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Chemical Financial Corp  (NASDAQ:CHFC)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Chemical Financial Corporation Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, today's conference is being recorded. A copy of today's earnings release can be accessed by logging on to chemicalbank.com, and selecting the Investor Information tab at the top of the website. Also included is a slide presentation on our Investor Information page with Supplemental Information that will be referenced in today's call.

With us today are David Provost, CEO and President of Chemical Financial Corporation; Thomas Shafer, Vice Chairman of Chemical Financial Corporation and CEO & President of Chemical Bank; and Dennis Klaeser, our Chief Financial Officer. After brief comments from management, the call will be opened to your questions.

Before we begin, we would like to caution listeners that this conference call may contain forward-looking statements about Chemical, its business, strategies and prospects. Please refer to the forward-looking statements disclaimer and other information on pages two through three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

And, now, I'd like to turn the call over to David Provost.

David Provost -- President and Chief Executive Officer

Thanks, Tara; and good morning, everyone. Looking at the third quarter financial highlights, our earnings of $70.4 million represent earnings per diluted share of $0.98, which is up from both a prior quarter and the third quarter of 2017. Our solid earnings for the quarter are reflective of our continued strong growth in our earning assets and overall credit quality improvement. These benefits are partially offset by the addition of our operating expenses in order to build upon our foundation with key additions to our management team, upgraded operating systems, and the continued expansion of our commercial lending team.

We are proud of our ability to have increased our deposit base in a highly competitive market by $893 million, or 24.6% annualized, in the third quarter alone. It's important to note that this level of growth does not yet include the impact of the operating accounts we expect from our selection as a City of Detroit's primary banking partner announced earlier this quarter. We expect the deposit growth from the City of Detroit's partnership to begin slowly in the fourth quarter and then increase to a larger extent in the first quarter of 2019.

We are also pleased with our loan growth for the quarter of $217 million or a 5.9% annual growth rate during a seasonally slow quarter. Our growth was primarily driven by new relationships in our commercial and industrial portfolio as many of our new lenders we've added to our team are now fully up and running.

The recent additions to our team joined with the strength we have previously built provide us with a continued optimistic outlook and believe that we have positioned ourselves for further expansion in increased market share in our high-growth potential markets of Detroit, Cleveland, and Grand Rapids as we focus on services and product lines that provide the greatest opportunity to create value.

Note that while we continue to make strategic market investments, we will continue to balance our disciplined expense management philosophy with a strong focus on driving revenue growth as we continue to make progress toward our goal of being the Midwest premier community bank providing best-in-class service to all of our customers.

With that, let me turn over to Tom to go through some of the specifics of our overall strategic plan. Tom?

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Thanks, David. I'm pleased with the improvement in our fundamentals following the assessment of our allocation of capital over a year ago. We have succeeded in reinvesting our operational cost reduction implemented during the fourth quarter of last year into business segments and markets, now producing an improved return on capital. And our lower total operating cost run rate has not decreased, it has been reallocated toward enhancing our revenue growth streams strengthening our regulatory compliance and enhancing customer satisfaction.

Our key focus is now on solidifying and growing our foundation, maintaining strong market share and brand recognition in our historical markets and driving growth in our high potential markets in West Michigan, Southeast Michigan and Cleveland. These high potential markets are defined as markets where we are currently have relatively low market share but where we are investing additional resources to grow the institution.

As an example, in the Detroit MSA, we have 2% positive market share in $133 billion market or 84% of those deposits are held by out-of-state national or large out-of-state regional banks. The investments I mentioned includes strategic staffing additions and product enhancements leveraging our system upgrade that was completed in July.

Our recruitment of some of the market's top commercial bankers, mostly coming from national and large super regionals to our team in high potential growth markets has shown positive results through our commercial loan growth, specifically C&I growth this past quarter and we anticipate more significant growth over the remainder of the year and into 2019. We currently expect our loan growth rate to be in the high single digits in the fourth quarter.

Let me be more specific. The 28 commercial bankers added in our high potential markets are meaningfully adding to our commercial loan and deposit growth this year and as these bankers continue to gain market recognition as Chemical bankers, their quarter-over-quarter production has grown. We also continue to add commercial talents, including three commercial bankers, in the third quarter and anticipate adding five in the fourth. In the third quarter, we also hired two professionals that are longtime commercial deposit specialists to enhance our commercial deposit growth.

In addition, the excitement for the move of our headquarters to Detroit continues as the plans for a new building in the center of the entertainment and business district are under way and our partnership with Detroit to service the city is beginning to ramp up. We are proud to be part of building our economy and investing in Michigan and the Midwest future.

With that, let me turn it over to Dennis to go through the financial result in further detail. Dennis?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Thank you, Tom; and good morning, everyone. Moving on to slide seven, net income was $70.4 million in the third quarter of 2018, an increase of $1.4 million from the previous quarter's net income and $29.9 million from the same quarter a year ago. Diluted earnings per share were $0.98 per diluted share in the third quarter of 2018, an increase from $0.96 in the second quarter and from $0. 56 in the third quarter of 2017. The increase in net income compared to the prior quarter was primarily driven by the increase in our net interest income resulting from increases in average balances and yields earned on loans and investment securities.

As seen on slide eight, our return on average equity and return on average tangible common equity, return on assets and return on average tangible common equity remains very strong at 1.37% and 17.5%, respectively, down just a couple of basis points from the prior quarter. As shown on slide nine, year-over-year our total loan portfolio has grown by approximately 7% or $963 million to $14.8 billion at September 30, 2018. I think it's important to focus on the composition of the loan growth. In our view, the highest quality loan growth is in commercial and industrial loans, which accounted for $400 million of the growth and in owner-occupied CRE loans, which contributed $180 million of the growth. Together, these two loan categories are responsible for 60% of the growth in the past year, and during 2018 these categories are driving almost 70% of our loan growth.

Turning to slide 10, we had $217 million of loan growth in the third quarter, representing an annualized loan growth of just under 6%. We are pleased with this level of growth, given the third quarter are seasonally slower for loan growth, but more importantly we are very pleased with the quality and composition of our loan growth.

From slide 11, you can see that our $217 million of net loan growth for the quarter, it will result to $448 million of growth in our originated portfolio, offset by $231 million run-off in our acquired loan portfolio. While the run-off of acquired loan slowed from the prior quarter, overall loan run-off is faster than we previously expected, which we believe is a reflection of the strong economy, which is improving customer's ability to pay down loans.

Moving on to deposits, as you see on slide 12. Overall, deposit growth year-over-year totaled $1.6 billion or 12%. The third quarter 2018 was exceptionally strong with deposit growth of $893 million as we have actively pursued new customer deposits, which have reduced our reliance on brokered deposits and FHLB borrowings. As Dave previously mentioned, this growth does not yet include City of Detroit operating account deposits, which we expect to come -- to start coming in later this year and during the first quarter of next year. Our average cost to deposits increased to 72 basis points in the third quarter, up from 56 basis points in the prior quarter, which is partly due to the competitive environment but probably more importantly because we are being more aggressive to keep our loan-to-deposit ratio below 100%.

In managing our overall funding and deposit cost, one of the key strategic focuses is growing our non-interest-bearing checking accounts. Looking at our net interest margin table, you'll see that the average balances for non-interest-bearing checking accounts has grown nearly 10% year-over-year to just over $4 billion in the third quarter of 2018. One of the key drivers of this growth is our success in providing treasury management services to our growing base of commercial loan borrowers.

Turning to slide 14, our asset quality and loan loss coverage ratios remain strong. The decrease in the provision for loan losses for originated loans to $5.1 million in the third quarter compared to $9.6 million in the second quarter is a result of lower level of loan growth in the third quarter and also reflects improvement in collateral position on loans that are individually evaluated for impairment. The total provision for loan losses of $6 million includes $970,000 of impairment identified in one of the -- our older acquired loan pools as a result of our quarterly reestimation of cash flows that we do for all of our acquired loans. Net loan charge-offs were just 5 basis points of average loans in the third quarter, which was a decline from the prior quarter.

As I'm sure we'll discuss more during the Q&A section of this call, the increase in non-performing loans to $97 million or 0.65% of total loans from $63 million or 0.45% of total loans in the prior quarter is largely due to a single commercial loan relationship. This loan relationship was classified as non-performing, because it's so out of compliance with the loan covenant, which we expect to be resolved this quarter.

The loan relationship is not delinquent currently nor was it ever delinquent on any contractual debt service payments. The loan is a Michigan-based loan to a Michigan-based businessman with whom we have a long-standing relationship. Because of our collateral position and strength of the borrower, the potential losses on this loan relationship is very low.

Our charge-off rates have remained consistently low over the past couple of years and we see no signs of that materially changing. In fact, we find that our overall loan quality is improving given that collateral values continue to rise and the overall business environment remains very healthy.

As shown on slide 15, net interest income increased $2 million to $159.5 million in the third quarter compared to the prior quarter. The net interest margin on a tax-equivalent basis was 3.48% in the third quarter compared to 3.59% in the second quarter of 2018. The margin was negatively impacted by the $213 million increase in our securities portfolio. As I've discussed previous quarters, we will add leverage to our securities portfolio by match funding those securities resulting in a fairly narrow spread of only about 1.1%. Additionally, as a result of the substantial growth in the deposits over the quarter, our lower-yielding deposits at the Federal Reserve Bank increased by about $100 million.

Additionally, we have the normal pressure on margin given the reduced accretive yield contribution as our acquired loan portfolios run-off.

Overall, the margin was weaker than I expected for the quarter, but looking forward I expect less pressure on the margin given the yield increase we will get on existing loan portfolio and able to generate loans from the recent increases in prime rate and LIBOR. We will get a yield pick up on about 25% of our securities portfolio and more -- and we'll also get yield benefit for more effective deployment of a portion of our liquid funds, which again will provide incremental benefit to the margin.

Longer term, our continued success in bringing in operating accounts from municipalities like Detroit and broadening our treasury management relationships with commercial customers will provide additional benefits as we move into 2019.

Moving on to non-interest income on slide 16. Our non-interest income for the third quarter totaled $37.9 million compared to $38 million in the second quarter, a slight decrease in non-interest income was largely due to a seasonal decrease in wealth management revenue of $1.1 million, partially offset by an increase of net gain on sale and other mortgage banking revenue of $1 million. Our mortgage banking revenue benefit from an increase in a change in fair value of our loan servicing rights in the third quarter.

As seen on slide 17, core operating expenses, excluding impairment associated with tax credits realized during the quarter, were $106.5 million in the third quarter of 2015 compared to $102.8 million in the second quarter of 2018. Included in our operating expenses was $2.7 million of conversion-related cost during the third quarter compared to $3.2 million in the prior quarter. Expenses associated with historic tax credits added $3.2 million to our operating expenses in the third quarter compared to $1.7 million in the second quarter of 2018.

Also during the third quarter, our occupancy expense increased by $0.9 million due to a lease termination cost. During the quarter, we exited a lease and consolidated some of our office space. We expect the lease termination will result in annual reduction of our occupancy expense of about $450,000.

Going back to our historic tax credits. We expect an additional $6 million of historic tax credit impairment expense in the fourth quarter. That's up a little bit from the prior guidance. Again, that will be fully offset by tax benefits realized during the fourth quarter. We expect our effective tax rate to be approximately 11% in the fourth quarter, assuming the previously discussed timing of historic tax credits are completed on schedule compared to our effective tax rate of approximately 13.8% in the third quarter of 2018.

Our adjusted efficiency ratio was 52.8% in the third quarter of 2018 compared to 51.2% in both the second -- and the -- period of 2018 and from the one year ago. We expect to move our adjusted efficiency ratio close to the 51% level during the fourth quarter as we reduce our expenses related to our core operating system conversion and we continue to increase our revenue streams.

Turning to slide 18. We ended the quarter with tangible book value of $22.87, which represents just over 7% in our tangible book value compared to a year ago. Our TCE to total assets remained strong at 8.3% at the end of the quarter and our regulatory capital ratios are strong at an estimated 10.9% Tier I capital ratio and 11.7% total risk-based capital ratio.

I will now turn it back to Dave for some closing remarks.

David Provost -- President and Chief Executive Officer

Thanks, Dennis. As usual, the key factors that will drive our future earnings are revenue growth and the continuation of our disciplined expense management. We continue to believe that while the reinvestments we are making in our foundation come at a cost, the benefit to come in the future are very much worth the expense.

From an M&A standpoint, we periodically evaluate merger and acquisitions and believe activity in our geographic market areas can offer the potential for additional opportunities to better leverage our capital position and further accelerate our forward momentum. However, as always, we strive to appropriately balance risk and reward. And as I said before and I'll say it again, not every deal is created equal.

As always, we appreciate your time and interest in Chemical Financial Corporation, and on that note, moderator, let's open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Chris McGratty at KBW.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Hey. Good morning.

David Provost -- President and Chief Executive Officer

Good morning.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Dennis, maybe just start on expenses. I got the tax credit $6 million in the fourth quarter. Can you just help us with kind of the next couple of quarters given all the moving pieces with the systems and the investments and maybe compared to this quarter? Thanks.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Sure. So the unusual items are the tax credit of approximately $6 million in the fourth quarter assuming the deals that we're working on get completed as expected. The other item is the final expenses related to the systems conversion, which was completed in July but there are some lingering expenses associated with that full implementation. We expect that to be about $1 million in that neighborhood in the fourth quarter.

And then the -- sort of the base level of expenses underlying that is in the $104 million range and that has primarily crept up, because the quarterly run rate of our core operating system has ticked up now that we're on the better system and we're paying the cost associated with this upgraded system. Additionally, as Tom noted, we have done some incremental hiring and so we have seen some incremental increases in our compensation expense as well.

As I commented before, in 2019, the expense base -- the pace of growth should slow, because we've made the investments in the core operating systems. We will have the normal sort of the inflation adjustments to base levels of compensation. The pace of hiring of the higher cost in commercial lenders will slow. We will continue to do some hiring, but I think the cost of that and the pace of that hiring will be more moderate than we experienced in 2018.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay. Thanks a lot. A lot of details. But I can go back and make sure I got it all, but relative to this quarter, if we take out the termination charge, you're like $109 million roughly, which included about $3 million on the tax group. So the 100 -- call it 106, ex the tax, can you just help us kind of circulate in a little bit narrower for the fourth quarter relative to that number? Maybe, I'll go back and add it all up, but I just want to make sure I got the model right.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yup. And the total expense is in the $100 million range -- $111 million range with $6 million of that being historic tax credits and $1 million of that being final conversion expenses.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Got it. Okay. Got it. Appreciate that. And just maybe on -- pivoting to the margin, I totally get what you're doing with the great deposit strategy and obviously the yield curve is not helping many banks today, but the guide has been a little more challenged for you guys. And I guess the 8 basis points or so of core compression ex the equation this quarter, you're seeing slightly less pressure, but just maybe help the magnitude and also kind of how you see like when the trough might occur? Thanks.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. When you just look for example at the increase in the deposits at the Federal Reserve were probably $100 million, $150 million of our target. If we move $100 million of that into loans, we would benefit margin by about 2 basis points or so. The other thing is that, as you know, LIBOR really didn't move throughout the quarter. It did move later in the quarter, probably moved at the end of the quarter. We will get the benefit on just under a-third of our loan portfolio immediately adjusting up, but maybe even more importantly in terms of the new loan production it will be pegged off of the higher rates and the majority of what we're -- the new loan originations are prime LIBOR based floating.

We also have about 20% or so of our securities portfolio that is variable rate pegged either off of LIBOR or prime. There's a slight lag in terms of benefit we get on the lift there, but we will get a lift on 20% of our securities portfolio and there's another 5% or so of just the cash flow portfolio that gets repriced and reinvested. So all of those things create a bit more lift in the yield on the loan portfolio, more lift in the fourth quarter versus what we saw in the third quarter. The overall deposit growth in the fourth quarter would likely be lower than what we saw in the third quarter and the change in those deposits flows actually has an incremental benefit on the margin as well.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay. Thank you for all that color. And David if I just sneak in one more. Your concluding remarks about not all M&As are kind of created equal, maybe elaborate on that? I'm interested in those comments. Thanks.

David Provost -- President and Chief Executive Officer

So this management team has a history of being inquisitive, but the deals that we have done have really benefited our shareholders and I don't want to get thrown in with the mix of deals that have been done recently that really don't benefit shareholders, so that's really the purpose of that comment.

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay. Thank you. Thanks for the question.

Operator

And we'll go next to David Long at Raymond James.

David Long -- Raymond James Financial, Inc. -- Analyst

Good morning, guys.

David Provost -- President and Chief Executive Officer

Hey, David.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Good morning.

David Long -- Raymond James Financial, Inc. -- Analyst

With the City of Detroit deposits that you should start to add here, at least the operational account deposits here in the fourth quarter and into the first quarter, how much is there that you think you guys can add? And then at what cost do you anticipate these deposits coming on in?

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Yes. So depending on the year, because of these cycle of the collections of the municipalities it will probably range from 200 to 500 in that general range throughout the year when we're fully implemented. We expect the operating cost to begin this quarter and through the first quarter. It's a significant, I would say, system upgrade for the city as we often move to a more modern finance program.

The average cost, I mean, there will be a mix between -- there'll be a mix between both operating deposits and the money markets, something like that, depending on the amount of collection they have at any given time. There are some permanent dollars that they have at all times. I mean, that's probably around $100 million that will stay with us and we will help them through a money market arrangement probably.

David Long -- Raymond James Financial, Inc. -- Analyst

Okay. Can you talk about the expected cost on those deposits? And then also any operational or operating expenses in the third or fourth quarter that you guys may have realized as a result of building out your infrastructure to handle these deposits?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yes. We really shouldn't be quoting particular rates for particular clients, but overall the deposit relationship is expected to average down our overall deposit costs.

David Long -- Raymond James Financial, Inc. -- Analyst

Got it. Okay. Thanks, guys.

Operator

We'll go next to Scott Siefers at Sandler O'Neill + Partners.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Good morning, guys.

David Provost -- President and Chief Executive Officer

Hi, Scott.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Hey. I wanted to go back on both the margin and expense questions, so I guess Dennis maybe to start on the cost side, I think on the last call you guys had suggested that when we get into like the first quarter of 2019, since we'll have less noise from the tax credit business, we should be able to get down to like a $102 million kind of steady-state run rate. It sounds like there might be a little bit more pressure on that number if I read your comments correctly. What are you thinking for a sort of steady-state cost base as we go into early 2019?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. No, I believe that I was talking more of a $103 million to $104 million range previously sort of that baseline and that's crept up to say $104 million range, because of the additional hiring that we're doing. That's starting out into next year. So that's sort of a baseline that we're building off, but then again if we see opportunities to add talent, make investments that we think are going to drive revenue growth that over time benefits shareholders, we're going to do that. We see the significant opportunity of capturing market share, particularly in what we believe as our growth markets and we think it's a good opportunity to exploit that.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Okay. All right. Thank you for the clarification. So it sounds like basically $111 million in the third quarter or excuse me in the fourth quarter down to about $104 million in the first quarter and then we sort of grow just normally off of that?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. Again, not the split hairs, but in the first quarter like every institution has, we typically have cost and living adjustments to compensation. It's seasonally higher in terms of payroll taxes, so we've got that issue. So I'm sure you're accustomed to modeling that sort of normal trend line into the first quarter. I'd suggest that we end the year at a base run rate level of the $104 million, excluding those items -- the historic tax credits and the conversion expense.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Okay. I understand. That actually clarifies it pretty much. I appreciate that. And then going back to the margin, just want to try to resolve exactly where it's going. If I think back to the second quarter, I think the hope was that would be stable to up now more pressure than we anticipated and it sounds like the hope is just for less pressure going forward, meaning that it will still be down. So if we start on the three 25 core margin, what would be your expectation into the fourth quarter and beyond?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. In hindsight, I probably should have been more cautious, taking to consider all the different moving parts of that margin. But, overall, I'm expecting some very modest pressure on the margin going forward based on the various items I talked with. So, optimistically, we might see a little bit lift, but I want to be just cautious and suggest that to expect a little bit of pressure on the margin, given our expectations at our loan growth is going to be higher than peer and thus our deposit growth is going to be higher than peer. Any bank that has high levels of loan and deposit growth tends to have a little bit higher betas to get those incremental deposits.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Okay. Perfect. And then, I guess, as a final one, hopefully, when the city of deposits -- pardon me, City of Detroit deposits come all online that'll at least ease some of the incremental pressure, will that allow the margin to sort of flatten out? Is there enough of a base from those deposits, or is this sort of going to be an ongoing funding pressure issue?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. You can do the calculation that's average balance of that might range up to $500,000 -- $500 million, overall lower cost relative to the overall deposit base does have some incremental benefit, but that -- it doesn't dramatically move the needle.

What's our strategic focus is other relationships as well, other similar relationships to the City of Detroit, other municipalities, other institutions, law firms and, in particular, just overall our commercial relationships where we're cross-selling treasury management services. Additionally, when we look at the growth of our non-interest bearing checking accounts, we've had very significant growth in our retail deposit base there as well. So we're gaining market share and market and share of wallet with our retail customers. And so, it's really hitting on all of those cylinders, that's I think -- in our strategic focus to manage funding as we move through the cycle and expect to have -- continue to have strong loan growth and we're obviously looking to fund the largest portion of that loan growth with core deposits.

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Yup. Okay. Perfect. Thank you very much for the color.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

We'll take our next question from Kevin Reevey at D.A. Davidson. Your line is now open.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning, gentlemen. How are you?

David Provost -- President and Chief Executive Officer

Good, Kevin.

Kevin Reevey -- D.A. Davidson -- Analyst

So can you talk about, I know, the rise in salaries and benefits one quarter that was mostly due to additional hires. Was that all lenders or were there other hires that you brought on board during the quarter? (technical difficulty) And how many did you bring on and where?

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

So I think that the -- there's a number of (technical difficulty) we're focused on. We added some treasury management skill sets to the organization last quarter. I mentioned the deposit specialist that were brought on, we did bring on some additional commercial bankers and support staff for them and we're going to be bring that -- we continue to grow that. We also got some credit talent that you got to add to the team.

The -- Dennis answered anything specific about quarter-over-quarter, because these people don't come on right at the beginning of the quarter and so you end up having a little bit of mixed expenses between quarter-over-quarter. But for the most part it's been focused on commercial and the commercial segment, which includes treasury and support staffs, I'd say, with that segment.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. I think the overall move is pretty modest quarter-over-quarter. Results are a little bit of noise within the quarter-over-quarter, given a change in mortgage loan production and also there's a change as a result of -- with lower new loan origination there's less salary expenses that are capitalizing on with the cost of originating those loan. So, a portion of it is driven by those incremental hires, but the other portion is driven by that normal noise that you have between quarters.

Kevin Reevey -- D.A. Davidson -- Analyst

And then as far as we -- I know you have other municipal RFPs that are in the pipeline. Can you give us a timeline as to when you think some of those other RFPs could be announced and what the potential dollar amount of those RFPs are?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. Certainly, I want to be careful to predict which one's we're looking at public funds opportunities, regularly significant clients and prospects throughout the Midwest. I'd say they were actively -- we're actively pursuing them both on public funds, municipalities and commercial. So, we'll routine and bring them on, and I think that that's reflected in the growth of our deposits and the growth of our loan. So, routinely -- but I don't think I could give guidance on any specific client.

Kevin Reevey -- D.A. Davidson -- Analyst

Okay. Thank you.

David Provost -- President and Chief Executive Officer

In general, obviously, the Detroit is very unusual in terms of its size and also unusual in the fact that we wanted to capture having a nearly 100-year relationship with another regional bank. These other relationships aren't necessary things that are going to require or justify a separate sort of 8-K filing or public announcement.

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Individually move the needle like that one did. I think also the importance over the message on winning the Detroit business is to really message the skill set that goes along with that.

Kevin Reevey -- D.A. Davidson -- Analyst

Excellent. Thank you.

Operator

We'll take our next question from Terry McEvoy at Stephens.

David Provost -- President and Chief Executive Officer

Hi, Terry.

Terry McEvoy -- Stephens, Inc. -- Analyst

Good morning, guys. Hi. Good morning. Just a question on 2019. If I just put this together, expense growth slows, net interest income growth accelerates from here. I guess my question is, what are your thoughts on operating leverage and the efficiency ratio? Or maybe any other thoughts on kind of ROA or ROATCE targets, just to give us some level of comfort around -- to kind of profitability in 2019?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. No -- 2019, we expect to be a year of increased operating leverage. We did achieve some operating leverage this year, but we expect to have increased operating leverage because of that dynamic of the slowing pace of growth of operating expenses and sustained growth of revenues driven by strong loan growth and we expect some growth in the fee income areas as well. Right now, I don't think we want to set a particular ROATCE target, but we're very focused on that and we think there's meaningful upside to that.

Terry McEvoy -- Stephens, Inc. -- Analyst

Thank you. And then 4Q 2018 loan originations, is that going to look similar to maybe what we saw in the second quarter? Or is there potential upside to that figure given the new hires and what they bring to the table?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Our target is to have it at that level. One wild card is the repayments -- the pay down in other loans, whether it's acquired loans or it'd be within the originated loan portfolio. And frankly that's in both of those categories have proved to be higher than we've expected and we think it's reflective of the very strong economy, very strong balance sheets that our customers have and we prefer customers not to pay down loans, but because of the very strong financial positions we could see that create a little bit more headwind to the loan growth than we expected. But I think Tom indicated very clearly that for the fourth quarter we think the annualized loan growth rate is going to get to that previous guidance of the high single-digit annualized loan growth rate.

Terry McEvoy -- Stephens, Inc. -- Analyst

And just one last question, Dennis. If not of the historic tax credits gets pushed into 2019 what would the effective tax rate look like?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. In 2019 there are two credits that are still counted for under the old accounting regime. And so, we'll have an impact in the core book that was going to affect, but their are projects that have probably at least a couple quarters before they are completed. And so, when they do go into effect, that quarter will have a very low tax rate like we occasionally saw this year. So, in general, for the full year, I'm expecting the effective tax rate to be in the 17% range and potentially moving down a little bit lower depending on the timing and level of the not only historic tax credits business that we are pursuing but also loan and housing tax credits that we're pursuing.

Terry McEvoy -- Stephens, Inc. -- Analyst

Great. Thank you.

Operator

(Operator Instructions) We'll go next to Nathan Race at Piper Jaffray.

Nathan Race -- Piper Jaffray -- Analyst

Hi, guys. Good morning.

David Provost -- President and Chief Executive Officer

Good morning.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Good morning.

Nathan Race -- Piper Jaffray -- Analyst

On the income trends, Tom, just curious with a lot of the hires that you guys are making on the commercial side, I mean what kind of impact should we see on maybe treasury management fees and other fee income categories as we think about 2019 run rates?

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Yeah. I said the majority of the team that's now have been hired but here is benefiting by the improved treasury management services that we have and the new system that we have in place that was implemented during the third quarter. So, when we talk about the segment growth for C&I, the vast majority of those come with treasuries that are expected to exceed the continued growth -- gradual growth, because of the annuity like value of that over time as we're very focused on growing that segment with those services for that segment.

Nathan Race -- Piper Jaffray -- Analyst

Okay. Got it. And then Dennis going back to expenses for 2019, what impact do you guys potentially expect to see as the assessments come down, perhaps, later this quarter or into early 2019?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yeah. We haven't fully analyzed that impact, but obviously it could have a fairly meaningful benefit on operating expenses for us?

Nathan Race -- Piper Jaffray -- Analyst

Okay. Got it. And then any kind of updated thoughts on how we should think about the accretion running through spread income into 2019 as well and, perhaps, into 4Q?

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Yeah. So I think the pattern that occurred between the second and the third quarter is likely to continue. And as we did last year in the first quarter, we do a periodic sort of reassessment of all the assumptions that are lying -- the accretion and the market that we have on the portfolio. And so, there's potentially some benefit if the results of our next reestimation or reevaluation turn out like they did last year, they would benefit us starting in the first quarter of next year.

Nathan Race -- Piper Jaffray -- Analyst

Okay. Perfect. I appreciate the color, guys.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Thanks.

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Thank you.

Operator

And we'll go next to John Rodis at FIG Partners.

David Provost -- President and Chief Executive Officer

Hi, John.

John Rodis -- FIG Partners -- Analyst

Good morning, guys. Good morning.

David Provost -- President and Chief Executive Officer

Good morning.

John Rodis -- FIG Partners -- Analyst

Dennis, just back to the tax rate, you said for full year 2019 roughly 17%, which was a little bit down from what you said last quarter. Should we be -- what about as far as tax credit amortization, should we still be modeling a couple million dollars or?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

It will be, yes. So to bring that rate down below 18%, it's a result of tax credit and there is an offset in the amortization expense, in other expenses as a net interest operating expenses.

John Rodis -- FIG Partners -- Analyst

Okay. So a couple million dollars, is that sort of the -- for the full year as far as amortization expense?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yes. It's a little bit higher than that. I don't have the exact number, but it's a little bit higher than that. And, again, it's the amount that brings the tax rate down to roughly 17% for the full year.

John Rodis -- FIG Partners -- Analyst

Okay. So, but it's probably less than $5 million for the year?

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Yes, yes.

John Rodis -- FIG Partners -- Analyst

Okay.

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

And it's likely to be concentrated in the single quarter during the latter half of the year.

John Rodis -- FIG Partners -- Analyst

Okay. Fair enough. Thank you.

Operator

And that does conclude the question-and-answer session. At this time, I'll turn the conference back over to management for any closing remarks.

David Provost -- President and Chief Executive Officer

All right. Thanks. As always, we appreciate your interest in Chemical Financial. We continue to remain very confident in the future, and we believe we are very well positioned to achieve additional market share as we move forward. So, with that, thank you for your interest, and thank you for joining the call. Have a great day. Thank you, everybody.

Operator

And that does conclude today's conference. Again, thank you for your participation.

Duration: 45 minutes

Call participants:

David Provost -- President and Chief Executive Officer

Thomas Shafer -- Vice Chairman and Chief Executive Officer & President of Chemical Bank

Dennis Klaeser -- Executive Vice President and Chief Financial Officer

Christopher McGratty -- Keefe Bruyette & Woods, Inc. -- Analyst

David Long -- Raymond James Financial, Inc. -- Analyst

Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Terry McEvoy -- Stephens, Inc. -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

John Rodis -- FIG Partners -- Analyst

More CHFC analysis

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