Reply Brief — United States v. First National Bancorporation, Inc.

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INDEX

Page

I lnc cnttieclp anit cciheinnitaacnceninaciaiiesnicnoninn 11

CITATIONS

Cases:

Allied Bankshares Corporation, 53 Fed.

IL UNIT cintoccaniiihptnaaanoxavccaanccrtmaniescresanine 9

Federal Trade Commission vy. Procter &

Gamble Co., 386 U.S. 568 5

First Empire State Corp., 58 Fed. Res

LISSA ero Oe 9

First National seuaieibiibbitie 58 Fed.

Res. Bul. 493 - se 6, 9, 10

Kennecott Copper Corp. v. Federal Trade

Commission, C.A. 10, No. 71-1371, de-

cided September 15, 1972 - bas 1

Morgan New York State Corporation, 48

ee 8 8 eee 9

United Banks of Colorado, 58 Fed. Res.

kes SI ee ee 9,10

United States v. Philadelphia National

oes, 204 US. LL 3, 4

United States v. Phillipsburg National

Bank, 399 U.S. 350 WW . 3, 4

Virginia National Bankshares, 58 Fed.

Ra rete eee ae 7

Statute:

Section 7 of the Clayton Act, 15 U.S.C.

ESSER: SEs AE te cer ee ee 2,8

Miscellaneous:

SR |” 8

Scherer, Industrial Market Structure and

Economic Performance, 50 (1970) ___ 4

Moody’s, Bank and Finance, Vol. 44, p.

1464, September 19, 1972 9

a

In the Supreme Court of the United States

OcTOBER TERM, 1972

No. 71-703

UNITED STATES OF AMERICA, APPELLANT

v.

First NATIONAL BANCORPORATION, INC. AND

THe First NATIONAL BANK OF GREELEY

ON APPEAL TO THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

REPLY BRIEF FOR THE UNITED STATES

Appellees’ lengthy briefs do not dispute the fact that

bank mergers and acquisitions,’ like mergers and ac-

quisitions in other industries (compare Kennecott

Copper Corp. v. Federal Trade Commission, C.A. 10,

No. 71-1371, decided September 15, 1972), which elim-

inate from a designated geographic market significant

*For purposes of antitrust analysis, there is no material

economic distinction between bank holding companies which

own multiple banks and banking corporations which operate

multiple branch offices. State law requirements, as much as

anything else, determine what method of organization is used.

(1)

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potential competition, violate Section 7 of the Clayton

Act. Where the parties differ is with regard to the

showing that the government must make in order to

establish such a violation.

It is our submission, as explained in considerable

detail in our main brief, that judicial appraisal under

Section 7 of the competitive impact on the Greeley

Area banking market of Bancorporation’s entry by

acquisition of the second largest banking corporation

there (FNB Greeley) should be based upon objective

factors: “whether, considering the structure of the

market, the putative entrant’s financial capability to

enter independently, its economic incentive to do so,

and the reasonable prospects for making such an entry

successful, there exists a basis for entry which would

be reasonably acceptable to prudent management, if

entry by acquisition of a large market share was not

available” (Gov’t Br., pp. 29-30). We have already

demonstrated in our main brief that the objective evi-

dence in this record requires an affirmative answer

to that question.

Appellees’ response consists essentially of a frontal

attack on the conclusion that the banking market in

the Greeley Area is concentrated (see Gov’t. Br., pp.

20-28, 47-49), and a collateral attack—based on testi-

mony of the acquiring firm’s officers denying any in-

tent to enter de novo and on testimony of a federal

banking official that he would not recommend the

chartering of a new bank in the area—on the objec-

tive evidence showing that Bancorporation is a signi-

ficant potential entrant into the market (see Gov't.

a |

F

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Br., pp. 36-44). Our main brief answers most of

these arguments.* We add only the following ob-

servations:

* Appellees also argue (Br. 68-78) that even if the merger

has the proscribed anticompetitive effects, they are outweighed

by its alleged pro-competitive aspects. As explained in our

principal brief (pp. 46-47), however, these contentions are

to be considered under the “ ‘convenience and needs of the

community to be served’” defense, but not in determining

whether the government has shown anticompetitive effect.

Since the district court dismissed the complaint because of its

holding that the government had not proven anticompetitive

effect and did not consider the “convenience and needs” de-

fense, that issue is not properly before this Court.

* Appellees have challenged the district court’s finding (J.S.

App. A, pp. 41-43) that the relevant line of commerce for pur-

poses of resolving the potential competition question is “com-

mercial banking” (Br. 82-83). Their argument was fully

considered by the court below and rejected “on the merits of

the question [and] on the basis of positive law” (J.A. App. A,

p. 42). This ruling is in line with the decisions of this Court.

See United States v. Philadelphia National Bank, 374 USS.

321, 356; United States vy. Phillipsburg National Bank, 399

US. 350, 360-361.

With reference to the relevant geographic market, appellees

now contend (Br. 78-82) that the district court erred in

choosing the so-called “Greeley Area” (J.S. App. A, pp. 43-

47), rather than the City of Greeley. In the district court,

however, they argued that all of “Weld County is the rele-

vant area for measuring the effects of the merger” (J.S.

App. A, p. 46). The government's position in the district court

was that either the City of Greeley or the larger Greeley Area

were appropriate geographic markets. After reviewing the

evidence, the court found that the most relevant market of

those proposed for testing the effect of the acquisition was

the Greeley Area, “that is, the City of Greeley and its environs

and satellite communities * * *” (J.S. App. A, p. 47). Ap-

pellees state no persuasive reason for disturbing this finding.

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1. Market concentration. Appellees attempt to ,

show that the Greeley Area market is not highly con-

centrated by a comparative reference to the number

of banks in communities of similar size elsewhere in

the country (Br. 32-37). They argue that “concentra- j

tion” exists only when “the market in question has

been preempted by fewer competitive entrants than

could reasonably be accommodated within a given

geographic market * * *” (Br. 32). Since the six

banking organizations in the Greeley Area are said to

exceed the number of banks generally serving compar-

able markets elsewhere, appellees conclude that we

deal here with “a highly wnconcentrated market” (Br.

35). d

This approach to market concentration misses the

mark. It ignores market share figures, which this

Court has consistently regarded as fundamental to a

determination of anticompetitive effects. See United

States v. Philadelphia National Bank, 374 U.S. 321,

363; United States v. Phillipsburg National Bank 399 |

U.S. 350, 366-367. A market concentration ratio is |

defined “as the percentage of total industry sales (or

* * * assets) contributed by the largest few firms,

ranked in order of market shares.” Scherer, Indus- |

trial Market Structure and Economic Performance,

50, 51 (1970). In the Greeley Area, the three largest

(including FNB Greeley) of the six banking organiza-

tions have more than 90 per cent of all deposits (Gov't.

Br., p. 47). That is the true measure of the economic

structure of the market, and the one which this Court

applied in Phillipsburg in holding that the market

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there, which contained seven banks, was “already con-

centrated” because of the large percentage of the bus-

iness done by the top firms (399 U.S. at 366-367).*

2. Bancorporation as a potential entrant. Ia our

main brief, we discuss the objective factors showing

that Bancorporation is a significant potential entrant

as one of the few firms outside the Greeley Area with

the ability and incentive to enter as a substantial

competitor into the market (Gov’t. Br., pp. 36-44).

Appellees respond with the argument that, since

“Greeley has had the lowest absolute growth of any

Colorado community of 25,000 or more and * * * Ban-

corporation had no office in 11 of those 13 communi-

* See also the discussion in our main brief at pp. 47-49.

* Appellees argue (Br. 46-50) that Bancorporation’s status

as a potential entrant makes it no different, as a competitive

influence on the market, from anyone else who is free to enter

by organizing a new bank. But this argument overlooks the

fact that no individual group of businessmen without banking

experience, substantial resources, and skilled personnel can

hope to have the same impact on the Greeley market that

independent or foothold entry by Bancorporation would have.

As appellees point out (Br. 69), the combination of Ban-

corporation’s $500 million in resources, its expert personnel

and institutional experience would make it a most effective

competitor in the Greeley Area. While permitting it to acquire

FNB Greeley would further entrench the existing three-firm

dominance of the Greeley market, as we have pointed out in

our main brief (Gov’t Br., p. 51) (and see Federal Trade

Commission Vv. Procter & Gamble Co., 386 U.S. 568, 578-580;

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

936, 945-946 (C.A. 3), certiorari denied, 391 U.S. 919), this

would not be the case if Bancorporation’s competitive ability

were placed behind a new bank or a small bank in the Greeley

Area; the effect of such entry would rather be to offset the

existing domination of the three market leaders.

i

ties” (Br. 45), the Greeley Area was a relatively un- °

attractive market to the acquiring holding company.

Bancorporation, however, now operates banks in 4 of

those 13 communities (Denver, Northglenn, Boulder

and Colorado Springs) ; six others are in the Denver

Standard Metropolitan Statistical Area (“SMSA”),

where Bancorporation is the largest banking organiza-

tion and operates five separate banks. Hence Greeley

is one of only three cities (Pueblo and Fort Collins

are the others) outside the Denver SMSA of signifi-

cant size in which Bancorporation has no commercial

banking office.

Moreover, Weld County—where the Greeley Areais |

located—is one of only four counties in the State with ,

more than 50,000 population where Bancorporation

does not operate.’ The company is actively considering

entry by foothold acquisition into Larimer County

(Loveland) (PX6; App. 563-567), and has sought un-

successfully to enter Pueblo County (56 Fed. Res. Bul.

731). Thus, Weld County, and more particularly the

Greeley Area, represent one of the very few major

population centers of the State not served by Bancor-

poration.’ In #% view of Bancorporation’s concerted

* Of the ten counties in Colorado with more than 50,000 pop-

ulation, five (Denver, Boulder, Jefferson, Adams and Arapa-

hoe) are in the Denver SMSA, an area in which Bancorpora-

tion already has a major position. Bancorporation has recently

entered El Paso County by foothold acquisition. First Na-

tional Bancorporation, 58 Fed. Res. Bul. 493. |

7 Nor does the record support appellees’ apparent effort to

disclaim any interest by Bancorporation in the Greeley Area.

The district court found that Bancorporation does trust busi-

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effort to expand into new banking markets throughout

the State (see also Gov’t. Br., p. 7, n. 9 and pp. 25-26,

n. 28), a comparison between the Greeley Area’s

growth rate and that of other communities in Colorado

of similar size, is an inadequate basis for measuring

the Greeley market’s relative attractiveness to Ban-

corporation.*

Appellees’ heavy reliance on testimony of the ac-

quiring firm’s officers, disavowing any intent to enter

that market de novo, is equally misplaced.’ We have

ness in the area (J.S. App. A. 31-32; PX 37); and appellees do

not dispute (Br. 24-27) that the acquiring company also solic-

its business (merchant accounts) in the area, makes large

loans there and operates a mortgage-lending office in Greeley

(which was recently spun off with certain other mortgage

offices operated by Bancorporation to form the First National

Bancorporation, one of the largest mortgage banking concerns

in the State of Colorado, 58 Fed. Res. Bul. 596). Contrary to

appellees’ assertion (Br. 24), we do not contend that these ac-

tivities establish “a presence” in Greeley; they do, however,

demonstrate Bancorporation’s continuing interest in the

market and underscore its presence on the edge of the market

as a potential competitor. Compare Virginia National Bank-

shares, 58 Fed. Res. Bul. 494, 495-496.

* Moreover, appellees’ comparative analysis cannot erase the

fact, as demonstrated in our main brief at pp. 9, 37, that the

Greeley Area experienced substantial growth in the decade of

the 1960’s.

° This testimony does not address the question of a possible

“foothold” entry by Bancorporation; accordingly appellees

have sought to defend the decision below solely on the ground

that the acquiring firm’s officers stated that the holding com-

pany “would not enter Greeley by de novo charter * * *” (Br.

40).

The district court also discounted the possibility of a foot-

hold acquisition by Bancorporation. Referring only to one of

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already pointed out why such “subjective” testimony

should be accorded little weight in evaluating the

potential competition question under Section 7 (Gov't.

Br., pp. 28-36). Similarly, we explained in our main

the three small commercial banks in the Greeley Area that

could appropriately serve as a foothold (see Gov’t Br., p. 11, n.

13), State Bank of Greeley, it observed that “the objective

evidence presented * * * does not suggest that [an acquisition

of that bank by Bancorporation] is or would be a likely possi-

bility” (J.S. App. A, p. 50). The “objective evidence” alluded

to was testimony by a Bancorporation witness indicating that

State Bank of Greeley was unavailable because the owners

insisted on unreasonable terms (App. 298). Recently,

however, Central Colorado Bancorporation filed an ap-

plication with the Federal Reserve Board to acquire State

Bank of Greeley (application filed May 12, 1972; amended ap-

plication filed June 12, 1972), and the Board published notice

of its approval of the application on August 3, 1972 (37 Fed.

Reg. 15533). The application was approved by the Federal

Reserve Board October 3, 1972. Moreover, there still remain

two small “foothold” banks in the Greeley Area available to

Bancorporation. The fact that they are respectively located

at 8 miles north and 5 miles south of the City of Greeley

hardly makes them “out-of-the-way” for Greeley customers,

as appellees seem to suggest (Br. 12, n. 23). Nor are appellees

accurate in their apparent contention that the district court

was unaware of the existence of these smaller banks (see

J.S. App. A, p. 33).

1°Despite management’s stated reluctance to enter the

Greeley Area de novo, this method of entry had been the sole

means of expansion by the principals of Bancorporation’s lead

bank, FNB Denver, prior to formation of the holding company

(see Gov’t. Br., p. 6; App. 286). Certainly de novo entry into

the Greeley Area remains a viable alternative for Bancorpo-

ration if it can not acquire FNB Greeley.

Indeed, on one occasion Bancorporation considered entering

a market by chartering a bank there. Toward the end of

1969, Bancorporation officials discussed with the Regional

Dagny IRATE PUA em

Re

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brief (Gov’t. Br., p. 41) why the district court im-

properly gave controlling weight to the testimony of

the Regional Administrator of National Banks that he

could foresee no need for a new national bank in

Greeley for “upward to five years” (App. 330).¥

The unreliability of abstract opinions given by reg-

Administrator of National Banks the possibility of applying

for a charter for a new bank in the Montbello Shopping

Center, a suburb of Denver (App. 509-510, 298, 351). Ban-

corporation subsequently applied to the Board of Governors

of the Federal Reserve System to acquire the existing bank in

Montbello, which had opened in the interval, but the Board

denied the application (App. 252; DX 52, App. 1750). Ban-

corporation then filed with the Comptroller of the Currency

an application to form a new national bank there, but, after a

hearing, the Comptroller denied it (App. 353).

1 When a bank enters a market de novo or through a dif-

ferent acquisition, after a proposed acquisition has been re-

jected, the intervening interval may vary considerably. In

Colorado, both Bancorporation and United Bankshares entered

the Colorado Springs market within a year after being frus-

trated in their efforts to buy market leaders. United Banks of

Colorado, 58 Fed. Res. Bul. 58; First National Bancorporation,

58 Fed. Res. Bul. 493. But in New York State, by contrast, it

took almost ten years for Manufacturers and Traders Bank of

Buffalo to enter New York City as an actual competitor. See

First Empire State Corp., 58 Fed. Res. Bul. 582 (original

combination denied in 1962—Morgan New York State Cor-

poration, 48 Fed. Res. Bul. 567). In 1967, V'rginia National

Bank sought unsuccessfully to enter the Richmond, Virginia,

area, by acquisition of a local market leader, Central National

Bank. Allied Bankshares Corporation, 53 Fed. Res. Bul. 763.

Virginia National has, however, recently announced plans to

enter this market through a foothold acquisition. See Moody’s,

Bank and Finance, Vol. 44, p. 1464, September 19, 1972.

Such intervals between proposed and actual entry thus do

not alter the potential-competitor-status of those firms on the

edge of the market during that period.

Piiiea»

mi.

ulatory officials as to whether they would or would not

charter a new bank, not made in connection with any

actual application therefor, is further shown by the

recent experience in Greeley. Unlike the Regional

Administrator of National Banks, the State Banking

Commissioner in this case expressed no opinion on

whether he would authorize a new bank in that area,

for which no application was then pending (App. 491).

Less than twelve months after such testiinony, the

State Banking Board granted a charter to another °

Colorado bank holding company (Colorado National |

Bankshares) to organize a new bank in Greeley (Ap-

pellees’ Br., p. 4, n. 6). This action further supports

the argument in our main brief that theoretical state-

ments by bank regulatory officials provide no sound

basis for predicting what the officials would do when

presented with an actual application based upon speci-

fic facts.”

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12 Since Colorado National Bankshares is not forming a

q national bank, it is not required also to obtain approval for

the new charter from the Comptroller of the Currency.

}

1% The statement by the Regional Administrator that he

; would not recommend the chartering of a new bank in Greeley

3 was irrelevant to the question whether Bancorporation could

; enter the Greeley market by making a foothold acquisition,

or by having its principals organize a new state bank and then

acquiring the latter’s stock, since such acquisitions would be

subject to the regulatory approval not of the Comptroller of

the Currency, but of the Federal Reserve Board. Compare

First National Bancorporation, 58 Fed. Res. Bul. 493, United

Banks of Colorado, 58 Fed. Res. Bul. 58 (entry into Colorado

Springs by foothold acquisitions).

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CONCLUSION

The judgment of the district court should be re-

versed and the case remanded for further considera-

tion under correct criteria.

Respectfully submitted.

ERWIN N. GRISWOLD,

Solicitor General.

THOMAS E. KAUPER,

Assistant Attorney General.

DANIEL M. FRIEDMAN,

Deputy Solicitor General.

WM. BRADFORD REYNOLDS,

Assistant to the Solicitor General.

PETER C. CARSTENSEN,

Attorney.

OCTOBER 1972.

W ov. 8. covaenmant paimvine ovvica; 1972 478546 230