Steve Gardner - Chairman and CEO Ron Nicolas - SVP and CFO.

Matthew Clark - Piper Jaffray Bob Ramsey - FBR Jackie Boland - KBW Andrew Liesch - Sandler O’Neill Gary Tenner - D.A. Davidson Tim Coffey - FIG Partners Tyler Stafford - Stephens Don Worthington - Raymond James.

Good afternoon, and welcome to the Pacific Premier Bancorp Fourth Quarter 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Steve Gardner, Chairman and CEO of Pacific Premier Bancorp. Please go ahead..

Our disciplined and consistent approach to business development that creates a steady flow of new clients; healthy economic conditions and good loan demand in our markets; and the quality of our relationship managers, which was significantly enhanced earlier this year with the Security Bank acquisition and will be further strengthened through the acquisition of Heritage Oaks.

Our loan production continues to be well-balanced with all of our major lending areas making significant contributions to our overall loan growth.

During the fourth quarter, we originated $52 million in new C&I loan commitments; $57 million in franchise loans; $36 million in SBA; $90 million in construction loans; and $103 million in commercial real estate loans.

As has been our ongoing strategy, we prioritize business-related loans and higher yielding specialty finance products in C&I, franchise lending, construction finance, and SBA loans. This focus continues to produce a high-quality, well-diversified loan portfolio that generates favorable risk-adjusted yields.

Moving to other notable highlights in the quarter. When the merger-related expenses are excluded, our non-interest expense was within the $24 million to $25 million range that we guided to on our last conference call.

We previously talked about the investments we made throughout 2016 to build an infrastructure that will support our longer term growth and ensure that our enterprise risk management practices and internal controls keep pace with the higher regulatory expectations for larger high growth banks.

These investments were made in anticipation of executing a larger transaction, which of course occurred on December 13 of last year. Upon closing of the Heritage Oaks acquisition, we will exceed $6 billion in assets. With the additional scale from this acquisition, over time, we expect to increase our operating leverage and improve efficiencies.

As I indicated earlier, we also saw return to more normalized credit cost this quarter as asset quality strengthened. Our total non-performing assets declined during the quarter and stood at just 4 basis points of total assets at the end of 2016.

We recorded a provision expense of $2.1 million for the quarter with most of that related to the growth we had in the loan portfolio.

With the strong revenue growth and well-managed expenses, we were able to generate a return on average assets of 1.24% and a return on average tangible equity of 14.42% in the quarter, which is more in line with the performance standards we have established for Pacific Premier.

Of course, the most significant event of the quarter was the assigning of a definitive agreement to acquire Heritage Oaks Bancorp. This acquisition will extend our franchise into the attractive deposit-rich California Central Coast market.

Since the announcement, we’ve had the opportunity to meet with all of the key managers and relationship bankers of the Heritage Oaks organization, and we’ve been very impressed with the quality of the team. Based on our conversations and meetings, we remain bullish about the growth prospects in this market.

The strong deposit franchise that Heritage Oaks has built, coupled with our highly productive approach to generating new client relationships should further enhance our ability to deliver profitable growth.

And taking this over the $6 billion asset mark, the acquisition of Heritage Oaks will not only improve our scale and operational efficiencies but also open up new markets for us to continue to build franchise value. The Heritage Oaks acquisition is on track to close in late Q1 or early Q2 of this year.

We have made substantial progress towards integrating the two organizations and are looking forward to both the strategic and economic benefits that will result from this combination. And we believe that we will have greater opportunities to create value for all shareholders.

Looking ahead to 2017, we intend to continue employing the same strategies that have generated strong value creation for our shareholders over the past several years. We will remain focused on developing commercial banking relationships that result in stable, low cost core deposits.

We will continue to maintain a well-diversified high-quality loan portfolio that generates attractive risk-adjusted yields and solid fee income for the Bank. We will employ leading edge technology to enhance our sales management process and further improve the highly productive sales culture that has driven our consistent organic growth.

We will maintain disciplined credit risk management practices that have produced the superior credit quality that has been a foundation of our franchise. We will look to invest in our personnel and infrastructure to ensure we are effectively managing our growth and ensuring appropriate internal controls and enterprise-wide risk management.

And we will supplement our organic growth with additional acquisitions of commercial banks that will deepen our penetration of existing markets and expand our franchise to other areas along the West Coast. We believe favorable conditions will remain in place in the coming year.

We are generally seeing an increased level of optimism among our clients regarding the economy and the prospects for growing their businesses. And we believe that loan demand will support another year of quality loan growth.

With continued organic growth combined with the positive impact of the Heritage Oaks acquisition, we believe we can deliver solid profitability in 2017 and create additional value for our shareholders. With that, I’m going to turn the call over to Ron to provide a little bit more detail on our fourth quarter results.

Ron?.

Thanks, Steve. And good morning, everyone. We have provided a fair amount of detail in our earnings release today. So, I will review some of the more significant items in the quarter, focusing primarily on the linked quarter comparisons, starting with the income statement.

As highlighted in our earnings release, net income was $12 million and we earned $0.43 per diluted share on 28 million fully diluted average shares outstanding in the fourth quarter compared with net income of $9.2 million and $0.33 per diluted share in the third quarter.

Total pre-provision revenues came in at $46.6 million compared with $45 million in the prior quarter. Key drivers were stronger net interest income, primarily as a result of a larger balance sheet partially offset by lower non-interest income. During the quarter, we provisioned $2.1 million compared quarter $4 million in the prior quarter.

Non-interest expense, as anticipated, decreased to $25.4 million and included $772,000 of merger-related costs as well as $369,000 of REO expense. Excluding merging related costs, our non-interest expense was $24.6 million, in line with our previous guidance. Turning now to more specific income statement line items.

Our net interest income increased by $3.3 million, driven principally by our loan and securities portfolio growth as well as our earning asset mix. You will recall, at our third quarter earnings call, we discussed strong loan growth in the back half of the third quarter giving rise to higher loan balances and Q4 net interest income.

Combined with our fourth quarter production, the Bank added a $181 million in average loan balances and $65 million in average investment balances, which combined with lower cash average balances, added $1.5 million to net interest income; in addition to our net interest margin increase to 4.59% compared to 4.41% in the third quarter and included 18 basis points for accretion, 5 basis points for the special FHLB dividend and 4 basis points for a one-time interest accrual adjustment.

Our core net interest margin was 4.32% compared with 4.22% in the third quarter including the impact of prepayment fees. The core net interest margin increase was principally driven by an improved earnings asset mix.

As we mentioned at our last call, we were able to lower our cash requirements and redeploy the excess funds into both higher yielding loans and securities.

We saw the full benefit this quarter as our average cash balances were reduced to 3% of total average earning assets from 6% in the prior quarter, and our loans and securities grew to 97% of total average earning assets from 94%. The more efficient balance sheet resulted in higher net interest income of almost $1 million this quarter.

Of course, we will not see this quarter-to-quarter increase repeat in the first quarter. Our overall cost of deposits came down at 1 basis-point to 27 basis points as some of our higher yielding time deposits ran off. We do not anticipate significant changes with our cost of funds at this time.

However, we remain cautious in terms of deposit pricing pressures. We believe our core net interest margin should continue to hold up as we move into the first quarter. While there continues to be downward pressure on loan pricing, the Bank has never competed solely on price.

We continue to remain disciplined, while balance customer needs and taking into consideration the full customer relationship. Going forward, accretion will continue to have a lesser impact in the first quarter from the 18 basis points realized this quarter.

Our larger earning asset base and improved earning asset mix will help to combat increasing competitive pricing pressures. In addition, with the most recent rate hike, we saw approximately $750 million or 23% of our loan portfolio re-price immediately. And we will see another $300 million re-price as we move through 2017.

The Bank recorded a provision for loan loss of $2.1 million for the quarter compared with $4 million in the prior quarter. In addition to providing for loan growth of approximately $1.6 million, the Bank provided for unreserved net charge-offs of $500,000. Total net charge-offs were $2.6 million of which $2.1 million were previously reserved.

Non-interest income decreased $1.7 million to $4.3 million from the third quarter for a few reasons. First, during the quarter the Bank sold $30 million of SBA loans, achieving a net gain of $2.4 million compared with $36 million sold and a net gain of $2.7 million in the third quarter.

The net gain rate bounced back improving approximately 50 basis points to just over 8% in the fourth quarter. In the third quarter, you will recall, the Bank also had a one-off commercial loan sale gain of approximately $450,000. We also have lower gains related to recoveries on pre-acquisition charged off loans of approximately $200,000.

And lastly, we sold approximately $17 million of securities in the third quarter, achieving approximately a $500,000 gain and did not sell any securities this quarter. Given the potential rising rate environment, we see less security sales in the future. Turning now to non-interest expense.

Overall, our non-interest expense came in at $25.4 million and included the $772,000 of merger-related costs as well as REO expense of $369,000. As we discussed at our prior earnings call, we anticipate a non-interest expense to be in the range of $24 million to $25 million. Excluding the merger related costs, our total NIE was $24.6 million.

Most of the remaining expense line items, were in line with our expectations. And the areas of onetime costs we highlighted in the third quarter, mainly compensation, marketing and other operating expense, came down as anticipated.

As we move into the first quarter and forward with our integration plans for Heritage Oaks, we expect some growth in our operating expense in anticipation of our end of the first quarter or early second quarter close, and subsequent integration and conversion activities.

Lastly, the Bank ended the quarter at 446 full time equivalents, down 2 FTEs from our September 30th number. Our effective tax rate was just under 38% in the fourth quarter as we trued up our tax rate for our final 2015 filings and the 2016 full year impacts.

Notwithstanding any significant changes to the corporate income tax laws, we would anticipate our 2017 effective tax rate to continue to be in the 38% to 39% range. Keep in mind, our merger-related costs are generally non-taxable and will unfavorably impact our tax rate as we move through the second and third quarters.

Turning now to the balance sheet highlights. Total loans, as highlighted in our release, increased by $150 million or 20% on an annualized basis and were driven principally by record organic originations for the quarter of $385 million, eclipsing the previous record of $322 million set last quarter.

Total average loan balances rose by $181 million during the quarter, reflecting the strong originations in the back half of the third quarter, giving rise to the expanding net interest income and net interest margin.

Origination yields were down slightly at 4.80% compared with 4.87% in the prior quarter, reflecting increasing pricing competitiveness, partially muted by our favorable business mix and pricing discipline.

We anticipate new origination loan yields may hold flat with the initial rate move offsetting some of the downward competitive pressure on loan rates. Total combined portfolio amortization or repayments accelerated somewhat this quarter, compared with the third quarter.

And the annual rate of repayment improved to 26% compared with 24% in the prior quarter. This was more a function of normal amortization and line utilization than prepayments which actually declined compared to the third quarter.

We grew our investment portfolio $68 million as we purchased $88 million during the quarter and saw $14 million redeemed and amortized, and incurred a $7 million fair value mark-to-market adjustment. We continue to target a portfolio size equal to 10% of our total assets.

Overall, deposits grew $86 million with interest bearing higher by $61 million and non-interest bearing higher by $25 million. Our non-maturing deposits grew $83 million to almost 82% of total deposits as of December 31st.

Of the approximate $86 million in deposit growth, our HOA deposit business grew $24 million and totals over $750 million as of December 31st.

The Company and the Bank both remain well-capitalized across all regulatory capital measures and our tangible book value increased $0.29 per share to $12.51 during the quarter, despite the negative after tax impact of the mark-to-market to the available for sale securities portfolio. Lastly, taking a look at the asset quality.

Our ALLL ended the quarter at $21.3 million, down $500,000 from the prior quarter with our coverage ratio at 0.66% of loans held for investment, down from 0.71%. Both of these slight decreases were directly attributable to the loans charged off that had specific reserves. The ALLL reserve coverage on the non-classified loans remained flat at 0.74%.

Total net charge-offs for the quarter were $2.6 million and included two credits which were previously reserved for totaling $2.1 million. Non-performing loans decreased $4.8 million to $1.1 million or 4 basis points as a result of the net charge-offs as well as a $2.5 million note sale for the full amount owed.

And finally, our total delinquency of $832,000 was 3 basis points of total loans compared with 18 basis points in the prior quarter. With that, we would be happy to answer any questions you may have. Operator, please open the call up for questions..

We will now begin the question-and-answer session. [Operator Instruction] Our first question will come Matthew Clark with Piper Jaffray. Please go ahead. .

Maybe just first just on the pipeline and related outlook and loan portfolio coming off the couple of quarters of record production.

Just curious how the pipeline stands today going into the first quarter, and is there any seasonality we should consider again going into the first quarter?.

Sure. Historically, the Q3, Q4, the second half of years are typically our strongest quarters, Matt; and Q1 typically is a weaker part of the year. That being that said, we have a pretty strong pipeline headed into Q1, roughly $500 million.

The investments that we made and more importantly the acquisition of Security Bank last year is continuing to contribute to the pipeline in its strength. So, overall, it’s pretty strong headed into Q1; at the same time, Q1 is historically our slowest quarter of the year..

Okay, great.

And then, maybe on the loan-to-deposit ratio of 103%, I know the Heritage Oaks [ph] the acquisition is going to help that equation as that deal closes but in the interim, should we anticipate some loan sales maybe here in the first quarter or you expect deposit growth to pick up?.

We have historically done loan sales at various times and loan purchases to manage a number of areas, our liquidity risk; credit risk; concentration risks and the like. And it’s something that we will take a look at. We balance that against the deposit inflows, the prepays, the origination.

And there is no way to get it right every single time per se or exactly where we might like it. And so, we’ll look at that as a potential option, as we move through the quarter. But as you pointed out, we have the Heritage Oaks acquisition coming up. Their loan to deposit ratio at the end of the third quarter was quite a bit lower than us.

We think that there is plenty of opportunity to grow deposits there in the Central Coast region. And as such, we will look at all of those factors in determining whether or not we have loan sales here in Q1..

Okay, great. And then, last one. Non-performers here de minimis here 5 basis points of loans in OREO.

And I’m just curious, first, have your classified or criticized classified trends followed through? And also just curious if you could add some additional color around your customer base and it sounds like they are feeling more optimistic, but just curious what you’re seeing on the CRE fund, anything that might make you a little bit more cautious or vice versa?.

Sure. The classifieds have come down with the rest of the improvement and strengthening in the classified assets.

We ended the year at -- what was it?.

Yes, 5 basis points, I believe --..

No, in the classifieds, Ron. We will get that number in a second and then I’ll just speak to you generally. Look, as I mentioned, discussions that we’re having with our business owners and clients, I think that there is generally an optimistic mood that with potential regulatory reform, tax reform that there could be increased growth in the economy.

And I think that generally speaking, most of business owners are incrementally more optimistic. I think with a lot of us that have operated in this economy, since the financial crisis, it’s -- you like to hear the rhetoric and discussion out of DC.

And I think that all of us are cautiously optimistic but I don’t think that any of us lose sight of the fact that we still have a two-party system in this country. And so, we’ll see how things shape out and how that could positively impact the economy.

But as I said, overall, I think business owners are more optimistic today than they were at the end of Q3. I don’t see any areas of CRE or any other loan category that is giving us pause for concern. As we’ve talked about a number of times, over the last several years, we’ve seen liquidity flow in to the commercial real estate markets.

That has not been due to a lessening of debt or loan conditions, at least not at our institution.

It has been predominantly equity, liquidity that has flowed into the markets where you have new entrants that have a very strong balance sheets personally ending their businesses looking to invest their excess liquidity and seeing real estate, commercial real estate in particular, multifamily and the like as an attractive opportunity..

And Matthew, just a follow up on Steve’s comment, classified loans were $13 million, 40 basis points of total loans for the quarter. So, they were down and trending downward..

Our next question comes from Bob Ramsey with FBR. Please go ahead..

Just sort of thinking about the margin, I know you mentioned the FHLB special dividend; is that included in the core margin? And so, should we sort of start the first quarter of 5 basis points narrower; is that fair?.

No, Bob. I excluded the 5 basis points, the special dividend portion from the FHLB from our core margins. So, our core margin was 4.32 that included about 14, 15 basis points of prepayment fees that accelerated of course that came about. But that is our core margin stripped of all of those of onetime items..

Okay, perfect. That’s good to know. And then thinking forward, I know you guys said that strong earning assets will certainly be a little bit of a lift. Do you think with the shorter day count, net interest income is up directionally in the first quarter with little lower prepayments, but more [Multiple Speakers]..

I don’t think -- I think not a material impact..

I don’t think the shorter day count will affect it. Obviously, as I mentioned in my earlier comments, we got kind of a onetime quarter-to-quarter lift through the redeployment of the lower cash into loans and securities that sort was a onetime opportunity here in the fourth quarter that we realized.

The larger balance sheet going forward will continue to give us lift. So, we will see that continue as we move forward into the first quarter. But, I am not so sure that the day count is going to have much of an impact..

Okay. Shifting gears to talk about M&A, Heritage Oaks, you guys sound like you are on track, going to close that before too terribly much longer. When are you sort of ready for the next transaction and sort of how would you describe the pipeline of transactions out there, or conversations you made --..

We are ready now..

And you are ready now, okay..

Sorry for interrupting. We are ready now; we are continuing to have conversations. I think the pipeline is similar to how it’s been over the last several years and that activity ebbs and flows. Certainly there are fewer targets as we move up in size, and we look that we start to limit the size of institution that we want to consider.

We’d still look at -- we think about today as sort of the minimum $500 million. We really wouldn’t have much interest below that and even $500 million is on the low end of the scale. We’d much prefer to see deals in that $2 billion, $3 million to $5 billion range, quite frankly..

And is five the high end or would a merger of equals be the high end or how high would you go?.

We don’t do mergers of equals. And I don’t know, I haven’t seen it in the, maybe at the locals Zoo there is a mergers of equals, but I’m not familiar with it in real business. But, no, 5 billion is not the cap we would look at larger institutions that we think we could add value and that would add value to our shareholders as well..

Okay. And maybe last question on that front.

Any sense in how potential seller sentiment has changed post-election or are targets more interested in selling because valuations have improved or are they less interested in selling because it appears that there could be a lot of opportunities in banking or sort of how our sellers thinking about their options?.

I think that every seller is different and they all -- they have differing perspectives depending upon the outlook that they see for their business. Certainly the regulatory impact and cost, their ability to earn their cost of capital, a whole variety of factors and I don’t think that you can lump any of them together in one category or another..

Okay. Fair enough. Thank you for taking the questions. .

Sure..

Our next question comes from Jackie Boland with KBW. Please go ahead. .

Just as a follow up to the last conversation, as you think about future acquisitions and given that you would consider somebody up to 5 billion or perhaps even higher.

How do you think of crossing the 10 billion platform and what requirements would be necessary to do that?.

We started to just think about that within the last two to three months. We don’t anticipate it immediately, but we are thinking about that threshold and the impacts that it has from a whole host of various, whether its DFAST becoming regulated by the CRPB and a whole host of other areas.

And we’ve been taking steps in the organization, it's that constant seeking to improve, strengthening the executive senior management team, improving on our processes, constantly looking at our organization, its structure, the internal controls, becoming more sophisticated in our modeling or models validation, enterprise risk management and all of those things, those are all things that we are looking at and considering and putting and beginning to put in place as we speak.

And its just again Jackie part of our constantly seeking to get better at what we do. .

Okay.

So fair to say already in your infrastructure, some of the improvements that have been happening and then ongoing and any sort of concrete expense build would be a future item that can be quantified once you get to be a little bit bigger in assets?.

Potentially we'll see, I mean, it's just like we added expense in Q1 and Q2 of the last year in anticipation of any acquisition, we were pleased that we were able to get Heritage Oaks done, but there were no guarantees as we were adding those folks, but we certainly expected that we would have another acquisition, that would move us into another category in our own minds.

But it’s just it’s an on-going process for us, to constantly look to improve and crossing that $10 billion threshold, we are well aware that it’s a significant impact on an organization, at the same time we’re comfortable with our ability to manage through that affectively..

Okay, that’s helpful thank you.

And then a clarification question for Ron, you mentioned the 4 basis point impact on the margin from an accrual adjustment was that an interest recovery or was that something else?.

It was an interest recovery..

Okay, and then thinking about securities yield, if I strip out the roughly 50 basis point impact from the FHLB special dividend, it looks like those were still up a good amount quarter on quarter.

Was that just due to the may be a higher rate on some of the purchases you had?.

Yes. Jackie, last quarter we initiated a small portion of our securities portfolio into little bit of corporate debt area, which has a little bit higher yield. Last quarter we probably got a half of quarters worth of benefit to that end. This quarter we saw kind of the full effective of that benefit.

And also the redeployment of course the of the lower cash requirements, part of that went into the securities portfolio as well. So all of that had a yield enhancing effect on the securities portfolio..

And Jackie, just to clarify on the corporate, we started buying and doubling in corporates sometime in the middle part of the summer and added a little bit in Q4 as well..

Okay, I know you’ve had mentioned that, the level of the quarter-on-quarter NIM expansion is unlikely to repeat, but would there still be some forward benefit in 1Q from some of the purchases you made in 4Q?.

Limited, I’m not so sure I would go there to the -- certainly to the same extend that we saw in 3Q to 4Q. We’re still -- seeing as, as I made in my comments, some downward pressure from a competitive standpoint. We saw the rate hike, but it remains to be seen how all this mix is going to play itself out here in the first quarter.

I would expect more of a flattish result here in the first quarter compared to the fourth quarter as far as the core margin is concerned..

[Operator Instructions] Our next question comes from Andrew Liesch with Sandler O’Neill. Please go ahead..

Just some follow up questions to some topics discussed earlier.

Steve you mentioned acquisitions, I think you referenced other West Coast locations, are you considering something out of state or are there any specific markets where you would like to complete a deal may be outside of Southern California?.

You know we’ve -- there haven’t been any that we’ve looked out at that are out of state. I think we’ve talked about this before and in that L.A.

is certainly our primary, our ideal focus, but we’ve looked in market, as we’ve said before, we'd look on Central Coast, we'd look into Central Valley, we'd look in Northern California, we haven’t looked at this point at anything out of state that’s probably more of a little bit of a longer term perspective.

At the same time, if something of interest that's really going -- that will add to our core focus of creating an institution of scale that is headquartered in Southern California and really will drive franchise value, it's something we'll take a look at and consider..

All right.

And then I think you also mentioned, Ron, you did 10% investment securities to assets, I think Heritage Oaks is running well above that, maybe it's too early to tell, but you guys plan on repositioning of either your securities portfolio or their book, once the deal is done?.

Yes. Andrew, we did take a look obviously through the due diligence process at their securities portfolio. I think part of that portfolio we'll retain and likely part of it we'll sell. So I would expect post-merger for the portfolio again to represent roughly the 10% of the total assets..

Very good, thanks for taking my questions..

Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead..

A lot of questions are answered. But couple of quick ones here.

Steve, you mentioned the loan pipeline around 500 million at the end of the year, can you give us an idea of where that stood back at September 30?.

Put roughly, the same. And the 500 million Garry is about where we are today. We were a little bit higher than that headed into the New Year..

Okay, got you. Thanks.

And then regarding Heritage Oaks, when you announced the deal there was some discussion on the conference call regarding their resi-mortgage platform, can you update us kind of with how you are thinking about that today, as you're getting closer to closing the deal?.

We don’t plan on being in mortgage banking. We are not in mortgage banking today, we don’t expect to be in mortgage banking after we close this acquisition..

Okay.

And is that something that you think there is appetite from people that want to diversify and maybe have that platform to kind of sell that platform, or is this something that you wind down?.

Yes, you can sell it for $0..

Okay. Very good thank you..

Our next question comes from Tim Coffey with FIG Partners. Please go ahead..

Ron, in your prepared remarks, you mentioned that the repayments this past quarter included amortizations and utilizations in aggregate.

What were kind of the repayments for the quarter?.

Tim, I don’t have that number handy here. I think they upticked, I remember looking at it a bit ago, I think they upticked a little bit through the normal amortization, but again the prepayment side of that number was down a little bit as well. I think overall, it was down -- we were up a little bit, but nothing extra ordinary..

Tim, just to clarify. The payoffs were down just slightly quarter-over-quarter, but some of the other amortization, pay downs online, it's a variety of things that was up that combine quarter-over-quarter and we can get you that specific number after the call..

Great. Yeah, I'll be more than happy to follow up with you guys on that. And then, kind of, see if you can give me some -- a little bit color on the thesis for the sales of the non-performing loan. I mean obviously you had very little non-performing loans.

So, were you just -- were you testing the market to see what the appetite was for doing future loan sales like that, or was this just the kind of one-off thing?.

We didn’t sell any loans, Tim. On the large non-performing loan that we took a specific reserve for in the third quarter and was highlighted during that call that was charged off during the fourth quarter.

The loan sales were predominantly SBA, and then there maybe have been just one small loan sale, but that’s not the bulk of it, it was that one large loan that we took the charge-on..

Okay. Perhaps I misread the press release then. I look at the reference, the sale of nonperforming loans during the quarter..

Yeah. We did sell one note; it was relatively small. Yeah. It was roughly around $2.5 million for the full amount owed, it was previously a non performing classified asset..

Okay..

So the combination of those two that's what drove -- we reduce if you'll recall in our non-performing we were down about 4.8 million, roughly half of that was attributable to the charge-offs that we had which were in large part full reserved.

And then the other part was the note sale the one-off note sale that we did for the full amount, there was no gain or anything, so to Steve's earlier point, it wasn’t our normal business thing. We just -- we had the opportunity to sell the note for the full amount, given our strong collateral position..

So, Tim, I’m sorry. I was focused on the other loan that we had charged off.

So, we’ve done that over -- historically over the years, where we’ve sold one-off individual loans, but it's not a matter of going out and testing the market, it's just where we have an opportunity, the collateral will allow for us to sell it and move something off the books that is substandard, we’ve done that before..

Okay. All right. Thank you for the color on that Steve. And then just kind of looking at the cash balances in relation to earning assets, its low relative to kind of where you've been keeping it near-term, but not historically. So you have kept it a little bit low, this low before.

I’m wondering that as you, once you close on the Heritage Oaks transaction, do you anticipate holding a little bit more cash?.

Well, the cash we had reduced in Q3, towards the end of Q3 through some steps that we had taken. That level from a percentage basis should be relatively consistent once we close Heritage Oaks we don’t expect to carry it from a percentage basis any higher just an absolute dollar basis of course it will be a little higher..

Right. Okay. thanks, I was asking about the percentage basis. Great, thank you those are my questions. .

[Operator Instructions] Our next question comes from Tyler Stafford of Stephens. Please go ahead..

Hey one last one for me on M&A topic, I appreciate the commentary around the size parameters, what financial hurdles can you remind us about that you’re targeting in an acquisition, what are EPS accretion, tangible books dilution, et cetera?.

Sure, each deal needs to be accretive to EPS in the full first year of operations. Maximum dilution to tangible book 10%, maximum payback is 4 to 5 years on tangible book dilution, 15% IRR.

All of that being said, we've never announced the deal that has come close to 10% dilution to tangible book value, no deal has come close to the five-year payback on tangible book dilution, all of them have been accretive to EPS in the first full year. And so those remain as our broad parameters that we have. .

Thanks Steve, Ron, do you happen have that the breakdown of the PCI versus non-PCI accretion this quarter?.

I don’t have that, Tyler, at my fingertips, so if you want I can follow up with you on that..

Okay that’s fine. And then maybe one more just clarification question on the core margin in 1Q.

You expected to stay flat relative to the 432 this quarter, even absence the FHLB dividend payment in 1Q?.

Even the special dividend is excluded from that 432, call it 430 net interest margin, but that does include pre-payment -- the benefit of pre-payment fees which adds about 14 basis points to that number. So pre-payment is the volatile number, the Steve’s earlier comment, we typically see originations a little softer.

I suspect we’ll see pre-payments a little softer, we probably won’t have 14 basis points, 15 basis points of pre-payment. So it could soften from there, but other than that, yes, I do see it relatively flat..

Okay, and have you done any preliminary work that you could share on how much of the benefit, you'd realize if there is reduction in the corporate tax rate?.

We haven’t done analysis. Look there is a couple of -- there is rates floating around out there, 15%, 20%, 25%. Look at -- wherever it shakes out we will be happy to take it and take the benefit that we pick up from it..

And just to add, while there would be a kind of current period benefit, not unlike a lot of banks to the extent that there is a reduction, we’re all going to be facing a haircut on our differed tax assets. So all be it, maybe a onetime adjustment, but that will of course come into play as well..

Our next question comes from Don Worthington of Raymond James. Please go ahead..

In terms of the FHLB borrowings during the quarter, were those primarily overnight or did you do any term borrowings during the quarter?.

Yes. Don, that was all overnight. As we moved through the quarter into December we were seeing again as we've already noted strong originations, we saw a little bit of softening normal seasonal softening on the deposit side. So abundance of caution or just to prudent quite frankly, we decided to put on that little extra liquidity.

I can tell you January 4th, came around and we jettisoned that liquidity and deposits we have rebounded back very, very nicely this quarter..

Okay great.

And then one more in terms of the REO right-down, was that due to a new appraisal?.

Yes, new valuation that came in towards the end of the year. Just in our normal process..

Okay great. Thank you..

This concludes our question-and-answer session. I would now like to turn the conference back over to Steve Gardner for any closing remarks..

Thank you Daniel. Thanks again all for joining us this morning. If you have any other questions, please feel free to give either Ron or myself a call and we would be happy to talk with you. Have a great day..

This now concludes our conference for today. Thank you for attending today's presentation. You may now disconnect..