Cabela's 2012 Annual Report Download - page 95

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CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
As a result of the consolidation of the Trust, the Company’s retained earnings were adjusted for the
additional allowance for loan losses, the recording of the fair value of an interest rate swap relating to a variable
rate obligation of the Trust, and the derecognition of the interest-only strip (previously a component of retained
interests), net of tax effects. The Trust was consolidated on January 3, 2010, resulting in increases in total assets
of $2,154,540 and liabilities of $2,247,348, and a decrease in retained earnings and other comprehensive income
of $92,808, after tax. In 2010, we began reporting the results of operations of our Financial Services business in
a manner similar to our historical managed presentation for financial performance of the total managed portfolio
of credit card loans, excluding income derived from the changes in the valuation of our interest-only strip, cash
reserve accounts, and cash accounts associated with the securitized loans.
Prior to the consolidation of the Trust, WFB sold the majority of its credit card loans to a securitization trust
and recognized related gains or losses as a component of securitization income in Financial Services revenue. WFB
retains a minimum 20 day average of 5% of the interests in the securitization trust, known as a “transferor interest”
in the securitized loans, and ranks equal with the investor notes. Credit card loans classified as held for sale, which
included WFB’s transferor’s interest in securitized credit card loans, were carried at the lower of cost or market.
Net unrealized losses, if any, were recognized in income through a valuation allowance. Although WFB continued
to service the underlying credit card accounts and maintained the customer relationships, these securitization
transactions were treated as sales and the securitized loans were not included in the Company’s consolidated
balance sheet. Gains or losses were recognized at the time of sale, and depended in part on the carrying amount
assigned to the credit card loans sold, which was allocated between the assets sold and retained interest based on
their relative fair values at the date of transfer.
WFB retained certain interests in securitized loans, including a transferor’s interest, servicing rights, interest-
only strips, cash reserve accounts, and in some cases cash accounts. WFB classified the interest-only strips and
cash reserve accounts as retained interests in securitized loans. A servicing asset or liability was not recognized as
WFB received adequate compensation relative to current market servicing rates.
In addition, WFB owned asset-backed securities from its securitizations, which in some cases were
subordinated to other notes issued as retained interests in securitized loans. The asset-backed securities were
classified as trading securities or available-for-sale securities. Asset-backed trading securities fluctuated daily
based on the short-term operational needs of WFB. Advances and pay downs on the trading securities were at
par value. Therefore, the par value of the asset-backed trading securities approximated fair value. Asset-backed
available-for-sale securities were carried at fair value with changes reflected in accumulated other comprehensive
income. For asset-backed available-for-sale securities, WFB estimated fair value using discounted cash flow
projection estimates based upon management’s evaluation of contractual principal and interest cash flows.
WFB retained rights to future cash flows from (i) finance charge collections, certain fee collections,
allocated interchange, and recoveries on charged-off accounts net of collection costs arising after investors had
received the return for which they were entitled; (ii) reimbursement for charged-off accounts; and (iii) after certain
administrative costs, such as servicing fees. This portion of the retained interests was known as interest-only strips
and was subordinate to investor’s interests. For interest-only strips and cash reserve accounts, WFB estimated
related fair values based on the present value of future expected cash flows using assumptions for credit losses,
finance charge yields, payment rates, and discount rates commensurate with the risks involved but did not include
interchange income since interchange income was earned only when a charge was made to a customer’s account.
The value of the interest-only strips and cash reserve accounts were subject to credit, payment rate, and interest
rate risks on the loans sold. For cash accounts, WFB estimated related fair values based on the present value of
future expected cash flows using discount rates commensurate with the risks involved. Fair value changes in
the interest-only strips and cash reserve accounts were recorded in securitization income included in Financial
Services revenue.