Illustrating the relative health of the nation's farm economy, small banks focused largely on agriculture lending continue to outperform more mainstream banks, according to a new report from the American Bankers Association.

Agricultural banks, which the ABA defines as those with less than $1 billion of assets and farm loans equal to at least 13.95% of total loans, reported total profits of $3.1 billion last year, up nearly 34% from 2009, the ABA said in its annual Farm Bank Performance Review released Monday. The return on average assets for this group, which consists of roughly 2,240 banks, was 0.8%, compared to an industry average 0.12%.

"Farm income was up in 2010 on the strength of high commodity prices," said John Blanchfield, the director of the ABA's Center for Agricultural and Rural Banking. "This has translated into a solid performance on the part of our nation's farm banks."

Loan growth in the farm sector was solid in 2010, with farm banks reporting total ag loans outstanding of $60 billion at Dec. 31, up 4.9% from a year earlier. Fueling the jump was a sharp increase in real estate-related farm loans — a growing concern for banking regulators worried about inflated real estate values in rural markets.

According to the ABA's analysis of Federal Deposit Insurance Corp. data, outstanding farmland loans grew by 6.5% last year, to $30.7 billion, while farm production loans grew at more modest clip of 3.2%, to $29.3 billion. However, the report pointed out that total nonperforming farmland loans at these banks rose by 25.6%, to $408 million, "greatly exceeding the prior cyclical of $172 million on in 2003."

Late last year, the Federal Deposit Insurance Corp. warned of a potential real estate bubble in the farm sector and urged banks to be more prudent in their underwriting. "Land values currently are experiencing a boom of historic proportions based in part on strong agricultural conditions," the report said. "Similar episodes in the past ended with a sharp contraction of agricultural land values."

But Blanchfield speculated that the spike in nonperformers could be more a result of more stringent examinations than any deterioration in loan values. "Increased regulatory scrutiny could be partially responsible for the increase in classified loans," he said.

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