obtained.

The first amount to be amortized under this policy was £41,228, and this was charged to the Income & Expenditure in 1973/74. This charge resulted in a balance on the Amortization Account of £671,975 at March 31st 1974, which was shown in the Balance Sheet as an Asset.

 

The following year (1974/75), the balance on the Amortization Account (now £548,953) was shown, more correctly, as a deduction from Reserves on the Liabilities side of the Balance Sheet.

 

In 1975/76, a modification was made to the accounting policy for the Investment Amortization Account. This allowed for ad hoc contributions to be set aside from the Income & Expenditure Account. This policy was applied to make an additional charge for the year of £426,376 - an amount that wrote off the remaining balance.

 

In the year prior to the introduction of the Amortization policy (1972/73) the Interest Margin for No 1 and No 3 Departments was (£):
 - Interest Receivable .…. 6,120,892
 - Interest Payable ….….. 4,348,724
 - Interest Margin ….….... 1,772,168

 

In 1975/76, the Margin had improved as follows (£):
 - Interest Receivable ….. 9,729,123
 - Interest Payable ……... 5,916,871
 - Interest Margin ….….... 3,812,252

 

This significant improvement in Interest Margin, enabled the book losses incurred in 1973/74 (in order to boost income) to be written-off earlier than originally planned. It also improved the final Balance Sheet of the Birmingham Municipal Bank, which was handed over to the Birmingham Municipal Trustee Savings Bank, with no sum deducted from Reserves, on March 31st 1976.