Mercantile members will be invited to vote on the proposal at the Society's AGM at the end of April.
The FSA has consented to Leeds Building Society proceeding by Board resolution.
The combined Society, which will be named Leeds Building Society, will have assets of almost £7bn, with £6.7bn from Leeds Building Society and £0.24bn from Mercantile Building Society.
The new society will have around 635,000 members, 69 branches throughout the UK and around 1,000 employees.
Mercantile's 30,000 qualifying savers and 4,000 qualifying borrowers are expected to receive a bonus of at least £100 if the merger goes ahead.
Gordon Robinson, chief executive of the Mercantile Building Society, said: "This represents excellent news for our members and an exciting opportunity for both societies. Mercantile has been and continues to be a very successful society and is in a strong position. The board has used that position of strength to find the optimal way forward for the members in a rapidly changing financial services sector.
Taking into account this maturing marketplace, with its regulatory
requirements, demands for ever more sophisticated IT and greater competition, we decided that the long-term interests of our members would be best served by seeking a partner who can bring the benefits of greater size but still retain for our members all the advantages and privileges of mutuality.
With the Leeds we have achieved those objectives. As well as remaining members of a mutual building society our members will see significant new benefits, gaining access to a wider range of competitive products and services than would be possible without this merger. They will gain access to a national branch network, excellent call centre operations, cheque book
accounts and web-based functionality for both savings and mortgages. The merger will also result in our members becoming part of a society with substantially greater total assets.
The interests of staff have also been at the forefront of our minds and this deal gives them job security along with greater training and career opportunities. As an Investor in People, Leeds Building Society recognises the skills of our employees and the loyalty of our members and has made a commitment to grow the business in the region enabling our staff to continue to develop their careers in the enlarged society.''
Mercantile Building Society's Wallsend head office will be retained as an operational administrative centre and the new society is guaranteeing no redundancies as a result of the merger for at least three years. Existing staff pension arrangements will be preserved.
Leeds Building Society is committed to the ongoing success of Mercantile branches and proposes to carry out a programme of further investment through refurbishment, new technology and local advertising.
The operations of both societies are geographically complementary which will significantly improve the distribution of both products and services to members of the enlarged society.
Ian Ward, chief executive of the Leeds Building Society said: "This is great news for customers of both societies. Members of Leeds Building Society will see their society grow and increase its branches in the North-East, and Mercantile members will benefit from a wider range of products and the real efficiencies that will be realised by the combined societies
The enlarged society will give us the opportunity to build further on our growth capabilities whilst maintaining the competitive advantages of cost efficiency, a strong capital base and good asset quality. Leeds Building Society has consistently demonstrated its efficiency with its cost income ratio of 47p in 2004 being the most favourable of any building society."
Leeds Building Society, which already operates on a multi-site basis, with different offices around the UK, will gain additional flexibility from Mercantile Building Society's Wallsend site. There are a range of potential opportunities under consideration, including the expansion of Mercantile's subsidiary Mercantile Asset Management Ltd to originate and trade in mortgage assets.
A local board will be created to provide continuity and stability for
Mercantile's members and staff. It will comprise the existing directors of the Mercantile and an executive director of Leeds Building Society. Its main functions will be to monitor Mercantile's member issues and act as an advisor to the main board. In particular, it will contribute to the development of a strong identity for the combined business throughout the
North-East region.
Under the proposed merger, Ian Ward, chief executive of Leeds Building Society, will become chief executive of the combined society. Gordon Robinson, chief executive of Mercantile Building Society, will become director for the North-East and will assist with the development of the business and the integration of the two societies, until his retirement date in August 2007. The chairman of the Mercantile Building Society John Anderson will join the Leeds Building Society board.
The combined society will remain an independent mutual building society owned by its members.
Details of the bonus expected to be paid to qualifying borrowers and savers of Mercantile Building Society will be announced. Each qualifying member of Mercantile Building Society is expected to receive a taxable minimum merger bonus payment of £100.
It is expected that eligible savers and borrowers of Mercantile Building Society will receive full particulars of the proposed merger in March together with details of the bonus arrangement.
Borrowing or saving membership at December 31 2005 is one of the requirements for the bonus. Payment of the merger bonus is dependent on approval of the transfer by Mercantile members at its April AGM and on approval of the merger by the FSA.
