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Margins holding up better at credit unions than banks

Margin compression has been less severe recently at U.S. credit unions relative to U.S. banks and thrifts.

The credit union industry's net interest margin was 3.28% in the third quarter, down 34 basis points from the year-ago period. In contrast, the margin for commercial banks, savings banks, and savings and loan associations declined by approximately twice as much.

Credit unions have bested their banking counterparts in terms of net interest margin in every quarter since 2015. The gap between the two industry aggregates had ranged from 8 basis points to 30 basis points through the first quarter of 2020. But in the quarter ended June 30, the gap exploded to 64 basis points. It then edged up to 65 basis points in the most recent quarter.

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In part because of loan composition, credit unions are better situated than banking institutions to moderate margin pressure in a declining rate environment. Credit unions specialize in consumer and one-to-four-family mortgage lending, with a concentration in fixed-rate loans, whereas the banking industry's portfolio is far more diverse, with a greater emphasis on adjustable-rate loans.

Additionally, banks and thrifts have been more active participants in the Paycheck Protection Program, which has exacerbated margin compression during the last two quarters. PPP loans comprised 4.7% of total loans and leases for the banking industry at Sept. 30, compared to just 0.8% for credit unions.

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An S&P Global Market Intelligence analysis found 16 credit unions with a net interest margin of at least 3.25% for the last five quarters and a range between the minimum and maximum margin during that period of no more than 8 basis points. Arapahoe CU had the most stable margin in the analysis, ranging from 4.24% to 4.27%. Used vehicle loans and first-lien one-to four-family loans and lines of credit comprised more than two-thirds of total loans as of Sept. 30 at the Littleton, Colo.-based credit union.