Five Questions Every Bank Should Answer Before Raising Capital

In today’s environment, the timing of a capital raise can be just as consequential as the structure. With a large population of issuers refinancing subordinated debt that was set to reprice at a higher rate and an open market at advantageous spreads, issuances have increased. In 2025, banks with less than $25 billion in assets raised roughly $7 billion in capital, about 61% more than the amount raised in 2024, according to data from S&P Global Market Intelligence.

Banks in search of capital will undoubtedly face different needs, particularly those in rural markets with smaller investor pools. But no matter the institution, the underlying process should start the same. Before embarking on a capital raise, bankers should be prepared to answer five foundational questions:

1. 1. What are our strategic goals, and how do shareholder expectations shape our capital decisions?
2. 2. How resilient is our capital structure across different interest rate scenarios?
3. 3. What is the true cost of capital, and how can we offset it through improved performance?
4. 4. What forms of capital are realistically available for our business model and profile, and who are the right investors or partners?
5. 5. When is the optimal time to raise capital?

The first step is having a clearly defined purpose. Some banks may want to give shareholders a chance to sell their long-held holdings. That could be a private equity firm exiting its investment after several years or a family member who inherited a large chunk of bank shares and wants out. Others may do so for defensive reasons, such as filling capital holes from defaulted loans or unrealized losses in their bond portfolio. Or a bank may need extra capital to go on the offensive — buying another bank or taking advantage of loan growth opportunities. Regardless of motivation, clarity on strategic goals and their outcomes matter.

Banks have two main avenues to raise capital: debt or equity. Equity helps banks the most in meeting regulatory requirements, as it gives them a bigger cushion to absorb losses. But it’s also costly because investors demand a higher return since they’re taking on more risk.

For many small and privately held banks, raising equity — whether common stock or dividend-paying preferred shares — often is not feasible. Recognizing this, regulators often allow bank holding companies with less than $3 billion in assets to issue debt at the holding company level and downstream the proceeds as equity to the bank subsidiary.

That debt can take several forms. Senior debt is typically less expensive than subordinated debt, since it sits higher in the capital structure. However, it often comes with restrictive covenants that can limit flexibility if asset quality deteriorates or earnings come under pressure.

Subordinated debt, while carrying higher interest costs, offers greater operational flexibility and typically does not include financial covenants. For many banks, the trade-off is worthwhile. Investors are often attracted to the somewhat higher coupons, which has contributed to a notable increase in subordinated debt issuance across the industry.

To fully understand the cost of each capital source, institutions should complete a comprehensive analysis before making strategic capital decisions. That analysis should extend beyond traditional pricing and include how each option performs across multiple interest rate scenarios, interacts with the broader balance sheet and achieves shareholder objectives. By modeling cash flows and earnings impact over time, banks can identify opportunities to improve profitability and help offset capital costs. This step is often missed and can meaningfully impact the bottom line.

The right capital solution depends on how the funds will be deployed. If a bank is pursuing a strategic initiative that enhances profitability or increases the institution’s long‑term relevance, the market is more likely to support the transaction. That support is strongest when management can demonstrate thoughtful modeling across multiple rate scenarios and articulate outcomes with confidence.

Timing also plays a critical role. Banks that wait until capital is scarce often face higher costs and fewer options. Some banks choose to take advantage of periods where markets are open. Others are proactive by regularly stress testing their balance sheets under adverse conditions, including shifts in interest rates.

It’s insufficient to look at just a snapshot of what the bank looks like today and make a concrete decision about whether the company is sufficiently capitalized. Capital decisions should be informed by how the institution performs in both current and unknown conditions.

Ultimately, successful capital raises are rooted in preparation, clarity and alignment. Banks that understand why they are raising capital, choose the right structure and time it thoughtfully are better positioned for durable value, and those outcomes are driven by a disciplined, repeatable process.

Performance Trust Capital Partners, LLC has been advising community banks for 30 years and is a registered broker/dealer, member of FINRA/SIPC. This is intended for educational and informational purposes only and is not intended to be legal, tax, financial, or accounting advice or a recommended course of action in any given situation. This is not an offer or solicitation to purchase or sell securities. The Information is subject to change without notice.