Good day, ladies and gentlemen and welcome to the Southside Bancshares fourth quarter and year-end 2016 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 follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Ms. Deborah Wilkinson. You may begin.

Thank you, Tiara. Good morning everyone and thank you for joining Southside Bancshares' fourth quarter and year-end 2016 earnings call. The purpose for this call is to discuss the company's results for the quarter and year 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' fourth quarter and year-end 2016 results are Lee Gibson, our President and CEO and Julie Shamburger, our CFO. Our agenda today is as follows: First, you will hear Julie discuss an overview of financial results for the fourth quarter and the year ended 2016, including loan growth, asset quality, oil and gas exposure and an update on our securities portfolio and an update eon our public offering that was completed in December 2016. 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 fourth quarter and year-end earnings call. We reported fourth quarter net income of $11.6 million compared to fourth quarter of 2015 net income of $11.7 million, a 1% decrease. Excluding the gain in loss on sales of securities from both quarters, net income during the fourth quarter 2016 increased $1.8 million or 15.2% compared to the same period in 2015. We are pleased to report record net income of $49.3 million for the year ended December 31, 2016, an increase of $5.4 million or 12.2% when compared to $44 million for the year ended 2015. Our diluted earnings per share for the fourth quarter ended December 31, 2016 were $0.43 per share, a decrease of $0.01 or 2.3%, compared to $0.44 per share for the same period last year. For the year ended December 31, 2016, diluted earnings per common share increased $0.21 or 12.7% to $1.86 as compared to $1.65 for the year ended 2015. On a linked quarter basis, we reported an increase in total loans of $73 million. For the year ended December 31, 2016, total loans increased by $124.8 million or 5.1%, when compared to December 31, 2015. The growth primarily resulted from an increase in our commercial real estate loan portfolio and to a lesser extent the increase in municipal loan portfolio. We continued to see roll off in the indirect consumer portfolio of approximately $44 million during 2016. The indirect portfolio decrease to $36 million at the end of the year and we do not anticipate the roll off in this category will significantly impact our efforts to grow the loan portfolio during 2017. As we stated in our earnings release today, our loan topline remains strong and we expect consistent loan growth…

Thank you, Julie. 2016 was an exceptional year by any measure, primarily due to increased revenues and improvements in expense control. A 12.2% increase in net income resulting in record earnings highlighted our financial performance during 2016. During the year, we added $125 million in loans and we were successful in significantly improving our asset quality with nonperforming assets to total assets decreasing over 50% to 0.27% at year-end. We continue to experience bottomline results in our cost containment efforts during 2016, resulting in a 52% efficiency ratio during the fourth quarter. Our goal is for this ratio to average 50% or less during 2017. In early December, with our stock price up over 65% year-to-date, we issued common stock netting $76 million of additional capital for future growth and potential acquisitions. We are excited about our prospects for 2017 and look forward to a year filled with additional opportunities. Our loan pipeline is strong and we believe loan growth during 2017 will be more consistent. Solid asset quality, loan concentration levels below regulatory guidelines and additional capital provided balance sheet well-positioned to lend into the growing dynamic markets we serve. The DFW and Austin economies remain very healthy and the prospects for 2017 continue to look promising. DFW is projected to lead the U.S. in total job growth during 2017 and Austin's job growth projections remain solid. It appears we are beginning 2017 with an administration bent on reducing regulation and an interest rate environment that is potentially more net interest margin friendly. This potential new interest rate environment along with projected loan growth should improve our net interest margin over time. On the acquisition front, we are receiving more inbound calls from sellers in our areas of interest. The additional capital we raised coupled with our currency level positions us well for the right opportunity. At this time, we will conclude our prepared remarks and open the lines for your questions.

[Operator Instructions]. Our first question comes from the line of Brad Milsaps from Sandler O'Neill. Your line is open.

Hi. Good morning.

Good morning Brad.

Lee or Julie, I was curios if you could maybe give a little more color around the margin. How much this quarter was impacted by loan discount accretion income? And then, I know you guys don't buy a lot of premium CMOs anymore, but was there anything other than just the rate environment affecting the yield on the securities book? It was up about five basis point. So just kind of curious what your outlook would be for recovery and that getting back closer to where it had been running right around 2%?

I think the biggest thing that impacted the net interest margin was the sub debt offering that we had, that we did in September. We had almost a month's worth of that impact in the third quarter, but we had the full three months impact in the fourth quarter. And so on a linked-quarter basis, that increased our borrowing cost quite a bit. And so that had the biggest impact on the net interest margin. In terms of the securities book, we do anticipate that and we are seeing it that the securities portfolio. we should see the CMOs and things of that nature begin to improve in yield quite a bit with the slowing of prepayments. And we have seen quite a bit of that already.

If you happen to have the impact of accretion for the quarter?

Yes, Brad. The loan accretion was flat over the quarter. It ran about $478,000 in the fourth quarter compared to about $480,000 in the third quarter.

Okay. Great. And Julie, just one more maybe on expenses. I think I heard your comments, you expect to realize or the cost savings will continue to come through in 2017. Does that mean you should sort of hold expenses flattish from the 2016 annual number? Or do you think, you know, they have the ability to go lower from where 4Q 2016 was? Just kind of curious on framing some of your comments around expenses.

I do think that we will probably remain flat for the most part. I think there is some potential for them to go down somewhat but I think mostly it will be a flat level with like it was in 2016.

So for Q4.

Yes, it's because in current.

Got it. Okay. Thank you.

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

Hi. Good morning.

Good morning Mike.

I wanted to touch on loan growth topic. It's been back-end weighted the last two years and you guys had made comments before that you thought it would be more balanced this year. Could you maybe just update us on what you are seeing thus far end of the year? And any change in sort of your loan growth outlook for the year?

Right now, we have some things that we believe are actually going to fund in the first quarter. And then we have a number of construction projects that the equity has gone in and we expect to begin to fund on those. So that's why we believe that we should see a more balanced approach to the funding on our loans this year compared to the past two years.

Okay. And I think before, you talked about potentially hiring some C&I producers or something like that. Would that be incorporated in the efficiency ratio and expense outlook you provided? Or would that be add on top of that?

That is incorporated in there. We have hired a couple, but we also in the fourth quarter, there were some expense in there for some people that were let go. So basically we are trading dollars and we have added some new C&I lenders, very experienced in the DFW market.

Okay. And just last one for me on M&A. Just curious what you are seeing in the pipeline? I assume you are still looking on the same sort of triangle you guys have talked about in the past, but any update just in terms of conversations that you may be having or increased activity in the market?

There seems to be more -- basically we are getting more inbound calls and there are more actionable deals that are coming across the desk and two or three of them look very interesting at this point in time. So we are taking a look at those very seriously. And they are in the areas of interest which is that triangle from East Texas over to Fort Worth down to Austin and back again.

Okay. Thank you Lee.

All right.

Thank you. And our next question comes from the line of Mike Belmes from KBW. Your line is open.

Good morning.

Good morning Mike.

Most of my questions have been answered, but I want to revisit the NIM. So nice to see that loan yields have increased relative to the prior quarter, but I wanted to kind of get your thoughts on the deposits side and the pricing regarding that in particular time deposits?

On pricing side, we are not seeing a real change there. If anything, some of the pricing, we were able to get a little better pricing than that we have in the past. It really just depends, if we get to a point where we are seeing 50% equity, then the pricing gets a little more skinny, but our typical deals, 35% to 40% equity in deals, the pricing has remained pretty consistent and in some cases has improved.

I appreciate it. And well, I have seen that time deposits have been increasing quarter-over-quarter. Are you guys seeing more competition there? Should we expect this trend to kind of continue or stabilize in the near term?

I would say that was stabilized. Some of that is, we have some public fund deposits and we have quite a few entities that were their depository and this time of year, they are depositing a lot of money and in some cases they want to put it in time deposits. And so that's I think what you are seeing there is an increase in time deposits related to some of those public fund entities. But it were their depository.

Got you. Thanks. And last question from me and more of a housekeeping item. I saw the tax rate came in lower this quarter. Is about 18% in the right area going forward?

Yes. So this is what we would expect next year.

Yes. If you take out the loss on the sale of securities, the tax rate for the fourth quarter would have been a little over 17%.

17.1%.

Yes, 17.1%.

Got you. I appreciate it, guys.

All right. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Stan Westhoff from Walthausen & Co. You may begin.

Good morning everyone.

Good morning.

I just want to touch on the loss on the securities book there that we took this quarter and I guess how it relates to the unrealized losses you have in the securities book and in the discussion that you had with selling them off as we progress through 2017. Do we expect to see some more of these securities losses on the sale?

It really just depends what transpires during the year. We just decided to sell off those treasuries at the end of the year. They were the lowest yielding treasuries we had and that was a decision that we made. At this point in time, we don't anticipate any sales of securities at loss. And it's a decision that we make based on the environment at the time.

Okay. And then just touching on the growth in the CRE book that we had this quarter. It was pretty significant year-over-year and quarter-over-quarter here. Can you talk about what went into that? What kind of properties went into that? And I guess if some of the decline in construction that we had go into that, like say permanent financing for the CRE?

Yes. Some of the decline in the construction definitely goes into the CRE bucket and the CRE bucket is wide variety of things. It's office building. It's retail space. It's multifamily. It's, I don't think I said retail. I am getting a list here. But it's a wide variety of things that make up that commercial real estate bucket.

Well, I was just looking to, was there anything that stood out in the quarter?

No. It was pretty diversified. And typically we try to limit any single property to around $15 million, $20 million. Sometimes on occasion it may get up in $20 million, $25 million range. But any one single project, we try to limit.

Okay. All right. That's all I had. Thanks.

All right. Thank you.

Thank you. At this time, I am showing no further questions in the queue. I would like to turn the call back over to Lee Gibson for closing remarks.

All right. Thank you. Record net income, strong asset quality, additional capital and dynamic growing markets provide an excellent foundation for us to further expand the Southside franchise during 2017. Thank you for joining us today and we look forward to next quarter's call.

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