A small commercial bank in Newport Beach, Calif., that already plays an outsize role in home lending is planning to form a real estate investment trust.

Pacific National Bank, which has $225 million of assets, has increased its mortgage production by a third this year, to $1 billion at the end of November. The yearend total is expected to exceed $1.1 billion. The loans are originated mostly in Southern California.

This month the bank will join with a major investment bank to form a REIT. The investment bank has not been identified. The trust will go public in the first quarter with a $100 million initial public offering, said Allen C. Barbieri, president of Pacific National.

Once the REIT is set up, Pacific National will "start looking more like a savings and loan with a portfolio," said Mr. Barbieri. But it will have "the huge advantage of not paying taxes." he added.

For now home loans are strictly a fee business for the bank. Dealing with wholesale mortgage brokers, Pacific underwrites, funds, and sells the loans to secondary market investors.

Profits from the mortgage business accounted for half of all income at the bank, which had a return on equity of 26% last year. The rest of the profits come from the bank's small-business loans.

Pacific National sells mortgage servicing rights to Norwest Corp. and Countrywide Credit Industries.

So with thrifts and even large banks cutting back or exiting home loans, how is Pacific National thriving?

Pacific National's mortgage business is profitable because it is lean, Mr. Barbieri said.

The bank's mortgage business has 150 employees. It has only two mortgage offices-one in San Diego and the other in Phoenix; each houses the full complement of sales representatives, underwriters, and document handlers.

Many sales representatives work out of their homes or in executive suites; unlike most thrifts, Pacific National pays its salesmen commissions, not salaries, he said.

A one-time S&L executive, Mr. Barbieri, 39, pointed out that when Cenfed Bank of Irvine stopped making home loans last year, it sent its customers to Pacific National.

Pacific originated the loans at a profit, he said. Citing low returns on equity, Cenfed agreed this year to sell itself to Glendale Federal Bank.

Mr. Barbieri said Pacific National's experienced staff also accounts for its success at home loans.

He hired many of them in 1994 when large mortgage banks were shrinking their refi-swollen staffs. Those hires "came with a lot of relationships" to mortgage brokers, he said.

Pacific National still uses that strategy to build its competitive edge. Recently the bank hired most of Norwest Corp.'s San Diego mortgage office, when Norwest decided to cut back on wholesale lending there.

Another plus-Pacific National's small size allows senior executives to work on difficult loans with mortgage brokers.

The practice "creates loyalty among brokers," Mr. Barbieri noted. "They'll send us their good loans because we help them on their difficult loans."

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