Good day, ladies and gentlemen, and welcome to the Southside Bancshares, Incorporated Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I would like to introduce your host for today's call, Ms. Deborah Wilkinson, Executive Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Amanda. Good morning everyone, and thank you for joining Southside Bancshares' third quarter earnings call. The purpose for this call is to discuss the company's results for the quarter just ended, and our outlook for upcoming quarters. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other disclosures and presentations, I will remind you that any forward-looking statements made are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and in our Form 10-K. Joining me today to review Southside Bancshares' third quarter results are Julie Shamburger, our CFO; and Lee Gibson, our President. Our agenda today is as follows: First, you will hear Julie discuss an overview of financial results for the third quarter of 2016, including loan growth, oil and gas exposure in our loan portfolio, and an update on our securities portfolio, and our cost savings. Then, Lee will share his comments on the quarter. I will now turn the call over to Julie.

Thank you, Deborah. Good morning everyone. Welcome to Southside Bancshares' 2016 third quarter earnings call. We had a solid third quarter with net income of $12.9 million. Our diluted earnings per share for the third quarter in the September 30, 2016 were $0.49 per share, an increase of 11.4%, compared to the same period last year. Our diluted earnings per share for the nine months ended September 30, 2016 were $1.43, an increase of 18.2% compared to the same period in 2015. On a linked quarter basis, we reported a $99 million increase in loans. This was primarily driven by increases in our commercial real estate and construction loan portfolios, largely offsetting the continued roll-off in indirect automobile portfolio of approximately $10.5 million. This increase in loans during the third quarter reinforces our belief that we will see loan growth during the balance of 2016, based on our existing top line as approved and funded loans. At September 30, 2016, our loans with oil and gas industry exposure remained very minimal at 1.1% of our loans. We reported loan loss provision expense during the third quarter of 1.6 million, down from 3.8 million in the second quarter, which was related to the two large impaired commercial loans charged down last quarter to the estimated net selling price of the remaining asset. During the third quarter, we sold the non-performing assets related to both of these loans, and incurred approximately $400,000 in net expense related to the sale of these assets. As a result of these two charge-offs in the third quarter sales and the related non-performing assets, total non-performing assets decreased just over 50% from 32.5 million at December 31, 2015, to 16 million at September 30, 2016, and our ratio of non-performing assets to total assets decreased to 0.29%…

Thank you, Julie. The third quarter saw a net income grow 9.4% over last year and nine month net income increased 16.9% over the first nine months of 2015. Southside showed solid financial results by almost every measure during the first nine months, primarily resulting from successful cost containment efforts, increasing revenues, and strong asset quality with a nonperforming asset to total asset ratio of 0.29% at the end of the quarter. The loan expansion we expected this year began during the third quarter as the loan commitments made throughout 2016 funded at a greater space with loans increasing approximately $100 million. We expect this to continue during the fourth quarter and into 2017 as our loan pipeline remains solid. Opportunities to review new loan request and improve quality loans persist in all of our markets. As loan growth occurs and we are able replace securities with loans, our margin should improve. The additional capital we raised during the quarter expands our options to enhance the franchise. We continue to find areas for cost containment as our efforts to automate and streamline processes are bearing fruit. The DSW and Austin economies remain robust fueled primarily by job growth and company relocation. The Tyler economy reflects a slower but steady growth pattern. We look forward to closing out the year with a solid fourth quarter and entering 2017 with promising loan growth prospectus, a strong balance sheet, and a lower cost structure. At this time, we will conclude our prepared remarks and open the lines for your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brad Gailey from KBW. Your line is open.

Hey, it's Brady. Good morning, guys.

Hi, Brady. How are you doing?

Good, good. So, just looking at the margin, the bond yield was down, loan yield was down, funding cost was up a little bit most of the time, kind of everything headed in the wrong direction for the margin. How do you think about the margin going forward? I know some of the bond yield issues were because of some added securities, but how do you think about the margin going forward and especially end of 2017?

You know, I think on the bond side, we are not going to be adding to that bond portfolio. We did that to offset those costs on the sub debt offering as we add additional loans and loan growth occurs in the future quarters, we are going to be gradually reducing that securities portfolio. So I would anticipate that the securities portfolio yield should remain fairly consistent, and the loan portfolio yields on average are much higher than the securities portfolio yield. So we should start to see some pick up in the overall asset yield.

Okay. And then on the funding side, you think that funding cost will continue to rise from here on out, or are you seeing competitive pressure to rise deposit cost?

The only place we're seeing any competitive pressure in that time deposit area. The rest of it, we're just not seeing any pressure at all. There is a little bit of pressure in that time deposit arena, you know, and if the Fed does raise rates in December with our balance sheet and all the flooding rate loans that we have, you know, that also will be a positive effect for us.

Okay. All right, and then on the loan growth side, I think previously you all guided a 7% to 9% loan growth for this year, which maybe you'll hit the lower end of that. Do you think as we go into 2017, that's still an appropriate level of loan growth kind of the high single-digit period?

Yes, I think the 7% to 9% for 2017 is probably appropriate. I think for this year we know that we have a couple of payoffs in the fourth quarter, so I think something probably similar to what we saw in the third quarter is what we're probably looking at in terms of loan growth for the fourth quarter.

Okay. And then last for me, just an update on M&A, you know, you're all having more conversations with targets or less conversations, just an update on general M&A in Texas?

We're seeing more things come across our desk, and it's -- you know, there just seems to be more opportunities out there. Some of them look interesting and some of them are in market areas that we're just really not interested in.

All right, great. Thanks, Lee.

All right.

Thank you. And our next question comes from the line of Kevin Fitzsimmons from Hovde Group. Your line is open.

Hi, good morning.

Hi, Kevin, how are you doing?

I'm good, I'm good. Hope you're well. Just wanted to touch on loan growth again, you alluded to, Lee, that I guess the fundings accelerated over the course of the quarter and I'm assuming maybe you had some pay-downs in third quarter as well. You just I think alluded to that as well. So is that really what explains what was a pretty sharp difference between average loan growth link quarter, which was pretty low and the period loan growth linked quarter which was more substantial?

That is correct.

And that is just I think you mentioned on last quarter's call that just you guys tend to see this seasonality of your loans just increasingly funding in the back half of the year, right?

We have for this in the last two years, we saw this in '15 and we're seeing it this year. I don't know that we can explain it. We've talked to our loan officers and we're perplexed by it, but I don't know if it's the heavy rains we received in the spring and some of our construction projects get pushed back and the heavy equity that's going into some of those, we're not sure what it is, but that has happened in the last two years.

And when you -- you just said for fourth quarter you'd expect loan growth to be like the third quarter or you're talking about average loan growth or you're talking about end of period loan growth?

I'm sorry. I'm talking about end of period loan growth. I think an average loan growth should be much better than what we saw in the third quarter, because you're right average loan growth was only about $10 million. And we've put on a couple of really good ties loans I think it was in late August, early September.

Okay. And just a quick question on the expense run rates, so if we pull out the 1.8 million on the leasing, the leases rather and then maybe pull out that 400K of dealing with the sale of the non-performers, is that a decent run rate to think of going into fourth quarter? It still seemed like it went up second to third even making those adjustments which is I'm wondering if there's other items in there.

Actually the down there and other expense associated with the sale of the assets there was about a little over $900,000 in expense and losses down there and other expense. And then up in other income we actually had a gain on the sale of part of the assets that ended up in other income. And so the net 400,000 is the net between those two. So the other -- there were a lot of things up there in other income that kind of went both ways, but there was about 480,000 I'm thinking gains up there and then a little over 900,000 down there in expense. So that was the big driver in other expense going up.

Got it. Okay. That's helpful, thank you. Okay, that's all I had, thank you.

Okay.

Thank you. [Operator Instructions] And the next question comes from the line of Brad Milsaps from Sandler O'Neill. Your line is open.

Hey, good morning guys.

Good morning, Brad. How are you doing?

Good, good. You guys have addressed most everything but will you just maybe back to the balance sheet for a bit. Would you think that the overall size of the balance sheet would likely stay the same size? I know you pre-invested a little bit this quarter with the sub-debt coming on late in the quarter. They look like short term borrowings we're up quite a bit too, is that all related, just kind of curious how you expect the overall size of the balance sheet to sort of move through the rest of the year and into next?

Yes, I think the overall size of the balance sheet will probably stay the same. We actually had some extra cash on the balance sheet at the end of the quarter a little over $100 million so I think we definitely would look for the balance sheet to stay about the same potentially maybe even shrink a little bit with that extra cash on there.

And just curiously back to Brady's question about the funding cost. I mean at this point why would you fight to keep those time deposits? Why not let those run if you're kind of having to you know you kind of said that's the most competitive spot but just giving all your liquidity, why pay up or compete for those?

If you look the average the size of the time deposits has decreased so we aren't, I wouldn't say we're fighting to keep them. It's just the ones we do keep the cost of keeping them is going up.

Sure, sure, okay.

Though I mean we are letting them you know we are letting them line down.

Yes, I guess I was looking more year over year. Okay and maybe finally just kind of always the kind of mystery number and hard to get exact but the tax rate do you think you kind of migrate up closer to 20 or you think you're still sort of in this high team kind of run rate.

I suspect we're going to stay in this 18%, maybe hit 19% rate is my expectation right now.

Okay, all right, great. Thank you, guys.

Thanks, Brad.

Thank you. And your next question comes from the line of Michael Young from SunTrust. Your line is open.

Good morning.

Good morning, Michael.

Just good to see you know the credit costs coming back down after last quarter. It seems like we've got those issues sort of behind us now but just wanted to get your outlook maybe going forward or even in the next year about how much sort of reserve build you need for loan growth and what rate maybe your provisioning for on new loan growth?

I think we're probably budgeting somewhere in the neighborhood of $700,000 or $750,000 a month.

Okay. And I guess last one for me just wanted to see kind of your thoughts now on capital and capital returns obviously you did the sub that issue but any thoughts going forward in terms of you know increasing the dividend and the stock dividend should we expect those things to kind of continue as per normal?

We're really not looking at the -- I mean, the stock dividend is something we've consistently done I think since '93. I don't know that we have any plans to do anything different on that front. The cash dividend we look at we don't normally look at it this time in terms of the regular quarterly dividend so we'll look at that probably next year. We do look at a special dividend about this time of year and the board will probably be considering that in the near future.

Okay. Great, thanks.

Thank you.

And at this time, I'm showing no further questions. I would like to turn the call back over to Mr. Lee Gibson, President.

All right. Well, thank you for joining us today on today's call, and we appreciate you taking the time to join us. And we look forward to a very solid fourth quarter, and you joining us in late January for our next earnings call. Thank you again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everybody have a great day.