Nationwide merger with Cheshire and Derbysire now a done deal
I posted yesterday that Nationwide had confirmed it was in advanced talks with both Cheshire and Derbyshire. Now, it seems the mergers are complete. However, it should be noted that these deals were done under duress (see post mentioned above). Cheshire and Derbyshire were foisted onto Nationwide by the FSA.
See the details of the deal from the Nationwide Press Release below. It is quite thorough.
MERGERS OF NATIONWIDE WITH THE DERBYSHIRE AND THE CHESHIRE BUILDING SOCIETIES
Nationwide Building Society today announces that it will merge with The Derbyshire Building Society and The Cheshire Building Society, who will transfer into the Nationwide Group by way of two separate transactions. These are prudent and pre-emptive actions taken independently by the Boards of The Derbyshire and The Cheshire following the identification of financial issues faced by both Societies. The transactions represent an important step in maintaining a strong mutual sector in the UK, with Nationwide’s pre-eminent position and financial strength providing a solid foundation for the future.
These transactions bring The Derbyshire and The Cheshire’s combined circa 925,000 members the benefits and security of membership of Nationwide, the UK’s largest building society, and create a society with assets totalling more than £191 billion and £122 billion of retail deposits.
Summary of Transactions
- Both The Derbyshire and The Cheshire separately and independently approached Nationwide as a prudent measure to ensure the financial strength and stability of each Society
- The Derbyshire has assets of £7.1 billion, 50 branches and 485,000 members. It expects to report an unaudited pre tax loss of £17 million for the half year to 30 June 2008 arising predominantly in its near-prime, sub-prime and commercial loan portfolios. These represent material financial uncertainties for The Derbyshire particularly in the current economic climate
- The Cheshire has assets of £4.9 billion, 45 branches and over 440,000* members. It expects to incur an unaudited pre-tax loss of £10.5 million for the half year to 30 June 2008 due to an exceptional £11.5 million impairment charge on a single secured commercial loan
- Nationwide has satisfied itself that The Derbyshire and The Cheshire’s general reserves are sufficient to cover conservative fair value adjustments including current and expected future losses
- Nationwide’s capital ratios are robust and well in excess of its peers, with Core Tier 1 at 8.1%; Total Tier 1 at 9.7%; and Total Capital at 12.4% as at 4 April 2008. These ratios are all forecast to increase during the current financial year as a result of retained trading profits and after allowing for the two mergers
- The mergers are to be concluded by way of separate Board resolutions of The Derbyshire, The Cheshire and Nationwide without the requirement for a member vote at a general meeting of any of the societies
- In order to preserve capital within the enlarged Nationwide for the benefit of its combined membership there will be no distribution to The Derbyshire or The Cheshire members
- Nationwide recognises the strengths of The Derbyshire’s and The Cheshire’s local franchises and will retain their brands and branch networks
- An Instrument of Transfer has been agreed with The Derbyshire and Heads of Terms have been agreed with The Cheshire
- The transaction with The Derbyshire is expected to conclude on 1 December 2008. The transaction with The Cheshire is expected to conclude before the end of the calendar year. Both transactions are subject to confirmation by the FSA and approval by the Office of Fair Trading (OFT).
Commenting on the mergers, Graham Beale, Nationwide’s chief executive, said:
“The Derbyshire and The Cheshire have independently concluded that a merger with Nationwide is in the best interests of their savers and borrowers given the financial issues faced by both societies. The core member businesses of both societies are in good shape and have a better future as part of a larger organisation. Nationwide is in a unique position because of its size and financial strength to provide support, and we regard it as both responsible and commercially beneficial to undertake these mergers.
“The mergers with The Derbyshire and The Cheshire provide an excellent opportunity for Nationwide to build on its strong position in the financial services sector by adding two attractive customer franchises creating an organisation with almost 15 million* members, around 1,000 retail outlets, £191 billion of assets and £122 billion of retail deposits.
“The mergers will further enhance Nationwide’s position as the leading UK building society. Nationwide remains committed to mutuality and recognises that these transactions play their part in maintaining a modern and healthy mutual sector in the UK. We look forward to welcoming The Derbyshire and The Cheshire members to Nationwide as part of the UK’s largest building society.”
Graham Picken, chief executive of The Derbyshire, said:
“I am pleased that The Derbyshire has come to an agreement with Nationwide that assures the future for our savers and borrowers. The Board recognised a number of financial uncertainties facing The Derbyshire, and has taken this prudent and pre-emptive action in seeking a solution to secure the interests of our members over the long-term. I have every confidence that The Derbyshire members will benefit from being part of the enlarged Society.”
Karen McCormick, chief executive of The Cheshire, said:
“We are pleased with the progress we have made at The Cheshire in building a progressive modern mutual organisation for our members. The core member business is strong. However, whilst we have performed resiliently, the unprecedented market conditions and poor economic outlook have led the Board to consider its strategic options. I am confident that our members will benefit from the strength of the combined organisation. It is pleasing that The Cheshire brand and branch network, together with its presence in the North West, are being retained through a merger which we believe will be in the best interests of our members.”
Background to the transactions
Nationwide: Following separate and independent approaches from The Derbyshire and The Cheshire Boards, Nationwide agreed to evaluate the benefits of a merger with each Society. Nationwide has satisfied itself that the proposed transactions are in the long term interests of its members and will generate enhanced value over the medium term. The Board regards it as responsible and commercially beneficial to support the mutual sector in this way and to extend the franchise of Nationwide to include two regionally branded building societies.
The Derbyshire: Following the appointment of a new chairman and new chief executive in December 2007 and February 2008 respectively, the Board of The Derbyshire initiated a strategic review of the Society in conjunction with professional advisers. Following this review the Board of The Derbyshire identified that it would post an unaudited pre-tax loss of £17 million for the half year to 30 June 2008, with the potential for further future losses. These losses arise as a result of credit defaults predominantly within its near-prime and sub-prime residential mortgage portfolios (particularly in its acquired portfolios) and commercial loan portfolio. As a result, and especially given the current uncertain economic conditions, The Derbyshire’s
Board felt it was appropriate to consider its strategic alternatives. Having reviewed all options, the Board of The Derbyshire has determined that it is in the best interests of its members to take a definitive step by seeking a merger with Nationwide.
The Cheshire: The Cheshire has invested in its business to build a strong local franchise and its core member businesses have continued to perform resiliently. The Cheshire’s pre-exceptional profit before tax for the half year to 30 June 2008 was £1 million. The deteriorating property market has resulted in an exceptional impairment charge, in the current year, of £11.5 million on a single secured commercial loan and an unaudited pre-tax loss after this exceptional item of £10.5 million. This in itself would not have affected the ability of the Society to operate successfully as an independent organisation. However, the Board is mindful of the current unprecedented market conditions, the impact of the credit crunch and the state of the UK housing market, all of which have made the outlook uncertain. As a result, the Board has carried out a review of The Cheshire’s strategic options, which led to a proactive approach to Nationwide to discuss a possible merger. Once concluded, the merger will provide The Cheshire’s members with the security and stability provided by the UK’s largest building society.
Nationwide Trading Update
Despite the continued challenging environment, Nationwide’s performance for the first four months of the financial year has been strong and is in line with the Society’s expectations and the prior year’s performance. Asset quality across all areas of lending remains strong. Additionally, Nationwide has recorded minimal impairment charges on its commercial loan and treasury portfolios in the first four months of the year.
The proportion of prime residential mortgages three months or more in arrears at the end of July 2008 was 0.31% (4 April 2008: 0.30%). The equivalent ratio for all residential lending was 0.38% (4 April 2008: 0.36%) significantly below the CML industry average of 1.33% as at June 2008 (1.21%, March 2008).
Financial Impact
Nationwide has a strong and high quality balance sheet with total assets of £179 billion and total capital of £9.5 billion as at 4 April 2008. Following the two transactions, the Core Tier 1 capital ratio will reduce by 34 basis points (bp), Total Tier 1 by 21 bp and Total Capital ratio by 16 bp. Nationwide expects to recover these reductions in the current financial year as a result of retained trading profits.
The Derbyshire has assets of £7.1 billion at 30 June 2008 including £1.4 billion of near-prime and sub-prime residential mortgage loan assets and £0.5 billion of commercial loan assets. The sub-prime and commercial loan books were closed to new business in March and May 2008 respectively. The Derbyshire’s core residential mortgage business is sound and The Derbyshire has no commitments to buy further mortgage portfolios. All of the assets and liabilities of The Derbyshire will be adjusted to their fair value at the date of the merger. Nationwide is satisfied that The Derbyshire’s general reserves are sufficient to cover conservative fair value adjustments including current and expected future losses on The Derbyshire’s assets.
As at 30 June The Cheshire had assets of £4.9 billion, including a prime residential book, with excellent asset quality of £2.4 billion. The Society has limited exposure, of less than £0.15 billion to near-prime and sub-prime residential mortgage assets. Of its £0.6 billion commercial loan book, £0.3 billion comprises loans to registered social landlords. The balance is a diversified loan portfolio secured on commercial property assets. In accordance with accounting regulations, the assets and liabilities of The Cheshire will be adjusted to their fair value at the date of the merger. The Cheshire is strongly capitalised and Nationwide considers that The Cheshire’s general reserves are sufficient to cover Nationwide’s conservative fair value adjustments including current and expected future losses on The Cheshire’s assets.
Members
The combined Society will continue to operate as a mutual building society, owned by and run for the benefit of its members. Nationwide has a membership totalling 14 million*, The Derbyshire has a membership of 485,000 and The Cheshire has a membership of over 440,000.
As part of the enlarged organisation, The Derbyshire and The Cheshire members will benefit from the security provided by Nationwide’s scale and financial strength. The Derbyshire and The Cheshire brands and branch networks will be retained. Nationwide intends to develop these businesses further and ensure that both franchises continue to serve the needs of their respective local communities.
Nationwide has a long-standing track record of value creation for its membership, and estimates that members benefited by £690 million in the previous financial year as a result of better pricing, lower interest rates and lower charges.
Transaction structure
In order to ensure the mergers are completed as quickly as possible and following detailed discussions with the FSA, the mergers of The Derbyshire and The Cheshire will be facilitated under section 42B(3)(b) of the Building Societies Act (the Act). In relation to Nationwide, the FSA has given consent under section 94(5)(b) of the Act. As a result the mergers will proceed on the basis of Board resolutions of The Derbyshire, The Cheshire and Nationwide Boards. The Societies’ Boards believe it is in the interests of all parties that the mergers complete as quickly as possible to avoid a period of prolonged uncertainty.
There will be no member vote. The transaction will not involve any distribution to The Derbyshire or The Cheshire membership. All eligible The Derbyshire and The Cheshire members will receive a ‘Merger Notification Statement’ outlining details of their respective mergers.
The mergers are subject to statutory confirmation by the FSA and approval by the OFT.
Board and operational structure
On completion of the mergers, the combined Society will be run by the current Nationwide Board, led by chairman, Geoffrey Howe, and chief executive, Graham Beale. The Directors of The Derbyshire and The Cheshire will agree to resign from their positions immediately before completion. Graham Picken and Karen McCormick will remain with the Society in non-Board roles for a period of up to 12 months to ensure an orderly transition. They will report to Tony Prestedge, Nationwide executive director of Group development.
Nationwide’s existing head office in Swindon will remain the head office for the combined Society. It is expected that The Derbyshire’s head office in Duffield and The Cheshire’s head office in Macclesfield will be retained as operational service sites within the Nationwide Group.
The businesses of The Derbyshire and The Cheshire will continue on the effective date to operate under their respective current brands as separate trading activities of Nationwide. There are no plans to integrate The Derbyshire’s or The Cheshire’s member businesses with Nationwide’s member business and the branch networks will remain. However, it is likely that some back office and central group functions of The Derbyshire and The Cheshire will no longer be required.
Nationwide will continue to manage down the non-conforming and commercial books owned by The Derbyshire and The Cheshire, and integrate them within the relevant divisions of Nationwide.
Timetable
A Merger Notification Statement will be issued to eligible members of The Derbyshire within 12 days of this announcement and a separate Merger Notification Statement will be issued to The Cheshire members within the period required by the Act (withi
n 14 days of the instrument of transfer being entered into). There is no requirement for a general meeting of members of any of the societies, and members need take no action.
Members of each society, and other interested parties will have the right to make representations to the FSA with respect to the proposed merger. Details of how to make representations, together with the timetable, will be set out in the Merger Notification Statements that will be issued to all eligible members of The Derbyshire and The Cheshire.
Both transactions are expected to be concluded by the end of December 2008.
Enquiries:
|
Nationwide |
Rosemary Callender |
07770 634 531 |
|
Brunswick Group LLP |
Susan Gilchrist |
020 7404 5959 |
Notes to Editors:
*Based on member figures correct as at 30 June 2008
A fact sheet showing key information relating to each of the three Societies is shown in Appendix 1.
Photos:
Photos of Graham Beale, Graham Picken and Karen McCormick, and logos of all three societies are available at: www.nationwide.co.uk/mediacentre
About Nationwide
Nationwide is the largest building society in the world, the second largest mortgage lender and the second largest retail savings provider in the UK.
Nationwide employs around 18,300 people, serves 14 million* members and has a relationship with one in every four households in the UK. As at 4 April 2008, the Society had total assets of £179 billion and capital of £9.5 billion, with a Tier 1 ratio of 9.7% and a total solvency ratio of 12.4%. In the year to 4 April 2008 its underlying profit before tax increased by 17% to £781.1 million.
Nearly 70% of Nationwide’s balance sheet funding is derived from retail funding, and its loan to deposit ratio is 117%. During 2007/8 the Society attracted £9.1 billion of net retail deposits, a 19% share of the UK savings market, and all net lending was funded by retail deposits.
In 2006, Nationwide announced a merger with Portman, which was concluded on 28 August 2007. This transaction was the largest merger in building society history.
About The Derbyshire
As at the last reported year end, The Derbyshire was the 9th largest building society and the 26th largest UK mortgage lender by asset size. As at 30th June 2008 the Society had assets totalling £7.1 billion. It has approximately 485,000 members with 50 continuing branches mainly based across the East Midlands. The Society employs over 800 staff.
The Derbyshire’s loan assets as at 30 June 2008 total £5.4 billion. The Derbyshire is predominantly funded by retail savings, with balances of £4.7 billion representing 68% of overall funding as at June 2008. The loan to deposit ratio is 92% and The Derbyshire has a long-term A3 rating from Moody’s. The Derbyshire has no exposure to Collateralised Debt Obligations (CDOs), Collateralised Loan Obligations (CLOs) or Structured Investment Vehicles (SIVs).
About The Cheshire
As at the last reported year end, The Cheshire was the 11th largest building society in the UK. As at 30 June 2008 the Society had assets totalling £4.9 billion. It has over 440,000 members with 45 branches (of which 14 include The Cheshire Estate Agencies) based mainly in the North West. The Society employs around 750 staff.
At 30 June 2008 the Society had loan assets of £3.8 billion. The Cheshire is predominantly funded by retail savings, with balances of £3.2 billion representing 66% of overall funding as at 30 June 2008. The loan to deposit ratio was 93%. The Cheshire has no exposure to CDOs, CLOs or SIVs.
The majority of The Cheshire’s residential lending has been biased towards prime mortgages, with 64% of all advances, as at 30 June 2008, classified as prime. At that date the average LTV ratio was 61.8% and mortgage balances that are 90 days or more in arrears were 0.51% of total balances. Some 50,000 new savings accounts were opened by new and existing members in the first half of 2008, adding £85 million in retail deposits.
Advisors
Morgan Stanley & Co Limited is acting as financial adviser to Nationwide and no one else in connection with the matters described in this announcement. In connection with such matters, Morgan Stanley & Co Limited, its affiliates and their directors, officers, employees and agents will not regard any other person as their client nor will they be responsible to any other person for providing the protections afforded to their clients.
N.M.Rothschild and Sons Limited is acting as financial adviser to The Cheshire and no one else in connection with the matters described in this announcement. In connection with such matters, N.M.Rothschild and Sons limited, its affiliates and their directors, officers, employees and agents will not regard any other person as their client nor will they be responsible to any other person for providing the protections afforded to their clients.
Allen & Overy LLP has acted as legal adviser to Nationwide. Addleshaw Goddard LLP has acted as legal adviser to both The Derbyshire and The Cheshire.
The information in this document is unaudited and does not constitute statutory accounts within the meaning of section 81A of the Building Societies Act 1986. Nationwide, The Derbyshire and The Cheshire Statutory accounts have been prepared for the years ending 4 April 2008, 31st December 2007 and 31st December 2007 respectively and which contain their respective unqualified audit reports prepared in accordance with Section 78 of the Building Societies Act.
This document may contain forward-looking statements with respect to certain plans and current goals and expectations relating to the future financial conditions, business performance and results of Nationwide, The Derbyshire and The Cheshire. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide, The Derbyshire and The Cheshire. As a result, Nationwide, The Derbyshire and The Cheshire’s actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements.
Appendix 1 – Fact Sheet
|
Nationwide |
The Derbyshire |
The Cheshire |
|
|---|---|---|---|
|
Scale (1) |
As at 4 April 2008 |
As at 31 Dec 2007 |
As at 31 Dec 2007 |
|
Ranking in UK Building Society Sector (by Total Assets) |
1st |
9th |
11th |
|
Ranking in UK (by Mortgage Lending Assets) |
2nd |
26th |
29th |
|
Total Assets (£ Bn) |
179.0 |
7.1 |
5.0 |
|
Relative Size (% of Nationwide) |
N/A |
4.0% |
2.8% |
|
Members & Customers (‘000) |
|||
|
– Members |
13,400 |
485 |
442 |
|
– Borrowers |
2,500 |
89 |
44 |
|
– Savers |
10,700 |
424 |
401 |
|
Employees (2) |
18,318 |
818 |
758 |
|
– Head Office |
8,469 |
470 |
356 |
|
– Branches |
9,849 |
348 |
402 |
|
Branches |
c.900 |
50 |
45(4) |
|
Capital(1) & Long Term Credit Rating (3) |
|||
|
Core Tier 1 Ratio |
8.1% |
7.4% |
7.7% |
|
Total Tier 1 Ratio |
9.7% |
11.5% |
9.4% |
|
Total Capital Ratio |
12.4% |
14.7% |
12.3% |
|
Credit Rating |
|||
|
– S&P |
A+ |
N/A |
N/A |
|
– Fitch |
AA- |
N/A |
N/A |
|
– Moody’s |
Aa2 (neg) |
A3 |
A3 |
Notes
1 Figures as at fiscal year-end
2 Based on average number of employees during fiscal year
3 All long-term credit rating are as at September 2008
4 This is the current figure (49 as at 31 December 2007)
|
Nationwide |
The Derbyshire |
The Cheshire |
|
|---|---|---|---|
|
Financials |
|||
|
P&L |
As at 4 April 2008 |
As at 31 Dec 2007 |
|
|
Underlying PBT (£ Mn) |
781.1 |
13.2 |
8.1 |
|
Ratios |
|||
|
Underlying NIM (bps) |
102 |
87 |
73 |
|
Underlying Cost / Mean Total Assets (bps) |
78 |
85 |
73 |
|
Balance Sheet (£ Mn) |
At 4 Apr-08 |
At 30 June 2008 |
|
|
Assets |
|||
|
Liquid Assets |
31,676 |
1,553 |
1,065 |
|
Mortgages |
139,832 |
5,418 |
3,814 |
|
Unsecured consumer finance |
2,972 |
– |
– |
|
Fixed and Other Assets |
4,547 |
122 |
66 |
|
Total Assets |
179,027 |
7,093 |
4,945 |
|
Liabilities |
|||
|
Retail Deposits |
113,816 |
4,651 |
3,152 |
|
Corporate and Other Deposits |
8,000 |
1,219 |
951 |
|
Bank Deposits |
11,777 |
220 |
183 |
|
Debt Securities in Issue |
33,772 |
502 |
355 |
|
Subordinated Liabilities |
2,058 |
103 |
65 |
|
Subscribed Capital (PIBS) |
1,245 |
140 |
41 |
|
Other Liabilities |
2,351 |
11 |
18 |
|
Reserves |
6,008 |
247 |
180 |
|
Total Liabilities |
179,027 |
7,093 |
4,945 |
|
Ratios |
|||
|
Loan / Deposit Ratio (%) |
117% |
92% |
93% |
|
3+ Month Arrears (%) |
0.36% |
2.70% |
0.51% |
|
Nationwide |
The Derbyshire |
The Cheshire |
|
|---|---|---|---|
|
Treasury Asset Breakdown (£ Bn) |
|||
|
At 4 Apr-08 |
At 30 June 2008 |
||
|
Certificates of Deposit (CD) |
7.3 |
1.0 |
0.6 |
|
Bonds |
4.7 |
0.1 |
– |
|
Floating Rate Note (FRN) |
6.0 |
0.1 |
0.3 |
|
Residential Mortgage Backed Security (RMBS) |
3.8 |
0.2 |
– |
|
Commercial Mortgage Backed Security (CMBS) |
0.9 |
– |
– |
|
Collateralised Loan Obligation (CLO) |
0.5 |
– |
– |
|
Collateralised Debt Obligation (CDO) |
0.1 |
– |
– |
|
SIVs |
– |
– |
– |
|
Cash |
0.4 |
0.1 |
0.1 |
|
Other |
7.9 |
– |
0.1 |
|
Total |
31.6 |
1.5 |
1.1 |
|
% of Treasury Assets rated A or better |
97% |
97% |
90% |
|
Customer Loans Breakdown (£ Bn) |
|||
|
At 4 Apr-08 |
At 30 June 2008 |
||
|
Prime Residential |
105.5 |
2.0 |
2.4 |
|
Non-Conforming Mortgages |
14.1 |
2.9 |
0.8 |
|
Commercial Lending |
20.3 |
0.5 |
0.6 |
|
Other |
2.9 |
– |
– |
|
Total |
142.8 |
5.4 |
3.8 |
|
Nationwide |
The Derbyshire |
The Cheshire |
|
|---|---|---|---|
|
Key Individuals |
|||
|
Chairman |
Geoffrey Howe |
Alan Woods |
Robert Hough |
|
Chief Executive Officer |
Graham Beale |
Graham Picken |
Karen McCormick |
|
Group Finance Director |
Mark Rennison |
Tom Wood |
Duncan Hanlon* |
|
Other |
|||
|
Head Office |
Swindon |
Duffield |
Macclesfield |
|
Founded |
1846 |
1859 |
1870 |
* Interim Finance Director
Source
Mergers of Nationwide with The Derbyshire and The Cheshire Building Societies – Nationwide
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