UK Lender OakNorth On Crossing The Pond In Search Of Growth With Bank Purchase

After carving out a niche in Britain by serving the “missing middle” of borrowers, OakNorth Bank is planting its flag across the Atlantic Ocean in search of new growth opportunities.  

Its pending acquisition of a bank in Michigan marks the centerpiece of that strategy, setting it up to expand its lending operations in U.S. commercial real estate. The move underscores OakNorth’s bet that its lending model, honed over the last decade in the UK, can stand out in a market where capital is still hard to secure.

“We know that lots of the banks have become harder and more difficult to work with, and we’re doing well in that space,” said Ben Barbanel, head of debt finance at the bank. “We believe there is a firm, strong market in the direct lending space, and that's what we want to tap into.”

OakNorth has lent more than $1.3B to U.S. businesses since it launched its stateside operations in July 2023. The bank was founded in the UK in 2015 and in the decade since has originated more than $17B in loans, which are roughly evenly split between CRE and commercial and industrial lending. 

The bank expects to complete at least $1.5B of CRE deals this year. 

OakNorth has grown at about 20% year-over-year since its inception, and to fuel continued growth, the bank decided to look beyond its shores. 

“Growing 20% year-on-year in what is a relatively small island is challenging,” Barbanel said. 

The London-based bank in March agreed to acquire Birmingham, Michigan-based Community Unity Bank. The lender was founded in 2023 and has $74M in assets, including $1.6M in construction loans, $2M of multifamily loans and more than $18M in commercial real estate loans, according to its second-quarter call report to the Federal Financial Institutions Examination Council.

The deal is still pending regulatory approval, which Barbanel estimated would come by the end of the third quarter.

Barbanel said the acquisition will enable OakNorth to fuel its U.S. expansion through an American deposit base, reduced foreign exchange risk and stateside direct loan origination. OakNorth chose the U.S. as an expansion target due to its market size, common language with the UK and similar legal system.

OakNorth is stepping up its push into the U.S. lending fray as lenders are slowly beginning to reenter the marketplace.

Commercial and multifamily mortgage loan originations were 66% higher in the second quarter compared to a year earlier, and they increased 48% from the first quarter, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. ​​

“What we know about the market and how other lenders behave is that they are very backward-looking in terms of portfolio management vis-à-vis the economy,” Barbanel said. “We believe there's no such thing as a sector that should be off limits.” 

Barbanel said the format, borrowed from the bank’s UK playbook, builds trust, speeds up decisions and reduces risk by letting the lender assess not just a deal's underlying metrics but also the borrower’s experience, plan and ability to execute.

A signature of OakNorth’s lending approach is its credit committee process, which brings borrowers directly into the room or onto a Zoom call with senior decision-makers. Rather than relying on relationship managers to relay information, sponsors present their projects and answer questions from the people who will ultimately approve or decline the deal.

“We have a framework … but within the framework, we intentionally want to be flexible,” Barbanel said. “We want to be a bank that isn't formula-led, that isn't algorithm-led, that isn't computer-led, and we really want to understand every deal on a deal-by-deal basis.”

The process has led to just over 40% of OakNorth’s customers returning for additional loans, and roughly 80% of new business comes through word-of-mouth referrals, according to a company spokesperson.

The bank centers its lending strategy on the segment of borrowers seeking midsized financing that often falls between the reach of traditional loan sources, Barbanel said. The size of its CRE loans range from $3M to $50M. Its core CRE investment sectors are multifamily, hotels, office and storage.

“We definitely like beds,” Barbanel said. “We definitely understand those asset classes in terms of what happens through the cycle, in terms of how they operate, in terms of construction and cost and monitoring construction.”

Until recently, OakNorth’s U.S. activity was largely guided by co-lender partnerships, with a primary focus on the New York Tri-State area but deals scattered nationwide. 

OakNorth’s significant CRE deals include a $28M note-on-note lending facility to Oak Funding to help acquire a New Jersey office building, an $18.4M note-on-note facility to S3 Capital to support a residential development in Manhattan, and a $25.1M note-on-note facility to Mavik Capital Management to convert a vacant hotel in Syracuse, New York, into apartments.

Now, with greater scale and fresh hires, the bank is using economic trends, yields and long-term debt yield performance to identify the strongest markets for expansion, Barbanel said. 

That analytical approach is rooted in two personal lessons Barbanel learned from his father, advice the banking executive has carried through his career. 

“Any schmuck can lend money. The clever ones get it back,” Barbanel said. “Lesson No. 2 is don’t tell people you’re in the lending business, tell them you’re in the repayments business.”