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Dec 12, 2023
To print this article, all you need is to be registered or login on Mondaq.com. Having general counsel is critical for community banks, butwhat's the right balance between in-house and external counsel?Community bankers and legal experts weigh in on how to create theright strategy for your bank. General counsel is a must-have for any business, and communitybanks are no exception. But some community banks downplay the need,which can be a tactical and costly mistake. To be sure, larger community banks may derive additional benefitfrom having in-house counsel, but it's something all communitybanks should also consider, according to bankers and attorneys whowork within or alongside these institutions. This is especiallytrue for community banks in growth mode or those that are trying toexpand into new service lines, states or markets, as well as forthose that have identified regulatory or compliance gaps. "It's something I would consider and carefullyevaluate. I think it makes more sense than sometimes peopleappreciate," says Robert Messer, chief financial officer andchief risk officer of $5.5 billion-asset American National Bank ofTexas in Terrell, Texas, which has had an inside general counselfor decades. Here are four considerations for community banks when weighingthese matters. 1. Analyze the potential cost benefits of in-house generalcounsel Community banks could spend hundreds of thousands of dollars peryear on legal fees for outside counsel, depending on the servicesthey need and the attorneys they work with. In addition to carefully tracking their overall legal spend,community banks should delve into what they are spending theirlegal dollars on, said Shelli Clarkston, an associate attorney atlaw firm Lathrop GPM in Kansas City, Mo. She previously served asin-house general counsel for a financial services holding company,its three community banks and two insurance companies, and nowrepresents banks as outside counsel. By delineating whether the money is going mostly to collections,compliance-related matters, litigation, contract work or somethingelse, the community bank can make more informed decisions about theexpertise they might want to bring in-house and what might still beneeded on a contractual or retainer basis, Clarkston says. "You're generally not going to cover everything withone jack-of-all-trades person." —Chris Mastrangelo, Grasshopper Bank The question then becomes: Can the community bank find someonein-house to lower these costs? If a $250 million-asset communitybank is spending $1 million a year in outside legal fees, even ifall the in-house attorney does is collections, it would still savethe bank money, Clarkston says. Ideally, a community bank should review its legal spending aspart of its annual strategic review or any time the bank isconsidering offering a substantial new product or service, saysChris Mastrangelo, a former bank examiner and the chief complianceofficer at $600 million-asset Grasshopper Bank in New YorkCity. 2. Investigate other potential benefits Aside from monetary savings, there can be other advantages toin-house counsel. "When you're not paying by the hour, you feel morecomfortable using your attorneys more and getting them involvedearlier in the process." —Aaron M. Kaslow, Sandy Spring Bank There's value in having the ability to walk down the hallwaywhen a loan officer or someone in the compliance department hasquestions, says Michelle Terry, general counsel and senior vicepresident at $1 billion-asset First Arkansas Bank & Trust inJacksonville, Ark. Indeed, banks with in-house counsel also tend to be moreproactive when it comes to potential legal matters. "If youhave to call outside counsel and get billed in 15-minuteincrements, you might not call," Messer says. Aaron M. Kaslow, executive vice president, chief administrativeofficer and general counsel for $14 billion-asset Sandy Spring Bankin Olney, Md., agrees. "When you're not paying by thehour, you feel more comfortable using your attorneys more andgetting them involved earlier in the process," he says. The internal legal team at Sandy Spring Bank works closely withthe compliance department on issues that require interpretation,Kaslow says. The legal team, which consists of three lawyers, twoparalegals and an assistant corporate secretary, also reviewsmarketing materials and fields a significant number of questionsfrom the bank's retail group. In-house counsel can also beinvaluable when it comes to contract review, he says, especiallygiven that banks today tend to partner with numerous vendors. "You might do okay on the business terms, but there arelegal issues that need to be addressed regarding cybersecurity andprivacy, for example," Kaslow says. 3. Partner more effectively with outside counsel Some banks make the mistake of thinking that they can hire anin-house counsel and eliminate all outside fees, but that's anunlikely scenario. "You're generally not going to cover everything withone jack-of-all-trades person," Mastrangelo says. In fact, relying on a single in-house attorney could put thelawyer and the bank in a precarious position, says Asnardo Garro , a partner in the corporate and financial services practice atAvila Rodriguez Hernandez Mena & Garro LLP, a Coral Gables,Fla., law firm that works with financial institutions. "They'll get swamped," he says. "At mostcommunity banks, there's so much legal need that it's toomuch for one person to handle." Garro also adds that if a bankhas only one attorney in-house, it's important to provide themwith internal and external resources for support. Bankers and attorneys say there's a role for both, within-house general counsel helping to streamline a communitybank's legal functions and appropriately divide tasksinternally and externally. Having an in-house attorney work withoutside counsel on specialized services such as litigation oremployment matters can be more time- and cost-efficient than havinga layperson "muddle through" complicated legal issues,Messer says. An in-house attorney is also in a better position than alayperson to know what's reasonable in terms of outside legalfees and the time being spent on various legal projects, says PaulSaltzman, chief legal officer at $11.2 billion-asset EagleBank inBethesda, Md. 4. Think big picture A community bank needs to carefully consider its growth plans.If it is growing, having in-house counsel could make even moresense, says Anne Balcer, senior executive vice president and chiefof government relations and public policy at ICBA. "You wouldrather have someone come in early on and work collaboratively aspart of your growth and management team to position you to besuccessful and avoid some of the pitfalls you can run into bygrowing quickly," she says. What's more, a general counsel role doesn't have to benarrowly tailored, Saltzman says. A bank, for instance, might beable to organize compliance and other administrative operationsunder the supervision of a chief legal officer. General counsel canbe involved in business planning, corporate governance, productplanning and other areas that reduce legal risk—before itmanifests itself in a customer complaint or regulatory action. "In-house counsel needs to be looked at as people whoprevent fires," Saltzman says, "not just people who putout fires." Finding your bank's best legal team No one size fits all when it comes to how community banksorganize their legal departments. For example, Michelle Terry,general counsel and senior vice president at $1 billion-asset FirstArkansas Bank & Trust in Jacksonville, Ark., reports directlyto the CEO, who is also one of the bank's majorityshareholders. By contrast, at American National Bank of Texas inTerrell, Texas, the general counsel reports to the bank's chiefoperating officer and offers advice to the board, even though hedoesn't hold a board seat, says Robert Messer, chief financialofficer and chief risk officer. Meanwhile, Aaron M. Kaslow, executive vice president, generalcounsel and secretary, is a member of the executive team at SandySpring Bank in Olney, Md. "I think it's a really good idea, because you want yourgeneral counsel to be aware of what's happening across the bankso the general counsel can be proactive and not just reactive toissues that come up," he says. Bankers and attorneys say things generally work best when thegeneral counsel has unfettered access to the C-suite and isactively involved in multiple matters across the bankingorganization. "It's not just a lawyer sitting in-house. That'sprobably the biggest mistake banks make," says Paul Saltzman,chief legal officer at EagleBank in Bethesda, Md., who serves onthe executive committee and several management committees. "Anoutside counsel may tell you whether you can do it; an insidelawyer will tell you whether you should do it." Originally published on IndependentBanker.org The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances. AUTHOR(S)
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