Cabela's 2006 Annual Report Download - page 25

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21
The performance of our financial services business may be negatively affected by the performance of our
merchandising businesses.
Negative developments in our direct and retail businesses could affect our ability to grow or maintain our
financial services business. We believe our ability to maintain cardholders and attract new cardholders is highly
correlated with customer loyalty to our merchandising businesses and to the strength of the Cabela’s brand. In
addition, transactions on cardholder accounts produce loyalty points which the cardholder may apply to future
purchases from us. Adverse changes in the desirability of products we sell, negative trends in retail customer service
and satisfaction or the termination or modification of the loyalty program could have a negative impact on our bank
subsidiary’s ability to grow its account base and to attract desirable co-branding opportunities with third parties.
Our financial services business faces the risk of a complex and changing regulatory and legal
environment.
Our financial services business operates in a heavily regulated industry and is therefore subject to a wide array
of banking and consumer lending laws and regulations. Failure to comply with these laws and regulations could
result in financial, structural and operational penalties being imposed. In addition, as a Visa member bank, our bank
subsidiary must comply with rules and regulations imposed by Visa. For example, our bank subsidiary could be
fined by Visa for failing to comply with Visa’s data security standards.
Changes in interest rates could have a negative impact on our earnings.
In connection with our financial services business, we borrow money from institutions and accept funds by
issuing certificates of deposit, which we then lend to cardholders. We earn interest on the cardholders’ account
balances, and pay interest on the certificates of deposit and borrowings we use to fund those loans. Changes in these
two interest rates affect the value of the assets and liabilities of our financial services business. If the rate of interest
we pay on borrowings increases more (or more rapidly) than the rate of interest we earn on loans, our net interest
income, and therefore our earnings, could fall. Our earnings could also be adversely affected if the rates on our
credit card account balances fall more quickly than those on our borrowings. In addition, as of the end of fiscal 2006,
approximately 36.4% of our cardholders did not maintain balances on their credit card accounts. We do not earn any
interest from these accounts but do earn other fees from these accounts such as Visa interchange fees. In the event
interest rates rise, the spread between the interest rate we pay on our borrowings and the fees we earn from these
accounts may change and our profitability may be adversely affected.
Credit card industry litigation could adversely impact the amount of revenue generated by our financial
services business.
Our financial services business faces possible risk from the outcomes of certain credit card industry litigation.
For example, a number of entities, each purporting to represent a class of retail merchants, have sued Visa and several
member banks, and other credit card associations, alleging, among other things, that Visa and its member banks have
violated U.S. antitrust laws by conspiring to fix the level of interchange fees. To date, we have not been named as a
defendant in any credit card industry lawsuits. If the interchange fees that are charged to merchants are reduced as
a result of the interchange lawsuits or if the credit card industry is adversely affected by other credit card industry
litigation, the financial condition and results of operations of our financial services business may be negatively
impacted.
Fluctuations in the value of our interests in our securitizations relating to our financial services business
may adversely affect our earnings.
In connection with our securitizations relating to our financial services business, we retain certain interests
in the assets included in the securitization. These interests are carried on our consolidated financial statements and
include our retained interest, or a “transferor’s interest,” in the securitized loans; an “interest-only strip,” which
represents our right to receive excess cash available after repayment of all amounts due to the investors; servicing
rights; and in some cases cash reserve accounts and Class B securities which are subordinate to the investors’
certificates and notes. The value of these retained interests depends upon income earned on these interests which
is affected by many factors not within our control, including the performance of the securitized loans, interest paid
to the holders of securitization securities, credit losses and transaction expenses. The value of our interests in the
securitizations will vary over time as the amount of loans in the securitized pool and the performance of those loans