Cabela's 2009 Annual Report Download - page 68

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Securitization of Credit Card Loans
Our Financial Services business historically has funded most of its growth in credit card loans through an asset
securitization program. We sell our credit card loans in the ordinary course of business through variable funding
facilities and longer-term fixed and floating rate securitization transactions. In a variable funding securitization, our
credit card loans are converted into securities and sold to commercial paper issuers, which pool the securities with
those of other issuers. The amount securitized in a variable funding structure is allowed to fluctuate within the terms
of the facility, which may provide greater flexibility for liquidity needs.
The Trust issues to outside investors various forms of notes each of which has an undivided interest in the assets
of the Trust. The Trust pays to the holders of the notes a portion of future scheduled cash flows under preset terms
and conditions, the receipt of which is dependent upon cash flows generated by the underlying performance of the
assets of the trust.
WFB retains a “transferor’s interest” in the securitized loans, which ranks equal with the investor certificates
and notes; an “interest-only strip,” which represents the right to receive excess cash available after repayment of all
amounts to the investors; servicing fees; cash reserve accounts and cash accounts in some cases as added protection
for investors; and asset-backed securities from its securitizations. Neither the investors nor the Trust have recourse
against WFB beyond the assets of the Trust, other than for breaches of certain customary representations, warranties,
and covenants and minimum account balance levels which must be maintained to support our retained interests.
These representations, warranties, covenants, and the related indemnities do not protect the Trust or the outside
investors against credit-related losses on the loans.
WFB records its interest-only strips as an asset at fair value, which is an amount equal to the estimated present
value of cash flows to be received by WFB over the expected outstanding period of the loans. These cash flows
essentially represent finance charges and late fees in excess of the amounts paid to note holders, credit losses, and
servicing and administration fees. WFB uses certain valuation assumptions related to the average lives of the loans
sold, anticipated finance charge yields, and anticipated credit losses, as well as a discount rate commensurate with
the risks involved, in determining the estimated present value of the interest-only strips. Changes in the average life
of the loans sold, finance charge yields, discount rate, and credit-loss percentage could adversely impact the actual
value of the interest-only strips. Accordingly, actual results could differ materially from the estimates, and changes
in circumstances could result in significant future changes to the assumptions currently being used.
Gains and losses on securitization transactions, fair value adjustments, and earnings on our securitizations
are included in consolidated revenue in the consolidated statement of income. The cash accounts, asset-backed
securities, interest-only strips, and cash reserve accounts are included on our consolidated balance sheet as “retained
interests in securitized loans.” The transferor’s interest is included in credit card loans. All of WFB’s securitization
transactions are currently accounted for as sale transactions. As a result, the loans relating to those pools of assets
are not reflected on our consolidated balance sheet, other than WFB’s transferor’s interest, cash reserve accounts,
asset-backed securities and interest-only strips.
A credit card loan represents a financial asset. Unlike a mortgage or other closed-end loan account, the terms
of a credit card account permit a customer to borrow additional amounts and to repay each month an amount the
customer chooses, subject to a monthly minimum payment requirement. The credit card account remains open after
repayment of the balance and the customer may continue to use it to borrow additional amounts. WFB reserves the
right to change the credit card account terms, including interest rates and fees, in accordance with the terms of the
credit card agreement and applicable law. The credit card account is, therefore, separate and distinct from the loan. In
a credit card securitization, the credit card account relationships are not sold to the securitization entity. WFB retains
ownership of the credit card account relationship, including the right to change the terms of the credit card account.