When to Use Subordinated Debt: Capital Planning to Unlock Growth

By: Mark DeBree, CFA, Managing Principal, Catalyst

Growth is rarely constrained by opportunity. More often, it is constrained by capital levels.

Across the credit union industry, we continue to see strong demand for loans, new markets, technology investments, and strategic combinations. Yet many institutions find themselves unable to execute their plans – not because of a lack of strategy, but because their balance sheets lack the capital to support them. Net worth ratios compress, leverage efficiency declines, and growth becomes increasingly dependent on the pace of retained earnings growth.

Subordinated debt enters the conversation at precisely this moment – not as a rescue tool, but as a capital planning tool designed to unlock growth capacity.

Capital is the real limiter on growth

For credit unions, capital grows in only one way: through earnings. That reality works well in stable environments with modest growth expectations. But as balance sheets scale, that model begins to break down.

Organic capital formation often struggles to keep pace with sustained loan growth, market expansion initiatives, investments in technology and talent, and merger and acquisition opportunities.

Traditional deposits and borrowings can fund assets, but they do not solve the capital constraint. In fact, they often exacerbate it by increasing assets without increasing regulatory capital, placing further pressure on net worth ratios over time. Without additional capital growth, something must give – you must either restrict growth or witness capital ratios decline. 

What subordinated debt changes in capital planning

Subordinated debt is not simply another funding source. When structured appropriately and used by eligible credit unions, it functions as regulatory capital, allowing institutions to grow without relying solely on retained earnings. 

More importantly, it decouples growth from capital formation, making it a valuable fuel for growth without capital dilution!

Instead of asking, “How fast can we grow our capital?” leadership teams can ask a more strategic question: “What level of capital do we need to execute our long‑term plan across cycles?”

When subordinated debt makes strategic sense

Subordinated debt is not appropriate for every institution, nor should it be issued casually. It tends to make the most sense at clear strategic inflection points, including:

• Sustained growth that outpaces earnings – Credit unions experiencing consistent loan demand often find that capital becomes the binding constraint well before liquidity does.
• M&A and strategic optionality – Capital flexibility matters in competitive merger environments. Institutions with capital headroom can act decisively, while others are forced to pass.
• Transformation and market expansion – Investments in new markets, delivery channels, or product capabilities often require upfront capital before earnings materialize.
• Cycle positioning – Securing capital before economic stress or margin compression occurs provides flexibility when it matters most.

Addressing cost directly

Subordinated debt is often labeled “expensive capital.” That observation is technically true, but strategically incomplete.

The question is not whether subordinated debt costs more than secured borrowings. It is whether the incremental growth and earnings enabled by this capital exceed its cost.

Subordinated debt is not a stand‑alone decision

The most successful issuers do not treat subordinated debt as a transaction. They treat it as part of a broader capital strategy that includes forecasting, stress testing, and board‑level alignment.

The decision to issue subordinated debt should be coupled with a tangible growth plan that provides a reasonable degree of certainty of achieving that growth. Subordinated debt should not be issued simply to boost capital.

A 2026 capital planning perspective

As we look ahead, capital planning is becoming more dynamic. Economic cycles are shorter, rate environments are less predictable, and competitive pressure continues to intensify.

Subordinated debt allows leadership teams to plan through cycles rather than react to them, positioning the balance sheet for opportunity – not constraint.

As you plan for the years ahead, bring subordinated debt into your strategy discussions. Not as a requirement to issue, but as a tool to help you achieve your goals when you find capital as a limiter to your strategy.

Take a proactive approach to capital planning by evaluating how subordinated debt could support your organization’s long-term objectives.

Speak with one of Catalyst’s subordinated debt experts today to ensure your strategy is ready for tomorrow’s opportunities.

ABOUT CATALYST
Catalyst, one of the nation's largest corporate credit unions with approximately $6.5 billion in assets and over 1,200 member and client relationships, delivers innovative payment, asset management and liquidity solutions to credit unions nationwide. At Catalyst, we are passionate about bringing vision to life, helping credit unions grow and better serve their members every day. Discover why thousands of credit unions choose Catalyst: catalystcorp.org.