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U.S. Bancorp (USB 1.56%)
Q4 2017 Earnings Conference Call
Jan. 17, 2017, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to U.S. Bancorp's Fourth Quarter 2017 Earnings Conference Call. Following a review of the results by Andy Cecere, President and Chief Executive Officer, and Terry Dolan, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session. If you would like to ask a question, please press *1 on your touchtone phone and press # to withdraw. This call will be recorded and available for replay beginning today at approximately 12:00 noon Eastern time through Wednesday, January 24th, at 12:00 midnight Eastern time. I will now turn the conference call over to Jen Thompson of Investor Relations for U.S. Bancorp
Jennifer Thompson -- Senior Vice President of Investor Relations
Thank you, Jamie, and good morning to everyone who has joined our call. Andy Cecere, Terry Dolan, and Bill Parker are here with me today to review U.S. Bancorp's fourth-quarter results and to answer your questions. Andy and Terry will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules, are available on our website at USBank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that can materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Andy.
Andrew Cecere -- President and Chief Executive Officer
Thanks, Jen, and good morning, everyone, and thank you for joining our call. We have a lot to talk about this morning, and as usual, we'll take your questions at the conclusion of our prepared remarks. I'll start with Slide 3. In the fourth quarter, we reported earnings per share of $0.97, which included several notable items amounting to $0.09 per share. Let me take a minute to talk about these notable items. The tax reform legislation that was passed a few weeks ago is a very positive development that will provide immediate and ongoing benefit to our employees, customers, communities, and our shareholders as we invest a portion of our tax savings in each of these core constituencies. As a result of the signing of the legislation, the company recognized a one-time fourth-quarter benefit related to the revaluation of our tax-related assets and liabilities of $910 million. In connection with this event, we took the opportunity to make a $150 million contribution to our charitable foundation and we accrued $67 for a special one-time bonus to certain eligible employees. The impact of these two items was approximately $152 million net of tax.
We also recognized an accrual of $608 million for costs associated with legal and regulatory matters and an investigation discussed in previous filings related to our legacy bank secrecy, anti-money laundering compliance program, and a legacy banking relationship between U.S. Bank and a former customer's business. U.S. Bank has worked diligently over the past several years to improve and strengthen its AML controls, processes, and staff, including increasing compliance staff and making significant investments in systems. U.S. Bank embraces the highest standards of integrity, risk management, and compliance, and we remain committed to continually improving our controls and processes across the enterprise to protect all of our stakeholders. The 8-K we filed this morning provides additional information on this topic.
Our earnings per share were $0.88 excluding the notable items. Slide 4 provides highlights of our results. Long growth was in line with our expectations at 0.8%, credit quality was stable, and our book value increased by 6.9% from a year earlier. We returned 72% of our earnings to shareholders through dividends and share buybacks. Slide 5 highlights key performance metrics. Our performance excluding notable items in the fourth quarter was highlighted by a 13.4% return on average common equity, a 17% return on tangible common equity, and a 1.33% return on average assets. We delivered positive operating leverage on a year-over-year basis in the fourth quarter and our efficiency ratio excluding notable items was 55.3%. Now, let me turn the call over to Terry, who will provide more detail on the quarter as well as forward-looking guidance.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Thanks, Andy, and good morning. If you turn to Slide 6, I'll start with the balance sheet review and follow up with the discussion of fourth-quarter earnings trends. My remarks will be referencing results excluding the notable items. In the fourth quarter, average loans increased by 0.8% on a linked-quarter basis and grew 2.6% from a year ago. Commercial loans increased 1% sequentially. We continue to gain market share across our commercial lending businesses. Commitment levels increased in the fourth quarter; however, line utilization rates continue at historically low levels and paydown activity remained elevated in the quarter as some borrowers tapped capital markets to fund long-term funding needs.
Paydowns also continued to negatively impact our commercial real estate portfolio. We remain prudent in our lending activity in both our construction and commercial mortgage lines, continuing to forego loan opportunities that do not fit our return and risk appetite. Primarily as a result of the paydown activity and our prudent view in lending and commercial real estate in general at this time, average total commercial real estate loans declined by 1.5% in the fourth quarter, which contributed to a 40-basis-point drag to our total average loan growth for the quarter. Retail loan growth of 1.9% was supported by strong growth in installment loans and retail leasing. During the quarter, credit card loans increased 1.4% sequentially -- partly reflecting seasonality -- and mortgage loans increased 1%.
Turning to Slide 7, average total deposits increased 1.2% on a linked-quarter basis and 3% year-over-year. Compared with the third quarter, noninterest-bearing deposits increased slightly, and savings deposits grew 1.4%, reflecting growth in consumer and business banking and wealth management and investment services. Our interest-bearing deposit betas continue to perform consistently with past experience. We expect the total interest-bearing deposit beta -- following the most recent rate hike -- to end up between about 30% to 35%. As future rate hikes occur, we continue to expect our deposit beta will gradually trend toward a 50% level. However, the pace toward that level continues to be somewhat slower than we initially anticipated, primarily due to lower than expected betas in our consumer deposits.
On Slide 8, you can see that credit quality was relatively stable compared with the third quarter. Net charge-offs as a percentage of average loans declined 1 basis point on both a linked-quarter basis and year-over-year. Non-performing assets declined by 4% on a linked-quarter basis and were 25% lower than a year ago.
I will now move on to earnings results. Slide 9 provides highlights of fourth-quarter results versus comparable periods. Record fourth-quarter net revenue of $5.6 billion was up 0.5% compared with the third quarter and up 3.7% versus the fourth quarter of 2016. On Slide 10, net interest income on a fully taxable equivalent basis was $3.2 billion in the fourth quarter, up modestly compared with the third quarter and up 6.4% year over year. Linked-quarter and year-over-year growth were both supported by growth in loans and higher loan yields. In the fourth quarter, the net interest margin decreased 2 basis points to 3.08%, as expected. Excluding interest recoveries that contributed approximately 2 basis points to the third-quarter margin, the net interest margin would have been unchanged.
Slide 11 highlights trends in noninterest income, which increased by 0.8% on a linked-quarter basis and 0.4% year over year. On a year-over-year basis, corporate payment systems revenue grew 10.5% and credit and debit card revenue grew 5.4%, both driven by higher sales volumes. Trusted investment management fees increased 7.1%, mainly due to favorable market conditions and net asset and account growth. Somewhat offsetting this strong fee performance was a 15.8% decrease in mortgage banking revenue, driven by lower refinancing activity -- which impacted production margins for the industry -- as well as slightly lower merchant revenue. In line with our previous guidance, merchant processing revenue declined 1% from a year earlier, mainly due to the exiting of certain joint ventures in the second quarter of 2017 and the impact of weather events that occurred late in the third quarter of 2017.
Turning to Slide 12, noninterest expense increased 2.5% compared with the third quarter of 2017. The increase in expenses was primarily due to seasonally higher costs related to investments in tax-advantaged projects. On a year-over-year basis, expenses grew by 3.6%, reflecting higher compensation and employee benefits expense, mainly related to hiring to support business growth and compliance programs. Regulatory and compliance expense growth has slowed in recent quarters and continues to moderate toward the company's overall expense rate. It's worth noting that in the fourth quarter, professional services expense decreased 27% versus a year ago, reflecting fewer consulting services as compliance programs near maturity. Slide 13 highlights our capital position. At December 31st, our Common Equity Tier 1 Capital Ratio, estimated using the Basel III standardized approach as if fully implemented, was 9.1%. This compares to our capital target of 8.5%.
I'll now provide some forward-looking guidance. Let me start with a discussion of how our earnings will be positively impacted by tax reform on a go-forward basis. Our effective rate in 2018 is expected to be approximately 16% for federal tax purposes plus 3% to 4% for state taxes, or approximately 9% in total. We expect our taxable equivalent tax rate to decline to about 21.5%. This compares with our taxable equivalent tax rate excluding notable items of about 29.8% in the fourth quarter of 2017. Consistent with our capital management policies, we plan to reinvest approximately 25% of the tax benefit we expect to realize in business growth initiatives, including technology, innovation, and business automation, as well as in our employees. Inclusive of these accelerated investments, we expect to deliver positive operating leverage for the full year of 2018.
Now, let me shift to first-quarter 2018 guidance. We expect net interest income to increase at a mid-single-digit pace on a year-over-year basis. Due to the impact of day count, we expect net interest income to be modestly lower on a linked-quarter basis, as is typically the case in the first quarter. We expect fee income to increase at a low single-digit pace on a year-over-year basis. On a linked-quarter basis, fee income is typically lower in the first quarter due to seasonally lower credit card and merchant processing sales volumes, and seasonally lower deposit service charges. We expect expense growth on a year-over-year basis to be in the mid-single-digit range.
On a linked-quarter basis, noninterest expense is typically seasonally higher in the first quarter due to higher compensation costs reflecting in the timing of merit increases, employee benefits, employee incentive programs, and marketing activities. This is somewhat offset by seasonally lower tax credit amortization and professional service costs. We expect noninterest expense to increase slightly on a linked-quarter basis. We expect credit quality to remain relatively stable compared to the fourth quarter. I'll hand it back to Andy for closing remarks.
Andrew Cecere -- President and Chief Executive Officer
Thanks, Terry. We are now ten years past what in hindsight was the beginning of a national crisis. By almost any account, the banking industry has reemerged stronger, safer, and more nimble. Today, the economy appears to be on firm footing. The regulatory environment is becoming more supportive of growth and tax reform will arguably promote job growth, consumer spending, and prolong the growth phase of this business cycle. Against this backdrop, U.S. Bank is well-positioned to win market share in our lending and fee businesses and deliver improving returns and equity while operating with the same risk discipline that has served us well through many credit environments.
The delivery of predictable, industry-leading profitability and returns has been a constant over the years, but recently, the pace of improvement in these metrics has been limited by headwinds we have faced -- some within our control, some out of our control. However, there is reason to believe that these headwinds are starting to abate. First, expenses have been higher than we consider normalized, primarily due to costs related to addressing our consent order with the OCC. However, the heavy lifting is completed, and we have spent compliance and regulatory costs to continue to revert toward our overall expense growth trajectory.
The headwinds are starting to shift in our favor. Mortgage refinance activity, which has been a headwind for the industry, is declining at a diminishing pace, and home sales continue to strengthen. Strategic decisions and market challenges depressed our merchant processing revenue in 2017. However, we remain confident that merchant processing revenue will return to a mid-single-digit growth trajectory by the third quarter. And, while diminishing headwinds are beneficial, what we are most optimistic about is the potential for investments that we have previously made in our businesses -- as well as investments we plan to make in the future -- to increasingly manifest in the form of top-line revenue growth and profitability. Our corporate payments services business is firing on all cylinders heading into 2018.
For the first time in many years, both the commercial business sector -- which is benefiting from higher T&E spend -- and the government sector are showing good momentum. In our wealth management and investment services business, market share gains are being driven by new client growth. In our traditional banking businesses, we are up-tiering our clients in corporate bank and moving up the lead tables in our capital markets businesses. And, on the consumer side, investments over the past several years aimed at enhancing our auto relationships are driving strong market share growth. We are well-positioned as one of the few remaining non-captive lessors in the industry, and as one of the few financiers to offer both a lending and leasing option to our dealers.
It is clear that past investment spending is delivering the intended results and we expect to reap those benefits for years to come. And now, because of tax reform, we have the opportunity to accelerate our investment spending. We will target additional technology and investment spending on the initiatives aimed at enhancing the customer experience and leveraging our competitive positioning, with a particular focus on payments, digital and mobile banking, and B2B capabilities. Technology and innovation are core to our long-term strategy for growth, and we're excited about the opportunity to advance key initiatives that will support both top-line revenue and improved operating efficiency.
To wrap up, I believe 2018 will prove to be a very good year for U.S. Bank, and by that, I mean for the entirety of what makes us U.S. Bank: Our employees, our customers, our communities, and of course, our shareholders. That concludes our formal remarks. Terry, Bill, and I will now be happy to answer your questions.
Questions and Answers:
Operator
At this time, I would like to remind everyone in order to ask a question, press *1 on your telephone keypad. Your first question comes from Ken Usdin with Jefferies. Your line is open.
Amanda Larsen -- Jefferies -- Analyst
Hi, this is Amanda Larsen on for Ken. Did you say that your effective tax rate is going to be 19%? Can you go over that again?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Yes, 19%.
Amanda Larsen -- Jefferies -- Analyst
Okay, great. And then, the expense outlook -- you noted that you're planning on reinvesting approximately 25% of the benefit, and you noted that there would be an expense growth rate in 1Q of '18 of mid-single digits. Should we expect that for the full year '18 we're going to move to the mid-single-digit range in lieu of that 3% to 5% you guys had previously discussed?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Yes. When we end up looking at expenses for the full year of 2018, because of the reinvestment that we plan on making, you would expect us to be at that mid-single digits and the high end of that range.
Amanda Larsen -- Jefferies -- Analyst
Okay, thanks. And then, also, can you touch upon fee growth outlook for '18, particularly in deposit service charges area and treasury management? A couple of your competitors have announced some changes to overdrafts to make it more customer-friendly. And then, on treasury management, if you are removing that earnings credit rate yet. Thank you.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Yeah, thanks for the question. From a fee standpoint -- so, if you think about deposit service charges, we made a lot of those types of changes a while back, so I wouldn't see us making any further changes with respect to our fee structure at this point in time. We have seen good growth with respect to deposit service charges, and that is really tied to both deposit balances and growth in terms of consumer accounts.
In terms of treasury management, treasury management has been a real success story for us this year. We've seen good core growth in terms of good client relationships throughout the year, and we would continue to expect that that would have a positive impact going into 2018. As deposit rates do rise, though, we would expect that we'd be making some adjustment to the earnings credit rate, and that would dampen it a bit.
Andrew Cecere -- President and Chief Executive Officer
And, I'd add that as we think about treasury management, we think about it in combination with corporate payments because they're really two parts of the same component, and corporate payments, in particular, has had a wonderful year -- 11% growth on both the government and the corporate side. Our Virtual Pay product is going 22%, and as we think about the future, there's going to be that combination of thinking about treasury management together with corporate payments.
Operator
Your next question comes from John Pancari with Evercore ISI. Your line is open.
John Pancari -- Evercore ISI -- Managing Director
Good morning. On the merchant processing side, Andy, I know you indicated that you're confident you can get back to that mid-single-digit growth rate by third quarter. What are you seeing that's giving you that confidence in the rebound?
Andrew Cecere -- President and Chief Executive Officer
I'll ask Terry to add on, but I think the principal reason is two of the impacts this year and this quarter were the weather-related as well as the exit of the joint ventures that we talked about in the past. The weather-related will diminish greatly in the first quarter going forward and we lap the exit of the joint ventures starting in the second half of '18.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
So, the impact of those two is about 2.5% to 3%, and again, the weather events diminish pretty significantly in the first quarter and by the end of the second quarter, as Andy said. But, the other thing we're seeing is that sales volumes in our merchant-acquiring business have been particularly strong. We're at 4% plus in terms of same-store sales, which was good. We saw some nice lift in the fourth quarter. And then, our overall sales were about 7.3%, kind of in that ballpark, and that's because we're seeing nice growth in terms of new business. We believe that that momentum that we started to create in the merchant-acquiring business is going to help us generate that mid-single digits by the second half of 2018.
John Pancari -- Evercore ISI -- Managing Director
Okay. All right, that's good. And then, on the loan growth side, I just wanted to get a little bit more color in terms of what you're thinking about for 2018. Is it fair to assume still around GDP, GDP-plus -- so, 2% to 3% growth -- in loans as you look at '18, and on that front, on commercial real estate, I just wanted to get your updated thoughts on when we could see some stabilization and possibly some growth in that line. Thanks.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Let me take it first, and then I'll hand it off to Bill. If you think about loan growth in the near term, there's certainly going to be impact of tax reform. It's a little bit difficult to forecast, but quite honestly, loan growth in the near term is going to be dependent upon the level of paydowns that we see and that sort of activity in the capital markets as corporate customers realign or rebalance their debt structure -- the capital structure, if you will. I think your expectation of GDP or plus of that is a good or reasonable estimate as you think about the full year, but in the near term, it's going to be impacted by some of the things that we see in terms of customer behavior.
W. Parker -- Vice Chairman and Chief Risk Officer
Yeah, I'll pick up on your question on commercial real estate. The commercial mortgage line, which we've seen decrease over the last several quarters -- I think that's a function of the interest rate environment. Once we get through this rate increase environment and see more stabilization there, I think we'll be more able to build that book. On the construction side, we are seeing some positive growth on our residential construction area. We've been expanding that into the Southeast, and we're hopeful with the tax bill that perhaps multifamily should come back, so we're looking forward to being aggressive in that area in '18.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
And then, John, the last thing I would add in terms of loan growth is in the latter half of 2017 -- and, I think, with tax reform -- we are seeing momentum in terms of consumer spend and consumer activity, and I think that that bodes well with respect to loan growth on the retail side.
John Pancari -- Evercore ISI -- Managing Director
Okay, great. Thank you.
Operator
Your next question comes from Scott Siefers with Sandler, O'Neill. Your line is open.
Scott Siefers -- Sandler, O'Neill & Co. -- Principal, Equity Research
Good morning, guys. Quick question on the mid-single-digit expense growth for '18. Just so I'm clear, can you give the dollar amount for 2017 off which you're basing the mid-single-digit growth expectation?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
I think if you end up looking at our growth rate this year, it was a little bit above 5% on a year-over-year basis, and we expected that to continue to improve, excluding the tax reform and some of the reinvestment that we ended up making. With that tax reform, that really is what causes us to think we're going to be at the high end of that range or at the mid-single digits.
Andrew Cecere -- President and Chief Executive Officer
And, when we're talking about the base for that, it is off of the numbers excluding notable items, which I think is about $12.1 billion of expense.
Scott Siefers -- Sandler, O'Neill & Co. -- Principal, Equity Research
Okay, perfect. That clarifies it. I appreciate it. And then, I think you guys said in the prepared remarks that you would expect positive operating leverage excluding the investments. I guess that implies revenue growth somewhere at or below mid-single digits.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
No, Scott, we expect positive operating leverage including the investments.
Scott Siefers -- Sandler, O'Neill & Co. -- Principal, Equity Research
All right, good. I appreciate that clarification. I just wanted to make sure I heard it correctly, and I did not. That should do it for me. I appreciate it.
Operator
Your next question comes from Kevin Barker with Piper Jaffray. Your line is open.
Kevin Barker -- Piper Jaffray -- Analyst
Thanks for taking my questions. I just wanted to get a little bit more detail on the innovation spending that you're making, and when you think about the range of mid-single-digit growth rates, can you put some parameters around it?
Andrew Cecere -- President and Chief Executive Officer
Our focus is going to be on the things I talked about, which is digital, mobile banking, B2B, brand, continuing our expansion of our customer base and our customer experience, as well as our employees. We talked about the increase of the $15.00 minimum wage. But, those are all the things we were talking about, and as you think about what we've been doing, our success is really dependent on continuing to innovate and continuing to deliver the very best customer experience, so those are the things we're focused on that, over time, will continue to drive the growth that we've been experiencing. And then, Terry, in that mid-single digits, we're talking around 5% or so in terms of expenses.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
That's right.
Kevin Barker -- Piper Jaffray -- Analyst
Okay. And then, in regard to the flow-through into 2019 and 2020, will you start to return back to your longer-term target of 3% to 5% expense growth rate or do you feel like that will continue for the next couple of years?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Let me take that. If you think about incremental investments as you're making -- there's kind of an arc, and I think about it over a two- or three-year time frame -- making the investment today, and you start to see the revenue benefit in the second half of the second year, and then into the third year. So, when we think about 2019 and 2020, we have to think about that arc, if you will. I do believe that as you get out to the 2020 time horizon, you're going to see that incremental revenue that's going to be impacting the business positively, but the double benefit of that is with the digital initiatives that we have going on, we also would expect to see efficiencies come from those investments as well, following that time horizon.
Andrew Cecere -- President and Chief Executive Officer
And, importantly, Terry, as you said, we're looking at this from both a revenue and expense perspective, and we're making the additional investments to grow the revenue. Simply stated, we're going to manage both sides of that equation -- the positive operating leverage -- in '18, '19, '20, and going forward.
Kevin Barker -- Piper Jaffray -- Analyst
Thanks for taking my questions.
Operator
Your next question comes from Matt O'Connor with Deutsche Bank. Your line is open.
Ricky Dodds -- Deutsche Bank -- Analyst
Hi. This is actually Ricky from Matt's team. Sorry if I missed this, but I was wondering if you could touch a bit on NIM outlook for the year -- both with and without additional hikes -- and the puts and takes there.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Given all the moving parts, I think one of the things we're really going to focus on is giving guidance with respect to net interest income. And so, when we think about net interest income going into next year, we would expect growth pretty similar to what we see this year, the income growth being a little bit stronger. That net interest income growth is going to be driven by our expectations around loan growth and the rising interest rate environment.
Ricky Dodds -- Deutsche Bank -- Analyst
Got it. And then, maybe one follow-up. It looks like securities ticked up a bit this quarter. I wonder if you could talk a bit about that and what the trajectory for the securities book should look like in 2018. Is that going to track overall balance sheet growth?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
Yeah, the way we end up managing our investment portfolio is really from a liquidity management standpoint, and that will track similarly with the growth and average earning assets.
Ricky Dodds -- Deutsche Bank -- Analyst
Okay, thank you.
Operator
Your next question comes from Erika Najarian with Bank of America. Your line is open.
Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director
Yes, good morning. Thank you for taking my questions. My first question is on the regulatory backdrop. It seems like there's bipartisan momentum to pass some amendment to Dodd-Frank, and obviously, the Senate version has a dollar threshold of $250 billion. I'm wondering if you could share some feedback. Does that simply mean -- if the new threshold for SIFI is $250 billion -- that nothing changes for U.S. Bank, or does that put you in a different tier in terms of SIFI rules?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
My expectation is that we would have limited changes to U.S. Bank. As a reminder, we're above $250 billion, but we don't have a SIFI buffer in the capital component. We're already at the capital levels. We have the processes in place for CCAR and stress testing, so I expect limited change or impact to our company.
Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director
Got it. As a follow-up to Ricky's question, could you share -- embedded in your positive operating leverage guidance -- how many rate hikes you presume for 2018, and also, the shape of the curve for 2018?
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
When we're thinking about 2018, we expect that we're going to probably a couple rate hikes, and then one in December, so we'll see two mid-year. And then, in terms of the yield curve, we established our plan or our forecast based upon where the yield curve was in that mid-December timeframe, and as you know, recently, it's steepened a little bit, but I think there's probably going to be movement up and down in terms of where that yield curve is. There's going to be pressure, and I think it's probably going to flatten a bit as rates rise during the year as well.
Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director
Got it. Thank you.
Operator
Your next question comes from David Long with Raymond James. Your line is open.
David Long -- Raymond James -- Analyst
Good morning, everyone. I just wanted to get your thoughts on any potential competing away of any of the tax benefits, whether that happens in 2018 or further on down the road.
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
When you think about tax reform, how it ends up getting utilized -- we talked about the reinvestment, but the competition in terms of pricing -- we obviously live in a pretty dynamic environment. I do think there is going to be some bleed that will take place because of competitive pricing, but I also expect that that's going to take place over time, and it's probably going to be a little bit different depending upon the product, the service, and the customer segment that you have. Obviously, we operate in a pretty competitive environment, so ultimately, how much gets competed away will depend upon that competition.
I would say that if you think about the last ten years, though, the industry has run at lower return levels because it's been real difficult to price in things like regulatory cost, the cost of capital and liquidity, and all sorts of things, so I do think that -- especially for some period of time -- the banking industry is going to try to recapture some of that in terms of its returns, and as a result, from a competitive standpoint, I think that'll be a little bit delayed.
David Long -- Raymond James -- Analyst
Got it. I appreciate the color. Thanks.
Operator
And again, if you would like to ask a question, press *1 on your telephone keypad. Your next question comes from Brian Klock with KBW. Your line is open.
Brian Klock -- KBW -- Managing Director
Good morning, everyone. I have a question probably for Bill. Talking about the CRE paydowns, I noticed that there was a tick-up in charge-offs after being in a net recovery position in the CRE book for a while. So, can you talk about that? I think the note was it was related to enclosed malls that were written down. So, can you give us a little bit of color on that?
W. Parker -- Vice Chairman and Chief Risk Officer
Sure. Obviously, at this point in the cycle, you eventually run out of the recoveries, so we're pretty much there on the CRE book. With the enclosed malls, we do have a smaller portfolio of what I'd call small-market enclosed malls. I think some of those are the harder hit with this shift to online. That's where we saw that. The overall portfolio is about $700 million, but we don't expect that to continue each quarter. We just have a couple of deals this quarter that we had to deal with.
Brian Klock -- KBW -- Managing Director
All right, great. Thanks, that's helpful. Follow-up question for Andy -- thinking about the legal settlement or the legal accrual that you had related to BSA/AML -- and, I know you guys have spent a lot of money and a lot of effort to remediate that -- can you give us an update on where you think you stand with that regulatory order?
Andrew Cecere -- President and Chief Executive Officer
Yes. That hasn't changed, Brian. We completed most of the -- all of the systems integration, and process, and build, as well as the people and process, at the end of 2017, and we're now on the sustainability phase of it, and we will continue to be in there for the first half of '18, which is really ensuring that the processes we put in place are acting and performing as expected.
Brian Klock -- KBW -- Managing Director
Okay. So, it's possible that in the back of '18, you could be looking -- maybe being able to pursue bank acquisitions again? Is that reasonable or is that something we should think about for '19?
Andrew Cecere -- President and Chief Executive Officer
That's dependent upon the regulators, certainly. We're doing everything on our end to make sure we're performing as well as we can, and as I said, I think we have all the processes, and systems, and people in place. Now, it's just a matter of going through it and ensuring that they're working appropriately. I would also remind you that the M&A activity that we've been focused on has been not related to the AML consent order -- things like card portfolios, payments, and trust activities -- and we'll continue to look at those items.
Brian Klock -- KBW -- Managing Director
Great. That's helpful. Thanks for your time.
Operator
There are no further questions at this time. I will turn the call back over to the presenter.
Jennifer Thompson -- Senior Vice President of Investor Relations
Thank you, everyone, for listening to our call. Please contact us if you have any follow-up questions.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 36 minutes
Call participants:
Andrew Cecere -- President and Chief Executive Officer
Terrance R. Dolan -- Vice Chairman and Chief Financial Officer
W. Parker -- Vice Chairman and Chief Risk Officer
Jennifer Thompson -- Senior Vice President of Investor Relations
Amanda Larsen -- Jefferies -- Analyst
John Pancari -- Evercore ISI -- Managing Director
Scott Siefers -- Sandler, O'Neill & Co. -- Principal, Equity Research
Kevin Barker -- Piper Jaffray -- Analyst
Ricky Dodds -- Deutsche Bank -- Analyst
Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director
David Long -- Raymond James -- Analyst
Brian Klock -- KBW -- Managing Director
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