Navigating regulatory requirements is an ongoing challenge for financial institutions, and Lineage Bank is no exception. This local community bank, based in Franklin, Tennessee, has faced increased scrutiny from federal regulators twice this year. The Federal Reserve Board’s recent enforcement agreement aims to address various deficiencies, including reforming the bank’s board policies, managing transactions between affiliates, and conserving capital to ensure financial soundness. Although the specific deficiencies were not disclosed, a common practice in such orders, they highlight the importance of maintaining robust risk management frameworks and internal controls within the banking sector.
Regulatory Scrutiny from Federal Reserve and FDIC
Federal Reserve’s Enforcement Agreement
The Federal Reserve Board’s enforcement agreement with Lineage Bank has put a spotlight on the need for strong governance and risk management practices in the banking sector. The agreement seeks to address deficiencies in the bank’s board policies, affiliate transactions, and capital conservation, all essential elements for ensuring financial soundness and stability. By focusing on these areas, the Federal Reserve aims to create a more resilient banking environment capable of withstanding economic fluctuations and potential financial crises.
The enforcement agreement underscores the crucial role of effective board policies in the overall governance of financial institutions. Strong board policies are vital for guiding the bank’s strategic direction, ensuring compliance with regulatory requirements, and managing risks effectively. Additionally, the agreement highlights the importance of managing transactions between affiliates to prevent conflicts of interest and ensure fair and transparent dealings. By conserving capital, the bank can maintain a buffer to absorb potential losses, thereby enhancing its financial stability.
FDIC’s Concerns on Third-Party Risk Management
In late January, the Federal Deposit Insurance Corporation (FDIC) flagged Lineage Bank for insufficient management of third-party risks, particularly those involving fintech groups. This concern is especially relevant given Lineage’s previous engagement in a Banking-as-a-Service (BaaS) model, partnering with various fintech firms to offer innovative financial services. Such partnerships, while beneficial for expanding the bank’s product offerings, also introduce additional risks that need to be managed diligently.
During its BaaS period, Lineage Bank’s assets saw significant growth, jumping from $27 million in 2020 to an impressive $290 million by 2023. However, this growth was somewhat short-lived, as assets subsequently reduced to $214 million by the third quarter of 2023. The rapid expansion and subsequent contraction in assets highlight the volatile nature of fintech partnerships and the importance of effective risk management practices. The FDIC’s emphasis on managing third-party risks serves as a reminder for banks to remain vigilant and ensure robust due diligence when engaging with external partners.
Strategic Shift Back to Traditional Banking Model
Leadership Changes and Local Market Focus
In response to the regulatory pressures and challenges posed by its BaaS model, Lineage Bank has decided to pivot back to a more traditional banking model. This strategic shift involves focusing on lending within its local Nashville suburban market, a move that aligns with the bank’s historical roots as a community-focused financial institution. The change in strategy has been accompanied by significant changes in the bank’s leadership.
Carl Haynes has been promoted to interim president and CEO, bringing a wealth of experience and a fresh perspective to the bank’s leadership team. Additionally, Jeffrey Hausman has been appointed as chairman, and Gerry Hayden has joined the board of directors. These leadership changes are expected to provide the guidance and oversight needed to navigate the bank through this transitional phase and reinforce its commitment to serving the local community.
Broader Trend in BaaS Banks
The challenges faced by Lineage Bank are not unique to this institution alone. Other banks that have experimented with Banking-as-a-Service models have similarly faced increased regulatory scrutiny and have had to reassess their strategies. Blue Ridge Bancshares, for example, has also reverted to a more traditional banking model in response to regulatory pressures.
This broader trend of banks moving away from BaaS models underscores the difficulties in managing third-party risks and ensuring compliance with Bank Secrecy Act/anti-money laundering laws. While fintech partnerships can offer significant opportunities for innovation and growth, they also come with increased regulatory and operational complexities. As a result, many community banks are finding that a return to traditional banking models, with a focus on localized services and customer relationships, provides a more sustainable path forward.
Historical Context and Future Outlook
Lineage Bank’s Evolution
Founded as Citizens Bank & Trust Company in 1927, Lineage Bank has a long history of serving its community in Tennessee. The bank underwent a rebranding in 2021, adopting the name Lineage Bank to reflect its commitment to innovation and growth. Despite the recent challenges and regulatory scrutiny, the bank continues to operate three branches in Tennessee, providing essential financial services to its customers.
The narrative of Lineage Bank’s evolution illustrates the challenges and opportunities that come with embracing new business models and technologies. While the partnership with fintech firms allowed the bank to expand its assets rapidly, it also introduced new risks and regulatory challenges. The bank’s decision to return to a traditional banking model reflects a strategic realignment aimed at ensuring long-term stability and compliance with regulatory requirements.
Looking Ahead
Navigating regulatory requirements is a constant challenge for financial institutions, and Lineage Bank is no exception. Based in Franklin, Tennessee, this local community bank has faced increased scrutiny from federal regulators twice this year. The Federal Reserve Board’s latest enforcement agreement aims to address several deficiencies, including reforms to the bank’s board policies, improved management of transactions between affiliates, and efforts to conserve capital to guarantee the bank’s financial soundness. Although the specific deficiencies have not been disclosed—a common practice for such orders—these actions underscore the critical need for strong risk management frameworks and robust internal controls within the banking sector. Maintaining these measures is essential for ensuring stability and compliance in a rapidly evolving regulatory environment. For Lineage Bank, adhering to these regulations is crucial to maintaining trust and ensuring financial health, not just for the institution but also for its community and stakeholders.
