In the windblown farming town of Watford City, N.D., banking customers run in herds.

Seven years ago, they withdrew nearly $1 million a month from the bank in a year's time -- and stampeded to brokerage houses, insurance companies, and mutual fund companies.

Although most of the withdrawals were offset by deposits, Stephen L. Stenehjem, president of First International Bank, was worried.

"It was a significant amount," said the 38-year-old banker, whose institution has $122 million of assets. "We realized we didn't have everything our customers would like."

Betting on Funds

So in 1986, Mr. Stenehjem, with his father, Lee, and his brother Leland, decided to take a risk. Lee Stenehjem is the 75-year-old chairman of the bank; Leland is chairman of First International Bank of Fessenden, which also is owned by the family.

The trio figured the bank could capture fleeing deposits and generate fee income by selling mutual funds and annuities through a third-party vendor.

The idea came from Leland's former football coach, Thomas E. Gunderson, president of Investment Centers of America Inc., in Bismarck. The firm supplies banks with brokers, technical tools, and the know-how to set up a mutual fund and annuity sales program.

First International was the second bank to join the program, which has 170 banks in 17 states.

"It has been worth our time," said Mr. Stenehjem, who would not disclose how much the bank earns from the arrangement. Fee income has increased every year, he said.

No Dilution of Deposits

Smaller banks typically have shied away from offering mutual funds and annuities because they fear it could drain deposits. So far, the Stenehjems have had no such problem.

"We haven't had a dilution of our deposits, and we're seen a great deal of money come from outside our immediate area," said Lee Stenehjem. "We get the additional contacts and the cross-selling."

First International has investment centers in five of its 10 offices, and plans to open two more in the next two years. Four brokers are under contract.

Growing Income

Last year, First International of Watford City earned $277,000 in noninterest income, up from $230,000 in 1991, and $191,000 in 1990, according to Sheshunoff Information Services. It earned $1.5 million for the year.

The bank in Fessenden, which has $55 million of assets, earned $98,000 in noninterest income, up from $84,000 in 1991, and $43,000 in 1990. It earned $512,000 for the year.

About a quarter of the 1992 noninterest income came from the investment center program.

First International's arrangement with Investment Centers works like this: Investment Centers charges the bank a $25,000 fee to start the program. If furnishes a computer, software, a communications system, and a broker.

The bank provides space in a branch and a secretary. It charges the company rent and makes a commission on each sale.

Mr. Gunderson said for each $1 in commissions earned, the company keeps 25 cents, and the broker and the bank split 75 cents. A more experienced broker with a large book of business commands a higher percentage of the commission.

"It's excellent fee income for the bank, and it establishes good, long-term relationships with the customer," Mr. Gunderson said.

|Wall Street to Main Street'

Stephen Stenehjem said mutual funds and annuities are the big sellers. Through the investment center, customers have access to hundreds of these products.

"Every investor is looking for something different," he said. "Some want gold funds, others want stock funds that have growth potential. We bring Wall Street to Main Street."

The bank uses newspapers, direct mail, radio, and television to tout the program. It's mainly straight business advertising, but once in a while the Stenehjems toss in a jingle.

"You get what you put into it," Mr. Stenehjem said. "If you don't put much effort into it, you don't get much back."

Some industry experts believe small banks will drop out of the mutual fund business at the first hint of a downturn.

But Mr. Stenehjem says First International is in the business for the long haul.

"Anything we do we try not to do for the short term," Mr. Stenehjem said. "When you commit six years to a project, you are not going to let it die."

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