Cabela's 2004 Annual Report Download - page 75

Securitizations'' and Note 2 to our consolidated Ñnancial statements. The fair value of these retained
interests depends upon income earned on these interests which is aÅected 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 receivables in the securitized pool and the performance of those loans
Öuctuate. The performance of the loans included in our securitizations is subject to the same risks and
uncertainties that aÅect the loans that we have not securitized, including, among others, increased
delinquencies and credit losses, economic downturns and social factors, interest rate Öuctuations, changes
in government policies and regulations, competition, expenses, dependence upon third-party vendors,
Öuctuations in accounts and account balances, and industry risks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk through our bank's operations and, to a lesser extent, through our
merchandising operations. We also are exposed to foreign currency risk through our merchandising
operations.
Financial Services Interest Rate Risk
Interest rate risk refers to changes in earnings or the net present value of assets and oÅ-balance sheet
positions less liabilities (termed ""economic value of equity'') due to interest rate changes. To the extent
that interest income collected on managed receivables and interest expense do not respond equally to
changes in interest rates, or that rates do not change uniformly, securitization earnings and economic value
of equity could be aÅected. Our net interest income on managed receivables is aÅected primarily by
changes in short term interest rate indices such as LIBOR and prime rate, as variable rate card
receivables, securitization certiÑcates and notes and corporate debts are indexed to LIBOR-based rates of
interest and are periodically repriced. We manage and mitigate our interest rate sensitivity through several
techniques, but primarily by modifying the contract terms with our cardholders, including interest rates
charged, in response to changing market conditions. Additional techniques we use include managing the
maturity, repricing and distribution of assets and liabilities by issuing Ñxed rate securitization certiÑcates
and notes and by entering into interest rate swaps to hedge our Ñxed rate exposure from interest strips.
The table below shows the mix of account balances at each interest rate at Ñscal year end 2004, 2003 and
2002.
Fiscal Year
2004 2003 2002
As a percentage of total balances outstanding
Balances carrying interest rate based upon the national prime lending rateÏÏ 57.2% 58.1% 57.3%
Balances carrying an interest rate of 9.99% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.1% 3.8% 4.6%
Balances not carrying interest because their previous month's balance was
paid in full ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39.6% 38.1% 38.0%
Charges on the credit cards issued by our Financial Services segment are priced at a margin over the
deÑned national prime lending rate, subject to certain interest rate Öoors, except purchases of Cabela's
merchandise, certain other charges and balance transfer programs, which are Ñnanced at a Ñxed interest
rate of 9.99%. No interest is charged if the account is paid in full within 20 days of the billing cycle.
Management has performed an interest rate gap analysis to measure the eÅects of the timing of the
repricing of our interest sensitive assets and liabilities. Based on this analysis, we believe that if there had
been an immediate 100 basis point, or 1.0%, increase in the market rates for which our assets and
liabilities were indexed during Ñscal 2004, our operating results would not have been materially aÅected.
Management has also performed an interest rate gap analysis to measure the eÅects of a change in the
spread between the prime interest rate and the LIBOR interest rate. Based on this analysis, we believe
that an immediate 50 basis point, or 0.5%, decrease or increase in this spread would cause an increase or
63