By Christine Stebbins CHICAGO, March 19 (Reuters) - U.S. agricultural banks boosted farm lending by about 14 percent in 2012 to $81.8 billion, reflecting a strong farm economy despite drought-related stress in the livestock and dairy sectors, the American Bankers Association said on Tuesday. "The agricultural sector continues to outperform the broader national economy and, as a result, farm banks posted solid performance in 2012," the ABA said in its Farm Bank Performance Report. It cited a U.S. Agriculture Department forecast for near-record 2012 U.S. net farm cash income of more than $133 billion on the strength of high commodity prices and increasing global demand for food. "This has translated into a solid performance on the part of our nation's farm banks. Farm banks reported a strong increase in earnings and improved asset quality in 2012. In addition, farm banks, as a group, remained well-capitalized through 2012," the ABA said. The association defined ag banks as those with a ratio of domestic farm loans to total domestic loans of at least 13.96 percent. It expanded its definition in 2012 to include banks that specialize in serving agriculture with more than $1 billion in assets. In addition, in 2012 savings and loan associations began to be required to report farm-related lending activities and 32 were included in the ABA study. The majority of farm banks are small institutions, with one of median size having $97.9 million in assets. However, there were 33 farm banks included with more than $1 billion in assets, the ABA said. The main competition for private banks in lending to farmers and ranchers remains the giant Farm Credit System, a government-linked nationwide network of cooperative banks which dates from the early 20th century. Farm Credit assets total more than $245 billion. The ABA said the nation's 2,215 farm banks added more than 3,615 jobs in 2012, a 4.2 percent increase, and employed 90,569. More than 95 percent of farm banks were profitable last year, with 67 percent reporting an increase in earnings. Income before taxes and extraordinary items totaled $3.6 billion, up 7.4 percent. The nonperforming-loan ratio declined to 1.49 percent of total loans, close to pre-recession levels, it said. "Farm real estate loans grew at a faster rate than farm production loans. Outstanding farm production loans grew at a pace of 13.7 percent, or $4.8 billion, to a total of $40.0 billion. Farmland loans rose by 14.0 percent, or $5.1 billion, to $41.8 billion," the ABA said. Farm business balance sheets improved due to strong farm income and the continued appreciation in farmland values. The farm debt-to-asset ratio is projected to fall 40 basis points to 10.2 percent in 2013. This would be a new historical low, confirming the strength of the farm sector's solvency, the association said. "The continued growth in farm loans demonstrates the important role banks play in the success of farms and ranches both large and small," said John Blanchfield, senior vice president and director of ABA's Center for Agricultural and Rural Banking.