Where does your bank get legal advice?

Community banks are complex organizations with a multitude of liabilities. That’s why having sound legal advice from a firm or general counsel is increasingly necessary. Here’s what to consider when hiring a firm or internal legal professional.

By Elizabeth Judd

Even community banks with only a few branches and modest assets find themselves in need of a stunning breadth of legal expertise. No matter the topic—regulatory compliance, M&A, lender liability, employment, vendor management or cybersecurity—having legal expertise allows community bankers to better perform their duties and achieve their goals.

Recently, for instance, employment law got much thornier during the COVID-19 pandemic, and community banks wrestled with issues surrounding remote work, shutdown orders and the safety of their employees.

“There are a bunch of really unique HR and employment issues that came up—and continue to arise—because of the coronavirus,” says Chet Fenimore, managing partner at Fenimore Kay Harrison & Ford, LLP in Austin, Texas.

Revisiting bread-and-butter corporate law in light of the pandemic also makes good sense, Fenimore says. For example, many community bankers realized that their articles, bylaws and committee charters needed refreshing because they didn’t permit shareholders and/or board members to meet over virtual platforms.

Most community bankers understand that legal counsel, while expensive, is a regular, even daily, necessity. Tom Sellers, chairman of the board and CEO of $1.1 billion-asset Alliance Bank in Sulphur Springs, Texas, says the community bank’s need for legal expertise has skyrocketed.

“Nowadays,” he says, “there’s something we need legal help with nearly every day.”

Securing top-notch legal advice

Peter Weinstock, co-practice leader of the financial institutions group at Richmond, Va.-based Hunton Andrews Kurth, LLP, says the number of emerging risk areas for community banks has grown dramatically. Of a typical community bank’s employees, about 30% now perform work related to consumer compliance, Bank Secrecy Act (BSA) or IT. “These are risk areas that we didn’t think about 20 years ago,” he adds.

As these risks have grown, Weinstock says, sometimes even smaller community banks are hiring a seasoned lawyer as general counsel. A general counsel is not expected to be an expert in all legal areas but should be an “informed buyer of legal services, someone who appreciates what type of legal expertise is needed for a project at a good price point,” he adds.

“I used to think you needed to be $500 million to $750 million in assets before it made sense to have a general counsel,” Weinstock says, “but what I find on a day-to-day basis is that the lack of somebody who has an appreciation for legal minds can wind up with some real penny-wise, pound-foolish results.”

With that said, many community banks still exclusively use outside law firms rather than hiring a general counsel—and this model works well, too. With or without a general counsel, most community banks will work with several firms for legal advice because the range of issues being addressed is so broad.

“The most critical thing for community banks that don’t have an in-house general counsel,” Fenimore says, “is to have one dedicated firm and a lawyer or two who can almost act as their outside general counsel.”

Assessing who’s a good fit

When hiring a firm, Chris Floyd, president and CEO of $420 million-asset First National Bank in Syracuse, Kan., says one criterion should be to have “a point of contact, or someone who makes sure that the work gets done.”

Weinstock agrees, noting that relationships with firms work best when a designated individual takes responsibility for outcomes and when the scope of all projects is well defined. “This can’t be something where you toss a ball into the yard and then turn your back,” he says. An early understanding of what a project entails—and what it will cost—will help promote a successful outcome.

Industry expertise is another must-have. “It’s very important that the law firm understands community banking and has a background in community banking,” Sellers says.

Finally, Sellers says a relationship with a knowledgeable group of lawyers can provide a sounding board for exploring cutting-edge ideas that may be worth pursuing. “I call [the lawyers I work with] just to bounce ideas around,” he says, adding that when a lawyer truly understands the issues a community bank faces, “it’s a relationship that develops and gets better over the years.”

Take a close look at your contracts

Seven years ago, VeraBank typically reviewed the boilerplate in vendor and technology contracts without analyzing every aspect with a fine-tooth comb. That’s changed, says Brad Tidwell, president and CEO of the $3 billion-asset community bank in Henderson, Texas. “These contracts have become more complicated and sophisticated,” he adds.

As a result, Tidwell has begun relying on outside legal counsel to review and analyze contracts in much greater depth.

Chris Floyd, president and CEO of First National Bank in Syracuse, Kan., agrees. “You can’t just carte blanche take everything the vendor ships you and sign it,” he says. By carefully reviewing technology and vendor contracts with outside counsel, Floyd has gotten “a pretty good education” into why specific changes make sense.

Indemnification for security breaches is, of course, a critical issue for lawyers to consider. Technology has become “the sidewalk where customers come in to see you,” says Peter Weinstock, leader of the financial institutions group at Hunton Andrews Kurth in Richmond, Va. So, he adds, “issues of technology now go to the heart of product delivery. Being able to do digital banking well from a legal to a compliance to a technology standpoint is as white-hot as any area a community bank faces.”

Elizabeth Judd is a writer in Maryland.