Jurisdictional Statement — United States v. First National Bancorporation, Inc.

Supreme Court brief1972

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INDEX

EPR Per ee sae 1

I ieee, eh x ge A pawn ed a 1

Questions presented |. 2

Statutes involved ..._..... oy eR ee ene 2

Statement .............:. , 4

A. The structure of ising’ in 1 Colorado. 4

| B. The acquiring holding company 5

C. The local geographic market... 7

D. The acquired bank and the structure of

banking in Greeley ....... ...... 7 8

K. The proceedings.............. Pie ae ee

The questions are substantial ..... oar

NS EON dis otek ena eed oe 25

SS SS eee we ye 26

Seta be ae Se ae Oem Oe eee 62

I Nw nc ea pea ates ee ae 63

CITATIONS

Cases:

Bendix Corp, The (FTC), 3 Trade Reg. Rep.

{| 19,288, vacated and remanded on other

grounds, The Bendix Corporation v. The

Federal Trade Commission (C.A. 6, No.

20,687, October 18, 1971)... .. Me Bn ee 20

Brown Shoe Co. v. United States, 370 U.S.

ae ec a icck a ie ee ats 18,24

Ekco Products Co. v. F.T.C., 347 F.2d 745 15

Federal Trade Commission vy. Procter &:

Gamble Co., 386 U.S. 568... ... ._.. 15,19

General Foods Corp. v. F.T.C., 386 F.2d 936,

certiorari denied, 391 U.S. 919... 15

First National Bancorporation, Inc., In the

Matter of the, FRB Order, June 17,1971.. 7

Page

Cases—Continued

United States v. Alcoa, 377 U.8. 271 17

United States v. Bethlehem Steel Corp., 168

F. Supp. 576 25

United States v. Continental Can Co., 378 U.S.

441 15,16

United States v. E. 1. du Pont de Nemours &

Co., 353 U.S, 586 18

United States vy. First National Bancorpo-

ration, Inc. and the Security State Bank of

Sterling, D. Col., C-2754, filed Dee. 2, 1970 7

United States vy. Jos. Schlitz Brewing Co., 253

F. Supp. 129, affirmed, 385 U.S. 37 15

United States v. Kennecott Copper Corp., 231

F. Supp. 95 24

United States v. Kimberly-Clark Corp., 264

F, Supp. 439 24

United States v. Pabst Brewing Co., 384 US.

546 18

United States v. Penn-Olin Chemical Co., 378

U.S. 158 15,19,22

United States vy. Philadelphia National Bank,

374 US, 321 18,22,23,25

United States v. Phillipsburg National Bank,

399 U.S. 350 22,25

United States v. Standard Oil Co., 253 F.

Supp. 196 15

United States v. Von's Grocery Co., 384 US.

270 2%

United States v. Wilson Sporting Goods Co.,

288 F. Supp. 543 15

Statutes:

Bank Holding Company Act of 1956, 70 Stat.

134, as amended:

§3, 12 U.S.C. 1842 4

§ 3(a), 12 U.S.C. 1842(a) 10

iii

Page

§3(¢), 12 U.S.C. 1842(¢) oe |

§ 3(d), 12 U.S.C. 1842(d) ; 16

§ 11(b), 12 U.S.C. 1849(b) <a

Clayton Act, Section 7 as amended, 64 Stat.

1125, 15 U.S.C. 18 _. 2,3,4,14,15,18,19,20,25

Colo. Rev. Stat. 1963, § 14-3-1 (1969) 4

Miscellaneous:

Board of Governors of the Federal Reserve

Board, Recent Changes in the Structure of

Commercial Banking, 56 Fed. Res. Bull. 195

(1970) _. ey 16

Brimmer, Market Structure, Public Conven-

ience and the Regulation of Bank Mergers,

86 Banking L.J. 733 (1969) 17

Kohn and Carlo, Potential Competition: Un-

founded Faith or Pragmatic Foresight?,

Foreword (N.Y. State Banking Dept. 1970) 16

In the Supreme Court of the Cinited States

Ocrobper Tex, 1971

No. 71-

Usxirep Staves OF AMERICA, APPELLANT

First Nationst Baxcorvporatiox, Ixc. axp

Tue Fier Nationa, Bank or GreELEY

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

JURISDICTIONAL STATEMENT

OPINION BELOW

The memorandum opinion and order of the district

court (App. A, infra, pp. 26-61; 1971 Trade Cases

* 73,651) is reported at 329 I’. Supp 1003.

JURISDICTION

The memorandum opinion and order of the district

court was filed on July 12, 1971. On August 27, 1971,

the district court entered an order denying plaintiff's

timely motion, under F. R. Civ. P. 52(b) and 59, to

(1)

a »

reopen the record, to obtain additional findings of fact

and conclusions of law, and to obtain the relief re-

quested in the complaint (App. B, infra, p. 62). A

notice of appeal to this Court was filed on September

24, 1971 (App. C, infra, p. 63). The jurisdiction of

the Court is conferred by Section 2 of the Expediting

Act (15 U.S.C. 29). United States vy. Phillipsburg Na-

tional Bank, 399 U.S. 350; United States v. Third

National Bank in Nashville, 390 U.S. 171.

QUESTIONS PRESENTED

1, Whether acquisition of a leading bank in a con-

centrated local market in Colorado by one of the largest

holding companies in the state violates Section 7 of the

Clayton Act by eliminating the potential competition of

the acquiring firm and by contributing to the statewide

trend toward domination of commercial banking by a

few large holding companies.

2. Whether acquisition of the second largest bank in

Greeley, Colorado, by the second largest bank holding

company based in Denver, Colorado, may substantially

lessen competition among Denver banks offering cor-

respondent banking services to Colorado ‘‘country

banks’’ by contributing to the trend toward foreclosure

of such services in the state.

STATUTES INVOLVED

Section 7 of the Clayton Act, 38 Stat. 731, as

amended, 64 Stat. 1125, 15 U.S.C. 18, provides in per-

tinent part:

No corporation engaged in commerce shall ac-

_—_

quire, directly or indirectly, the whole or any part

of the stock or other share capital and no cor-

poration subject to the jurisdiction of the Federal

Trade Commission shall acquire the whole or any

part of the assets of another corporation engaged

also in commerce, where in any line of commerce

in any section of the country, the effect of such

acquisition may be substantially to lessen competi-

tion, or to tend to create a monopoly.

Section 3(¢) of the Bank Holding Company Act of

1956, 70 Stat. 134, as amended, 80 Stat. 237, 12 U.S.C.

1842(c), provides in pertinent part:

The [Federal Reserve] Board shall not approve—

* * *

(2) any other proposed acquisition or merger or

consclidation under this section 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

or* trade, unless it finds that the anticompetitive

effects of the proposed transaction are clearly out-

weighed 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 Board shall take into consider-

ation the financial and managerial resources and

future prospects of the company or companies and

the banks concerned, and the convenience and

needs of the community to be served.

* So in original.

——_

STATEMENT

This is a direct appeal from the judgment of the

United States District Court for the District of Colo-

rado, dismissing a complaint by the United States seek-

ing to enjoin the acquisition by the second largest bank

holding company in the State of Colorado, First Na-

tional Bancorporation (‘‘Bancorporation’’), of The

First National Bank of Greeley (**F NB Greeley’’), the

second largest commercial bank in Greeley, Colorado,

as being in violation of Section 7 of the Clayton Act.

A. The Structure of Banking in Colorado

The banking, commercial and financial center of

Colorado is located in the state capital at Denver; there

are, however, significant banking markets in other

population centers of the state, including Greeley,

Colorado Springs, Boulder, Ft. Collins and Pueblo.

By statute,’ Colorado does not permit banking cor-

porations to operate branches. Consequently, the lead-

ing Colorado banks have recently begun to form

holding companies in an effort to bring local banks

across the state under uniform control. In 1960, one

out-of-state holding company, Western Bancorpora-

tion,’ operated 3 subsidiary banks in Colorado which

accounted for 4.4 percent of total Colorado deposits.

By 1970, there were seven holding companies in Colo-

rado; together, they operated 41 subsidiary banks

1 Colo. Rev. Stat. 1963 § 14-3-1 (1969).

2 As an out-of-state holding company, Western Bancorporation is

now barred from further expansion in Colorado. 12 U.S.C.

1842(d).

ee eee Leen he If NEEL SIE LEI ESAS Ae ,

(App. A, infra, p. 35), including 13° of the 27 banks

outside of Denver having total deposits in excess of $20

million (PX 125).* While this gave these seven com-

panies ownership of less than one-fifth of all Colorado

banks, their share of total deposits for the state had

increased by 1970 to 51 percent.’ As a result, although

the absolute number of banks and banking organiza-

tions in Colorado increased during this ten-year period

(DX 28), the decided trend has been toward control by

a few large holding companies of the leading banks in

local market areas.°

B. The Acquiring Holding Company

Bancorporation, a registered bank holding company,

was organized by the state’s largest bank, First Na-

tional Bank of Denver (‘‘F NB Denver’’), to combine

FNB Denver with its three smaller affiliates in the

Denver area (PX 3, Preface). In June 1970, Bancorpo-

3 This includes the recent acquisition of National State Bank of

Boulder by Bancorporation.

4**PX’’ references are to plaintiff’s exhibits introduced in the

district court ; ‘‘DX’’ references are to defendants’ exhibits intro-

duced in the district court; ‘‘Tr.’’ references are to the transcript

of proceedings below.

5 Computed from PX 115 and DX 28.

*The largest holding company in the State, United Banks

of Colorado, Inc., abandoned plans to acquire the third largest bank

in Colorado Springs because the purchase agreement expired during

the period that the government’s suit to enjoin its consummation

was pending (Tr., Aug. 9, 1971, pp. 30-31). Bancorporation has

unsuccessfully attempted to acquire two other local market leaders,

and litigation is pending as to a third. See n. 7, infra. The banks

it sought to acquire in Pueblo and Colorado Springs are now the

largest banks in a proposal to form a new five-bank holding com-

pany (Tr., Aug. 9, 1971, pp. 23-28).

; i

ration’s lead bank, FNB Denver, had total deposits of

$468.0 million (12.3 percent of total deposits held by |

Colorado commercial banks); it had total assets of |

$586.5 million, and loans and discounts of $340.8 million ag

(App. A, infra, pp. 29-30). Moreover, FNB Denver is ”

one of only six Denver banks offering a full range of ad

correspondent banking services to smaller Colorado i

banks. As of August 1970, its share of Colorado inter- "

bank deposits held by these six banks was in excess of 37 sa

percent, as compared to approximately 23 percent held sa

by each of its two nearest rivals (PX 204, 205; Tr. 670). “g

At the time of its organization, Bancorporation os

stated in its first annual report (PX 3, Preface) : “2

The policy of our company is to expand as rapidly ps

and as wisely as possible through the acquisition bai

of other banks in Colorado (preferably banks in “

those growth areas where Bancorporation may Co

make the most significant contribution to Colo- res

rado’s economy and concurrently generate the 2

highest profits for its shareholders) and through on

other legally permissible investments and activ- Fi

ities.

The proposed Bancorporation acquisition of FNB 4

Greeley is the first of six applications the holding com- G;

pany filed with regulatory authorities from 1969 to A

1971 to acquire important banks in various Colorado th

local banking markets; it is continuing to explore other ”

possibilities.’ The six applications involved banks with i

total deposits of $217.2 million (DX 1). sa

a ce

*The Federal Reserve Board denied Bancorporation’s applica- -

tions to acquire the largest bank in Pueblo, Colorado (DX 49), and *

POET LES : ,

C. The Local Geographic Market

The banking market in which the acquisition in-

lved here is to take place is the so-called ‘‘Greeley

rea,’’ consisting of the City of Greeley, Colorado, and

jacent communities (App. A, infra, pp. 32, 43-47).°

reeley is located 50 miles north of Denver in Weld

yunty; it is the county seat (App. A, infra, p. 29).

1e Greeley Area is presently undergoing rapid and

pansive development; in the past decade it has grown

bstantially, while the entire economy of Weld County

s experienced a healthy diversification (Tr. 257-

8).°

» only bank in the rapidly expanding Montbello section of Den-

* (DX 52). The Board approved acquisition of the second largest

nks in Colorado Springs (DX 54) and Boulder, respectively (In

, Matter of the First National Bancorporation, Inc., FRB Order,

ne 17, 1971) and the largest bank in Sterling (DX 51). The

lorado Springs acquisition was blocked by the statutory stay

ulting from the filing of a civil antitrust action by the United

ites. The government did not oppose the Boulder acquisition,

ich involved a bank with serious financial difficulties. The gov-

ment has challenged the Sterling acquisition (United States v.

rst National Bancorporation, Inc. and the Security State Bank of

rling, D. Col., C-2754, filed Dee. 2, 1970). Bancorporation has

ler proposed acquisitions under active consideration (PX 241;

also PX 4, p. 21; PX 6, pp. 10-14; Tr. 745).

‘This includes neighboring Evans, LaSalle, Peckham, Kersey,

1, Eaton, Lucerne, Farmers and Bracewell (App. A, infra, p. 47).

trial the government argued that both the City of Greeley and

» Greeley Area are appropriate markets in which to test the mar-

; extension aspects of this acquisition.

Between 1950 and 1968, farm earnings dropped from 49.2 per-

it to 28.3 percent of total personal income in Weld County. In the

ne period, earnings from manufacturing increased from 4.1 per-

it to 11.1 percent. (App. A, infra, p. 34, n. 4; PX 104). This

‘urred during a period in which Weld County remained among

» nation’s top ten agricultural counties (App. A, infra, p. 34,

4).

”

8 }

The population of the Greeley Area increased from

45,228 to 58,500 between 1960 and 1970, an increase of

29.3 percent (PX 98). Most of this increase occurred |

within the City of Greeley, where the expansion was | |

47.8 percent (PX 88). Economic growth during the |

period was even more significant. For example, the

consumption of electric power and of natural gas in-

creased 115.8 percent (PX 101), and 127.3 percent

(PX 100), respectively; and the number of main tele-

. phones went up 48.2 percent (PX 99). Retail sales

j for Greeley—which is Weld County’s trade and govy-

; ernment center—were up 97.1 percent (PX 91), while

: gross sales soared 281.8 percent (PX 90). Moreover,

personal income in Weld County rose from $119.5

million in 1959 to $212 million in 1968 (PX 103).”°

D. The Acquired Bank and the Structure of Banking

in Greeley

Within the Greeley Area, six separate banking orga-

nizations operate eight banking offices of varying size.

The acquired bank, FNB Greeley, is the community’s

largest independent bank, and its second largest bank-

ing organization (App. A, infra, pp. 32, 48). It has total

deposits of $39.2 million, constituting 33.9 percent of

the total deposits for the city, and 31.8 percent of the

total deposits for the Greeley Area (App. A, infra, p.

32). Its total assets were $47.7 million, and its outstand-

ing loans were $28.9 million, or 32.6 percent of the

Greeley Area total (PX 73, 78).

10 Since three-fourths of Weld County’s population growth is

attributable to the City of Greeley (PX 88), presumably a similarly

disproportionate share of the County’s growth in personal income

was earned by Greeley residents.

The largest banking organization in the Greeley

Area is a holding company, Affiliated Bankshares of

Colorado, Inc. (‘‘ABC’’) ; it owns three banking insti-

tutions there, the combined deposits of which total

$49.6 million, or 40.2 percent of the total deposits for

the area (App. A, infra, p. 33; PX 74). ABC’s

principal bank is almost the same size as the acquired

bank (PX 73-86; Tr. 272-273, PX 114-118).

The third largest banking organization operating in

the Greeley Area, the United Bank of Greeley

(‘United Bank’’), is a subsidiary of Colorado’s largest

holding com:pany, United Banks of Colorado, Inc. (PX

114-118). United Bank has $24.7 million in deposits,

which are 21.4 percent of the total deposits for the city

and 20 percent of the total deposits for the area (App.

A, infra, p. 33).

Together, the acquired hank, ABC and United Bank

account for 98.2 percent of total deposits in the City of

Greeley, and 92 percent of deposits in the Greeley Area

App. A, infra, pp. 32-33)."

While none of Bancorporation’s subsidiaries com-

petes directly with Greeley Area banks for local busi-

ness, the acquiring holding company has maintained a

presence there through a loan-production office op-

erated by its lead bank, FNB Denver (PX 4, pp. 24-25;

PX 40, Exh. F, pp. 31-32); it also has made a number

of large loans in the area (PX 48). Bancorporation

is the largest Colorado holding company not already in

The only other bank in the City of Greeley, State Bank of

Greeley, is a commercial bank (Tr. 729) with less than 2 pereent

of local deposits (App. A, infra, p. 33). There are two additional

banks in the Greeley Area, which combined have slightly more than

6 percent of the area’s total deposits ([bid.).

oman

the Greeley Area (Tr. 269-270). Of the three remain-

ing holding companies in the state, only two appear

capable of entry; the third has a total combined deposit

figure which amounts to less than the deposits held by

the acquired bank (Ibid.; compare App. A, infra, pp.

35-36 n. 5 with PX 74)."

E. The Proceedings

On July 9, 1969, Bancorporation applied to the Fed-

eral Reserve Board, pursuant to Section 3(a) (3) of the

Bank Holding Company Act of 1956 (70 Stat. 134, as

amended, 84 Stat. 1763, 12 U.S.C. 1842(a)(3)), for ap-

proval of the proposed acquisition of FNB Greeley. The

Comptroller of the Currency recommended approval,

but the Department of Justice advised the Board that it

believed the combination *‘ ‘would have a significantly

adverse effect on competition’ ’’ (DX 48, statement,

p. 4). The Board approved the application by a four-

to-three vote on June 9, 1970."

22 Colorado CNB Bankshares, with combined deposits of $281.3

million; First Colorado Bankshares, with combined deposits of

$120.4 million; Central Colorado Bancorporation, with combined

deposits of $36 million (App. A, infra, pp. 35-36 n. 5).

18 The three who dissented deemed the proposed acquisition to be

anticompetitive (DX 48). In their view, the effect of the majority's

approval is to permit Bancorporation, upon a minimal showing, to

enter by acquisition into a market that is attractive for de novo

entry, under circumstances where its existing presence could be

expected to expand into a full service operation in competition with

existing banks. They argued that the adverse impact of such a

determination is accentuated by the ongoing holding company move-

ment, which threatens to concentrate in the hands of a few the

control of a large percentage of the banking institutions in Colo-

rado’s six most significant banking markets (Denver, Colorado

Springs, Boulder, Fort Collins, Greeley, and Pueblo). The time to

stop this trend, they concluded, is now.

PETRI NEE es ARI re:

The United States filed this civil antitrust action

on July 8, 1970, thereby automatically staying consum-

mation of the acquisition under Section 11(b) of the

Bank Holding Company Act of 1956 (70 Stat. 138, as

amended, 80 Stat. 240, 12 U.S.C. 1849(b) )."* It claimed

that the acquisition would substantially lessen com-

petition by (1) eliminating Bancorporation as a poten-

tial entrant into the Greeley Area, (2) removing it as

an external influence on the relevant market, and (3)

contributing to the trend toward dominance of the

state’s banking institutions by a few large holding

companies. In an amended complaint, it was further

alleged that actual competition would be eliminated by

the acquisition since FNB Greeley would thereby be

foreclosed as a customer for the correspondent banking

services in Colorado, offered by six Denver banks; and

that this would thus contribute to the trend which had

already foreclosed a substantial portion of the market

for correspondent banking services due to holding com-

pany ownership of both supplier and customer banks.

Following a trial on the merits, the district court

dismissed the complaint, holding that the government

had failed to show that the effect of the acquisition

‘“‘would be substantially to lessen competition’’ (App.

A, infra, p. 47). It discounted as ‘‘future horribles’’

(id. at p. 52) the government’s evidence of a trend in

Colorado toward the acquisition by statewide holding

companies of leading banks in separate local markets.

Instead, noting that this was Bancorporation’s first

attempt to expand beyond the Denver metropolitan

On October 4, 1971, Mr. Justice White continued the stay

pending disposition of this appeal.

area,” the court focused solely on the competitive im-

pact that this particular acquisition would have on

banking in the Greeley Area.

First, the court found that Bancorporation was not

a potential de novo entrant into the relevant market.

Relying solely upon figures showing comparisons of

population per banking office (App. A, infra, p. 49),

it determined that neither the Greeley Area nor Weld

County was *‘underbanked."’ Banecorporation offi-

cials, it pointed out, had denied any intention to enter

the Greeley Area other than by acquisition of FNB

Greeley. Moreover, **objective” evidence showing that

Greeley’s growth was only ‘*moderate,”’ and that the

appropriate banking agencies would not now permit

de novo entry, seemed, in the court's view, to give sub-

stance to these denials, Consequently, while reeog-

nizing Bancorporation’s financial capability for de

novo entry, it concluded that ‘the practical difficulties,

together with the expense, argue against Bancorpora-

tion's following this route’’ (App. A, infra, p. 50).

The possibility that Baneorporation would make a

**foothold”’ acquisition of Greeley’s smallest bank was

* It stated that ‘’* * * thi. « the first effort on the part of the

Government to halt the trend of acquisitions. It did not choose to

intervene until after the United Banks of Colorado and Affiliated

Bankshares had both entered the Greeley Area’’ (App. A. infra,

p. 37).

* While Greeley’s ratio of 6484 persons per bank office is lens

than the 9,854 ratio for the state, it is larger than the national figure

of 5,751 (App. A, infra, p. 49). Moreover, the addition of a

seventh bank based on 1970 population figures would draw the ratio

down to 5,557, or slightly less than the national average. Among the

several states these ratios range from a statewide average low of

2,591 for South Dakota to a high of 13,470 for Florida (DX 22).

Colorado's ratio is the second highest in the nation (1bid.).

dismissed as unlikely under ‘‘the objective evidence

presented’’ (App. A, infra, p. 50); however, the court

made no mention of the other two ‘‘foothold”’ possi-

bilities in the larger Greeley Area. It found little evi-

dence demonstrating that Bancorporation was an exist-

ing influence in the market by its presence in the

“wings’’ (App. A, infra, pp. 50-51).

Finally, portraying FNB Greeley as an unaggressive

competitor, the court concluded that Bancorporation’s

control of FNB Greeley would not be likely to increase

the likelihood of parallel behavior or make the acquired

bank a less aggressive competitor (App. A, infra,

p. 51).

The district court also rejected the government’s ar-

gument that this acquisition would effect an anticom-

petitive foreclosure of FNB Greeley as a customer for

Denver-based correspondent banking services. Ignor-

ing the cumulative effect of this acquisition in light of

existing customer foreclosure due to holding company

ownership of both supplier and customer banks, it

found simply that the 1.2 percent " foreclosure claimed

by the government was insubstantial." The court dis-

* The district court accepted this figure only arguendo. First, it

found questionable the government's reliance on interbank deposits

as an acceptable measure of market shares in the correspondent

banking market; it pointed out that wide variations in the amount

of uncollected funds in deposit accounts distort the sums actually

available for investment by the correspondent banks. Secondly, the

court found that the government's market was improperly cestricted

to the interbank deposits of Colorado banks held by six Denver

correspondent banks (App. A, infra, pp. 58-59).

* In light of this finding, the court found it unnecessary to decide

whether Denver-based correspondent banking is an appropriate

“line of commerce,"’ and whether Colorado is an appropriate

“geographic market or submarket"’ (App. A, infra, pp. 53-58).

...

ee =

tinguished cases holding similarly small foreclosure

percentages to be anticompetitive on the ground that

they involved national markets in other industries

(App. A, infra, p. 60).

THE QUESTIONS ARE SUBSTANTIAL

The structure of banking business in the United

States is presently experiencing significant changes. In

many states, a few banking organizations have recently

reached, or in the near future will reach, a position of

dominance in the statewide banking business through

acquisitions of leading local banks in significant bank-

ing markets throughout the state. This case is the first

antitrust challenge to this trend to reach this Court.

The situation in Colorado is typical of this emerging

movement. There, the trend toward concentration has

rapidly accelerated, with Denver-based holding com-

panies endeavoring to acquire control of established

institutions which have large market shares in the

state’s various local banking markets. The result is a

form of merger known as a market extension—i.c., the

entry of a firm into a new geographic market by aequi-

sition of a firm already doing business there. Although

such mergers do not change existing market shares,

they may well affect significantly market structure

and behavior by eliminating the potential competition

of the acquiring organization. This case involves the

legal criteria by which the substantiality of this effect is

to be determined in market-extension acquisitions by

banking organizations; it raises squarely the question

of the extent to which Section 7 of the Clayton Act for-

bids this developing domination by a few organizations

of a substantial percentage of the banking business in a

—

In resolving the question relating to potential compe-

tition in this case, the district court required the gov-

ernment to prove that competition ** would be’’ lessened

(App. A, infra, p. 47), rather than looking to whether

the effect of the questioned acquisition *‘may be sub-

stantially to lessen competition or tend to create a

monopoly,”’ as required by Section 7. Moreover, it ap-

plied subjective rather than objective criteria in deter-

mining the substantiality of the acquiring bank’s role

as a potential competitor; it failed to give due weight

to existing concentration in the Greeley Area; and it

ignored the relationship between this particular acqui-

sition and the undisputed trend toward concentration

throughout the state. Finally, we submit, the court

applied erroneous standards in ruling that the actual

competition in the correspondent banking markets in

Colorado which would be eliminated by this merger

was not significant.

1. Under Section 7 of the Clayton Act, “‘potential

competition” is significant to the preservation of actual

competition in concentrated markets. See United

States v. Penn-Olin Chemical Co., 378 U.S. 158; Fed-

eral Trade Commission v. Procter & Gamble Co., 386

U.S. 568; United States v. Co.tinental Can Co., 378

U.S. 441, 464-465.” The ‘potential competition” fac-

tor is applicable where there are a limited number of

” See also United States v. Standard Oil Co., 253 F. Supp. 196

(D. NJ.); United States v. Jos. Schlitz Brewing Co., 253 F.

Supp. 129 (N.D. Cal.) affirmed, 385 U.S. 37; United States v.

Wilson Sporting Goods Co., 288 F. Supp. 543 (NLD. IIL); Ekco

Products Co. ¥. Federal Trade Commission, 347 F. 24 745 (C.A. 7);

General Foods Corp. +. Federal Trade Commission, 386 F. 2d 936

(C.A. 3), certiorari denied, 391 U.S. 919.

_—— es ~~ =o

firms on the edge of such a market with capability and

incentive to enter it. Such firms are competitively im-

portant because they are a source of future deconcen-

tration by independent entry, and because their posi-

tion is an external factor influencing the conduct of

those already in the relevant market. Ibid.

a. In the banking industry potential competition is

particularly important. A recognized authority in

state and federal bank regulation has recently written

that ‘‘the potential competition standard may be the

only criterion available to the bank regulatory agencies

or the courts by which a trend toward a market domi-

nated by only a handful of banks or bank holding com-

panies may be checked.’’*” The swiftness with which

such a trend may develop in particular states across the

country has been documented by the Federal Reserve

Board.” To be sure, state and federal laws generally

forbid entry by out-of-state banking organizations. See,

e.g., 12 U.S.C. 1842(d). Behind this legal barrier, how-

ever, there has been an accelerated trend in states which

permit acquisitions, either under branching laws or by

2° Frank Wille, then New York Superintendent of Banking, now

Chairman, Federal Deposit Insurance Corporation, in Foreword to

Kohn and Carlo, Potential Competition: Unfounded Faith or Prag-

matic Foresight? (N.Y. State Banking Dept. 1970).

21 Board of Governors of the Federal Reserve Board, ‘‘ Recent

Changes in the Structure of Commercial Banking,’’ 56 Fed. Res.

Bull. 195 (1970). Statewide concentration ratios measured by total

deposits held by the largest five banking organizations are very

high. In some states where the concentration has been very intense,

there have recently been signs of some deconcentration as new

banking organizations have been created, The situation in the bank-

ing industry is therefore at a crucial stage in which the trend could

go either way.

PO MDP MLE LEI COLON. ETL POLLS PENI! TOI, oe” = ,

holding companies, toward the acquisition by the state-

wide leaders of banks with the largest market shares in

local banking markets.“ In a number of these states,

this trend has progressed to the point where two or

three banking organizations together control more than

half of the state’s total deposits (PX 30).

Because local banking markets can support only a

limited number of banks, such markets are inherently

concentrated. When large institutions within a state

enter most of that state’s significant markets by pur-

chasing large market shares, there develops, as the gov-

ernment’s expert testified in this case (Tr. 435-436), a

situation in which the same organizations begin to con-

front each other as the dominant factors in concen-

trated markets all over the state. This encourages a

tendency to develop parallel practices in such com-

monly linked oligopolistie markets without regard to

local competitive conditions (ibid.). Consequently,

there is a real danger that such dominant banks will

tacitly renounce vigorous competition (Tr. 451-456).

“As that condition develops the greater is the likeli-

hood that parallel policies of mutual advantage, not

competition, will emerge.’’ United States v. Alcoa, 377

U.S. 271, 280.

As we have already indicated, such a situation now

threatens in Colorado; seven Colorado holding com-

panies already control more than half of the state’s

total deposits (App. A, infra, p. 35), including 13 of

the 27 banks outside of Denver having total deposits in

excess of $20 million (PX 125).

*? See Brimmer, Market Structure, Public Convenience and the

Regulation of Bank Mergers, 86 Banking L.J. 773, 776-778 (1969).

me if

The district court dismissed these considerations as

‘future horribles’’ (App. A, infra, p. 52). But, it is

just such ‘‘future horribles’’ that are the primary con-

cern of Section 7 of the Clayton Act. That provision

prohibits acquisitions whose effect may be substantially

to lessen competition; it is carefully designed to cut

off anticompetitive movements in their incipiency. See,

e.g., United States v. Philadelphia National Bank, 374

U.S. 321, 362; United States v. E. I. du Pont de Ne-

mours & Co., 353 U.S. 586, 589; Brown Shoe Co. v.

United States, 370 U.S. 294, 317-318. A state may not

be a banking market in the strict economic sense, but it

clearly is an area of the country entitled to protection

under Section 7 (see United States v. Pabst Brewing

Co., 384 U.S. 546); it has competitive significance in

banking because entry from outside is barred by law

(cf. United States vy. Philadelphia National Bank,

supra).

Where, as here, the particular acquisition challenged

is part of a statewide trend toward concentration, that

trend is necessarily relevant to a proper evaluation of

the effect that the acquisition ‘‘may tend’’ to have

upon competition (370 U.S. at 317). If all the local

banking markets in a state should become dominated by

the same few firms, bank customers would no longer

have a meaningful alternative to the banking policies of

the acquiring companies; the safeguard against possi-

ble exploitive conduct that inheres in the availability

of alternative banking markets in the state disappears

once those markets become dominated by the same

firms.”

* This is substantiated by the testimony of a banker in Greeley

who concluded that, if prices for bank services in Greeley should

ORG OKIE SP EAL LOL ALA ORL EE LE LI RIOT TO 12 I Pa

b. Even putting to one side for the moment the

court’s failure to attach any importance to these state-

wide considerations, we submit that the district court

applied the wrong standard in assessing the acquiring

bank’s role as a potential entrant into the Greeley Area.

Principal reliance was placed on testimony by FNB

Denver officials that Bancorporation would not enter

the market except by acquisition of FNB Greeley, with

its large market share. But the determination with

respect to potential competition in a Section 7 case

should not turn on such subjective, self-serving state-

ments; the competitive status of a firm on the edge of

the relevant market must be ascertained on the basis

of objective evidence, showing the potential entrant’s

financial capability to enter independently, its eco-

nomic incentive to do so, and the reasonable prospects

for making such an entry successfully. Thus, in United

States v. Penn Olin Co., 378 U.S. 158, 175, after a full

review of objective evidence showing the capability and

incentive of joint venturers to enter a market inde-

pendently, this Court held: ‘‘Unless we are going to

require subjective evidence, this array of probability

certainly reaches the prima facie stage. As we have in-

dicated, to require more would be to read the statutory

requirement of reasonable probability into a require-

ment of certainty. This we will not do.’’ See also Fed-

eral Trade Commission v. Procter & Gamble Co., 386

U.S. 568, 580-581.

The reason is manifest. The proper question before

the court in potential competition cases should not be

whether management considered independent entry to

now get ‘‘out of line,’’ business could be lost to FNB Denver, the

acquiring bank (Tr. 775-776).

20 a. il

be preferable to entry by acquisition, but whether in-

dependent entry is preferable to no entry at all for a

firm with the defendant’s capabilities and incentives.

Entry by purchasing a large share of the market is

always preferable to the hard competition required for

successful entry de novo, or by a small ‘‘foothold’’ ac-

quisition.“ Moreover, if subjective evidence were deter-

minative, effective enforcement of Section 7 would be

seriously jeopardized, since the test of potential com-

petition would then depend upon the trial court’s evalu-

ation of the sincerity of an acquiring firm’s statements

that independent entry is not a feasible alternative.

Such a standard would make the antitrust consequences

of an acquisition completely unpredictable to both busi-

ness and government. Plainly, that is not the case under

the proper objective standard, based essentially on

whether the market is attractive and the firm has the

necessary capability to enter it; the type of showing

that would warrant classification of a firm as a potential

independent entrant on the basis of that test is readily

ascertainable.

In the instant case, Bancorporation had both the ca-

pability and the interest to be viewed objectively as a

potential entrant into the Greeley market. Unques-

tionably, it had the resources. Its interest in expanding

into the major local markets outside of Denver was re-

flected clearly in the series of acquisition applications

that it filed.” Moreover, there was ample incentive to

24 On ‘‘toehold’’ entry, see, The Bendix Corp., (FTC), 3 Trade

Reg. Rep. { 19,288, vacated and remanded on other grounds, The

Bendix Corporation yv. The Federal Trade Commission, (C.A. 6, No.

20,687, October 18, 1971).

2° See n. 7, supra, and accompanying text.

CMe RIL LOT ALLEL ALMD ILE ONES em 0 nha PO Soc ¥ lL

SMF AISCES PCLE PIPER

enter Greeley in particular: the area had experienced

substantial growth in the past ten vears (pp. 7-8,

supra), and the banks doing business there were all

profitable (thus casting doubt on the district court’s

conclusion that the market was ‘‘overbanked’’). And,

as noted earlier, there was one small commercial bank

in the City of Greeley, and two other small commercial

banks in the Grecley Area, which were available to

Bancorporation to establish a ‘‘foothold’’ in the rele-

vant market.”

ec. To be sure, the Regional Administrator of National

Banks testified that he would not presently recommend

a new charter for the area (App. A, infra, p. 50).”

But that, in itself, is not, in our view, sufficient to alter

the acquiring firm’s status as a potential entrant.

Where, as we submit is the case here, new entry is not

barred by any clear indication that a community is

over-banked—.e., if the market is still growing and

the banks doing business there are profitable—a regula-

tory decision with respect to new entry does not turn

on the need to protect existing banks from harmful

76 Bancorporation had in fact broken off negotiations for the

purchase of a bank in a town 15 miles outside of Greeley—Windsor,

Colorado—after FNB Greeley became available (PX 41; PX 241).

It had been interested in the Windsor bank because Eastman Kodak

was locating a major industrial facility in Windsor, which would

affect the economy of Greeley, Fort Collins and Loveland (see PX

4, pp. 21, 30-31; 34; Tr. 120-132).

27 The district court also interpreted the testimony of the State

Banking Commissioner to be that he would not now approve a new

charter. But, the Commissioner actually declined to take any

position at trial on that question in the absence of a pending appli-

cation (Tr. 1200-1204).

~ —

competition. Rather, it is premised on the convenience

and needs of the community to be served at the time

that the application for entry is under consideration. As

conceded by defendant’s witnesses, this depends upon

a wide range of variables unique to each market (Tr.

834, 1199-1204; DX 42-43). Whatever disposition the

regulatory agencies might make on an evaluation of

those variables in the present context, defendants’ own

expert witness acknowledged that, if Greeley banks

abused their market power, the agencies might then

open the gates to new entry (Tr. 976-977).

Indeed, precisely because Bancorporation remains a

significantly potential entrant, without regard to the

present liklihood of its obtaining a new charter from

the regulatory agencies, the bank customers in Greeley

are more likely to receive effective performance by the

existing banks in the area. Greeley is a concentrated

banking market; this Court has held that anticompeti-

tive consequences may be inferred from concentration

in banking markets in the same manner as in other

industries. United States v. Philadelphia National

Bank, supra, 374 U.S. at 363; United States v. Phillips-

burg National Bank, 399 U.S. 350, 365-366. There is,

therefore, a clear need for the influence of a few sig-

nificant potential entrants. As this Court observed in

United States v. Penn-Olin Chemical Co., supra, 378

U.S. at 174, ‘‘[t]he existence of an aggressive, well

equipped and well financed corporation engaged in the

same or related lines of commerce waiting anxiously to

enter an oligopolistic market would be a substantial

incentive to competition which cannot be underesti-

mated.’’ Here, there are only two such corporations

PITS TRIOS EE In re —— Spay ec tee ” : ba

in addition to Bancorporation not in the Greeley Area,

and the loss of the latter, the most significant of the

three, as a potential entrant would have a serious ad-

verse effect on competitive interests in the Greeley

area.”

2. This acquisition also would have another anticom-

petitive effect: the foreclosure to other Denver banks

of FNB Greeley as a customer for correspondent bank-

ing services in Colorado. Correspondent banking, like

commercial banking, is a congeries of services clustered

around demand deposits; it involves, however, banking

services that are provided by large ‘‘city’’ banks to

small ‘‘country’’ banks, rather than to the public at

large (Tr. 531, 571, 580-589). In a unit-banking state,

such as Colorado, these services are supplied to and

through local banks by correspondent relationships,

and are generally paid for by the maintenance of cor-

respondent balances, which are in fact interbank de-

mand deposits (Tr. 646-648).

Banks offering a full range of correspondent bank-

ing services—such as check clearing, international

banking, investment advice, personnel acquisition as-

78 In disputing that Bancorporation exerted a competitive influ-

ence by its presence ir the ‘‘wings’’, defendants relied essentially

on testimony of local bankers in the Greeley Area that their past

market decisions have not been affected by the fact that the aequir-

ing company was located on the edge of the market. Such testimony,

however, is entitled to little weight. Plainly, those already in the

market prefer that Bancorporation enter by acquiring an estab-

lished market share, rather than by adding to the number of actual

competitors by coming in de novo. Moreover, it is doubtful that

they would want to go on record as stating that their local ecompeti-

tors are so unaggressive that their real worry comes from the

competitive threat posed by outsiders. Cf. United States v. Phila-

delphia National Bank, supra, 374 U.S. at 367 n.43.

kbse oe

sistance and training, overline loans,” and the like (Tr.

667-668 )—tend to be located in the financial and politi-

cal centers of a state (Tr. 609-610, 656-658).°° Moreover,

customers for full-range correspondent banking serv-

ices tend to be limited to ‘‘country”’ banks located in the

same state, in part because it is important to have a

primary correspondent familiar with local banking

regulations (Tr. 531, 610-612, 656-658 ; see also Tr. 54).

At the end of August 1970, based on interbank de-

posits, approximately 12 percent of the market for cor-

respondent banking in Colorado was foreclosed by

holding company ownership of both supplier and ecus-

tomer banks (PX 215; Tr. 688). Bancorporation’s ac-

quisition of the National State Bank of Boulder “ adds

2.5 percent to this figure (PX 164, 217; Tr. 689-689A),

and its acquisition of Security State Bank in Sterling

will add another 0.8 percent (PX 217).

The acquisition of FNB Greeley would increase hold-

ing company ownership by an additional 1.2 percent.

In numerous eases, it has been held that foreclosure of

even a relatively small percentage of a market may pro-

duce a substantial lessening of competition. See, e.¢.,

Brown Shoe Co. v. United States, 370 U.S. 294 (2 per-

cent, 1.5 percent and 1 percent). The district court

*° Overline loans are loans made together with another bank that

is unable to satisfy its customers’ credit needs because of its legal

lending limits.

*° Some of these services may be offered by specialty organiza-

tions, such as savings and loan associations, which provide specific

competition for commercial banks but do not compete over the

entire offering of services (see Tr. 553, 609-610, 633).

51 See n. 3, supra.

*2 See also United States v. Kimberly-Clark Corp., 264 F. Supp.

439 (N.D. Cal.) (2 percent) ; United States v. Kennecott Copper

SRAM SLES ILL IHS SIT PAE IEE ON RTI RRR REE aR te “ye

held that these cases were inapplicable in the present

context on the ground that they involve national, not

loeal, markets. But this Court has made it clear that the

antitrust laws apply with the same vigor in local mar-

kets as in the larger areas. United States v. Philadel-

phia National Bank, supra; United States v. Phillips-

burg National Bank, supra.

Moreover, we think it is improper to consider the

acquisition involved here in isolation, as the district

court did. Rather, in determining whether the fore-

closure of FNB Greeley may tend substantially to les-

sen competition within the meaning of Section 7 of the

Clayton Act, the transaction must be viewed in the con-

text of the clear trend now developing in Colorado to-

ward foreclosure of the correspondent banking market

through large bank holding company acquisitions. Cf.

United States v. Von’s Grocery Co., 384 U.S. 270, 277.

CONCLUSION

Probable jurisdiction should be noted.

Respectfully submitted.

ERWIN N. GRISWOLD,

Solicitor General.

RicHarp W. McLaren,

Assistant Attorney General.

Wm. Braprorp REYNOLDs,

Assistant to the Solicitor General.

Howarp E. SHaprtro,

Lee A. Rav,

Attorneys.

NOVEMBER 1971.

Corp., 231 F. Supp. 95 (S.D.N.Y.) (7.6 to 10 percent); United

States v. Bethlehem Steel Corp., 168 F. Supp. 576 (S.D.N.Y.).

Bats

APPENDIX A

Is THe Untrep States Disrnicr Cover

ror THE District or CoLornapo

Civil Action No. C-2413

Unsrrep States or AMenica,

PLAINTIFF,

Vv.

Fimst Nationa Banconpora-}

tion, Ixc. aXp THE Fest Na-

TIONAL Bank or GReELey,

DEFENDANTS.

Appearances for Plaintiff:

Hexsext G. Scnoerxe, Esq.

Kevin D. Brenan, Esq.

Aan R. Marasxy, Esq.

Evoexe V. Lirxowrrtz, Esq.

Attorneys, Department of Justice

Antitrust Division

Washington, D.C. 20530

James L. Treece, United States Attorney

By: Cano_yyn J. McNeu, Assistant United States

Attorney

323 United States Courthouse

Denver, Colorado 80202

(26)

Appearances for Defendants:

Merzorn, Scuwanz, McKenna & Kempen

By: Evoexe J. Merzorr, Esg.

Cant J. Scuwanz, Esq.

DowaLy Witiamson, Esg., Of Counsel

One Farragut Square South

Washington, D.C. 20006

Huvoues « Dorsey

By: Evwanxp B. Cros, Jn., Esq.

401 First National Bank Building

Denver, Colorado 80202

MEMORANDUM OPINION AND ORDER

Dorie, Judge.

L Precimixnany STaTEMENT

Involved in this action is the attempted acquisition of

The First National Bank of Greeley by the First Na-

tional Bancorporation, Inc. The United States has in-

stituted this suit under Section 15 of the Clayton Act,

15 U.S.C. § 25, seeking an injunction preventing the

alleged violation of Section 7 of the Clayton Act. The

cause was tried to the Court, and following the filing of

post-trial briefs, together with proposed findings, has

been submitted.

A. Background of This Litigation

On June 9, 1970, the Board of Governors of the Fed-

eral Reserve Board approved in a four-to-three deci-

sion the application of First National Bancorporation,

Ine. for the acquisition of 80 percent or more of the vot-

ing shares of The First National Bank of Greeley. The

opinion of the Board recites that the comptroller had

been duly notified and had approved the application.

The majority opinion considered all of the evidence and

concluded that the proposed acquisition would not have

the effect of substantially lessening competition or

would not tend to create a monopoly. It was pointed out

that this was the first expansion by First National Ban-

corporation, Inc. outside the Denver area, and that

while other applications about which the Board had

knowledge might change the banking structure in the

state, that this one would not have such an effect.

It was noted that one of the competitors in Greeley

was also a leading competitor of First of Denver in

Denver (United Bank); that there existed, however,

no likelihood that a structure in Greeley would result

in mirroring the situation in Denver. In a concurring

opinion one of the Governors pointed out that Weld

County (where Greeley is located) is not underbanked ;

that, rather, there are more banking institutions per

population than in adjothing counties of Larimer and

Boulder.

The main thrust of the minority opinion was that the

proposed acquisition was one step in a trend toward

concentration not only in the Greeley area but in the

state as a whole, and that the Board should not approve

an acquisition in furtherance of this trend. The min-

ority finally said:

In our view, the effect of consummation of the

applicant's proposal would be to substantially les-

sen future competition in Greeley, in Weld County,

and perhaps in other Colorado areas which might

———_ — go

otherwise have been served by a new organization

which bank could have significantly participated.

The minority also considered that one result of the

acquisition would be to close a mortgage loan produc-

tion office maintained by The First National Bank of

Denver, the lead bank of Bancorporation, and would

thus remove this institution as a competitor, and would

also lessen potential competition resulting from The

First National Bank of Denver being on the threshold

of the market.

B. The Banking Institutions Involved

As noted above, Bancorporation is a registered bank

holding company organized under the laws of Colorado

and maintains its principal place of business in Denver.

On the other hand, The First National Bank of Greeley

is a national banking association organized under the

laws of the United States, which operates in Greeley,

Weld County, Colorado, which is roughly 50 miles

north of Denver. Both Bancorporation and The First

National Bank of Greeley are engaged in interstate

commerce. Moreover, the Court has jurisdiction of the

action.

The main nucleus of Bancorporation is The First

National Bank of Denver. However, there are three

other subsidiaries—commercial banks—all of which are

located in the metropolitan area surrounding Denver,

Colorado. The First National Bank of Denver is the

largest commercial bank in Colorado. Its total deposits

as of June 1970 amounted to $468.0 million, 12.3% of

the total commercial bank deposits within Colorado. Its

assets total $586.5 million, and its loans and discounts

total $340.8 million.

The other three commercial banks, subsidiaries of

Bancorporation, are The First National Bank of

Northglenn, The First National Bank of Bear Valley

and The First National Bank of Southglenn. Each of

these banks was organized de novo by officers and direc-

tors of The First National Bank of Denver.

The Northglenn bank was established on November

14, 1963. It is located in the suburban community of

Northglenn in Adams County, which adjoins Denver

County. It has been, from the date of its opening to the

date of its acquisition by Bancorporation, an affiliate

of First National Bank of Denver. Its total assets as

of June 1970 amounted to $9.5 million. It had total de-

posits of $8.5 million and total loans and discounts of

$6.1 million. Its income in 1969 amounted to $780,058,

an increase over prior years.

The First National Bank of Bear Valley was also or-

ganized by officers and directors of the First National

Bank of Denver, having been established on June 15,

1964. This institution is located within the City and

County of Denver and has been, from the date of its

opening to the date of its acquisition by Bancorpora-

tion, an affiliate of The First National Bank of Denver.

The total assets of the Bear Valley bank are $11.4 mil-

lion. Its total deposits are $10.1 million, and its loans

and discounts total $6.9 million. Its income as of 1969

had substantially increased over the prior years.

Similarly, The First National Bank of Southglenn

was organized de novo by officers of The First National

Bank of Denver, having been established on November

30, 1964, in Littleton, Arapahoe County, Colorado. It

was an affiliate of The First National Bank of Denver

from the date of its opening until its acquisition. As of

June 1970, it had total assets of $6.4 million, total de-

posits of $5.8 million and total loans and discounts of

$3.2 million. Its total income in 1969 was substantially

higher than in prior years.

As noted above, the present acquisition represents

the first attempt by Bancorporation to acquire a bank-

ing institution outside of Denver. This application was

approved, as also noted, by the Board of Governors on

June 9, 1970. On July 8, 1970, the Antitrust Division of

the Department of Justice brought the present suit.

The First National of Greeley was established in

1884. Its only office is in the City of Greeley, County of

Weld. As of June 1970, its deposits totaled $39.2 mil-

lion, and its total loans and discounts amounted to

$28.9 million. It is the fifteenth largest bank in Colo-

rado from the standpoint of total deposits, and the

twelfth largest in terms of total loans and discounts.

The evidence does not disclose that there is competi-

tion at the present time between The First National

Bank of Denver and The First National Bank of Gree-

ley. To be sure, The First National Bank of Denver

maintains a mortgage loan production office in the City

of Greeley. This institution does not perform banking

functions, but rather sells and services real estate loans

to long-term investors such as savings and loan institu-

tions, mutual savings banks and insurance companies.

This service is performed for a fee and the most that

can be said as to its contribution to the objectives of

Bancorporation and First National Bank of Denver is

—_—_ =

that it undoubtedly serves to furnish information as to

the market conditions to the First National, although

there is no evidence in the record which establishes this

fact. In other respects the First National Bank co-

operates with The First National Bank of Greeley in

connection with overline loans either itself or through

its correspondent banks in other sections of the coun-

try. The First National Trust Department administers

a small number of trusts for individuals who live in

Weld County, but it does not solicit this kind of busi-

ness there. Accordingly, it cannot be said that the pro-

posed merger or acquisition qualifies as a horizontal

one.

C. Commercial Banking Institutions in Greeley

There are six commercial banks in the City of Gree-

ley and two other banks in what is referred to as the

Greeley Area—which includes communities adjacent

to the City of Greeley.’ The following Table sets forth

the relative percentages of total deposits held by each

of these eight banks as of June 1970:

ToraL Depostts-COMMERCIAL BANKS IN THE

Crry or GREELEY AND THE GREELEY AREA *

(Dollar amounts in thousands)

June 1970

% of % of

Amount City Area

First NATIONAL Bank

or GREELEY $ 39,237 33.9% 31.8%

* The seven banks other than FNB Greeley were listed in Bancor-

poration’s application to the Board of Governors of the Federal

Reserve System as ‘‘all other banks that Applicant believes to be

competing with’’ FNB Greeley.

% of % of

Amount City Area

AFFILIATED BANKSHARES

oF CoLorapo, Inc.

Greeley National Bank 39,279 34.0 31.8

Cache National Bank 7,080 6.1 5.7

West Greeley National

Bank 3,273 2.8 2.7

Unitep Banks OF

Cotorapo, Inc.

United Bank of

Greeley 24,743 21.4 20.0

State Bank of Greeley 2,070 1.8 1.7

City or GREELEY 115,682 100.0% 93.7

South Platte National

Bank, LaSalle 2,773 2.2

Eaton Bank 4,983 4.0

TOTAL: |

GREELEY AREA* $123,438 100.0%

Note: Detail may not always add to total due to rounding.

* Includes City of Greeley, and adjacent towns of Evans, LaSalle,

Peckham, Kersey, Gill, Eaton, Lucerne, Farmers and Bracewell.

Source: Reports of Condition of individual banks, June issues,

1969 and 1970.

While there is some evidence that FNB Greeley and

other Greeley Area banks effectively compete in the

rest of Weld County,’ Bancorporation’s Application to

the Board of Governors of the Federal Reserve System

2 FNB Greeley has $3,130,000 of its $28,897,000 in loans in the

rest of Weld County (outside the Greeley Area).

to acquire FNB Greeley characterizes an area similar

to the Greeley Area as FNB Greeley’s ‘‘ Primary Serv-

ice Area’’ and characterizes an area extending easterly

and northeasterly from Greeley (comprising somewhat

less than half of Weld County) as FNB Greeley’s

‘*sphere of influence.’’

The City of Greeley, the Greeley Area and Weld

County have all experienced a moderate amount of

economic and population growth over the last decade,’

although the area certainly cannot be characterized as

a ‘‘boom”’ area such as Boulder or Colorado Springs.

Some industry has moved into the area during recent

years, but Weld County continues to be primarily a

farming area and agricultural loans continue to con-

stitute a substantial part of the bank’s business.‘ There

is also evidence concerning odors from the packing

* The 1970 population of the Greeley Area was 58,500, a 29.3%

increase over its 1960 population of 45,228. Most of the population

growth in the Greeley Area is attributable to the City of Greeley.

Economic statistics presented by plaintiff indicate that from 1960

to 1970 the number of main telephones in the Greeley Area in-

creased 48.2% and electric power consumption increased 115.8%.

Gas customers increased 45.5%, while total gas volume consumed

increased 127.3%. In addition, the rural families served by the

Greeley Post Office have increased 43.3% since 1960, while the

number of individual customers served has increased 27.8%. The

growth of the City of Greeley and the Greeley Area has also been

reflected throughout Weld County as a whole. Finally, the popula-

tion of the City of Greeley is roughly 38,000, of which 10,000

consist of students attending the college located there.

* Whereas farm earnings accounted for 49.2% of total earnings in

Weld County in 1950, by 1968 they had decreased to 28.3% of total

earnings. In the same period, earnings from manufacturing in-

creased from 4.1% to 11.1%. The industrial usage of gas increased

from 15.2% of the gas consumed in 1960 to 35.9% of the gas

consumed in Weld County in 1970. This diversification took place

during a time in which Weld County remained one of the top ten

agricultural counties in the United States.

IMOLP NST LE OUI 5 ’ GAY : ‘ idea

plants and feedlots which suggests that Greeley is not

likely to become a great population center in the near

future. Despite this growth, there is some evidence to

the effect that the Greeley Area is presently quite ade-

quately served by its existing banking institutions.

D. Statewide Holding Companies

One other aspect which should be mentioned in con-

nection with the background of this case is that the last

decade has seen a trend of holding company formations

and bank acquisitions in Colorado. As of December 31,

1960, Western Bancorporation of Los Angeles was the

only bank holding company operating in Colorado. It

had three bank subsidiaries which held 4.4% of the total

commercial bank deposits in the state ($87.5 million).

As of December 31, 1970, there were seven bank holding

companies in Colorado with 41 commercial bank sub-

sidiaries. These holding company banks, as of June

1970, held 51.1% of total Colorado deposits.’

5’ The following table summarizes the percentages of Colorado

deposits held by each of the bank holding companies and the areas

in which their subsidiaries operate. The holding companies are

listed in order of their formation.

TotraL Deposits HeLp spy BANK Ho.pine

CoMPANIES IN COLORADO AS OF JUNE 1970

(Dollar amounts in thousands)

% of

Bank Group Amount Colorado

WESTERN BANCORPORATION (operating

three banks in Denver, Englewood

and Fort Collins) ............... $ 197,858 5.2

First Cotorapo BANKsHAREs (forma-

tion approved, 11/16/61) (operat-

ing four banks in Denver, Engle-

wood and Wheat Ridge) ......... 120,378 3.1

be:

In addition, Bancorporation has received Federal

Reserve Board approval for the acquisition of FNB

Greeley and the Security State Bank of Sterling (these

are in litigation), and it has an application pending for

approval of the acquisition of the National State Bank

of Boulder. Bancorporation’s applications to acquire

banks in Montbello and Pueblo have been denied, and

the agreement to acquire the Exchange National Bank

of Colorado Springs, for which approval had been

5 (continued ) % of

BANK GROUP Amount Colorado

Unitep Banks or Co.orapo, Inc.

(formation approved, 11/7/63)

(operating nine banks in Denver,

Aurora, Boulder, Greeley, Littleton,

Fort Collins, Lakewood, Pueblo and

Grand Junction) ............... 565,486 14.8

CoLorapo CNB BAaNKSHARES (Forma-

tion approved, 11/29/67) (operat-

ing five banks in Denver, Lakew- od

and Glenwood Springs) ... ..... 281,327 7.3

First NATIONAL BANCORPORATION,

Inc. (formation approved, 5/27/68)

(operating four banks in Denver,

Southglenn, Bear Valley and North-

ge Bet Pepa cee Sea A nae arene 495,675 12.9

AFFILIATED BANKSHARES, INc. (for-

mation approved, 12/31/69) (op-

erating 13 banks in Colorado

Springs, Fort Carson, Manitou

Springs, Loveland, Greeley, Ault,

Boulder, Lafayette and Louisville) 260,176 6.8

CENTRAL COLORADO BANCORPORATION

(formation approved, 3/31/70)

(operating three banks in Colorado

Springs and Rocky Ford) ...... 36,012 0.9

$1,956,912 51.1

Compiled from plaintiff’s Exhibits 113 and 115.

granted, has been mutually rescinded by the parties.

Also, United Banks of Colorado, Ine. has received ap-

proval to acquire the Colorado Springs National Bank

(this is also in litigation). Banecorporation’s attempt

to acquire FNB Greeley is its first attempt to acquire a

bank outside the Denver metropolitan area. Also, this

is the first effort on the part of the Government to halt

the trend of acquisitions. It did not choose to intervene

until after the United Banks of Cuiorado and Affiliated

Bankshares had both entered the Greeley Area. Affili-

ated Bankshares has acquired Greeley’s largest and

most vigorous bank, Greeley National Bank, plus two

additional smaller banks in the area.

II. Tur Issurs

It is not contended by the government that there

exists at the present time any substantial competition

between First of Denver and First of Greeley which

could be affected by the present acquisition. It is main-

tained, rather, that potential competition would be af-

fected. The government’s argument is that if the Ban-

corporation is to enter the Greeley or the Weld County

market, it should do so de novo or via the acquisition of

the Greeley State Bank, a very small institution,

whereby the assets and economic power of First could

be utilized in enhancing the competitive atmosphere

within the Greeley market. It is also maintained that

the presence of two other bank holding companies

within the City of Greeley results in the market being

presently a concentrated one which is likely to result

in further concentration with the present acquisition

and, finally, entrenchment is likely to result, whereby a

substantial threat to competition in the future exists.

38 )

A second line of attack which was devised by the gov-

ernment just prior to trial is to the effect that corre-

spondent banking is a distinct line of commerce apart

from commercial banking and that there are a limited

number of banking institutions in Denver with capac-

ity to offer a full range of correspondent banking serv-

ices, one of these being The First National Bank of

Denver. It is said that presently there is competition

among about six banks in Denver for the offering of

this character of service and that the present acquisi-

tion will remove a customer and, thus, to that degree

will tend substantially to lessen competition in the off-

ering of correspondent banking services to country

banks in Colorado.

III. PorentiaAL COMPETITION

In a case alleging violation of Section 7 of the Clay-

ton Act, the government has the burden of proving the

‘reasonable probability’’ of a substantial lessening of

competition. United States v. Philadelphia National

Bank, 374 U.S. 321 (1963). As the Supreme Court has

noted,

[d]Jetermination of the relevant market is a nec-

essary predicate to a finding of a violation of the

Clayton Act because the threatened monopoly must

be one which will substantially lessen competition

‘‘within the area of effective competition.’’ Sub-

stantiality can be determined only in terms of the

market affected.’

SL a eT Siw peer

* Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962),

quoting from United States v E. I. du pont de Nemours & Co., 353

U.S. 586, 593 (1957).

—_ “wo

The ‘‘area of effective competition’’ must be deter-

mined by reference to a product market (the ‘‘line

of commerce’’) and a geographic market (the

‘section of the country’’).’

The government charges that if consummated the

effect of the proposed merger may be to substantially

lessen competition, in violation of Section 7 of the

Clayton Act, through the elimination of potential com-

petition. When such a violation is found, the Bank

Merger Act of 1966 requires the District Court to de-

cide whether ‘‘the anticompetitive effects of the pro-

posed transaction are clearly outweighed in the public

interest hy the probable effect of the transaction in

meeting the convenience and needs of the community to

be served.’’ 12 U.S.C. § 1828(¢) (5) (B).

The government has the burden of proving the ‘‘rea-

sonable probability’’ of a substantial lessening of com-

petition. United States v. Philadelphia National Bank,

374 U.S. 321 (1963). The burden of proving that the

exception set forth in 12 U.S.C. § 1828(¢)(5)(B) is

satisfied rests with the defendant banks. United States

v. First City National Bawk of Houston, 386 U.S. 361,

366 (1967). This Court is required to review de novo

the issues presented, using the identical standards ap-

plied by the regulatory agencies. 12 U.S.C. § 1828.

A. Economie Effects

There being no direct competition here, the proposed

merger between the banks at bar is what is described as

a ‘‘peographic market extension’’ merger. As such, the

* Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962).

ee...

40 —

concentration in the relevant market remains the same

after the merger. It limits us to an ‘evaluation of

whether it has the effect of removing a potential market

entrant and to a consideration whether Bancorpora-

tion, which is not yet in the market, may still be a pres-

ent competitive force, the presence of which deters

oligopolistie practices, whereby its merger with a mem-

ber of that market may eliminate competition in much

the same way that a simple horizontal merger can.

However:

The sight of a particular firm ‘waiting at the mar-

ket’s edge’’ may emphasize the entry threat, but

it is ease of entry, not necessarily an identifiable

potential entrant, that limits present market power

by reminding existing firms that high profits will

attract outsiders. The competitive situation will

not be affected by a merger with a particular po-

tential competitor unless the merger alters entry

conditions or is thought to alter them. Existing

firms would have no reason to change their be-

havior unless they supposed that the merger elim-

inated the one firm uniquely capable of entering

or substantially reduced the probability of new

competition by eliminating one from a small uni-

verse of potential entrants. Areeda, Antitrust

Anal ysis at 517 (1967) (emphasis added).

Thus, the issue is a narrow one requiring the weighing

and evaluation of future projections—a most difficult

process having few tangible standards.

A “geographic market extension’’ merger can, of

course, have the future effect of eliminating one who

an. oneal OLIN OGIO YO a” & EE” eo « /Z

would have entered the market independently but for

the merger, thereby adding to the number of competi-

tors in the future, but there must be at least some evi-

dence to support a prophecy that such an entrance will

occur.

How important the elimination of a potential entrant

is will depend in part on how concentrated the market

is, concentration being one indication of a firm's mar-

ket power. Where concentration is quite low, the mer-

ger will have few adverse effects because the market

will remain unconcentrated after the merger. Where

the concentration is high, the merger removes the po-

tential competitor as a restraining influence and the

anticompetitive effects can be significant.

B. The Product Market

In United States y. Philadelphia National Bank, 374

U.S. 321, 356 (1963), the Supreme Court held that com-

mercial banking was the relevant product market

within which to measure the effects of the proposed

horizontal bank merger:

(T Jhe cluster of products (various kinds of credit)

and services (such as checking accounts and trust

administration) denoted by the term ‘commercial

banking’ * * * composes a distinct line of com-

merce, Id,

Several district court cases involving bank mergers

have criticized this definition of a “line of commerce”

on the basis that it does not take into account the croas-

elasticity resulting from competition between banks

and other institutions providing many of the same

—

products and services included within the definition of

“‘ecommercial banking.’’* We fail, however, to see any

room for such criticism either on the merits of the

question or on the basis of positive law. Since Philadel-

phia National Bank the Supreme Court has again

stated in no uncertain terms that commercial banking

is the relevant line of commerce. In United States v.

Phillipsburg National Bank and Trust Company, 399

U.S. 350, 360-61 (1970), the Supreme Court said:

Commercial banks are the only financial institu-

tions in which a wide variety of financial products

and services—some unique to commercial banking

and others not—are gathered together in one place.

The clustering of financial products and services in

banks facilitates convenient access to them for all

banking customers. For some customers, full-serv-

ice banking makes possible access to certain prod-

ucts or services that would otherwise be unavail-

able to them; the customer without significant

collateral, for example, who has patronized a par-

ticular bank for a variety of financial products and

services is more likely to be able to obtain a loan

from that bank than from a specialty financial in-

stitution towhich he turns simply to borrow

money. In short, the cluster of products and serv-

ices termed commercial banking has economic sig-

* United States v. Idaho First National Bank, 315 F. Supp. 261,

267-68 (D. Idaho 1970) ; United States v. First National Bank of

Maryland, 310 F. Supp. 157, 168 (D. Md. 1970) ; United States v.

First National Bank of Jackson, 301 F. Supp. 1161, 1181 (8.D.

Miss. 1969) ; United States v. Crocker-Anglo National Bank, 277

FP. Supp. 133, 151-53 (N.D. Calif. 1967).

nificance well beyond the various products and

services involved.

In addition, *‘commercial banking” is even more rele-

vant as a line of commerce where, as here, a small coun-

try bank is being acquired. Jd. at 361-62. Moreover,

the record here does not disclose what other institu-

tions, if any, compete with Greeley banks for the prod-

ucts and services which they offer. Hence, there could

be no justification for a contrary holding. Therefore,

we conclude that the relevant line of commerce is com-

mercial banking.

©. Relevant Geographic Market for Measuring the

Effects of an Alleged Elimination of Potential

Com petition

The test for determining the relevant geographic

market is set forth in United States v. Philadelphia

National Bank, supra, wherein the Supreme Court

said:

The proper question to be asked in this case is not

where the parties to the merger do business or even

where they compete, but where, within the area of

competitive overlap, the effect of the merger on

competition will be direct and immediate. * * *

[A]s we recently said in a related context, the

‘area of effective competition in the known line of

commerce must be charted by careful selection of

the market area in which the seller operates, and to

which the purchaser can practicably turn for sup-

plies.”’ Id. at 357-59 (emphasis original).

In the case at bar we determine that the ‘Greeley

Area”’ rather than Weld County (as argued by Ban-

corporation) is the relevant geographic market within

which to measure the effects of the proposed merger

upon potential competition. This area provides FNB

Greeley with a substantial amount of its loans and de-

posits: 81.9% of its demand deposits, 77.7% of its sav-

ings deposits, 76% of its time deposits, 80.6% of its

commercial and industrial loans, 71.9% of its personal

installment loans, 74.3% of its single payment loans,

75.6% of its real estate loans and 64.5% of its loans to

farmers. Although comparisons in the present context

are not too persuasive, we note that compared to the

four-county area determined to be the relevant geo-

graphic market in the Philadelphia National Bank

case, 81.9% of FNB Greeley’s demand deposits came

from the Greeley area (versus figures of 56% and 77%

in Philadelphia National Bank), 80.6% of its commer-

cial and industrial loans (versus 54% and 63%), and

75.6% of its real estate loans (versus 74% and 84%).

The rest of Weld County supplied respective amounts

of 6.6%, 1.8% and 9.9%.

Because individuals and corporations generally pre-

fer to do their banking in their local communities,

banks normally have a very localized business:

[C]onvenience of location is essential to effective

competition. Individuals and corporations typi-

cally confer the bulk of their patronage on banks

in their local community; they find it impractical

to conduct their banking business at a distance.

* * * The factor of inconvenience localizes bank-

ing competition as effectively as high transporta-

tion costs in other industries. Id. at 358.

The localization of business typical of the banking in-

dustry is especially pronounced where, as here, a coun-

try bank is involved:

We stated in Philadelphia Bank * * * that ‘in

banking the relevant geographical market is a

function of each separate customer’s economic

scale’’—that ‘‘the smaller the customer, the smaller

is his banking market geographically” * * *.

Small depositors have little reason to deal with a

bank other than the one most geographically con-

venient to them. For such persons, geographic con-

venience can be a more powerful influence than the

availability of a higher rate of interest at a more

distant, though still nearby, bank. The small bor-

rower, if he is to have his needs met, must often

depend upon his community reputation and upon

his relationship with the local banker. * * * Thus,

the small borrower frequently cannot “‘ practicably

turn for supplies’’ outside his immediate com-

munity ; and the small depositor—because of habit,

custom, personal relationships, and, above all, con-

venience—is usually unwilling to do so. United

States v. Phillipsburg National Bank and Trust

Company, 399 U.S. 350, 363-64 (1970).

Individuals and corporations in Greeley, for instance,

do not normally deposit their funds in Denver banks,

and their counterparts in Denver seldom keep their

deposits in Greeley banks. Convenience becomes less

important only when banking transactions assume

large proportions. Since Colorado prohibits branch

banking, FNB Greeley has no other offices in Weld

County or in any other location.

pers:

The defendants contend that Weld County is the

relevant area for measuring the effects of the merger.

Approximately 10.7% of FNB Greeley’s business

comes from the rest of Weld County. Since there are

seven other banks serving this expansive area, it is not

surprising that this figure is not larger given the in-

cidence of convenience which attends banking. 10.7%

would not appear quite so insignificant if it repre-

sented, for instance, 809% of the business available in

the rest of Weld County. Whatever foreclosures or

other anticompetitive effects might result from this

merger must be measured, of course, in terms of those

being affected. The defendants, however, have failed

to introduce sufficient evidence suggesting that the

business solicited by FNB Greeley and the other

Greeley banks from the rest of Weld County represents

a significant share of what is available.

Moreover, the defendants have also stated that the

Greeley area is their ‘‘primary service area’’ or the

area of effective competition. In their application to

the Board of Governors of the Federal Reserve System

for approval, they noted:

Judgment of Bank’s officers as to Bank’s ap-

proximate service area, the actual or estimated

population of such area, and an explanation of the

basis for such a service area delineation.

Greeley’s Primary Service Area, that area

within which approximately 80% of Greeley’s

L.P.C. Demand, Savings and Time deposits origi-

nate, and within which an excess of 75% of

Greeley’s loans originate, is more particularly de-

scribed as follows: Commencing at Eaton, Colo-

ts a

rado, located 7 miles north of the city of Greeley,

extending in a southeasterly direction approxi-

mately 15 miles to the community of Gill, Colorado,

thence in a southwesterly direction approximately

23 miles to the community of Platteville, Colorado,

thence in a north-northeasterly direction returning

to the original point.* * *

In addition to Greeley’s Primary Service Area,

described above, there exists a ‘‘sphere of influence

which extends in an easterly and northeasterly

direction from the city of Greeley proper, and

covers an area of Weld County large in size but

sparsely populated.* * *

In view of the foregoing, it is our conclusion that the

proper geographic area is that urged by the govern-

ment, that is, the City of Greeley and its environs and

satellite communities, including the towns of Evans,

LaSalle, Peckham, Kersey, Gill, Eaton, Lucerne,

Farmers and Bracewell.

D. Effect on Competition in Commercial Banking

in the Greeley Area

We turn now to the question whether the proposed

acquisition has been shown to be in violation of Sec-

tion 7 of the Clayton Act in that its effect would be

substantially to lessen competition in any line of com-

merce in any section of the country. The government

emphasizes the fact that the Bancorporation is the

second largest banking institution in the state, and

from this fact alone would have us hold that its entry

into the Greeley market by way of this acquisition

would in and of itself substantially lessen competition.

Bie.

The government argues that if relief is granted against

this present acquisition, Bancorporation will enter the

market de novo or through some other acquisition, the

effect of which would be to promote rather than to

lessen competition.

As previously noted, the principal subsidiary of Ban-

corporation is First National Bank of Denver.

Bancorporation’s other three subsidiaries are small

institutions located on the outskirts of the Denver

metropolitan area. They do not add measurably to the

economic power of Bancorporation. Nor can it be said

that the acquisition of FN B Greeley would significantly

increase Bancorporation’s economic power since FNB

Greeley is not a large bank, although it is the second

largest institution in Greeley. It is second to Affiliated

Bankshares of Colorado which has three subsidiary

banks in the Greeley area and which has 40.2% of the

total deposits as against the 31.8% held by FNB

Greeley.

We consider it significant that the market share of

the FNB Greeley has been on the decrease during the

past 20 years. The Greeley National Bank, on the other

hand, its principal competitor, has been steadily gain-

ing ground. FNB Greeley is shown by the evidence

to lack management depth and to have not been pur-

suing aggressive competitive policies. Bancorporation

promises to remedy all this, whereby the acquired insti-

tution will become a vigorous competitive influence.

These, of course, are mere promises which are not en-

titled to weight in the present evaluation except that

it can be said with some assurance that the competitive

influence of FNB Greeley is unlikely to decrease as a

result of the acquisition.

We also consider significant the fact that the popu-

lation per banking office in the City of Greeley is con-

siderably higher than average. The average population

per banking office in Weld County is 5,953 people,

whereas in the City of Greeley there is an average

of 6,484 persons per banking office as compared with

a national figure of 5,751 persons per banking office and

a state figure of 9,854. It cannot be said then that

either Greeley or Weld County is underbanked.

On the question whether the merger eliminates a

potential entrant, we must conclude that it does not.

The evidence is uncontradicted that Bancorporation

has no intention of entering the Greeley market if this

acquisition is disapproved. Greeley is shown by the

evidence to be experiencing moderate growth, but not

boom growth. This and other objective evidence corro-

borates the testimony from Bancorporation that it does —

not intend to enter the market apart from the present

acquisition. Furthermore, there is no persuasive evi-

dence in support of the conclusion that Bancorporation

is now present on the threshold of the Greeley market

and thereby exercises an influence on competition. As

pointed out above, Bancorporation has not actively

competed in the market and its presence in the wings,

so to speak, is not apparent.

There is further objective evidence which supports

the finding that there will be no de novo or other entry

by Bancorporation. Testimony from the State Bank

Commissioner indicates that a new state charter would

not be granted because the growth of the area would

not justify it. Approval of a national charter by the

Comptroller of the Currency is equally unlikely. The

Regional Administrator of National Banks testified

that he would not recommend any de novo entry during

the foreseeable future. It further appears that char-

ters have been denied in other areas which are faster

growing and where the need would seem to be more

apparent. Indeed, Bancorporation’s application for a

new charter in Montbello, which is on the edge of

Denver, was denied, and this fact evidences the diffi-

culty of obtaining approval of a new charter in the

Greeley area.

Unquestionably, Bancorporation has the financial

capability to enter the Greeley market de novo, but

the practical difficulties, together with the expense,

argue against Bancorporation’s following this route.

One other possibility has been posed by the government

and that is the acquisition of the State Bank of Greeley.

However, the objective evidence presented here does

not suggest that this is or would be a likely possibility.

We are constrained to conclude then that there is

no possibility, at least from the evidence produced

at this trial, that Bancorporation will enter the market

in the manner recommended by the government and,

further, that there is a dearth of evidence to show

that Bancorporation has any threshold influence on

competition at the present time. It does not appear

that it is standing in the wings, so to speak, ready to

enter the market and thus serves as a restraining in-

fluence on the other institutions in the community, and

it cannot be said that its entrance will significantly or

substantially lessen either present or potential com-

petition.

It is finally argued that parallelism and other mono-

polistie practices are very likely once Bancorporation

becomes established. We are mindful, of course, that

there are two other holding companies presently in

the Greeley market. No evidence whatsoever was pre-

sented at the trial which suggests that such practices

are being carried on presently, and while we are not

prepared to say that FNB Greeley will become an

aggressive and vigorous participant in the battle for

market shares, we cannot say in all fairness that it will

become less competitive than at present.

We have examined the recent decisions of district

courts in which the government has sought to obtain

injunctions pursuant to Section 7 of the Clayton Act.’

We have compared the various aspects of these deci-

sions, and we note that notwithstanding that the facts

presented by the government were much stronger and

more formidable than are the facts in the present case,

the government failed to obtain relief in each and every

instance. Also, we have carefully considered the deci-

sion of the Supreme Court in United States v. Phila-

delphia National Bank, 374 U.S. 321 (1963), and the

Court’s more recent decision in United States v. Phil-

lipsburg National Bank and Trust Company, 399 U.S.

350, 359-62 (1970). We have sought to apply the stan-

® United States v. First National Bank of Jackson, 301 F. Supp.

1161 (S.D. Miss. 1969) ; United States v. Idaho First National Bank,

315 F. Supp. 261 (D. Idaho 1970) ; United States v. First National

Bank of Maryland, 310 F. Supp. 157 (D. Md. 1970) ; United States

v. Crocker-Anglo National Bank, 277 F. Supp. 133 (N.D. Calif.

1967).

ce CER

OEE BOE AMSA ME AL IS Beige

mee

dards laid down by the Supreme Court in those cases

to our facts in an effort to arrive at an accurate and

fair decision herein. The main difficulty here is the

lack of cogent evidence which even suggests that there

is likely to be a lessening of competition as a result of

this present acquisition. Nothing has been presented

which of itself or considered with the total cireum-

stances serves to make any impact. Nor can we see any

so-called triggering effect from the acquisition in ques-

tion. As heretofore noted, there are several bank hold-

ing companies in Colorado, and undoubtedly they will

continue to seek acquisitions regardless of the outcome

of this case. The case at bar, in any event, must be

determined on its individual merits and not in relation-

ship to any future horribles.

IV. VertTICAL FORECLOSURE—LESSENING OF COMPETI-

TION IN THE SALE OF CORRESPONDENT SERVICES

The government’s secondary line of attack is that the

proposed acquisition will substantially lessen competi-

tion in correspondent banking in Colorado. The argu-

ment is that (1) the lead bank of Bancorporation—

FNB Denver—is one of six suppliers of correspondent

banking services for Colorado; (2) FEF NB Greeley is a

substantial customer or purchaser of these services in

the Colorado correspondent banking market; (3) by

acquiring FNB Greeley, FNB Greeley will become a

captive customer for FNB Denver’s correspondent

banking services, Bancorporation will effectively fore-

close FNB Greeley and hence this will preclude FNB

Greeley from becoming a correspondent banking cus-

er of the five remaining suppliers of correspondent

<ing services in Denver.

here is no judicial recognition of this concept, hence

nust consider several questions. First, does corre-

ident banking (or what plaintiff refers to as a ‘‘full

cage of correspondent banking services’’) consti-

an appropriate ‘‘line of commerce’’ or product

ket within which to measure the substantiality of

alleged foreclosure? Second, whether the State

Olorado is an appropriate section of the country or

evant geographic market”’ within which to measure

substantiality of any alleged market foreclosure?

rd, taking into account the appropriately defined

ket, will the acquisition and resulting foreclosure

tantially lessen competition in the geographically

1ed product market within the meaning of Sec-

7 of the Clayton Act?

Jorrespondent Banking as a ‘‘Line of Commerce”’

ince the competitive aspect is the main concern

er the antitrust laws, the market must be defined

rms of the product or line of products with respect

vhich there is competition. As stated in Brown

e Co. Vv. United States, 370 U.S. 294, 325 (1962):

The outer boundaries of a product market are

determined by the reasonable interchangeability of

use or the cross-elasticity of demand between the

product itself and substitutes for it.’

Even if it can be said that when the price of coal (for example)

high enough, coal users will switch to oil (cross-elasticity), the

and inconvenience of doing so would normally place enough of

ternal (nonprice) limitation on the demand behavior of coal

Thus, the issue is whether, in the banking industry

in Colorado (or the otherwise relevant geographic

market), the various correspondent banking services

compete with each other within one product market,

or whether they form various more or less distinct,

product markets? In order to answer this question,

an examination of the economic nature of correspond-

en* banking generally and as specifically set forth in

the evidence in this case is necessary.

The legal standard for determining the existence,

for antitrust purposes, of a line of commerce appears

to be that set forth in Brown Shoe Co. v. United States,

370 U.S. 294, 325 (1962). If commercial banking gen-

erally is to be considered a broad line of commerce

which ineludes correspondent banking,

* * * within this broad market, well-defined sub-

markets may exist which, in themselves, constitute

product markets for antitrust purposes. United

States v. E.I. du pont de Nemours & Co., 353

U.S. 586, 593-595, 77 S.Ct. 872, 877, 1 L.Ed.2d

1057. The boundaries of such a submarket may be

determined by examining such practical indicia

as industry or public recognition of the submarket

as a separate economic entity, the p oduct’s pe-

culiar characteristics and uses, unique production

facilities, distinct customers, distinct prices, sensi-

tivity to price changes, and specialized vendors.

users that coal and oil will nevertheless continue to exist in separate

product markets. On the other hand, if the cost and inconvenience

of switching from one type of coal to another type of coal has a

relatively insignificant effect on the demand behavior of coal users,

the two different types of coal will, in all likelihood, continue to

exist in the same product market.

DOMED CARLO QOL LP

Because §7 of the Clayton Act prohibits any

merger which may substantially lessen competition

‘*in any line of commerce’’ (emphasis supplied),

it is necessary to examine the effects of a merger in

each such economically significant submarket to

determine if there is a reasonable probability that

the merger will substantially lessen competition.

In terms of the criteria in Brown Shoe, supra, the

evidence presented in this case is somewhat inconclu-

sive as to whether correspondent banking constitutes a

separate and distinct product market (or product sub-

market of commercial banking generally). The testi-

mony did show that there is, within the banking com-

munity at least, some recognition of the submarket as a

separate economic activity and the alleged ‘“‘line of

products’’ can be said to have unique production facili-

ties, distinct customers, and specialized vendors. On

the other hand, there is no evidence in this case that

the ‘‘product’’ has distinct prices or sensitivity to price

changes. As to the product’s peculiar characteristics

and uses, it can be said that the range and diversity

of services involved makes it somewhat difficult to

classify correspondent banking services as competitive

within the same market. At best, the group of services

offered varies from bank to bank and tlie common

elements are the demand deposit and the overline loan.

From the fact, however, that the alleged line of com-

merce (apart from the mentioned elements) is diverse

and varies from bank to bank, it does not follow that

they cannot be legitimately viewed, in a proper case,

as a “‘line of commerce.’’ The United States Supreme

Court has held an equally diverse cluster of banking

ie: -

products and services—commercial banking generally

—to be a line of commerce.”

It is noted that the central feature of this alleged line

of commerce is the interbank demand deposit, and

arguably the larger banks compete for this by offering

various services for which little or no charge is made.

To this extent only it has the appearance of a line of

commerce as the same is defined in Philadelphia Bank,

supra. But in view of our conclusion that there is not

a substantial lessening of competition, we need not

decide or comment further.

B. The Geographic Market

Plaintiff contends that the relevant geographic mar-

ket for correspondent banking in Colorado is limited

to the State of Colorado. Yet, there is some evidence

11 We refer to the statement in United States v. Philadelphia

National Bank, 374 U.S. 321, 356 (1963), wherein the Court said:

We agree with the District Court that the cluster of products

(various kinds of credit) and services (such as checking ac-

counts and trust administration) denoted by the term ‘‘com-

mercial banking,’’ . . . composes a distinct line of commerce.

Some commercial banking products or services are so distinctive

that they are entirely free of effective competition from prod-

ucts or services of other financial institutions; the checking

account is in this category. Others enjoy such cost advantages

as to be insulated within a broad range from substitutes

furnished by other institutions. . . . Finally, there are bank-

ing facilities which, although in terms of cost and price they

are freely competitive with the facilities provided by other

financial institutions, nevertheless enjoy a settled consumer

preference, insulating them, to a marked degree, from com-

petition ; this seems to be the case with savings deposits. In

sum, it is clear that commercial banking is a market ‘‘suffi-

ciently inclusive to be meaningful in terms of trade

realities.”’...

th:

OD ee ee ed

t the Colorado banks which solicit interbank de-

sits and offer correspondent banking services ‘‘effec-

ely compete’’ in a wider area. For instance, The

‘st National Bank of Denver regularly travels and

icits interbank demand deposits in areas outside of

lorado including Montana, Wyoming, Nebraska,

nsas, parts of Utah, Idaho, New Mexico, Arizona

1 Texas. As a result, FNB Denver generates ap-

<imately 30-40% of its interbank deposits outside of

lorado. For example, as of December 31, 1969, the

> Colorado bank customers of FNB Denver com-

sed 48.8% of its total of 250 correspondent cus-

ners on that date, and they supplied 69% of the total

$67.6 million in interbank deposits held by FNB

nver as of that date. At the same time, FNB Denver

‘ried 26 accounts with Wyoming banks, 21 accounts

th Nebraska banks, 14 accounts with Montana banks,

accounts with North Dakota banks, 11 accounts with

msas banks, nine accounts with New Mexico banks

1 nine accounts with banks in Texas.

Plaintiff’s argument that areas outside of Colorado

yuld be excluded beeause non-Colorado banks obtain

ver correspondent services from Denver banks is

thout merit. It is conceded that even Colorado banks

not normally obtain a ‘‘full package”’ of corres-

ndent services from any one Denver bank, and, in

y event, we fail to see a relevant distinction between

nks which obtain all of the available correspondent

‘vices and those which obtain only some of them.

Plaintiff roy have a valid argument in asserting

it only Colorado banks can utilize their Denver cor-

spondent as a depository for bonds or other collateral

ich are required by Colorado law to be posted as

58 |

security for deposits of the State Treasurer in Colorado

banks. Plaintiff also asserts that only Colorado banks

would have a demand for utilizing the expertise of their

Denver correspondent for advice on matters peculiar

to Colorado law, and that Colorado thus constitutes a

substantial geographic submarket.

In view of the fact that the effect of this acquisition

on competition is insubstantial under either definition

of the geographic market, it is unnecessary to make

the precise distinction here asserted by the parties.

C. Substantiality of the Alleged Foreclosure Effect

The parties have not presented evidence from which

the substantiality of the alleged foreclosure effect can

be precisely determined. Plaintiff contends that the

amount of correspondent bank balances are the best

measure of the amount of correspondent banking busi-

ness done by banks offering such services. However,

the evidence is to the effect that the banks themselves

use a much more sophisticated and accurate method of

aecounting for the correspondent banking transactions

in which they engage. FNB Denver, for example, ana-

lyzes its larger demand deposit accounts in terms of (1)

the income generated by the ‘‘average balance’’ after

deducting therefrom the 174% reserve requirement

and the ‘‘uncollected funds’’—1.e., funds which have

been deposited with FNB Denver, but have not yet

been collected and are thus unavailable for investment;

and (2) the expenses to be charged against the account

for services rendered. If at the end of a quarterly

accounting period the analysis reveals a loss, FNB

Denver generally bills the customer for the excess

charges. If the amount of ‘‘uncollected funds’’ was

; &

aa, PRD SA teat ale BMMEL POE Fn

a constant percentage of the average balance like the

174% reserve requirement, then the average interbank

demand deposit would be an accurate relative measure

of the degree of foreclosure. However, the evidence

indicates that the proportion of ‘‘uncollected funds’’

allocable to various accounts varies from customer to

customer. Thus, the gross average interbank balance

is at best a very rough, inaccurate approximation of

the amount of correspondent banking business done by

banks orfering such services.

Based on a comparison of interbank demand balances

as an acceptable measure of the degree of foreclosure

likely to be effected by the proposed acquisition, the

foreclosure effect does not appear to be substantial in

the context of the banking industry and the particular

submarket here involved, however defined. If FNB

Denver were to succeed to all of FNB Greeley’s corre-

spondent business in FNB Denver’s ‘‘service area,’’ ”

(and it is not certain that it will succeed to all of it),

FNB Denver would gain %oths of one percent of serv-

ice area correspondent balances. Assuming that Colo-

rado is the relevant geographic market, FNB Greeley’s

correspondent balances represent only somewhat less

than ‘“Acths of one percent of the correspondent bal-

ances held by Colorado banks (in all banks).”

12 Major Denver banks have nearly 90% of their sales of bank

services to other banks in a service area which includes Colorado,

Kansas, Nebraska, New Mexico and Wyoming.

18 According to plaintiff’s statistic, FNB Greeley’s correspondent

balances represent 1.2% of all such deposits in the six Denver

correspondents from Colorado bauks. This statistic assumes that the

market is limited not only to Colorado customers, but to that por-

tion of the Colorado customers’ business which remains in Colorado.

This percentage, as well, appears to be insubstantial under the cir-

cumstances presented by this case.

We have considered cases cited by plaintiff to the

effect that foreclosure of a relatively small percentage

of a national retail sales or supply market constitutes

substantial lessening of competition. None of the per-

centages are as minimal as those involved here.” In

any event, a local or regional banking market presents

a wholly different competitive situation from a national

retail sales or supply market in shoes, chemicals, paper

or steel. We are not here dealing with nation-wide

giant corporations threatening to take over an entire

line of commerce and divide it up between them, and

the measure of substantiality must be gauged in the

context of the particular industry and market involved.

Plaintiff relies on the fact that there is a statewide

trend toward bank acquisition which is bound to pro-

duce vertical foreclosure in the correspondent banking

market relevant here. But most of the evidence of

future acquisitions—particularly as concerns Bancor-

poration’s participation—is based on proposed acquisi-

tions which have either not been approved by the

Federal Reserve Board or are presently pending litiga-

tion. While we must consider the probable future ef-

fects of this particular acquisition, we must not eval-

uate the effects of this acquisition by prejudging the

merits of pending acquisitions which are not presently

before the Court.

In sum, we are unable to conclude, in light of the

past trend of bank acquisitions up to this point in

™ Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ; United

States v. Kimberly-Clark Corp., 264 F. Supp. 439 (N.D. Cal. 1967) ;

United States v. Kennecott Copper Corp., 231 F. Supp. 95

(S.D.N.Y. 1964) ; United States v. Bethlehem Steel, 168 F. Supp.

576 (S.D.N.Y. 1958).

time, or considering the possible future acquisitions,

that the minimal amount of foreclosure which would

result from this acquisition constitutes a substantial

lessening of competition within the meaning of Section

7 of the Clayton Act. To hold otherwise would serve to

automatically preclude an acquisition in any instance

in which a correspondent relationship had existed or

was even potential.

CONCLUSION

Having concluded that the government has failed

to sustain its several allegations that the acquisition

in question has the effect substantially to lessen com-

petition, or to tend to create a monopoly in a line of

commerce in a section of the country as required by

Section 7 of the Clayton Act, it follows that the re-

quested relief must be denied and that the complaint

and cause of action must be dismissed. It is so ordered.

The Court’s findings and conclusions are contained

in this opinion, and hence formal findings and conelu-

sions are dispensed with.

The government is granted a stay of proceedings for

30 days. During this period the statutory injunction

will remain in force.

DATED at Denver, Colorado, this 12th day of July,

A.D. 1971.

By THE Court:

/s/ William E. Doyle

WiuiM E. Doy eg, Judge

APPENDIX B

In THE Unttep States District Court

FOR THE District oF CoLORADO

UNITED StTaTes OF AMERICA,

PLAINTIFF,

THE First NationaL Bancorpo-}

RATION, INc. AND THE First Na-

TIONAL BANK OF GREELEY,

DEFENDANTS.

Filed, Aug. 27, 1971, G. WaLtER Bowman, Clerk.

ORDER

In accordance with the oral opinion rendered by this

Court on August 9, 1971, after hearing, regarding the

disposition of Plaintiff’s Motion to Re-Open the Rec-

ord, to Make Additional Findings of Fact and to

Amend the Judgment, dated July 22, 1971, and Plain-

tiff’s Motion to Extend the Statutory Stay, dated

August 3, 1971;

Ir Is Heresy OrpERED that the aforesaid Motion to

Re-Open the Record, etc. is denied.

/s/ William EK. Doyle

United States District Judge

Civil Action

No. C-2413 |

Dated:

Approved as to form:

/s/ Herbert G. Schoepke

Attorney, Department of Justice

Attorney for Plaintiff

Metzcer, Scowarz, McKenna & KEMPLER

By: Carl W. Schwarz

A Member of the Firm

Attorneys for Defendants

(62)

—

APPENDIX C

In THE Untrep States Districr Court

FOR THE DIstTRICT OF COLORADO

Unrrep States oF AMERICA,

PLAINTIFF,

se Civil Action

First NATIONAL BANCORPORATION, ? No. C-2413

Inc. AND THE First NATIONAL

BANK OF GREELEY,

DEFENDANTS.

NOTICE OF APPEAL TO THE SUPREME COURT OF THE

UNITED STATES BY THE UNITED STATES OF AMERICA

Notice is hereby given that the United States of

America, plaintiff herein, appeals to the Supreme

Court of the United States, under the Expediting Act,

15 U.S.C. Section 29, from the judgment entered July

12, 1971, dismissing the complaint in this action, which

became final upon entry of the order of August 27,

1971, denying the timely motion of the plaintiff, United

States, to re-open the record, make additional findings

of fact and conelusions of law, and grant the relief re-

quest in the complaint as amended.

James L. TREECE

United States Attorney

/s/ Carolyn J. MeNeill

By Caro.yn J. MCNEILL

Assistant U. S. Attorney

323 U.S. Courthouse

Denver, Colorado 80202

Howarp E. SHaprro

HERBERT G, SCHOEPKE

Attorneys

Department of Justice

Anti-Trust Division

Washington, D.C. 20530

ve U.S. Government Printing Office: 1971—449-504/290

(63)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.