Cabela's 2006 Annual Report Download - page 24

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20
We may have to reallocate capital from our direct and retail businesses to meet the capital needs of our
financial services business, which could alter our destination retail store expansion program.
Our bank subsidiary must satisfy the capital maintenance requirements of government regulators and its
agreement with Visa U.S.A., Inc., or Visa. A variety of factors could cause the capital requirements of our bank
subsidiary to exceed our ability to generate capital internally or from third party sources. For example, government
regulators or Visa could unilaterally increase their minimum capital requirements. Also, we have significant potential
obligations in the form of the unused credit lines of our cardholders. As of the end of fiscal 2006, these unfunded
amounts were approximately $9.5 billion. Draws on these lines of credit could materially exceed predicted line usage.
In addition, the occurrence of certain events, such as significant defaults in payment of securitized loans or failure
to comply with the terms of securitization covenants, may cause previously completed securitization transactions
to amortize earlier than scheduled or be reclassified as a liability for financial accounting purposes, both of which
would have a significant effect on our ability to meet the capital maintenance requirements of our bank subsidiary,
as affected off-balance sheet loans would immediately be recorded on our consolidated balance sheet and would be
subject to regulatory capital requirements. If any of these factors occur, we may have to contribute capital to our bank
subsidiary, which may require us to raise additional debt or equity capital and/or divert capital from our direct and
retail businesses, which in turn could significantly alter our destination retail store expansion strategy.
It may be difficult to sustain the historical growth and profitability of our financial services business,
and we will be subject to various risks as we attempt to grow the business.
We may not be able to retain existing cardholders, grow account balances or attract new cardholders and the
profits from our financial services business could decline, for a variety of reasons, many of which are beyond our
control, including:
• credit risk related to the loans we make to cardholders and the charge-off levels of our credit card
accounts;
• lack of growth of potential new customers generated by our direct and retail businesses;
• liquidity and funding risk relating to our ability to create the liquidity necessary to extend credit to our
cardholders and provide the capital necessary to meet the requirements of government regulators and
Visa; and
• operational risk related to our ability to acquire the necessary operational and organizational infrastructure,
manage expenses as we expand, and recruit management and operations personnel with the experience to
run an increasingly complex and highly-regulated business.
Economic downturns and social and other factors could cause our credit card charge-offs and delinquencies
to increase, or credit card balances to decrease, which would decrease our profitability.
Economic downturns generally lead to increased charge-offs and credit losses in the consumer finance industry,
which would cause us to experience increased charge-offs and delinquencies in our credit card loan portfolio. An
economic downturn can hurt our financial performance as cardholders default on their balances or carry lower
balances. A variety of social and other factors also may cause changes in credit card use, payment patterns and the
rate of defaults by cardholders. These social factors include changes in consumer confidence levels, the public’s
perception of the use of credit cards, changing attitudes about incurring debt and the stigma of personal bankruptcy.
Additionally, credit card accounts tend to exhibit a rising trend in credit loss and delinquency rates between 18 to
30 months after they are issued. If the rate of growth in new account generation slows, the proportion of accounts in
the portfolio that have been open for between 18 to 30 months will increase and the percentage of charge-offs and
delinquencies may increase. Our underwriting criteria and product design may be insufficient to protect the growth
and profitability of our financial services business during a sustained period of economic downturn or recession or a
material shift in social attitudes, and may be insufficient to protect against these additional negative factors.