FARGO — Gate City Bank is among a handful of banks singled out in a report documenting that half or more of the banks’ net income stemmed from overdraft charges.

Aaron Klein, a senior policy fellow in economic studies for the Brookings Institution, wrote that “a few small banks have become overdraft giants” and cited Gate City Bank as one of six banks with deposits of $1 billion or more that got at least half of their net income from overdraft fees.

Gate City Bank, headquartered in Fargo, got 59% of its net income from overdraft charges in 2020, according to the analysis from the Brookings Institution, a research and advocacy group.

In an opinion piece about his findings, Klein said there has been an “explosion” in overdraft charges that is “making basic banking expensive for people living paycheck to paycheck.”

Kevin Hanson, president and CEO of Gate City Bank, said the bank’s heavy emphasis on consumer banking — and its lack of commercial lending, agricultural lending and trust services that many other banks offer — skew the figures, since so much of its business comes from servicing checking and savings accounts.

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“We are going to have a large amount (of overdraft fees) because we’re a retail-centered bank,” Hanson said. Gate City Bank, with 43 locations in North Dakota and Minnesota, has about a 30% market share for checking accounts in North Dakota, which Hanson believes is the largest share of any bank.

The fees Gate City Bank’s customers most wanted forgiven, Hanson said, were ATM fees — fees Gate City doesn’t charge its own customers and reimburses when they withdraw cash from other banks’ ATMs.

Since 2006, Gate City Bank has refunded more than $43 million to its customers for ATM fees they incurred from other banks’ machines, Hanson said.

Many banks charge ATM fees, which the Brookings analysis doesn’t note, he said. “They’re just pulling out one number,” he said

Gate City Bank checking account customers must opt to have overdraft coverage. Those who don’t opt for the coverage risk having their purchase declined at the cash register if they have insufficient funds to cover the purchase, Hanson said.

Since 2015, Gate City has charged a $32 overdraft fee, he said. Overdraft fees for banks in the area range from $30 to $36, he said.

To avoid overdrafts, bank customers can monitor their checking account balances at their convenience via online banking, text banking, mobile banking and phone banking, all free of charge, Hanson said.

Also, Gate City Bank will soon give customers with overdraft protection the ability to automatically transfer money from their savings account to their checking account to avoid an overdraft charge. “Our plan is to have that available later this year,” Hanson said.

Overdraft protection is popular with customers, he said. “It’s certainly over half that opt in,” he said. “It’s really the customer’s choice.”

Customers who don’t opt for the coverage risk the embarrassment of being declined. He gave the example of a motorist trying to fill a gas tank on a cold day; an overdraft charge likely is preferable, he said, to running out of gas in subzero cold.

Last year, Gate City Bank generated interest income that accounted for 55% of revenues, Hanson said, compared to 13.4% for service charges, including overdraft charges, with mortgage loans contributing 18.2%.

With deposits of $2.58 billion, Gate City Bank’s overdraft charges totaled $19.69 million in 2020, according to reports compiled by iBanknet.

By comparison, Bell Bank had deposits of $8.59 billion and overdraft charges totaling $2.63 million in 2020, according to reports.

Although deposits are a common gauge of the size of a bank's operations, Hanson said the mix of loans a bank makes offers a better reflection of how it can be more or less prone to customers with overdrafts.

Almost half of Gate City's loans — 48.6% — are home mortgages, which comprise only 22.7% of Bell Bank's loan portfolio, according to bank reports. Commercial loans make up 21.3% of Bell Bank's loans, compared to 4.4% for Gate City. Similarly, commercial real estate loans make up 20% of Bell Bank's loans and 3% of Gate City's.

"It's just really different business models," Hanson said.

Gate City Bank, consistent with its community banking mission, doesn’t emphasize commercial lending and doesn't offer trust services, business lines that don't result in overdraft charges and account for a smaller proportion of income, Hanson said.

Because of its heavy focus on checking, savings and consumer and mortgage lending, Gate City Bank is similar to credit unions, which don’t have to disclose their overdraft charge revenues, Hanson said.

The average Gate City Bank checking account is almost 12 years old, indicating strong customer loyalty and satisfaction, Hanson said.

The Brookings Institution’s Klein acknowledged that banks with deposits of less than $1 billion don’t have to report their overdraft charges, so it’s possible that smaller banks could rank as “overdraft giants.”

Federal banking regulators should crack down on overdraft fees, Klein argued in his Brookings Institution report and a commentary published recently by Politico. Some banks are moving away from overdraft charges, he wrote, while other banks announced overdraft and non-sufficient funds fee waivers during the COVID-19 pandemic.

Gate City Bank gave all of its customers complete access to their pandemic relief checks, even if they had a negative account balance, said Amy Durbin, a Gate City executive vice president. Gate City also works with its struggling customers, sometimes contacting them proactively, she said.

Many large banks have high service fees that aren’t reflected in overdraft charge comparisons, Durbin said.

Research in 2017 by the Consumer Financial Protection Bureau found that those who often overdraft their checking accounts make up 9% of all accounts in banks studied but paid 79% of all overdraft and non-sufficient funds payments.

The OliverWyman consulting firm issued a report, “Beyond the Overdraft,” concluding that the pandemic crisis is accelerating the need to replace what it calls an “antiquated product” — the overcharge fee, though acknowledges it will be a challenge for banks.

Competitive forces are moving consumers away from overdraft fees, with access to digital-only banks that are challenging traditional banks and a growing number of banks that are eliminating overdraft fees.

Still, the OliverWyman report concedes, almost 60% of mass market checking accounts generate insufficient deposit interest income and fees to cover all the costs. But it outlines strategies for eliminating overdraft fees.

Among the nation’s top 25 regional banks, those with deposits of at least $1 billion, overdraft fees generated an average of 9% of pre-tax net income, OliverWyman reported. Frequent overdrafters effectively “pay for” the 60% of mass market checking accounts that don’t generate enough interest income or fees to cover their full costs, the report said.