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This pamphlet of instructions to examiners
and assistant examiners of the Federal Deposit
Insurance Corporation remains the property of
the Corporation. A copy is loaned to each ex­
aminer and assistant examiner for the period
of his services only, and must be returned to
the Corporation when for any reason the exam­
iner or the assistant examiner to whom it is
loaned severs connection with the Corporation.
56228— 34




I




CONFIDENTIAL INSTRUCTIONS
TO

EXAMINERS AND ASSISTANT EXAMINERS
OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION
E x a m in a t io n s

1. Examinations to be made without notice.—The
examination of the bank, to be effective, should
always be made without any previous notice or inti­
mation to the officers or anyone else connected with
the bank of the contemplated examination.
2. When an examination should be commenced.—
An examiner should, as far as possible, enter the bank
to be examined at the hour of closing the day’s busi­
ness or in the morning just before the bank opens
for business. An examination should not be com­
menced between the opening and closing of the day’s
business if it is practicable to avoid it, as it is very
difficult to obtain a satisfactory comparison of the
assets with the books while business is in progress.
3. Confidential information.— Reports of examiners
are strictly confidential communications to the Cor­
poration. All information obtained by the examiner
relative to any bank examined must also be regarded
as strictly confidential, to be imparted to no one
except the Corporation, the supervising examiner, and
the officers and directors of the bank examined; and
no opinion should be expressed to others or comment



1

2

FEDERAL DEPOSIT INSURANCE CORE.

made in regard to tlie condition of any bank examined
except by special permission of the Corporation. All
requests for information concerning the condition of
a bank or any of its affairs should be courteously
answered by referring the questioner to the super­
vising examiner.
Examiners should observe a proper reticence in
regard to examination work and relations with the
Corporation, and it is improper to discuss with anyone
not connected with the Corporation information which
may be learned or facts which may be ascertained in
the course of examinations, or to indulge in gossip in
regard thereto. Outsiders should not be taken into the
examiner’s confidence in regard to any official matters
whatsoever.
All information pertaining to each bank must be
kept in strict confidence by any assistant employed.
4.
GeneraI plan to be followed in making examina­
tions.— Upon entering the bank the examiner should
take custody of all assets, consisting of the cash on
hand, cash items, loans and discounts, stocks, bonds,
and other securities either owned or held as collateral
for loans, or any other assets which may be called for
by the books, the examination to be conducted in every
way so as to cause the least possible interference with
the regular business of the bank.
Upon entering a teller’s cage the examiner should
obtain possession of the cash items at the earliest
possible moment and retain possession thereof until
the cash itself has been balanced and the list very
carefully scrutinized, since cash items offer the best
opportunity to cover quickly any shortage that might
exist in the cash.
To prevent a bank officer from handing the exam­
iner the same money or securities twice, possession
should be taken by the examiner of all assets of the
bank at once, and released only when each item has
been verified.



INSTRUCTIONS TO EXAM INERS, ETC.

3

Sufficient cash and securities for the transaction of
current business should he counted and checked out to
the teller, and the safes should he sealed by pasting
an adhesive paper seal or label bearing the signature
o f the examiner over the edge of the door of each
compartment, to prevent its being opened without
breaking the paper.
Where nickels and other minor coins are found in
large quantities, the contents of the packages may be
examined and the value determined by a careful esti­
mate of the bulk without making an actual count of
the number of pieces contained in each package.
5. Representative of bank to be present when cash
is counted, etc.— In all examinations made, it is in­
sisted that an officer or responsible employee of the
bank under examination shall be present the entire
time the examiner is counting the cash and exam­
ining the bonds and securities owned and those held
by the bank as collateral, on deposit, or for safe­
keeping. This requirement is made in order that
ground for subsequent criticism may be avoided in
connection with any of the assets of the bank.
6. Assistance from bank clerks prohibited.— Under
no circumstances should clerks employed by banks
under examination be permitted to assist in counting
cash, listing and verifying loans and discounts, veri­
fying certificates of deposit, or cashier’s checks, or
taking trial balances of the individual ledger. Lists
of overdrafts and data of any kind furnished by offi­
cers or employees of banks under examination must
always be checked by the examiner or his assistant
with the original records of the bank from which such
data are taken. For work other than that above in­
dicated no objection will be made to clerks in banks
assisting the examiner when it is agreeable to the
officers of the bank under examination.
7. Precautions as to time lock on vault.— The exam­
iner should see if the time lock is set for the hour




4

FEDERAL DEPOSIT INSURANCE CORP.

at which lie arranges to lie present the next morning.
If the vault or safe has no time lock the examiner
should seal the door of the vault or safe to prevent
its being opened without his knowledge.
8.
To facilitate examination.—The examiner will re­
quest from the president or cashier the information as
listed on Corporation form Bx-1, as follow s:
(a) A typewritten list, alphabetically arranged, of
officers, directors, and employees. Opposite each name
give number of shares of bank’s stock owned and par
value; number of years with bank, and annual salary.
For directors give occupation and estimated net worth.
(ft) A list of firms in which any director, officer, or
employee is interested which have liability to the
bank. Opposite the names of such firms, place the
names of director, officer, or employee interested;
also a list of corporations together with information
called for above.
(If an officer owns controlling
interest in corporation, so state.)
(c) The minute book of directors and executive
committee meetings. (The minutes should be properly
signed.)
( (l) Copy of last call report of condition; copy of
last report of earnings and dividends; copy of bank’s
bylaws; stock certificate book and stock ledger.
(e) Typed list of charge-offs and recoveries by
classification (loans, bonds, etc.) since last exami­
nation by Federal Deposit Insurance Corporation.
(f) A schedule of other real estate owned. The
schedule should show separately each piece or parcel,
with a brief description of any improvements thereon.
Opposite each piece should be shown the amount at
which carried on the books; the appraised value;
encumbrances, if any; the assessed value; the amount
of fire insurance; annual net income; the date and
how acquired. (Appraisal should be in same form
as required for real estate collateral.)



INSTRUCTIONS TO EXAM INERS, ETC.

0

(g) Deeds to all real estate owned, including bank­
ing house, and/or copies of leases for banking house.
( h) Insurance policies on bank building, furniture
and fixtures, bank burglary, robbery, bold-up, forgery,
safe-keeping, safe-deposit box, registered mail, public
liability, and employees’ surety bonds.
(i ) Typed list, in duplicate, of assets pledged to
secure borrowed money, showing to whom indebted;
date of obligation; maturity; amount; and rate of
interest paid.
(j) Typed list, in duplicate, of assets held else­
where for safe-keeping, showing where and by whom
held.
( k ) A list of accounts due banks which are carried
on the individual or savings ledgers.
(l) Typed list, in duplicate, of public funds held,
showing name of the account, name and address of
the official who signs thereon, rate of interest paid,
amount on deposit, and indication after the amount
whether secured or unsecured, and a detailed list of
assets pledged securing each account.
(m ) Copies of deposit waiver agreements, if any.
(n) Typed list of accounts receivable, if any.
(o) Hand to the president or cashier pages 1—
A
and 1-Ii for their completion and certification over
their signatures.
R eports

of

E x a m in a t io n

The examiner in the field must make every effort
to expedite sending reports to the supervising exam­
iner. The reports will be typewritten in the office of
the supervising examiner and all verifications shall
he made in that office. That these verifications may
he properly made, each examiner shall send to the
supervising examiner with the pencil copy of exam­
ination report, transcripts of the accounts with cor-




6

FEDERAL DEPOSIT INSURANCE CORP.

respondent banks from the date of the last statement
on tile, according to form prescribed by the
Corporation.
The following accounts also should be carefully
verified by use of the forms furnished by the
Corporation :
Balances of State, county, city, town, or other
public officials.
Accounts with all other hanks.
Collection items sent to other banks.
Securities held as collateral to loans in other banks.
Securities held elsewhere for safe-keeping, where
personal visit by the examiner is not necessary.
Bills payable.
Rediscounts.
Notes held elsewhere, such as participation loans
held by correspondent banks, or notes in the hands
of attorneys.
All obligations for money borrowed in any other
form, such as certificates of deposit, bonds borrowed,
bonds or securities sold under repurchase agreement,
and notes made or endorsed by directors for sole
benefit of bank.
The examiner should attach to each report for­
warded to the supervising examiner for typing a cer­
tificate in duplicate on form provided authorizing the
supervising examiner to sign the typed reports. One
copy of this authorization shall be attached to the
original report and retained by the supervising
examiner and the other copy attached to the type­
written copy sent to Washington.
The examiner should carefully read the printed
instructions on the report blank in order that he may
obtain all information called for, not only by the
general instructions but also by special instructions
on these blanks.
The examiner should include in each report all
information which is deemed pertinent to the condi


INSTRUCTIONS TO EXAM INERS, ETC.

7

tion of the bank, whether or not it is specifically
called for in the report blank or instructions.
When a situation arises in connection with the
affairs of a bank concerning which the local exam­
iner is in doubt, or desires advice, instruction or
assistance, or any matter of great importance requir­
ing immediate action in connection with an examina­
tion, the examiner in charge should promptly com­
municate with the supervising examiner by telephone,
letter, or code telegram.
The examiner’s pencil copy including all supporting
schedules must be completed in a turn-key manner be­
fore leaving the bank under examination.
The
finished report is compiled from the pencil copy and
all information requested and provided for in the
report must be obtained during the examiner’s visit
with the bank and recorded in the examiner’s pencil
copy.
Page 1 : Balance sheet.
The items listed and numbered under “As­
sets ” and “ Liabilities ” conform to the balance
sheet as adopted by the Board, and for sake
of uniformity carry several captions that may
be found in large national banks and State
Federal Reserve member banks, but obviously
will not be used in the examination of the
smaller banks.
It will be noted that provision for a subtotal
of items from 1 to 7 inclusive on the asset side
will give, at a glance, a consolidated cash posi­
tion of the institution, and likewise a subtotal
on the liabilities side of items 1 to 9 inclusive
will show the total aggregate of deposits, and a
subtotal of items from 10 to 17 inclusive will
include all other liabilities except the liabilities
shown in the capital structure bracket.
£6220— 84-------- 2
¿



8

FEDERAL DEPOSIT INSURANCE CORP.

It will also he noted that items 12 and 13
on the liabilities side will call for a contra
entry to he made on the asset side where lia­
bilities of the nature described are found to
exist.
Attention is especially directed to the asterisk
at line caption “ Subtotal (1-9 inclusive)”
which corresponds to the asterisk at the bottom
of the balance sheet where you will include
such proportion of deposits as may be for any
purpose restricted. Details of the restricted
deposits are called for on page 16 as well as
waived deposits, if any, in cases of reorganized
banks.
Page 1-a : General statement
Page 1-a is prepared for the examiner to
hand to the president or the cashier o f the bank
on which is to be recorded the general state­
ment o f the assets and liabilities of the bank
under examination, and to which the president,
the cashier, or other proper officer shall certify
over his signature in the manner provided for
by the form.
Page 1 -b : Questionnaire
Likewise, the questionnaire as contained on
this form is to be filled in and certified to by
the president, the cashier, or other proper offi­
cer in the manner provided for by the form.
Page 2: Officers and directors
Included in the respective schedules showing
the directors’, officers’, and employees’ direct
and indirect liability, should be listed cash
items and overdrafts as such liability may ap­
pear.




INSTRUCTIONS TO EXAM INERS, ETC.

9

Page 5: Loans and discounts in general
The questions listed on this page are consid­
ered pertinent and it is anticipated that the
examiner in charge will answer fully interroga­
tions pertaining to loans and discounts.
Page 6: Classification of loans
In order that uniformity may he had in
measuring overdue paper as contrasted with the
statutory bad debt section of the National Bank­
ing Act, this corporation has adopted: Overdue
palter listed as “ class A ” to include loans on
which tlie interest is past due and unpaid for
a period of 6 months or more, unless amply
secured and in process of collection ; “ class B ”
to include other loans which are overdue as to
principal or interest for a period of less than 6
months and loans excluded from “ class A ”
above. Other salient features of the schedule
are explained at the top of the page.
Page 10: Real estate loans
As will be noted this schedule includes the
total aggregates of loans and discounts secured
by real estate mortgages and other liens on
realty, as well as loans collateraled by mort­
gages on real estate, segregating first liens and
all other junior liens as well as a break-down
into four classifications. Furthermore, real
('state loans subject to special comment are to
be listed as indicated on the schedule in four
specially grouped classifications with the groups
segregated and numbered 1, 2, 3, and 4 respec­
tively, as designated and described under the
respective numbers. It is not deemed necessary
to list real estate mortgages which are not
subject to particular criticism.



10

FEDERAL DEPOSIT INSURANCE CORI\

Page 11: Recapitulation of bonds, securities, etc.
The schedule for recapitulation of bonds,
securities, etc., has been arranged first by
classifications, second by ratings, third by
pledged and unpledged, and a recapitulation by
groups to show that part of the depreciation
which the examiner classifies as “ Loss.” This
schedule makes for a uniform study and when
prepared according to the schedule should
assist the examiner in presenting the invest­
ment policy of the bank under examination to
its board of directors.
Page 12: Bonds, securities, etc.
The examiner should indicate in column
under “ Remarks ” , opposite the individual
issues, those bonds and securities which are
pledged for bills payable, etc., or held for safe­
keeping elsewhere, by using symbols to desig­
nate to whom pledged or where held, giving key
for symbols used.
fi. Supplemental report of examination ( confidential
information) .— Space is reserved for examiner’s criti­
cism, or comments and recommendations concerning
specific elements of danger observed, such as (1)
weak management; (2) weak board of directors;
(3) impairment of capital; (4) losses exceeding capi­
tal structure; (5) high aggregate slow assets; (6)
excessive investment in banking house; (7) excessive
other real estate owned and potential other real
estate; (8) excessive D.P.C. mortgages including
junior liens; (5)) excessive borrowings; (10) excessive
amount of public funds; (11) excessive amount of
assets pledged; (12) excessive investment substand­
ard securities; (13) loans in excess of the statutory
limit; (14) negligible cash position; (15) dangerous
affiliations—designate; (16) weakened position due to



INSTRUCTIONS TO EXAM INERS, ETC.

11

merger or purchase of another bank; (17) lack of
earning power; (18) heavy loss of deposits; etc.
(Such of the above elements of danger may be shown
on p. 21 of the report as the discretion of the examiner
may dictate.)
10. Management.— It will be noted that one page
has been devoted to management, and space has been
reserved for examiner’s criticisms, or comments and
recommendations concerning the intimate manage­
ment of the bank and for recording the reasons sub­
stantiating such remarks which it is deemed inad­
visable to incorporate among the criticisms, remarks,
or recommendations called for on page 21 of the
report. It is imperative that the Corporation be
thoroughly informed as to the management of its
member banks with the view to promoting stronger,
more capable, and more efficient bank management
than has heretofore existed.
Particular attention should be given to the condi­
tion and completeness of the credit tiles. Are the;
adequate, are they kept current and used in an intel­
ligent manner as the basis of extending credit?
Does the record of payments indicate that the
management understands the necessity of having a
definite collection program instituted at the date of
inception of the loan?
In the event the bank has been reorganized or con­
solidated, it is expected that the examiner will secure
sufficient information to discuss the subject in his
report as to any hearing or effect such reorganization
or consolidation might have on the present situation.
Recommendations as to corrections of capital struc­
ture should he made here and clearly defined, show­
ing sources of corrections already made.
11. Economic survey of local conditions.— Space has
been provided for a résumé of the general local condi­
tions, which it is expected that the examiner will
carefully prepare.



12

FEDERAL DEPOSIT INSURANCE CORP.

12. Statement of liquidity and invested capital.—
This statement is especially desirable for the Cor­
poration’s study from time to time, and inasmuch
it is constructed on the basis of liquidation it will
be necessary that the examiner prepare the state­
ment during his visit to the bank.
13. Trust department report.— There has been fur­
nished a revised report for the examination of trust
departments. Among other things the report segre­
gates individual trusts from corporate trusts and
provides a study of the trust department’s affairs in
general. The form of the report is believed to be
self-explanatory.
It is the duty of the examiner to ascertain that—
(a ) All trust assets are intact.
(b) They are held by the bank in a fiduciary ca­
pacity.
(c) The income has been collected on income-pro­
ducing assets of the various trusts.
(tZ) Income has been properly distributed to the
beneficiaries, or otherwise accounted for.
(e) All distributions of principal have been prop­
erly made.
( f ) The earnings of the trust department have been
properly accounted for.
(g) The assets of the trust department reflect law­
ful and efficient management of the trusts committed
to it.
The examiner must either verify these items, or
else see to it that the trust department is being op­
erated in such a manner that a complete detailed
check is unnecessary. In the small trust department,
it is usually best to verify all of these items in de­
tail, while in the larger department an examination
of the assets and a partial check on the other items
will be sufficient. Under some conditions, in a wellorganized bank having a good system of internal
control, it might be sufficient to inspect the assets
and make a review of the routine in operation.




INSTRUCTIONS TO EXAM INERS, ETC.

13

Examiners should report in all instanices where the
bank has sold real estate notes, or other investments,
from its assets to any trust estates and where sub­
ject to criticism describe fully, stating ivliether the
bunk appears to have incurred a liability.
14. Securities held for safe-keeping.— Bunks should
be directed to keep a proper record or register of all
bonds, stocks, notes, or other securities, not their
property but in their custody, together with the names
of the actual owners of such securities, showing
whether left with the bank for safe-keeping or other­
wise by customers, or left at the bank with any officer
or director of the bank for any special purpose, or
whether received by mail or express and from whom.
The records should be so kept that the examiner
may be able to distinguish readily at all times be­
tween the assets belonging to the bank and those be­
longing to other parties, and to enable the examiner to
account properly for every item found in the bank.
L oans

and

D iscoun ts

15. Verification of towns and discounts and liabili­
ties of directors and officers.—A list o f loans and dis­
counts should be made from the notes themselves, and
the aggregate compared with the general ledger.
It should be determined whether notes not in the
files of the bank have been rediscounted, placed as
collateral for bills payable, or whether they are
merely held free and unencumbered in the hands of
correspondents, so that every loan made by the bank
may be properly accounted for.
Whenever proforma notes are found to take the
place of the original notes, due to the notes being
hypothecated or for some other reason, a list of these
should be made and verified by correspondence. The
verification should include for what purpose the notes
were hypothecated, such as for bills payable, for­
warded for collection, etc.



14

FEDERAL DEPOSIT INSURANCE CORP.

It is advisable, particularly in a large bank, to list
first the past due paper and notes maturing the next
day, taking such data in regard to them as the examiner considers necessary, check them back with the
note teller, and release them so that there will be as
little interruption as possible of the next day’s busi­
ness, which is helpful both to the examiner and the
teller. The note teller should be requested, however,
to O.K. the examiner’s adding-machine totals after he
has checked the notes thus released.
Before proceeding to verify the account of loans and
discounts, the examiner should obtain a list of the
directors, officers, and clerks of the bank. Each note
or bill on which the name of a director, officer, or
employee appears as maker, endorser, or guarantor
should be listed against each individual and reported
in the schedule provided.
Where two or more directors or officers are jointly
liable on the same note, the entire amount should be
listed against each in the schedule. The total should
be ascertained and a footnote made thereunder show­
ing the excess of the joint liability over the amount of
the note, and the final total given must agree with the
amount of paper actually held.
In order to show whether the resources of the bank
are being unduly or improperly used by the officers
or directors for their personal benefit or that of
enterprises in which they are interested, all paper
upon which officers are liable should be very care­
fully scrutinized. The accounts of clerks should be
carefully reviewed as well as the accounts of officers.
Examiners are especially directed to ascertain
whether or not officers or directors of the bank are
obtaining money or credit through “ dummy ” or
indirect loans and should report all such cases.
Examiner should be careful to ascertain if the
large lines of paper are continually carried by the
bank or if paid up once or twice a year. Heavy



INSTRUCTIONS TO EXAM INERS, ETC.

15

losses are likely to be sustained on continuous loans
and they should be closely scrutinized, not for the
purpose of arbitrarily discounting the value thereof,
but to make doubly certain that none of the facts
in relation thereto are overlooked in giving consid­
eration to the value of the large continuous lines.
Special attention should he given to proving the
collaterals for all loans, not only to ascertain whether
or not the loans are “ covered ” but also to see that
the required collateral is stated on the face of the
note and is actually in the possession of the hank.
The examiner must confer with the managing
officers and the directors as to the value of the paper
and securities found in the hank, especially where
there is any question or probable loss. Such estimates
are not to he accepted as conclusive, but should be
given due and full consideration.
16. Examination and verification of collateral.—
The collateral held as security for loans should be
examined and verified by comparison with the bank’s
collateral cards or register (or with the list made by
examiner from the notes themselves where no cards
are kept). Those verified should be laid aside within
the examiner’s view until the whole list is verified, to
guard against the possibility of having the same
collateral presented to him more than once.
In the examination of collateral special care
should be exercised to see that all stock certificates
and all registered bonds are properly assigned, or
covered by powers of attorney executed in blank,
properly dated, and properly witnessed.
17. Overdue paper.—All paper coming within this
class should be carefully listed and inquired into
with a view of ascertaining what loss, if any, will
probably be sustained thereon. The name o f the
maker and endorser appearing on each piece of paper
and the date of its maturity should be noted, and
also a description of any collateral held as security
therefor.



16

FEDERAL DEPOSIT INSURANCE CORP.

All paper which has passed the date of maturity
without payment or renewal must be classed as
“ overdue.” The same rule applies with regard to
“ demand ” paper, if maturity is not fixed by the
law of the State in which the bank is located, in that
it falls due within a reasonable time. Where there
have been no adjudications in the State in which
the bank is located defining what is a “ reasonable
time ” , examiners will be expected to report as “ over­
due ” all demand paper held for a longer period than
that for which the bank usually accepts time paper,
i.e., 6 months, etc.
18.
Loans secured by mortgages or other liens an
realty.—The examiner should satisfy himself that
the title, mortgage, or other lien on the property
is held by the bank, and that it is properly recorded
in the name of or in trust for the bank, and not in
the name of any other party. If recorded in the
name of any other party, this fact should be reported.
The examiner should also ascertain whether the bank
holds the first lien as security; if not, the amount of
any prior lien should be stated.
Where the fair value of the mortgaged property is
in excess of the amount of the mortgage and other
charges against the property, such mortgage shall be
given full value, provided there is a margin sufficient
to take care of additional carrying charges for a
reasonable period including taxes, interest, and pos­
sible foreclosure costs—unless it is a case where
the borrower has virtually abandoned the property,
or the loan in other respects has bad characteristics.
In such latter instances liquidating value shall govern.
The determination as to what is fair value, and
the margin of security required, must be left to the
judgment and discretion o f the examiner. No fixed
rule may be laid down that will apply arbitrarily to
all cases. It is self-evident that distressed selling



INSTRUCTIONS TO EXAM INERS, ETC.

IT

values cannot be generally applied. On border-line
cases difficult to appraise, a varying degree of consid­
eration should be given, depending upon circum­
stances. The most favorable consideration should be
given to loans o f borrowers who are continuing with
the mortgaged properties, anxious to retain owner­
ship, and particularly borrowers having a satisfactory
record for a substantial period prior to the present
depression; in other words, those borrowers who are
anxious to continue operations and whose present
debts are heavy due solely to general conditions.
This factor should be kept in mind when appraising
farmers’ paper in country banks, such as loans
secured by second real estate mortgages plus first
mortgages on crops, farming equipment, chattels, etc.
On the other extreme there will be cases where con­
ditions surrounding the assets are so unsatisfactory
that its appraisal must be made on a strictly liquidat­
ing basis.
19.
Classification of “ doubtful” assets.—Little, if
any, value will be accorded the “ doubtful ” classifica­
tion. Special care should therefore be given to items
having doubtful aspects to determine as closely as
I>ossible the “ loss ” and the “ recoverable ” portions
thereof. The following rule should be observed:
(а) The portion that may reasonably be expected
to become a loss should be classified as “ loss.”
(б ) The amount that may be reasonably expected
to be salvaged should be classified as “ good ” or
“ slow.”
(c) Any difference, the amount that is very difficult
of determination, should be classified as “ doubtful.”
Habitual use of the doubtful column by an examiner
is indicative of lack of decision. Reports of examina­
tion which reflect an undue use of a large volume of
doubtful classifications will be returned to the exam­
iner for reclassification before being copied.



18

FEDERAL DEPOSIT INSURANCE CORP.

B onds , S ecurities ,

etc .

20.
Examination of bonds, stocks, securities, claims,
etc.—All items of bonds, stocks, securities, etc., em­
braced under this bead should be examined, actually
verified by the examiner, and carefully listed. Care­
ful inquiry as to the market value of each item
should be made, and also whether or not interest is
regularly paid. A verification of the estimated value
of all such items held should be made by consulting
market quotations published in the daily newspapers,
or financial journals, as far as this may be practicable.
In case of municipal bonds of sound value where
there has been no default and there is none impend­
ing, the examiner may disregard the market value of
such bonds because the market on municipals is
oftentimes narrow, and in some cases there is no mar­
ket. It is felt that when the municipality is not
in difficulty, the obligations should be treated as good
and appraised at cost or par, whichever is low er;
but in no event include a premium or a write-up value.
In cases where the municipality is in default a care­
ful review of the financial condition of the issuing
unit should he made to determine just what intrinsic
value exists or what salvage could reasonably be
expected. Consideration should be given to the pro­
portion of such holdings to total assets. One insti­
tution’s holdings may be so large that it is especially
deitendent on market value, while another’s holdings
may be in such an amount that there would be little
doubt of its ability to hold for liquidation or maturity.
The examiner should be satisfied as to the character
and worth of all unlisted securities either owned by
the bank or held as collateral by direct investigation
or inquiry independent of any statement made by the
officers of the bank relative thereto, especially scrut­
inizing those securities in which the officers or di­
rectors of the bank may be interested. Bonds, stocks,



INSTRUCTIONS TO EXAM INERS, ETC.

19

and other items secured wholly by real estate and
carried in this account should be listed separately and
so classified.
The examiner should scrutinize the assignments on
all bonds or certificates of stock or other securities
which are not issued in the name of the bank to see
that assignments are in proper form. Where securities
held by the bank are not registered in the bank’s name
but in the name of other corporations or individuals,
inquiry should be made and the condition called to the
attention of the bank.
21. Examination of securities held elsewhere than
at the bank.—When securities or cash are placed with
a safe-deposit company, or with another institution,
for safety and are not accessible to the holder without
the presence of a representative of the owner bank,
verification should be had by actual examination. If
such securities or cash are held for safe-keeping at a
distant point, the examiner in charge of the examina­
tion will request an examiner located or working in
the city where such securities are held to make the
examination. In either event, the examiner should
take proper steps to prevent officers of the bank from
having access to the securities between the time of
examination of the hank and verification of such se­
curities. The records of the institution where the
safe-deposit box is located should be consulted by the
examiner at the time of examination of the securi­
ties to ascertain whether an officer of the bank has in
the meantime had access thereto.
Securities held by correspondent banks, as collateral
or otherwise, will be verified by the supervising
examiner as in the case of balances.
22. Other real estate owned.— Careful inquiry should
be made from reliable sources regarding the value of
the real estate owned. The examiner should be satis­
fied that the title to real estate is vested in the bank
and the deed recorded.



20

FEDERAL DEPOSIT INSURANCE CORI’ .

If any considerable amount of real estate taken for
debt is owned by the bank, the amount of taxes paid
and net annual income should be stated, together
with the assessed valuation of the property, and if
improved, the amount of insurance.
23. Banking house and furniture and fixtures.— If
the banking house is rented, ascertain the annual
rental p a id ; if owned, whether title is in the bank
and the deed recorded, whether covered bv insurance,
and whether or not the actual value is equal to the
book value. The examiner should not arbitrarily fix
a value on the banking house, but should be satisfied
beyond a reasonable doubt as to its worth. If part
of the bank building is rented for other purposes,
ascertain the net annual rental received for the
rented portion and whether any portion o f the building
is occupied by any other banking institution.
Ascertain and report in all cases the net amount
which the bank receives on its investment in banking
house, exclusive of rent paid by the bank, together
with the percent of net earnings, including bank’s own
rent, giving amount of such rent and state whether
the amount charged to rent on the part of the bank
seems excessive. Report this data for each of the
past 7 years, .or for such shorter period as the figures
may be available. If no amount is credited to bank­
ing house earnings on account of use of bank’s own
quarters, state for purposes of comparison what, in
your judgment, would be a reasonable amount.
An estimate should be made o f the value of the
bank’s furniture and fixtures to determine the correct­
ness of book value. The examiner should also ascer­
tain whether or not the banking house, furniture and
fixtures, are mortgaged, or the former subject to
ground rent, and, if so, what ground rent.
24. Vaults, safes, etc.—The examiner should ascer­
tain and report whether the vault, vault door, locks,
etc., are secure; likewise the safe or safes, if any.



INSTRUCTIONS TO EXAM INERS, ETC.

21

Procedure in verifying, appraising, and cheeking the
assets of a hank can he followed with, a certain
amount of precision and can be fairly definitely estab­
lished. An important test of an examination, how­
ever, is in the determination, setting up, and classifi­
cation of the full amount of the liabilities of the bank.
A competent examiner is always alert to note indica­
tions which, when traced out, will lead to the
disclosure of liabilities not reflected on the books of
the institution. It is impossible to draft an all-inclu­
sive set of instructions that will cover in detail this
broad subject. It is necessary, therefore, to rely on
the ingenuity of the examiner to ascertain all of the
liabilities of the institution under examination. How­
ever, brief instructions relating to the usual liabilities
appearing in every bank are as follows:
25. Profit accounts on individual ledger.— An exam­
iner should ascertain and report whether any o f the
profits of the bank are carried on the individual
ledgers under such titles as “ Suspense account ” ,
“ Contingent fund ” , “ Stockholders’ account ” , etc.
Full details should he given relative to the manner in
which any such account was created and is used.
26. Certificates of deposit—cashier's cheeks and cer­
tified checks.—A list of all certificates of dei>osit, pay­
able either on time or on demand, should be taken
from the stubs, if any, otherwise from the certificate
of deposit register, if any is kept, or from the account
kept on the ledger, and the footing of all certificates
outstanding should he compared with the balance of
these items shown by the general ledger. Certified
checks and cashier’s checks outstanding should be
verified in the same way.
Canceled certificates should he called for and
checked with the certificate register and stubs, if any,
in order to ascertain whether the certificates marked
paid on the register are in reality in the bank and
canceled and the amounts agree with the stubs.



22

FEDERAL DEPOSIT INSURANCE CORE.

Certificates marked “ void ” or “ cancele<l ” on the
the certificate register should be called for in order
to determine that they have not been used.
27. Trial balances of ledgers.—A trail balance
should be taken in all cases.
It has been found in some instances that bank offi­
cers manipulate their ledgers after the beginning of
an examination. The examiner should take every
precaution to prevent such practices. In some cases,
lie may find it feasible to take possession of the ledg­
ers as soon as he enters without detriment to the
business of the bank.
28. Overdrafts.— In listing balances on the indi­
vidual ledger all overdrafts should be noted in a sep­
arate column, and any large amounts, or those bo
officers or employees of the bank, or those which
have been of long standing without change, should
be especially noted and inquiry should be made as
to the probable loss, if any, on such items. Over­
drafts have no place in normal banking operations
and represent an unsecured and unwarranted exten­
sion of credit on an account-receivable basis.
29. Profit and loss account and expenses.—The
examiner should examine the profit and loss account
of the bank as far back as the date of the previous
examination, or for such period as he deems proper.
80. Capital stock.—The examiner should be fully
satisfied that the bank’s capital stock, or any in­
crease therein, was actually paid-in in cash or in
assets of sound value.
31. Stock ledger.— The stock ledger should be ex­
amined and the number o f shares standing in the
name of each shareholder listed and totaled to as­
certain whether the aggregate of such shares equals
the number of shares represented by the capital
stock.
32. Stock-certificate book.— The stock-certificate book
should be
examined with a view to ascertaining


INSTRUCTIONS TO EXAM INERS, ETC.

23

whether it is the custom of the bank to properly
cancel and tile surrendered certificates, whether any
certificates have been signed in blank by any officer
of the bank, and whether any canceled or unused
certificates are unaccounted for, and due report should
be made of any irregularity.
The examiner should also note and report whether
or not the bank owns or holds any of its own stock,
either as an investment or as security in any way
for a loan or discount, and whether each director
owns in his own right the number of shares required
by law unpledged in any w a y ; also, whether the
bank holds any notes given by its shareholders in
payment of stock.
Ascertain whether the shareholders have borrowed
from other banks to pay capital o f a newly organized
bank or a bank which has just increased its capital,
and afterwards transferred the notes_ to the bank
examined; and if any cases of this sort are discovered,
same should be reported.
33. Money borroiced.— Under this heading should
be included all liabilities for borrowed money, whether
bills payable, rediscounts, oi>en accounts, certificates
of deposit, bonds, or other securities sold under agree­
ment to repurchase, notes made or endorsed by direc­
tors or officers for the sole benefit of the bank, or
otherwise.
34. Notes and bills rediscounted.— The examiner
should make a list of all loans and discounts redis­
counted by the bank, showing the names o f makers
and endorsers, amounts and names of the rediscount­
ing bank, or other lenders, in order that correctness
of these items may be verified. Only the total amount
of paper rediscounted with each bank or party, and
the rate of interest paid on such rediscounts, need be
diown in the report.
35. Bills payable— Where bills payable or certifi­
cates of deposit issued for borrowed money are




24

FEDERAL DEPOSIT INSURANCE CORP.

outstanding, the examiner should make a list of the
amount of each, and the date issued, and the date of
maturity when not payable on demand, and the rate
of interest paid by the bank, and should reconcile
each account by correspondence with the lenders.
Wherever money is borrowed in any form the
examiner should ascertain from the minutes of direc­
tors’ meetings whether or not such action was duly
authorized by the board of directors.
Paid and canceled certificates of deposit issued to
directors or officers of the bank should be called for
in order that the examiner may possibly ascertain
from the endorsements appearing thereon whether
they were used for the purpose of borrowing money
for the bank.
36. Officers and employees—fidelity bonds.—All offi­
cers and employees o f every bank should be ade­
quately and sufficiently bonded in a responsible
corporate surety.
37. Reconcilements.—The supervising examiner will
furnish to the examiner forms for use in obtaining the
information desired in order to reconcile the various
accounts of the banks examined. With the exception
herein stated ail reconcilements will be made in the
supervising examiner’s office.
The examiner should make a note of any loans,
discounts, and other items forwarded for collection;
the name of the bank to which sent, the date sent,
and the date of maturity; verify the reconcilements of
the accounts last rendered the bank and continue the
verification of remittances and collections, as far as
the acknowledments will permit, to the date of exam­
ination. A minute should be made of all items not
acknowledged at Ihe close of the examination.
The examiner should in each examination call for
all of the last reconcilements, should compare each
with the books, and be satisfied that each is properly
made. If any irregularities appear, examination



INSTRUCTIONS TO EXAM INERS, ETC.

25

should be made of reconcilement for the month pre­
ceding. This should enable the examiner to detect
any discrepancy or blind item carried from month to
month to cover irregularities.
38. Reports of Condition, and earnings and divi­
dends.— Every bank should keep a duplicate of each
report of condition and also each report o f earnings
and dividends made to the supervising authority, com­
plete in every respect. The examiner should always
call for all reports made since the previous examina­
tion, or as many as the examiner deems proper, and
make comparison with the books of the bank to as­
certain whether the reports reflect condition shown
by the books on the dates of the reports.
The report of condition should be checked against
the accounts in the general ledger (not the statement
book) in order that any forced balances may be
detected.
39. Reserves.— When the books of the bank reflect a
reserve for contingencies, the examiner should ascer­
tain whether this reserve has been set up to provide
for certain specific items, or merely for losses that
may accrue but are yet undetermined.
40. Accruals.—Where the bank under examination
purports to operate on an “ accrual basis ” or a
“ partial accrual basis ” an analysis should be made
to ascertain if income on non-income-producing assets
has been accrued in the same manner with earning
assets.
41. Audit of insured liability of bank.—All banks
that have not heretofore been audited for verifica­
tion of remittance covering deposits eligible for in­
surance in the temporary Federal deposit insurance
fund in accordance with the provisions of the Bank­
ing Act of 1933 will be audited by special represent­
atives and/or examiners of this corporation in due
course.



26

FEDERAL DEPOSIT INSURANCE CORI*.

Reference i.s made to form 44A—F.D.I.C. “ Instruc­
tions for the preparations of the certified statement
(form 45) to be filed with the Federal Deposit In­
surance Corporation ” , which has been made available
to the examiners and assistants.
Banks having total accounts numbering 2,000 and
Under must be audited by the examiner during the
next examination of the bank following its admittance
to membership in the fund.
42.
Joint examination with State banking depart­
ments.— For the purpose of avoiding a multiplicity
of examinations all examinations should be conducted
jointly with State supervisory authorities so far as
that procedure is practicable. In the interest of ef­
fective and thorough examinations it is highly im­
portant that the most cordial relationship be main­
tained between the personnel of the examining divi­
sion of this Corporation and that of the State bank­
ing authorities, as well as with national and Federal
Reserve examiners. The examiner should especially
refrain from expressing any criticism of State bank­
ing authorities or their methods. In the case of a
joint examination with a State banking department,
proper deference should be shown the State exam­
iners and their suggestions followed insofar as it is
possible without limiting the scope of examination
for this Corporation. If information is requested by
any other examining or supervising agency concerning
the condition of any bank which is affiliated with a
bank under their supervision, or the status of any of
its borrowers, the examiner is authorized to give such
information provided that he secures the consent of
the Corporation in each instance and that he has an
understanding that the same courtesies will be ex­
tended by such agency if a similar request is made
by the examiner.




INSTRUCTIONS TO EXAM INERS, ETC.

27

43. Examiners should not antagonize officers.— The
authority vested in the examiner should he wisely,
discreetly, courteously, and tactfully exercised. Care
should be taken to avoid giving needless irritation to
officers and employees of the banks, but the examiner
should be firm in his requirements and insist on faith­
ful compliance with instructions.
44. Examiner must not obligate himself to any
bank.—An examiner must not put himself under any
obligation to any bank examined or to be examined
by him by borrowing money, accepting extra com­
pensation or otherwise. An examiner should espe­
cially avoid placing himself under social or any other
obligations to officers or employees o f the banks which
lie may be called on to examine. It is best that an
examiner should neither accept any hospitalities or
invitations from or entertain the officer’s or employees
of any bank, nor should he accept from them at any
time presents of any sort.
An examiner should be quite as studious, to avoid
placing himself under any obligations to the officers
or employees of the banks he examines as is the judge
of a court in regard to the litigants who may be called
before him.
An examiner will not be permitted by the Corpora­
tion to engage in the work of examining or auditing
the books, accounts, etc., of any corporation, company,
firm, or individual. His work must be confined to the
examination of banks under instructions from the
Corporation or its representative.
P ublic U tterances

Public utterances before luncheon clubs or other
public organizations, and contributions to magazines
or newspapers are not regarded with favor by the
officials of the Corporation.



28

FEDERAL DEPOSIT INSURANCE CORP.

C onclusio n

All examiners and assistants should feel free to
approach a supervising examiner as well as the
examining division at the Corporation’s office in
Washington on any and all matters affecting their
official duties or personal conveniences,




untin«

orneii i » m