Competition for California's feverish small-business market is about to heat up some more as several of the region's largest lenders pair off.

Portland, Ore.-based U.S. Bancorp, which has a solid presence in Northern California, is expected to complete its merger with First Bank System Inc. of Minneapolis in November.

The merger of Southern California's Great Western Financial Corp. with one of two suitors, Washington Mutual Inc. or H.F. Ahmanson & Co., will alter the competitive landscape as well, observers say.

Executives of small and medium-size banks view the coming megamergers with hope and fear. They hope for opportunities to steal angry customers from the newly consolidated banks. But they fear that the combined institutions will steal customers from them, particularly after merger- related problems are worked out.

"This portends some real competition for us," said Donald Hance, small- business manager for Union Bank of California, a San Francisco-based subsidiary of Bank of Tokyo-Mitsubishi.

California is widely viewed as a battleground state in small-business banking because of its many entrepreneurs and aggressive lenders.

In addition to Wells Fargo & Co. and BankAmerica Corp., the Golden State is home to some of the toughest community banks in the country as well as Money Store, the largest Small Business Administration lender.

The combination of U.S. Bancorp and First Bank System would have an extensive branch network and resources to support an expanded lending and marketing effort in California, where U.S. Bancorp has a presence.

U.S. Bancorp and First Bank would have a combined $3.6 billion of small-business loans nationwide, according to data from the June 1996 call reports.

The banks' combined loan portfolio would rival the $3.9 billion outstanding in small-business loans at San Francisco-based Wells Fargo & Co., the second-largest small-business lender in the country.

While Washington Mutual, Ahmanson, and Great Western small-business portfolios are dwarfed by comparison-Wamu has the largest of the three, $457 million in small-business loans-the thrifts are increasing their focus on small business, and their combined retail marketing might would be a competitive asset.

But small banks see an opportunity to capitalize from the consolidation surrounding them.

"As the larger banks get larger, they are less able to take care of small-businesses needs," said Daryl Foreman, president and chief executive officer of Sacramento Commercial Bank, in a town where U.S. Bancorp has expanded in recent months. "Customers probably will have a wait-and-see attitude and then look around."

Mr. Foreman said U.S. Bancorp has strong advertising and marketing skills but too many management levels to respond quickly to small- businesses' needs.

"When small-business owners gets involved with their bureaucratic procedures, it turns them off," he said. "I don't see that improving as the bank gets bigger."

According to a study by the National Federation of Independent Businesses, 17% of business owners switch banks after a merger. Other bankers expect customer turnover.

"That's the reality of any merger." said Gary Barnes, small-business manager at Los Angeles-based Imperial Bank. "Some small-business owners may find it's in their best interest to look at other alternatives."

If the aftermath of Wells Fargo's acquisition of First Interstate Bancorp is any indication, competition for new customers will be fierce.

H.F. Ahmanson and Glendale Federal Savings Bank aggressively courted former First Interstate staff and small-business customers.

Last year, H.F. Ahmanson's Home Savings of America spent four months creating from scratch a small-business program that includes more than 40 products.

Washington Mutual, which made a friendly offer for Great Western, purchased several community banks in recent years that specialized in small-business lending.

California bankers said the thrift that wins the battle for Great Western is likely to develop a more potent presence in the small-business market.

"Once they get their act together, the resulting company could be a much stronger force," Union Bank of California's Mr. Hance said.

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