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July 23, 1980

UNITED STATES of America, Plaintiff,
FIRST NATIONAL STATE BANCORPORATION, First National State Bank of Central Jersey and First National Bank of South Jersey, Defendants, and John G. Heinmann, Comptroller of the Currency, Intervenor

The opinion of the court was delivered by: GERRY



 The United States of America, plaintiff, by its attorneys, acting under the direction of the Attorney General of the United States instituted this action by the filing of a complaint on June 6, 1979 to prevent and restrain an alleged violation by defendants of Section 7 of the Clayton Act (the "Act"), 15 U.S.C. § 18. *fn1" The court has jurisdiction over the parties, and it has jurisdiction over the subject matter of the complaint pursuant to Section 15 of the Act, 15 U.S.C. § 25. Venue in the District of New Jersey is proper. 28 U.S.C. § 1391(b)-(c). All of the defendants are engaged in interstate commerce.




 Defendant First National State Bancorporation ("Bancorporation") is a registered bank holding company organized under the laws of New Jersey, with its principal place of business in Newark, Essex County, New Jersey. It principally owns and supervises six subsidiary banks which operate a general commercial banking business in the State of New Jersey. Bancorporation offers a broad range of lending, depository and related financial services to commercial, industrial, financial, governmental and individual customers. As of June, 1979, Bancorporation was the largest commercial banking organization with commercial banking offices within New Jersey, as measured by deposits. *fn2"

 One of Bancorporation's subsidiaries, First National State Bank of Central Jersey ("FNSB-Central") is also a defendant in this action. FNSB-Central is a national banking association organized and existing under the laws of the United States. It maintains its principal place of business in Trenton, Mercer County, New Jersey and operates a general commercial banking business within that state.

 Defendant First National Bank of South Jersey ("South") is a national banking association, organized under the laws of the United States with its principal place of business in Atlantic County, New Jersey. As of June, 1979, South was the sixteenth largest commercial banking organization, as measured by deposits, with commercial banking offices within the state.


 In January, 1978, defendants entered into a formal agreement providing for the merger of South and FNSB-Central, under the charter of the latter, and with the title of First National State Bank of South Jersey. *fn3" The defendants filed a merger application with the Comptroller of the Currency ("Comptroller") and, pursuant to the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(4), copies of the application were submitted to the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), the Federal Deposit Insurance Corporation ("FDIC"), and the Antitrust Division of the United States Department of Justice for reports on the competitive factors involved. *fn4" The Federal Reserve Board reported to the Comptroller that the proposed merger "would have adverse effects on competition." *fn5" The FDIC and the Antitrust Division reached similar conclusions. *fn6"

 On September 22, 1978, Bancorporation and South filed with the Comptroller a supplemental merger application amending, in part, the terms of the transaction. Although the Federal Reserve Board, the FDIC, and the Antitrust Division continued to oppose the merger, it was approved by the Comptroller on May 8, 1979. *fn7"

 The Comptroller, however, conditioned his approval of the transaction upon the divestiture by the defendants of seven of their banking offices to banking organizations without offices located in the market areas serviced by the offices to be divested. In particular, Bancorporation, through its subsidiary, First National State Bank of West Jersey ("FNSB-West"), agreed to sell all three of the offices operated by that subsidiary in Atlantic County. South agreed to sell two of its five Atlantic City offices, as well as two offices located in Burlington County. *fn8" The Comptroller further based his approved of the merger upon the commitment of Bancorporation and South to form and fund a Community Development Corporation ("CDC") in Atlantic City after consummation of the transaction. *fn9"

 The complaint filed by plaintiff within thirty days of the Comptroller's approval of the transaction seeks to enjoin the merger between FNSB-Central and South on the grounds that it will (1) eliminate substantial direct competition between South and Bancorporation in the Atlantic City, Hammonton, and Atlantic County commercial banking markets; (2) eliminate Bancorporation as an actual potential competitor in these markets; (3) eliminate Bancorporation as a perceived potential competitor in these markets; (4) foster concentration or entrench Bancorporation as the dominant bank in the relevant markets; and (5) trigger other mergers and consolidations in the relevant markets. *fn10"

 The timely filing of the complaint in the instant action stayed the effectiveness of the Comptroller's approval of the transaction. 12 U.S.C. § 1828(c)(7)(A). Thereafter, the court, on September 7, 1979, granted the Comptroller's motion to intervene as of right as a party defendant. *fn11" The court denied the defendants' motion to lift the statutory stay on September 21, 1979. *fn12"

 Trial began on January 29, 1980 and was completed in March of that year. The Antitrust Division called twenty-one witnesses for its case-in-chief and one rebuttal witness. Plaintiff rested its case on February 20, 1980. The bank defendants called nineteen witnesses between February 21 and March 3, 1980. The Comptroller called eight witnesses between March 6 and March 13, 1980. Several hundred exhibits were offered by each party and received into evidence by the court.


 Prior to 1969, New Jersey state law prohibited branching other than within the county in which that bank had its principal office, and then only in municipalities that did not have the principal office or branch office of another bank. *fn13" Because of this home-office protection statute, most banking markets within New Jersey were artificially concentrated and non-competitive. *fn14"

 In 1969, the New Jersey Legislature liberalized the state's bank holding company, branching and merger statutes. *fn15" As a result of the legislature's actions, competition among commercial banks in New Jersey increased. More branch offices opened. Banks kept longer hours, paid depositors higher interest rates, charged lower loan rates, and offered new services. *fn16"

 Because of further amendments to the state's banking laws, *fn17" competition heightened among commercial banks in New Jersey during the mid-to late-1970's, especially for the business of the locally-limited banking customer, i. e., the small-to-intermediate retail and small-to-intermediate business customer. *fn18" More specifically, the demise, in large part, of home office protection, the advent of statewide branching, subject to regulatory approval, and the proliferation of mini-branches and automatic teller machines resulted in an increase in local banking options, a decrease in population per banking office in most counties, better prices for existing services, and more convenient hours of banking operation. *fn19"

 This liberalization of statewide branching laws generally has resulted in an increase in the larger banking organizations' statewide market share. *fn20" This trend, however, has not led to a corresponding increase in concentration in local markets. Rather, competition has increased significantly because of new entry by the larger bank holding companies into local markets from which they previously had been barred. *fn21"

 Since the liberalization of branching laws in New Jersey, Atlantic County has experienced an increase in the number of branch offices and commercial banking organizations serving the county. During the last twelve years, the number of commercial banking offices in the county has increased from 32 to 59, and the number of commercial banking organizations with offices in Atlantic County has increased from 5 to 10. Also, deposits per banking office, as measured in constant dollars, and population per office have declined. *fn22" These developments suggest that commercial banks with offices in Atlantic County have been forced to respond to competition with the opening of more convenient locations, despite a disproportionate increase in the costs associated with that effort. *fn23"


 Notwithstanding the above mentioned effects of the liberalization of the state's branching law, until recently, the economic prospects for Atlantic County, and in particular Atlantic City, were not bright. Once a mecca for tourists and conventioneers, Atlantic City had fallen on hard times. *fn24" But the legalization of casino gambling in 1976 vastly improved the economic prospects for Atlantic City and the surrounding area. *fn25" Authorities generally forecast significant economic growth for the region. *fn26" Many commercial banks, savings banks, and savings and loan associations responded positively to the improved prospects for the region by establishing, or proposing to establish, new branches or offices in the area. *fn27" Other banks entered, or sought to enter, the region by acquisition. *fn28" Still others indicated an interest in doing so. *fn29" In sum, there is a general perception and belief that the competition triggered by the liberalization of the branching laws will continue because of the prospects for economic growth in the region attending the legalization of gambling. *fn30"

 Nevertheless, entry into and exit from commercial banking is the subject of extensive regulation by both federal and state governments. Regulators exercise control over the number of bank charters to be granted and the circumstances under which a bank can open additional branch offices. Thus, any intention of a commercial bank either to enter or expand within a given local banking market, by acquisition or de novo branching, is subject to the approval of the responsible regulatory agency. *fn31" Such approval, moreover, is not automatic: applications for approval to branch by state-chartered depository institutions have been denied on approximately 80 occasions within the past 5 years. *fn32" Applications for approval to open branches in Atlantic County have also been denied by regulators for discretionary reasons. *fn33" On the whole, however, the barriers to entry into commercial banking in New Jersey are not high.


 Commercial banks presently are the only financial institutions able to offer an entire menu of financial services; *fn34" only commercial banks can accommodate the financial needs of both small retail and large wholesale customers. However, the combination of two factors reduces considerably the significance of this finding: (1) plaintiff chose to focus its theory of competitive impact upon the "locally-limited customer," i. e., a customer who has $ 100,000 or less in deposits and who, as a practical matter, can shop for financial services only among financial institutions located within the relevant geographic market; *fn35" and (2) commercial banks face competition with respect to most of the financial services they offer. *fn36"

 In the State of New Jersey, mutual savings banks and savings and loan associations ("thrifts") offer essentially the same services to the locally-limited retail customers *fn37" as do commercial banks. Within this common group of retail services are checking accounts or their equivalent, savings or time accounts, mortgage loans, home improvement loans, installment loans, safe deposit boxes, trust services, drive-in facilities, 24 hour cash dispensing, traveler's checks, and many other commonly used banking services. *fn38" Moreover, the recently enacted Depository Institutions Deregulation and Monetary Control Act of 1980 ("1980 Act") *fn39" insures the elimination of any remaining distinctions between thrifts and commercial banks with respect to retail financial services provided to the locally-limited customer. *fn40"

 Thrift institutions also compete effectively with commercial banks for the deposits of the locally-limited retail customer. *fn41" Indeed, in New Jersey, commercial banks hold only 51.8% of the deposits of depository institutions. *fn42" Their share of deposits has declined steadily since 1945. *fn43"

 Only with respect to the locally-limited wholesale customer *fn44" do commercial banks offer a cluster of services unequalled by thrift institutions. Commercial banks are the most important source of short and intermediate term credit to the business community, excluding trade credit. *fn45" Other than loans on commercial real estate and account loans, thrifts do not participate significantly in unsecured roll-over or term loans to businesses. *fn46" Although mutual savings banks are able to offer demand deposit (checking), time deposit and savings deposit accounts to individuals and corporations, *fn47" a $ 150,000 deposit limitation on such accounts makes it impractical for mutual savings banks to offer many banking services to commercial customers. *fn48" Neither state nor federally-chartered savings and loan associations may offer N.O.W. accounts to for-profit corporations. *fn49"

 Commercial banks can offer services to the locally-limited wholesale customer that thrifts cannot. For example, only commercial banks can accept for payment at future dates drafts and bills of exchange drawn upon them; issue letters of credit; discount, buy or invest in bankers' acceptances; buy and sell gold and silver bullion; buy and sell foreign exchange; invest in domestic corporations engaged in international or foreign banking; make loans secured by domestic shipping documents or secured by warehouse receipts conveying or securing title; make loans to small businesses pursuant to New Jersey's Small Business Loan Act; perform data processing services for customers; and assist customers in preparing, handling, and disbursing their payrolls. *fn50" Only commercial banks can offer armored car services and act as a payroll agent, and are used by other financial institutions in the conduct of their business; for example, for transactions involving payment and credit such as check clearing and clearing of N.O.W. accounts. *fn51"


 The relevant sections of the country within which to assess the alleged anti-competitive effects of the proposed merger between South and Bancorporation's subsidiary FNSB-West vary with the type of customer who allegedly will be harmed by the transaction and with the legal theory under which plaintiff proceeds. Plaintiff's case focused on the locally-limited bank customer. *fn52" To such a customer, choice of bank depends in large part on the convenience of location of bank offices. *fn53" Most locally-limited customers prefer to bank where they live or where they shop or where they work. *fn54" These factors must be considered in defining the relevant geographic section of the country. Conversely, the banking preferences of customers with $ 100,000 or more in deposits are irrelevant for the purposes of this case. Such customers can shop in the national banking market for the services they require.

 Similarly, the relevant geographic market within which to measure the effects of the proposed merger upon direct competition differs from the geographic market within which to measure the effects of the transaction upon potential competition. *fn55" Where plaintiff challenges the proposed merger under a direct competition theory, the appropriate section of the country is the area of effective competition or substantial overlap between the acquired and acquiring institutions. *fn56" On the other hand, under a potential competition theory, the relevant geographic market is the area in which the acquired bank markets its services and competes directly with other commercial banks. *fn57"


 The most reasonable method of determining the section of the country in which the merging banks compete is to determine the geographic areas from which they draw their business. Where the geographic areas intersect, the banks compete directly. *fn58" Implicit in such an analysis is the generally valid assumption that bank customers within the area of overlap can conveniently turn to any of the competing banks for banking services. *fn59"

 Dr. Baxter made such an analysis. It shows that FNSB-West competes only in a very small geographic portion of Atlantic County: a strip, five to seven miles wide, along the White Horse Pike between the outskirts of the City of Hammonton and the Garden State Parkway. *fn60" The area of overlap between FNSB-West and South is a portion of Hammonton, west of the Mullica Township line. The proposed merger would eliminate direct competition in this area in the absence of the divestitures required by the Comptroller which ...

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