Subordinated Debt as a Strategic Growth Lever for Credit Unions

Author: Steven Houle, CFA, FRM VP Asset Management, Chief Compliance Officer

Subordinated debt (sub-debt) issuances have increased significantly over the last few years as credit unions use the capital for strategic growth strategies. As of March 31, 2025, 167 credit unions had $4.1 billion in outstanding sub-debt. This is a significant increase from 2016, when 70 credit unions had only $182 million outstanding. Given those trends, this article answers questions like: What is sub-debt? Why do credit unions issue sub-debt? And, what are the application requirements to issue sub-debt?

What is sub-debt?

Sub-debt is a type of borrowing that federally insured credit unions can use if they meet all applicable regulatory requirements. The NCUA must review and approve any application to issue or repay sub-debt. For low-income designated credit unions (LICUs), sub-debt has an added advantage: it can count toward their Net Worth and Net Worth Ratio, strengthening their financial position. It’s also important to note that sub-debt is treated as a security under federal and state securities laws.     

Why do credit unions issue sub-debt?

Credit unions issue sub-debt for a variety of strategic reasons, such as increasing membership and assets, expanding their geographical footprint, funding capital expenditures, and offering a wider array of financial services, especially to their underbanked and underserved members. Furthermore, the ability to include it in Net Worth and Net Worth Ratio, if approved by NCUA, enhances their capital position, future financial profile, and growth potential.    

What are the key application requirements?

A credit union seeking approval to offer and sell sub-debt must apply to NCUA that, at a minimum, includes:

1. A statement indicating how the credit union qualifies to issue sub-debt
2. The maximum aggregate principal amount of sub-debt notes and the maximum number of discrete issuances of sub-debt notes
3. The estimated number of investors
4. A statement identifying any outstanding sub-debt or grandfathered secondary capital previously issued by the credit union
5. A copy of the credit union’s strategic plan, business plan, and budget, and an explanation of how the credit union intends to use the sub-dent in conformity with those plans
6. An analysis of how the credit union will provide for liquidity to repay the sub-debt upon its maturity
7. Pro forma financial statements covering at least two years
8. A statement indicating how the credit union will use the sub-debt
9. A statement identifying the governing law specified in the sub-debt notes; and
10. A draft written policy governing the offer, issuance, and sale of sub-debt

What is the size and capital profile of issuing credit unions?

When examining Call Reports and Financial Performance Reports published by NCUA, issuing credit unions are usually greater than $1 billion in total assets with a Net Worth Ratio of approximately 8.7 percent. These asset and capital-sized credit unions are usually primed for growth and expansion, but need additional capital to realize their goals. 

How much sub-debt do credit unions issue?

On average, credit unions issue up to 20 percent of their current Net Worth. That said, this amount will vary based on each credit union’s earning profile, deployment strategy, and issuing interest rate.

What next?

If your credit union is considering subordinated debt as part of its balance sheet strategy, Catalyst can help. With years of hands-on experience guiding credit unions through the issuance process, we understand the regulatory requirements, financial implications, and strategic opportunities involved. As your trusted financial experts, we’re here to provide the insight and support you need to take the next step confidently. Get started today.

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