A small San Francisco bank has scrapped its in-house investment program and plans to refer customers to an outside brokerage.

Pacific Bank, which had managed its own investment program since 1996, decided it would be more profitable to refer customers to an outside brokerage, said John P. Halicky, chief financial officer and an executive vice president.

The $713 million-asset bank "couldn't derive enough critical mass to cover the overhead," Mr. Halicky said. In the fall, he began looking for a brokerage to work with on a referral basis.

The agreement with Stone & Youngberg, which specializes in bond underwriting, was signed in December. Previously, two to four bank employees were licensed to sell mutual funds, annuities, stocks, and bonds through McClurg Capital Corp. of San Francisco and Capital Brokerage Corp. of Richmond, Va.

The alliance with Stone & Youngberg lets Pacific generate revenue without incurring such high costs, Mr. Halicky said. In addition, he said, the bank's customers-primarily those of high net worth-were interested in municipal bonds, one of Stone & Youngberg's specialties.

"We felt it was a very good fit," Mr. Halicky said. And a Pacific employee who had sold investment products full-time has been hired by Stone & Youngberg.

"It gave our customers continuity," Mr. Halicky said.

Investment product sales have been a coveted business line in recent years, and many banks - particularly smaller ones - are turning to third- party marketing firms to provide the services in-house. It is rare to drop an internal program for a referral-only system, one observer said.

"I'll never recommend that a bank continue a losing program, but a decision to move to a referral-only program shouldn't be made without substantial research," said Richard Ayotte, a consultant who helps banks find third-party marketers.

"Rarely do you run into a situation that can't be fixed," said Mr. Ayotte, of American Brokerage Consultants, St. Petersburg, Fla.

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