Former BaaS bank cited again by regulators

Andrew Harrer/Bloomberg

A Franklin, Tennessee, community bank has been cited by federal regulators for the second time this year.

Lineage Bank and its holding company, Lineage Financial Network, entered into a written agreement with the Federal Reserve Board this week, agreeing to reform its board policies, better manage its transactions between affiliates and conserve capital.

As is typical for such orders, the Fed's published enforcement document does not list specific deficiency at the bank. It only notes that Lineage Financial Network — for which the central bank serves as primary supervisor — entered into the agreement to protect the bank's financial soundness.

A spokesperson for Lineage did not respond to requests for comment Thursday afternoon.

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The enforcement action by the Fed follows a similar action from the Federal Deposit Insurance Corp. in late January, which flagged the bank's management of third-party risks — particularly those related to financial technology groups — as an area needing to be addressed.

Until recently, Lineage had pursued a business model centered on banking as a service, or BaaS. Its fintech partners included Synapse, the now-bankrupt firm that specialized in providing technologies to small banks to help them partner with consumer-facing tech startups.

Between 2020 and 2023, Lineage grew from $27 million of assets to $290 million of assets, according to FDIC data. The bank has since shrunk to $214 million, as of the third quarter of this year. 

According to a March report from the Williamson Herald, the local newspaper for Williamson County, Tennessee, Lineage has been pivoting away from BaaS and toward a more traditional banking model focused on lending in its home market in Nashville's suburbs. 

In that same report, the bank announced leadership changes, including promoting executive vice president and chief banking officer Carl Haynes to serve as interim president. The bank's website now lists Haynes as president and CEO. 

Local executive Jeffrey Hausman was named chairman of both the bank and the holding company, according to the article, and Gerry Hayden, a health care executive, was added to the board of directors. Neither individual is listed on the bank's website. 

Federal regulators have scrutinized BaaS banks closely in recent years and issued a raft of enforcement actions for insufficient third-party risk management and Bank Secrecy Act/anti-money-laundering compliance. Agency officials have said, through speeches and formal guidance, that oversight duties tend to get lost between banks and their partners in these arrangements.

This would not be the first time a BaaS-focused bank pivoted back toward traditional banking after drawing regulatory scrutiny. Just this month, Blue Ridge Bancshares terminated its final fintech partnership. At one point, the Charlottesville, Va., bank had 70 partnerships, but was deemed to have insufficient AML controls in place for them. It is now repositioning itself as a traditional community bank.

Founded as Citizens Bank & Trust Company in 1927, the firm rebranded as Lineage in 2021, according to FDIC records. Along with its headquarters and second branch in Franklin, it has a third branch in Atwood, Tennessee, in the western part of the state.