Access to capital is crucial to financial institutions’ growth, longevity, and regulatory compliance. However, credit unions and community banks face unique challenges in securing capital, from evolving regulatory demands to increased competition from big banks.
So, how can credit unions and community banks raise capital in 2025 and stay competitive?
In this article, we’ll examine why maintaining strong capital reserves is critical for these institutions and outline their regulatory requirements. After that, we’ll explore some capital-raising strategies that can help your institution thrive in today’s financial environment.
The Role of Capital in Credit Unions and Community Banks
Capital is the difference between a financial institution’s assets and liabilities. These funds serve as a cushion against losses during economic stress and fuel strategic growth initiatives, from expanding branches to investing in new technologies.
For financial institutions, sufficient capital reserves also help satisfy regulatory requirements set by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). These regulators classify capital into two categories:
- Tier 1 capital, often referred to as “core capital,” is the highest quality and most reliable form of capital. It primarily consists of common equity, retained earnings, and certain types of preferred stock.
- Tier 2 capital, also known as supplementary capital, is less stable than its Tier 1 counterpart. It typically includes subordinated debt, loan-loss reserves, and certain preferred shares. While it can’t absorb losses as readily as Tier 1, it still provides an important layer of protection for financial institutions.
Capital plays a crucial role in sustaining financial institutions’ solvency and stability. As a result, regulators closely monitor capital levels when evaluating institutions’ risk profiles.
What Are Credit Union and Community Banks’ Capital Requirements?
The FDIC and NCUA require all insured financial institutions to maintain minimum capital levels, typically expressed as a percentage of their total assets. For example, most federally insured credit unions must maintain a capital ratio of at least 7% to be considered “well-capitalized.”
Meanwhile, credit unions with assets over $500,000 must maintain a 10% capital ratio.
Community banks share similar requirements. According to Basel III capital standards, community banks must maintain a capital ratio of at least 8% and a common equity Tier 1 capital ratio of at least 4.5%.
The purpose of these capital minimums is to safeguard financial institutions’ solvency and protect depositors during economic stress. Thus, institutions with higher capital ratios are generally viewed more favorably by members, customers, and regulators alike.
How Financial Institutions Use Capital to Fuel Growth
Beyond safety, capital is also essential for financial institutions’ growth initiatives. Whether a credit union or community bank wants to open a new branch, adopt a new tech solution, or pursue a strategic acquisition, it needs sufficient capital to do so without compromising its stability.
Unfortunately, many credit unions and community banks aren’t investing in growth initiatives fast enough. In turn, they’re losing a lot of Millennial and Gen Z business. These tech-savvy consumers often prefer big banks for their convenient mobile banking apps, superior websites, and broader service offerings.
How Community Banks Can Raise Capital in 2025
While credit unions and community banks share a commitment to serving local communities with personalized financial services, their capital-raising capabilities differ in notable ways.
Unlike credit unions, which are member-owned cooperatives, community banks operate as shareholder-owned corporations. This allows them to access a wider range of capital-raising tools, including:
- Retained earnings – One of the most common ways community banks can boost capital is by saving a portion of their net income rather than distributing it to shareholders as dividends. For this method to be effective, community banks must be profitable enough to have excess earnings to stash away.
- Common stock – Next, community banks can issue common stock to raise capital from investors. While this approach provides fast, flexible funding, it can dilute existing ownership. Even so, it remains one of the most effective tools for growth-oriented banks.
- Preferred stock – Community banks may also issue preferred stock, which offers investors a fixed dividend without any voting rights. Thus, it gives these institutions a way to raise capital without diluting their ownership or control.
- Subordinated debt – As a Tier 2 capital, subordinated debt carries more risk for investors. Despite this, it’s still an appealing option for community banks that want to increase capital without issuing additional shares.
Credit Unions’ Unique Capital-Raising Challenges
Credit unions have fewer capital-raising options than community banks. As not-for-profit cooperatives, they can’t issue stock, which leaves retained earnings as their primary method of building capital.
This limitation has contributed to the following challenges:
- Strained capital during growth phases – As credit unions’ assets grow, they must proportionally increase their capital reserves. For example, when a credit union receives $10 million in new deposits, it must retain approximately $1 million in net income to maintain its 10% capital ratio. When a credit union’s earnings fail to keep up with sudden asset growth, its capital ratios can plummet, jeopardizing its “well-capitalized” regulatory status. This can lead to increased regulatory oversight, higher borrowing costs, and reputational damage.
- Restricted flexibility during economic downturns – When the economy slows, credit unions often experience a decrease in loan demand, lower profit margins, and increased defaults. Together, these factors can reduce their net income, making it harder to accumulate capital.
- Hindered ability to serve and satisfy members – Without adequate capital, credit unions may be forced to cap their deposit intakes, tighten their lending standards, and postpone key growth initiatives. These actions often undermine members’ trust and satisfaction, increasing the risk that they’ll take their business to a big bank.
The 2022 NCUA Final Rule: A Game-Changer for Credit Unions
While capital raising hasn’t always been easy for credit unions, a 2022 NCUA ruling introduced a new avenue: eligible credit unions can now issue subordinated debt to accredited investors, an option previously available only to community banks.
So, which credit unions are eligible to leverage this capital-raising strategy? According to the NCUA ruling, the following types of credit unions are permitted to issue subordinated debt to bolster their capital reserves:
- Complex credit unions (those with assets over $500 million)
- New credit unions seeking early-stage capital
- Low-income designated credit unions
By employing this strategy, eligible credit unions can enjoy the following benefits:
- Streamlined regulatory compliance – Credit unions that issue subordinated debt can build their capital reserves, making it easier to reach their capital ratio requirements.
- Expanded growth opportunities – The additional capital raised through subordinated debt can support credit unions’ branch expansions, strategic acquisitions, and technology upgrades.
- Stronger competitive advantage – Subordinated debt gives credit unions an alternative way to grow their capital without streamlining their services or raising fees. In turn, it can help safeguard their members’ satisfaction.
- Increased operational flexibility – Unlike common or preferred stock, subordinated debt doesn’t dilute ownership so it can boost capital while preserving members’ control and cooperative governance.
Other Capital-Raising Options for Credit Unions
While subordinated debt can support credit unions’ capital-raising efforts, it’s not the only strategy available. Some other methods include:
- Retaining earnings – This method is the most widely used among credit unions. While it rarely results in large capital infusions, it offers a consistent and reliable way to build capital over time.
- Selling non-strategic assets – Credit unions can raise capital by selling assets that are no longer essential to their core operations, like extra real estate or service agreements they no longer need. Credit unions can also sell their share of loans that they previously partnered on with other lenders.
- Strategically growing memberships – Credit unions can expand their member base by targeting demographics that drive higher returns. For example, offering small business lending services may attract more entrepreneurial members, boost loan income, and strengthen retained earnings.
- Merging with capital-rich credit unions – Credit unions with limited capital may want to consider merging with ones with stronger finances. This can instantly improve their capital ratios, unlock new growth opportunities, and elevate their service quality.
- Exploring grant funding – Low-income designated credit unions (LICUs) may be eligible for secondary capital through grants or low-cost loans provided by the NCUA or other programs. These funds are designed to support strategic growth, expand lending to underserved communities, and finance critical infrastructure improvements.
How to Proactively Improve Your Financial Institution’s Capital Strength in 2025
Whether you run a credit union or a community bank, employing the right capital-raising strategies is just one part of the process. You also need to:
#1 Clarify Your Capital Needs
Understanding your capital requirements is just as crucial as developing strategies to meet them. Start by forecasting your asset growth, net income, and capital needs over the next three to five years. Next, stress test your projections.
Ask yourself how your forecasted figures may change if a sudden interest rate hike took place or you received an unexpected surge in deposits. This exercise can help you ensure that your financial institution maintains sufficient capital, no matter what the market throws your way.
#2 Diversify Your Capital Sources
Retained earnings can provide a solid foundation of capital reserves for community banks and credit unions, but they shouldn’t be the only source. A well-diversified capital-raising strategy can strengthen your resilience and offer you more options during times of economic uncertainty.
If you run a community bank, consider exploring equity-based tools like common or preferred stock issuance. If you run a credit union, find out if you’re eligible to issue subordinated debt.
#3 Evaluate Each Capital-Raising Strategy’s Cost vs. Return
Just like any investment decision, every capital-raising strategy has benefits, drawbacks, and opportunity costs. That’s why you should carefully assess how the cost of acquiring capital—whether that’s paying interest on subordinated debt or diluting ownership from equity issuance—compares to the returns it provides.
For example, if you’re using subordinated debt to enhance your credit union’s mobile app technology, make sure the estimated gains justify the long-term cost.
#4 Align Your Efforts With Regulatory Expectations
Regulators frequently update their capital requirements. Staying up to date on their standards can help you maintain compliance and avoid regulatory setbacks.
To set yourself up for success, proactively communicate your capital plans to regulators—particularly if you’re considering subordinated debt issuance. This way, you can clarify their expectations, address potential concerns, and reduce the chances of unexpected audit issues.
#5 Work With a Capital Advisor
A capital advisor is a financial professional who helps organizations plan, structure, and execute strategies to raise and manage capital. Partnering with one of these professionals can accelerate your capital-raising progress and reduce risk.
Here are just a few key areas where capital advisors can provide critical support:
- Strategy development – After assessing your institution’s financial position, growth goals, and regulatory obligations, your capital advisor can construct a customized capital raising plan that includes comprehensive financial forecasting and identifies the most effective funding sources.
- Capital sourcing – Next, your capital advisor can help you access the right sources of capital, whether that’s common or preferred stock, asset sales, subordinated debt, or partner investments.
- Market participation – Your capital advisor can manage the entire fundraising process, from connecting you with accredited investors and institutional buyers to presenting your equity offerings. Along with taking this work off your hands, they’ll ensure seamless, compliant transactions.
- Regulatory alignment – Your advisor will review your capital sourcing deals to ensure they comply with NCUA, FDIC, or Basel III requirements, as well as assist with the documentation and filing process.
- Ongoing support – After helping you raise capital, your advisor can help allocate the funds effectively, monitor their performance, maintain investor relations, and modify your capital-raising strategies as market conditions evolve.
Read More: Institutional Financial Services That Every Company Needs
Strengthen Your Capital-Raising Strategy With Alden Investment Group
Raising capital in 2025 is easier when you have an experienced capital advisor on your side. At Alden Investment Group, we specialize in helping community banks and credit unions overcome their most pressing capital challenges by providing tailored advisory and capital markets services.
Whether you’re exploring subordinated debt issuance, evaluating equity offerings, or planning a merger and acquisition, our experienced team is here to guide you every step of the way. Our current institutional services include:
- Structuring and marketing subordinated debt offerings
- Advising on common and preferred stock issuances
- Crafting tailored financing strategies for mergers and acquisitions
- Ensuring regulatory compliance and strong investor relations
By partnering with Alden Investment Group, you can build your capital and pursue sustainable growth with confidence. Want to learn more? Contact Alden Investment Group today!
Sources:
Investopedia. Tier 1 vs. Tier 2 Capital: What’s the Difference?
https://www.investopedia.com/ask/answers/043015/what-difference-between-tier-1-capital-and-tier-2-capital.asp
Federal Register. Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-Based Capital.
https://www.federalregister.gov/documents/2021/08/16/2021-15965/capital-adequacy-the-complex-credit-union-leverage-ratio-risk-based-capital
Investopedia. What Is the Minimum Capital Adequacy Ratio Under Basel III?
https://www.investopedia.com/ask/answers/062515/what-minimum-capital-adequacy-ratio-must-be-attained-under-basel-iii.asp
McKinsey & Company. Six imperatives for credit unions to secure their future.
https://www.mckinsey.com/industries/financial-services/our-insights/six-imperatives-for-credit-unions-to-secure-their-future
Cornell Law School. 12 CFR § 702.102 – Capital classification.
https://www.law.cornell.edu/cfr/text/12/702.102
NCUA. 12 CFR Part 702: RIN 3133-AF43 – Subordinated Debt
https://ncua.gov/files/agenda-items/subordinated-debt-final-rule-20230316.pdf
NCUA. Low-Income Credit Union Designation.
https://ncua.gov/support-services/credit-union-resources-expansion/field-membership-expansion/low-income-credit-union-designation