Cabela's 2006 Annual Report Download - page 39

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Financial Services Revenue. On a generally accepted accounting principles (“GAAP”) basis, Financial Services
revenue increased by $31.6 million, or 29.9%, to $137.4 million in fiscal 2006 from $105.8 million in fiscal 2005. We
measure the results of our Financial Services business on a non-GAAP managed basis as presented in the following
table labeled Managed Financial Services Revenue Presented on a non-GAAP Basis.
Interest income measured on a non-GAAP managed basis increased $42.6 million. The increase in interest
income was due to an increase in interest rates and managed credit card loans. Interchange income, net of reward
costs, increased by $8.6 million, or 20.3%. Interchange income is driven by net purchases, which increased by 21.4%.
Other income increased by $3.3 million due to the fair value change of the interest-only strips on our securitized
loans The increases in interest income, interchange income and other income were offset by an increase in interest
expense of $23.3 million due to increases in securitized credit card loans, borrowings and interest rates. Compared
to fiscal 2005, the number of average active accounts in fiscal 2006 grew by 17.5% to 853,187 and the average balance
per active account grew by 5.5% to approximately $1,591.
For credit card loans securitized and sold, the loans are removed from our consolidated balance sheet and the net
earnings on these securitized assets after paying outside investors are reflected as a component of our securitization
income on a GAAP basis. The following table summarizes the results of our Financial Services segment for fiscal
years 2006, 2005 and 2004 on a GAAP basis with interest and fee income, interest expense and provision for loan
losses for the credit card loans receivable we own reported in net interest income. Non-interest income on a GAAP
basis includes servicing income, gains on sales of loans and income recognized on our retained interests, as well as
interchange income on the entire managed portfolio.
Financial Services Revenue as Reported on a GAAP Basis:
Fiscal Years
2006 2005 2004
(In Thousands)
Interest and fee income, net of provision for loan losses . . . . . . . . . . . . . $ 23,973 $ 17,196 $ 12,735
Interest expense ............................................. (5,008) (3,241) (3,063)
Net interest income, net of provision for loan losses . . . . . . . . . . . . . . . . . 18,965 13,955 9,672
Non-interest income:
Securitization income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,173 133,032 96,466
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,381 31,836 24,905
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,554 164,868 121,371
Less: Customer rewards costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,096) (72,992) (61,983)
Financial Services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,423 $105,831 $ 69,060
(1) For the fiscal years ended 2006, 2005 and 2004, we recognized gains on sale of credit card loans of $17.4
million, $17.0 million and $8.9 million, respectively, which are reflected as a component of securitization
income.
Our managed credit card loans represent credit card loans receivable we own plus securitized credit card loans.
Since the financial performance of the managed portfolio has a significant impact on the earnings we will receive
from servicing the portfolio, we believe the following table on a managed basis is important information to analyze
our revenue in the Financial Services segment. This non-GAAP presentation reflects the financial performance of
the credit card loans receivable we own plus those that have been sold for the fiscal years ended 2006, 2005 and 2004
and includes the effect of recording the retained interest at fair value. Interest income, interchange income (net of
customer rewards) and fee income on both the owned and securitized portfolio are recorded in their respective line
items. Interest paid to outside investors on the securitized credit card loans is included with other interest costs and
included in interest expense. Credit losses on the entire managed portfolio are included in provision for loan losses.
Although our financial statements are not presented in this manner, management reviews the performance of its
managed portfolio in order to evaluate the effectiveness of its origination and collection activities, which ultimately
affects the income we will receive for servicing the portfolio. The securitization of credit card loans primarily
converts interest income, interchange income, credit card fees, credit losses and other income and expense related to
the securitized loans into securitization income.