Brief for the United States — United States v. Phillipsburg National Bank & Trust Co.

Supreme Court brief1970

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PHILLIPSBURG. Nafiowat! BANK Sab aoe Canbanisy: ty

/ SEcoND NATIONAL’ BANK OF bjs Ong

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ON APPEAL FROM THE ena STATS DISTRICT cote

FOR HE: ee, OF NEW JERSEY~

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Opinion below

Jurisdiction

Statutes involved

Questions presented

INDEX

Statement:

The proceedings .

Bank-customer relations in Phillipsburg-

Easton

The merging banks and the banking structure

in their community

The district court’s decision ..................---------------

Introduction and summary of argument -..................

Argument:

Il.

Ill.

Commercial banking is a relevant product mar-

ket

Phillipsburg-Easton is a relevant geographic

IIE s:oisesedbacsuielionainciietainienen

The district court’s evaluation of the merger’s

effects on competition and on community con-

venience and needs was defective because it ap-

plied erroneous standards ................--.---------------

A. The effect of the merger in Phillipsburg-

Easton may be substantially to lessen com-

petition -.. Jp siainich iaitsiacheenesioaisndcamniivaniee

B. The district court isaciaiialiias and misap-

plied the community convenience-and-needs

I sictiteireeree

1. Community convenience and need should

be evaluated in the same Siento

area as competitive effect

2. The district court misapplied the con-

venience-and-need standard ....................

Page

ate

Argument—Continued

3. The merging banks—and the district

court—failed adequately to consider less

anticompetitive alternatives to this mer-

ger 51

(a) Alternatives to merger were not

seriously pursued 52

(b) The possibility of less anticompeti-

tive mergers was ignored ................ 55

Conclusion 58

Appendix 59

CITATIONS

Cases:

Brown Shoe v. United States, 370 U.S. 294_........... 30, 31,

32, 40

Marion National Bank v. Van Buren Bank, 418

F, 2d 121 (C.A. 7, 1969) 17

Northern Natural Gas Co. v. Federal Power

Commission, 399 F. 2d 953 44

Transamerica Corp. V. Board of Governors, 206

F. 2d 163, certiorari denied, 346 U.S. 901 ........ 35

United States v. Columbia Steel Co., 334 U.S.

495 32

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

441 30

United States v. Crocker-Anglo National Bank, 277

F. Supp. 133 30

United States v. First City National Bank of Hous-

ton, 386 U.S. 361 21, 29, 42, 46

United States v. First National Bank of Jackson,

301 F. Supp. 1161 30

United States v. First National Bank of Maryland,

1970 CCH Trade Cases {73,061 (D. Md.

1970) 30

United States v. Pabst Brewing Co., 384 U.S.

546 eh G 31, 40, 44

LQOLIE TN LI OE EOI OM,

Cases—Continued Page

United States v. Philadelphia National Bank, 374

U.S. 321 17, 21, 22, 23, 25, 26, 28, 29,

32, 33, 34, 35, 39, 40, 43, 44, 46

United States v. Provident National Bank, 280 F.

Supp. 1 30, 39, 44

United States v. Third National Bank in Nash-

ville, 390 U.S. 171 21, 29, 41, 42, 43, 44,

45, 46, 51, 54, 55, 57

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

270 ... 32, 44, 56

Statutes :

Bank Merger Act of 1966, Sec. 18(c), 12 U.S.C.

(Supp. IV) 1828(c) -.-..-- 3, 5, 29, 41, 45, 46, 51, 57, 59

Clayton Act, Section 7, 38 Stat. 731, as amended,

I eciicnccenntecensninscion $1, 32, 41, 42, 45, 57, 59

12 U.S.C. 24 18

N. J. Stat Ann. § 17:

9A-19(B) (1963) 16

9A-19(B) (3) (1963) 16

9A-19(B) (3) (Supp. 1969) 16

9A-19(F) (Supp. 1969) 16

Purdon’s Pa. Stat. Ann. 7-904 (1965) .................-.. 17

Miscellaneous:

112 Cong. Rec. 2445, 2457 47

Hearings on S. 1698 Before the Subcommittee on

Domestic Finance of the House Committee on

Banking and Currency, 89th Cong., 1st Sess. -. 26

Federal Deposit Insurance Corporation, Summary

of Accounts and Deposits in All Commercial

Banks (1968) 8, 22

GB Fed, Beware WT. .nnnncnncacennccccnccnscnscoccccecosersrocsense 26

Kohn, The Future of Small Banks—An Analysis of

Their Ability to Compete with Large Banks

(N.Y. State Banking Dept. 1966) .. 57

1969 Statistical Abstract of the United States........ 7

Te ee me

oie

Ju the Supreme Court of the United States

OcTOBER TERM, 1969

No. 1093

UNITED STATES OF AMERICA, APPELLANT

Vv.

PHILLIPSBURG NATIONAL BANK AND TRUST COMPANY,

SECOND NATIONAL BANK OF PHILLIPSBURG, AND

WILLIAM B. Camp, COMPTROLLER OF THE CUR-

RENCY

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

BRIEF FOR THE UNITED STATES

OPINION BELOW

The opinion of the district court (App. 667) is

reported at 306 F. Supp. 645.

JURISDICTION

The judgment of the district court (App. 701) was

entered on October 20, 1969, and a notice of appeal

to this Court was filed on November 28, 1969. Prob-

able jurisdiction was noted on February 27, 1970

(1)

(App. 702). The jurisdiction of this Court is con.

ferred by Section 2 of the Expediting Act, 15 U.S¢

29. United States v. Third National Bank in Nash.

ville, 390 U.S. 171; United States v. Philadelphia Na.

tional Bank, 374 U.S. 321.

STATUTES INVOLVED

The pertinent portions of the Clayton Act and the

Bank Merger Act of 1966 are printed in the Appen.

dix, infra, pp. 59-64.

QUESTIONS PRESENTED

1. Whether the district court erroneously rejected

commercial banking as a relevant product or service

market in which to test the competitive effect of bank

mergers in small communities.’

2. Whether, in an antitrust action challenging a

proposed merger of banks located in a community in

which the banking business is predominantly local,

the court may properly refuse to consider the mer-

ger’s probable effect on competition in that commv-

nity because, on the basis of evidence of general so-

cial and economic integration, it deems the relevant

geographic market to be a broad multi-community

area,

8. Whether, in such an action, the court’s consid-

eration of the “convenience and needs of the commu-

nity to be served” is legally insufficient if the “com-

munity” whose “needs” are considered is narrower

1 This question was preserved in the jurisdictional statement

(J.S., p. 3, n. 1, p. 19, n. 17).

than the relevant geographic market in which the

anticompetitive effects of the merger are measured.

4, Whether, in any event, the court below erred

in its determination of the convenience and needs

issue by failing adequately to consider whether the

same benefits could be achieved by less anticompetitive

means.

STATEMENT

1. The Proceedings

In April 1967, Phillipsburg National Bank and

Trust Co. (“PNB”) and Second National Bank of

Phillipsburg (“SNB”), both with their headquarters

in Phillipsburg, New Jersey (App. 668), agreed to

merge. Phillipsburg is directly across the Delaware

River from Easton, Pennsylvania, its twin city (App.

894). The two cities are in the northeastern part of

the Census Bureau’s Allentown-Bethlehem-Easton,

Pennsylvania—Warren County, New Jersey standard

metropolitan statistical area (hereafter “Lehigh Val-

ley”).

On May 1, 1967, the banks applied to the Comp-

troller of the Currency for approval of the transac-

tion as required by the Bank Merger Act of 1966

(12 U.S.C. (Supp. IV) 1828(c), App. infra, pp. 59-

60). Pursuant to Section 1828 (c) (4), the Federal Re-

serve Board, the Federal Deposit Insurance Corpora-

tion and the Attorney General each submitted inde-

pendent reports to the Comptroller on the competitive

factors involved.? The Federal Reserve Board concluded

2 Copies of the Application for Approval to Merge, the re-

ports to the Comptroller and the Comptroller’s decision have

been lodged with the Clerk of this Court. All of these are

public documents.

that the overall competitive effect of the merger would

be substantially adverse because it would eliminate a

significant degree of competition. in the Phillipsburg.

Easton banking market and would reduce banking

alternatives in Phillipsburg from three to two by

merging that city’s two largest banks (FRB Rep., p.

4). The Federal Deposit Insurance Corporation re.

ported that the merger would harm competition in

Phillipsburg-Easton, particularly in the Phillipsburg —

sector of the area; it noted that the resulting bank

would be approximately three times the size of the

remaining Phillipsburg bank and that the publics —

banking choices there would be reduced (FDIC Rep,,

p. 2). The Attorney General also concluded that the

merger would have a significantly adverse effect upon

competition in the Phillipsburg-Easton area.

The Comptroller approved the merger on December

18, 1967. He concluded that the other banking agen-

cies and the Attorney General had defined both the

product market and the geographic market too nar-

rowly (Comp. Rep., pp. 3, 7-8). Treating most of the

Lehigh Valley as the relevant geographic market and

evaluating competition from 34 finance companies, 13

savings and loan institutions and insurance compan-

ies as well as 38 commercial banks in this broad area,

he determined that there would be no significant anti-

competitive effect (ibid.). He also concluded that the

merger would provide the resultant bank with an

opportunity for expansion and enable it to hire spe-

cialized management personnel (id. at 9).

On January 16, 1968, the United States filed the

present suit in the district court charging that the

eee craaeaaaeaaameaamareanes

proposed merger might substantially lessen competi-

tion in violation of Section 7 of the Clayton Act (App.

3-7). This automatically stayed the merger’s con-

summation. 12 U.S.C. 1828(c)(7)(A). The Comp-

troller intervened as a defendant (App. 14). After

an eleven-day trial in September 1968 (App. 1-2),

the district court held that the proposed merger was

lawful (App. 700), and dismissed the complaint.®

The court continued the statutory stay pending dis-

position of this appeal (App. 701).

2. Bank-Customer Relations in Phillipsburg-Easton

Phillipsburg, New Jersey, is an established indus-

trial city of 18,500 inhabitants situated on the Dela-

ware River in the southwestern corner of Warren

County, New Jersey. Including the city’s immediate

environs,‘ the population of the Phillipsburg sector

(hereafter “Phillipsburg”) was approximately 28,500

in 1960 (App. 678-679). While the city’s population

has been static for a long period, the surrounding

suburbs have been growing steadily in population,

commerce and industry (App. 679-680; 261-263).

Easton, Pennsylvania, directly across the Delaware

River from Phillipsburg, is a larger industrial city of

82,000 people. Including the city’s surrounding com-

‘3

* Ata hearing prior to the entry of judgment for the defend-

ants, the record was reopened and evidence was admitted re-

lating to changes in State banking law that took effect since

the trial (App. 580-595).

*Lopatcong, Pohatcong, and Greenwich townships, and

Alpha Borough.

PLD TRY ARETE

aN aR Bo Peel) Dn

munities,’ the Easton sector (hereafter “Easton”)

had a total population of 60,000 in 1960. As in Phil.

lipsburg, the city’s population: has remained stabk

while its environs have grown in population, industry

and commerce (App. 679-680; 287-288).

Phillipsburg and Easton are linked by bridges, one

a free bridge directly connecting the downtown areas

of the two cities, and the other a toll bridge located

just north of the main business districts on an inter.

state highway for which ticket books reducing the

toll to less than three cents a crossing may be pur.

chased (App. 45, 115, 229, 435-436). The two cities

were described by a Phillipsburg businessman as “in

effect * * * one town” (App. 287).

The Lehigh Valley, in which Phillipsburg and Eas

ton are located, is an area of approximately 1,000

square miles, which also includes the cities of Bethle.

hem, Pennsylvania (population 55,325), thirteen miles

west of Phillipsburg; Allentown, Pennsylvania (popv-

lation 108,347), eighteen miles west; and Nazareth,

Pennsylvania (population 6,209), twelve miles north-

west (App. 678-679, 803-804, 894).

There is considerable mobility among the residents

of the area. Residents of Phillipsburg shop in Easton

and vice versa, and drive to the larger towns as well

(App. 45, 58, 70, 224-225, 286-288, 291-292, 366-367,

386-387, 499-500, 634-635). The labor force is also

mobile; many residents of Phillipsburg and Easton

‘The townships of Forks, Williams and Palmer, and the

boroughs of Wilson, West Easton, Glendon, Stockertown and

Tatamy, all in Northampton County, Pennsylvania (App.

677).

Prey

—V————e

drive to work elsewhere, sometimes across the river

(App. 193-194, 423, 432-433, 814-815). Neverthe-

less, as a Bethlehem banker testified, “the three cities,

Bethlehem, Easton and Allentown have developed

pretty independent cultures, and people do cross lines

and so forth and it is integrated socially and eco-

nomically, but not nearly to the extent that you

might guess” (App. 104).

Although the Lehigh Valley contains 38 banks,*

customer preferences for local service and prevailing

conservative banking practice tend to limit the bulk

of each institution’s business to its primary service

area (App. 29, 57-58, 62, 78-80, 81, 89, 131-132, 258,

399, 468, 554-555, 564-565, 652). Individual de-

positors in this area choose their banks primarily

on the basis of convenience to their residence (¢.g.,

(App. 85, 201, 257, 263, 278, 665); small business-

men also tend to prefer banks in their local commu-

nity (App. 277-278, 290, 326-327, 355, 375, 421-422,

430-431, 434). Large commercial and industrial

borrowers, investors of sums in excess of $5,000 and

settlors of trusts, however, are more likely to shop on

a regional or even national basis; and as the amounts

involved increase, the significance of local preference

declines (App. 90, 100, 165, 235-236, 333-334, 339-

340, 353-354, 355-356, 369-370, 487, 489-491, 510-

512, 528, 600, 653).

;

Poa

= :

61969 Statistical Abstract of the United States, p. 892.

‘For larger investors, significantly higher interest rates

may make a difference. The Girard Trust Bank’s branch in

Riegelsville, Pennsylvania, 10 miles from Phillipsburg, offered

a 5 percent investment bond sold mainly in $5,000 multiples,

Small banks, such as PNB and SNB, are patronized

principally by small depositors and borrowers* to

whom the convenience of one-stop banking (App. 181,

653) and the advantages of good relationships with a

local banker are important (App. 58, 106, 114, 271),

A customer who uses one service usually looks to his

bank for others as well, and is encouraged to do so

(App. 63-64, 77, 119, 146, 181, 183; see App. 615).

Checking and savings accounts are likely to be main-

tained in the same local bank even when higher say-

ings interest is available elsewhere (App. 38, 520,

624, 635, 653), and an established depositor expects,

and sometimes receives, favorable consideration as a

small borrower (App. 22, 119, 280).

The merging banks reflect this pattern of predomi-

nantly small customers with a local orientation char-

acteristic of banks in relatively small communities

(App. 83-84, 133-134) and particularly in the Lehigh

Valley trading area (App. 37-40, 83-84, 90, 100, 133-

134, 137-140, 759-760, 788). For example, 74 percent

of PNB’s number of total deposits, and 72 percent of

SNB’s, are less than $1,000; and 96 percent and 97

percent, respectively, are less than $10,000. Simi-

larly, 76 percent of PNB’s number of loan accounts,

and mailed promotional literature to Phillipsburg-Easton at-

torneys, physicians and morticians in December 1967. It is

estimated that this has attracted some 3 percent of total Phil-

lipsburg-Easton deposits. See App. 235-236, 603-604.

* More than 80 percent of the number of all deposit accounts

in banks with total deposits of between $10 million and $25

million are less than $1,000. Federal Deposit Insurance Cor-

poration, Summary of Accounts and Deposits in All Commer-

cial Banks, 4 (1968).

and 58 percent of SNB’s, are less than $2,500, and 94

percent and 96 percent, respectively, are less than

$10,000 (App. 725-726, 733-734). Banks elsewhere

in the Lehigh Valley, including banks within 10 or 14

miles of Phillipsburg-Easton, derive relatively little

business—“‘a few scattered accounts” (App. 55; see

App. 74)—from that community (App. 53-57, 64-68,

96-98) ; and the Phillipsburg-Easton banks similarly

do relatively little business outside that area (App. 31-

32, 37-40, 120-125). The vast bulk of the merging

banks’ deposits and loans originate in Phillipsburg-

Easton: 91.6 percent of PNB’s total deposits and

78.6 percent of its total loans; 92 percent of SNB’s

total deposits and 87.2 percent of its total loans (App.

725-738, 817-818; see n. 29 infra, p. 37).

Even within Phillipsburg-Easton, banking is local-

ized in each of the two communities (App. 198-

204). For example, the Easton branch of Naza-

reth National Bank in Forks gets no business from

Phillipsburg (App. 78, 86). Although Phillipsburg

businessmen regard Easton as an alternative credit

source, they strongly prefer to borrow from banks in

Phillipsburg (e.g., App. 421, 434, 490-491, 636).° Of

the merging banks, Phillipsburg National derived

only 10.9 percent of its total time and savings de-

posits from Easton, and Second National only 9.6

percent (App. 731-732).

There are several indications that the banks in

Phillipsburg-Easton enjoy substantial insulation from

outside competition. Nearly every one of the approxi-

RR Rare re ee

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* State boundaries also contribute to localization of banking

business (App. 62, 78, 93, 130, 201, 207, 606-607).

mately 8,500 families in Phillipsburg deals with one

of that community’s three commercial banks (App.

176). Banks outside Phillipsburg-Easton rarely go-

licit or advertise there except to the extent that audi-

ences elsewhere are served by media also serving Phil.

lipsburg-Easton (App. 54, 77, 87-88, 99, 252, 266,

559, 604-605). Phillipsburg-Easton banks similarly

rarely solicit outside their area (App. 48, 79, 182.

133, 228, 627, 633).'° Finally, the Phillipsburg-East-

on banks have increased their savings deposit accounts

substantially even though their passbook savings

rates were lower than the rates paid by other banks

in the area (App. 753). As of December 31, 1967,

Easton banks were paying only 3 percent and Phil.

lipsburg banks 3!. percent interest, while banks in

towns within a thirteen-mile radius were paying 4

percent (App. 63, 94, 116-117, 118-119, 198-201, 652-

653).

3. The Merging Banks and the Banking Structure In

Their Community

Phillipsburg has three commercial banks, and Eas-

ton has four.”’ Phillipsburg National, the acquiring

bank, is the largest bank in Phillipsburg and the

third largest bank in Phillipsburg-Easton. As of

1967, its’ assets were $23.9 million, its deposits were

$22.4 million, and its loans and discounts were

local newspapers and generally do not solicit elsewhere for

business (App. 723-724; GX-53 at p. 209; DX-60 at p. 163).

* Six of these seven institutions have their headquarters in

Phillipsburg-Easton; the seventh is a branch of the Nazareth

National Bank of Nazareth, Pa., which has a branch in Forks

Township, a suburb of Easton (App. 740-751).

$14.5 million. It held 13.7 percent of Phillipsburg-

Easton deposits and 15.8 percent of the community’s

loans and discounts, Between 1957 and 1967, it

doubled its assets, doubled its deposits, and tripled its

loans and discounts (App. 752-753).” in addition to

its main office in downtown Phillipsburg it operates

two branches, both of which were opened in the sub-

urbs of Phillipsburg in 1964 (App. 262, 642-643.

See App. 627-628).

Second National, the acquired bank, is the second

largest bank in Phillipsburg and the fifth largest

bank in Phillipsburg-Easton. It is in direct compe-

tition with PNB (Merger App., n. 2, supra, p. 3).

Its main office is directly across the street from

PNB’s, and its only branch is across the highway

from Phillipsburg’s Hillcrest office (App. 10, 15, 202).

It had assets of $17.3 million, deposits of $16

million, and loans and discounts of $10.5 million in

1967. It accounted for 9.8 percent of Phillipsburg-

Easton’s total deposits and 11.4 percent of its loans

and discounts (see p. 13, infra). It has also grown

rapidly in the last decade, increasing its assets 82

percent and its deposits 86 percent, and tripling its

loans and discounts (App. 752; see App. 775-776).

Both of the merging banks offer the wide range of

services customarily available from commercial banks,

including demand deposits, savings and time deposits,

consumer loans, installment loans, commercial and

industrial loans, real estate mortgages and trust serv-

2 Its rate of growth in the preceding five years exceeded

that of the other two Phillipsburg banks (App. 754-756,

775-776).

‘

Cpemeeressp roe reece errs eeteeen ee ea NHI TL HR

ices, safe deposit boxes, escrow services and utility

bill collections (App. 174, 246, 705). The ratio of

their loans to deposits is higher than that of any

other bank in Phillipsburg-Easton (App. 764). As is

true of other Phillipsburg-Easton banks, a substan-

tial volume of their loans is in real estate mortgages

(e.g., App. 39-40, 656-657, 764; see supra, pp. 7-8);

business loans, both real estate and commercial or in-

dustrial, represent 22.2 percent and 21.2 percent re

spectively of each bank’s loans (GX-86 p. 2; see App.

763-764; cf. App. 100).

As previously noted (supra, pp. 8-9), the services of

these two banks are oriented primarily toward small

customers. Phillipsburg National, for example, con-

ducted the local grammar school savings program

(App. 246), and, when other banks were refusing,

offered both FHA and VA home financing and college

tuition loans (App. 21, 73, 246-247, 269, 637). It also

made numerous unsecured loans on the basis of char-

acter, which are very difficult for area borrowers to

get elsewhere (App. 271-272, 280. Compare App. 58,

106, 114, 437-438). PNB increased its install-

ment lending portfolio from $700,000 to $3 million

4 1966 when its directors ordered loan officers to con-

‘ centrate again on real estate mortgages (App. 413-

> 414).

The structure of the commercial banking market in

’ Phillipsburg-Easton, as of December 31, 1967, is sum-

* marized in the following chart:

[Dollar a

(App. 739, 7

TOTAL

ASSETS DEPOSITS

No. of Percent Percent Percent ©

BANK Offices Amount Phill.-East. Phill. Amount Phill.-Eas§&

Only y

Phillipsburg

at. 3 $23.9 112 44 $22.4 11.8

Second Nat. 2 17.3 8.1 31.8 16 8.4

[Resulting Bank 5 41.1 19.3 75.8 38.4 20.2

Phillipsburg

rust Co.

2 13.2 6.2 24.2 12.1 6.4

Easton Nat.

Bank & Trust 5 75.6 35.5 — 67.7 35.6

Northampton Nat.

Bank Easton 1 23.2 10.9 — 19 10

Lafayette Trust

Bank 2 27.7 13.0 — 24.3 12.8

Nazareth Nat.

Bank * 1 32.0 15.0 — 28.7 15.1

Forks Township

Branch s e.5

Totals 16 $212.8 100 100 $190.1 100

* While the deposit figures for N’

branch, the assets and loan figur

total assets and loan figures o

the portion attributable to the

somewhat understates the perc

including the appellees.

[Dollar amounts in millions]

(App. 739, 740-741, 742-743, 747)

TOTAL DEMAND

ASSETS DEPOSITS DEPOSITS LOANS

Percent Percent Percent Percent Percent Percent Percent Percent

hill.-East. Phill. Amount Phill.-East. Phill. Amount Phill.-East. Phill, Amount Phill.-East. Phill.

Only Only Only Only

11.2 44 $22.4 11.8 44.3 $6.5 10.1 45 $14.5 15.8 48.9

8.1 31.8 16 8.4 31.7 4.6 7 31.3 10.5 11.4 35.2

19.3 75.8 38.4 20.2 76.1 11.1 17.1 76.4 24.9 27.3 84.1]

6.2 24.2 12.1 6.4 23.9 3.4 5.3 26.3 4.7 5.2 15.9

35.5 —. 67.7 35.6 -_———- 25.4 39.2 — 32.6 35.7 —

10.9 — 19 10 — 6.4 9.8 — 6.5 7.1 —

13.0 — 24.3 12.8 — 10.8 16.7 —. 11.8 12.9 —

15.0 —— 28.7 15.1 — 7.8 12.0 — 10.8 11.9 —.

100 100 $190.1 100 100 $65 100 100 * $91.5 100 100

* While the deposit figures for Nazareth National Bank are segregated by

branch, the assets and loan figures are not. This chart, therefore, uses the

total assets and loan figures of Nazareth National Bank (rather than

the portion attributable to the bank’s Easton branch) and accordingly

somewhat understates the percentages attributable to the other banks,

including the appellees.

These figures show that, of Phillipsburg-Easton’s 7

banks, the two largest—Easton National Bank and

Trust Co, and Lafayette Trust Co., both in Easton—

account for 56 percent of the area’s total deposits, 63

percent of total demand deposits and 44 percent (7

out of 16) of the banking offices. When Phillipsburg

National’s share is added, the three largest banks

account for 69 percent of total deposits and 74.2 per-

cent of demand deposits. In the Phillipsburg sector,

which is served only by the two merging banks and

their small competitor, the Phillipsburg Trust Co.,

PNB has 43.9 percent of total deposits and SNB has

32.2 percent; of loans and discounts PNB has 49.8

percent and its-merger partner 34.9 percent. Of the

7 Phillipsburg banking offices, the merging banks

control 5.

The combined bank would be the second largest in

Phillipsburg-Easton with assets of $38.8 million

(19.3 percent), total deposits of $36 million (20.2

percent), and loans and discounts of $22.8 million

(27.3 percent). The total share of deposits held by

the two largest banks would increase by 9 percent

to 65 percent, and the share held by the three largest

banks would increase 10 percent. The two largest

banks would control 10 of the 16 banking offices,

ie, 62.5 percent of the total. The impact in the

Phillipsburg sector would, of course, be much greater

(see App. 205, 207-208, 210). The banking alterna-

tives in Phillipsburg would be reduced from 3 to 2,

the combined bank would be three times larger than

Phillipsburg Trust Co., and all but 2 of the banking

offices in Phillipsburg would be controlled by one

firm.

Qecrenr ere ted

The record provides no indication that this sub.

stantia] increase in banking concentration is likely

to be alleviated by new entry into the market. Entry

is restricted by both New Jersey and Pennsylvania

banking statutes, and although recent changes in

New Jersey law have made it possible for banks in

the northern part of that State to enter the Phillips.

burg area by merger, this would not increase the

number of banking alternatives available in the com-

munity.” Expert testimony indicated, moreover, that

** When the complaint was filed, New Jersey law prohibited

the merger of banks located in different counties, and restrict-

ed branch banking to the county in which the parent bank

was located (N.J. Stat. Ann. § 17:9A-19(B) (1963)). Addi-

tionally, a “home-office-protection” proviso precluded branch-

ing into cities in which another bank had its home office or

into communities in which a bank or branch was already

located (N.J. Stat. Ann. § 17:9A-19(B) (3) (1963) ). Entry

into “home-office-protected” communities could be effected

only through merger with a bank in the community by a

bank outside the community but in the same county.

Under a New Jersey banking statute, enacted on J anuary 17,

1969, and effective July 17, 1969, that State is divided into

three banking districts (N.J. Stat. Ann. § 17: 9A-19(F)

(Supp. 1969) ), of which Phillipsburg is in the first. District

wide de novo branching and merger are authorized, subject

to the retained “home-office-protection” proviso. In addition,

the law precludes branching into communities of less than

7,500 in which a bank branch is already located. N.J. Stat.

Ann. § 17: 9A-19(B) (3) (Supp. 1969).

No community on the New Jersey side of the Phillipsburg-

Easton community is open to de novo branching from outside

Warren County under the new statute because of the “home-

office-protection” provision; entry by merger, however, is now

possible for some 80 New Jersey banks located in the First

Banking District (App. 588-589, 777-780). The question

whether a national bank may avoid the operation of the

State “home-office-protection” proviso by moving its “main

office” into a protected community, while simultaneously

“reopening” the former “main office” as a branch office, is

ihn cc hi aan gi a ;

the chartering of new banks in Phillipsburg-Easton

does not appear to be a significant probability (App.

211, 213-215).

There is no evidence that as a group the seven

banks in Phillipsburg-Easton are failing to meet the

community’s banking needs. Four of the banks have

loan limits which approach or exceed one-quarter

million dollars and one has a limit of more than

one-half million.* Requests for loans in the $100,-

000 to $500,000 category are infrequent (App.

137)."° Large borrowers can, and do, satisfy their

before the Court of Appeals for the Third Circuit in Ramapo

Bank v. Prospect Park National Bank & William 3. Camp.

In Marion National Bank v. Van Buren Bank, 418 F. 2d

121 (C.A. 7, 1969), it was held that a similar action was

precluded under analogous Michigan banking law.

Pennsylvania Banking Law is similarly restrictive, permit-

ting new branching only in contiguous counties. Purdon’s Pa.

Stat. Ann. 7-904 (1965). See United States v. Philadelphia

National Bank, 374 U.S. 321. Easton, located in Northampton

County, is protected by Bucks County against branching by

Philadelphia banks (App. 402-403).

* The legal lending limits of the commercial banks in Phil-

lipsburg-Easton as of December 31, 1966, computed on the

basis of ten percent of the sum of capital, surplus, and un-

divided profits, were as follows (App. 765) :

PHILLIPSBURG NATIONAL $100,701

SECOND NATIONAL 107,414

Phillipsburg Trust 53,167

Easton National Bank 587,049

Northampton National Bank 369,259

Lafayete Trust Bank 224,362

Nazareth National Bank 294,354

%* PNB estimates that it receives 25 requests per year for

loans which exceed its lending limits ($100,000) and SNB esti-

mates that it receives 12 such requests per year. Only 25 of

PNB’s total of 5,566 loans, and only 17 of SNB’s total of

2,235 loans, were for more thap $50,000. (App. 271, 733-

734.)

TLMETAA fin QI MEE ure Ne

eM aS ENT AF

eo SERNA SCARE RI MSE SP LAER IIE

credit needs from outside the Phillipsburg-Easton

area (App. 90, 290, 333, 339, 355, 412, 418, 426

429, 440, 444-445).

Lending limits, which depend to some extent on

the accounting method used to calculate them, are

computed as 10 percent of capital and surplus of

undivided profits and reserves, as approved by bank.

ing authorities (see 12 U.S.C. 24. But see App. 82,

89, 111, 136, 403-404). Using the most conserva-

tive method of calculation, PNB’s lending limit was

$90,000 and SNB’s was $80,000 (App. 670. But see

n. 14, supra, and App. 248, 713). The district court

found that, when combined, the two banks would

have a limit of $250,000 (App. 670), presumably

by reason of changes in accounting metheds relating

to their capital structure.

4. The District Court’s Decision

In dismissing the complaint, the district court held

that the merger would not be anticompetitive in the

broad geographic market it deemed relevant, and

that “any conceivable anticompetitive effect”? was in

any event clearly outweighed by the merger’s effects

in meeting the convenience and needs of the commu-

nity (App. 699).

Treating the product market first, the court recog-

nized that “commercial banking” has been identified

in all previous bank merger decisions of this Court

as an appropriate line of commerce, but decided over

the government’s objection (App. 549-550) that a

“detailed analysis of all the competitive banking serv-

ices offered to the public by the merging banks is nec-

essary in each case” (App. 669). The court excluded

from its consideration services not offered to any

great degree by the defendants as well as services

“in which competition from many sources [such as

savings and loan associations, pension funds, mutual

funds, government bonds, insurance companies and

finance companies] is so widespread that no question

of significant diminution of competition by the merg-

er could be raised” (App. 675).

The lines of commerce selected by the court in-

cluded checking accounts, savings accounts, certifi-

cates of deposit, personal loans, consumer installment

loans and commercial loans of less than 100,000 dol-

lars. Trust services, small real estate mortgage

loans, automobile dealer financing, “large scale com-

mercial inventory financing” and commercial and in-

dustrial loans in excess of 100,000 dollars were

excluded. (App. 670.) While conceding that “[t]he

approach adopted may not be orthodox,” the court

deemed it appropriate because, in light of the small

size of the defendant banks and their high propor-

tion of savings deposits to demand deposits, “this

is not the usual bank merger case” (App. 675).

The court did not, however, make specific findings

as to the effect of the merger in each of the lines of

commerce it had selected. Instead, presumably be-

cause some of the services it selected are unique to

commercial banks, the court analyzed the merger’s

effects on competition only in terms of the product

market it had earlier rejected—commercial banking

(App. 681-689).

Turning to the question of the appropriate geo-

graphic market, the court rejected both of the gov-

ernment’s proposed alternatives, Phillipsburg-Easton

‘

i NSO PERT Ty TPES PE LNT LIT

Qrreseersrerrr ert

——

and environs or Phillipsburg and environs (App.

677).** It chose instead an area slightly smaller than

the entire Lehigh Valley (but excluding Allentown),

The area selected encompasses thirteen towns and

cities, including Bethlehem in Northampton County

and five cities and towns in Bucks County, Pennsyl-

vania, plus the southwest half of Warren County and

the northwest portion of Hunterdon County, New

Jersey (App. 678-679). The court treated as not sig-

nificant the government’s statistical showing of the

localized nature of the existing banking business

(App. 681), and the court’s opinion made no mention

of the growth of savings deposits in Phillipsburg and

Easton banks while they were paying a lower rate

of interest than other banks in the Lehigh Valley

(see supra, p. 10). The court relied instead on evi-

dence of population mobility tending toward general

economic integration of the broader area (App. 679-

680), and, apparently, on the court’s expectation

that the increased size of the merged banks would

permit them to offer services in a somewhat wider

area than at present (App. 688).

The court held that the government had failed to

establish that the merger “would have any measur-

able anticompetitive effect” in this broad area (ibid.).

** The advisory banking agencies treated Phillipsburg and

environs as a relevant banking sector or submarket, and the

government introduced evidence below showing banking locali-

zation and concentration in Phillipsburg. After the court made

clear its rejection of Phillipsburg as a relevant market (see

App. 25-26, 567-568), the government relied in its trial

brief upon Phillipsburg-Easton. See Plaintiff’s Trial Brief,

pp. 10-18.

Bitticidivcia sate: ABA Saas ie BR Rr saci ee a SE

Moreover, the court stated that under applicable

New Jersey law there were “many locations [in the

New Jersey part of the court’s geographic market]

where either a new bank or a branch bank could be

established” (App. 687).

The court then found that the potential ability of

the merged bank to supply one sector of its geograph-

ic market—Phillipsburg—with commercial loans of

more than 100,000 dollars and trust services (serv-

ices excluded from the court’s lines of commerce)

clearly outweighed any conceivable anticompetitive

effect (App. 689-690). As to less anticompetitive al-

ternatives to merger which might achieve these bene-

fits, the court found that “tentative” exploration of

obtaining qualified officers to specialize in commercial

lending and trust services was properly abandoned

because of the cost of employing such personnel (App.

690) and that meeting local loan needs through

participation with other banks had “disadvantages”

(App. 697).

INTRODUCTION AND SUMMARY OF ARGUMENT

The fundamental question in this case is whether

the antitrust standards defined by this Court in

United States v. Philadelphia National Bank, 374

U.S. 321, and preserved in the Bank Merger Act of

1966,” apply to mergers of directly competing small

commercial banks * in the nation’s smaller commu-

"See United States v. Third National Bank in Nashville,

390 U.S. 171, 181-182 (hereafter “Nashville Bank’); United

States v. First City National Bank, 386 U.S. 361, 363-364

(hereafter “Houston Bank’).

8 In 1968 there were 13,630 commercial banks in the United

States, of which 11,798—86.6 percent—had deposits of less

iiaiate =

nities. The difference between the competitive impact

of horizontal mergers among the great city banks

and the nation’s small town banks is merely one of

scale. Indeed, because there tend to be fewer finan.

cial institutions to provide alternatives in small com.

munities for those in need of their services, the con-

siderations set forth in the Philadelphia Bank opinion

apply a fortiori—including the basis for defining the

product and geographic markets and for evaluating

the competitive consequences of reducing alternatives

in already concentrated banking markets.

Commercial banks, with their unique clustering of

financial products and services in one institution, are

peculiarly significant to the economy of communities

whose population is too small to support a large ar-

ray of differentiated savings and credit businesses,

In such communities, dependence on local bank-

ers for financial services tends to be even greater

than in the city. Convenience of access to a bank is

as important. Small town residents and businessmen

have the same interest in preserving the range of

banking choices in their community as do urban

borrowers and savers. For in the small town as well

as the large, “if the businessman is denied credit

because his banking alternatives have been eliminated

by mergers, the whole edifice of an entrepreneurial

system is threatened; if the costs of banking services

and credit are allowed to become excessive by the

absence of competitive pressures, virtually all costs,

than $25 million. Federal Deposit Insurance Corporation,

Summary of All Accounts and Deposits in All Commercial

Banks, 4, 7 (1968).

in our credit economy, will be affected * * *” (Phila-

delphia Bank, 374 U.S. at 372).

We shall show, first, that the district court erred

in rejecting the government’s contention that here,

as in the Philadelphia Bank case, commercial bank-

ing is a relevant product market in which to test

the competitive effect of the merger. The merging

banks have all the basic attributes of commercial

banks outlined by this Court in Philadelphia Bank;

hence their unique cluster of financial products and

services “composes a distinct line of commerce” (374

U.S. at 356).

We shall then show that the court similarly erred

in rejecting the government’s contention that Phil-

lipsburg-Easton is a relevant geographic market

within which to assess the effects of this merger on

competition. That this is an area in which the merg-

er’s effects will be direct and immediate is shown by

the application here of a number of factors empha-

sized in this Court’s Philadelphia Bank opinion—

including the importance, especially to small custom-

ers who are principally served here, of convenient

access in banking; the fact that banks in Phillips-

burg-Easton generally compete for deposits within a

radius of only a few miles (and have paid lower

rates of interest to depositors than were being offered

by nearby banks outside of Phillipsburg-Easton) ;

and the fact that the vast bulk of the business of

banks in Phillipsburg-Easton, including that of the

merging banks, is localized within the area.

Finally, we shall show that there were several

legal errors in the district court’s evaluation of the

merger’s effects on competition and determination of

whether those anticompetitive effects are clearly out.

weighed by offsetting benefits to the convenience and

needs of the community to be served. First, had the

court considered the merger’s effects in the relevant

geographic and product markets identified by the

government, it should have concluded that this merg.

er, which will substantially increase concentration in

an already highly concentrated market, may sub

stantially lessen competition. Because of this error,

the court balanced the convenience-and-needs factor

against an erroneous assessment of competitive im-

pact. Second, the court balanced competitive impact

in a broad multi-community area against the conven-

ience and needs of Phillipsburg considered in isola-

tion, whereas the Act requires that both factors be

assessed with reference to the same “community” or

geographic market. Third, the court misapplied the

convenience-and-needs standard by focusing only on

the asserted needs of customers for large business

loans and trust services and exaggerating the bene-

fits that the merger would afford those customers.

Fourth, the court and the merging banks failed ade-

quately to consider alternative ways of achieving the

merger’s ‘purported benefits—including reasonably

available internal steps that either bank might have

taken and the possibility of less anticompetitive

mergers. For all of these reasons, the court failed

to balance the factors with the kind of accurate, de-

tailed consideration that the Act requires; and the

case should, therefore, be remanded for further con-

sideration under correct criteria.

———————_

ARGUMENT

Commercial Banking Is a Relevant Product Market

The term “commercial banking” covers the cluster

of products and services offered by the only institu-

tions permitted by law to accept demand deposits,”

to create additional money and credit, to participate

in and manage the nation’s checking account system

and to furnish short term business loans.” While com-

mercial banks compete with certain other financial in-

#” Mutual savings banks in New Jersey are permitted to ac-

cept demand deposits, but there are no such institutions in

Phillipsburg-Easton or in the Lehigh Valley (App. 175, 453).

*In United States v. Philadelphia National Bank, supra,

874 U.S. at 326-327 n. 5, this Court noted:

The principal banking “products” are of course various

types of credit, for example: unsecured personal and busi-

ness loans, mortgage loans, loans secured by securities

or accounts receivable, automobile installment and con-

sumer goods installment loans, tuition financing, bank

credit cards, revolving credit funds. Banking services in-

clude: acceptance of demand deposits from individuals,

corporations, governmental agencies, and other banks;

acceptance of time and savings deposits; estate and trust

planning and trusteeship services; lock boxes and safety-

deposit boxes; account reconciliation services; foreign

department services (acceptance and letters of credit);

correspondent services; investment advice. It should be

noted that many other institutions are in the business of

supplying credit, and so more or less in competition with

commercial banks (see further, pp. 356-357, infra), for

example: mutual savings banks, savings and loan associa-

tions, credit unions, personal-finance companies, sales-

finance companies, private businessmen (through the fur-

nishing of trade credit), factors, direct-lending govern-

ment agencies, the Post Office, Small Busines Investment

Corporations, life insurance companies.

BLN OVE LOGE POLLS

Sparen eererersess

stitutions in seeking deposits or in supplying credit,

their demand deposit functions make them unique in

the cluster of financial services they offer (App. 174-

186). :

The merging banks here have all of the basic at.

tributes of commercial banks outlined in Philadelphia

Bank, supra. In a single institution they offer de.

mand deposits; create credit; pay interest for the use

of other people’s money in time and savings deposits

and lend it at greater interest; and offer short-term

business loans and longer term real estate loans and

even a modest trust service (see Statement, supra,

pp. 11-12; see, also, App. 19, 52, 76, 182, 246)”

This case is therefore governed by the holding in

Philadelphia Bank (374 U.S, at 356-357) that:

the cluster of products (various kinds of credit)

and services (such as checking accounts and trust

administration) denoted by the term “commer-

cial banking,” see note 5, supra, composes a dis-

tinct line of commerce. Some commercial bank-

*1 Accordingly, competition with other financial institutions

does not eliminate the need for competition between commer-

cial banks themselves. See Hearings on S. 1698 Before the

Subcommittee on Domestic Finance of the House Committee

on Banking and Currency, 89th Cong., 1st Sess., at 378-379

(testimony of Federal Reserve Governor Mitchell).

22 As is characteristic of banks of their size operating in

small communities (e.g., App. 95-96), their ratio of com-

mercial loans to deposits is low, and a higher proportion

of their loans is in residential and business real estate mort-

gages than is in short term commercial credit. This is

typical of banks in the Lehigh Valley. See App. 83-84, 100,

133-134. See, generally, 55 Fed. Res. Bull. Charts A-20 and

A-24,

ing products or services are so distinctive that

they are entirely free of effective competition

from products or services of other financial insti-

tutions; the checking account is in this category.

Others enjoy such cost advantages as to be in-

sulated within a broad range from substitutes

furnished by other institutions. For example,

commercial banks compete with small-loan com-

panies in the personal-loan market; but the small-

loan companies’ rates are invariably much higher

than the banks’, in part, it seems, because the

companies’ working capital consists in substan-

tial part of bank loans. 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 “sufficiently inclusive to be

meaningful in terms of trade realities.” Crown

Zellerbach Corp. v. Federal Trade Comm’n, 296

F. 2d 800, 811 (C.A. 9th Cir. 1961). [Footnotes

omitted. ]

The court below refused to follow this standard.

In a ruling it characterized as “not orthodox” (App.

675), it purported to analyze the product market by

“different groupings within the line of commerce

separating those products and services where ab-

sence of competition may be significant from those in

which competition from many sources is so widespread

that no question of significant diminution of competi-

tion by the merger could be raised” (App. 675).

As previously noted, however, the court did not make

any findings as to the competitive significance of this

ae En

A AUS

Paes? EI EE He ONENESS ENR Ie THe ee TGS Ee tS

merger on the fragmented lines of commerce it ge.

lected.

The court’s stated reason for’ refusing to follow

Philadelphia was that the merging banks here have a

considerably smaller proportion of demand deposits

to total deposits, and of commercial and industria]

loans to total loans, and a larger proportion of time

and savings deposits to total deposits, than did the

large city banks in Philadelphia. From this it con-

cluded that competition from other types of institu-

tions was necessarily greater than in large cities and

that the defendant banks were engaged in only lim-

ited activity in fields unique to commercial banking

(App. 672).

This approach disregards the fundamental teach-

ing of Philadelphia: that it is the cluster of products

and services which commercial banks offer, and not

merely the ones that are unique to them, which as a

matter of trade reality make commercial banking a

distinct line of commerce. Commercial banks are to

financial services what super-markets are to food re-

tailing: a place where varied products and services—

some unique and some not—are gathered together at

a point of convenient access. In addition, the banks’

credit-creating and demand-deposit functions, in what-

ever proportion, give them a distinctive role and in-

fluence on the economy of their community. Custom-

ers in small communities desire and utilize this clus-

ter of services no less than city dwellers (see State-

ment, supra, p. 8).

If the district court’s analysis were correct, all of

the banks in Phillipsburg-Easton and most of those

elsewhere in the Lehigh Valley and in other small

communities across the nation, which have similar

ratios of business to those of the appellee banks (App.

764; see supra, pp. 7-8, 11-13), would be removed

from the category of commercial banking for pur-

poses of antitrust analysis and preserving competi-

tion. The result would be that residents of small

communities would be denied the protection of the

law enjoyed by city dwellers, and would have no

assurance that competitive alternatives in commer-

cial banking would be preserved for them.

The Bank Merger Act of 1966 did not change the

definition of lines of commerce, or draw a distinction

in this respect between city banks and banks in small

communities. Its legislative history largely records a

struggle over the criteria and procedures which should

apply to institutions within the reach of the Philadel-

phia decision—i.e., all commercial banks. The final

enactment continued the antitrust standard for bank

cases that had previously obtained (Nashville Bank,

390 U.S. at 182; Houston Bank, 386 U.S. at 363-364),

and manifested “no intention to alter the traditional

methods of defining relevant markets * * *” (Nash-

ville Bank, 390 U.S. at 182, n. 15).

The court below recognized, with reference to the

appellee banks, that “ ‘commercial banking’ may be

used to designate the general line of commerce em-

bracing all bank services * * *” (App. 669). The evi-

dence showed that the merging institutions were com-

mercial banks (see supra, pp. 11-12), and the district

court made no finding to the contrary. Since it also

OEE LENN DIONE HALES OLE MO TS

made no findings with respect to the fragmented

lines of commerce which it designated as appropriate _

product markets, and since it ultimately considered

only commercial banks in measuring the merger’s im-

pact (App. 681-689), the court seemed tacitly to ree.

ognize the impracticality of analyzing bank mergers

in the manner it proposed.* Although submarkets

such as the court defined are sometimes appropriate

for purposes of Section 7 analysis,* they may not be

utilized to exclude from consideration a more general

distinctive product or service market that is signifi-

cant in terms of commercial realities. Brown Shoe Co,

v. United States, 370 U.S. 294, 326; United States y.

Continental Can Co., 378 U.S. 441, 457. According-

ly, commercial banking was a relevant line of com-

merce here.

Phillipsburg-Easton Is a Relevant Geographic Market

In the district court, the government contended that

the anticompetitive effects of this merger should be

28 Several other district courts, as well as the Comptroller

of the Currency, have also purported to analyze bank mergers

with reference to numerous lines of commerce as proposed by

the district court here. See, e.g., United States v. Crocker-

Anglo National Bank, 277 F. Supp. 133, 153-162 (N.D. Cal.);

United States v. Provident National Bank, 280 F. Supp. 1, 7-

9 (E.D. Pa.); United States v. First National Bank of Jack-

son, 301 F. Supp. 1161, 1179-1183 (S.D. Miss.); United

States v. First National Bank of Maryland, 1970 CCH Trade

Cases { 73,061, at pp. 88,157-88,161 (D. Md. 1970).

* For example, some of the district court’s individual lines

of commerce would obviously be relevant in analyzing the

effect on competition of a merger between a commercial bank

and another type of financial institution.

_——————

judged either in Phillipsburg or in Phillipsburg-Eas-

ton, and that in either market the effect of the merger

may be substantially to lessen competition. The dis-

trict court held, however, that neither geographic area

is an appropriate “section of the country” under Sec-

tion 7; it ruled that “the appropriate geographic

market” was a substantially broader area covering a

major part of the Lehigh Valley (App. 678, emphasis

added). ,

“[W]ithin [a] broad [product] market, well-de-

fined submarkets may exist which, in themselves, con-

stitute product markets for antitrust purposes”

(Brown Shoe Co. v. United States, 370 U.S. 294, 325).

The principle is equally applicable to geographic mar-

kets; there may be several areas in which it is appro-

priate to test the effect of a merger upon competition,

and if the proscribed effect occurs in any one of them,

the merger is illegal. See United States v. Pabst

Brewing Co., 384 U.S. 546, 552. For Section 7 bars

mergers that may substantially lessen competition in

“any” section of the country, and “The language of

this section requires merely that the Government

prove the merger may have a substantial anticompeti-

tive effect somewhere in the United States” (Pabst,

supra, at p. 549). Moreover, the size of the particu-

lar area where the merger has an impact is immate-

rial in determining whether that area is an appro-

priate market; Section 7 is designed to preserve and

protect the benefits of competition in small communi-

ties as well as in vast metropolitan and larger regions.

Cf. Brown Shoe Co. v. United States, 370 U.S. 294,

339; United States v. Columbia Steel Co., 334 U.S,

495, 519.

In defining a relevant market under Section 7, “The

proper question to be asked * *’ * 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.'*! * * * This depends upon

‘the geographic structure of supplier-customer rela-

tions.’ * * * In banking, as in most service indus-

tries, convenience of location is essential to effective

competition.” United States v. Philadelphia National

Bank, 374 U.S. 321, 357-358.

In selecting the geographic market in this case, the

district court failed to follow the foregoing settled

principles, and as a result made three basic errors:

(1) it improperly assumed that only a single market

exists; (2) it ignored the evidence in the record that

this merger would have a “direct and immediate”

effect upon banking competition in Phillipsburg and

Phillipsburg-Easton; and (3) rather than focusing on

the area where the merger would have such an im-

pact, it instead stressed the economic and social inte-

25 The anticompetitive effect with which Section 7 is con-

cerned is the change in the structure of a market that a mer-

ger causes, rather than the particular anticompetitive prac-

tices, such as price changes, that follow such change. For Sec-

tion 7 is designed to forestall such practices by preventing

the changes in market structure that lead to them. See, e.9.,

Brown Shoe Co. v. United States, 370 U.S. at 346; Philadel-

phia Bank, 374 U.S. at 365; United States v. Von’s Grocery Co.,

384 U.S. 270, 277. Accordingly, the area of impact that de-

fines an appropriate geographical market is an area where

such structural changes occur.

TIl——

gration among the population and other businesses in

the larger merchandising area that it viewed as the

only appropriate geographic market. Under the teach-

ings of this Court, the record shows that Phillipsburg-

Easton is a relevant market for testing the effect of

this merger upon banking competition.

In Philadelphia Bank, this Court pointed out (374

U.S. at 358-360) :

Individuals and corporations typically confer the

bulk of their patronage on banks in their local

community; they find it impractical to conduct

their banking business at a distance. See Trans-

america Corp. v. Board of Govs. of Fed. Res.

Sys., 206 F, 2d 163, 169 (C.A. 3rd Cir. 1953).

The factor of inconvenience localizes banking

competition as effectively as high transportation

costs in other industries. * * * Theoretically,

we should be concerned with the possibility that

bank offices on the perimeter of the area may be

in effective competition with bank offices within;

actually, this seems to be a factor of little sig-

nificance.

In Philadelphia, this Court held that a four-county

area was a relevant market for evaluating the com-

petitive effect of the merger of the second and third

largest of 42 banks in the Philadelphia metropolitan

area. It emphasized a number of factors:

ON ee ve

(1) the particular importance in banking of con-

venient access (374 U.S. at 358, 360-361, 369) ;

(2) the fact that banking offices generally compete

for deposits within a radius of only a few

miles (374 U.S. at 358 n. 35);

ep:

’

(3) the principle that a borrower’s or investor’s

market varies directly with his size: “[T]he

smaller the customer, the smaller is his bank-

ing market geographically” (374 U.S. at 359

n. 36);

(4) the fact that the vast bulk of the banks’ busi-

ness originated within the area (374 U.S. 359

n, 36), and that their business from outside

the area was relatively slight (374 U.S. at

360 n. 37);

(5) the view of other federal banking agencies that

the region was an area of effective competition

(374 U.S. at 361); and

(6) the concentration of all the banks’ offices with-

in the area, as required by State law (374 USS.

at 361).

The Court also noted, in defining the product mar-

ket, the importance of habit, custom, personal rela-

tionships and convenience as a factor tending to in-

sulate banks from other competition—even when

higher rates are offered for savings deposits (e.g,

App. 652-653). 374 U.S. at 357, n. 34.

With one exception,” these factors are equally ap-

plicable to the Phillipsburg-Easton area—although

26 When this suit was filed, New Jersey law did not limit

the merging banks to operating in Phillipsburg, but permitted

them to open branches anywhere within their home county

(Warren County). While the case was pentling, New Jersey

law was amended to permit branching on a broader basis.

See note 13, supra, p. 16. Since no one contended that either

Warren County or the broader area in which the merging

banks may now do business was an appropriate geographic

market, this factor is not involved in this case.

naturally on a reduced scale—and they establish that

that area constitutes an appropriate section of the

country for testing the effect of this merger upon

competition,

(1) Convenience of access is as important in this

small community as it is in the larger markets (cf.

App. 665).” Thus, although these cities are suf-

ficiently small so that there is easy access to the

center of either town where the banks have their main

offices, the banks found it necessary to establish

branches in surrounding townships within a radius of

a few miles. They opened branches there because

that is “where the customers are (App. 273).”

* This is a general principle of the banking business. Com-

pare Philadelphia Bank, at 358 n. 35. As the Federal Reserve

Board noted in another proceeding, quoted in Transamerica

Corp. V. Board of Governors, 206 F. 2d 163, 167-168 (C.A. 3),

certiorari denied, 346 U.S. 901:

Because of the frequency of need for access to one or

more of the services of commercial banks, such banks

draw their business largely from areas within which

customers may conveniently visit the banks as occasion

may require. Thus, in this aspect of their customer rela-

tions, commercial banks are largely local, and for the

usually needed customer services a distant bank cannot

adequately serve a customer. Very large concerns with

national credit standing have access to credit from banks

in many parts of the country and may also maintain ac-

counts in widely scattered banks. This does not apply,

however, to the great multitude of the customers of com-

mercial banks. The smaller concerns, local business enter-

prises, and ordinary citizens must depend upon their

local commercial bank or banks for the financial services

peculiar to such banks; for all these customers there is no

alternative or substitute, because distantly located banks

do not serve or supply their needs.

(2) As the foregoing facts demonstrate, banking

offices in Phillipsburg-Easton generally compete for

deposits within a radius of only a few miles. More.

over, the merging banks do no significant advertising

outside the area and banks from outside the area

advertise within it only as part of incidental cover-

age utilized to reach other markets (see Statement,

supra, p. 10).

(3) The customers principally served are relatively

small: 74 percent of PNB’s and 72 percent of SNB’s

number of total deposits are less than $1,000; and 96

percent and 97 percent, respectively, are less than

$10,000 (App. 725-726, 733-734). Of total loans, 76

percent of PNB’s and 58 percent of SNB’s are less

than $2,500, and 86 and 94 percent, respectively, are

less than $10,000.*

(4) The vast bulk of the merging banks’ business,

and that of the other Phillipsburg-Easton banks as

well, is localized within the area. For example, nearly

every family in Phillipsburg deals with one of that

community’s three banks (App. 176). The merging

banks’ deposit and loan statistics show that they draw

about 85 percent of their total banking business in

every category from the Phillipsburg-Easton area.

About 90 percent of each bank’s total deposits, de-

mand deposits, and time and savings deposits origi-

nate there; as well as 78 percent of PNB’s total loans

28 Only 25 of PNB’s 5,566 loans, and only 17 of SNB’s

2,235 loans, exceed $50,000 (App. 733-734).

and 87 percent of SNB’s.” Indeed, the business is so

localized that the merging banks draw only about 10

percent of their deposits from Easton (App. 731-

732). And, as the district court itself found in as-

sessing the convenience and needs of the community

to be served, Phillipsburg’s businessmen prefer to

deal with one of the three banks in that sector (App.

691, 693-697).

The small amount of business that the merging

banks do outside the area results from special per-

sonal contacts or business relationships (App. 37-38,

40, 41-42, 80, 97, 269, 637). Similarly, banks from

outside the area do relatively little business within

it (App. 53-57, 64-68, 74, 96-98).

(5) The two other banking agencies required by

the Bank Merger Act to comment on the competitive

factors involved in this case also viewed Phillipsburg-

Easton, or the Phillipsburg sector thereof, as the pri-

* DEPOSIT AND LOAN ACCOUNTS OF PHILLIPS-

BURG NATIONAL AND SECOND NATIONAL LOCATED

WITHIN PHILLIPSBURG-EASTON DECEMBER 30, 1967

(Percent of Total)

Phillipsburg National Second National

number value number value

App. 725-726: Total Deposits 916% 874% 92 % 88.8%

App. 727-728: Demand Deposits 88.1 83.7 90.7 84.8

App. 729-730: IPC Demand

Deposits 88.2 83.8 90.8 88.7

App. 731-732:. Time and Savings

Deposits 92.7 89.1 92.6 90.4

App. 733-734: Total Loans 78.6 77.7 87.2 81.6

App. 735-736: Comm. & Indust,

Loans 79.5 86.9 90.9 76.0

App. 737-738: Real Estate Loans 86.8 82.1 87.8 82.5

App. 817-818: Installment Loans 77.2 67.9 88.0 86.2

App. 819-820: Single Payt. °

Loans 73.4 58.5 74.6 69.7

pe SA

mary area in which the merger’s competitive impact

would be felt (FDIC Rep., p. 2; FRB Rep., p. 4).

The extent to which the Phillipsburg-Easton banks

were insulated from competition outside the area is

dramatically illustrated by their practice with respect

to interest rates on savings deposits. As of December

31, 1967, commercial banks elsewhere in the Pennsyl-

vania and New Jersey sectors of the trial court’s geo-

graphic market—many of them located only a few

miles from Phillipsburg-Easton—were paying 4 per-

cent interest on ordinary passbook savings accounts

(some had been paying this rate since 1962). Com-

mercial banks in Phillipsburg as of that date, and un-

til at least July 1968, paid only 314 percent on these

accounts; Easton commercial banks paid 3 percent.”

Yet Phillipsburg National’s rate of deposit growth

during 1962-1967 exceeded that of most Lehigh

Valley banks known to be paying the higher rates

of interest on such accounts during some or all of

that period, and similar growth was experienced by

Second National (see Statement, supra, pp. 10-11).

8° The president of Easton National Bank testified “3 per-

cent was paid from October 1, 1959 until July 1, 1968. * * *

We were authorized to go to a 4 percent level several years

ago, and the regulations permitted us to, but we chose not to

increase our rate” (App. 117). Phillipsburg National, how-

ever, had paid 314 percent since early 1962. Almost all banks

on the periphery of the Phillipsburg-Easton area were pay-

ing 4 percent during that period. Phillipsburg National’s

president explained that the half-percent differential enabled

them to keep most small accounts because for them it

“doesn’t mean this much” (App. 635). Phillipsburg and

Easton banks, however, almost simultaneously followed

Lafayette Trust’s lead when that Easton bank increased its

rate to 4 percent (App. 118).

Despite the demonstrated localization of banking

in this area, it is of course possible for customers

from Phillipsburg-Easton to go elsewhere if they can

afford the time and tolerate the inconvenience, and

if an institution primarily serving another commu-

nity is interested in dealing with them. Cf, United

States v. Provident National Bank, 280 F. Supp. 1,

14-15 (E.D. Pa.) The broader market used by the

district court in effect implies that Phillipsburg-

Easton residents can protect themselves against the

adverse competitive consequences of this merger by

thus banking elsewhere. But as the Court noted in

Philadelphia, this is largely a question of their size.

“Small businessmen especially are, as a practical mat-

ter, confined to their locality for the satisfaction of

their credit needs * * *. If the number of banks in

the locality is reduced, the vigor of competition for

filling the marginal small business borrower’s needs

is likely to diminish” (Philadelphia Bank at 369).

Moreover, small depositors have little reason to leave

their money for safe keeping or checking purposes in

communities they visit only on occasional shopping

trips (Tr. 295). Whatever may be the social and eco-

nomic integration of the larger region, it does not

create the kind of credit relationship, based on inti-

mate local knowledge, that opens the doors of banks to

small businessmen, householders and those whose pri-

mary security is their character (App. 58, 280-

281). Nor does it evidence the kind of convenience

that encourages the residents of an area to use a

bank’s deposit and other services.

FETE ROL RD SEA ERR LR

ae SPUN,

The possibility that the resulting bank might com-

pete more vigorously in the future with banks serv.

ing peripheral areas, as a ground for using the

broader area relied on by the district court (compare

App. 29-30, 33-34, 125-126, with App. 688), does

not controvert the government’s proof that in Phil.

lipsburg and Easton the immediate effect of the pro-

posed merger would be elimination of competition

between two substantial firms and a significant in.

crease in an already high degree of concentration,

“[W ]hile there is undoubtedly some commercial in-

tercourse between smaller communities within a single

‘standard metropolitan area,’ the most intense and

important competition * * * will be confined to * * *

the particular communities in such an area and their

immediate environs.” Brown Shoe at 339. As Phila-

delphia Bank makes clear, any area where a merger

has such an impact is an appropriate section of the

country. “Proof of the section of the country where

the anticompetitive effect exists is entirely subsidiary

to the crucial question in * * * every § 7 case which

is whether a merger may substantially lessen compe-

tition anywhere in the United States” (Pabst, supra,

384 U.S. at 549-550)

If the banking interests of residents and businesses

in small communities are to be protected, the localized

81 Moreover, the district court’s stated reason for not ac-

cording significance to the government’s proof that most of the

merging banks’ business is local—that “These percentages

have significance only to the extent that they are considered

in conjunction with concentration of population” (App. 681)

—hardly justified the court’s extension of the market to in-

clude Bethlehem, a city with a larger population than that of

either Phillipsburg or Easton.

————7—_—_-

nature of banking must be given primary weight in

defining banking markets, for it defines the princi-

pal area of impact. Otherwise, an effective exemp-

tion from the statute will have been created for hori-

zontal mergers of small banks in small communities,

thereby reducing for the people of those areas the

choice among banking alternatives that Section 7

preserves in the more densely populated areas. This

was not the intention of Congress when it adopted

the original Section 7, extended it in the Celler-

Kefauver Antimerger Act, and reaffirmed this Court’s

application of it to commercial banking in the Bank

Merger Act of 1966.

III

The District Court’s Evaluation of the Merger’s Effects

on Competition and on Community Convenience and

Needs Was Defective Because It Applied Erroneous

Standards

Under the Bank Merger Act of 1966, the determi-

nation of the legality of a bank merger involves a

two-step process. First, the effect of the merger upon

competition must be evaluated, i.e., whether, in the

relevant product and geographic markets, it may sub-

stantially lessen competition. That determination is

made by applying the usual standards under Section

7 of the Clayton Act. United States v. Third Na-

tional Bank in Nashville, 390 U.S. 171, 181-183. f .

Second, if the merger violates those standards, then f

the district court may approve it only if it finds ;

that “the anticompetitive effects of the proposed

transaction are clearly outweighed in the public in- :

terest by the probable effect of the transaction in

meeting the convenience and needs of the community

to be served.” See Nashville Bank, supra, at 183.

184; United States v. First City National Bank of

Houston, 386 U.S. 361, 369-370.

If the district court erroneously evaluates the ef.

fect of the merger on competition—whether by using

the wrong markets or by applying improper criteria

for determining such effect—that error also invali-

dates its conclusion that such effect is clearly out-

weighed by the community convenience and needs,

Nashville Bank, supra, at 188. Similarly, any error

in applying the convenience-and-needs standard nec-

essarily also undermines the balancing of the two

factors involved. “To weigh adequately one of these

factors against the other requires a proper conclu-

sion as to each” (ibid.).

In the present case, the district court erred both

in evaluating the effect of the merger on competition

and in balancing that effect against the meeting of

community convenience and needs. The court’s

threshold error, as we have just shown, was using

the wrong geographic market for testing competitive

impact. As we shall show, under this Court’s Section

7 decisions, the effect of the merger in Phillipsburg-

Easton may be substantially to lessen competition.

The district court’s evaluation of whether the off-

setting convenience-and-needs factor clearly outweighs

the merger’s anticompetitive effects was defective for

a number of reasons: (1) the court weighed this

factor against an erroneous assessment of competi-

tive impact; (2) it failed to balance the factors with

the kind of detailed consideration that this Court’s

Nashville Bank decision requires; (3) it determined

competitive effect and community convenience and

needs in different geographic markets rather than,

as the Act requires, in the same market; and (4) it

failed adequately to consider whether the commu-

nity benefits could have been achieved by a less anti-

competitive method than this merger.

A. The Effect of the Merger in Phillipsburg-Easton

May Be Substantially to Lessen Competition.

Under the criteria developed by this Court, par-

ticularly in Philadelphia Bank, 374 U.S. at 364-366,

for determining the effect upon competition in con-

centrated markets of so-called horizontal mergers

(those between competitors), the effect of this merger

may be substantially to lessen competition. The de-

terminative inquiry is the effect of the merger on

concentration as reflected in the market shares of

the merging banks and of the remaining banks serv-

ing the community.

In Phillipsburg-Easton, the commercial banking

market is highly concentrated (see Statement, supra,

pp. 18-15). The merger would significantly increase

this concentration. The total deposit shares of the

two largest banks would increase from 56 to 65 per-

cent and the merged bank would control 20.2 percent

of total deposits and 27.3 percent of total loans and

discounts. Its share of overall business would be at

least 24 percent (see Statement, supra, pp. 13-15).

In such a concentrated market, these market shares

show that the effect of the merger may be substan-

tially to lessen competition. Philadelphia Bank (30

rps

Bais MG , muy EERE A MESES eo BS SE POLL PET REL PAIS

percent combined); Nashville Bank (33.6 percent

and 4.8 percent) ; United States v. Von’s Grocery Co,,

384 U.S. 270 (7.5 percent combined) ; United States

v. Pabst Brewing Co., 384 U.S. 546 (4.9 percent

combined); United States vy. Provident National

Bank, 280 F. Supp. 1 (E.D. Pa.) (10 percent com-

bined).

This Court has noted the particular importance of

preserving competitive alternatives in banking mar-

kets which are already concentrated, since they pro-

vide the opportunity for competitive deviations from

the oligopolistic pattern. Philadelphia Bank, 374 U.S,

at 365 n. 42. “[E]ven the mere addition of one seller

to an oligopoly market makes the market more

complex and less predictable. Therefore there may

be competitive actions and reactions in an oligopoly

market.” Northern Natural Gas Co. v. Federal Power

Commission, 399 F.2d 958, 965-966 (C.A.D.C.). In

banking these competitive reactions may manifest

themselves in deviations from generally prevailing

loan and deposit interest rates (e.g., App. 188, 457-

458, 463) and in improved services such as more

convenient banking hours (e.g., App. 34) or more

conveniently located branches (e.g., App. 273, 398-

399).*

** For these reasons the district court’s view that the gov-

ernment failed to prove its case because it did not show that

the merger would result in immediate adverse consequences

in daily transactions (App. 688) misconceived the significance

of the structural approach to horizontal mergers set forth in

Philadelphia Bank, 374 U.S. at 366. The extensive evidence

offered by the defendants to the effect that bank mergers have

no immediate adverse competitive effects is similarly irrele-

vant. Id. at 367, n. 43. See n. 25, p. 32.

B. The District Court Misconceived and Misapplied

the Community Convenience-and-Needs Standards

As noted, the district court’s improper assessment

of the competitive impact of the merger vitiated its

weighing of that impact against the benefits to the

community. Nashville Bank, supra, 390 U.S. at 183-

184. Moreover, it conclusory statement (App. 699)

that “any conceivable anticompetitive effect of the

merger is clearly outweighted by * * * the needs and

convenience of the community to be served” does not

reflect the kind of carefully articulated and reasoned

analysis that the Act requires before the court may

find that the anticompetitive consequences are “clear-

ly outweighed” by the community benefits. Nash-

ville Bank at 187-192.

There were also several serious fundamental de-

fects in the district court’s understanding and appli-

cation of the community convenience-and-needs stand-

ards.

1. Community Convenience and Need Should be

Evaluated in the Same Geographical Area as Com-

petitive Effect. By assessing competitive impact in

a broad multi-community market, the court was able

to conclude that the anticompetitive effect would be

insubstantial; turning to the needs of the community,

however, it assessed the present availability of the

two needs it focused on—large loans and trust serv-

ices—only in the Phillipsburg sector of the commu-

nity.

This approach seriously misapprehends the rela-

tion between Section 7 and the Bank Merger Act.

The latter statute, whose history has twice been re-

viewed by this Court (in the Houston Bank and

Nashville Bank cases), was a compromise produced

in an intense legislative struggle. It had three prin.

cipal substantive effects: (1) establishment of a uni.

form standard for the assessment of commercial bank

mergers by courts and banking agencies; (2) con.

tinuation of traditional antitrust standards for test.

ing the anticompetitive effects of such mergers; and

(3) creation of a new affirmative defense to proved

violations of the antitrust standards—convenience

and needs of the community to be served.*

Since the defense depends upon a balancing of

anticompetitive effects against the community’s needs, —

both factors must be assessed with reference to the —

same geographic area if the comparison is to be

meaningful. The reason that a particular area is an |

appropriate geographic market is because it is an

area where the merger will have a direct and serious

impact upon competition, i.e., it will eliminate one

of the reasonably available choices for customers in

the area. Any offsetting benefits that may justify

the merger must be evaluated on the basis of their

effect in the same area. For such benefits relate to

the serving of the same banking needs which under-

lie the selection of the geographic market for deter-

mining competitive impact. Congress manifestly in-

tended the convenience-and-needs defense to legalize

only those anticompetitive bank mergers whose di-

rect benefits to the people to be served clearly out-

83 Under the law as it stood prior to the 1966 Act, such a

defense was not available. Philadelphia Bank, 374 U.S. at

371.

— °°

weigh the injury those same people would suffer

through the elimination of a significant entity that

regularly had been serving them. In terms of the

statutory language, the “community to be served,”

whose convenience and needs are to be evaluated, is

the same as the “section of the country” in which the

competitive impact of the merger is to be tested. See

112 Cong. Rec. 2445, 2457 (remarks of Rep. Reuss).

In determining the needs of the community when

thus properly defined, it is, of course, appropriate to

focus on a particular sector if the benefit to that

sector will accrue to the entire community. An ex-

ample might be a merger which would confer other-

wise unachievable benefits upon a blighted area of

a city. Although the larger urban area would con-

stitute the relevant market, benefit to the smaller

area within it might be found, in such a case, to

serve the convenience and needs of the city at large.

The district court made no such findings here,

however. It never viewed Phillipsburg-Easton as a

community in which to measure competition or needs.

Although it measured competition in a large multi-

community area, it treated Phillipsburg alone (where

the anticompetitive effect of the merger would be the

most drastic) as the “community” whose banking

needs were to be considered—and it assessed those

needs with reference only to banking services located

in Phillipsburg, while ignoring those available in its

twin city across the river.

2. The district court misapplied the convenience-

and-need standard. In assessing the needs of the

Phillipsburg community, the district court considered

too narrow a segment of that community. It looked

Be ONAN PIL ETSI RII

ey Oe

RE HS Sa?

Qa LIEB EET

to the needs of only two groups there—customers for

large business loans or for trust services. The needs

of the smaller depositors and the smaller borrowers,

whose number is far greater, whose banking range

is far narrower, and whose local banking alterna.

tives the merger would reduce, were ignored.

The primary need emphasized by the court, as re

flected in extensive quotations from testimony (App,

691-698), was the desire of some Phillipsburg

businessmen for an opportunity to borrow larger

sums from a bank located in Phillipsburg than any

of the three banks presently located there can directly

supply. But the record shows that in Easton four

banks have lending limits equal to or substantially

in excess of that of the proposed resulting bank (see

n. 14, supra, p. 17). Moreover, the larger borrowers,

who tend to be established businessmen, have greater

access than smaller borrowers to banks elsewhere in

the region (see Statement, supra, pp. 7, 17-18). In

other words, the broad multi-community area used by

the court to measure the merger’s competitive effect

would seem more relevant to assessing this asserted

need of the Phillipsburg community than to the pur-

pose for which it was used.

The other need emphasized by the court related to

improved trust services. Demand for this service,

however, is relatively slight compared with demand

for other banking services, and much of the area’s

need for personal and corporate trust services is

satisfied by large banks in cities as distant as Phila-

delphia and New York, because users of such services

are willing to shop further afield (App. 75, 90, 95,

165, 858, 439, 462, 491). Moreover, trust services

are available from most of the local banks (App.

838). Both of the merging banks have small trust

departments (App. 165, 245, 631-633, 710), and

ample trust services are available in Easton from the

Easton National Bank, which handles more than $45

million in both personal and corporate trusts (App.

119), and from the Lafayette Trust Bank (App.

388). In addition, Nazareth National Bank, which

has a branch in Easton’s suburb of Forks, handles

some $20 million in trust assets (App. 77). There

appears to be no serious demand for trust services in

Phillipsburg which cannot be met without difficulty

(App. 50, 627).

The district court also found that the larger bank

resulting from the merger would benefit the com-

munity because it could afford the salaries of a full

time specialist in commercial loans and a trust officer

(App. 689-690). But it is doubtful that the combined

institution would have sufficient business to warrant

this step in the near future. An officer from a large

Bethlehem bank testified that a full time trust officer

becomes justifiable only after trust business ap-

proaches $30 million, which may take nearly a decade

(App. 111-118). Similarly, a substantially greater

volume of commercial loans than either bank pres-

ently has would be necessary to support a full time

specialist in this field (App. 279).

Small banks typically do not have personnel de-

voting full time to any one phase of their varied

operations (App. 92, 281-282, 884, 396-397, 478-479,

540). Their officials become experienced in several

_ fields, and are usually able to specialize in any one of

LEAL ET pe PIPE LEE OPI E 3 thy

- ay

them if the need arises. PNB’s vice-president con-

ceded that he could handle all commercial lending if

he devoted full time to it (App. 268-269; Tr. 869.

870), and its consumer loan specialist greatly ex-

panded that department until he was told to con-

centrate on mortgage loans (App. 267-268, 413-414),

Thus the bank’s present officials have the potential for

necessary specialization, if their business warrants it

(see App. 638-639). As a PNB officer recognized

(App. 266-267), however, the merger was not expect-

ed to produce a significant change in the character of

the resulting bank’s business (App. 281-282). While

the merger might increase its ability to handle busi-

ness from outside the community, this is an extremely

attenuated benefit to the convenience and needs of

the people in Phillipsburg-Easton (cf. App. 143-144,

528-529).

We submit that a far more compelling showing of

need would be necessary to outweigh clearly the

merger’s anticompetitive effect in increasing bank-

ing concentration in Phillipsburg-Easton—and this

showing would have to be all the greater if the Phil-

lipsburg sector alone were to be considered the rele-

vant area. An increase in lending limits when there

are other available local sources for larger loans, or

the provision of better trust services in a small com-

munity where there are several banks with estab-

lished trust departments, is not enough “clearly” to

outweigh the anticompetitive impact of this merger.

Undoubtedly the merger would serve the convenience

of larger business borrowers, and those who wish to

establish trusts. But the fact that the merged bank

might be a larger institution which would render

better banking services is not in itself sufficient to

establish a defense under the Bank Merger Act. Un-

der that statute a merger cannot be approved unless

the gains in better service to the entire community

clearly outweigh the anticompetitive detriment to it

and the merger is “essential to secure this net gain

** *” Nashville Bank, 390 U.S. at 188-189.

3. The Merging Banks—and the District Court—

Failed Adequately to Consider Less Anticompetitive

Alternatives to This Merger. In determining wheth-

er benefits to the community outweigh the anticom-

petitive effects of a merger, the merging banks must

demonstrate that any overall gain to the public in-

terest cannot be achieved except by merger. For

“{iJf the injury to the public interest flowing from

the loss of competition could be avoided and the con-

venience and needs of the community benefited in

ways short of merger but within the competence of

reasonably able businessmen, * * * we seriously doubt

that Congress intended a merger to be authorized

by either the banking agencies or the courts. * * *

Otherwise, the benefits of competition, acknowledged

by Congress, would be sacrificed needlessly.” Nash-

ville Bank, 390 U.S. at 189. In the present case,

even assuming arguendo that the district court prop-

erly determined convenience and needs by reference

only to Phillipsburg, its ultimate holding on this is-

sue is invalid under the foregoing principle because

of its failure adequately to consider less anticom-

petitive methods of achieving the same benefits.

iciedieibals |

(a) Alternatives to Merger Were Not Seriously Pursued,

Both of the merging banks were growing and

profitable. They had increased their assets, deposits

and loans dramatically in the preceding decade, had

financed substantial improvements and new banking

offices internally, and had continued to pay sub

stantial cash dividends (App. 282, 285, 644; Tr.

996; GX-14). Any problems they had resulted

largely from their own commercial success within

their community.

The district court stressed the lack of full time

specialists in their trust and commercial loan depart-

ments. It found that there was only “tentative ex-

ploration of the possibility of obtaining qualified bank

officers,” and that this tentative effort “ceased when

it became clear that the expense was out of reach”

(App. 690). The only evidence of such tentative ex-

ploration, however, was a discussion by SNB with

an officer of one of the nation’s largest banks, Chem-

ical Bank of New York, after the merger had been

announced. He indicated that SNB could not meet

his terms (App. 406-408). The banks apparently did

not investigate whether there were available qualified

bank officers from other parts of the country whose

compensation requirements might be lower. Except

for an occasional casual review of unsolicited place-

ment listings, no effort was made, so far as the ree-

ord shows, to use the various services specializing in

the recruitment of bank specialists and executives.

Yet a PNB officer stated that, because of increased

business, even if the merger were disapproved the

bank would “have to hire somebody * * * [whether

he was a specialist or not” (App. 284; compare App.

285 with App. 540-541).

Officers of both banks admitted that one reason

for the lack of serious effort to hire new manage-

ment personnel, during at least the 18 months prior

to the merger, was that the merger discussions were

under way (App. 644-645, 649, 654, 657-658).

These discussions had begun several years before the

merger plan was consummated (e.g., App. 630,

644-645), and they directly affected the way the

banks were operated. For example, they did not re-

tain cash to pay salaries which might attract full

time specialists, although the cash dividends alone

were substantial during this period.™

Nor did the banks explore methods of increasing

their lending limits. They did not seek to enlarge

their capital structure by offering new capital stock

because, as a spokesman for the banks testified, “if

both banks should attempt to sell [new stock] they

would only be fighting for the dollar themselves, one

against the other which would not do anybody any

good” (App. 156). No effort was made to retain cash

dividends to enlarge surplus accounts for the purpose

of increasing lending limits (App. 714-715; Tr. 996) .*

* PNB paid cash dividends of $33,000 in 1967 and total divi-

dends from 1962 to 1967 of $192,000; SNB paid cash dividends

of $36,250 in 1967 and total dividends between 1962 and 1967

of $198,750 (GX-14; App. 285).

** Moreover, lending limits are not an absolute barrier.

Where credit risks are sound, requests for loans exceeding the

limits may be accommodated through participation with other

commercial banks in or outside the area. For example, PNB

financed the construction of the local parochial high school by

participating in loans in excess of its limit (App. 271-272.

See App. 319, 324). It has also accommodated large bor-

rowers by making multiple loans; in 1967 it extended a total

credit of $1.6 million to a single businessman (App. 621).

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The record further indicates that practical alter.

natives to merger were available for achieving the

benefits the banks contended the merger would pro-

duce. A small bank in Easton, Lafayette Trust Com.

pany, demonstrated this by hiring new management,

issuing stock and taking other steps to enlarge its

loan limits and modernize its operations. Internal

development by the defendant banks of the allegedly

needed services, therefore, was reasonably feasible

(cf. Nashville Bank, 390 U.S. at 190-192), though

perhaps less attractive to the defendants than merger.

**In May 1965—shortly before the defendant banks became

involved in their merger plans—Lafayette Trust, then with

“approximately 18 million” dollars in deposits (App. 396),

hired a new vice president for $11,000 salary with “nothing”

in fringe benefits (App. 395). Then, using the methods out-

lined in the text, Lafayette Trust was able to add two addi-

tional branches and a full time mortgage specialist, to build

deposits to 24.3 million dollars in December 1966 and to near-

ly 30 million dollars by September 1968, and to increase its

lending limit. Although Lafayette Trust had no full time

commercial lending officer, it moved aggressively into that

field; it solicited new deposits by boosting passbook interest

rates—forcing other Phillipsburg-Easton banks, after some

delay, to do the same (App. 118)—and in February 1968 it

began computerizing (App. 398). As a result Lafayette

Trust, which has only $4 million more in assets than PNB,

has a loah limit ($224,365) (see supra, n. 14, p. 17) which is

more than twice as great (App. 401), because it took steps

to increase its capital accounts (App. 403-404).

** The merging banks have the financial strength for efforts

similar to those of Lafayette Trust (see supra, n. 36). Both

banks showed substantial growth and considerable profits dur-

ing the decade preceding the merger (see supra, pp. 11, 53, n.

34) and they were able to finance internally the modernization

of the offices, the opening of branches and the purchase of av-

(b) The Possibility of Less Anticompetitive Mergers

Was Ignored.

The trial court failed to weigh, as the government

urged (App. 588-589, 593), the possibility of achieving

the same community benefits through a less anticom-

petitive merger. In Nashville this Court ruled “that be-

fore a merger injurious to the public interest is ap-

proved, a showing [must] be made that the gain

expected from the merger cannot reasonably be ex-

pected through other means” (390 U.S. at 190). The

Court held, accordingly, that the owners of the Nash-

ville bank should have made a serious effort to sell

to someone, other than their leading competitor, who

might have been willing to remedy the bank’s diffi-

culties (390 U.S. at 191-192). By the same reason-

ing, the possibility of a less anticompetitive merger

is an alternative which must be explored to satisfy

the convenience and needs test. Yet the district

court’s opinion reveals no consideration of this alter-

native.

At the time of the merger, PNB and SNB were

two of nine banks in Warren County. Under the

existing State law, either could have merged wiih

any of the six Warren County banks outside of Phil-

lipsburg, without the severe loss of direct competition

tomated equipment at substantial costs without reducing their

cash dividend. For example, in 1957 PNB modernized its main

office and added a parking lot at a cost of $120,000. In 1964 it

opened its Hillcrest Branch at a cost of $116,500 and its Alpha

Branch at a cost of $130,000. Since 1958 it has purchased

$48,000 worth of semi-automated bookkeeping equipment.

(GX-14, App. 627, 641-643.)

—

that is involved here.** But neither PNB nor SNB

gave “any consideration to contacting any other banks

in Warren County with respect to the prospects of

merging with one of those banks * * *” (App. 327,

662-663). Two of these Warren County banks, lo

cated in the town of Washington, some 12 miles from

Phillipsburg, were approximately the same size as the

two Phillipsburg banks.*® Thus, the asserted “con-

88 The available number of less anticompetitive alternatives

has been greatly increased by the amendments to the New

Jersey Branch Banking Law (see, supra, p. 16, n. 13). Now

either defendant could merge with any of the 86 other banks

located throughout the newly created First Banking District,

covering all of northern New Jersey (App. 868-870). A merg-

er with such a bank located in some other northern New Jersey

community would not involve a loss of existing competition in

Phillipsburg-Easton. We believe that it would be appropri-

ate for the district court to consider, on remand, the wider

range of alternatives now available.

8° The First National Bank of Washington had deposits of

$18.2 million and the Washington Trust Co. had deposits of

$14.5 million, as compared with $22.3 million and $16.0 mil-

ion for PNB and SNB (App. 684).

Subsequently, the First National Bank of Washington mer-

ged with Hackettstown National Bank (deposits of $10 mil-

lion), to form Warren County National Bank. This merger of

two small banks thirteen miles apart was approved by the ap-

propriate federal banking agencies. As pointed out by de-

fendants (Joint Motion to Strike, Affirm and Advance at 17),

Warren County National thereafter became an affiliate of First

National State Bancorp, a Newark-based holding company.

The possibility that larger Newark-based banks may now

enter Warren County by means of such “foothold” acquisi-

tions does not, as appellees suggested in their motion to af-

firm, justify the merger of PNB and SNB to foreclose this

threat of additional local competition. Such a merger might

be justified only where small competitors had to combine to

save themselves from destruction by large firms. United

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

venience-and-reeds” benefits based on increased size

and lending Jimit might well have been available

through mergé? With either of these banks,

Small bank’S Can compete successfully in small

markets and indeed can compete successfully with

large banks if: they have the will to do so. Nashville

Bank, 390 U.S. at 191, n. 24.” As a class they face

similar problems—difficulty in hiring full time spe-

cialists, lending limitations, and restriction of busi-

ness opportunities because of the small size of the

community they serve. If the common problems of

small banks im small communities were to be a justi-

fication for merger in the absence of significant

efforts to alleviate them by other means, multiple

banking alternatives would be likely to disappear in

many of the small towns of America. But Section

7 of the Clayton Act and the Bank Merger Act were

intended to preserve a diversity of banking oppor-

tunity for all Americans—in small communities as

well as large.

“See Kohn, T d ,

Their Ability tr? Future of Small Banks: An Analysis of

‘ Compete with Large Banks (N.Y. State

Banking Dept. 1966), p. 18.

— ee

CONCLUSION

The judgment of the district court should be re

versed and the case remanded for further considera.

tion under correct criteria. —

Repectfully submitted.

ERWIN N. GRISWOLD,

Solicitor General.

RICHARD W. MCLAREN,

Assistant Attorney General,

DANIEL M. FRIEDMAN,

Deputy Solicitor General,

LAWRENCE G. WALLACE,

Assistant to the Solicitor General,

HOWARD E. SHAPIRO,

KENNETH G. ROBINSON, JR.,

Attorneys.

APRIL 1970.

APPENDIX

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

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

pertinent part:

That no corporation engaged in commerce

shall acquire, directly or indirectly, the whole

or any part of the stock or other share capital

and no corporation 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 competition, or to tend

to create a monopoly.

Section 18(c) of the Bank Merger Act of 1966, 80

Stat. 7, 12 U.S.C. (Supp. II) 1828(c), provides:

“(c)(1) Except with the prior written ap-

proval of the responsible agency, which shall in

every case referred to in this paragraph be the

Corporation, no insured bank shall—

“(A) merge or consolidate with any non-

insured bank or institution;

“(B) assume liability to pay any deposits

made in, or similar liabilities of, any non-

insured bank or institution;

“(C) transfer assets to any noninsured

bank or institution in consideration of the

assumption of liabilities for any portion of

the deposits made in such insured bank.

“(2) No insured bank shall merge or consoli-

date with any other insured bank or, either di-

SEP SAS Pe Ee

rectly or indirectly, acquire the assets of, or

assume liability to pay any deposits made in,

any other insured bank except with the prior

written approval of the responsible agency,

which shall be—

“(A) the Comptroller of the Currency if

the acquiring, assuming, or resulting bank

is to be a national bank or a District bank;

“(B) the Board of Governors of the Fed-

eral Reserve System if the acquiring, as.

suming, or resulting bank is to be a State

member bank (except a District bank) ;

“(C) the Corporation if the acquiring,

assuming, or resulting bank is to be a non-

member insured bank (except a District

bank).

“(3) Notice of any proposed transaction for

which approval is required under paragraph (1)

or (2) (referred to hereafter in this subsection

as a ‘merger transaction’) shall, unless the re-

sponsible agency finds that it must act imme

diately in order to prevent the probable failure

of one of the banks involved, be published—

“(A) prior to the granting of approval

of such transaction,

“(B) in a form approved by the respon-

sible agency.

' “(C) at appropriate intervals during a

period at least as long as the period allowed

for furnishing reports under paragraph (4)

of this subsection, and

“(D) in a newspaper of general circu-

lation in the community or communities

where the main offices of the banks involved

are located, or, if there is no such news-

wige Sera

paper in any such community, then in the

newspaper of general circulation published

nearest thereto.

(4) In the interests of uniform standards,

before acting on any application for approval

of a merger transaction, the responsible agency,

unless it finds that it must act immediately in

order to prevent the probable failure of one of

the banks involved, shall request reports on the

competitive factors involved from the Attorney

General and the other two banking agencies re-

ferred to in this subsection. The reports shall

be furnished within thirty calendar days of the

date on which they are requested, or within ten

calendar days of such date if the requesting

agency advises the Attorney General and the

other two banking agencies that an emergency

exists requiring expeditious action.

“(5) The responsible agency shall not ap-

prove—

“(A) any proposed merger transaction

which would result in a monopoly, or which

would be in furtherance of any combination

or conspiracy to monopolize or to attempt

to monopolize the business of banking in

any part of the United States, or

“(B) any other proposed merger trans-

action whose effect in any section of the

country may be substantially to lessen com-

petition, or to tend to create a monopoly, or

which in any other manner would be in re-

straint of trade, unless it finds that the an-

ticompetitive effects of the proposed trans-

action are clearly outweighed in the public

interest by the probable effect of the trans-

action in meeting the convenience and needs

of the community to be served.

In every case, the responsible agency shall take

into consideration the financial and manageria]

resources and future prospects of the existing

and proposed institutions, and the convenienc

and needs of the community to be served.

“(6) The responsible agency shall immedi.

ately notify the Attorney General of any ap.

proval by it pursuant to this subsection of a

proposed merger transaction. If the agency has

found that it must act immediately to prevent

the probable failure of one of the banks involved

and reports on the competitive factors have been

dispensed with, the transaction may be consum.

mated immediately upon approval by the agency,

If the agency has advised the Attorney General

and the other two banking agencies of the exist-

ence of an emergency requiring expeditious ac-

tion and has requested reports on the competi-

tive factors within ten days, the transaction may

not be consummated before the fifth calendar

day after the date of approval by the agency.

In all other cases, the transaction may not be

consummated before the thirtieth calendar day

after the date of approval by the agency.

“(7) (A) Any action brought under the anti-

trust laws arising out of a merger transaction

shall be commenced prior to the earliest time

under paragraph (6) at which a merger trans-

action approved under paragraph (5) might be

consummated. The commencement of such an

action shall stay the effectiveness of the agency’s

approval unless the court shall otherwise specifi-

cally order. In any such action, the court shall

review de novo the issues presented.

“(B) In any judicial proceeding attacking a

merger transaction approved under paragraph

(5) on the ground that the merger transaction

alone and of itself constituted a violation of any

antitrust laws other than section 2 of the Act

of July 2, 1890 (section 2 of the Sherman Anti-

trust Act, 15 U.S.C. 2), the standards applied

by the court shall be identical with those that

the banking agencies are directed to apply under

paragraph (5).

“(C) Upon the consummation of a merger

transaction in compliance with this subsection

and after the termination of any antitrust liti-

gation commenced within the period prescribed

in this paragraph, or upon the termination of

such period if no such litigation is commenced

therein, the transaction may not thereafter be

attacked in any judicial proceeding on the

ground that it alone and of itself constituted a

violation of any antitrust laws other than sec-

tion 2 of the Act of July 2, 1890 (section 2 of

the Sherman Antitrust Act, 15 U.S.C. 2), but

nothing in this subsection shall exempt any bank

resulting from a merger transaction from com-

plying with the antitrust laws after the consum-

mation of such transaction.

“(D) In any action brought under the anti-

trust laws arising out of a merger transaction

approved by a Federal supervisory agency pur-

suant to this subsection, such agency, and any

State banking supervisory agency having juris-

diction within the State involved, may appear

as a party of its own motion and as of right,

and be represented by its counsel.

“(8) For the purposes of this subsection, the

term ‘antitrust laws’ means the Act of July 2,

1890 (the Sherman Antitrust Act, 15 USL.

1-7), the Act of October 15, 1914 (the Clayton

Act, 15 U.S.C. 12-27), and any other Acts in

pari materia.”

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