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Article written by Steve Brawner at Talk Business and Politics September 28, 2022. Original post here.

A tech product patented by an Arkansas company is helping smaller community banks connect with each other to share the risks of larger loans.

Little Rock-based BankLabs holds the patent for Participate, which company leaders say makes the participation loan process more efficient and automated. The company last year received the only Arkansas-based patent for a loan participation automation product.

“A big part of what we’re doing is ‘democratize loan trading for all those banks that aren’t big,’ so it’s providing a level playing field for the Davids versus the Goliaths,” said Matt Johnner, the company’s Dallas-based president.

Johnner and Mike Montgomery, the company’s Little Rock-based CEO, said Participate allows smaller banks to engage in participation loans, where financial institutions share larger loans with other banks to reduce their risk. Banks have policies governing their lending activities, including a maximum loan amount, a limit on a particular client, and a limit on the percentage of loans in a particular sector such as construction. The originating bank services the loan and has the relationship with the borrower, who typically doesn’t know about the arrangement.

The two said participation loans traditionally have been based on personal relationships within city limits. Smaller banks often don’t have tools, processes or skill sets to participate in certain loans. Transactions are often managed by spreadsheet, FedEx shipments, and back-and-forth attorney interactions.

Participate automates and removes frictions and can operate 24-7. It enables processes to be done digitally so loans can close in a couple of weeks. It automates what portion of the borrower’s payment goes to both the originating bank and the participating bank and tracks the balances. It handles electronic document management, workflow, e-signatures, integration of the participation agreements, and the legal agreements between the two banks. They said the processes eliminate the surprises that occur at the end of a loan. Banks can do smaller loans that weren’t efficient for them, and they can participate in bigger ones they couldn’t previously handle.

Montgomery said many rural banks have less than a 70% loan-to-deposit ratio, which is not an efficient way for banks to operate. Banks only make money when they are lending; deposits are a liability. Banks in markets without commercial borrowers are disadvantaged.

“I think that this makes it easier for the rural and community banks to compete with the great big guys,” he said. “I think they can maintain personal relationships in their markets. But they can kind of drink a little bit from the wealth generated in banks in more populous areas that have commercial real estate. They’d like to have some of that on their balance sheets and vice versa. The guys that are in mid-city would like to have some ag loans, and they don’t know a farmer on the earth.”

Montgomery said BankLabs’s target is to have a network of one or two originating banks in every state with 2-5 downstream banks. He believes the company can reach that goal in 2-3 years.

The company’s overall mission is to help the dwindling number of community-based financial institutions compete with bigger banks using technical products. It tries to find backroom or front-end processes where a technical solution can increase efficiency and add value. Then they can operate it or find a better parent and sell it.

“It’s kind of that kind of a cycle,” Montgomery said. “We’re looking for a problem, see if we can’t solve it, see if we can’t solve it with efficiency, and make sure it monetizes itself on our side or on the back side.”

BankLabs has 21 employees, with about 10 in Arkansas and the rest spread across the country. It expects to hire more as Participate grows in the market.

It was founded by Montgomery, an early player in the Arkansas financial technical services company Systematics that is now known as FIS. The company is now based in Florida but still has a strong Arkansas presence. He also helped start Pinnacle Bank and was an early investor in Delta Trust & Bank.

He said he started BankLabs in 2010 during the banking crisis after seeing how big banks were depressing prices by dumping giant pools of foreclosed assets on the market. At the same time, banks had stacks of folders in their offices. He saw that community banks could benefit if their processes were more automated.

Montgomery in 2015 believed the construction industry was poised for a comeback, so the company created Construct, which connects borrowers, builders and banks.

Construct went to commercial sale in January 2016. Johner said the product eventually grew to 150 customers and was helping manage $70 billion in construction loans associated with roughly 100,000 projects. The company sold the product line to Abrigo this year, sending 15 of its then 35 employees to Abrigo.

Construct started with two clients, one of them Southern Bancorp, an Arkansas-based community development financial institution serving underserved areas and clients.
It has 54 locations and is the only financial institution in seven of its markets and one of two in six of them.

John Olaimey, the company’s president and CEO, said the company was an investor in Construct and is using Participate now. He compared the process for creating new bank relationships through Participate with creating Facebook friends. Banks reach out to each other and get invited to follow. Messages can be sent to a group of banks. He said it has reduced paperwork, spreadsheets and shipping items back and forth. Thousand-page tax returns are being sent through a secure portal rather than an email.

“When two banks do a loan participation today, it’s somewhat clumsy and it also depends upon who you can get access to at what time,” he said. “Participate really allows you to do that when you’re ready to do it and really is all online. It’s all secure. I don’t have to call somebody and say, ‘Hey, can you get me this document? Can you get me that document?’”

Now that BankLabs has sold Construct, it will focus on its Participate product. The company was one of 10 selected for the most recent FIS Fintech Accelerator cohort. That program, which is done in concert with The Venture Center in Little Rock, connects promising financial technical services companies with financial institutions. Montgomery said the company’s involvement led to 70 demonstrations with FIS clients and a small investment by FIS.

He said the company has a couple of other new product ideas.

“We’re a solid company,” he said. “We’re self-sustaining. We’re reasonably well-capitalized. We just went through a full product life cycle where we provide jobs for people. I think this company can have a multi-decade run easily. We provided a 10 times return on invested capital, which is sort of a gold standard, quite frankly. And we’ve got lots of new product ideas and at least one new product that’s already coming out and starting to prove that it can operate efficiently.”

Austin, Texas, August 15,2022 – Abrigo, the leader of compliance, credit risk, and lending solutions for financial institutions, purchased BankLabs’ Construct and +Pay loan administration and funding solutions, expanding Abrigo’s award-winning loan origination solution and creating an end-to-end construction origination, management, and administration platform. 

The acquisition allows construction lenders to seamlessly integrate pre-closing origination with post-closing administration activities to automate workflows, streamline communications, and realize greater interest income through faster funding. 

“Abrigo has always focused on delivering products created out of a deep understanding of the needs of U.S. financial institutions. In BankLabs, we found a partner that produced a robust loan administration tool, developed to cover all types of commercial and residential construction loans and borrower types,” said Wayne Roberts, CEO of Abrigo.  

Mike Montgomery, BankLabs’ Founder and CEO noted “the acquisition realizes BankLabs’ vision of partnering with financial technology leaders to help community-oriented financial institutions succeed faster than BankLabs can deliver alone. We could not have found a better partner to execute on our mission. I know Abrigo will take Construct and +Pay to new heights.” 

Using the integrated Abrigo loan origination and Construct administration suite, loan officers can unlock greater efficiency and focus on strengthening relationships instead of managing spreadsheets. Real-time reporting, alerts, and detailed audit trails provide improved visibility and mitigate risk. +Pay manages the construction payment process for builders, general contractors, financial institutions, or any company that pays subcontractors, adding speed and eliminating mountains of paperwork. 

“In partnership with The Carlyle Group and Accel-KKR, we’re doubling down on our efforts to Make Big Things Happen in the industry as we invest in our people, our products, and our service to customers. We’re thrilled to have some of the BankLabs team members join the Abrigo family, and we share their commitment to service, product excellence, and innovation. We’re equally excited about additional opportunities to collaborate with BankLabs in the future,” said Roberts.   

“We are grateful to our clients, associates, and distribution partners who helped us reach $70 billion dollars in construction loans across about 100,000 projects,” said Matt Johnner, President and Co-Founder of BankLabs. “Transitioning Construct and +Pay to Abrigo will provide even greater efficiency and interest income gains to our lenders. Abrigo’s technical and product investments will expand the commercial features, integration points, and user experiences for these products. Meanwhile, BankLabs will focus on creating new products that accelerate banks’ capability to move money, credits, and payments while growing our patented Participate product as the digital balance sheet management tool of choice.”

Construct and +Pay join a strong and growing portfolio and will continue to enhance the value Abrigo brings to both its customers and the industry. 

About Construct and +Pay 
The Construct product is an easy-to-use, web-based software solution that automates the construction loan management process for residential and commercial projects. Accessible from any mobile device or computer, it eliminates paper files and spreadsheets, improves loan officer and loan admin productivity, and improves the experience for the borrower, builder, and other stakeholders.  

+Pay automates the construction payment stream for institutions paying subcontractors on behalf of their trusted builders. It improves efficiency through approval routing of invoices and eSignature for lien waivers, differentiating the institution with builders and subcontractors and creating new income opportunities. 

About Abrigo 
Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Abrigo has secured strategic growth investments from funds managed by Accel- KKR and Carlyle (NASDAQ: CG). Visit abrigo.com to learn more. Follow Abrigo on social media using @WeAreAbrigo. 

About BankLabs 
BankLabs provides community banks with state-of-the-art technologies that help increase efficiency, improve profitability, and enhance in-market relationships. BankLabs is committed to creating platforms that streamline loan processes for banks so you can get back to what really matters – serving your customers and your community. BankLabs’ latest product, Participate, is the first patented loan participation and balance sheet management tool for community banks that brings buyers and sellers of loan participations onto a single platform. 

‘Friendly’ Fintech BankLabs Helps With Lending

by Sarah Campbell-Miller on July 26^th 2021

BankLabs of Little Rock will graduate from this year’s FIS Fintech Accelerator in August as it adds employees and works on a new software product designed to automate agricultural lending for banks.

BankLabs was the only Arkansas company selected from 148 applicants across 31 countries to participate in the program, which is sponsored by financial technology giant FIS of Jacksonville, Florida, and the state of Arkansas and hosted by the Venture Center of Little Rock.

“We like to call ourselves friendly fintech. The reason we use that term is we’re helping banks around the country, regardless of size, defend against the disruptive fintechs,” Matt Johnner, BankLabs president and co-founder, told Arkansas Business. “We’re the friendly fintech that helps the banks deploy additional lending solutions, including some more forward-thinking things, like allowing different companies to make loans to each other, but still benefiting the bank.”

The company was founded in 2016 and employs about 30 people. It’s hiring another 16 over the next year, he said. “We are really at a point of acceleration, or a tipping point. We’ve signed over 130 banks in the first five years. We’ve now built a great foundation,” Johnner said. “And so now it’s time to go to the next level. We’d like to double our revenue in this coming year. And then double the year after that; we just closed our first outside funding round with some great individual investors.”

He declined to disclose the company’s annual revenue, but said it raised more than the $3 million it sought from the funding round. BankLabs isn’t profitable yet. It “could be profitable in less than one year, but that would sacrifice growth,” Johnner said. He added that he was not building the company to sell it.

Johnner said BankLabs aims to be a company that has a multi-product portfolio heavily focused on commercial lending and is profitable in the long run. “We will continue to evaluate opportunities. We have had some folks try to acquire us already, and we just determined it wasn’t the right time,” he said.

For now, BankLabs has two main products, Construct and Participate. The company’s new agricultural lending product is unnamed and in the “ideation phase,” Johnner said.

Construct is software that automates construction lending for lenders to make that process — traditionally accomplished with spreadsheets and other paper documents — more profitable and efficient. The automation also reduces risk by providing real-time alerts to lenders.

Participate is software that automates lending between lenders. For example, a small bank that has a loan limit of $6 million could use it to lend $15 million to a borrower, with the additional $9 million participation coming from a partner bank, Johnner said. The software “automates the whole digital lending flow and has a marketplace component to it, to find new partners if that bank doesn’t have enough partners already,” he said.

BankLabs’s goals include signing more banks up for its products and building out the network effect of Participate. “So, if you’re a bank in Arkansas and you have, let’s say, 10 or 15 loan participations on your balance sheet, you might also have 10 unique banks that have bought one or more of those from you,” Johnner said. “And so what we do is we try to leverage that network effect, … give free access to [the] 10 downstream banks. And then we lovingly land and expand and try to upsell them.”

In addition, BankLabs touts experience in banking and technology from both Johnner and its co-founder, Chairman and CEO Mike Montgomery.

Johnner was an oilfield engineer before he joined Perot Systems Corp., which is now Dell Information Services, in 1994. After that, he worked for numerous technology companies.

Johnner said Montgomery is a third-generation banker who has invested in more than 20 community banks around the country and serves on the board of Southern Bancorp in Arkadelphia. Montgomery was also an executive at Systematics Inc., the Arkansas-based predecessor of FIS. Johnner called his partner’s past experience “fintech 1.0.”

“We’re trying to help Arkansas expand its economy and bring high-paying jobs back to Arkansas, through what we would call fintech 2.0,” he said. “This is a great time of consolidation for banks. It’s a great threat to banks that don’t innovate. So we seek out and welcome banks that are looking for digital innovation and defense against the bad guys.”

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“Matt Johnner, BankLabs Aiming to Further Disrupt Commercial Lending Space”

by Carl Kozlowski in Arkansas Money and Politics, July 9, 2021

Matt Johnner is no stranger to taking on challenges. He worked as a drilling fluid engineer in the oil and gas industry in such far-flung locales as Nigeria, Yemen and Dubai before entering the business world as a top-level software developer for the famous Texas billionaire H. Ross Perot at Perot Systems.

From there, the 50-year-old New York native gained a vast amount of experience by leapfrogging across several startup and small-stage companies, eventually working for Texas tech giant Morton Myerson. So, when he got the call from Mike Montgomery to join the financing company Radius Group in 2013, he jumped at the chance to start a journey that led to the founding of BankLabs in 2016, where he serves as president to this day.

BankLabs is a multi-product company that helps banks compete with “disruptive fintechs” and large international banks by automating lending. Their products help banks work on loans together when they’re too large for just one bank to handle, thus minimizing the concentration risk while replacing the inefficient, traditional process for handling loans.

The impressive results include being picked as one of just 10 companies from across the United States and 29 other countries to be part of the 2021 FIS Fintech Accelerator at The Venture Center in Little Rock. Johnner hopes participation in the accelerator will help his team grow Banklab’s Participate program.

“We started with a product called Construct, which automated construction lending, and now Participate is a balance-sheet management tool for banks used to sell off pieces of loans they already have and sell them at a premium to increase loan profit and reduce concentration risk,” he explained. “We think this can also create a whole new digital-lending channel and allow merchants to make loans to other merchants.”

Johnner posits an example in which a lumber yard has a small-to-medium size business client that buys $500,000 worth of lumber each year.

“That client needs lower financing costs than a credit card’s 21 percent. We see a day where Participate facilitates a loan between the lumber yard and a carpentry business at a much lower rate, say 5 percent,” said Johnner. “And we execute on our mission to help banks and be a friendly fintech and allow the banks in our universe or our partner’s universe like FIS to put the loans on bank balance sheets in our network.

“We see a day where the lumber yards, mills and manufacturers are getting loans from their suppliers and the suppliers are keeping loyal customers, maybe making a little bit of money on the loan, and then the loan goes on the bank’s balance sheet. It’s a version of buy now, pay later. We’ll see. Most people think we’re a little crazy, but we always think that’s a good thing.”

Participate follows the success of BankLabs’ Construct program, which aimed to create big changes in the annual $1.3 trillion construction loans marketplace. Construct’s +Pay feature automated the construction payment stream for builders, general contractors, banks, title companies or disbursement agents that pay subcontractors.

Builders and banks benefit from the resulting faster process that eliminated paper with electronic lien waivers and invoices, while builders got automated 1099 reporting and project accounting. Subcontractors receive same-day pay through its ACH feature, and all told, this makes +Pay and Construct the world’s first cloud-based, vertically integrated construction-funding platform.

Those innovative approaches have paid off with more than 100 bank clients such as CenterState, a $45 billion Florida-based bank; the $15 billion Plains Capital Bank based in Dallas; as well as smaller banks including the $500 million Valliance Bank in Oklahoma and north Texas. BankLabs’ work with CenterState increased its construction loan portfolio by 567 percent. Altogether, it has managed $37 billion worth of construction loans across 57,000 projects.

While Johnner is based at the firm’s offices in Dallas, it proudly counts Little Rock as its headquarters, building on the tradition of other giants including Systematics and Alltel.  The company currently has 30 employees but is looking to add 16 more staffers in the next six to nine months in the fields of software engineers, sales and customer-satisfaction specialists.

“Our goal is to differentiate the financial institutions that are not happy with the status quo from those that are resistant to change,” Johnner said. “Our clients want new ways to do things that leverage their strengths. We’re at a huge transition point and have a huge runway ahead of us and that’s only possible through great team.”

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