Good day, and thank you for standing by, and welcome to Southside Bancshares, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Suni Davis, Chief Risk Officer. Please go ahead.

Thank you, Justin. Good morning, everyone, and welcome to Southside Bancshares' second quarter 2024 earnings call. 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 are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and Form 10-K. Joining me today are Lee Gibson, CEO; and Julie Shamburger, CFO. First, Lee will share his comments on the quarter, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.

Thank you, Suni. Good morning, everyone. This morning, we reported second quarter net income of $24.7 million, earnings per share of $0.81, a return on average tangible common equity of 16.9% and continued strong asset quality metrics. Linked quarter, our net interest margin increased 1 basis point to 2.87%. During the quarter, we sold approximately $93 million of lower coupon municipal securities, unwound the related fair value swaps and reinvested most of the proceeds in higher-yielding agency mortgage-backed securities. We estimate the payback of the loss on the sale of securities will be less than one year. Linked quarter, loans increased an annualized 1.1% as we experienced a few payoffs. Our loan pipeline remains solid, and we continue to target 5% loan growth for 2024. Since the last quarter, we have continued implementing initiatives associated with our 5-year strategic plan. One of the initiatives is to carefully examine additional revenue as well as cost containment opportunities. Attrition and a slight reduction in workforce resulted in additional cost savings of approximately $600,000. Repricing of services in our wealth management and trust department will result in additional revenue of approximately $500,000. We are executing on an initiative to expand C&I lending in our metropolitan markets to further diversify our loan portfolio, increased revenue and grow deposits. We've hired a lead C&I relationship manager in the Houston area and expect to add additional C&I team members in the coming months. The $600,000 in cost saves and $500,000 in added revenue are estimated to more than cover the expense associated with this initial C&I expansion phase in the Houston area. We continue to evaluate expenses as well as revenue opportunities, and we'll update you on any further progress in future quarters. The markets we serve remain healthy and continue to grow and perform well. I look forward to answering your questions following Julie's remarks. I will now turn the call over to Julie.

Thank you, Lee. Good morning, everyone, and welcome to our second quarter call. We are pleased to report second quarter net income of $24.7 million, an increase of $3.2 million or 14.7% on a linked-quarter basis and diluted earnings per share of $0.81, an increase of 14.1% linked quarter. We had slot loan growth of $12 million or 0.3% linked quarter and 1.1% annualized. Our annualized year-to-date loan growth was 2.9%. The growth was driven by increases of $59.4 million in commercial real estate loans and $17.5 million of 1-4 family residential loans partially offset by decreases in construction loans of $53.4 million and municipal loans of $10.2 million. The average interest rate of loans funded during the quarter was approximately 8%. As of March 31, our loans with oil and gas industry exposure were $120.8 million or 2.6% of total loans. Our allowance for credit losses decreased $762,000 for the linked quarter to $45.6 million. Asset quality metrics remained strong. Nonperforming assets decreased to $6.9 million from $8 million or 0.08% of total assets on June 30 compared to 0.10% at March 31. On June 30, our allowance for loan losses as a percentage of total loans was 0.92% compared to 0.95% on March 31. Our securities portfolio was $2.71 billion at June 30, consistent with March 30. As Lee mentioned, we sold municipal securities and replaced them with higher-yielding agency mortgage-backed securities and to a lesser extent, U.S. treasury bills. In connection with the sale of the municipal securities, we unwound the fair value swaps associated with the hedged items, which resulted in a net loss in the second quarter of $563,000. There were no transfers of AFS securities during the second quarter. As of June 30, we had a net unrealized loss in the AFS securities portfolio…

[Operator Instructions] And our first question comes from Woody Lay from KBW. Your line is now open.

Hi, thanks for taking my question. I wanted to start on the NIM. Obviously, a couple of different moving pieces there. I think in the opening comments, you called out sort of a short term in nature of deposit account that benefited the NIM in the quarter. Any way to quantify how much of an impact that was on either the NIM or NII?

I can tell you that the account started accumulating money probably in early June and reached that high of around $120 million at June 30. So I don't know what the exact average was, but I'm going to guess it was $60 million for that one month. So one-sixth of the quarter, we experienced a benefit on that $60 million. I have not quantified it in basis points. But likely, it's probably going to leave sometime in August is what we estimate at this point in time. It is an account that does this every year and they build up to a certain level. And then they take the money and -- for the purposes that it was raised for.

Got it. And that account is listed in the interest-bearing bucket?

That is correct.

Okay. And then with the securities reposition, we've seen a pullback in longer-term rates over the past couple of months. Is there an opportunity for further repositionings from here?

It's possible. And we're going to continue to look for those opportunities. We've been doing it off and on now for probably the last 18 to 24 months. And as we find opportunities, especially with the fair value swaps that we have in place and we can get a reasonable payback, and we're going to look for those opportunities. I don't have anything specific right now. But we're obviously going to -- as rates change, as spreads change on the various securities, we're actively looking at that.

Yes. And then maybe lastly on the loan growth front, any expectations for growth in the back half of the year. You've got the C&I initiative coming on board, but I would imagine that would take some time to contribute to the growth?

Yes, I think it will. I -- we may see some growth occur as a result of that in the fourth quarter, but I don't think -- it will be 2025 before we believe that's going to be significant in nature. So likely, most of the growth will be continued funding on our construction portfolio and other full funders on the CRE front.

All right. Thanks for taking my question.

All right. Thank you.

Thank you. And one moment for our next question. And our next question comes from Brett Rabatin from Hovde. Your line is now open.

Hi, good morning, everyone.

Good morning.

Wanted to ask, just staying on the margin. So, it looks to me like the securities portfolio actions you've taken if I look at it, right, it didn't really affect the second quarter that much. Do those actions raise the margin in 3Q? Or does the cost of funds, is that going to be an offset in the back half of the year? Just any thoughts on the tenure of the margin in the back half?

Most of those transactions took place in either late May but the bulk of them took place in June. And so there really wasn't much impact that we saw in the second quarter. Most of that impact will be in the third quarter, and I agree with you. I think as long as the Fed funds rate stays where it is, that's mainly going to mitigate any potential impact as a result of potential deposit increases. And really, it's just a point -- when we reach that point where the Fed does decrease rates. And I think that pressure will wane, and it will move the other direction.

Okay. And then on the expense guidance, if I heard you correct, Julie, was that $37 million for the back half of the year?

Yes, that's correct.

Okay. And so looking at 2Q versus the $37 million, I know you've obviously made some changes and done some things to improve efficiency. Is the growth in the back half because of the initiatives that you've added. Can you maybe give us some color on the growth in the back half of the year.

Well, originally, we started off with a budget of roughly $37.9 million. And then we did some of the cost containment efforts in the first quarter and kind of projected out that, that would have $800,000 or $900,000 -- or maybe $700,000 or $800,000 impact on the third and fourth quarter. So we're -- I'm taking that off. Certainly, we continue in -- we want to err on the side of caution with respect to software and software expense continues -- has remained steady. And actually, most of the categories, if you look at them quarter-to-quarter, we're pretty steady with the exception of salaries and employee benefits. So I really just didn't want to project a lower number. I mean, so far, we have been lower than that anticipated budget that just didn't want to project it any lower than that for the third and fourth quarter if that helps.

Yes, that's helpful. And then...

We are probably being conservative.

Yes. I mean we are being conservative.

Okay. And then just lastly on credit. The results are really pristine and you reduced the reserve with the negative provision. Any thoughts on, are criticized assets lower? Any color on if you guys just are basically just not seeing anything from a credit perspective at this point in terms of any pull over stress.

Yes. Once a month, we have our watch list meeting, and it's basically any credits that are criticized at all. I came away from that meeting not losing sleep over any of them. I think we have one small -- very small credit that we think will have a small loss in, but it looks like now that loss is going to be less than what we've reserved for. Beyond that, there's just with the equity that we had going into deals, it just doesn't look like we're -- at this point, we're seeing any credits that give us any significant concern. Obviously, we have ones that we watch, and we get reporting on a monthly basis, but many of them are trending in the right direction. So that's encouraging.

Okay, great. Appreciate all the color.

Thank you. [Operator Instructions] And our next question comes from Matt Olney from Stephens. Your line is now open.

Hi, thanks. Good morning.

Good morning.

Want to ask about the fees. Good quarter of fees even after I make a few adjustments that you noted, I would love to hear any commentary about expectations for fees for the back half of the year.

I think we mentioned that we did some repricing and we needed to in the wealth management and trust area. So we anticipate those fees are going to go up the last half of the year. Also, our brokerage is doing extremely well. So I think that's going to go up and then the deposit services fees have really done probably better than we originally budgeted and anticipated. So those are really the areas obviously, then we have the extra BOLI income, but that was a death benefit. So we are hopeful that doesn't reoccur in the third quarter. But overall fees, it's been encouraging this year to see the fees move in the direction they have.

Okay. Appreciate that. And then the Houston C&I hiring. Appreciate it may take some time to get some traction there. Would love to hear maybe kind of some longer-term plans. I guess it's early as far as the team. You're still looking for new employees, but maybe it's a longer-term strategy that you want to build out there.

Yes. I think our plan is, and it's going to occur over many, many quarters, is we'll -- we're going to build out that Houston area first and then we'll decide whether to move to DFW or Austin next. But those would be the three markets that we would build out some additional C&I lending teams that can focus on small to midsized C&I lending in those areas, and that will be their primary focus so that we can further expand our C&I lending in those metro markets. But we're going to start with the greater Houston area and then we'll move forward. But we're anticipating -- we're hopeful by year-end, we'll have a large part of the team in place in Houston.

Okay. And I guess your existing footings in some of those larger metro Texas markets, I assume at this point, those are mostly real estate based. So these new teams would kind of complement those existing teams?

That is correct. I mean we do have some C&I lenders in the various markets. But if you were to look at the concentration of the lenders we have, they're much more heavily focused in the CRE arena.

Right. Okay. Thanks for the commentary.

All right. Thank you.

And I'm showing no further questions. I would now like to turn the call back over to Lee Gibson, CEO, for closing remarks.

Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares along with the opportunity to answer your questions. In closing, we're looking forward to our prospects during the second half of 2024 and reporting third quarter results to you during our next earnings call in October. This concludes the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.