Department of Finance
University of Illinois at Chicago
2422 University Hall,
601 South Morgan Street,
Chicago, Illinois 60607

November 27, 2001

Mr. Alfredo Perez Jr.
Retail Service Manager
SOUTH CENTRAL BANK
525 West Roosevelt Road
Chicago, Illinois 60607

Re: Performance of South Central Bank

Here is the project about the performance of South Central Bank, along with the products and services analysis, financial analysis, portfolio analysis which including the investment portfolio, loan portfolio, and deposit portfolio, marketing strategies, SWOT analysis, along with some recommendations for improvement. The primary study focused on how South Central Bank performed in the year 2000.

Although South Central Bank has posted excellent financial returns in year 2000, the information gathered shows that with some effort, the Bank should be able to increase the number of accounts, amount of deposits and loans, so as to increase the profits. Recommendations include increasing operation efficiency, increasing accounts and deposits by marketing techniques, increasing deposits by services, increasing loans by deposit accounts, and increasing fee income.

Our group is grateful to you for giving us valuable ideas and information to develop this report. Your enthusiasm and support contributed greatly to the success of this research project.

Please do not hesitate to let us know if you have any questions and we appreciate if you have any comments to us. Please send all comments to our professor, Ms. Mary Brown, at mrb@uic.edu and/or the undersigned at BennieChu@yahoo.com.

Thank you very much.

PERFORMANCE OF SOUTH CENTRAL BANK,
CHICAGO, ILLINOIS

INTRODUCTION

South Central Bank was established in 1966 as a community bank servicing the near-south-side area of Chicago. Now, the Bank operates three office facilities in Chicago. Their locations are at 555 West Roosevelt Road, 3032 South Halsted Street, and 2335 South Wentworth Avenue. These three facilities are only within 10 miles together. In 2000, the South Central Bank ranked 88 out of 242 Chicago-area banks in terms of return on average assets (ROA).

The near south side of Chicago is now one of the fastest growing residential areas in Chicago.  Loft conversions, apartment buildings, single-family residences, are happening throughout the area. Convenience shopping, including major food stores, and major retailers are new and add to the panoply of unique and special retail stores which characterized this area for many years.

South Central Bank was one of the first Small Business Administration Preferred Lenders, enabling the bank to make SBA 7A small business loans throughout northern Illinois.

South Central Bank is also one of the leading home improvement lenders in the Midwest.  The bank services home improvement contractors and their consumer customers in Illinois, Wisconsin, Indiana, and other midwestern states.  The bank is the leading provider of HUD/FHA Title 1 home improvement financing in our home state, and in the adjoining states.  The bank has assisted in the legislative process in the U.S. Congress to foster responsible home improvement lending programs throughout the United States.

At first, First Business Bancorp Company established the headquarters of South Central Bank at 555 West Roosevelt Road. The people over there are mainly African America and Middle East. Then, they expanded their business to 3032 South Halsted Street (Bridgeport branch) where there are mainly Spanish, Italian and Irish. Since the Chinese people started to move in the Bridgeport area, South Central Bank found that the expansion to the Chinese community would bring them more businesses. Therefore, they established a facility at 2335 South Wentworth Avenue (South Chinatown branch), which is inside the South Chinatown in December 1993.

This report will analyze South Central Bank’s product and services, financial statements, and investments, deposits, and loans portfolios based on the whole organization. On the other hand, this report will focus the marketing strategies, its strengths, weaknesses, opportunities, and threats based on the Chinatown branch. Finally, the last section will address some potential ideas in terms of increasing operation efficiency, accounts, deposits, loans, as long as profits.

PRODUCTS AND SERVICES

South Central Bank offers different types of products and provides various kinds of services to satisfy customers' needs and wants. There are three main categories: personal banking, business banking, and Internet banking.

Personal Banking

South Central Bank offers different types of personal banking accounts and loans to satisfy different needs of the customers. Personal banking accounts include savings accounts, checking accounts, NOW (negotiable order of withdrawal) accounts, MMDAs (money market deposit accounts), CDs (certificate of deposit) and IRAs (individual retirement account). Loans include mortgage loans, home equity loans, home improvement loans, auto loans, personal loans and overdraft protections.

Product Name

Business Banking

South Central Bank believes a productive banking relationship is an important factor in the success of business. By understanding and responding to the needs of their customers, they have become a leading commercial bank in the Chicago land area and have a continuing commitment to work hard for customers’ businesses. Their business customers include small business corporations, partnerships, and entrepreneurs; medium sized corporations, local branches of large corporations, and organizations, associations, and non-profit groups.

South Central Bank offers different types of business banking accounts and loans to satisfy different needs of the business customers. Business banking accounts include Bonus Business Checking, Regular Business Checking, NOW Business Accounts, Money Market Business Checking, and Sweep Checking/Investment Accounts. Loans include commercial line of credit, term loans, SBA loans, and commercial mortgage loans.

Internet Banking

For the new century, by popular request, customers have asked for free checking with free Internet Banking access and online bill payment service. With Internet Banking, South Central Bank customers can access account information 24 hours a day, 7 days a week. It is a fast and easy way for all the customers to interact with their accounts and all information are protected by a unique password. There are some special features in this Internet Banking: Jumbo CD Auction, which customers can request their own interest rate for their funds (South Central Bank reserves the right to accept or reject the request); Loans Applications, which customers can get a free credit check; and Specials of the Week, which offers attractive interest rate for additional earnings or savings.

Services

For the service side, South Central Bank offers outgoing and incoming wire transfers service for domestic and international. Customers also can choose to use the service of money orders or cashier's checks. The Bank also provides direct deposits, ACH debits, certified checks and travelers checks. Moreover, it provides coins change service and notary service for business and individual customers. Customers can also pay their utilities bills through the Bank. Other services include ATM cards, safe deposit boxes rental, telephone customer services, stop payments, statement reconcilement and check printing services. In addition, they have a trust department to serve the people in terms of the trust matters.

FINANCIAL REPORT

For 2000, South Central Bank has posted excellent financial returns. It ranked 88 out of 242 Chicago-area banks in terms of return on average assets (ROA) with 1.03. At the end of 2000, the Bank’s capital reached $8,409,000, posting a growth of 17.02% over 1999. Total Income increased by 8.71% to $10,258,000, in which total interest income accounted for 89.73% and total non-interest income accounted for 10.27% over the total income. Total expenses increased by 10.07%, in which total interest expenses accounted for 44.93%, up 34.08% from 1999 because of interest incentives to the customers for attracting deposits. Total non-interest expenses were 55.07% of the total expenses, which were down 3.96% from 1999. This led to an increase of 0.31% in net-after-tax profits to $1,291,000 over 1999. Table 1 and Figure 1 show a comparative summary of the results of years’ operations for the past five years.

Deposits were $110,045,000, surging 16.35%; in which time deposits were up 48.03% to $41,492,000, MMDAs deposits were up 92.87% to $8,174,000, and core deposits were up 5.54% to $83,014,000.

In addition, during 2000, South Central Bank increased its loans to consumers and small businesses, and for single family and multi-family housing. Total loans as of year-end 2000 were $86,254,000, up 11.80% from 1999, in which all real estate loans were up 11.35% to $67,149,000 and commercial and industrial loans were up 18.46% to $7,770,000. However, the loan loss reserves accounted for only 0.70% or $607,000, down 5.60%, which means that the loans are less risky than 1999 even though the total loans were increased.

Furthermore, during the past five years, South Central Bank has increased its assets by more than 40% to $130,109,000. In fact, for the period ended on June 31, 2001, its ROA was increased to 1.27, which was an excellent increased in this downturn economy situation. Table 2 and Figure 2 show a comparative summary of year-end financial conditions for the past five years in terms of dollar amounts. Table 3 and Figure 3 show some key ratios of the past five years for comparison.

Table 1

RESULTS OF YEARS' OPERATIONS
(Dollars in Thousands)

Figure 1

RESULTS OF YEARS' OPERATIONS
(Dollars in Thousands)

Table 2

YEAR-END FINANCIAL CONDITION
(Dollars in Thousands)

Figure 2

YEAR-END FINANCIAL CONDITION
(Dollars in Thousands)

Table 3

FINANCIAL RATIOS
(Units: %)

Figure 3

FINANCIAL RATIOS
(Units: %)

Risk Management

In this section, several ratios and/or accounts were extracted from the past five years to compare with the FDIC selected peer group in terms of risk. These ratios were then divided into four classifications: Operational Risk, Credit Risk, Capital Adequacy, and Liquidity Risk.

These two accounts listed can be divided into many individual components, for example, the Other Operational Expenses may incorporate telephone, machine rentals, and so on. Some changes have already been initiated since Other Operational Expenses did decline considerably on the Income Statement at the end of December 31, 2000. Figure 4 shows the comparison between South Central Bank and the FDIC Selected Peer Group.

On the other hand, Personnel Expenses only saw a slight decline.  In regards to the ratios, Average Personnel Expense / Employee was increasing more than the peer group while Assets / Employee was decreasing.  The ratios reiterate the problems stemming from the accounts as they imply the efficiency of the employees in the operation of the bank.  In comparison to the peer, the efficiency was low due to the personnel expenses being higher and the assets per employee being lower. Although these accounts and ratios do not contribute extensively to the overall profits they are expenses that, when compared with their peers, need attention. 

Figure 4

OTHER OPERATIONAL EXPENSES
(In Percentage of Total Assets)

The account for Net loans and Leases saw extensive growth rates during the five years analyzed with a high during 1997 of 24.92%. Although there are positive effects associated with growth, one of the negative side effects of this accelerated growth which affectively impacted the banks profitability was the increase in Loans 90 days Past Due and the Non-accrual Loans which had been consistently 2.00%, or higher, than that of its peers. Figure 5 shows the comparison between South Central Bank and the FDIC Selected Peer Group.

In addition to the growth in Net Loans and Leases, was an overall decline in the growth of Assets. These two growth rates help to explain why the Risk Assets / Total Assets and the Risk Assets / Total Equity were higher than that of its peers and why special attention should be given to the spread in the growth in loans relative to the growth in assets so that the loans, concentrated mainly in secured family residents, do not consume the majority of the assets. This will ultimately lead to an increase in credit risk and simultaneously the cost of debt. Figure 6 shows the growth in Net Loans and Leases versus the growth of Assets for South Central Bank.

Figure 5

GROWTH RATES OF NET LOANS AND LEASES
(In Percentage)

Figure 6

NET LOANS AND LEASES GROWTH VS. ASSETS GROWTH
(In Percentage)

The ratio for Equity Capital / Total Assets not only declined during the years from 1996 to 2000 but also was well below that of the peer group’s ratios. The contributing factors for the below average ratio were the growth rate of equity that although, for the bank, the rate was increasing it was not increasing at the same rate as the peers, and the unsteadily growth of assets being on average lower than that of its peers.  This ratio signifies that the bank is undercapitalized not only by definition but also compared to the peer group as well.  This is extremely risky for the bank as it offsets the earnings coverage to Net Loan Charge-Offs and Equity to Risk Assets that both reflect trouble in times when cash is scarce.  It also requires that the bank find further funding from other sources as is seen in 1999 with an increase of over 6% in the account of Other Borrowed Funds.

The Liquidity risk is among the most important of indicators of trouble in the bank as it indicates the cash, or ease of conversion to cash, that is available to pay the liabilities.  The ratios above all signify liquidity issues with the bank. The first ratio, Cash and Securities / Total Assets, reflects a decline in cash and securities. This ratio is above its peers, however, it is declining now. The second ratio, Temporary Investments / Total Assets, which should reflect a percentage of between 15 - 20%, had remained, on average, well below this goal at an average of 8%.  This tells that the temporary investments, which are the most liquidated assets, are declining.  The third ratio, Pledged Securities / Total Securities, indicates the amount of securities that are unable to be converted into cash.  This ratio has been steadily increasing with a difference of at least 30% above that of the peers between the years from 1998 to 2000. Figure 7 shows the pledged securities between South Central Bank and the FDIC Selected Peer Group.

Furthermore, the pledged securities are not the only assets where potential cash is tied but also in the Securities Available for Sale. In this account, US Treasuries and Government Securities together with Municipal Securities far exceeded that of the peer group. The Municipal Securities, among the most risky, had the greatest spreads with the low point being 11.39% higher in 1996 and a high of 41.83% higher in 1999. The fourth ratio, Net Loans and Leases / Core Deposits, reflects that the funding for Net Loans and Leases, which is normally reserved for core deposits, began to dip into the jumbo CDs by 2000. This was due to the overall decline in core deposits as the Core Deposits / Total Assets was just 75.44% in 2000 and the extensive growth in Net Loans and Leases covered in the classification of Credit Risk. Highly risky since the jumbo CDs, in most cases, are short term. Figure 8 shows the Short Term Assets to Short Term Liabilities between South Central bank and the FDIC Selected Peer Group.

This then leads to the sixth ratio, Short Term Assets / Short Term Liabilities, which reflects the Short Term Assets covering on average only 38% of the Short term Liabilities compared to the 89% of that of the peers.  The final ratio, Total Primary Assets / Total Adjusted Deposits, enforces the findings indicated above as the liquidity of the primary assets (i.e. cash and due from the bank, securities less pledged securities) has been continually declining, with the exception to the small increase in 2000, at an average rate of near 17%.

Figure 7

PLEDGED SECURITIES
(In Percentage of Total Investments)

Figure 8

SHORT-TERM ASSETS TO SHORT-TERM LIABILITIES
(In Percentage)

After reviewing all the above ratios and accounts, it is apparent that the extensive growth in Net Loans and Leases has led to most of the problems that the bank is seeing today with exception to the Securities which had felt a negative impact due to the same economic and monetary factors that caused the growth of the Net Loans and Leases.

The first problem was the increase in Personnel and Other Operational Expenses. These expenses would naturally increase with an increase in loans and leases since more telephone calls would be made, etc; however, this does not mean that this was the case just that it should be viewed as a potential reason.

The second area of concern was with the increase in Loans 90 days Past Due together with Non-accrual Loans.  This increase could also correlate with the increase in Net Loans and Leases. The higher the number of loans and leases, the greater the probability of defaults it is.  However, we should not view this as the only cause to the increase in Loans 90 days Past Due and Non-accrual Loans since the underwriting and approval for loans along with the decline in the economy could have just as easily have caused the increase.

The third problem dealt with the under-capitalization of the bank.  This was due to the decrease in equity which, in part, when entered into the Net Income to Average Equity ratio (i.e. ROE) would help to explain its relatively high numbers of 17% to 18%.  Although these numbers appease the stockholders, they do not come at a small price. This leads into the fourth and final problem, the liquidity of the bank assets.

Due to the problems with the securities combined with the problems faced by the increase in growth of the Net Loans and Leases, many of the banks short term assets are tied up elsewhere as is reflected in the Short Term Assets to Short Term Liability Ratio.  This ratio, which expresses the state of the banks financial situation, is requiring that long-term assets pay off short-term liabilities at a rate of 40% or more than that of the peer group. As was said at the beginning of this analysis these are only a few of the ratios and accounts that were extracted from the Balance Sheets and Income Statements based on trends that showed considerable differences between the FDIC selected peer group.  Since there are many more areas in which further evaluations can be made, further investigation is required to understand the entire impact of the growth of the Net Loans and Leases on the Bank.

BANK PORTFOLIOS

There are two assets and one liability that almost tell about the whole bank’s financial, operation, and strategies. The two assets are the securities investment portfolio and the loan portfolio. The one on the liability side is the deposit portfolio. However, they are tied up to produce the profits for the bank. This section will mainly focus on the classifications on each portfolio.

Investment Portfolio

South Central Bank invested in permissible securities in order to provide primary and secondary liquidity sources and generate interest income. The general objective is to maximize income while maintaining high quality investments, provide sufficient securities for liquidity and to secure pledged deposits and minimize current tax liability through the use of municipal securities. The investment portfolio will be divided between a liquidity portfolio and those for long-term investment or needed to protect public deposits. Table 4 shows the summary of the investment portfolio together with time to maturity and Figure 9 shows the distribution of investment for the past five years.

US Treasuries, time deposits of other banks, Federal funds sold, and US government securities maturing in less than one year are defined as short-term instruments and sources for primary liquidity. The securities purchased for a long-term investment and to secure public deposits will be comprised of a mixture of US Treasuries, Federal agencies, municipal bonds, and other securities. Dollars invested in municipal bonds is correlated to the Bank’s current level of taxable income and need for tax-exempt income.

All the investments of South Central Bank have a credit rating of at least “A” ranked by Moody. All ratings are reviewed at least quarterly, with rating overview monthly. Any bonds experiencing a downgrade in rating subsequent to purchase will be classified with possible reserves or loss taken depending upon the rating given.

South Central Bank focused all the investments mainly in two categories: US Government Obligations (Mortgage Backed and Non-Mortgage backed) and the States and Political Subdivisions. These two categories almost divided 50 – 50 split. In terms of maturity, as Table 4 showed, the Bank focused on long-term investment in which it tied up around 75% of the total investments in recent two years. It seemed that the Bank had a good forecast in the interest rate trend because the Fed had already lowered the interest rate by ten consecutive times in year 2000. Since the market interest rate is declining, the market value of the Bank’s investment portfolio is increasing. In addition, the Bank also can enjoy the high interest income from the securities it bought two years ago.

Table 4

SUMMARY OF INVESTMENT PORTFOLIO
(% to Total Securities)

Figure 9

DISTRIBUTION OF INVESTMENT PORTFOLIO

Loan Portfolio

South Central Bank’s philosophical purpose of making loans is to supply funds for the community’s legitimate credit needs, thereby providing a greater return to the stockholders on invested capital. In order to maximize profits by investing funds in loans, its loan-to-deposit ratio may prudently reach a limit of 75%. A 5% variance is expected and acceptable at times due to the seasonal demand and pay back of loans. However, the Bank would not intent to extend credit to meet this ratio by substituting quantity for quality. Table 5 shows the summary of the loan portfolio together with time to maturity and Figure 10 shows the distribution of the loans for the past five years.

The first concern of South Central Bank is the safety of the depositors’ funds, second will be the community, and when these two criteria are met, the third concern is the return to the Bank shareholders. Therefore, diversification of the loan portfolio is very important for South Central Bank in order to reduce the risk.

The Directors Loan Committee is authorized to approve loans up to the Bank’s legal lending limit, evaluate loans in accordance with the loan policy, review and monitor the repayment situation, review actions taken on delinquent and charged-off loans, and establish lines of credit on an annual basis.

On the other hand, the Chief Lending Officer will be responsible to assure that the loans portfolio is in compliance with the loan policy, with proper loan documentations, adequacy monitoring of collection efforts, perfection of liens on collateral pledged, and adequacy of loan analysis and documents review.

Since South Central Bank is local community bank, the primary lending area of the Bank is considered to be within the county of Cook; however, the Bank has nothing to do with the redlining zone. In addition, in order to comply with the Equal Credit Opportunity Act, every loan applicant will be given an opportunity to obtain a loan without regard to race, color, sex, religion, national origin, ancestry, age, marital status, receipt of public assistance, or any other type of unlawful criteria. All loans are complied fully with applicable Federal, state, and local laws, rules, and regulations.

The policy of South Central Bank dictates a preference for short and intermediate-term credits. Short-term credits are those of one year or less in maturity and intermediate-term credits generally should not exceed five years. Of course, the Bank does offer mortgage loans, which will be matured from 5 years to 15 years. However, those long-term loans will be in adjustable rate in which the interest rate will be moved with the Prime Rate. As showed in Table 5, the loans maturing in 5 years to 15 years accounts for more than half of the total loans. In order to ensure adequate funds to serve the community and meet the credit needs of established customers and companies, which are considered attractive prospects, South Central Bank may place limitations on investment in long-term loans during periods of disintermediation that caused a high turnover of deposits.

South Central Bank adopts the conservative strategy in lending practice, which requires that the loans must be with collaterals and the bank will only offer credits to those customers who have absolutely best credit ratings. For the past five years, around 80% to 90% of the loans portfolio was in all real estate loans in which 1-4 family residential account for around 65% to 70%, commercial real estate loans account for around 10% to 15%, and home equity loans account for around 7% to 10%. The all real estate loans are considered low risk because the LTV (loan-to-value) is 80% for 1-4 family residential, 70% for commercial real estate, and 80% of the borrower’s equity in the property. Other compositions of the loan portfolio were 10% to 15% on commercial and industrial loans, 3% to 13% on individual loans such as credit cards, customer loans, car loans, installment loans, and student loans, and not more than 1% on other loans. Furthermore, the loan-to-deposit ratio was steadily stated at around 70% to 80% in the recent three years, which is in line with the policy mentioned above.

Table 5

SUMMARY OF LOAN PORTFOLIO
(% to Total Gross Loans)

Figure 10

DISTRIBUTION OF LOAN PORTFOLIO

Deposit Portfolio

The depository industry is in the midst of significant change that brought about by banking innovations, new competition, and changes in banking law and regulations. In the 1980s, Congress removed the legal limits on the interest rates; banks and thrift institutions could pay on time deposits and ended bank’s monopoly as the nation’s sole providers of demand deposits. In this case, competition was extremely increased. In order to attract more deposits to maintain the market shares, South Central Bank continuously offers comparative interest rates to satisfy different customers’ needs. On the other hand, the Bank offers various types of accounts to attract different types of deposits to maintain or increase the market share in the deposits market, to maintain the Bank’s liquidity, to maintain the gap in order to decrease the interest rate risk, and to increase the non-interest income for the Bank.

Deposits are divided into two main categories: transaction accounts and non-transaction accounts. Table 6 shows the summary of the deposit portfolio and Figure 11 shows the distribution of the deposits for the past five years.

Transaction accounts consist of demand deposits, NOW (Negotiable Order of Withdrawal) accounts and ATS (Automatic Transfer Service). For the past five years, the transaction accounts have stayed steady around 35% of the total deposits. These accounts, while they do not make up the majority of deposits, are very important to the bank because cash is not accepted everywhere and for the time being checking accounts are a necessity for all banks to offer. Most people do not keep the majority of their money in a checking account. Demand deposits are just simple checking accounts that do not pay interest.  However, South Central Bank does offer interest to those accounts when balances are kept over $1,000. This type of checking accounts encourages the customers to keep higher balances in their checking accounts with great earnings and flexibility. On the other hand, the Bank could save some manpower in doing the regular transactions of transferring between savings and checking accounts.

Non-transaction accounts receive deposits from MMDAs, savings accounts, CDs (including jumbo CDs), and IRAs. These interest-bearing deposits are the major source of funding for all banks. For the past five years, these accounts make up the majority of the deposits staying steady at around 65% of the total deposits. MMDAs were created to compete with Merrill Lynch’s cash management account (CMA); however, they were not that competitive because the accounts were classified as savings accounts with restrictive check-writing privileges (three per month). Thus, MMDAs hold the smallest percentage of deposit accounts around 3% to 7% of the total deposits compared to the savings accounts, which account for around 27% to 30% of the total deposits except in year 2000. For the year 2000, there was a significantly change in the deposit portfolio. People tended to switch the deposits from demand deposits accounts to the other transaction deposits accounts such as NOW accounts and ATS accounts; and switch the deposits from savings accounts into jumbo CDs.

The non-interest bearing deposits to interest bearing deposits stay constant at a 25 – 70 split from 1996-1998 but then changes to a 30 – 70 split in 1999. This accounts for the increase in demand deposits and the decrease in MMDAs. However, in 2000, the spread takes a significant change to a 20 – 80 split.  This giant change is mainly due to the surge in large time deposits between years 1999 and 2000.

Core deposits are steadily decreasing 2% to 3% each year between years 1996 to 1999 but there is a significant decline to 75.44% in 2000. This is also because the effect of the large time deposit surge. This may be a problem for the Bank because core deposits are usually more desirable because of their lower cost and greater stability.

Table 6

SUMMARY OF DEPOSIT PORTFOLIO
(% to Total Deposit)

Figure 11

DISTRIBUTION OF DEPOSIT PORTFOLIO

MARKETING STRATEGY

This section will focus on the South Chinatown branch of South Central Bank in terms of its short-term marketing strategy and long-term plan. South Chinatown branch started in December 1993. As of August 31, 2001, the total deposits in South Chinatown branch was $12.1 million with 1,398 accounts. By looking at this figure, it seems that South Central Bank has achieved its goal – to gain a portion of market share from the Chinese people in Chinatown. It is because 95% of the customers are Chinese and they hold 95% of the total accounts. This 95% represents $11.5 million of deposits in the South Chinatown branch.

In a service business, the customer and front-line service employee interact to create the service. However, effective interaction depends on the skills of front-line service employees and on the service production and support processes backing up these employees. For a service-profit chain, superior employee selection and training will result in more satisfied, hard-working employees and will result in more effective and efficient customer value creation and will result in customers repeating the services and referring other customers and will result in superior service firm performance. Therefore, the followings will explain the market strategy of the South Central Bank in South Chinatown in terms of the internal marketing, the external marketing, and the interactive marketing.

Internal marketing means that the service firm must effectively train and motivate its customer-contact employees and all the supporting service people to work as a team to provide customer satisfaction. Although the South Chinatown branch do not give cross training for all employees, they do have training on every position to make sure that the customer-contact employees such as tellers and customer service representatives know how to satisfy customers' needs in order to create customer satisfaction. For the tellers and customer service representatives, South Central Bank do not give them cross training because the Bank want them to focus on their job responsibilities. Thus, the responsibilities of the assistant branch manager and branch manager are very heavy. In addition, there is no loan officer working permanent in the South Chinatown branch, the assistant branch manager and the branch manager has to know the basic process of loan application and even though process some simple loans such as auto loans and overdraft protection. However, when there are complicated loans such as commercial loans and mortgage loans, they have to call the headquarters for help. Internal marketing also refers to motivation. To create employees' momentum is a very important part in a successful profit-service chain. South Central Bank offers "referral incentives" to all employees. When an employee refers friends or relatives to open accounts or apply loans successfully, the employee will get an incentive in terms of money.

External marketing also serves as an important part in the marketing strategy of a bank. It refers to the marketing between the company and customers. South Chinatown branch continuously offers high and competitive interest rate to different customers. Although the Bank is used to offer high interest rate, they still want the customers to stay banking with them forever. Therefore, they always have special promotions. The Bank does not want customers to stay banking with them for a while because of temporary high interest rate. The continuous special promotion strategy could encourage the customers switching their accounts to South Central Bank in order to enjoy a high interest rate of the savings accounts and CDs. Once the customers switch their accounts and have CDs in South Central Bank, and the Bank can provide the same or even though better service for them, the customers will not border to switch their accounts back and forth. What a great psychological marketing strategy! That is why South Central Bank seldom does advertising; they are used to get referrals from their employees and customers.

For the interactive marketing, the primary goal of South Central Bank is to enhance their public image as a friendly, high quality institution that will project strength, soundness and integrity. Thus, the employees of the South Central Bank are emphasized on the service quality of the delivery. Politeness, smile, and patience are something that they will not forget in order to achieve the customer satisfaction.

SWOT ANALYSIS

Knowing the strengths, weakness, opportunities and threats of oneself is very important in the business world. If one can explore his or her strengths and opportunities, correct from weakness, and avoid or defense from the threats, he or she will be much success. This section will address the above issues for the South Chinatown branch of South Central Bank.

South Central Bank continually offering high and competitive interest rate, the "referral incentives", and the psychological marketing strategy are the major strategies to make the growth. Therefore, these strategies are considered the strengths and opportunities of the Bank. It motivates not only the employees but also the customers. Internet Banking is also a plus for South Central Bank. Due to the technology changes, Internet Banking provides much convenience options for the customers. They can check their balances, transfer balances, view interest rates and special offers, and even though apply loans through the Internet. In this competitive South Chinatown market, South Central Bank has done its best to accommodate the customers.

The weakness of the South Chinatown branch of South Central Bank is that there is no permanent loan officer in the branch to help and hold the customers immediately. Customers are just like shoppers; they tend to shop around for the lowest interest rate when they want to borrow. If there is a permanent loan officer at the branch and can help and hold the customers immediately, at least, the customers feel the service from the Bank. In this case, the Bank has the opportunity of not only doing these customers’ loans businesses but also has a chance of cross-selling businesses such as opening new accounts. In addition, the safe deposit box rental service only available in the headquarters is very inconvenience for the South Chinatown people even though it is free with the opening of Bonus Banking Extra checking accounts.

In terms of the threats, we have to discuss them with the comparison of South Central Bank's main competitors in South Chinatown area - New Asia (NAB) Bank. Although there are six banks/branches in the South Chinatown area, we choose NAB Bank because it is the largest Chinese capital bank while the South Chinatown branch of South Central Bank is just a small branch.

NAB Bank has been in South Chinatown for 16 years and it is the largest Chinese capital bank. The mission statement of NAB Bank is "make from Chinatown and use it in Chinatown". Thus, NAB Bank is very active in the Chinatown activities in terms of sponsorship and involvement. Once you are involved in South Chinatown activities, Chinese TV channels, Chinese radio station and different kinds of Chinese newspaper will report those activities and the name New Asia (NAB) Bank will be mentioned repeatedly. It is a kind of advertising. In the banking operation, NAB Bank’s goal is to help everyone who wants to be a homeowner. NAB Bank's loan-to-deposit was as high as 82.04% in year 2000.

In order to make a good relationship with customers; New Asia Bank will invite large depositors and loan customers to their annual party in the Chinese New Year. Although it costs some money, it creates a very closely and friendly relationship with the customers. At the end of year 2000, the total assets of New Asia Bank were $147 million with $1.04 million net income. Because of their expenses on advertising, participating in community activities, building relationship with customers, hiring quality employees, incentives and bonus and other expenses, the ratio of return on average assets was 0.73% and ranked only 130 out of 242 Chicago-area banks. It seems that the financial figures are not looking good; however, we are focus on the competing of market shares in South Chinatown in terms of marketing strategies and techniques.

NAB Bank has three services that are superior to the South Chinatown branch of South Central Bank. They are the drive-thru service, currency exchange, and international cashier’s check. Be remembered that banking services are cross selling, people will try to do everything in one location rather than run back and forth. Drive-thru service provides the most convenience service to the customers. Currency exchange is also a very important service in the Chinese community because there are many Chinese immigrants from Mainland China and Hongkong. When they exchange their money, they used to open their accounts at the same time. Although South Central Bank does provide currency exchange service; however, it is only on demand basis. International cashier’s check is a great product from NAB Bank. Since NAB Bank had been in the South Chinatown for 16 years and it is the largest Chinese capital bank, the management knows the customs of Chinese people. People in South Chinatown, especially those came from Mainland China, always would like to send money to their family where they came from. It is not an occasionally practice; in fact, it is on monthly basis. However, if they wire the money to their family, it is faster and safe but it costs $45. If they buy the cashier’s check drawn in US dollars, it costs nothing but needs almost one month for their family to receive money because of clearing process between the US and the Mainland China. Nevertheless, if you buy an international cashier’s check drawn in the local currency, it costs $5 but it draws on the China Bank in China or the Hongkong Bank in Hong Kong, which needs only three days clearing process because it is a local check in Mainland China or Hong Kong. These are the needs of the Chinese customers and NAB Bank knows that.

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Increasing Operation Efficiency

Although the competitors in the South Chinatown are so strong, South Central Bank still has the opportunity to expand their business. It can offer more convenience services to the customers in the South Chinatown branch. Although its location would not allow them to have a drive-thru service, it still can add the service of currency exchange and safe deposit box rental in this South Chinatown branch in order to increase the competition. Moreover, a loan officer works permanently is very important in the South Chinatown branch. It helps to hold the customers immediately rather than they run and shop with the other banks.

Besides the improvement of the fundamental products and services, South Central Bank may have to do some advertisement. If its target in the South Chinatown branch is mainly Chinese, they can advertise in the Chinese newspaper or any other Chinese medias. By advertising, more people will know its existing and services. On the other hand, special promotions can be given during the advertising period. Furthermore, the branch may involve in some of the Chinatown activities so that more merchants and people can recognize South Central Bank.

In addition, the South Chinatown branch can hold some financial seminars to the customers on a variety of topics including basic financial services, which will include information about lending and deposit products and programs. There are two advantages for these seminars. Firstly, more people will know your existing and your professionalism. Secondly, special offers can be used at the seminars to attract the people banking immediately.

Increasing Accounts and Deposits by Marketing Technique

One way to boost up the number of accounts and deposits is to introduce the Kids Savings Account. State Treasury of Illinois office had already introduced a book called “Banking at School” to teach the kids in school about the importance of banking. South Central Bank may adopt this strategy to help boosting the accounts and deposits. This program may apply to kids when they are still in elementary school or lower. Gifts can be given to the kid as an encouragement when they open accounts. Although the kids will deposit only a small amount of money and the Bank is not going to make a lot of money from that; however, one way you turn the corner is that these accounts help to convince families to do their businesses in South Central Bank too. This Kids Savings Account may also be offered in the neighborhood schools. In cooperation with the local schools, deposits in school may be allowed. Students receive a deposit ticket and an envelope. They can drop their deposits into a locked box that is kept at the principal’s office. The box is collected and deposits are processed once a week. These accounts fit in with the Bank’s effort to be a partner with the schools. For example, employees can often speak in the schools, demonstrating skills and theory such as how to handle a checking account to the kids, how savings is important, and so on. In this case, the bank not only boosts its accounts and deposits but also teaches the kids – our future. In addition, the Bank will have a good relationship with the teachers. Do give out some incentives or promotions to bring the teachers’ business into the Bank too.

Another way to increase the number of accounts and deposits can be by offering promotions around an eye-catching theme. Winter is coming now. The following promotion may work for South Central Bank. This was an idea coming from the First Federal Savings and Loan Association of Hazelton, Pennsylvania in 1996. The S&L used a 1,000-pound ice sculpture to promote the Bank. The ice-centered promotion included a 50-basis-point bonus on CDs opened at the designated branch, before the sculpture melted, coolers were given to customers opening any new deposit account in the branch, and ice scrapers were mailed to encourage customers to come to the branch where they could win a prize. In this case, South Central Bank can put the ice sculpture outside its headquarter as a promotion. Since the Roosevelt Road is a very prosperity and busy street, many people will see that and especially when you put the Christmas light on. It will definitely draw the people’s attention.

From the deposit portfolio, there was a tremendous drop in IRA deposits, from 1.17% to only 0.36% of the total deposits. The following way may help to boost the IRA deposits in the coming months and increase the interest margin of the Bank in the coming years. IRA is a retirement account, people used to roll over repeatedly every year. Since the interest rate is so low at this moment, the Bank may give a higher interest rate, even though 100-basis-points more than the regular CDs, to a 5-year IRA deposits. In this way, you can attract high interest lover to bank the IRA in your South Central Bank. On the other hand, you can keep low interest long-term liabilities in the deposit portfolio.

Increasing accounts and deposits are important to a Bank; however, to be profitable by those accounts and deposits are also very important. Among all the checking accounts provided, the most profitable checking accounts will be the commercial checking accounts because the Bank will make fee income once the transactions over the limit. Incentives to employees on calling for business accounts together with discount tier fee will be helpful to boost the business accounts. Employees usually will call the one who know the prospect personally. In this way, the Bank can save the advertising fee, promote internal marketing, and provide a personalized and friendly service to the business accounts. By backing with the employees, the Bank can offer a discount tier fee schedule to the business accounts. Since the Bank charges the business accounts on per item basis, the discount tier fee schedule can give discount to those business customers. For example, 10 percent discount will be given to 100 items or more, 20 percent discount will be given to 250 items or more, 30 percent discount will be given to 500 items or more, and so on. Of course, this is just a suggestion tier only; the range should be determined by the Bank estimate depending on the average items per business account or any determination.

Increasing Deposits by Service

South Central Bank always has special promotion on CDs in order to attract funds. However, when the CDs come to maturity, the CD holders tend to shop around again. One problem with running a bonus rate promotion to generate deposits is that the Bank often “loses” these funds at maturity. Therefore, we could adopt a personalized care strategy that may help the deposits growth or retention. Because CDs are such a large portion of the Bank’s deposit portfolio, retention strategies are always important. You do not want your customers always shopping around but want to tie them in your Bank. By using this strategy, a personalized letter could be sent to the customers who have maturing CDs in two to four weeks before the maturity date. The letter includes the projected value of the CD at maturity. It also includes the value of the renewed CD plus 30 percent more deposits. This can give the customers big picture about their CDs. Once letters are sent, personal bankers call each customer as soon as possible. The personal banker has to make sure that the customer has received the letter and asks if the Bank can roll the CD over. If the customer wants more liquidity, the personal banker could offer an MMDA. The personal banker’s call is just a soft sell. If the customer has other relationships with the Bank besides CD, the personal banker can offer 20 additional basis points for renewing the CD. Businesses are built with friendly services and satisfaction. In addition, the Bank can pay an incentive of $1 per customer if the personal bankers can successfully do the business. However, the Bank has to monitor those personal bankers not to be hard selling because of the incentives. Otherwise, it will not help the Bank but, on the other hand, hurting the Bank’s images. By using this strategy, the Bank not only can retain those deposits but also show your good customer service with personalized care. Moreover, this encourages the personal bankers to work hard in terms of internal marketing we have discussed in the marketing section.

Increasing Loans by Deposit Accounts

Interest rate discount can be given to those loans customers that will make monthly payments by automatic fund transfer from any transaction accounts in the Bank at the first payment date rather than the last day of the grace period. Of course, the customers have to sign an authorization allowing the Bank to do that. In this way, the Bank may encourage the customers to do all their businesses in one bank – South Central Bank. In addition, the Bank can receive the payments quickly and promptly to decrease the workloads of the collection department. Moreover, the Bank can charge NSF/OD fee if the customer breaks his authorization promise; however, the Bank, of course, can waive that for some circumstances and that will sometimes make the customers happy and brings in more businesses.

Increasing Fee Income

It pays to often review the personal DDA service charges to make sure that they are in line with the local market and still cover expenses. For example, the NSF/OD charges in Chinatown is average $25.00 per item; however, South Central Bank only charges $20.00 per item, which is 20% lower than the average. Wire transfer for local and international are charged $25 and $45 respectively in Chinatown but South Central Bank only charges them for $18 and $35. Another fee may be considered are the under balance fee, monthly fee, and minimum balance required.

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