Loan demand by businesses and consumers remained mostly level in the fourth quarter across the country, according to a survey released by the Federal Reserve Board on Wednesday.

"Overall loan demand was stable or slightly higher across nearly all districts, and several bankers noted stiff competition for qualified borrowers," according to the Fed's quarterly economic survey known as the Beige Book.

In districts like Philadelphia, Cleveland, Richmond and Chicago, demand for residential real estate loans was "strong," driven by refinancings because of the continued historically low interest rates.

Asset quality also improved across a few districts, while others reported higher competition for qualified borrowers.

But there was still some general uneasiness by financial institutions. Bankers in Cleveland were weighing cost-cutting steps, including layoffs, because of shrinking net interest margins. Their counterparts in Chicago noted that bankers were keeping very few mortgage originations on their balance sheets and instead using interest rate swaps to hedge against a rapid rise in interest rates. Bankers in Atlanta were also anticipating activity to ease toward the second half of the year.

Even so, most banks reported little change from the prior quarter. Bankers in New York, for example, said loan demand had increased, but reported no changes in credit standards. They also said there were lower delinquency rates on commercial loans and mortgages.

"Small- to medium-sized banks report steady demand for consumer loans but increased demand for all other categories of loans; demand for refinancing was unchanged," according to the Fed's survey.
Across the Philadelphia District, the volume of loans received by bankers continued to grow at a slight pace since the last Beige Book survey.

"Most loan categories have grown little or not at all, with somewhat more activity generated for small business lending and home mortgages, especially refinancings," according to the survey. "Consumer lending is relatively flat."

Bankers also said they were "generally optimistic" about future growth, but expected mergers and acquisitions to reduce the number of community banks in coming years.

Demand for consumer and business loans also remained relatively flat in the Cleveland District. "A few large banks noted a slowdown in loan applications during January, while community bankers saw a rise in demand for commercial real estate loans," according to the survey. "Reports on consumer credit also indicated little change in demand."

However, bankers there said they still remain "very concerned" about shrinking net interest margins, with some considering cost control measures including layoffs.

Lending activity in the Richmond District increased "marginally" since the last report with most bankers reporting a "slight uptick" in demand for commercial and residential mortgages.

"Refinancing constituted a significant portion of this demand, primarily due to low interest rates," according to the survey. "Officials from both a large commercial bank and a small community bank noted that the demand for refinancing also was driven by five year balloon payments coming due."

Reports from bankers in the Atlanta showed that loan demand had remained stable due mostly to refinance activity. "Some bankers expect the refinance market to ease up by mid-year as regulatory changes related to reselling mortgages on the secondary market becomes more stringent," according to the Fed's survey.

Bankers in that district said they were willing to lend, but took note of competitors that were offering loans with terms that could be riskier in the long run.

In Chicago, bankers reported moderate growth in business and consumer loan demand. Residential real estate, they said, continued to benefit from low interest rates. Banks, they said, were also keeping fewer "mortgage originations on their balance sheet and relying on interest rate swaps to hedge against a potential rise in interest rates."

Lending activity in the St. Louis district also changed very little in the fourth quarter. "During this period, credit standards and demand for commercial and industrial loans remained largely unchanged," said the Fed's survey.

In Kansas City, lenders said they saw "modest growth" in loan demand and improvements in loan quality.

Financial institutions in the Dallas District reported mixed loan demand with larger banks noting flat demand and community banks reporting moderate growth.

Meanwhile, in the San Fransisco District, lenders reported that loan demand was up a bit, but credit availability has either improved or remained unchanged from the past quarter. Contacts said they anticipate "loan demand to increase more rapidly after federal spending uncertainty is alleviated."

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