LONG BEACH, Calif. — California is turning into a banking battleground.

Despite the state's status as an epicenter of the mortgage crisis, financial companies eager to expand have spent the past year snapping up its failing banks, reshaping the top end of the market. The powerhouse players aren't going away soon; they say they are interested in additional deals, as more companies face mounting losses from commercial real estate and construction loans.

"If you look for ground zero in terms of transition and change, it has to be California," said Joseph Otting, U.S. Bancorp's vice chairman.

With so many banks constrained for capital, those that are well capitalized will have "a strong competitive advantage," he said.

"We are aggressively looking to grow. We are front and center of any opportunities in California."

The Minneapolis banking company, the fourth largest in California, has grown substantially in the southern part of the state by absorbing Downey Savings and Loan of Newport Beach and PFF Bancorp of Rancho Cucamonga in deals brokered last year by the Federal Deposit Insurance Corp.

The acquisitions have made U.S. Bancorp a stronger competitor against the two dominant financial companies, Bank of America Corp. and Wells Fargo & Co., which have also grown substantially through acquisition. B of A purchased Countrywide Financial Corp. and Wells bought Wachovia Corp., and JPMorgan Chase & Co. bought its way into the Golden State with the September purchase of Washington Mutual Inc.'s banking operations, including 708 branches in California.

Tim O'Brien, a research analyst at Sandler O'Neill & Partners LP who covers the California banking market, said the days are long gone when just two banks dominated California. "It has suddenly gotten far more crowded at the top."

However, banks are stepping up competition even as "the economic pie is shrinking," he said; unemployment has surged in California and state economists are anxiously waiting for the latest unemployment numbers, to be released Friday. "This kind of environment makes it that much more challenging to grow your bank."

All eyes are on JPMorgan Chase, which had no branches in the state before it bought the Wamu operations. The New York banking company recently launched an advertising campaign introducing itself to the state and its 13,000 new employees. It is investing $375 million to spruce up its newly acquired branches and plans to open 20 more this year.

"California was why we wanted Wamu," said Tom Kelly, a JPMorgan Chase spokesman.

Though JPMorgan Chase already had 13 million customers in California, primarily through credit cards and mortgages, the addition of an extensive branch network from the Wamu deal will allow it to expand in commercial banking, which Kelly called "a big growth area."

Fred Cannon, the chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods Inc., said the entrance of JPMorgan Chase "adds a true competitor to the market here."

But he said B of A and Wells "don't have too much to worry about in the near term," because of the amount of time it will take both JPMorgan Chase and U.S. Bancorp to convert their acquired thrifts to commercial banks.

"You can't just flip a switch and have a full commercial bank product overnight," Cannon said.

But the buyouts have eliminated much of the irrational pricing of some products in California, including option adjustable-rate mortgages and higher-yielding certificates of deposits, he said.

"If anything, irrational pricing has vanished, so it takes some competition out of the market," Cannon said. "Over time, California will have three and maybe four big players in commercial banking, so definitely the competition will heat up."

While JPMorgan Chase has moved West, Wells is moving in the other direction with its purchase of Wachovia, prompting analysts to question its ability to defend its home turf.

Lisa Stevens, Wells' president for California community banking, said the San Francisco company is sticking to a strategy of cross-selling as many financial products as possible to its retail customers.

Wachovia, which will be converted to the Wells name in 2010, added 192 California branches to Wells' existing 976 branches.

"The question is whether Wells is going to take its eye off the ball competing in its hometown market," O'Brien said.

In California, Wells remains the No. 1 lender to small businesses, an area that other banks see as ripe for growth, and the No. 2 mortgage lender, an area where it has jockeyed for years with B of A and Countrywide. It also claims to be the top provider of middle-market lending in California, defined as companies with revenue of $10 million to $500 million.

"Everybody wants this market," Stevens said, citing the state's population of 35 million.

Drew Collins, Wells' senior vice president and sales manager for mortgages in California, said he sees some good news for the downtrodden mortgage market. "What we are seeing from our forecasts is we are bumbling along the bottom, or we may be at the bottom" by yearend or early 2010.

He cited an increase in purchase activity that is heavily driven by first-time homebuyers and the sales of foreclosed and real estate-owned homes, which make up 50% to 60% of the market.

"Inventories of entry-level homes have been cut in half, so you don't have a flooded market," he said.

Though U.S. Bancorp has doubled or tripled its size in some areas, such as Riverside, San Bernardino and Santa Clara, its market share is still dwarfed by its larger competitors.

"Market share is not something we're overly concerned about — it doesn't make you profitable," said Ed Shanks, executive vice president and national sales manager for U.S. Bank Home Mortgage.

California is so big that many players can "coexist profitably," Shanks said.

"California has always been a good lending environment," Shanks said. "If you do the business the right way, you can make a profit."

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