Chelsea, which is set to merge with Yorkshire Building Society, had already reported a £26.3m loss at the half-year stage.
It saw its new mortgage lending reduce to £577m in 2009, compared to £2,229m in 2008.
This was all less than 75% loan to value and predominantly prime business.
During the first half of 2009 it reported rising levels of arrears on residential and buy-to-let mortgages, but the society says these are now reducing since launching its new arrears case management system Equitas.
Even though the total number of cases in arrears is declining, the provision for impairment of loans has continued to increase as those cases remaining in arrears have missed further payments.
During the second half of 2009 Chelsea has been investigating a number of suspected fraud cases, which it announced in 2009.
But it says a significant number of cases show no evidence of fraud.
This, together with improved house price inflation, has resulted in it decreasing the provision required and hence the charge has reduced from £41m at the half year to £32.6m
Stuart Bernau, chairman and interim chief executive at Chelsea, says: “This has been a challenging year for Chelsea Building Society. The losses incurred in 2008 and subsequent rating downgrade required us to focus on retail savings as wholesale funding became more difficult to acquire or retain. While we have been highly successful in attracting net receipts, this was at the cost of our net interest margin.
“This, combined with the need to provide for the fraud in our buy-to- let book, resulted in a pre tax loss at the half year of £26.3m. Over the second half we have worked extremely hard at restoring margin, reducing arrears, containing costs and recovering provisions against Icelandic bank exposure. The resulting performance over the second half is a pre tax loss of £0.8m and we are not only confident that Chelsea has returned to operating profit, but our Tier 1 capital position has also strengthened.
“The last few months have also been dominated by our forthcoming merger with Yorkshire Building Society and I believe the swift action that has been taken will enable the Chelsea business to form a robust part of the enlarged society.”