Lower utilization and elevated paydowns contributed to a quarterly decrease in loans at KeyCorp that its CFO described as a "surprise."
The bank expected loans to increase in the second half of the year, but that has not materialized, as KeyCorp reported a 0.2% quarter-over-quarter decrease in average loans.
The decline in loans impacted revenue for the bank, with adjusted total taxable-equivalent revenue down 2.7% quarter over quarter to $1.60 billion.
Average deposits were up 2% quarter over quarter, creating excess cash at the company without corresponding loan growth. This resulted in about $1 billion in excess cash that pushed down the bank's net interest margin to 3.18%, down from 3.19% in the second quarter.
Even as average loans were down, nonperforming loans increased. Nonperforming loans totaled $645 million, or 0.72% of total loans, up from 0.60% of total loans at Sept. 30, 2017.
KeyBank NA CEO Christopher Gorman said it is possible that customers may "continue to not borrow" into the fourth quarter due to cash positions; however, the bank expects average loan balances to increase by a low-single-digit percentage in the fourth quarter of 2018.
Loans were up about 2% from the third quarter of 2017, driven by commercial-and-industrial lending, which was up 8%. According to CFO Donald Kimble Jr., a "good percentage" of the bank's expected growth in loans should come from C&I loans.
The efficiency ratio for the second quarter was 58.7%, higher than the target ratio of 54% to 56%. CEO Beth Mooney said the bank may not reach the target until "the back half of 2019." Kimble said the bank had "previously assumed a benefit from a reduction in the FDIC assessment during the fourth quarter," but that is no longer expected in its efficiency ratio projections.
KeyCorp's stock price dropped 3.20% as of 1:39 p.m. ET.