A small bank plus small checks equals big business.

That's been a successful equation for First State Bank of Lake Lillian Minn.

With just $18.9 million of assets, First State isn't in the big leagues -- unless your business is rebates and promotions.

From its headquarters in Lilliputian Lake Lillian -- population 229 -- First State has been issuing and clearing rebate checks for companies since 1976.

"Everyone from Apple to Xerox," quipped Paul C. Forstrom, president of First State Marketing Corp., the subsidiary that markets those services.

Branching Out

Now First State is branching out. Through the Citizens State Bank, a $61.8 million-asset bank in Clara City that is also owned by Mr. Forstrom's family, it has entered the draft processing business.

It handles payable-through drafts, field payables, and similar items for corporations and government agencies. A large part of that business comes from processing WIC vouchers, a form of public assistance used to purchase groceries, for seven state and territorial governments.

A third bank owned by the family, $24.4 million-asset Security State Bank in Howard Lake, performs controlled disbursement functions for companies such as Nestle.

All told, Mr. Forstom estimated that First State will process 105 million items this year, with an estimated value of $8 billion to $10 billion.

Upgrades in the Works

Even with the entry into new markets, the rebate business remains a First State mainstay. First State is in the process of doubling the size of its item processing facility and upgrading its telecommunications capability. Mr. Forstrom said the company will also add 20 employees to its current staff of 30.

Consumer product rebates are a big business. A 1991 report by the Coupon Information Center, Alexandria, Va., estimated that 400 million rebate transactions worth about $900 million are conducted annually.

Mr. Forstom said First State is currently processing two million checks a month for American Telephone and Telegraph Co. alone, covering a variety of rebate programs.

Companies that offered cash refunds used to use coins to pay consumers. That method was supplanted by bearer drafts in the 1970s. Unlike checks, the bearer drafts can be mailed using the third-class bulk rate instead of first class, a significant cost saving.

Although the checks are drawn on a particular bank, corporations usually gave responsibility for collecting the responses and paying the rebates to a fulfillment house. A large number of fulfillment houses are in Minnesota and Iowa.

"The service we offered sidestepped the fulfillment house," said Mr. Forstrom. "If a promotion creates $100,000 in rebates, the fulfillment house invoices the corporation for the full amount, even if only $95,000 of the check are actually cashed."

By opening an account with First State to process the items, the corporation recaptures that $5,000. Mr. Forstrom said that dealing directly with the bank also reduces float and offers additional security and control.

First State's check clearing charges are also small. It has raised its per-item fee only once in 17 years, from 2 cents an item to the current 2.2 cents.

Even with the bank's size, "float is not really an issue any more," said Mr. Forstrom. "We're a one-day bank because of our volume."

About 30% to 40% of the bank's daily traffic comes from the Federal Reserve, with the bulk of the remainder direct presentments from other banks.

In anticipation of same-day settlement, which goes into effect Jan. 1, Mr. Forstrom said First State also receives check data from Fed banks in the electronic truncation pilot.

First State has also developed ways to add value to its processing. "With the WIC vouchers, we can take information from the voucher, such as the food type, and the vendor number, and add that to the MICR line," said Mr. Forstrom. That MICR information is then collected in a report and forwarded to the appropriate agency.

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