TERRABANK, NATIONAL ASSOCIATION Harvard Case Solution & Analysis

Terra Bank National Corporation


The net non-core funding dependency ratio of the company in the third quarter of 2015 is 9.59 which has increased from the previous years. The funding dependence in 2015 is more than the peers whose net non-core funding dependence is 6.56. This funding is sensitive to changes in the interest rates. It also shows that the bank is relying on the long term assets and it might not be available in times of adverse changes in the market conditions and also in times of financial stress.

The net loans to average total assets in the year 2015 is 72.06%, the trend of the net loans to average net assets is also upward. The net loans to average total assets measure the percentage of a corporation’s assets that are financed with loans and obligations which will last for more than one year. It also shows the financial position of the company and its ability to meet the financial requirement for outstanding loans. However, the ratio shows that the company is more dependent on debt than the previous years.

The average core deposits of the bank are also increasing which shows that the bank can predict the costs and can also measure the degree of customer loyalty. Increase in the core deposits shows that the bank is less vulnerable to the changes in short term interest rates than CD. However, Terra bank can increase its deposits through more incentives for customers and local marketing as the bank is only locally operated.

External forces like economic conditions, competition, marketing efforts can have daunting impact on the liquidity going concern of the bank. Due to poor economic conditions most businesses suffer and they end up in less depositing in the bank and taking more loans from the banks which causes bank to have poor liquidity which has the ability to affect the going concern status of the bank. Competition can also affect the liquidity of the bank, due to high competition the deposits share of the bank can decrease and marketing efforts are needed to retain the customers and the bank also needs to provide more services to its customers to retain them.

Sensitivity to Market Risk:

Sensitivity to Market Risk refers to the risk that changes in market conditions could adversely affect the earnings or the capital of the bank. Market risk encompasses exposures associated with the changes in interest rate, foreign exchange rates, commodity prices and equity prices. While all these items are important the most important item for bank is the interest rate risk. Interest rate risk is the balancing act.

The net interest margin of the bank has increased from 3.67% to 6% in year 2015 which shows that the bank is taking more on IRR than it is expected to take. However, it is not necessary that the changes in the net interest margin are related to the interest rate risk. Different factors like changing in the quantity of non-interest bearing funds, the income from the non-interest funds have also increased to 1.15% in 2015 as compared to 0.57% in 2014.

However, to monitor the exposure to interest rate risk, there are different models but the Gap model is easier to measure the exposure to interest rate risk. The Gap ratio for first year is 11%, which indicates the low amount of sensitivity over the next 12 months but the gap ratio for three years is -2.0% which indicates the amount of liability sensitivity over the next three years..........

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