Last year was the first time operating expenses exceeded net interest margin, with operating expenses at 3.33 percent and net interest margin at 3.17 percent. This resulted in net interest margin and operating expenses having a negative impact of 86 basis points on credit unions' ROA.

However, credit unions have been able to reduce the total impact on the ROA because of the performance of the loan portfolio, resulting provision for loan losses being reduced by 3 basis points.

An even more significant contributor has been non-interest income, increasing by 51 basis points. Non-interest income has increased from 9.24 percent of total income in 1996 to 18.82 percent in 2006.

The time is right for credit unions to review their traditional sources of non-interest income and explore potential new areas to offset the declining net interest margin and increased operating expenses.

Non-interest income has played an important role in helping credit unions stabilize the impact of net interest margin on ROA. Without non-interest income, credit unions would have posted a negative ROA of .46 percent.

The graph below illustrates how credit unions have become more reliant on non-interest income. This becomes even more evident as the gap continues to grow.

Non-interest income brings many benefits to credit unions, not the least of which allows credit unions to continue to offer strong loan and deposit rates to members until the yield curve changes to a more financial-friendly slope. If credit unions didn't have the non-interest income, what would be their current rates on loans and deposits and what would happen with their branch expansion?

Another source helping credit unions with the current rate environment and competition levels is their capital position. At some point, because of growth or their capital level, credit unions will need to fund it. Their only source of funding, at this point, is through their earnings.

When reviewing non-interest income, the three top contributors are NSF/courtesy pay, debit cards and credit cards. These three sources account for more than 61 percent of total non-interest income. What's nice about these income sources is they are either behavioral (NSF/courtesy pay), or a result of a transaction (the member using their debit or credit card). But credit unions need to ask is if there are additional risks like those experienced in 2003.

The Wal-Mart lawsuit had a direct impact on income from the debit card. The most recent event is Wal-Mart entering the debit card business–prepaid Visa debit card. What effect this will have on NSF/courtesy pay income and debit card interchange income is unknown at this time. It's also risky to have all your income resources in just a few baskets. If something happens to one source, it would significantly impact the credit union's income.

Your credit union's management team should look at traditional sources of non-interest income currently in place and consider new opportunities to generate additional income. Some of those potential non-interest income sources worth exploring include:

-Insurance products — The positive side here is most credit unions have a solid flow of new loans and if they increase their penetration of insurance products (credit insurance/debt cancellation, GAP, and MRC) on the loan it could be a major source of income. Some credit unions are having great success with their insurance products, and it contributes in the mid-teens as a percentage of net income. Another area affected by credit insurance, GAP, and MRC is charge-offs. By having the loan protected, it will help reduce future charge-offs at the credit union. The credit union's current provider can help them calculate the impact to their income by increasing the penetration of their insurance products.

-Broker services — With the average age of the credit union member increasing, many more members will be looking for additional help with their financial future. This would be a great service to help continue to build that relationship with the member and have a positive impact as another source of income for the credit union.

-Real estate market — It's a good source of non-interest income; credit unions have always done well in the refinance business, but now there's an opportunity to increase penetration in the purchase market. There are also additional services that could be offered within the real estate market; through a CUSO the credit union could have its own title company.

Non-interest income will continue to play a major role in the net income of credit unions, and will need to grow for many credit unions. This type of income is helping credit unions reduce the impact of a declining net interest margin and increased operating expenses. The challenge for credit unions is to maximize various sources of income while determining the impact of a lost revenue source.

Don't wait until it's too late; make sure you clearly understand how different areas of the income statement will be impacted.