Banking, like every other business, is done with the object of making, or "earning," a profit on the capital or funds invested in the business.

There are different terms applied to these profits; for instance, before "expenses" for conducting the business are deducted, all profits made from various .sources are called "gross earnings." When expenses are deducted from "gross earnings," the remainder is called "net earnings." But a bank usually incurs some losses on loans and other investments, in spite of all the care to be exercised, and when these are deducted from the "net earnings," the remainder is called "net profits." These two terms are sometimes used synonymously, and again in the National Bank Act, "net profits" is used, referring to the profits before deducting losses.

"Expenses" usually include such items as rent, taxes, salaries to officers, clerks and employes, books, stationery, postage, advertising, attorney's or counsel's fees, interest on deposits, and any other expenditures incurred in the conduct of the business.

"Losses" are incurred by the failure of borrowers to repay money borrowed from the bank, and also by the shrinkage in value of any real estate, bonds, stocks, mortgages, or any other form in which its funds may be invested, or sometimes through the theft or dishonesty of officers or employes.

"Gross earnings" are derived from interest received from loans and discounts, bonds and mortgages, from dividends on stocks owned, rents from real estate owned, and in the case of loan and trust companies, also from commissions or fees charged for executing any trusts, rent of safe deposit vaults, storage warehouses, or any other source.

A statement of "gross earnings," "expenses," "losses," etc., is usually made up by banks every six months, or semiannually, on the 1st of January and the 1st of July, every year. Some banks select other semi-annual dates, and some make up these statements every three months, or "quarterly." These are usually known as "dividend periods," because "dividends" are then "declared" and paid if they have been "earned."

If the result of the statement warrants it, the directors who have the power to do this hold a meeting and "declare a dividend," or authorize the payment of a certain percentage of the capital stock, to be paid to the stockholders, or divided ratably among them.

These "dividends" are usually paid to the shareholders by checks payable to their order, called "dividend checks," mailed to the address of each shareholder.

Every bank prudently managed refrains from paying out all its net profits or earnings in dividends, and retains a part of these to create a "surplus fund." Usually the law requires a bank to do this, as, for instance, every National bank is required to set aside one-tenth of its not profits of each dividend period for the surplus fund before declaring a dividend, and to go on doing this until the surplus fund amounts to at least twenty (20) per cent of the capital stock. Evidently the theory of this is that as every banking institution is apt to encounter unusual losses in times of panic and depression of business, it should gradually accumulate a fund out of which it can meet such losses, without "impairing" or using up any part of its capital stock, which would require an "assessment" on the shareholders to make such "impairment"' good.

This surplus, of course, belongs to the stockholders, and is really so much more capital used in the business for their benefit. Sometimes the "surplus" of a banking institution largely exceeds its capital stock, and in general the possesion of a large surplus fund is regarded as evidence of the strength and good management of a bank, for it represents the accumulation of so much profits over and above the amount paid to shareholders in dividends, and serves as a measure of the "earning power" of the bank.

The net earnings of the National banks as a whole from 1894 to 1899.varied between 5 and 5.8 per cent of their capital stock and surplus fund, and in 1900 rose to 8.2 per cent., reflecting the general prosperity of business shared by the banks.

In 1870 these net earnings amounted to nearly 12 per cent., and the fall to 8.2 per cent in 1900 illustrated a general decline, due to the accumulation of capital for investment on the one hand, and, on the other, to the fierce competition for business between banking institutions.