Capital One 1997 Annual Report Download - page 55

In connection with the transfer of substantially all of Signet
Bank’s credit card business to the Bank in November 1994, the
Company and the Bank agreed to indemnify Signet Bank for certain
liabilities incurred in litigation arising from that business, which
may include liabilities, if any, incurred in the purported class action
case described below.
During 1995, the Company and the Bank became involved in a
purported class action suit relating to certain collection practices
engaged in by Signet Bank and, subsequently, by the Bank.The com-
plaint in this case alleges that Signet Bank and/or the Bank violated
a variety of California state statutes and constitutional and com-
mon law duties by filing collection lawsuits, obtaining judgements
and pursuing garnishment proceedings in the Virginia state courts
against defaulted credit card customers who were not residents of
Virginia.This case was filed in the Superior Court of California in
the County of Alameda, Southern Division, on behalf of a class of
California residents.The complaint in this case seeks unspecified
statutory damages, compensatory damages, punitive damages,
restitution, attorneys’ fees and costs, a permanent injunction and
other equitable relief.
In February 1997, the California court entered judgment in favor
of the Bank on all of the plaintiffs’ claims.The plaintiffs have
appealed the ruling to the California Court of Appeal First Appel-
late District Division 4, and the appeal is pending.
Because no specific measure of damages is demanded in the
complaint of the California case and the trial court entered judge-
ment in favor of the Bank before the parties completed any signifi-
cant discovery, an informed assessment of the ultimate outcome of
this case cannot be made at this time. Management believes, how-
ever, that there are meritorious defenses to this lawsuit and intends
to defend it vigorously.
The Company is commonly subject to various other pending and
threatened legal actions arising from the conduct of its normal
business activities. In the opinion of management, the ultimate
aggregate liability, if any, arising out of any pending or threatened
action will not have a material adverse effect on the consolidated
financial condition of the Company. At the present time, however,
management is not in a position to determine whether the resolu-
tion of pending or threatened litigation will have a material
effect on the Company’s results of operations in any future
reporting period.
Note L: Related Party Transactions
In the ordinary course of business, executive officers and directors
of the Company may have consumer loans issued by the Company.
Pursuant to the Company’s policy, such loans are issued on the
same terms as those prevailing at the time for comparable loans
to unrelated persons and do not involve more than the normal risk
of collectability.
Note M: Securitizations
The Company securitized $2,114,695, $2,695,000 and $3,525,000
of consumer loan receivables in 1997, 1996 and 1995, respectively.
As of December 31, 1997, receivables under securitizations out-
standing consisted of $1,257,869 of retained (“seller’s”) interests
and $9,369,328 of investors’ undivided interests, maturing from
1998 to 2004.The gains on securitizations and other income from
securitizations are included in servicing and securitizations income.
The Company has entered into swaps to reduce the interest rate
sensitivity associated with these securitizations.The swaps, which
had a notional amount totaling $591,000 as of December 31, 1997,
will mature in 1998 and 1999 to coincide with the final payment of
a 1995 securitization. In 1997, the Company entered into swaps with
notional amounts totaling $591,000 to effectively offset the swaps
described above with matching maturities and terms which pay
fixed and receive variable rates. As of December 31, 1997, the vari-
able rate payments on the original and offsetting swaps were
matched and will continue to offset each other through maturity. As
of December 31, 1997, the weighted average fixed rate payment
received on the original swaps was 7.68%, and the weighted average
fixed rate payment paid on the offsetting swaps was 6.52%.
As of December 31, 1996, swaps with a notional amount totaling
$1,130,000, with maturity dates from 1997 through 1999, paid
three-month LIBOR at a weighted average contractual rate of
5.55% and received a weighted average fixed rate of 7.23%.
The terms of securitizations require the Company to maintain
a certain level of assets, retained by the trust, to absorb potential
credit losses.The amount available to absorb potential credit
losses was included in accounts receivable from securitization
and was $231,809 and $266,813 as of December 31, 1997 and
1996, respectively.
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