Banking is still personal in some places

About two-thirds of South Dakota's financial institutions are small, state-chartered banks. Combined they have nearly $19 billion in assets.

Roger Novotny, Director of South Dakota's division of banking, says there's a very simple reason the state hasn't seen the same problems in banking as the rest of the country.

"In South Dakota... people know each other. I think that a stronger lending atmosphere occurs under that circumstance."

"In South Dakota, because we don't have nearly as many people, people know each other. They know where you live and you see them on a day to day basis," says Novotny. "I think a stronger lending atmosphere occurs under that circumstance. It's a little bit old fashioned, but it's tried and true and it still works in today's economy."

Novotny says it helps that South Dakota is economically conservative, but the state's economy does have its problems. Mortgage foreclosures are on the rise. Higher food and fuel prices are hitting pocket books.

The International Monetary Fund reports the credit crunch has already cost some of the world's biggest financial companies about $232 billion. The IMF said last week that banks were in the worst financial crisis since the Great Depression.

Roger Novotny says it's not as severe in this region.

"The analogy I would use is when the rest of the country gets pneumonia, we catch cold. I think we're going to catch a cold but I don't think we'll go all the way down the pike that the other folks have," says Novotny.

Novotny says the Dakotas didn't experience the same boom as the rest of the nation when it came to the appreciation in the housing market - so the bust won't happen either. However, banking observers say there is a down side for states with a preponderance of small community banks.

University of North Dakota Economics Professor David Flynn says while small banks offer that personal, friendly atmosphere and sound risk management, they also have a less efficient banking system.

"You've got smaller lenders and if you are in need of a large lender, you may not have access to that type of banking institution. It also means a more diffuse banking system across the Midwest, which is creating potential problems as you get rural depopulation occurring," says Flynn. "Those bankers are under incredible pressure to maintain the business in an era of a declining market."

Flynn says there may be more federal regulations handed down by Congress because of the current banking crisis. If that happens, community banks will take a hit because they'll have to spend more time on paper work and less time on banking.

Flynn says the financial industry is strong in states like North and South Dakota because the agricultural economy is strong. He says it's going to stay that way only as long as commodity prices are high. Farmers are paying more for everything that goes into a crop like costs of seed, fertilizer and fuel. Land prices are also escalating.

Flynn predicts an uncertain future and some of that has to do with decisions yet to be made in Congress. A new Farm Bill was due last year.

"When you're talking about states like North Dakota, South Dakota, Nebraska and Iowa where a major part of economy is agricultural and ag- related, there's serious risk when dealing with something as uncertain as the Farm Bill," says Flynn.

The economics of farming play a much bigger role in states like North and South Dakota than in Minnesota.

Bank regulators base the health of a financial institution on the ratio between assets, capital and loans. In North Dakota, agriculture loans amount to three times a key measure of bank capitol. In South Dakota, the ratio is about two and a half times. Minnesota is only at about 75 percent of that key measurement.

Flynn says if the new farm bill forces lenders to take on more risk, community banks - and states like North and South Dakota - will suffer.

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