United States v. Phillipsburg National Bank and Trust Company

• Decision Date: 29 June 1970
• Docket Number: No. 1093,1093
• Citation: 26 L.Ed.2d 658,399 U.S. 350,90 S.Ct. 2035
• Parties: UNITED STATES, Appellant, v. PHILLIPSBURG NATIONAL BANK AND TRUST COMPANY et al
• Court: U.S. Supreme Court

399 U.S. 350

90 S.Ct. 2035

26 L.Ed.2d 658

UNITED STATES, Appellant,

v PHILLIPSBURG NATIONAL BANK AND TRUST COMPANY et al.

No. 1093.

Argued April 28, 1970.

Decided June 29, 1970.

[Syllabus from pages 350-351 intentionally omitted]

Daniel M. Friedman, Washington, D.C., for appellant.

Philip L. Roache, Jr., Washington, D.C., and Robert B. Meyner, Newark, N.J., for appellees.

Mr. Justice BRENNAN delivered the opinion of the Court.

This direct appeal under the Expediting Act, 15 U.S.C. § 29, is taken by the United States from a judgment of the District Court for the District of New Jersey dismissing, after full hearing, the Government's complaint seeking to enjoin as a violation of § 7 of the Clayton Act, 15 U.S.C. § 18,¹ the proposed merger of appellees, Phillipsburg National Bank and Trust Co. (PNB) and the Second National Bank of Phillipsburg (SNB), both located in Phillipsburg, New Jersey. The Comptroller of the Currency, also an appellee here, approved the merger in December 1967 and intervened in this action to defend it, as he was authorized to do by the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(7)(D) (1964 ed., Supp. V).² The Bank Merger Act required that the District Court engage in a two-step process, United States v. First City National Bank of Houston, 386 U.S. 361, 87 S.Ct. 1088, 18 L.Ed.2d 151 (1967); United States v. Third National Bank in Nashville, 390 U.S. 171, 88 S.Ct. 882, 19 L.Ed.2d 1015 (1968), the first of which was to decide whether the merger would violate the antitrust prohibitions of § 7 of the Clayton Act. If the court found that § 7 would be violated, then the Bank Merger Act required that the District Court decide whether 'the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.' 12 U.S.C. § 1828(c)(5)(B). The District Court found that the United States 'failed to establish by a preponderance of the evidence that the proposed merger would have any anti-competitive effect and, further, that even if there were de minimis anticompetitive effect in the narrowly drawn market proposed by the government, such effect is clearly outweighed by the convenience and needs of the community to be served by the merged bank.' 306 F.Supp. 645, 667, (1969). We noted probable jurisdiction. 397 U.S. 933, 90 S.Ct. 945, 25 L.Ed.2d 114 (1970). We reverse. We have concluded from our examination of the record that the District Court erred in its definitions of the relevant product and geographic markets and that these errors invalidate the court's determination that the merger would have no significant anticompetitive effects.

I The Factual Setting

Phillipsburg is a small industrial city on the Delaware River in the southwestern corner of Warren County New Jersey. Its population was 18,500 in 1960, 28,500 counting the population of its bordering suburbs. Although the population of the suburbs is and has been increasing, Phillipsburg itself has not grown. Easton, Pennsylvania, lies directly across the river. It had a population of 32,000 in 1960, 60,000 counting its bordering suburbs. Its population growth pattern has paralleled that of Phillipsburg. The cities are linked by two bridges and the testimony was that they are 'in effect * * * one town.'

This 'one town' has seven commercial banks, four in Easton and three in Phillipsburg. PNB and SNB are respectively the third and fifth largest in overall banking business. All seven fall within the category of small banks, their assets in 1967 ranging from $13,200,000 to $75,600,000.³ PNB, with assets then of approximately $23,900,000, and SNB with assets of approximately $17,300,000, are the first and second largest of the three Phillipsburg banks. The merger would produce a bank with assets of over $41,100,000, second in size of the six remaining commercial banks in 'one town.'

PNB and SNB are direct competitors. Their main offices are opposite one another on the same downtown street. SNB's only branch is across a suburban highway from one of PNB's two branches. Both banks offer the wide range of services and products available at commercial banks, including, for instance, demand deposits,

COMPARISON OF PHILLIPSBURG—EASTON BANKS^*

TOTAL DEMAND

ASSETS DEPOSITS DEPOSITS LOANS

% % % % % % % %

BANK No. of Amt. Phill Phill Amt. Phill Phill Amt. Phill Phill Amt. Phill Phill

Offices East. Only East. Only East. Only East. Only

Phillipsburg Nat.

Bank 3 $23.9 11.2 44.0 $22.4 13.7 44.3 $6.5 11.3 45 $14.5 15.8 48.9

Second Nat. Bank 2 17.3 8.1 31.8* 16.0 9.8 31.7 4.6 7.9 31.3 10.5 11.4 35.2

(Resulting Bank) 5 41.1 19.3 75.8 38.4 23.4 76.1 11.1 19.2 76.4 24.9 27.3 84.1

Phillipsburg Trust

Co. 2 13.2 6.2 24.2 12.1 7.4 23.9 3.4 6.0 23.6 4.7 5.2 15.9

Easton Nat. Bank

& Trust 5 75.6 35.5 — 67.7 41.4 — 25.4 44.1 32.6 35.7 —

Northampton Nat.

Bank 1 23.2 10.9 — 19.0 11.6 — 6.4 11.0 — 6.5 7.1 —

Lafayette Trust Bank 2 27.7 13.0 — 24.3 14.8 — 10.8 18.8 — 11.8 12.9 —

Nazareth Nat. Bank 1 32.0 15.0 — 2.3 1.4 — 0.5 0.9 — 10.8 11.9 —

Totals 16 $212.8 100 100 $163.7 100 100 $57.7 100 100 $91.5 100 100 savings and time deposits, consumer loans, commercial and industrial loans, real estate mortgages, trust services, safe deposit boxes and escrow services. As is characteristic of banks of their size operating in small communities, PNB and SNB have less of their assets in commercial and industrial loans than do larger banks. They emphasize real estate loans and mortgages, and they have relatively more time and savings deposits than demand deposits. Similarly, their trust assets are quite small. In short, both banks are oriented toward the needs of small depositors and small borrowers. Thus, in 1967 75% of PNB's number of deposits and 73% of SNB's were $1,000 or less; 98% of PNB's number of deposits and 97% of SNB's were $10,000 or less. Similarly, 75% of PNB's number of loan accounts and 59% of SNB's were $2,500 or less, and 93% and 87% respectively were $10,000 or less.

Both banks serve predominantly Phillipsburg residents. In 1967, although 91.6% of PNB's and 92% of SNB's depositors were residents of 'one town,' only 5.3% of PNB's and 9% of SNB's depositors lived in Easton. And, although 78.6% of PNB's and 87.2% of SNB's number of loans were made to residents of 'one town,' only 14.8% and 11.6% respectively went to persons living in Easton. A witness testified that all of the approximately 8,500 Phillipsburg families deal with one or another of the three commercial banks in that city. The town's businessmen prefer to do the same. The preference for local banks was strikingly evidenced by the fact that PNB and SNB substantially increased their savings deposit accounts during 1962—1967, even though their passbook savings rates were lower than those being paid by other readily accessible banks. At a time when Phillipsburg banks were paying 3.5% interest and Easton banks only 3%, other banks within a 13-mile radius were offering 4%.

Phillipsburg-Easton is in the northeastern part of the Lehigh Valley, a region of approximately 1,000 square miles, with a population of 492,000 in 1960 and 38 commercial banks in June 1968. There is considerable mobility among residents of the area for social, shopping, and employment purposes. Customer preference and conservative banking practices, however, have tended to limit the bulk of each commercial bank's business to its immediate geographic area. Neither PNB nor SNB has aggressively sought business outside 'one town.' Similarly, most other banks in the Lehigh Valley have shown little interest in seeking customers in Phillipsburg-Easton. The District Court found that '(t) here is an attitude of complacency on the part of many banks (in the Valley). They are content to continue outmoded banking practice and reluctant to risk changes which would improve service and extend services over a greater area to a larger segment of the population.' 306 F.Supp., at 661.

The merger would reduce the number of commercial banks in 'one town' from seven to six, and from three to two in Phillipsburg. The merged bank would have five of the seven banking offices in Phillipsburg and its environs and would be three times as large as the other Phillipsburg bank; it would have 75.8% of the city's banking assets, 76.1% of its deposits, and 84.1% of its loans. Within Phillipsburg-Easton PNB—SNB would become the second largest commercial bank, having 19.3% of the total assets, 23.4% of total deposits, 19.2% of demand deposits, and 27.3% of total loans. This increased concentration would give the two largest banks 54.8% of the 'one town' banking assets, 64.8% of its total deposits, 63.3% of demand deposits, 63% of total loans, and 10 of the 16 banking offices.

We entertain no doubt that this factual pattern requires a determination whether the merger passes muster under the antitrust standards of United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963), which were preserved in the Bank Merger Act of 1966. United States v. First National Bank of Houston, supra; United States v. Third National Bank in Nashville, supra. Mergers of directly competing small commercial banks in small communities, no less than those of large banks in large communities, are subject to scrutiny under these standards. Indeed, competitive commercial banks, with their cluster of products and services, play a particularly significant role in a small community unable to support a large variety of alternative financial institutions. Thus, if anything, it is even more true in the small town than in the large city that '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,...