Subordinated Debt: A Smart Capital Strategy for Community Banks
If you’re leading a community bank, you know how important it is to stay ahead—especially when it comes to capital planning and managing your balance sheet. With interest rates still elevated and new regulatory clarity emerging, now is a strategic time to revisit subordinated debt as part of your long-term financial strategy.
What Is Subordinated Debt—and Why Now?
Subordinated debt is long-term debt issued by bank holding companies and ranks below other liabilities. It’s a flexible, non-dilutive way to raise capital that qualifies as Tier 2 under FDIC and Federal Reserve guidelines. And right now, there are two big reasons to act:
1. Rising Interest Costs on Older Debt
Many banks issued sub debt in 2020–2021 with attractive fixed rates. But those deals are nearing their five-year call dates and are transitioning into variable rate structures tied to SOFR or other benchmarks. With rates still high, this shift could significantly increase your interest expense. Reissuing now—potentially with longer fixed terms—can help stabilize funding costs.
2. Strategic Benefits as Part of Capital Mix
Subordinated debt supports growth, acquisitions, and capital planning. In your capital mix, this debt has tax-deductible interest, provides liquidity and lending capacity, and enhances net interest margin when deployed into higher-yielding assets. Subordinated debt can be customized and structured with call options and favorable terms.
Why Partner with Bankers’ Bank?
Sub debt can feel complex—but you don’t have to go it alone. Bankers’ Bank specializes in helping community banks structure and place subordinated debt offerings. As a bank-owned correspondent, we bring deep capital markets expertise and a mission aligned with supporting community institutions.
Bankers’ Bank services include:
- Structuring your issuance to meet regulatory and investor expectations
- Investor outreach and engagement
- Documentation and compliance coordination
- End-to-end transaction management
- Optional paying agent services for automated disbursements and streamlined reporting
A recent example: Bankers’ Bank served as the exclusive placement agent for a $16 million subordinated debt offering for Emmetsburg Bank Shares, Inc., helping refinance existing debt and optimize their capital structure.
Bottom Line
Subordinated debt isn’t just a funding tool—it’s a long-term growth tool. With the right timing, structure, and partner, it can strengthen your bank’s foundation and fuel future strategic opportunities. Seize this moment to ensure your institution remains resilient, competitive, and community-focused.
Talk to your Bankers’ Bank representative today to explore how subordinated debt can support your bank’s goals.