At most banks relationship managers receive a salary and commission for bringing in loans and deposits and are not penalized when customers take their business elsewhere.
It does not work that way at Enterprise Bank in Allison Park, Pa., whose compensation method encourages lenders to take a long-term approach to serving small-business customers.
The $152 million-asset bank's relationship managers, who act as lending officers and business consultants, get no salaries, commissions, or promotions. Instead they receive a percentage of income generated by loans and deposits and are docked when loans go bad or customers leave Enterprise.
This model — which observers said is highly unusual in banking — does not provide much immediate income but can be lucrative if a customer sticks with the bank.
"Our concept is to have relationship managers run their own business inside the umbrella of a bank," said Chuck Leyh, Enterprise's president and chief executive.
In fact, he said, "there are some relationship managers who make more than I do."
Paul Sanchez, a consultant at Mercer Management Consulting in New York, said that though it is common to tie a portion of lenders' compensation to incentives, Enterprise's model is more like that of a hedge fund or venture capital firm.
Margaret Kane, the president of Kane Bank Services, a retail bank consulting firm in Sacramento, said some banks, especially in Europe, use a franchise model that gives an entire branch accountability.
"What's unusual is how Enterprise is taking this to the individual level," she said.
Mr. Leyh, a certified public accountant, founded Enterprise in 1998 with a group of business associates.
He came up with the idea for Enterprise Bank while providing public accountant services to financial institutions at Kinol Sharie Leyh and Associates in Shaler, Pa. He saw the way service was disrupted at small businesses when their relationship managers were promoted and the bank had to replace them — often with people who had no background in the customers' industry.
"I felt there was a lack of empathy on the part of the banks," Mr. Leyh said.
He and the other organizers hired a team of experienced bankers to run Enterprise, but Mr. Leyh took over as president and CEO about four years ago, after the bank reported a spike in chargeoffs.
Enterprise caters to small and midsize businesses, focusing particularly on start-ups and "distressed businesses" that other banks typically turn down, Mr. Leyh said.
Evonne Henry learned about Enterprise Bank after getting laid off from a private high school where she taught music and theater in Pittsburgh. After scrapping the idea of going into business selling baskets, she decided to open a jewelry business using the name of a family store in upstate New York.
Ms. Henry went to a number of Pittsburgh banks for a business loan, and they all told to get a home equity loan, she said. "It was disheartening."
Through her husband, a manager at Dollar Bank in Pittsburgh, Ms. Henry was introduced to Dave Miller, a relationship manager at Enterprise. He reviewed her business plan and helped her secure a $70,000 Small Business Administration loan and a $20,000 line of credit. Using that money and personal savings, she opened Conti Jewelers in Pittsburgh in April 2006.
Ms. Henry said she feels comfortable knowing Mr. Miller has a vested interest in her business.
"Dave is with this loan from beginning to end," she said. She is considering taking out another loan at Enterprise to expand the diamond end of her business, she said.
Mr. Miller said he has about 130 customers. He and the bank's other half-dozen relationship managers are paid like investment advisers, receiving annuity streams from the customers.
"We can lend a lot of money at one time, but if we don't keep our customer relationships long-term, we risk little return on a short-term basis," he said. "The system is designed for us to hang in with the business through good and bad."
It is up to Mr. Miller to pay his two administrative assistants, a facility fee for his office space, and a portion of his staff's benefits.
He said he is well compensated but has to budget for the risks he takes individually.
When a loan is approved, relationship managers have to kick in 20% of the loan-loss reserve allocation. The amount is determined after careful analysis of a company's performance and credit risk grading. If a loan is downgraded because of delinquency, the reserve allocation loses value, which affects Mr. Miller's compensation.
Under Enterprise's compensation model, Mr. Miller said he has the incentive to provide low-interest financing to supplement what the bank lends, because it is what is best for the customer.
For example, when L&S Machine Co. of Pittsburgh needed financing after emerging from bankruptcy several years ago, Mr. Miller spent two and a half years cobbling together a $3.8 million package that consisted of a $2 million Enterprise/Small Business Administration 7(a) loan, $800,000 from two Pennsylvania low-interest loan funds, a $500,000 loan from L&S' prior bank, and a $500,000 loan agreement from the Internal Revenue Service for taxes owed.
Rob DiNardi, L&S' president, said he "was surprised" Enterprise "could put the deal together with so many players. Anyone could have backed out at any minute."
Mr. Miller said he was willing to do the extra paperwork because "taking a risk with our customers when most other banks won't" fosters loyalty. Indeed, in March. L&S secured a second loan for $1.5 million to purchase its 25,000-square-foot facility.
Mr. Leyh said Enterprise's financial health has improved in recent years, largely because it has enforced a collateral-based lending policy that has reduced loan losses. It also generates a good chunk of revenue from fee services, including bookkeeping and marketing assistance.
Still, Enterprise has generally been less profitable than banks its size because its funding costs are higher. It has only one branch and uses a fleet of vans to pick up deposits at customers' sites.
In the first half of this year Enterprise earned $305,000 and had a return on assets of 0.42%, versus an average ROA of 1.09% for banks in its asset class, according to Federal Deposit Insurance Corp. data. Its 4.09% cost of funds was 93 basis points higher than the average at banks with assets of $100 million to $300 million, FDIC data showed.
Enterprise plans to roll out a remote deposit product this month that Mr. Leyh said should lower the cost of gathering deposits.
