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CVB Financial Corp  (NASDAQ:CVBF)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. And welcome to the Fourth Quarter and Year Ended 2018 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is William, and I will be your operator for today. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer period. Please also note that this event is being recorded.

And I would now like to turn the presentation over to your host for today's call, Ms. Christina Carrabino. You may proceed.

Christina Carrabino -- Investor Relations

Thank you, William, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth and year ended 2018. Joining me this morning are Chris Myers, President and Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab.

Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relates to, among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2018, and in particular, the information set forth in Item 1A, risk factors, therein.

Now, I will turn the call over to Chris Myers.

Christopher D. Myers -- President and Chief Executive Officer

Thank you, Christina. Good morning, everyone, and thank you for joining us again this quarter. Yesterday, we reported net earnings of $43.2 million for the fourth quarter, compared with $38.6 million for the third quarter of 2018 and $17.9 million for the year ago quarter. The fourth quarter of 2018 represents a full quarter of financial results post Community Bank merger. We earned $43.2 million, the highest quarterly earnings in CVBF's history, despite over $8.5 million in one-time costs related to the acquisition. Earnings per share were $0.31 for the fourth quarter, compared with $0.30 for the third quarter and $0.16 for the year ago quarter. The fourth quarter of 2018 represented our 167th consecutive quarter of profitability and 117 consecutive quarter of paying a cash dividend to our shareholders.

Net earnings were $152 million for the year ended 2018, compared with $104.4 million for 2017. The $152 million represent the highest annual net earnings in CVBF's history. Diluted earnings per share were $1.24 for 2018, compared with $0.95 for 2017.

Our tax equivalent net interest margin was 4.40% for the fourth quarter, compared with 4.06% for the third quarter of 2018 and 3.68% for the year ago quarter. The increase in our net interest margin was a result of growth in average loans as a percentage of total assets and a higher level of discount accretion from loans acquired. Excluding interest income related to additional purchase discount accretion and non-accrual interest paid, our fourth quarter net interest margin expanded by 21 basis points, compared to the third quarter.

Total loans increased by $182 million or 2.4% to $7.76 billion for the fourth quarter of 2018. Commercial real estate loans increased by $125 million for the fourth quarter and dairy & livestock and agribusiness loans increased by $90 million. Commercial and industrial loans decreased by $20 million and all remaining loan categories collectively declined by $13 million. The majority of the increase in dairy & livestock loans was seasonal as most dairy owners choose to defer their milk checks into the first quarter of the following year and/or prepaid or feed expenses.

Loan yields were 5.22% for the fourth quarter of 2018, compared with 4.99% for the third quarter of 2018 and 4.66% for the year ago quarter. Excluding interest income related to purchase discount accretion, loan yields were 4.73% for the fourth quarter. After excluding interest income related to purchase discount accretion and non-accrual interest paid, our loan yields increased by 9 basis points over the prior quarter and 30 basis points over the fourth quarter of 2017.

For 2018, total average loans for the quarter, including loans acquired from Community Bank increased $2.9 billion or 61%, compared to 2017. Excluding Community Bank's loans, total loans increased $200 million, or 4%, compared to 2017 year-over-year. At December 31, 2018, the allowance for loan and lease losses was $63.6 million or 0.82% of total loans, compared with $60 million or 0.79% of total loans at September 30, 2018. The allowance for loan losses as a percentage of non-acquired loans was 1.32% at December 31, 2018, compared to 1.33% at September 30, 2018.

Our portfolio of non-acquired loans grew by approximately $285 million during the fourth quarter. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $20.4 million or 0.18% of total assets, compared with $16.9 million, or 0.15% of total assets for the prior quarter and $15.2 million or 0.18% of total assets at December 31, 2017.

Total non-performing assets included $12.3 million in non-performing loans from the acquisition of Community Bank. At December 31, 2018, we have loans delinquent 30 days to 89 days of $5.3 million, or 0.07% of total loans. Classified loans for the fourth quarter were $51.1 million, a $3.1 million increase from the prior quarter. Total classified loans included $19 million acquired from Community Bank. We will have more detailed information on classified loans available on our year-end Form 10-K.

Now I'd like to discuss deposits. For the fourth quarter of 2018, our non-interest bearing deposits totaled $5.20 billion, compared with $5.22 billion for the prior quarter, and $3.85 billion for the year ago quarter. Non-interest bearing deposits were 59% of total deposits at the end of the fourth quarter, compared to 57% for the prior quarter, and 59% for the year ago quarter.

Our cost of deposits and customer repurchase agreements for the fourth quarter were 17 basis points and our total cost of funds was 19 basis points, compared to 15 basis points and 18 basis points, respectively, for the prior quarter. The modest increase in our funding costs was due to having a full quarter of Community Bank deposits. We continue to achieve our main -- our objective of maintaining a low cost, stable source of funding for our loans and securities. Although, rising short-term interest rates have created pressure to increase funding costs industry wide, we continue to take a disciplined approach to deposit pricing.

At December 31, 2018, our total deposits and customer repurchase agreements were $9.27 billion, compared with $9.51 billion at September 30, 2018 and $7.10 billion for the same period a year ago. Total deposits acquired from Community Bank as of August 10, 2018 were $2.87 billion.

Interest income, interest income for the fourth quarter of 2018 totaled $117.7 million, compared with $96.6 million for the third quarter, and $73.3 million for the same period a year ago. The increase in interest income from the third quarter of 2018 was a result of $1.1 billion in growth and average earning assets and an increased yield on total earning assets of 35 basis points. The increase in interest income for the fourth quarter of 2017 was the result of $2.4 billion in growth and earning assets and increase yield on earning assets of 80 basis points. The fourth quarter of 2018 reflected a $3.7 million increase in loan discount accretion and non-accrual interest paid over the third quarter of 2018, and an increase of $5.8 million over the fourth quarter of 2017. The tax equivalent yield on earning assets for the quarter was 4.58%, compared with 4.23% for the prior quarter and 3.79% for the year ago quarter.

Interest expense. Interest expense for the fourth quarter of 2018 totaled $4.7 million, an $886,000 increase over the third quarter and a $2.7 million increase over the fourth quarter of 2017. The increase can primarily be attributed to higher average interest bearing deposits.

Non-interest income. Non-interest income was $10.8 million for the fourth quarter of 2018, compared with $10.1 million for the prior quarter and $12.6 million for the year ago quarter. The increase over the prior quarter was primarily due to a full quarter of income from Community Bank. The fourth quarter of 2017 included $3.8 million in gains from an eminent domain condemnation of the business center and the sale of another business center.

Now expenses. Non-interest expense for the fourth quarter was $60.8 million, compared with $48.9 million for the third quarter of 2018 and $35.1 million for the year ago quarter. The fourth quarter of 2018 included $8.5 million in acquisition expenses, compared with $6.6 million for the prior quarter and $75,000 for the fourth quarter of 2017. Non-interest expense totaled 2.10% of average assets for the fourth quarter, compared with 1.93% for the third quarter, and 1.67% for the fourth quarter of 2017. Excluding acquisition expense and intangible amortization, non-interest expense was 1.71% for the fourth quarter, compared to 1.60% for the third quarter and 1.65% for the fourth quarter of 2017.

Now, I'd like to turn the call over to Allen Nicholson, our CFO to discuss our effective tax rate, investment portfolio and overall capital position. Allen?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Thanks, Chris. Good morning, everyone. Our effective tax rate was 28% for the fourth quarter and for the full year. This compares to 38.25% for the fourth quarter of 2017 and 37.7% for 2017 when the impact of the deferred tax revaluation is excluded. The reduction from the prior year was due to the decrease in federal tax rates from 35% to 21%, as a result of the Tax Reform Act. Our effective tax rate can vary depending upon the amount of tax-advantaged income, tax credits and discrete items, such as stock compensation.

Looking to our investment portfolio, at December 31, 2018, our combined available-for-sale and held-to-maturity investment securities totaled $2.5 billion, an $86.7 million decrease from the third quarter, and a $432.4 million decrease from the end of 2017. We did not purchase or sell any securities during the fourth quarter. At quarter end, investment securities available-for-sale totaled $1.7 billion, which included a pre-tax unrealized loss of $23.6 million. In addition, we had held-to-maturity investment securities totaling $744 million.

The tax equivalent yield on total securities portfolio was 2.55% for the fourth quarter, compared with 2.49% for the third quarter and 2.42% for the fourth quarter of 2017. The reduction in the federal tax rate had the impact of lowering the tax effective yield on securities in comparison to 2017. On a nominal basis, our investment security yield have increased modestly, with a 2.47% yield in the fourth quarter of 2018, compared with 2.41% in the third quarter and 2.29% in the fourth quarter of 2017.

So now turning to our capital position. Shareholders equity increased by $781.9 million to $1.85 billion at the end of 2018. The increase was due to $152 million in net earnings, $722.8 million for the issuance of common stock for the acquisition of Community Bank and a net increase of $5.2 million for various stock-based compensation and other items. Partially offsetting these increases to equity were $70.2 million in cash dividends, a $20.1 million decline in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities and $7.8 million for the repurchase of common stock. In December, under our stock repurchase plan, we repurchased 340,000 shares of common stock at an average stock price of $19.49.

I'll now turn the call back to, Chris, for some closing remarks.

Christopher D. Myers -- President and Chief Executive Officer

Thanks, Allen. Let's talk about economic conditions. Turning to the California economy. According to various economic outlooks, California's unemployment rate was 4.1% in November 2018, the same as in October 2018 and 4.5% back in November of 2017. California's economic performance was solid in 2018, fueled by industry expansion, increases in incomes and wages in a response to federal Tax Cuts enacted earlier in the year.

The State's economy is expected to maintain strong growth throughout 2019, leading the way for job growth or the healthcare professional services, and leisure and hospitality industries. There is a continued demand for housing in California. The supply of existing homes has increased slightly and is expected to remain lean. New home construction continues to increase at a modest pace.

In terms of a dairy industry, milk prices are expected to be higher in 2019 as a strong economy and domestic sales are offsetting any impact from the tariffs. Milk prices are still projected to be slightly under the cost of production for most of the first half of 2019, while feed prices are expected to decrease modestly.

In closing, we are pleased with 2018 and believe we are well-positioned for future efficiency and growth. We remain committed to growing the bank in a balanced way, utilizing all three of our growth initiatives, same-store sales, opening de novo centers and acquisitions. 2008 was a transformational year for our company. We crossed the $10 billion asset mark and continue to perform at a high-level with strong financial metrics, CVBF metrics.

In closing, I thank our employees for their continued hard work and dedication. I thank our customers for their business and ongoing loyalty, and I thank our shareholders for their continued support and trust. We look forward to a profitable and successful 2019, and we will continue to update you on our progress.

That concludes today's presentation. Allen and I will be happy to take any questions that you might have.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And the first questioner today will be Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

Hi. Good morning, everyone.

Christopher D. Myers -- President and Chief Executive Officer

Good morning, Jackie.

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Good morning.

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

I wanted to first dig into expenses. Just if you could provide an update on where you are in the cost saving process and where you'll be understanding that, that the conversions already taken place and that the branch consolidations are just beginning?

Christopher D. Myers -- President and Chief Executive Officer

Yes. Good question. Expenses are realized -- we didn't convert the operating systems or we didn't -- we didn't combine them until the middle of November. And when you do that sometimes we keep the employees a week or two after that as well to kind of make sure everything goes smoothly and make sure we have -- we have overlap. So we still were a little expense heavy in the fourth quarter on that operations and technology side, that has been streamlined here by the end of the year, and that area is really running pretty close to where it's going to run, maybe a little bit heavy right now at this moment in 2019.

Now, the second piece is, we have the consolidation of 10 financial centers, nine of those are Community Bank centers, one of those is a Citizens Business Bank center. We have begun that process. We've consolidated one of those centers earlier this month and we have another center that we are consolidating tomorrow. So we'll be two-tenths of the way by Monday. The other -- basically we're doing two centers a month and we'll complete that whole journey by the end of May.

I would estimate that we have still about $7.5 million, and this is just a throw a dart against the wall number, left in acquisition expenses for the first and second quarter of 2019 left, that we will -- that our tenant, what we call one-time expenses related to the acquisition. We also in the fourth quarter were a little heavy. We put a little bit more in our bonus accrual, because a lot of people have worked really hard, getting this merger done and so forth. So we wanted to make sure that we -- we did nice things for our employees like profit sharing and some other things, like that. So we were a little pumped up in the fourth quarter expenses from where we're going to be going forward and I anticipate that by the end of May, we will be fully integrated and fully operating as efficient as CVB should be operating.

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

So is it fair to say then that there's probably at least 50% of the targeted cost savings that are not reflected in the 4Q number, so those would still come out in 1Q, maybe they were reflected by the end of the year, but they weren't in the quarter's number?

Christopher D. Myers -- President and Chief Executive Officer

Yeah. I don't know if I have that percentage number for you, because we're doing it. It's just kind of -- we're doing it inside (ph) of one thing after another-after-another. I don't know if you have a feel for that Allen or not. But I think we're probably beyond 50% would be my guess by the end of the year. But remember we still have -- we're consolidating 10 locations or nine locations, because our Pasadena location, we are going to keep as an office. But basically from an expense standpoint, we're consolidating nine locations, which is all that brick and mortar, all that equipment and so forth. And then -- and there will be some reduction in staff, not a tremendous reduction in staff on that. Most of the staff reduction has already been accomplished, but remember a lot of it didn't happen until the mid-to-late of the fourth quarter.

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

Okay. Okay. Thank you. I will get back?

Christopher D. Myers -- President and Chief Executive Officer

So, I think, Jackie, the way to look at it is, I think, we will be operating under -- when you take total expenses divided by net earning assets, we look at that ratio as 1.70% total assets -- I'm sorry, expenses divided into...

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Average assets.

Christopher D. Myers -- President and Chief Executive Officer

...total average assets. Our objective there is to be below 1.70%. And if you take our merger-related expenses out or acquisition expenses, I expect us to be there in the first quarter and for sure be there by the second quarter, but nothing is for sure, but you know what I mean.

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

Okay. That's helpful. Thanks, guys.

Christopher D. Myers -- President and Chief Executive Officer

Yeah.

Operator

And the next questioner today will be Matthew Clark with Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hi. Good morning.

Christopher D. Myers -- President and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

I wanted to ask on the provision, the $3 million this quarter, how much of that related to the acquisition or not? And whether or not we should expect that level of provisioning going forward, if there's something you see out there that we don't -- particularly in the quarter with net recoveries and non-performers kind of within a range and low?

Christopher D. Myers -- President and Chief Executive Officer

Well, as far as the provision is, when we look at -- if you look at our Citizens Business Bank portfolio from the end of the third quarter to the end of the fourth quarter, that actually grew by about $285 million. Now, not all of that is pure new loan growth. Some of that is Community Bank loans that may have matured that we're renewing and putting on our books. And when we renew them and put them on our books, we need to reserve for those, and then any discount accretion that may be still present there gets brought into our income side and that goes on the accretion side.

So you're going to see that accretion level is kind of going to be elevated here for the next year or so, or maybe a little less than a year. And our -- and in turn our reserves are probably going to have to pace with that. So when you think about $285 million in growth, we reserved $3 million against that $285 million growth, which is like 1.1%.

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

And Matthew, keep in mind that, not just Community Bank, but some of our other recent acquisitions still have credit discounts and don't require an allowance. So, Chris, is referring to our -- what we call our non-acquired portfolio and the growth in that, and so most of the provisioning is predominantly due to just that growth that you pointed out.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. And then on the expenses, again, this -- how do you think about that run rate? I mean, you gave the guide, I guess on the overhead ratio 1.7%, which is helpful, but just trying to get a sense for the excess that exists in that $52.4 million excluding the merger charges?

Christopher D. Myers -- President and Chief Executive Officer

Yeah. I -- I don't want to -- I don't want to get into a corner on that. I really -- I think that the -- we have financial metrics that we want to meet in this company and those financial metrics that 1.70% we believe we should run -- that's the way we should run this company on ongoing basis to be below -- to at or below that ratio once we get normalized with all of the stuff. So if you're running models and so forth, I'd just model it in at 1.70% or something like that and ish and go from there.

I think we might be able to do a little better, but you know what, I think, that's fair. We are going to have some increased expenses in going over $10 billion in assets and some of that's -- we have -- it's greater demands on our PSA and AML and Cecil and all kinds of different things we have to do. So there is going to be some staffing that I've got to build up a little bit there. So I want to be make -- so that 1.7% I think is a fair number for us to run the company and I think if we do that we can be operating pretty close to a 40% or low 40% efficiency ratio. And I don't know, maybe we can dip under 40% if we're a little lucky.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. And then on the loan growth?

Christopher D. Myers -- President and Chief Executive Officer

And one other thing, Matt, can I talk on the reserve, I want to say some on the reserve too. So, remember when we did the acquisition with Community Bank we marked the loans of 1.99% was a credit mark, is that right now, Allen?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

That's correct.

Christopher D. Myers -- President and Chief Executive Officer

So 1.99% credit mark. So we feel that was fully adequate and so that does present, if we can do better than that, that presents kind of income opportunities for us in the future, if you will.

Matthew Clark -- Piper Jaffray -- Analyst

Yeah. Okay. And then just on loan growth stronger this quarter, want to get a sense from where that was coming from, whether there were no existing customers, market share gains, I know coming out of last quarter, you talked up a little bit your funding advantage relative to your competitors and the ability to maybe win more business. Just curious if that played out or not?

Christopher D. Myers -- President and Chief Executive Officer

Yeah. We had a really strong, like, when I -- when we did the last investor call we had a really strong pipeline then. I thought it was the strongest in our company history. I think that's moderated some, we still have a good pipeline. It's just not so robust like it was then. We ended up growing our loans 1.27% quarter-over-quarter if you take dairy out. So when you look at that, that's an annualized growth rate of a little over 5%. It's still below where we want to be at the 6% to 8%. However, our gross loan production was very strong, we had more run-offs in the fourth quarter. And I think you might see more run-off for the next quarter -- couple of quarters, because we're still getting all the Community Bank loans acclimated into our system. Some of those loans we may want to structure a little bit differently, sometimes when you structure them a little bit differently, you may or may not retain those loans, as you go forward. I don't -- I think, overall, the Community Bank credit is as expected as we due diligence it. So I'm not seeing any concerns there, but we are -- at Citizens Business Bank, we have a certain way we run our bank and we're very disciplined in that and we execute.

And so if something doesn't fit the way we want -- it fits in then we're going to have to take a look at that. But, overall, that's not a -- that's not very much in the scheme of things, but it could be a slight headwind in terms of net loan growth going forward, I would say for the next two quarters, because we are still making sure that all the credit is suitable to us. I think the tailwind would be the reserves at 1.99% and then, so it kind of, in some ways those offset each other.

Matthew Clark -- Piper Jaffray -- Analyst

Yeah. Just as a follow up to that. I guess, could you quantify maybe what you think you might want to run-off from here? You've remixed the balance sheet quite a bit since the deal closed and just want to get a sense for how much more of that might exist?

Christopher D. Myers -- President and Chief Executive Officer

On the deposit side, I think we've gotten to where we want to be in terms of the higher interest bearing deposit costs and so forth that we thought were non-relationship based, so we're pretty much there. So we're trying to -- going forward, we're trying to build deposits, which will be challenging, because rates are -- we're very disciplined on the rate side, and relationship and service, and all those kinds of things we are selling. So I think that the higher cost deposits we've pretty much -- that we -- that are non-relationship, we've pretty much extinguished those.

On the loan side, there's not a lot here that we need to cycle through and so forth, and say that this is not something we want to renew and so forth. Overall, I think, Community Bank did a very good job in credit underwriting. I think their deposits were not as strong as Citizens Business Bank deposits as a portfolio in itself, but we knew that coming in. And so the big -- where we're reaping tremendous benefits right now is, is the efficiency and the capacity of Citizens Business Bank deposits, if you will, funding the excess of loans over good solid core deposits that Community Bank had. So we knew that coming in. We were 65% loan-to-deposit ratio, now we're 83% or 84% or whatever it is, we knew we were using some of our deposits to fund their loans and that is a big portion of why that net interest margin is going up, right.

We've let higher cost deposits, non-relationship deposits go, just as we let the securities portfolio go and are really trying to -- again my objective is to not be the biggest, it is to be pound for pound the best. And so when we do an acquisition, we get in there, we filter through it, we tried as quickly as we can and efficiently as we can figure out what can be a core part of our organization and they can run just like Citizens Business Bank has been run historically and that's what we're getting to, and I think we're on track or even a little ahead of track to where I thought we'd be right now.

Matthew Clark -- Piper Jaffray -- Analyst

Thank you.

Operator

And the next questioner today will be Aaron Deer with Sandler O'Neill & Partners. Please, go ahead.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hi. Good morning, everyone.

Christopher D. Myers -- President and Chief Executive Officer

Good morning, Aaron.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Allen, if you could please give the total dollar amount of the purchase accounting accretion in the fourth quarter?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Sure. Aaron, it is in the non-GAAP tables in our earnings, but it was $8.5 million for the quarter. And there was some what I would call accelerated accretion for loans to payoff early unexpectedly in a sense that was probably about $1.5 million. So going forward, that will give you a sense of what the run rate is, but there's going to be volatility in that number as loans payoff earlier than their maturities.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Sure. No. That's great. That's exactly what I was looking for. I was trying to differentiate between those two components. And then the interchange revenue, are you still expecting that to drop by about a $1.5 million per quarter starting in the third quarter?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Yeah. Durbin will be effective for us July 1.

Christopher D. Myers -- President and Chief Executive Officer

But it's not a $1.5 million per quarter, it's a $1.5 million per year. So it's about $400,000 a quarter.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

I'm sorry, OK. Correct. Thank you. Okay. Thank you. All my other questions were answered.

Operator

(Operator Instructions) And the next questioner will be Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning. My questions have largely been answered, but, Allen, following up on the credit discount question. Could you just give us what the aggregate remaining credit discount is for all the deals that you've got?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Gary, I don't think I have that in my -- in front of me right now. So we're happy to send that out to everyone after the call.

Gary Tenner -- D.A. Davidson -- Analyst

All right. Sounds good. Thank you.

Operator

(Operator Instructions) And our next questioner will be Stan Westhoff with Walthausen & Co. Please go ahead.

Stan Westhoff -- Walthausen & Co. -- Analyst

Hey. Good morning.

Christopher D. Myers -- President and Chief Executive Officer

Hi, Stan.

Stan Westhoff -- Walthausen & Co. -- Analyst

Hi. I just wanted to touch on the non-performing loan that increased there by what about $3 million or so from-over the last quarter here. Can you talk about what was driving some of that? Was that some of the Community Bank, as you go through them, you find that they are maybe impaired or something like that?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Yeah. Let me give you some numbers on that. So, when we look at -- you're talking about non-performers and so forth. So, the total of non-accrual loans was just under $20 million for the -- at the end of the fourth quarter -- of that --

Stan Westhoff -- Walthausen & Co. -- Analyst

Yeah.

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Of that $12.3 million is Community Bank. There's nothing in there that we're seeing that's any kind of large trend or anything like that. I think as we're going through these loans, we're looking at them closely. We're -- again, I don't see any softness. The only area that we've seen that there is some softness is in the SBA portfolio. It's not a huge number at this point, but we're really putting a lot of resources on that to make sure we're scrubbing those loans as much as we can and those are mostly the SBA 7(a) loans -- where a lot of them have guarantees of 75% guarantees. But, overall, I feel pretty good about the credit. We did go up a little bit in terms of classifieds and non-accrual, and that was more on the Community Bank side than the Citizens Business Bank side.

Stan Westhoff -- Walthausen & Co. -- Analyst

Okay. That makes sense. And then, just -- what are you guys hearing from your customers? I mean, you've got a lot of nonsense going on in Washington and is there any hesitation by your customers of, where they want to expand, take on more credit? What do you think about --

Christopher D. Myers -- President and Chief Executive Officer

Yeah. Good question. And, it's amazing to me. Because I -- you pick up the paper, you look at the media, you do this and you do that, and you get nervous and you get jittery. But I sit down and I have customer lunches with probably one or two a month. That we sit down with customers from different offices and we go around the table and ask them how their business is? And I'm -- 80% of them are saying business is good. Our numbers are solid. We feel good about where we are, and so forth and so on. And that has not really changed a lot in the last year. So I hear all the rhetoric and all this. We did hear a little bit of talk that tariffs were affecting a few of our customers that are importing product from Asia, but that is not as prolific as we thought it might be so far.

So, overall, I mean, there's still a lot of optimism within our client base. But they're doing the same thing we're doing and looking at the media everyday and reading the papers and it causes them -- to be a little more conservative.

Stan Westhoff -- Walthausen & Co. -- Analyst

All right. That's all I got and good luck with the coming year.

Christopher D. Myers -- President and Chief Executive Officer

Yeah. Thanks.

Operator

(Operator Instructions)

Christopher D. Myers -- President and Chief Executive Officer

One of the things I wanted to add, I think that we haven't talked a lot about is, one of the real synergies of this merger and that is talent. And I think we've acquired a lot of talented people from Community Bank to combine with our talented people at Citizens Business Bank. And I've been very pleased with the quality of people. We've added three people to our senior leadership team that were former Community Bank senior leadership members as well. And so this was -- the numbers work really well on this, the territories work really well on this merger, the types of clients fit us what we do, there are lot of -- get your hands dirty businesses, manufacturers, distributor, wholesalers, we love that, there's tremendous synergies. We have more products and services to sell to their customers. We're starting to build a pretty good pipeline on the Citizens' Trust side and the Wealth Management side, a lot of that pipeline is being helped by former Community Bank clients.

But the one thing I haven't talked about much is the talent level and we have some really good people that have joined us and they're a big part of our company going forward and I want to thank them for their commitment too. So it's, I really said it's two all-star teams and we're putting them together and that's coming to fruition. And I think we're seeing that in the numbers, we're seeing that in the marketplace, we also took out a competitor. So I will say this when I ask my guys, hey, how -- I'm always -- it's the nature of sales people to say, boy, everybody's out pricing us on the loan side and blah, blah, blah and then complain about that. That complain margin has gone down tremendously. And I think that's two things. One thing is our cost of funds are lower. So some of the competition is having to keep rates higher because their cost of funds is higher. And then the second piece of that is we took out a competitor right in our backyard, and that competitor now is on our team. So I'm excited about that.

It's good stuff and I can tell you that I'm -- I feel very positive about what we've done so far with the merger, where we sit right now and our position going forward, both from the financial part, the strategic part and the third piece of that is the people part.

Operator

And there looks to be no further questioners at this time. So Mr. Myers, I will give you the floor back to your closing comments.

Christopher D. Myers -- President and Chief Executive Officer

Yeah. Thank you very much. I also want to thank everybody for joining us again this quarter. We appreciate your interest and look forward to speaking with you again in April for the first quarter of 2019 earnings call. Have a great day and thank you very much for listening.

Operator

The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.

Duration: 39 minutes

Call participants:

Christina Carrabino -- Investor Relations

Christopher D. Myers -- President and Chief Executive Officer

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Jackie Bohlen -- Keefe, Bruyette & Woods, Inc -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Stan Westhoff -- Walthausen & Co. -- Analyst

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