# United States v. Crocker-Anglo National Bank

> District Court, N.D. California · October 30, 1967 · 277 F. Supp. 133

URL: https://www.frixlaw.com/law-library/cases/1868942

## Case

- **Full name:** UNITED STATES of America, Plaintiff, v. CROCKER-ANGLO NATIONAL BANK, Citizens National Bank, and Transamerica Corporation, Defendants
- **Court:** District Court, N.D. California
- **Decided:** October 30, 1967
- **Citations:** 277 F. Supp. 133; 1967 Trade Cas. (CCH) 72,258; 1967 U.S. Dist. LEXIS 9340
- **Precedential status:** Published
- **Opinion:** Opinion by Zirpoli
- **Judges:** Pope, Circuit Judge, Sweigert and Zirpoli, District Judges
- **Cited by:** 22 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

OPINION AND ORDER DISMISSING COMPLAINT
Before POPE, Circuit Judge, SWEIGERT and ZIRPOLI, District Judges.
ZIRPOLI, District Judge.
Based upon reasonable
probabilities
arising from the actual and practical realities of the business of banking, as contrasted to
possibilities
arising from theoretical postulates, this court, on review
de novo
in the manner directed by the Supreme Court in United States v. First City National Bank of Houston, 386 U.S. 361 , 87 S.Ct. 1088 , 18 L.Ed.2d 151 (1967), applying the standards prescribed by the Bank Merger Act of 1966 ( 12 U.S.C. § 1828 (c) (5)), concludes that the merger of the defendant banks, Crocker-Anglo National Bank (here referred to as “Crocker”) and Citizens National Bank (here referred to as “Citizens”) was lawful and not in violation of the Bank Merger Act of 1966 ( 12 U.S.C. § 1828 (c)), § 7 of the Clayton Act ( 15 U.S.C. § 18 ), or § 1 of the Sherman Act ( 15 U.S.C. § 1 ), and in support of this conclusion, finds:
1. That prior to and at the time of the merger, defendant banks were not in actual competition with each other in any economically significant section of the country;
2. That prior to and at the time of the merger, defendant banks were not in substantial potential competition with each other in any economically significant section of the country;
3. That the plaintiff has failed to prove by a preponderance of evidence that but for the merger Crocker would have branched
de novo
into the Los Angeles metropolitan area or any economically significant banking market in which Citizens operated;
4. That plaintiff has failed to prove by a preponderance of evidence that but for the merger Citizens would have branched
de novo
into the San Francisco Bay area or any economically significant banking market in which Crocker operated ;
*139
5. That the evidence shows affirmatively that in the instant case there is no reasonable probability that absent the merger Crocker would have established
de novo
branches in the Los Angeles metropolitan area or that Citizens would have established
de novo
branches in the San Francisco Bay area;
6. That the merger of defendant banks did not have a substantial adverse effect on actual or potential competition in the business of banking in any economically significant section of the country;
7. That given the desirability of establishing another statewide banking competitor to Bank of America National Trust and Savings Association (hereafter referred to as Bank of America), as conceded by plaintiff, the only economically feasible solution was and is the. present merger; and
8. That even had a substantial lessening of competition occurred as a result of the merger of defendant banks, such anticompetitive effects were clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
HISTORY OF THIS LITIGATION.
Before discussing the above stated conclusions of the court and findings in support thereof and such other findings as are appropriate and relevant to the court’s decision, it would be well to review the history of this litigation to date and its relationship to the Bank Merger Act of 1966. Much of this history is set forth in the opinion of this court of October 6, 1966, when it stayed further proceedings in this cause and remanded the same to the Comptroller for further consideration in the manner indicated in the court’s opinion. See United States v. Crocker-Anglo National Bank, 263 F.Supp. 125 (N.D.Calif.1966). We deem that history essential to a better understanding of this final decision on the merits. Rather than rely thereon by reference, the court, for convenience of the reader, and without the use of quotation marks, here repeats much of what it then said, with such modifications as are needed to meet the de novo review directions of the Supreme Court in United States v. First City National Bank of Houston, supra.
On May 13, 1963, some 34 days prior to the decision of the United States Supreme Court in United States v. Philadelphia Nat. Bank, 374 U.S. 321 , 83 S.Ct. 1715 , 10 L.Ed.2d 915 (June 17, 1963), the Crocker-Anglo National Bank of San Francisco and Citizens National Bank of Los Angeles applied to the Comptroller of the Currency for permission to merge, under the charter of the former, with the title “Crocker-Citizens National Bank”. After notice and public hearing held July 30 and 31, 1963, and receipt of some 1605 pages of testimony and exhibits, the Comptroller, on September 30, 1963, made a decision approving the proposed merger, subject to certain named conditions, based on his findings, including the finding that the proposed merger would promote the public interest. The approval was to be effective on or after November 1, 1963. On October 8, 1963, this suit was filed attacking the proposed merger as unlawful under § 7 of the Clayton Act, ( 15 U.S.C. § 18 ) and § 1 of the Sherman Act, ( 15 U.S.C. § 1 ). A certificate under the Expediting Act ( 15 U.S.C. § 28 ) was filed and pursuant thereto a three judge court was named and assembled for the purpose of hearing the cause. The Government’s application for a preliminary injunction was denied (United States v. Crocker Anglo Nat. Bank, D.C., 223 F. Supp. 849 ), and after completion of extensive pretrial proceedings and the making of a pretrial order, the cause came on for trial on the merits. The trial began June 1, 1965 and the taking of testimony was concluded on June 18, 1965, with orders fixing the time' for filing of briefs and proposed findings by the parties.
While the court was thus in the process of hearing testimony, on June 11, 1965 the Senate passed, with no opposing vote, its S. 1698, a bill under whose provisions, if enacted, this ease would have become moot, for, as stated in the report ac
*140
companying the bill, the bill “would free the banks involved in such suits from further proceedings under the antitrust laws.” Whether it was because of their knowledge of the pendency of this legislation or otherwise, counsel by stipulation postponed the final filing of briefs and proposed findings until shortly before the passage of this proposed legislation, as amended in the House on February 9, 1966. The enactment, designated Public Law 89-356, 80 Stat. 7, was signed by the President on February 21, 1966.
The court was thus confronted with a somewhat extraordinary situation in which the law applicable to the case was changed after the testimony had been received and the cause submitted for decision. The measure, as finally enacted, made specific reference to this and other cases similarly situated in § 2(c) thereof, which provides as follows: “Any court having pending before it on or after the date of enactment of this Act any litigation initiated under the antitrust laws by the Attorney General after June 16, 1963, with respect to the merger, consolidation, acquisition of assets, or assumption of liabilities of an insured bank consummated after June 16, 1963, shall apply the substantive rule of law set forth in section 18(c) (5) of the Federal Deposit Insurance Act, as amended by this Act.”
1
The so-called “substantive rule of law set forth in section 18(c) (5)” is stated in the Act as follows: “(5) The responsible agency shall not approve—
(A) any proposed merger transaction which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States, or
(B) any other proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade, unless it finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
In every case, the responsible agency shall take into consideration the financial and managerial resources and future prospects of the existing and proposed institutions and the convenience and needs of the community to be served.”
That language refers to the tests to be applied, in a case of this type; by the Comptroller of the Currency in passing upon an application for approval of a proposed bank merger. Not only did § 2 (c), quoted above, specifically direct that this court, in respect to this case, “shall apply the substantive rule of law set forth in section 18(c) (5)”, but § 18(c) (7) (B) provided as follows: “In any judicial proceeding attacking a merger transaction approved under paragraph (5) on the ground that the merger transaction alone and of itself constituted a violation of any antitrust laws other than section 2 of the Act of July 2, 1890 (section 2 of the Sherman Anti-Trust Act, 15 U.S.C. 2), the standards applied by the court shall be identical with those that the banking agencies are directed to apply under paragraph (5).”
After a special hearing conducted for that purpose, evidence was received and the parties were granted time within which to file further briefs and memoranda expounding their views as to the action which the court should take in the light of the entire testimony and in view of the new enactment.
*141
It is the Government’s view that the new statute made no substantial change in the law or standards to be applied in passing upon the issues here presented, The Government puts it thus: “It is, of course, the essential position of the Government * * * that the 1966 amendment to the Bank Merger Act (P.L. 89-356 ; 80 Stat. 7 ) has not resulted in substantial change in substantive antitrust law
or in the standards used by the courts in determining the legality of bank mergers.”
Specifically, the Government took the position that the language of § 18(c) (5) referring to “the convenience and needs of the community to be served” is but a reiteration of the “failing company doctrine” long recognized as an integral part of settled antitrust law.
2
*142
We find no difficulty in concluding that the new enactment made substantial changes in the substantive law and in the standards to be applied in this case. Not only the language of the enactment, but its legislative history, is very compelling on this point. As we have noted, both § 2(c) and § 18(c) (7) (B), quoted above, specifically direct the court in this situation to apply the new standards of this Act. (The latter refers to the standards “directed to apply under paragraph 5” and § 2(c) and refers to these as “the substantive rule of law,” set forth in that section.) It would be a bit startling to assume that in making this enactment, over which the congressional committees struggled long and hard, the Congress had turned up with nothing of substance, or had accomplished no change in respect to the law applicable for testing the validity of bank mergers.
The legislative history of the Act most emphatically contradicts the position now taken by the Government. The Senate Committee report, which accompanied the introduction of the bill in the Senate, took note of what Congress had contemplated would be the result of the Bank Merger Act of 1960. The Committee stated: “At that time it was clearly expected that the decision of the responsible Federal bank authority, based on its own investigation and on reports on competitive factors from the other two banking agencies and from the Department of Justice, would be final and conclusive. The Attorney General’s report was expected to be advisory only.” The report states that the uncertainty created by the situation resulting from the Philadelphia and the Lexington bank cases (supra, note 1) “is harmful to the banking industry and to its customers. * * * There was unanimous agreement by all the witnesses that the present situation was undesirable and should be changed.” The House Committee report states clearly the intent to make changes in the law as follows: “The intended legal effect of the bill is to modify the foregoing provision in three respects:
First, it is intended to make clear that no merger which would violate the anti-monopoly section (sec. 2) of the Sherman Anti-Trust Act may be approved under any circumstances.
Second, the bill acknowledges that the general principle of the antitrust laws— that substantially anticompetitive mergers are prohibited—applies to banks, but permits an exception in cases where it is clearly shown that a given merger is so beneficial to the convenience and needs of the community to be served-—-recognizing that effects outside the section of the country involved may be relevant to the capacity of the institution to meet the convenience and needs of the community to be served,—that it would be in the public interest to permit it.
Third, the bill provides that this rule of law is to be applied uniformly, in judicial proceedings as well as by the administrative agencies.”
The most complete exposition of the congressional view in the process of this enactment is to be found in the remarks of Senator Robertson at the time the bill, as amended to conform to the House Committee report, came back to the Senate. At that time Senator Robertson, ■who was Chairman of the Senate Committee which had charge of the bill and who originally introduced the bill in the Senate, was recommending that the Senate accept the House amendment. No member of Congress had remained in closer touch with the bill’s progress through both houses than Senator Robertson. As he put it: “I have lived with this problem day and night for months. I am convinced that we have a good bill.” What he then had to say expounded at considerable length the ideas which had
*143
been expressed by various House members during consideration of the bill in the House.
3
Senator Robertson said unequivocally that the purpose of the bill was to “reverse a decision of the Supreme Court”. He said (Cong.Rec. Feb. 9, 1966, p. 2538): “The bill will end the confusion and controversy which has surrounded the bank merger situation since the ill-advised and unfortunate decisions of the Supreme Court in the Philadelphia and Lexington cases and the district court decision in the New York case which followed those precedents. It will do this by establishing a uniform rule 'for the bank supervisory agencies and the courts to follow in bank merger cases: a rule which takes into account both the competitive factors on which the antitrust laws are based—Tor banks these were written into the Bank Merger Act of 1960—and the convenience and needs of the public to be served by the proposed merged bank.” Referring to the pend-ency of the suit now before us, he said: “It would permit the continuance of proceedings against the three ‘post-Philadelphia’ cases—in Nashville, San Francisco, and St. Louis—where mergers were consummated after that decision, but in these three cases the courts would be directed to follow the new statutory standards laid down in the statute for all mergers to be considered in the future.” And' in a prepared statement, which he incorporated in the record a£ a part of his remarks, he said .of the bill: “It will strike the Philadelphia, Lexington, and New York decisions and opinions from the books.” 4
*144
Perhaps the most conclusive evidence of the fact that this Act alters the previous rules comes from a comparison of the language of this statute with what the Supreme Court said in the
Philadelphia
case, namely, that a bank merger such as that one “is not saved because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial.” Section 18(c) (5), quoted above, expressly requires a consideration of similar factors thus rejected in
Philadelphia.
This statute makes a further alteration in the nature of the proceeding now before us. After providing for the time of commencement of an action brought under the antitrust laws arising out of a merger transaction, § 18(e) (7) (A) stipulates: “In any such action, the court shall review
de novo
the issues presented.” Returning now to the provisions of § 2(e), requiring this court to “apply the substantive rule of law set forth in, § 18(c) (5)”, and to § 18(c) (7) (B) , reciting that in any judicial proceeding attacking a merger transaction approved under paragraph 5, “the standards applied by the court shall be identical with those that the banking agencies áre directed to apply under paragraph (5),” it seems clear that what we are now called upon to do is to review a decision and determination of the Comptroller of the Currency.
This requirement that we apply the standards under paragraph 5 presented some difficulty, since the prior decision of the Comptroller of September 30, 1963, was not made under or in the light of the New Bank Merger Act of 1966.
It is true that the Comptroller then found that the proposed merger “will promote the public interest”, using the language of the 1960 Act, but his determination did not contain findings covering the precise issues required to be determined by him under the language of § 18(e) (5) quoted above. Under that section it would be incumbent upon the Comptroller to determine whether any anticompetitive effects of the proposed merger were “clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.” We apprehended that an appropriate finding should specify in what respect the transaction would meet the convenience and needs of the community to be served.
There is another respect in which the earlier finding of the Comptroller was inadequate and out-dated. His decision of September 30, 1963 antedated the decisions of the Supreme Court in United States v. El Paso Natural Gas Co., 376
*145
U.S. 651, 84 S.Ct. 1044 , 12 L.Ed.2d 12 , decided April 6, 1964, and United States v. Penn-Olin Chemical Co., 378 U.S. 158 , 84 S.Ct. 1710 , 12 L.Ed.2d 775 , decided June 22, 1964. In those cases the Supreme Court developed, to an extent not previously announced, the doctrine that § 7 of the Clayton Act is designed to preserve not merely present but potential competition in the market in question. This is the doctrine of the application of § 7 to potential competition. The principal argument made by the Government here relates to alleged elimination by the merger of
substantial potential competition
in the State of California.
Since the Act requires this court to proceed in this case in the same manner in which it would have to deal with some future proposed merger, we were of the view that before the court could perform the required function of reviewing the action of the Comptroller, the matter should be remanded for the consideration of the Comptroller under the provisions of the 1966 Act.
Plainly enough the Act is designed to set up precise rules under which the validity of proposed bank mergers may be ascertained and determined. The first required step is the application. to the Comptroller of the Currency
5
for written approval of the proposed merger. Upon hearing on such an application, the Comptroller is directed to act upon the considerations set forth in § 18(c) (5) above referred to. Then, as indicated, if an action be brought attacking the merger transaction, it must be brought within a limited time and in any such action “the court shall review
de novo
the issues presented.” Thus the Act contemplates initial action by the Comptroller, followed by a review at the instance of the Department of Justice.
When we first faced the task of complying with these requirements, we were confronted with a difficulty arising out of the fact that the Act provides that this review shall be
“de novo”.
It will be noted that under par. (5) the Comptroller is charged with ascertaining two sets of facts. The first is whether the effect of the proposed merger transaction “in any section of the country may be substantially to lessen competition”, and the second, whether, having found that there would be anticompetitive effects in the proposed transaction, those effects “are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.”
We found no difficulty in reviewing
de novo
the first of these determinations, for this court has traditionally adjudged whether mergers have anticompetitive effects. But on the problem of reviewing the second determination by the Comptroller, namely, whether the proposed transaction is clearly outweighed in the public interest, and whether it meets the convenience and needs of the community to be served, we were originally of the view that this is a legislative or administrative determination of a type which this court, as a constitutional court, is prohibited from deciding.
6
We found an expression of this view in the
*146
words of the Supreme Court in the following quotation from United States. v. Philadelphia Nat. Bank, supra, 374 U.S. at 371 , 83 S.Ct. at 1745 which we have italicized:
We are clear, however, that a merger the effect of which “may be substantially to lessen competition” is not saved because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial.
A value choice of such magnitude is beyond the ordinary limits of, judicial competence,
and in any event has been made for us already, by Congress when it enacted the amended § 7. Congress determined to preserve our traditionally competitive economy.
This initial difficulty on the problem of reviewing the second determination of the Comptroller, has since been dissipated. It is now established that the previously held view of this court must be modified, for the Supreme Court, in passing upon the very standards here involved in United States v. First City National Bank of Houston, supra 386 U.S. at 369-370 , 87 S.Ct. at 1093 , said:
The courts may find the Comptroller’s reasons persuasive or well nigh conclusive. But it is the court’s judg-t ment, not the Comptroller’s, that finally determines whether the merger is legal.
That was the practice prior to the 1966 Act; and we cannot find a purpose on the part of Congress to change the rule. This conclusion does not raise serious constitutional questions by making the courts perform nonjudicial tasks. The “rule of reason”, long prevalent in the antitrust field (see, e. g., Chicago Board of Trade v. United States, 246 U.S. 231 , 38 S.Ct. 242 , 62 L.Ed. 683 ), has been administered by the courts. A determination of the effect on competition within the méaning of § 7 of the Clayton Act is a familiar judicial task.
The area of “the convenience and needs of the community to be served,” now in focus as part of the defense under the 1966 Act, is related, though perhaps remotely, to the failing-company doctrine, long known to the courts in antitrust merger' cases.
United States v. Diebold, Inc., 369 U.S. 654 , 82 S.Ct. 993 , 8 L.Ed.2d 176 . The appraisal of competitive factors is grist for the antitrust mill. See, e.g., United States v. Philadelphia National Bank, supra, 374 U.S. 357 -367, 83 S.Ct. 1738 -1743. The courts are not left at large as planning agencies. The effect on competition is the standard; and it is a familiar one. If the anticompetitive effect is adverse, then it is to be excused only if “the convenience and needs of the community to be served”
clearly
outweigh it.
We see no problems in bringing these standards into the area of judicial competence.
There are no constitutional problems here 'not present in the “rule of reason” cases. (Footnotes omitted.) (Italics ours.)
Not having had the benefit of the recent above quoted ruling of the Supreme Court and feeling as we did that a determination of “the convenience and needs of the community to be served” was an administrative, rather than a judicial function, we remanded the cause to the Comptroller with directions to proceed to make the determinations called for by the Bank Merger Act of 1966.
It is well that we'did so, for as the Supreme Court said in the above quotation, while on review
de novo,
“it is the court’s judgment, not the Comptroller’s that finally determines whether the merger is legal”, yet, in so determining,
*147
“the courts may find the Comptroller’s reasons persuasive or well nigh conclusive.”
On remanding the cause to the Comptroller, we suggested that he should make specific findings as to:
1. The competitive situation as to which the merger may have operative effects and particularly whether the merger will have a probable tendency to lessen or do away with competition; and
2. The probable effect of the transaction in meeting the convenience and needs of the community to be served. In this latter connection we suggested that he specify particularly what he finds to be the convenience and needs of the community, what he considers will be the effect of the merger thereon, and how and by what means he weighs these effects as against the anticompetitive effects of the transaction.
Finally, in order to avoid any possible necessity for further remand following our review of the Comptroller’s order, he was directed to make findings as to whether, assuming that the merger has the effect upon potential competition which the Government claims, that effect would be clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
7
Following the remand and after due notice to all interested parties, including the Attorney General of the United States,
8
the matter was further heard by the Comptroller on November 14, 1966, at which time he not only reviewed the record of the hearing on which he based the findings contained in his decision of September 30, 1963, but also all the material already introduced in evidence before this court in the course of its previous trial and rehearing of this case and additional information available to and presented by the Comptroller in the course of said hearing of November 14, 1966. The hearings of the Comptroller on this merger were probably the most extensive ever held on a bank merger. Had the Attorney General participated, it would have been an adversary proceeding equivalent to that before any administrative agency or the courts.
In the extensive findings and conclusions of law filed by the current Comptroller with this court on December 27, 1966, which this court finds from the evidence presented in this case on review
de novo
to be correct, he reaffirmed the judgment of his predecessor. Further hearings had been held in this court on April 19, 20, and 21, 1966, and following the filing of briefs and a limited hearing on February 3,1967, to consider the findings of the current Comptroller, the cause was ordered submitted. However, because of the pending appeal in the ease of United States v. First City National Bank of Houston, supra, relating to the nature of the review
de novo
and the burden of proof on “the convenience and needs of the community to be served”, this court deferred any ruling on the merits to await the decision of the Supreme Court, which was entered on March 27, 1967.
With the previous history of this litigation and its relationship to the Bank Merger Act of 1966 in mind and behind us, we are prepared to decide this cause on the merits.
Before discussing the merits of the issues presented, a review of the history and operations of the defendant banks, the negotiations leading to the merger and the role of Transamerica Corporation therein, and the hard facts as to
*148
the nature of the business and banking in California would be helpful.
HISTORY AND OPERATIONS OF DEFENDANT BANKS.
Defendant Crocker-Anglo National Bank, prior to November 1, 1963, was a banking association organized under the laws of the United States, with its principal place of business at San Francisco, California.
Defendant Citizens National Bank, prior to November 1, 1963, was a banking association organized under the laws of the United States, with its principal place of business at Los Angeles, California.
Transamerica Corporation (herein referred to as “Transamerica”) is a holding company incorporated under the laws of Delaware, with its principal place of business at San Francisco, California. At the time of the merger Transamerica owned approximately forty-one per cent of the capital stock of Citizens, and, as a result of the merger, it received approximately 12 per cent of the stock of Crocker-Citizens National Bank (herein referred to as “Crocker-Citizens”), the title given to the new bank under the charter of Crocker. Transamerica’s ownership in Citizens, which it voted in its entirety in favor of the merger, was sufficient to give it the power to prevent any merger of Citizens with any other bank. In addition to its holdings in Citizens (now in Crocker-Citizens), Transamerica holds stock in a substantial number of insurance companies, public utilities, industrial corporations and to a limited degree in Western Bancorporation, a holding company with subsidiary banks located throughout the western states, and Bank of America. These latter two holdings made for investment purposes, the court finds to be insufficient to have any appreciable effect on banking operations in any area relevant to this case.
Crocker and Citizens were each' engaged in interstate commerce. The merger of Crocker and Citizens was not a merger of necessity because of management problems or earnings, or any of the things that make a merger compelling in that respect. While both were progressive banks with a substantial future as separate institutions and while both were expanding their branching facilities within their respective areas of operation, up to the time of the merger, with the exception of Ventura County, California, where their operations were too minor to adversely affect competition in this presumed local banking market, neither bank had branched into or otherwise made any economically significant entry into the banking market of the other. The evidence, as will be hereinafter disclosed, is clearly insufficient to support a reasonable inference that either intended to, or that it was feasible for either to, enter the market of the other in the reasonably foreseeable future.
Crocker-Anglo was chartered in 1870. It was the fifth largest commercial bank in California and sixteenth largest in the United States in terms of deposits. It conducted a general commercial banking and trust business through 124 banking offices located in 29 California counties ranging from the Califomia-Oregon boundary on the north to Santa Barbara County in the south. As of December 28, 1962, Crocker-Anglo had total deposits of about $2,134,002,000, total assets of about $2,360,014,000, and total loans and discounts of about $1,219,050,-000.
Citizens was originally incorporated in 1890 under the laws of California; it received a national bank charter in 1901. Citizens was the eighth largest commercial bank in California and forty-third largest in the United States in terms of deposits. It conducted a general commercial banking and trust business through 78 banking offices located in Los Angeles, Orange, San Bernardino, Riverside, and Ventura counties. As of December 28, 1962, it had total deposits of about $713,793,000, total assets of about $791,662,000, and total loans and discounts of about $357,099,000.
A map showing the locations of the banking offices of each of the merging banks in California immediately prior to the merger can be found in the court’s
*149
opinion in United States v. Crocker-Anglo National Bank, D.C., 223 F.Supp. 849, 851 .
On February 10, 1956, Crocker First National Bank of San Francisco (herein “Crocker First National”) and Anglo California National Bank (herein “Anglo California”)-Consolidated under the name of Crocker-Anglo National Bank, combining the 47 offices of Anglo California located in 31 communities with the 3 offices of Crocker First located in San Francisco, Oakland and San Mateo. Anglo California also had offices in San Francisco and Oakland. Immediately prior to said consolidation Crocker First National had total deposits of about $430,488,000 and total loans of about $214,201,000, and Anglo California had total deposits of about $844,839,000 and total loans of about $440,461,000. On June 30, 1956, Crocker-Anglo National Bank offices located in San Francisco had 24.8 per cent of the total IPC (individual, partnerships and corporations) demand deposits in that City and County.
On June 22,1956, Crocker merged with the First National Bank of Scotia and with the First National Bank in Madera. On September 7, 1956, Crocker merged with Salinas National Bank. On May 29, 1959, Crocker merged with County National Bank and Trust Company of Santa Barbara. On September 25, 1959, Crocker merged with The Bank of Carmel and with The First National Bank of Monterey, and with The First National Bank of Pacific Grove. On June 23, 1961, Crocker merged with the Bank of San Rafael and with the First National Bank in San Ráfael.
9
On November 30, 1959, Citizens merged with the Bank of Whittier and with the First National Bank of Vernon. On December 7, 1962, Citizens merged with the Glendora Commercial and Savings Bank.
The nine banks acquired by Crocker from June 1956 to June 1961 had, combined, deposits of about $164,371,000, loans of $79,790,000, and 20 banking offices. The three banks acquired by Citizens from November 1959 to December 1962 had, combined, about $19,977,000 in deposits, $8,880,000 in loans, and 6 banking offices. All of these banks were engaged in interstate commerce.
NEGOTIATIONS LEADING TO THE MERGER.
The purpose of creating another statewide bank to compete with Bank of America
10
was clearly stated when the subject of the merger of Crocker and Citizens was first proposed. (Tr. 1021). In September 1958, L. O. Ivey, vice chairman of the board of Citizens National Bank and its second largest stockholder, approached Paul Hoover, president of Crocker, with regard to a merger of the two banks for the purpose of forming another statewide institution. (Tr. 1020, line 21-Tr. 1021, line 10; Tr. 1029). L. O. Ivey had no connection with Transamerica. (Tr. 1031). Although the management of Citizens may not have been favorably disposed to this proposal, Ivey interested Transamerica in the negotiations, but they came to an abrupt termination in March 1959, when Transamerica, as the dominant stockholder of Citizens, demanded too high an exchange ratio for the Citizens stock (Tr. 1022, 1029-1030). Although it appeared at this time that there was no possibility of merging Crocker with Citizens and although every reason now urged by plaintiff for entering Los Angeles then existed,
Crocker took no steps and made no plans to establish offices in Los Angeles or any of the other southern counties,
*150
either by merger or by
de novo
branching.
JUDGE POPE: I would like to ask this question: Was there any time subsequent to 1956 when the officers of '.your organization discussed the problem of establishing branch banks in the Los Angeles area? By that, I mean Los Angeles County, Orange County and vicinity.
THE WITNESS: Yes, the subject came up quite frequently, Your Honor, and was cast aside because we just didn’t have the horses, we didn’t have the capital, we just couldn’t do it and we didn’t have the personnel.
JUDGE POPE: Was this at a time when you were generally agreed that it would be desirable to enter—
THE WITNESS: It was indeed.
JUDGE POPE: To enter the Los Angeles area?
THE WITNESS: Yes.
(Hoover, Tr. 1038, Lines 5-19).
In January 1962, two years and nine months later, Paul Hoover and Emmett Solomon, then chairman of the board and president, respectively, of Crocker, called on John R. Beckett, the new president of Transamerica, to discuss the possibility of merger with Citizens. At that time they were informed by Beckett that Transamerica was not interested in such a move, but that if it did because interested, he would so advise Crocker (Solomon, G-337, pp. 109-110). Prior thereto, Transamerica, for reasons relating to the accounting rules of the Securities & Exchange Commission, was interested in owning more than 50 per cent of Citizens, in order that it might thereby substantially increase its earnings (Beckett, Tr. 1908). Subsequently and at the meeting of its board of directors on August 31, 1962, Transamerica, fearing that its 41 per cent holding in Citizens might result in Transamerica voting more than 50 per cent of the stock of Citizens represented at an annual meeting and thereby subject it and all of its subsidiaries wherever located in the world to examination by the Federal Reserve Board at the expense of the company, decided to dispose of its Citizens holdings and instructed Mr. Beckett to see what he could do in this regard (Beckett, Tr. 1910-1913).
Pursuant to such instruction in September 1962, Beckett informed Hoover or Solomon or both that Transamerica had decided that it would be interested in a merger because' Transamerica was leaning in the direction of becoming a mutual fund type operation (Solomon, G-337, p. 110; Beckett, Tr. 1913). In response to this, Hoover and Solomon negotiated with Transamerica for the purpose of determining what exchange ratio would be satisfactory to Transamerica in the event a merger was successfully negotiated with Citizens. Transamerica agreed that an exchange ratio of 1.8 shares of Crocker to 1 share of Citizens would be satisfactory to it (Solomon, G-337, pp. 125-126). Transamerica also agreed that it would not interfere with the management of the resulting bank and that it would dispose of its shares in the resulting bank on an orderly basis (Solomon, G-337, pp. 127-128). Transamerica thereafter informed the executive committee of Citizens of Crocker’s proposal and that Transamerica was in favor of it (Britt, G-334, pp. 10-12a). Hoover and Solomon then negotiated with the management of Citizens, not only as to the exchange ratio, but as to all other aspects of the merger agreement which were important to both groups (Britt, G-334, p. 12b; Solomon, G-337, 'pp. 124-125). Included were the composition of the board, adjustment of principal officers, employee benefits, location of directors’ meetings, name of the combined bank, composition of the executive committee, functions of the advisory committees, location of the bank’s headquarters and the multitude of other things, any one of which might have prevented agreement on a merger (Solomon, G-337, pp. 124-127; Clarke, Tr. 1246, line 18-Tr. 1247, line 17). Finally, by a letter from the chairman of the board of directors of Crocker, dated February 6, 1963, Croeker-Anglo offered to merge at an exchange ratio of 1.9 shares of Crocker
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Anglo to 1 share of Citizens. (Britt, G-334, pp. 22-24). The proposal also contained various provisions relating to the liabilities of the two banks, the composition of the board of directors of the resulting bank, future employment and pensions of employees of both banks (Ct. Exh. 195).
In February 1963, the boards of directors of both banks approved the merger in principle and authorized and directed the officers to i.egotiate a definitive agreement. On February 28, 1963, Crocker initiated an examination of Citizens and discovered the possibility of exposure to liability from a certain action pending against Citizens. Being unwilling to assume, through a merger with Citizens, responsibility for that litigation and for related contingent liabilities in connection therewith unless indemnified, Crocker entered into an agreement with Transamerica whereby Transamerica, together with its subsidiaries, agreed to indemnify and save harmless Crocker against any and all liabilities which might arise from that action, to the extent of 60 per cent thereof. Thereafter Crocker confirmed its offer by a letter dated April 1, 1963, from the chairman of its board. In April, the board of directors of each authorized the execution of the formal agreement to merge and it was duly executed (Ct. Exh. 195, “Application for Approval of Merger”, p. 4).
On May 3, 1963, the two banks submitted their Application for Approval to Merge under section 18(c) of the Federal Deposit Insurance Act, as amended, 12 U.S.C. § 1828 (c), and section 215a of Title 12 U.S.C., to the Comptroller of the Currency (Ct. Exh. 195).
Pursuant to notice, the Comptroller of the Currency held a public hearing on the proposed merger on July 30 and 31, 1963. The record developed at the hearing comprises 1,605 pages of testimony and exhibits (BK-A). On September 30, 1963, the Comptroller of the Currency rendered his decision approving the merger subject to the conditions that the board of directors of Transamerica agree: (1) that no more than one director or officer or other representative of Transamerica Corporation will serve as a director of the resulting bank, and (2) that it would dispose of substantially all of its stock holdings in the resulting bank by December 31, 1966. Subsequently, this provision was further changed by putting the stock in a voting trust, over which Transamerica has no control. Transamerica no longer has a director on the combined board, and the percentage of the stock it now holds under the voting trust has been reduced from 12 per cent to 8.8 per cent. The trust, which cannot be altered without approval of the Comptroller, is presumably to remain in effect until Transamerica can make a fair and equitable disposition (sale) of its holdings. The influence of Transamerica on the banking operations of the old Citizens or the new Crocker-Citizens has thus been effectively removed.
In his decision approving the merger, the Comptroller found favorably to the banks on all the banking factors involved and also found that the proposed merger would have no adverse effects on competition, that it would not tend toward monopoly, and that it would not violate section 7 of the Clayton Act (BK-A).
On October 8, 1963, this action was commenced and the Government moved for a preliminary injunction restraining the consummation of the merger. After hearing, the Government’s motion for a preliminary injunction was denied (United States v. Crocker-Anglo Nat. Bank, 223 F.Supp. 849 (N.D.Calif.1963)), and the merger was consummated on November 1, 1963. The subsequent history of this litigation has already been recited above.
THE NATURE OF BANKING IN CALIFORNIA AND THE ECONOMIC MILIEU IN WHICH IT OPERATES.
In view of the broad geographic distribution of the operations of the merging banks and their branches in order to better assess and render a balanced judgment on the impact of this merger, a
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review of the economic milieu in which they operated is imperative.
The geographic expanse of California, comprising 158,693 square miles of land with some 800 miles of coastline and an average width of 200 miles, with all the attendant problems created by distance, can best be appreciated if its area is transported to the east coast and overlaid on the eastern seaboard. . When the north-south California axis is placed on the north-south axis of the east coast, the California overlay extends from Boston, Massachusetts on the north to Charleston, South Carolina on the south. Encompassed in this area we will find all the land area of Connecticut, Rhode Island, New Jersey and Delaware and the eastern half of Massachusetts, Pennsylvania, Maryland, Virginia, North Carolina and South Carolina. It would embrace such cities as Boston, New York, New Haven, Wilmington, Philadelphia, Baltimore, Washington, D. C., Richmond, Norfolk, Charlotte, Winston-Salem and Charleston.
11
It has a topography and climate probably unmatched throughout the remain
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der of the United States for its complexity and variety and thus accounts for the extraordinary expansion, growth and diversity in population, agriculture, business and industry, which for decades have made and continue to cause
California to be a substantial capital import state
(Saxon, Tr. 2066-2068). This situation, which is recognized by all the parties, is of paramount importance in any consideration of the State of California as a whole as a relevant economic section of the country in which to evaluate the competitive nature of commercial banking (the term used in the Bank Merger Act of 1966 is “the business of banking”). It is also important to the court’s consideration of the convenience and needs of the community to be served.
Any attempt to divorce the entire State of California from the national market (as a submarket thereof) in assessing the anticompetitive impact of this merger by the use of concentration figures in commercial banking based upon the number of offices, assets, IPC deposits and loans of California banks alone (as plaintiff would have us do) and without consideration of other financial forces in and out of California which come into play and compete with such banks for the very financial services that may cause the entire state to be a relevant market (as contrasted to those which are basically local) is an oversimplification, an oversimplification which might make the court’s task easier, but which would ignore a substantial and essential part of the picture and would result in a false portrayal of the hard economic facts of banking in this assumed state market. As difficult as the task may be, ours is the obligation to clarify and establish the picture with certainty.
12
THE APPROPRIATE LINE OF COMMERCE TEST.
While it is well established that commercial banking, which has as one of its prime characteristics the fact that commercial banks are the only financial institutions that can accept demand deposits,
13
is an appropriate line of commerce within which to measure the an
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ticompetitive effects of a banking merger in local markets, it does not necessarily follow under the 1966 Act that the
totality of financial activities
carried on by
commercial banks
and
their competition
in á statewide market of the magnitude of California or in the national market
14
should be ignored. It is not the view of this court that in such expanded markets commercial banking is the sole line of commerce that the court can or should consider. Hence, what we are about to say, which represents the views of the members of this court, while not essential to the findings herein made and the conclusions herein reached, is, nevertheless, clearly applicable to this case and the substantive standards by which bank mergers are to be tested under the. Bank Merger Act of 1966.
In fact, the provisions and terminology of subparagraphs (A) and-(B) of the Bank Merger Act of 1966, § 1828(c) (5) of Title 12 U.S.C., which set forth the substantive standards by which banking mergers are to be judged, suggest to this court that a broader test was intended and now applies. We deem the deliberate omission from the Bank Merger Act of 1966, § 1828(c) (5) (B), of the phrase “in any line of commerce” is not without significance.
15
Plaintiff argues that “it was quite unnecessary, and indeed would have been inappropriate, for the phrase ‘in
any
line of commerce’ to have been included in so obviously a statute concerned exclusively with banks. To have had it there would have been out of place and would
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not have made sense”. (Plaintiff’s Supp. Post Reply Brief, p. 12A.)
This argument ignores the canons of statutory construction that “ * * the legislative language will be interpreted on the assumption * * * that if change occurs in legislative language, a change was intended in legislative result.”
16
Furthermore, the statute itself answers plaintiff’s argument. Subparagraph 5(A) immediately preceding sub-paragraph 5(B) provides the first substantive test for bank mergers. It is in terms of monopoly. It refers expressly to “the business of banking”. Congress obviously thought it “made sense” and was not “out of place” to use the words “business of banking” when formulating the monopoly test. In the following paragraph Congress just as obviously must have thought it “made sense” to omit those words. This gives all the more credence to Senator Robertson’s statement that Congress intentionally omitted “any line of commerce” (as well as “business of banking”) from subparagraph 5 (B) of the amendment, in order to provide a less stringent test. In his remarks on the floor of the Senate when he presented the amendments of the House of Representatives to S. 1698, the bank merger bill, Senator Robertson said:
It will be noted that the prohibitory language is based generally on the terms of section 1 of the Sherman Act and section 7 of the Clayton Act. Section 1 of the Sherman Act ( 15 U.S.C. § 1 ) prohibits contracts, combinations, and conspiracies “in restraint of trade or commerce” while section 7 of the Clayton Act ( 15 U.S.C. § 18 ), as amended in 1950, prohibits acquisitions “where in any line of commerce in any section of the country the effect may be substantially to lessen competition, or to tend to create a monopoly.”
The text of paragraph (B) of the new bill follows the terms of section 1 of the Sherman Act and section 7 of the Clayton Act, with the exception that the reference to “any line of commerce” in the Clayton Act is not carried over into the new bill. In this respect the new bill resembles the Bank Merger Act of 1960, and calls for an appraisal of the overall effects of the merger on competition, weighing increases of competition in one field against decreases in competition in another field. The banking agencies and the courts, in other words, are not intended and are not permitted to select some single, perhaps minor aspect of the banks’ business and to say that, because there is some lessening of competition in this element of the business, the overall effects of the merger—the increase of competition in the entire field of banking and in the broader field of financial institutions which may result from other aspects of the merger—are irrelevant and may not be considered.
As the Banking and Currency Committee said in 1959 in reporting out the Bank Merger Act of 1960, we do not want the banking agencies and the courts to say as did Judge Weinfeld in the Bethlehem-Youngstown merger, “If the merger offends the statute in any relevant market then good motives and even demonstrable benefits are irrelevant and afford no defense.” (U. S. A. v. Bethlehem Steel Corp. et al., D.C., 168 F.Supp. 576, 1958 ; see Senate Report No. 196, 86th Cong., S. 1062, pp. 5-6.)
We do not want the court to say, as it did in the Philadelphia case, that a merger which may substantially lessen competition in one line of business in one section of the country “is not saved because, on some ultimate reckoning of social debits and credits, it may be deemed beneficial.” We do not want the court to apply a statute which, in the words of the court in the Philadelphia case, proscribes “anticompetitive mergers, the benign and the malignant alike.” (Hearings on S. 1698, p. 403). In considering whether a proposed
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merger may lessen competition or tend to create a monopoly or be in restraint of trade, the banking agencies and the courts will, of course, take into consideration all the facts which I have discussed under the question of monopoly —the competition from other financial institutions in one or another part of its business, the competition from other banks and other financial institutions, locally, regionally, nationally and internationally, the inevitable limitations on competition imposed by statute and by regulatory authorities, with respect to entry into the business and with respect to the carrying on of the business. All of these factors must be taken into consideration in weighing the overall anticompetitive effects of the proposed merger. (Cong.Ree. Feb. 9, 1966, p. 2541-2.)
And Congressman- Ashley, as house manager for S. 1698, in reporting out his version of that bill, commented on the problem as follows:
The Committee recognized that commercial banks face intensive competition from other financial institutions— savings and loan associations, mutual savings banks, insurance companies, finance companies, and so forth. The Committee also recognized that competition between commercial banks and other institutions includes local competition, regional competition, national competition and even international competition for one part or another of the business. To overlook any one of these aspects of competition, or to concentrate on one of them to the exclusion of the others, would be unrealistic and might well diminish, not increase, financial competition.
17
In interpreting the Bank Merger Act of 1966 as it was finally enacted, plaintiff urges the court to listen only to the words of Representative Patman and his associate, Representative Reuss, who, plaintiff proposes “are the principal architects” of the legislation. Yet, anyone reading the legislative history of the Act cannot help but conclude that the language of Senator Robertson and Representative Ashley, more properly defines the scope and intent of the Act.
Certain things are clear from the legislative history. The initial bill was offered by Senator Robertson.'""With an amendment by Senator Proxmire it passed the Senate and was offered in the House by Representative Ashley. It was not until after a majority of the House Banking and Currency Committee, in an allegedly “rump” session, had voted to approve the Ashley bill that Representative Patman agreed to let any bill come out of the committee. In reporting the bill which bears his name and which became the Bank Merger Act of 1966, Representative Patman reported to the Congress :
Mr. Chairman, if I alone were writing this legislation and proposing it, I certainly would not propose it as it is before us. I would be against it as a matter of principle. (Cong.Ree., Feb. 8, 1966, p. 2357.)
We think it reflects no discredit upon Representative Patman if the court, recognizing the limitations of human nature, views his interpretations of this statute with a jaundiced eye. He opposed the bill “in principle” and with all his legendary vigor. What would be more natural than for him to attempt to shave its impact as much as possible when it reached the floor of the House?
On the other hand, Senators Robertson and Proxmire had sponsored the legislation in the Senate, as had Representative Ashley
18
in the House. When the
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House passed the amended bill, Senator Robertson quickly sponsored the House version before the Senate Banking Committee, where it was approved by a 9 to 2 vote.
Since the bill was eminently satisfactory to its original sponsors and so distasteful to Representative Patman, is it not to the “winners” that we should turn for an evaluation of the meaning of the statute?
COMPETING FINANCIAL INSTITUTIONS OTHER THAN BANKS.
The court, having concluded that the intent of Congress in deleting the phrase “line of commerce” from the Bank Merger Act of 1966 was to permit an assessment of the competitive effect of a merger, not in the narrow market consisting solely of commercial banks, but in the wider and more realistic field of all institutions which compete either for the savings or investment dollar or for the extension of credit, now reviews this wider field.
It would be appropriate to here also note that students have pointed out that because of the regulations to which banks are subjected, the character of their competition is quite different from that of other nonregulated industries or businesses and explains in part the reasons which prompted the 1966 amendments to the Bank Merger Act.
19
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The following uncontroverted data, contained in the record and appropriately cited by exhibit number, demonstrates the extent to which competition exists in the State of California between banks and various other financial institutions. The information is based upon a hypothetical statewide market and demonstrates the insignificance of Crocker-Citizens’ share of the savings and credits throughout the state.
(a) In 1962, California savings amounted to $46,057,807,000, only 27.-12 per cent of which were held by commercial banks and only 2.63 per cent of which were held by Crocker and Citizens (BK-E-27):
(000 omitted)
Commercial Banks (IPC time deposits) $12,493,031
Savings and Loan Associations (Savings Capital) 13,400,000
U. S. Savings Bonds (Redemption value of bonds held by individuals) 4.644.000
Credit Unions (Share capital and member deposits) 814,463
Postal Savings (Balance to credit of depositors) 32,137
Life Insurance Reserves 9,646,176
Mutual Investment Funds (Market value of net assets) 2.279.000
U. S. Government Marketable Securities With Maturity Within 1 Year from Date of Issue 2.749.000
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As of December 28, 1962, Crocker and Citizens combined held only 2.63 per cent of the total (BK-E-27).
(b) As of January 1962, commercial banks held only 10.01 per cent of California farm mortgage loans:
(000 omitted)
All Operating Banks $ 138,604
Life Insurance Companies 208,760
Federal Land Banks 187,167
Farmers Home Administration 9,555
Individuals and Others 840,000
Total $ 1,384,086
As of the closest available date, Crocker and Citizens together held only 1.34 per cent of California farm mortgage loans (BKE-28).
(c) As of January 1962, total California agricultural loans amounted to $2,184,790,000, only 33.4 per cent of which were held by operating banks:
(000 omitted)
All Operating Banks $ 730,396
Life Insurance Companies 208,760
Federal Land Banks 187,167
Banks for Cooperatives 92,303
Farmers Home Administration 15,802
Rural Electrification Administration 35,020
Production Credit Associations 75,342
Individuals and Others 840,000
As of the closest available date, Crocker and Citizens combined held only 2.77 per cent of California agricultural loans (BK-E-29).
(d) As of 1962, California mortgage debt on non-farm real estate amounted to $32,150,162,000, only 18.6 per cent of which was held by commercial banks:
(000 omitted)
Commercial Banks $ 5,978,775
Mutual Savings Banks 2,196,000
Savings and Loan Associations 13,941,000
Life Insurance Companies 5,634,387
Others 4,400,000
As of the same date, Crocker and Citizens held only 1.80 per cent of that total (BK-Er31).
20
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(e) In 1962, commercial banks held only 32.74 per cent of the total California business loans and credit outstanding. The $21,276,-061,000 total amount of such loans and credit was held as follows:
(000 omitted)
Commercial Banks $ 6,945,861
Commercial and Finance Company Paper 598,800
Small Business Administration 76,600
Finance Companies 1,111,700
Life Insurance Companies 2,064,400
Savings and Loan Associations 588,700
Trade Credit 9,830,000
Crocker and Citizens held 2.85 per cent of that total (BK-E-33).
(f) In 1962, commercial banks held only 44.36 per cent of California’s $7,101,896,000 installment and non-installment consumer credit:
(000 omitted)
Commercial Banks (Installment credit and single payment loans) $ 3,150,596
Other Financial Institutions (Single payment loans) 87,500
Sales Finance Companies 1,219,400
Credit Unions 497,300
Consumer Finance Companies 379,900
Others—Installment Credit 160,000
Retail Outlets (Installment credit and charge accounts) 1,156,600
Credit Cards 51,200
Service Credit 399,400
Crocker and Citizens had 5.56 per cent of that total (BK-E-35).
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The financial institutions which compete with commercial banks are located in every part of the State of California:
(a) The Morris Plan Company has 47 offices in 46 communities located in every area of the state. Its eight San Francisco Bay area offices include at least one in each of the five counties which plaintiff claims to be the relevant local market, and its 12 offices in the Los Angeles metropolitan area include three in Orange County and nine in Los Angeles County. As of December 31, 1955, it had total assets of $115,067,049 and total loans of $116,913,051 (BK-GGG, pp. 1-2).
(b) As of December 31, 1964, there were 7C federal and 206 state chartered savings and loan associations doing business in California through 670 offices located throughout the state (BK-GGG, p. 3; Ct. 195 (Exh. 15-B, p. 2)). Their total assets amount to $23.9 billion. Of those, 43, with total loans of $3 billion and total share accounts of $2.9 billion, have their headquarters in the San Francisco Bay area. Another 112, with total loans exceeding $13 billion and total assets exceeding $12 billion, are headquartered in Los Angeles and Orange Counties (BK-GGG, p. 3).
(c) As of December 31, 1965, there were nine agencies of the General Motors Acceptance Corporation in California having 18 offices in the principal economic areas of the state. Their total loans and discounts exceeded $450 million and their total assets amounted to more than $460 million. The two agencies located in the San Francisco Bay area had total loans and discounts of almost $100 million and total assets exceeding that sum. In Los Angeles and Orange Counties, five General Motors Acceptance Corporation agencies with seven offices have total loans and discounts of more than $300 million and total assets of more than $306 million (BK-GGG, p. 4).
(d) The California Department of Veterans Affairs, Division of Farm and Home Purchases, has 14 offices located in the principal economic areas of the state, and as of June 1965, had 127,201 home loan purchase contracts outstanding, with a total outstanding balance of $1.3 billion, and in addition, had 1,294 farm loan purchase contracts outstanding, with a total balance of $31.5 million. Of those, almost 25,000 home loan purchase contracts, with an outstanding balance of approximately $260 million, were held by its two offices in the San Francisco Bay area. The three offices in Los Angeles and Orange Counties held almost 40,000 home loan purchase contracts, with an aggregate balance of more than $380 million (BK-GGG, p. 5).
(e) Finance companies are also very active in the California local markets. As of 1961, there were 1,183 finance company offices in California, with total loans of $695 million (Ct. 195 (Exh. 15-C, p. 6)).
(f) Credit unions are active throughout California. As of 1962, they numbered approximately 1,750, had total assets of $917 million, total loans of $765 million and total share accounts of $814 million (Ct. 195 (Exh. 15-C, p. 2)). As of 1965, there were 88 operating credit unions in the San Francisco Bay area, including 28 in the City and County of San Francisco, 8 in San Mateo County, 14 in Contra Costs County, 2 in Marin County and 36 in Alameda County (BK-GGG, pp. 6-8). On the same date, there were 136 operating credit unions in Los Angeles County and another 17 in Orange County, for a total of 153 in the Los Angeles metropolitan area (BK-GGG, pp. 9-12).
(g) Some 371 insurance companies do business in the State of California. Together they have total assets of $156.7 billion and total loans of $65.8 billion (BK-GGG, pp. 21-36). The assets of 27 of them each exceed $1 billion, 16 exceed $2 billion, 11 exceed $3 billion, 8 exceed $5 billion and 2 exceed $20 billion (BK-GGG, pp. 21-36).
(h) There is no shortage of insurance companies doing business in the local markets in California. Some 200 insurance companies are represented in the five-county San Francisco Bay area. Together they have assets in excess of
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$149 billion and loans exceed $63 billion (BK-GGG, pp. 13-16). A slightly larger number do business in Los Angeles and Orange Counties. There some 213 insurance companies are represented, with total assets exceeding $150 billion and total loans exceeding $63.8 billion (BK-GGG, pp. 17-20).
In plaintiff’s hypothetical state market, where convenience is no longer a controlling factor, not only must a drastic modification (a reduction in percentage figures, as will be hereinafter shown) be made to reflect the foregoing data showing the competition given commercial banks by all financial institutions, but a further adjustment must be made to account for both out-of-state and foreign banks. Before making such necessary adjustments to plaintiff’s concentration ratios, we reiterate and reemphasize that were the court to confine its consideration of the facts of this case to commercial banking as the sole line of commerce, and thus accept the plaintiff’s interpretation of subparagraph B of § 1828(c) (5) of Title 12 U.S.C., we would still make the same basic findings herein made and reach the same conclusion.
ADJUSTMENTS TO PLAINTIFF’S CONCENTRATION RATIOS.
Throughout the trial, in its proposed findings and its brief, plaintiff has placed reliance on its concentration figures, so-called “concentration ratio”,
21
as an assertedly reliable indicator of the probable competitive effects of the instant merger. One would think, therefore, that plaintiff would endeavor to. present the court with a figure closely approximating the actual state of affairs, particularly since plaintiff has the burden of proof on that issue. Yet, plaintiff made no adjustment in any of its exhibits pur-' porting to reflect concentration ratios for the business done in California by out-of-state banks, notwithstanding (1) its knowledge that the Supreme Court made a 16% per cent adjustment therefor (from 36 per cent to 30 per cent) in United States v. Philadelphia Nat. Bank, supra, 374 U.S. at 364 n. 40, 83 S.Ct. 1715 ; (2) its concession that California is a capital import state and that out-
*163
of-state banks solicit the loans of business firms in California; and (3) prior warning that the amount of such business would be in issue.
Even if there were no evidence on the extent of the adjustment required, some adjustment would have to be made. In the
Philadelphia
case, the Supreme Court reduced the share of the merging banks from 36 per cent to 30 per cent for business done by banks outside the relevant area, though there was no evidence reflecting the amount of that business. Since California is growing more rapidly than Pennsylvania, and since larger amounts of capital are imported\to finance that growth, it would be expected that a larger percentage of bank financing would come from out of state. In an effort to make this necessary adjustment, Professor Weston not only relied upon the study of capital imports for home loans made in California by Leo Grebler, Professor of Real Estate and Urban Land Economics of the Graduate School of Business Administration at U.C.L.A., wherein he estimated that out-of-state funds provided 38 per cent of California home mortgage loan funds (and further concluded therefrom and his own knowledge and experience that a higher percentage would be expected for business loans) (Tr. 1580), but he also made an independent study based upon a 1955 loan survey of the Governors of the Federal Reserve System (BK-Y, Tr. 1555). On the basis of that survey, which was the only source of data from which out-of-state bank loans to California borrowers might be derived, he calculated that of the total business loans made to California borrowers by commercial banks in the United States, the combined share of Crocker First National Bank and Anglo-California National Bank (which became.Crocker-Anglo National Bank in 1956) and Citizens National Bank was only 6.41 per cent, which when compared with their 9 per cent share of the reported business loans by all California banks, represents an adjustment (reduction) of 28.78 per cent (BK-Y, Table 4; Tr. 1560-1568). The effect of such an adjustment, which it would be erroneous not to make, will be hereinafter shown.
The magnitude of the adjustment required to compensate for business done by out-of-state banks is itself evidence of the fact that the whole of California is not a relevant commercial banking market (Weston, Tr. 1583), a market based on economic facts that correspond to business reality.
An adjustment of Croeker-Citizens’ share of the hypothetical statewide market should also be made for available resources of foreign banks. Such an adjustment is difficult, if not impossible, to measure, unless we resort to plaintiff’s theory that every office of a bank has behind it all the resources of its whole system. In such event, if we were to postulate as the Government does, an adjustment of plaintiff’s concentration figures for California would have to include resources from foreign banks. The resources of these foreign banks, with subsidiaries and agencies in California, totaled $23.23 billion as of December 31, 1962, as contrasted to $29.99 billion for all California banks. As of that date, the resources of such foreign banks were of such magnitude as to reduce Croeker-Citizens’ hypothetical market share of deposits suggested by the Government from 9.6 per cent to 5.4 per cent (BK-Z, Table II). This we know would be an erroneous reduction, since a foreign bank, even more so than a statewide bank, cannot afford to risk all of its resources in a single market, nor are foreign banks generally able to do so because of capital export restrictions imposed by law in most countries. However, it is clear from the evidence in this case, including the testimony of plaintiff’s witnesses Thomson and Goto, representatives of the Chartered Bank of London and the Bank of Tokyo, Ltd., that a part of these total resources are available as a potential factor in California competition.’ What part of these resources are so available and the degree to which they would require a reduction of Crock-
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er-Citizens’ market share in California we cannot say nor reliably estimate. What we do know is that these foreign banks already have offices, and in one case, nine locations, in California.
22
Even though only a portion of the very substantial world-wide resources of these foreign banks are available for use in California, the availability of such resources would enable these offices to participate substantially with little effort in the asserted statewide market and in the local markets where they have offices (Goodman, Tr. 1735, 1880-1881). In the same way that a branch can shift its lending power from one particular branch to another, a foreign bank with an agency in California can shift its relative lending power from Montreal or London to San Francisco or Los Angeles (Goodman, Tr. 1737). The amount of funds that an agency of a foreign bank will divert to California is, from an economist’s standpoint, determined by the profits to be made. If there were a substantial increase in interest rates in California, there would be an immediate influx of funds brought into California for lending by foreign banks (Goodman, Tr. 1722-1723). Even plaintiff’s staff economist testified that Crocker’s ability to concentrate their total resources in the Los Angeles metropolitan area differed from the foreign banks’ ability to concentrate their resources in California only in degree (Gaffey, Tr. 1100).
It is apparent from the foregoing that the resources of foreign banks operating in California would require some further adjustment in Crocker-Citizens’ assumed market share, and while it could never equal a reduction from 9.6 per cent to 5.4 per cent, as the logic of plaintiff’s theory of availability of total resources of a bank with branches would lead us, it would, nevertheless, be substantial. However, since we are unable to measure this reduction in percentages, we make no further reference thereto, except to note that the percentage ratio of Crocker-Citizens’ share of the assumed market should in fact be slightly less than the figures hereinafter established by the court.
PLAINTIFF’S CONCENTRATION FIGURES ARE UNRELIABLE.
Primarily, for the reasons above indicated, we not only find that plaintiff’s
limited
line of commerce figures purporting to show increases in concentration are unrealistic and inappropriate for the purpose of assessing the competitive effect of the instant merger, but we are further satisfied that these figures,
which are related almost wholly to the Bank of America,
are inconsistent with plaintiff’s theories of market, unreliable and unsound. Furthermore, they are not supported by the banking agencies.
The trial revealed a basic inconsistency in plaintiff’s theory which undermined the testimony of both its experts and its exhibits. Dirlam and Gaffey assumed that the State of California was a market and that the number of competing banks had declined very substantially between 1945 and 1963. This being their theory, they had to admit that affiliated banks or banks commonly owned did not compete against each other. When this fact was brought to their attention, together with the existence of Transamerica as a holding company,
23
they had to-
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admit that instead of there being a decline in the number of banks between 1945 and 1963, there was a substantial increase in the number of competing units in California during that period. Witness the testimony of Dirlam
24
(Tr. 729, lines 20-24):
Q. How many of those 208 banks in 1945 were controlled by Transamerica Corporation?
A. That I don’t know.
Q. Didn’t it ever occur to you to ask that?
A. As a matter of fact, it didn’t, and (Tr. 733, lines 9-17) :
q. * * * Can’t we agree on one other thing, Doctor, that neither you nor I know the precise number, but from the standpoint of independent competing units, the number of independent competing units is greater in 1964 than it was in 1945 ? How much is the only question.
A. To the extent that Transamerica has * * *
Q. That’s right.
A. I think I would agree on that.
Q. When you originally testified on direct, you thought the reverse was true, did you not?
A. Yes.
Strangely enough, plaintiff, in its opening brief, still contended that “ * * the total number of competing banks actually went down from 208 in 1945.” Inasmuch as the evidence shows that there were other affiliated banks in 1945 and later and that plaintiff made no at
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tempt to eliminate any affiliates or subsidiaries other than those of Transamerica (Pltf. Opening Brief, p. 34, n. 1), it is apparent that plaintiff’s figures are unreliable. Even on plaintiff’s figures, however, the number of banks increased from 178 in 1950 to 200 in 1964 (G—25A). Dr. Gaffey, plaintiff’s staff economist, testified that this trend was a favorable factor (Tr. 1145-1146).
Statistically, plaintiff’s analysis of the effect of the instant merger on concentration was fallacious, as well as hypothetical. All plaintiff’s figures on concentration included Croeker-Citizens with the Bank of America. On almost every basis the Bank of America has approximately a 40 per cent share of the hypothetical state market. It has more offices in Los Angeles County alone than Croeker-Citizens has in the entire state. For this reason, as Professor Goodman points out, it is statistically unsound to group the Bank of America together with any other bank in an attempt to analyze what effect the other bank has on markets or market structure.
25
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Professor Goodman testified that such a grouping of the Bank of America with other banks produces what is known in statistics as an inverted “J”, from which it is impossible to obtain a statistically meaningful analysis. Plaintiff’s expert had to admit that if in the hypothetical California market, the Bank of America were omitted, there would be no economic basis for objecting to concentration in that market. On the other hand, if Crocker and Citizens were both excluded from plaintiff’s statistical analysis of that hypothetical market, concentration would still exist. Accordingly, any concentration in the California hypothetical market is not a function of Crocker-Anglo or Citizens alone or together. And, further, there was no evidence that the merger of Crocker and Citizens created a bank, which, by itself or in combination with any other bank other than the Bank of America, could adversely affect competition in California banking. From an economist’s standpoint a market in which about 155 (or more accurately, some 200) banks have 60 per cent of the market is a healthy market.
The Government attempts to make something out of the fact that the two voting FDIC directors “deadlocked” in reporting on the merger. We rather think that the FDIC directors stood two to one in the banks’ favor because the Comptroller clearly favored the merger, and though an FDIC director, abstained from voting (BK-A, p. 54).
In 1961, the Board of Governors of the Federal Reserve System launched a new program for comprehensive research in the field of banking structure and bank competition. This research included an over-all study of the measurement of concentration which is reported in Smith, “Measures of Banking Structure and Competition,” 51 Fed. Reserve Bull. 1212-1222 (Sept. 1965). The general conclusions there reached substantiate the specific conclusions we have reached regarding markets in this case. Smith points out the weaknesses of concentration ratios which fail to consider disparity in size of banks (ibid, at 1214, 1215) and which fail to consider all competitors within the market (ibid, at 1215). He affirms the necessity for a reliable definition of market area (ibid, at 1216-
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1217) . He also finds banking markets to be local or national (ibid, at 1217-1218) . He states (ibid, at 1216-1217): “The metropolitan area may indeed be the appropriate market area. If so, the State, or the nation, could not also constitute the appropriate market area.” Accordingly, all plaintiff’s suggested findings on concentration are without basis in fact and unsound in theory.
The largest, increase in concentration in plaintiff’s hypothetical statewide market in the period 1950 to 1962 was caused by the creation of United California Bank. The increase was over three times the increase in concentration caused by the merger of Crocker and Citizens. Yet none of the agencies, including the Department of Justice, viewed the creation of United California Bank as creating an increase in concentration. (1961 Ann. Report FDIC, pp. 60-62; 48th Ann. Report of Board of Governors of Fed. Reserve System, 150-52.) On the other hand, the instant merger produced only a very slight change in the market structure, even in plaintiff’s hypothetical statewide market. First Western Bank was also created with Government approval.
A consistent statistical analysis of the plaintiff’s hypothetical market shows that the merger was insignificant. If the statistical methods showing changes in market structure which were employed by the Department of Justice in the Philadelphia case, but which it elected not to employ in the instant case, were used as demonstrated by Exhibit BK-VV,
26
the change is almost impercep
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tibie. The market share of the nine largest banks in the hypothetical market at the end of 1962 was substantially the same as the market share of the nine largest banks at the end of 1963 after this merger. Accordingly, if there was any significant effect on concentration, it was among those banks which have statewide facilities and in this area the effect of the merger was obviously to decrease concentration.
APPROPRIATE SECTIONS OF THE COUNTRY.
In its complaint and in the pre-trial proceedings, plaintiff eliminated from the consideration of this court any question of the effect of the instant merger in national and international markets (Pre-Trial Order, pp. 3-4, 9,11). At all events, the evidence will in no way support any conclusion that the instant merger had any actual or potential adverse competitive effect in either of the markets. If anything, the evidence, as will be herein shown in the court’s discussion of convenience and needs of the community, affirmatively shows that California benefited by reason of the ability of Crocker-Citizens to compete a little more effectively in these markets.
The geographic market was originally limited to the State of California as a whole, the Los Angeles metropolitan area (Los Angeles and Orange Counties), and the San Francisco Bay area (City and County of San Francisco, and counties of Alameda, Contra Costa, Marin and San Mateo), BK-AA, No. 55). At the final pre-trial conference, plaintiff added three counties as alleged separate sections of the country: Ventura, Santa Barbara, and Kern Counties. At that time the court stated that, if, at the close of plaintiff’s case, plaintiff was relying on these three counties as markets for evaluating the instant merger, the defendant banks would be granted additional time within which to prepare; however, this proved unnecessary, for neither of plaintiff’s experts testified that Ventura, Santa Barbara or Kern Counties were appropriate sections of the country for assessing the impact of the merger. The court regards plaintiff as having abandoned any contention that those counties are appropriate sections of the country within which to judge the instant merger.
27
In fact, there is no evidence on which it could be found that any one of these three counties was itself a market or a sub-market.
CALIFORNIA AS A WHOLE.
To find adverse effects of the instant merger, plaintiff asserts that the state as a whole is a section of the country. It must do this because otherwise no competition between Crocker and Citizens can be found, and if there is no competition, there can be no increase in concentration. Likewise, prior mergers in the state as a whole could not be assumed to have adversely affected competition without evidence of such effects. It is obvious, for example, and plaintiff’s experts admitted, that there was no change in the banking structure in the Los Angeles metropolitan area, in the San Francisco Bay area, or in other local markets as a result of the merger (Dirlam, Tr. 638;- 676).
The following pragmatic data demonstrates that the State of California is not a market or section of the country:
(1) The geographic extent of the State of California, hereinbefore described, precludes it from being a market for commercial banking services which are essentially local in nature;
(2) Notwithstanding the fact that, before the complaint in the instant case was
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filed, plaintiff had been supplied with the names and addresses of all customers for whose business the two banks allegedly competed and the fact that it had available to it numerous files on mergers of other banks in the State of California, plaintiff could not produce the name and address of any customer in a statewide banking market, even when ordered by the court to do so (BK-CC, Order on Bank Defendants’ Motion to Compel Further Answers, Tr. 462);
28
(3) The hypothesis of a statewide market assumes that banks located in different sections of the state are competing against each other (Goodman, Tr. 1870). In its exhibits purporting to show concentration ratios applicable to the statewide market, plaintiff included every bank in the state, yet:
(a) Plaintiff’s expert witness had to admit that not all banks in the state were competing in metropolitan Los Angeles and that not all banks in the state were competing in the San Francisco Bay area (Tr. 732-722) ;
(b) In showing the structure of the San Francisco Bay area market, plaintiff’s expert excluded the second largest bank in the state, Security First National Bank, which is substantially twice the size of Crocker;
(c) In showing the structure of the Los Angeles metropolitan area banking market, plaintiff’s experts excluded the third largest bank in the state, Wells Fargo Bank, which is substantially four times the size of Citizens;
(d) Plaintiff’s expert, Gaffey, had no evidence that the Union Bank in Los Angeles was competing against the Hibernia Bank in San Francisco, and he knew of no banks that were competing with the Bank of America in San Diego who did not have offices there (Tr. 1069);
(e) Plaintiff admitted that Crocker did not compete with banks in the Los Angeles metropolitan area (BK-AA, No. 15);
(f) Plaintiff admitted that Citizens did not compete with banks in the San Francisco Bay Area (BK-AA, No. 15);
29
(4) A market survey of the customers of banks made by Professor Weston,
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whom this court finds eminently qualified to make such survey and which this court deems to have been a fair, representative, and adequate economic survey, demonstrates that there were no customers in such hypothetical statewide market (and the Government never offered any proof to the contrary) (BK-G; Weston, Tr. 1682-1686);
(5) The survey of the customers of Crocker First National Bank and Anglo California National Bank in December 1955 showed a very small number outside the five Bay Area counties and none in a statewide banking market;
(6) If the State of California were itself a market, the creation of United California Bank would have caused the largest increase in concentration in that hypothetical market in recent years. Plaintiff’s expert admitted that there are no factors suggesting the existence of a statewide banking market at the present time which did not exist in 1962 when the United California Bank was created (Dirlam, Tr. 742). It is therefore inconceivable that a banking market of the magnitude of that now asserted by plaintiff could have existed and gone undetected by the FDIC, the Federal Reserve Board and the Department of Justice, all three of which passed upon the creation of the United California Bank. Yet not one of those agencies stated in its report that there was a statewide banking market in California (other than for banks with statewide facilities) which would be adversely affected by the creation of that bank, nor did any of them state that concentration was increased or that earlier mergers had adversely affected any such market. (48th Ann. Report, Board of Governors, pp. 150-152; 1961 Ann. Report FDIC, pp. 60-62). It is also inconceivable that plaintiff would have failed to call the court’s attention to that increase in concentration at the time the settlement of the
Firstamerica
case was submitted to the court for approval if there had been such a market. It did not do so. United States v. Firstamerica Corp., Civil No. 38139, N.D.Cal., and letter on file therein dated September 27, 1960, from the Department of Justice.
30
The market, therefore, did not exist then, and it does not exist now.
From the standpoint of opinion evidence, as we pointed out in footnote 24, supra, plaintiff relied on an expert who had absolutely no familiarity with the State of California and who could not claim to be a financial expert.
On the other hand, defendant banks’ expert, Goodman, although he was far more familiar with California and California banking than plaintiff’s expert, Dirlam, declined to render an opinion or otherwise aid the defense before making an exhaustive study of California and banking in California, which included making on-the-site visits to banking offices, inspecting bank loan files, interviewing loan officers, and obtaining de
*172
posit data for every bank in every area in the state. On the basis of that study and experience, he reached the same conclusion as to which he testified for the Government in the
Philadelphia
case: banking markets are local, national and international. His opinion was that the state is neither a local market nor a relevant section of the country for the purpose of judging the effect of a change among competitors in the instant case. The court concurs in this view.
The defendant banks’ expert, Professor Weston, qualifies as one of the leading financial experts in the country. His opinion that the state was not a market was supported not only by his experience but by his survey.
We find that the substantial weight of the evidence shows that there was no statewide market for Crocker or Citizens. If there was no statewide market for Crocker or Citizens or for any bank that did not have branches throughout the entire state, the fact that Bank of America had over 800 branches scattered throughout the state and in every county and that two other banks to a lesser degree had branches in many counties throughout the state does not thereby convert the entire state into a meaningful economic market. All that you actually have is three banks able to service numerous local markets throughout the state.
31
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While it may very well be true, as plaintiff contends, that commercial banking can appropriately be divided into three geographic areas, local, regional and national, the test as to whether any given geographic area is a relevant (economically significant) market or section of the country is not based on political boundaries, but is based on economic grounds. Therefore, even though the laws of California permit statewide branching, this factor, which undeniably must be considered, does not in and of itself make the whole of California a relevant market or section of the country in which to measure the competitive effects of a merger. The same can be said for the whole of the State of New York. Permissive statewide branching merely extends the political boundaries in which a bank may open branches, local units, to operate in local markets. It does not bring to any particular bank or banking unit depositors or borrowers from all over the state. “Individuals and corporations typically confer the .bulk of their patronage on banks in their local community; they find it impractical to conduct their business at a distance.” United States v. Philadelphia Nat. Bank, supra, 374 U.S. at 358 , 83 S.Ct. at 1738 . Persons and corporations in San Diego do not normally deposit their funds in San Francisco or Sacramento. Persons and corporations in San Diego do not normally borrow from banks in San Francisco.
When a customer’s deposits become of real magnitude or his loans get into the category of $100,000 or more (which some economists use as an indicium of wholesale banking), cross-elasticity comes into play and extends the geographic limits and the field of financial institutions to which such depositors or borrowers will go. They will go where they can get the maximum return on their deposits and borrow from those who are prepared to take the risk at the lowest possible interest rate. The market then becomes national. These very factors prompted Professor Weston to conclude “that from an economic standpoint there is not a statewide commercial banking activity.” (Tr. 1489).
As to plaintiff’s contention that the application itself established the state as a market in which Crocker and Citizens competed against each other, the Comptroller to whom it was submitted did not so understand it (BK-A, p. 34). The fact that the resulting bank, Crocker-Citizens, would compete (a) in the area where Citizens competed prior to the merger, (b) in the area where Crocker competed prior to the merger, and (c) with banks which offer statewide banking facilities, does not mean that each of the merging banks was competing in
all
of these respects prior to the merger (Ct. 195, Exh. 13, pp. 1, 7). The references to the dependence of both banks, for their future growth and strength, “upon their ability to extend their services throughout the major commercial areas of California—-the North and South,—as demanded by the needs of their present and potential customers”, were expressly related to the necessity from a bank’s standpoint of having offices where the need arises in a growing and industrially expanding state (Ct. 195, “Application for Approval of Merger”, pp. 5, 6; Exh. 13, pp. 74, 87). One cannot fairly imply from the application that there is anything in California’s economy which destroys the local nature of banking services. The substance of the entire application is clearly to the contrary; each bank desired to merge in
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order to have officers in areas it was then unable to serve (Ct. 195, Exh. 15-J, pp. 4-11). In a sense each bank wanted to further emulate the Bank of America and take advantage of the benefits of commercial banking by offering the essential ingredient of “convenience” in more local markets throughout the growing and expanding state.
32
The court concludes that the State of California as a whole is not a relevant market or section of the country in which to measure the competitive effect, actual or potential, of the instant merger. Nonetheless, bearing in mind Professor Weston’s observation (note 31, supra) that the services rendered by a bank operating a statewide system may be “a market in a sense” or “a market under some definition”, the court, in order to finalize all the issues presented, will hereinafter assume the entire state to be a relevant market or section of the country and evaluate the competitive effect of the merger in such assumed market.
THE LOS ANGELES METROPOLITAN AREA.
Inasmuch as there was no competition between Crocker and Citizens in either the Los Angeles metropolitan area (Los Angeles and Orange counties) or the San Francisco Bay area (City and County of San Francisco and counties of Alameda, Contra Costa, Marin and San Mateo), the instant merger could not have affected actual competition in either of these assumed markets; however, since the main thrust of the Government’s claim is that this merger forecloses potential competition, and will result in a “reasonable likelihood” of a substantial lessening of compensation in these sections, as well as in the whole of California, the court deems it advisable to review the economic realities in these sections in terms of “the business of banking”.
Subsequently in this opinion we will call attention to the facts which demonstrate that potentially Crocker would not have entered the Los Angeles metropolitan area and that Citizens would not have entered the San Francisco Bay area. Accordingly, while Citizens may have had prior mergers in what plaintiff asserts to be the Los Angeles metropolitan area, and Crocker may have had mergers in certain counties of the San Francisco Bay area, we do not see how these can be relevant in adjudicating the validity of the instant merger which does not involve the same markets.
Plaintiff proved many things about the population, business and industries of metropolitan Los Angeles and the rate of its growth, but the essential thing it failed to prove is that the Los Angeles metropolitan area, as defined by it to in-
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elude Los Angeles and Orange Counties, is in fact a relevant market in “the banking business”.
The opinion of plaintiff’s expert, Gaffey, that Los Angeles and Orange Counties constituted a banking market was based upon the fact that the Bureau of the Budget at one time included those two counties in its definition of the Los Angeles-Long Beach Standard Metropolitan Statistical Area (Gaffey, Tr. 924-926). At the time of the Crocker-Citizens merger, however, such was not the ease. The Bureau of the Budget itself states that standard metropolitan statistical areas are not intended to be market areas, and Gaffey testified that the geographic boundaries of those areas are often determined by factors wholly unrelated to those which would determine a market area. Gaffey also relied on the fact that Citizens conducted its business in Los Angeles and Orange Counties, but Citizens also had branches in San Bernardino and Riverside Counties which were located so close to Los Angeles as to be considered a part of Los Angeles metropolitan area. Plaintiff’s reliance on economic data relating solely to Los Angeles County certainly does not prove that Los Angeles and Orange Counties together constitute a single banking market.
Another factor which Gaffey relied upon as establishing Los Angeles and Orange Counties as a relevant banking market was the fact that the banks, in their application to merge, represented that the State of California lends itself to a rough division into nine more or less distinct geographical and economic areas, including one demoninated the Los Angeles metropolitan area and composed of Los Angeles and Orange Counties (Ct. 195, Exh. 13, pp. 72, 73; Gaffey, Tr. 926, 927). Nowhere in the application did the merging banks characterize any of those so-called economic areas as banking markets or submarkets, and the fact that an area might constitute a market for the manufacturing and commerce activities of a bank’s customers does not ■establish it as a banking market.
Plaintiff’s reliance on economic data relating solely to Los Angeles County as evidence that Los Angeles and Orange Counties constituted a single banking market is unfounded. Data relating to one county cannot prove that two constitute a banking market.
Professor Goodman was of the opinion that the Los Angeles metropolitan area includes many local markets but is not itself a banking market (Tr. 1836). We agree. A banking office on Wilshire Boulevard would not be in competition with banking offices in other parts of Los Angeles County, let alone Orange County (Rhorer, Tr. 1357-1358).
In any event, Los Angeles and Orange Counties, separately or together, are not appropriate markets within which to judge the instant merger because, as plaintiff’s experts admitted, the instant merger did not change the banking structure in any community within those counties.
THE SAN FRANCISCO BAY AREA.
Plaintiff contends that five counties in the San Francisco Bay area, the City and County of San Francisco, Alameda, Contra Costa, Marin and San Mateo, constitute a relevant market to be used in testing the competitive effects of the Crocker-Citizens merger and that it was the relevant market to be used in testing the competitive effects of the 1956 consolidation of Crocker First and Anglo California. On its very face, the suggestion that those five counties constitute a Bay area market violates the mandate expressed in
Brown Shoe
that geographic markets must be a product of “commercial realities”, rather than a “formal, legalistic” approach. Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 336 , 82 S.Ct. 1502 , 8 L.Ed.2d 510 (1962). What possible basis can there be for drawing the boundaries of the so-called San Francisco Bay area market so as to include communities like Antioch and Pittsburg in Contra Costa County, while excluding Palo Alto and Los Altos in Santa Clara County? The San Fran
*176
cisco Bay is bordered by nine counties; namely, Marin, Sonoma, Napa, Solano, Contra Costa, Alameda, Santa Clara, San Mateo and the City and County of San Francisco. Prior to October 18, 1963, the San Francisco Standard Metropolitan Statistical Area, as defined by the Bureau of the Budget, encompassed six of the nine counties bordering the Bay, namely, Alameda, Contra Costa, Marin, San Mateo, Solano and the City and County of San Francisco. The San Francisco Bay area is normally regarded as including also Santa Clara as well.
In asserting that the five counties constituted a market for judging the Crocker First—Anglo California consolidation, plaintiff’s witness, Dirlam, based his opinion on three premises, none of which supports his conclusion that such a market existed or that if it did exist, it was limited to those five counties. One of the factors he relied on was that the five-county area was the area in which Crocker First and Anglo California had offices. Neither bank had offices in all five counties, and Anglo California, in addition to its offices located in other more remote counties, had offices in the other two Bay area counties of Santa Clara and Solano. The second factor on which Dirlam relied consisted of data designed to show that some of the Bay area offices of each consolidating bank derived the bulk of their business from customers having record addresses in those five counties. None of the tables, however, ■included data showing the record addresses of customers of Anglo California’s Bay area offices in Palo Alto and San Jose in Santa Clara County, and Vallejo in Solano County. Whatever they may have shown, if anything, they did not provide a rational basis for excluding either Solano County or Santa Clara County. The only other factor which Dirlam cited as showing a five-county market was his belief that these five counties constituted the San Francisco Standard Metropolitan Statistical Area, as defined by the Bureau of the Budget at the time of the Crocker First —Anglo California consolidation. In that, too, he was mistaken.
There was even less reason for restricting the San Francisco Bay area market to five counties at the time of the Crocker-Citizens merger. By that time the Bay area counties in which Crocker-Anglo did business had increased from six to nine. There was no evidence that the bulk of the banking business of its offices in nine Bay area counties was derived from customers located in only five of those counties. While it is true that the Bureau of the Budget changed its definition of the San Francisco Standard Metropolitan Statistical Area less than two weeks (October 18, 1963) prior to include only the five counties, Gaffey testified that such changes are frequently made for reasons wholly unrelated to those which would be determinative of a market area (Gaffey, Tr. 925, 926). Also, we doubt that plaintiff contends that the Bay area market was growing smaller. In this connection, we would point out that the larger the San Francisco Bay area market is assumed to be, the smaller would be the effect of the Crocker First— Anglo California consolidation and the acquisition of the San Rafael banks.
As in the situation applicable to the Los Angeles metropolitan area, this court finds that the San Francisco Bay area includes many local markets and that some of these local markets may include parts of an adjoining county (e. g., the San Francisco market overflows into and encompasses the adjoining San Mateo County communities of Daly City, Colma and South San Francisco, with no discernible indication of where, one stops and the other begins), but the San Francisco Bay area in and of itself, whether we include five, six or all nine counties bordering the Bay, is not a banking market.
In any event, it is admitted that the instant merger did not change the struc
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ture of any Bay area banking markets, regardless of which counties are in the Bay area.
THERE WAS NO COMPETITION BETWEEN CROCKER AND CITIZENS IN ANY OF THE RELEVANT MARKETS REFERRED TO IN THE COMPLAINT.
There was no competitive overlap between the merging banks. Plaintiff offered no substantial evidence of actual competition between Crocker and Citizens in any of the relevant markets referred to in the complaint. As Dir-lam testified, banks can never engage in very substantial competition in areas where they do not have offices (Dirlam, Tr. 875-876). The nature of banking markets is peculiarly local in California because of the large number of banking offices operating in virtually every area of the state. Customers in one community have no need to, and ordinarily do not, go to another community to do their banking and in many localities the number of banking offices is such that customers will not consider doing their banking at an office more than a few city blocks distant. California has in excess of 200 banks and about 2400 branches, local banking offices (Saxon, Tr. 2051).
There was no evidence that any branch of Crocker was so located as to be in competition with a branch of Citizens. There was no city, town or community in which both banks had offices. Ventura County was the only one of California’s 58 counties where both banks had an office at the time of the merger. The Thousand Oaks office of Citizens was some 23 miles northwest of and outside the service area of the Ventura office of Crocker and outside the service area of the subsequently established office of Crocker in Oxnard and of the town of Camarillo, where it was denied a permit. Even if that were not true and even if it were assumed that there was competition between one or even both of the Crocker offices in Ventura County and the Citizens office at Thousand Oaks, such competition was insignificant. By June 1964, these three offices of Crocker-Citizens had only %oth of 1 per cent of the total deposits in Ventura County (BK-EE).
The California Superintendent of Banks found that Crocker and Citizens were not in competition and their merger would not lessen competition (BK-A, p. 44).
From the standpoint of economies, evidence of the record addresses of customers shows nothing as to competition or the areas in which either bank did business. The fact that the banks had customers with record addresses in areas where the other bank had offices did not indicate that either bank was performing a service at the location of the record address. Likewise, the fact that each of the banks had the same customers did not indicate that they were competing for the business of that customer. Either the banks were performing local services or they were competing for this business with most of the other banks in the country. The same would, of course, be true for correspondent bank customers; Citizens could not provide collection or other services in San Francisco nor could Crocker provide such services in Los Angeles.
Plaintiff, of course, argues to the contrary, but the argument sounds strange indeed coming from plaintiff. One of its experts testified that the record address of a bank’s borrower does not delimit the market within which the bank is doing business, and its other expert testified that the services performed for such customers were performed in the vicinity of the banking office and not the address of the customer (Dirlam, Tr. 533; Gaffey, Tr. 1067-1068).
Plaintiff’s expert staff economist, Gaffey, testified that the question of whether there exists a class of customers
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in a statewide market is a subject of observation and not a subject of hypothesis (Tr. 1004). He further testified that such customers could be identified (Tr. 1001-1002), and that it was his business as an expert to engage in such work (Tr. 1003). Defendant banks submitted to the plaintiff thousands of names of their customers, and this court entered an order requiring plaintiff to identify every customer of which it had knowledge for whose business Crocker and Citizens competed. Notwithstanding all this and the burden of proof which rests with plaintiff,
plaintiff was unable to identify any customers for whose business the two banks competed,
other than those in the national market, such as Tidewater Oil Company and C.I.T. Corporation.
By reason of the foregoing, as we stated in the beginning of this opinion, the court finds that Crocker and Citizens were not in actual competition prior to or at the time of the merger in any relevant market alleged in the complaint.
THE MERGER DID NOT INCREASE CONCENTRATION IN CALIFORNIA.
Concentration is a function of a market. As stated in
Brown Shoe,
combinations are to be gauged on “their effect on competition generally in an economically significant market.” 370 U.S. at 335 , 82 S.Ct. at 1529. Unless they relate to a market, both in the geographic sense and in the line of commerce (or functional sense), figures purporting to show concentration ratios are meaningless.
Plaintiff’s and defendant banks’ experts all agreed that the instant merger did not increase concentration in the local markets (Dirlam, Tr. 676; Gaffey, Tr. 1085-1086 and 1097-1099; Weston, Tr. 1491, 1625-1626).
The evidence in the instant case, including the Weston survey, his ten year study of the question, and Goodman’s investigation, shows that the characteristics of California borrowers with state mobility are such that they have national mobility and are in fact in the national market. It follows that there is no statewide banking market in California, that plaintiff’s state-wide concentration ratios are, in the words of David A. Alhadeff of the Bureau of Business and Economic Research of the University of California,
33
“meaningless, or worse”, and that the merger of Crocker and Citizens could not possibly have increased concentration. Nevertheless, we will consider plaintiff’s concentration figures.
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The following table, adapted from Government’s Exhibit 30A, shows the percentages of total deposits of all banks of the state held by the largest banks before and after the merger,
DISTRIBUTION OF DEPOSITS IN CALIFORNIA BANKS AS OF END OF YEAR 1962 AND 1963
1963 Rank In California % of Total California Each Bank Cumulative Rank In California % of Total California Each Bank Cumulative
Bank of America 1 39.9 39.9 1 40.6 40.6
Security First National 2 13.5 53.4 2 12.7 53.3
Wells Fargo 3 9.9 63.3 3 9.6 62.9
United California Bank 4 8.0 71.3 5 8.0 80.1
Crocker 5 7.4 78.7 4 9.2 72.1
Union Bank 6 3.1 81.8 6 3.2 83.3
Bank of California, N.A. 7 2.6 84.4 7 2.7 86.0
Citizens 8 2.5 86.9 Merged with Crocker (11 -1-63)
First Western 9 2.0 88.9 8 1.9 87.9
All Other Banks 10-129 11.1 100.0 9-155 12.1 100.0
The foregoing table, dominated by the Bank of America figures, clearly shows how meaningless the Government’s figures are, since the concentration arises not by reason of the deposits of the next leading seven banks (or the remaining 154 banks) in 1963 but because of Bank of America’s 40.6 per cent. The concentration is caused by Bank of America. No one of the other banks is responsible for the concentration. Bank of America alone or Bank of America in combination with even the smallest bank would be concentration. That is why Professor Goodman said that using a table of this character without giving proper consideration to Bank of America’s dominance is like using a giant with a group of eight pigmies to show the average size of nine men. It just doesn’t make sense. Furthermore, it will be noted that as of the end of 1962 the seven next leading banks combined with Bank of America showed a cumulative percentage total of 86.9 per cent, and at the end of 1963 the seven next leading banks combined with Bank of America showed a cumulative percentage total of 87.9 per cent, a gain of 1 per cent; however, since Bank of America’s deposits rose from 39.9 per cent at the end of 1962 to 40.6 per cent at the end of 1963, we find that Bank of America’s deposits account for 70 per cent of this 1 per cent increase. This change, based upon commercial banking alone as the line of commerce, and without consideration of those factors heretofore set forth which call for an expansion of the line of commerce when we consider the state as a whole as the market, completely fails to satisfy this court that such change reflects a substantial lessening of competition in commercial banking. It should be noted that the fact situation presented by the present record is quite different from that which was presented in United States v. Philadelphia Nat. Bank, supra. In that case the merging banks were not only located in the same city and direct competitors of each other, but the result of the merger was a significant concentration with the merged bank controlling at least 30 per cent of the commercial banking business in the relevant area. The merger there would have resulted in an increase of more than 33 per cent in concentration ( 374 U.S. at 364-365 , 83 S.Ct. 1715 ). Here, in contrast, Crocker-Citizens would have 9.7 per cent (using the figures 7.2 per cent for Crocker and 2.5 per cent for Citizens, as used throughout the trial, rather than the combined figure of 9.2 per cent reflected in Government’s Exhibit 30A on which the foregoing table was prepared) of the deposits in the relevant area. This reflects an increase of Crocker’s percentage of deposits by 2.5 per cent through the addition of the de
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posits of Citizens. In view of these statistics and the extent of the other banks listed in the foregoing tabulation, there can be no inherent likelihood that competition will be substantially lessened, for it is readily obvious that the merger will not produce a bank controlling an undue percentage share of the relevant market and will not result in a significant increase in the concentration of banks in that area. Furthermore, as we previously noted, had the Government employed the statistical method employed in its Exhibit 32 in the
Philadelphia
case (here note 26), there was no perceptible change in concentration by reason of the instant merger.
Also, as we previously noted, the Government’s figures are misleading and fail to make necessary adjustments. The Government’s figures show the ratio of Citizens’ loans and discounts to be 2.1 per cent on all California loans and discounts before the merger, with that of Crocker at 7.2 per cent for a total for Croeker-Citizens to be 9.3 per cent; however, if we adjust this figure for loans and discounts for out-of-state banks, as was done in the
Philadelphia
case, we find that the combined figure of 9.3 per cent tabulated by the Government should be reduced, as Professor Weston satisfactorily demonstrated, by 28.78 per cent and we arrive at a figure of 6.6 per cent. And if we apply the same percentage adjustment to Crocker-Citizens’ percentage of total deposits of all California banks, we arrive at a figure of 6.8 per cent of total deposits.
An adjustment for available resources of foreign bank subsidiaries and representatives, as we previously noted, would result in a further reduction. Since no one can realistically compute or even estimate the extent of this reduction, we reject defendant banks’ exhibit BK-2, table 3, and Professor Goodman’s finding that an adjustment for both out-of-state banks
and foreign banks and agencies
would reduce Croeker-Citizens’ share of the relevant market to 3.8 per cent. We find no need to adjust for this further unknown figure, since we are clearly satisfied that on the Government’s figures alone the record fails to reflect a merger controlling an undue percentage of the relevant market.
More significant than any of the foregoing is the fact that if the competitive impact of the instant merger is to be meaningfully measured in plaintiff’s hypothetical state market (in which convenience is no longer the important factor), cross-elasticity comes into play and increases the degree of substitutability of products of other financial institutions and thereby appropriately extends the line of commerce to meet the realities of this extended market. In our previous review of this wider field in which other institutions compete ■ with commercial banks for the savings and investment dollar or for the extension of credit, we found that in 1962 Crocker and Citizens combined held:
(1) Only 2.63 per cent of the total of California savings;
(2) Only 1.34 per cent of the total of California farm mortgage loans;
(3) Only 2.7 per cent of California agricultural loans;
(4) Only 1.8 per cent of California mortgage debt on non-farm real estate (this is a rather significant figure when one considers that savings and loan associations held $13.9 billions of such loans as against $5.9 billions for commercial banks);
(5) Only 2.8 per cent of California business loans and credits; and
(6) Only 5.56 per cent of California’s installment and non-installment consumer credit.
If the foregoing inter-institutional competition is taken into account, the combined share of Crocker and Citizens in each of these savings and lending activities in no case exceeded 5.56 per cent of the total in the case of installment and non-installment consumer credit, and in the case of real estate loans dropped as low as 1.8 per cent of the total. These figures, which are unchallenged, call for a conservative adjustment of plaintiff’s concentration figures to at least one-half
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that fixed by the Government (if not to less than 2 per cent, as claimed by defendant banks). A market share of this limited magnitude can have no adverse competitive effect in a market like California with in excess of 200 banks and over 2400 branches and where ease of entry and demands for entry are probably greater than in any other section of the country.
34
Finally and before leaving our discussion of California as a relevant market, we find persuasive the testimony of the Comptroller
35
that, if there is a state market for some form of banking service, yet to be clearly defined and identified, at the time of the merger there were three (if not only two) competitors in that market, and the testimony of Professor Weston that
the merger,
if
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it affected competition at all,
in the California market “increased competition and decreased concentration.”
The merger served an immediate need, which even the Government on more than one occasion conceded, by giving us a fourth competitor among the banks capable of giving statewide service
now
and not ten or twenty years from now by
de novo
branching, assuming contrary to past history that this could be done.
THE LARGE NUMBER OF SUCCESSFUL NEW ENTRIES DISTINGUISHES MARKETS IN CALIFORNIA.
For the period January 1, 1954 to December 31, 1964, 706 new banking office entries were made in 375 different communities in California; 91 of these were by Crocker-Citizens or its predecessors (BK-H; BK-I; BK-J). This is dramatic evidence that the banking system in California provides more banking alternatives where they are needed than do the banking systems found elsewhere in the United States. In the very years during which plaintiff asserts that the number of banks was declining, the number of competing banks in banking markets throughout the state was increasing substantially. This is true in particular of every community in the San Francisco Bay area, the Los Angeles metropolitan area, Kern County, Santa Barbara County and Ventura County (BK-M— BK-Q).
During the period 1953 through 1964, 120 new banks were established and accumlated over $1.5 billion in deposits and established 208 banking offices, including their home offices. (BK-J). Since the Crocker-Citizens merger, some 20 new banks have been established in Los Angeles and Orange Counties alone (BK-I). These new banks have shown progressively larger annual increases in deposits during each of the last five years. Their rate of growth has exceeded that of California banks generally. In fact, the seventh largest bank in Los Angeles and Orange Counties as of December 31, 1962, was the City National Bank of Beverly Hills, which was established in 1953.
By way of contrast, in
Philadelphia
the number of banks had declined by more more than 50 per cent ( 374 U.S. at 331 , 83 S.Ct. 1715 ), and in the ten-year period ending in 1961, only one new bank had opened in the Philadelphia four-county area, and it was established in 1951. ( 374 U.S. at 367 n. 44, 83 S.Ct. 1715 ). In
Lexington,
there were only four other banks and apparently no new entries ( 376 U.S. at 668-669 , 84 S. Ct. 1033 ). In
Manufacturers Hanover,
there had been a 38.6 per cent decline in the number of banks, and in the decade prior to the merger only two new banks had opened and they were established by existing banks ( 240 F.Supp. 867, 943 ).
It is apparent from plaintiff’s own exhibits that the only limit to the number of banking offices in any area is the number of offices which the banking authorities will permit (B-22A; G-23). In every year, the number of applications has far exceeded the number of permits and charters granted (G-37). The fact that in years when the number of permits increases, there are a still larger number of denials, demonstrates that the only reason there aren’t more denials is that those seeking new offices and new charters are discouraged from applying more frequently than they do. In view of the large number of denials during 1963 and 1964, it would appear that applications will exceed the number of permits which plaintiff predicts will be authorized prior to 1980 by close to 500 per cent (BK-K; BK-L; G-23A). These facts only serve to confirm the Comptroller’s views of the matter (BKA, pp. 50-53, 59-60). Accordingl

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1868942. Public record. Not legal advice.