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February 12, 1968

United States , Plaintiff
Provident National Bank and Central-Penn National Bank of Philadelphia, Defendants and William B. Camp, Comptroller of the Currency (Intervenor)

Clary, Chief Judge

The opinion of the court was delivered by: CLARY

This case involves a proposed merger between the Provident National Bank and the Central-Penn National Bank, both of the City of Philadelphia, Commonwealth of Pennsylvania. It is being challenged by the Department of Justice as being in violation of the antitrust laws of the United States. The case was tried to the Court without a jury. In making a decision in this case, the Court is faced with the dilemma so ably stated by that noted legal scholar, John H. Wigmore, the late Professor and Dean of Northwestern University School of Law, and author of "Wigmore on Evidence", that "law and justice are from time to time inevitably in conflict." *fn1"

 The Facts

 On December 6, 1965, Provident National Bank (hereinafter Provident) and Central-Penn National Bank (hereinafter Central-Penn) filed with the Comptroller of the Currency an application to merge. Pursuant to Title 12 U.S.C. § 1828(c)(4), the Comptroller requested advisory reports from the other Government agencies, Federal Deposit Insurance Corporation (hereinafter F.D.I.C.) and Federal Reserve Board (hereinafter F.R.B.), and the Department of Justice (hereinafter Justice). The F.D.I.C. filed no report, but both F.R.B. and Justice reported that the merger's effect on competition would be significantly adverse and therefore should not be approved.

 Prior to the Comptroller's decision on this merger, the Bank Merger Act of 1960 (hereinafter B.M.A. 1960) was amended by Congress on February 21, 1966. The amended Act (hereinafter B.M.A. 1966) created a new defense for anticompetitive mergers in that if the anticompetitive effects of the proposed merger are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served, the merger is saved. Title 12 U.S.C. § 1828(c)(5)(B). The amended Act also deleted the words "line of commerce" which were present in B.M.A. 1960, thus leaving open the question whether commercial banking is still to be considered as the area of effective competition. See United States v. First City National Bank of Houston, 386 U.S. 361, 369, f.n. 1, 18 L. Ed. 2d 151, 87 S. Ct. 1088 (1967).

 On March 4, 1966, soon after B.M.A. 1966 was enacted into law, the Comptroller approved the proposed merger between Provident and Central-Penn. A formal decision containing the reasons for such approval followed on March 31, 1966.

 Justice, on April 1, 1966, then instituted suit under Section 7 of the Clayton Act (15 U.S.C. § 18), alleging that the proposed merger was anticompetitive under traditional Section 7 standards and therefore should be proscribed. The Comptroller was allowed to intervene in this suit by virtue of Title 12 U.S.C. § 1828(c)(7)(D).

 The suit was dismissed by this Court on December 29, 1966 on the basis that Justice chose to rely solely on Section 7 of the Clayton Act without regard to the new standards enunciated by B.M.A. 1966. United States v. Provident National Bank, et al., 262 F. Supp. 397 (E.D. Pa. 1966).

 Before discussing the legal questions presented by this merger, it would be wise to have the respective positions and histories of the merging banks in view.

 Provident is presently the fifth largest bank in the four-county area comprising Bucks, Montgomery, Delaware, and Philadelphia counties. As of June 30, 1965, Provident controlled approximately $683,000,000 or 9% of the total assets, $398,000,000 or 9% of the total loans, $475,000,000 or 9% of the total IPC deposits, and 32 or 9% of the banking offices in the four-county area.

 Since 1947, Provident has acquired seven banks in the four-county area. As of April 5, 1966, these acquired banks' assets constituted 58% of Provident's present asset position.

 As of June 30, 1965, Central-Penn, the seventh largest commercial bank in the four-county area, controlled approximately $369,000,000 or 5% of the total assets, $210,000,000 or 5% of the total loans, $263,000,000 or 5% of the total IPC deposits, $170,000,000 or 5% of the total IPC demand deposits, and 24 or 6% of the banking offices.

 Central-Penn has acquired six commercial banks in the four-county area since 1950. No less than 24% of its present asset position is attributable to these mergers and acquisitions.

 These facts must be viewed in the over-all setting of commercial banking in the four-county area. In 1945, there were 115 commercial banks in the four-county area. In 1960, there were 45. In 1965, the number of commercial banks was reduced to 37.

 On December 31, 1945, the five largest commercial banks held 51% of the total assets, 54% of the total loans, 52% of the total deposits, and had 15% of the total banking offices. In 1965, the five largest banks controlled approximately 73% of the assets, 74% of the total loans, 71% of IPC deposits, and 57% of all banking offices. Thus, there has been a substantial reduction of independent commercial banks, most of which have disappeared through the merger route. The trend is continuing as evidenced by Girard Trust Bank's recent announcement of intent to merge with Doylestown National Bank, and Continental Bank's announcement of intent to merge with Sonsitaly Bank and Trust Company. Since these acquired banks represent only a small percentage of area assets, loans, and banking offices, it may be questioned whether these mergers will be challenged by Justice.

 If this merger were approved, the resultant bank would become the fourth largest bank in the four-county area, controlling approximately 14% of the total assets, loans and deposits in the four-county area, and 15% of the commercial banking offices in the four-county area. The five bank concentration ratio previously mentioned will increase from 73.1% to 77.7% in terms of assets, 73.1% to 77.8% in terms of deposits, 73.9% to 78.6% in terms of loans, and from 57% to 63.3% in terms of total offices.

 With these facts in view, we shall now turn to our first level of inquiry, which is whether the proposed merger between Provident and Central-Penn is anticompetitive, when measured by traditional Clayton Section 7 standards.

 Before assessing the competitive effects of this merger, however, it is necessary to delineate a geographic market within which to assess the impact of this merger.

 The Relevant Geographic Market

 The four-county area of Bucks, Montgomery, Delaware, and Philadelphia, has been proposed by the Government as the relevant "section of the country" for this case. The Government's contention is grounded on the following facts: The defendant banks may not establish branch offices in any other area. The convenience factor localizes the area of competition, at least for retail customers. The Government also introduced statistics showing that by number, 95% of Provident's total deposit accounts are within the four-county area, and 98% of Central-Penn's total deposit accounts are located within the same area. In terms of dollar volume, 82% of Provident's total deposits are within the four-county area, while Central-Penn has 88% of its dollar volume for total deposits within the same area. So by number and by value, the four-county area appears to be a relevant section of the country. This evidence indicates to us that the four-county area is the most appropriate section of the country where the effect of the merger will be direct and immediate. United States v. Philadelphia National Bank, 374 U.S. 321, 357, 10 L. Ed. 2d 915, 83 S. Ct. 1715 (1963) (hereinafter PNB).

 The defendant banks accede to the Government's geographic market since it is a permissible "section of the country" for purposes of B.M.A. 1966. In so acceding, the banks feel that the case of United States v. Pabst Brewing Co., 384 U.S. 546, 16 L. Ed. 2d 765, 86 S. Ct. 1665 (1966) controls. This is undoubtedly correct. In Pabst, the Supreme Court did away with the requirement that Courts, or the Department of Justice, had to decide upon an appropriate geographic market as a preliminary step in discovering whether a merger was anticompetitive. The Government need prove only that there has been a merger between two corporations engaged in commerce, and that the merger may have a substantial anticompetitive effect somewhere in the United States. United States v. Pabst Brewing Co., supra, at 549. It (the Department of Justice) is no longer forced to prove what constitutes the relevant economic or geographic market.

 The Comptroller of the Currency disagrees with the assertion that the four-county area is a relevant geographic market. He contends that the Standard Metropolitan Statistical Area (SMSA), which comprises the three New Jersey counties of Gloucester, Camden, and Burlington, and the five Pennsylvania counties of Philadelphia, Delaware, Montgomery, Bucks, and Chester, is more relevant. The Comptroller states that he is not bound by the Supreme Court's ruling in PNB, supra, as to what constitutes the relevant geographic market on the basis that in this case, a different factual record has been developed. This is true, but the Comptroller has neglected to point to any compelling facts which would necessitate a change from the PNB standard. One of the mainstays of the Comptroller's argument is the Bureau of the Budget's definition of a metropolitan area as "an integrated economic and social unit with a recognized large population nucleus." (N.T. 3119). Yet, Frank A. Cisar, of the Bureau of the Budget, and Chairman of the Committee on Area Definitions, admitted upon cross-examination that the SMSA in itself cannot be equated with a marketing area, since no two market areas are the same. (N.T. 3127).

 While it is true that many persons from the excluded counties of Chester, Burlington, Camden, and Gloucester, work and shop in the four-county area, the statistics introduced by the Comptroller proved only that the banking done in the four-county area is minimal. *fn3"

 This problem was also in the forefront when the House was considering the amended B.M.A. In the Report which accompanied the House Bill to the Senate, the concept of a national market was placed in clear view. Under the heading "The relevant market", the House Report stated:

"A recurrent bone of contention in the development of general antitrust law is the problem of defining the relevant market. Sometimes this is easy, as in the case of automobile manufacturers whose market is clearly national, or laundries whose market is clearly local. It is not so easy in the case of the larger banks, which serve a local market of individuals and small businesses, but which are also competing in the regional or national financial markets for the opportunity to place large loans with major corporations which are shopping the country for funds." 112 Cong.Rec. 2440 (Feb. 8, 1966).

 Therefore, in finding the four-county area as the appropriate geographic market, we do so with an awareness that not all accounts found and assessed in this market are allocable to it. Some adjustment must and will be made when we discuss the effect of this dichotomy (i.e., national and local markets) under our "Anticompetitive Effects" heading.

 The Relevant Product Market

 Our next level of inquiry before delving into the competitive aspects of this merger is the ascertainment of the appropriate line of commerce within which this merger is to be viewed.

 Justice maintains that commercial banking is still the appropriate product market in which to assess this merger's competitive effects. In essence, it relies on the Supreme Court's ruling in PNB where the unique cluster of products and services offered by commercial banks was held sufficiently distinctive to constitute a relevant product market. However, since the PNB decision, as stated above, B.M.A. 1960 has been amended and the phrase "line of commerce" has been deleted. The Supreme Court, in United States v. First City National Bank of Houston, supra, at 369, f.n. 1, expressly left open the question whether this omission was significant.

 Two lower Courts have split on the significance of this omission. In United States v. Third National Bank of Nashville, 260 F. Supp. 869, 878, n. 5 (M.D. Tenn. 1966), prob. juris. noted, 388 U.S. 905, 87 S. Ct. 2111, 18 L. Ed. 2d 1345 (1967), the lower Court noted that such an important change in established antitrust law cannot be presumed to have been made by a mere omission, and also cites the lack of any significant legislative history in support thereof. It held that commercial banking was still the appropriate "line of commerce".

 This Court is persuaded by Judge Zirpoli's lucid analysis of this vexing problem presently before this Court. We are convinced that Congress did intend a change to be effected by the omission. A thorough examination of the legislative history and the House Committee Report reveals that the effect of this omission was not discussed in the House, but Senator Robertson dealt with this omission on several occasions during the Senate debates.

"The text of paragraph (B) of the new bill follows the terms of section 1 of the Sherman Act and section 7 of the Clayton Act, with the exception that the reference to 'any line of commerce' in the Clayton Act is not carried over into the new bill. In this respect the new bill resembles the Bank Merger Act of 1960, and calls for an appraisal of the overall effects of the merger on competition, weighing increases of competition in one field against decreases in competition in another field. The banking agencies and the courts, in other words, are not intended and are not permitted to select some single, perhaps minor aspect of the banks' business and to say that, because there is some lessening of competition in this element of the business, the overall effects of the merger-the increase of competition in the entire field of banking and in the broader field of financial institutions which may result from other aspects of the merger-are irrelevant and may not be considered." See Statements of Senator Robertson, 112 Cong. Rec., 2541, 2549-50, (Feb. 9, 1966).

 In so broadening the line of commerce, this Court is very much aware of the uniqueness of commercial banks in that they are the only financial institutions permitted by law which can accept demand deposits and service them. It is clear from this unique function that certain other financial services necessarily follow, such as payroll and lock box services to the corporation customer. It is also evident that commercial banks are insulated for the most part from direct competition in the area of trust services, corporate pension funds, etc. However, the inter-relationship of all these services is not so tightly bound or localized to preclude meaningful and direct competition from other financial institutions within or without the four-county area.

 It was admitted by Doctor Donald R. Hodgman, one of plaintiff's expert witnesses, upon cross-examination, that in the area of mortgages, loans and savings, there are other alternative, and sometimes better, sources than commercial banks, such as mutual savings banks and saving and loan associations. (N.T. 48-49).

 It was also pointed out by several witnesses that the competition for the savings dollar has intensified among commercial banks, mutual savings banks and saving and loan associations in the four-county area, and the nation as a whole. This competition was evidenced particularly by the Certificate of Deposit see-saw which took place in the four-county area during the latter part of 1965 and 1966. This competition for the savings dollar is of particular significance since the deposit base of commercial banks has undergone a drastic change in recent years. In 1960, the proportion between demand and time deposits nationally was 70:30. Today, it is 50:50. Thus, one-half of a bank's deposits are subject to competition, not only from other commercial banks, but mutuals and saving and loan associations as well.

 In extending the line of commerce only to these financial institutions (mutuals and saving and loan associations) because they alone offer direct and meaningful competition to commercial banks, our reasoning for so doing is buttressed by the Supreme Court's ruling in United States v. Continental Can Co. et al., 378 U.S. 441, 12 L. Ed. 2d 953, 84 S. Ct. 1738 (1964). In that case, the nation's second largest producer of cans desired to merge with the third largest producer of glass containers. There the Court found that Section 7 is not limited to identical products and lumped together the glass and container industries into one product market. It did so realizing the only actual competition between these two industries was primarily in the beer market, although potentially, they were competitors in broader markets. The Court emphasized cross-elasticity of demand and interchangeability of use as its reason for doing so. United States v. Continental Can Co. et al., supra, at 453. This reason exists, to a pronounced degree, in the situation at hand, only the competition is more direct and meaningful. If such interchangeability can be used negatively in antitrust jurisprudence, surely the same concept can be used positively. The underlying question remains the same in each instance, i.e., to construct reasonable product markets in which to measure probable competitive effects realistically.

 Therefore, since it is no longer true that commercial banks enjoy a "settled consumer preference" for the savings dollar, PNB, supra, 374 U.S. at 357, the line of commerce must be broadened in this respect. Competition from life insurance companies, finance companies, lawyers for trust services, etc., should not be considered since the competition is not direct, *fn4" and such a consideration would extend the product market to an unrealistic range.

 Furthermore, this Court has heard no compelling evidence and has observed no noted changes from the PNB situation during the trial of this case in competition from these other ...

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