Sure, big litigation settlements can have negative effects on corporate reputation or company morale. But Bank of America’s recent filings show where corporate misdeeds hit the hardest: The company’s quarterly earnings.
Bank of America announced on April 16 that it lost $276 million in the first quarter of 2014. That figure is a far cry from the $1.48 billion profit the company earned during the first quarter of 2013. As a result, the company’s stock fell by 2.9 percent in early trading.
The primary reason for the lack of shareholder confidence in Bank of America is an unexpectedly high legal bill in 2014. The Wall Street Journal reports that the company had $6 billion in legal charges during the quarter, including legal expenses that the company had not previously warned investors about.
As a result, Bank of America was not able to hit the average profit estimate of five cents a share from analysts polled by Thomson Reuters. The WSJ reports that without those legal expenses, Bank of America would have held a profit of 14 cents per share.
The $6 billion in legal charges represents a massive increase for the bank. The company held just $2.2 billion during the first quarter of 2013, and it paid $2.3 billion in legal expenses during the fourth quarter of 2013. Much of the difference has to do with massive settlement agreements stemming from the financial crisis. The most notable of these is the $9.3 billion settlement with Fannie Mae and Freddie Mac concerning faulty mortgage bonds during the financial crisis. The company charged $3.6 billion of that settlement to the first quarter of 2014, which aligned with previous projections.
And the legal spending may not be over yet. In a conference call following the earnings release, company Chief Financial Officer Bruce Thompson said that the company was building reserves for previously disclosed mortgage matters. He said on a separate call that legal costs “can be lumpy and it's just very hard to predict.”
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