The boards of Newcastle Building Society and Manchester Building Society said they have agreed heads of terms to merge “by way of a transfer of Manchester’s engagements to Newcastle.”

Newcastle Building Society has 345,000 members and 31 branches. It employs 1,400 people and its total assets were £5.3 billion at December 31, making it the 8th largest building society in the UK.

Manchester Building Society has 11,000 members and no branches. It employs 44 people and its total assets were £200 million at December 31, making it the 41st largest Building Society in the UK.

Addleshaw Goddard LLP has acted as legal adviser to Manchester and TLT LLP has acted as legal adviser to Newcastle.

“The boards of both societies believe it is in their respective members’ best interests to complete the merger in a considered and timely way, to realise the benefits a merger would afford,” said Newcastle.

“Manchester has not undertaken new lending since 2013, and faces uncertainty around its long-term future in the absence of a transaction.

“A merger would see Manchester savers and borrowers benefit from increased product choice and interest rates that are the same as, or better than, their current ones. 

“As members of the enlarged and expanding Newcastle they would also be part of a mutual which continues to grow strongly, and is currently the UK’s eighth largest building society.

“Apart from the Manchester Building Society executive directors, all Manchester Building Society employees would have the opportunity to further their careers as a valued and continuing part of a larger organisation.

“The advantages to both societies of a merger include greater resilience and additional capital strength, which would enhance Newcastle’s growth strategy and its continued commitment to high levels of customer service and delivery of member value.

“The prospect of retaining an operational Manchester base could provide additional opportunities for a pipeline of talent into the Newcastle Group, which includes its significant subsidiary fintech business, Newcastle Strategic Solutions.

“As the UK’s leading provider of outsourced savings management platforms, the Solutions subsidiary employs over 700 people.”

Newcastle CEO Andrew Haigh said: “The merger presents an opportunity for both our societies to come together in a way that truly benefits both sets of members. 

“As a financially robust, purpose-powered business, the move supports Newcastle Building Society in delivering our growth strategy at greater scale and impact, and in a way that offers opportunity for members, and colleagues from both organisations.”

Manchester chairman David Harding said: “Manchester’s Board strongly believes that this merger is in our members’ best interests. 

“Our members will become part of a larger, financially robust society that can offer a range of products and services we are unable to match as a standalone entity whilst providing staff at Manchester with long-term opportunities within the Newcastle Building Society and group.”

Since 2013, the Manchester board has been de-risking and shrinking Manchester’s balance sheet with no new mortgage lending being undertaken. 

While Manchester’s current capital and liquidity position is regulatory-compliant, the Manchester board believes it lacks the scale and resilience to endure a major financial or economic stress without raising additional capital. 

The Manchester board’s current projection is that the society would, as a standalone entity, have recurring losses which will deplete capital reserves each year. 

The merger will not involve a financial distribution to the members of either society.

Manchester permanent interest bearing shares (PIBS) will become PIBS with Newcastle on the merger taking effect with their existing terms and conditions, but subject to Newcastle’s rules.

If the merger does not proceed as planned, the heads of terms contain provisions which, depending on the circumstances, may require one of the societies to pay the other’s external costs of up to £1 million.

If the PRA decides to confirm the merger, it is expected that the merger will become effective on July 1, 2023.