Farm banks largely stayed out of the muck the past few years, but that hasn't stopped regulators from trying to rein in these lenders.

In the first quarter, farm banks — those with at least a quarter of their loans in agriculture — outperformed the broader banking industry, reporting fewer credit problems, stronger capital ratios and higher returns on assets. Only 7.28% of farm banks were in the red, compared with 18.67% of all institutions, according to the Federal Deposit Insurance Corp.

Economists doubt an agricultural bust is coming, though they expect growth in the business to slow in coming years. Still, regulators are applying lessons from the recent debacles in construction and commercial real estate and stepping up scrutiny of farm banks to guard against surprises.

"We are a little bit less willing to accept that ag is immune to a downturn," said James LaPierre, regional office director of the FDIC's division of supervision and consumer protection in Kansas City, Mo. "It would be foolish for us, or for our bankers, to think that while ag has been good that it will continue forever. … We've learned a lot of good lessons over the last few years. How do we apply it here?"

So far, some agricultural bankers say, the heightened scrutiny has focused on ensuring they could withstand a downturn, rather than making them write down loans.

"It reminds me of the same thing they are doing with making sure we are ready for interest rate increases," said Charles N. Funk, the president and chief executive of MidWestOne Financial Group Inc. in Iowa City. About a fifth of its portfolio is in agriculture. "Things are good in ag and the best time to be prepared for a downturn is when things are good."

Yet industry representatives say the increased attention has been uneven — with some farm-focused institutions facing much tougher supervision than others.

"In some cases, bankers are saying that examiners passed over it without any problems. Others say farm loans are being looked at like they are toxic assets," said John Blanchfield, senior vice president of the American Bankers Association's Center for Agriculture and Rural Banking.

The inconsistency could be explained by the diversity of the agricultural industry and of the banks that serve it. Overall, the nation's 1,553 farm banks, which make up about a fifth of all institutions, are healthy. The Department of Agriculture projects farm bank profits will climb 12% this year, to $63 billion.

Among the banks' clients, row crop farmers, who grow corn and grain, have fared well, though prices are down. The recession hurt livestock farmers as families cut back on protein, but that market is rebounding. Dairy farmers are a weak spot; they had a rough 2008 and 2009, and are now just breaking even.

The messy failure of the $2 billion-asset New Frontier Bank in Greeley, Colo., in April 2009 did not help agricultural banks' image. New Frontier had a huge exposure to dairy, including a loan to a large, bankrupt producer. The FDIC could not find a buyer for the bank.

"Some of the characteristics of that failure were associated with actions of the management, but there were some more broadly applicable issues that it raised," said Jason R. Henderson, vice president of the Federal Reserve Bank of Kansas City and executive of the Omaha branch. "It did spark a conversation between banks and regulators concerning: 'What is your exposure?' and 'How are your customers performing?' "

Travis Holt, the president and CEO of the $150 million-asset Citizens State Bank of Loyal in Wisconsin, at which dairy loans make up 64% of the loan portfolio, said he has noticed a marked change in supervision. "The regulatory environment was diminished four or five years ago and then came back pretty hard in late 2008," he said. "Things have deteriorated, obviously, but I think the inconsistency is what frustrates people the most."

FDIC officials said the regulator's message has not changed: it wants to ensure farm borrowers are hedging costs by locking in contracts early, staying current on payments and keeping debt low. They also acknowledged that farm banks, particularly in the Midwest, cannot limit their exposure to agriculture the way other banks could have cut back on construction and real estate loans.

"We can tell them to mitigate their risk, but the reality is that a bank in western Nebraska can do very little to avoid ag concentrations," LaPierre said. "We know they are doing everything they can to offset that concentration."

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