Veteran banker aims to bring back the multibank holding company

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Richard Herrington is embracing a banking model that fell out of favor after the financial crisis.

Herrington, who stepped down as CEO of Franklin Financial Network last year, plans to create a multibank holding company in Nashville, Tenn. Lineage Financial Network has deals in place to buy two banks, with long-term plans to acquire three to four banks a year.

While Lineage will support Sumner Bank and Trust and Citizens Bank & Trust with technology and capital, it will let the banks keep their names. Loan decisions will remain largely the domain of the individual banks, Herrington said.

The overarching goal is to enable smaller banks to compete with bigger lenders and nonbanks without having to lose their identity through consolidation.

“We asked if there’s an economic rationale and the research said, yes, there absolutely is,” said Herrington, 72, who is Lineage's chairman and CEO. “People want to bank with people they know, as opposed to simply going online.”

Still, the strategy runs counter to a prevailing trend over the past decade.

Several multibank holding companies, including Synovus Financial in Columbus, Ga., Carter Bancorp in Martinsville, Va., and Fulton Financial in Lancaster, Pa., centralized credit decisions and consolidated their charters, merging dozens of subsidiaries out of existence.

L.T. Hall, CEO of Resurgent Performance in Alpharetta, Ga., said he views Herrington's plan “with mixed emotions.”

“Something needs to be done” to help smaller banks, Hall said, but he noted that reducing costs may "give you a bump — but you’ve still got to compete” with cutting-edge technology and stellar marketing.

“It's not a walk in the park," Hall added.

Jeff Gerrish, chairman at Gerrish Smith Tuck in Memphis, Tenn., is more optimistic. While previous multibank holding companies collapsed their charters, in part because of significant operating expenses, he said Lineage has the advantage of starting with a clean slate.

Herrington "probably feels he can do better," Gerrish said.

Herrington, for his part, wants to give small banks a fighting chance.

It will likely take some time before Lineage lines up more deals. Its pending purchase of the $25 million-asset Citizens will give it the holding company necessary to expand, while the $196 million-asset Sumner provides a toehold in the Nashville market.

“We have to walk before we can run,” Herrington said, adding that a big priority is securing regulators' trust.

“An application with five or six banks” would have raised eyebrows, Herrington said. Limiting the scope to two banks gives Lineage an chance to “build and show what we can do, instead of just making promises.”

While declining to discuss Lineage, Michael Stevens, senior executive vice president at the Conference of State Bank Supervisors, said bank commissioners generally support efforts to keep smaller banks in business.

"State regulators are really interested in what those banks do for the community," Stevens said. "The focus ... comes from an understanding that they offer customized solutions to meet the needs of local communities."

Community banks are particularly critical in rural and underserved markets, Stevens added. "If community banks aren't in a position to serve those areas, where do they get access to financial services?" he said.

The number of banks with assets of less than $1 billion fell by 25% over the five-year period that ended on Sept. 30, according to the Federal Deposit Insurance Corp. Many of those banks sold to larger competitors, or merged with each other in an effort to gain scale.

Five banks in Tennessee have agreed to be sold already this year. In comparison, only four deals in 2019 involved sellers in the state.

Citizens, a one-branch bank in Atwood, Tenn., that is struggling with technology and economies of scale, seemed poised to be sold to a much bigger bank, Herrington said.

Citizens is “a good bank in a good community, but it’s very vulnerable,” Herrington said. “If something isn’t done, it’s not going to be here in a few years. It will become a branch of a larger bank or just close.”

Herrington said he began developing a strategy for Lineage while he was chairman and CEO at Franklin, the holding company for Franklin Synergy Bank. Herrington and his son, Kevin, helped found Franklin Synergy in 2007, guiding its growth to $4.2 billion in assets.

Franklin has been wrestling with credit quality issues over the past year, largely tied to exposure to shared-national credits and health care loans. In January, Franklin agreed to be sold to FB Financial in Nashville for $611 million in cash and stock.

Herrington declined to discuss Franklin's credit challenges. He said, however, that an inability to interest Franklin’s board in backing his roll-up strategy factored into his decision to step down in March 2019.

“It’s a different concept and Franklin was a very successful bank,” Herrington said of the board's decision to stay the course. “When you’re doing well, it’s hard to change course.”

Lineage's team, which includes Kevin Herrington as president and chief operating officer and veteran bank consultant William Lucado, did a deeper dive into the feasibility of their plan.

“Consolidating into a bigger bank and losing your name and history shouldn’t be the only answer for banks looking for a change,” Lucado said. “We believe Lineage can be another alternative for banks that have reached an inflection point.”

Sumner, a 14-year-old bank based in the Nashville suburb of Gallatin, has been unable to capitalize fully on the region’s growth, Herrington said. The bank tried to sell itself to HopFed Bancorp in February 2013, but the deal fell through that summer, after HopFed said Sumner failed to meet a performance target.

“We understand how to make a community bank grow,” Herrington said.

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