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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.

In a statment out today Nationwide said this was  a , "prudent and pre-emptive action taken independently by the Boards of The Derbyshire and The Cheshire following the identification of financial issues faced by both Societies."

These transactions bring Nationwide The Derbyshire and The Cheshire's combined circa 925,000 members.

The new building society will have assets totalling more than £191 billion and £122 billion of retail deposits.

It was claimed today that 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.

Assets

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).

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.