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raCHNICAL EXAMINATION■ 311. The technical examination covers the verification of the book accounts. The following suggestions are made as to points to be cov ered in the technical examination of an institution: The prin cipal points in connection with the Credit Examinations are cov ered in a separate memorandum. All examinations should be made without previous notice to the Institution-. All cash, securities, notes and other documents and papers belonging to the Institution should be placed under seal, to be released as soon as the examiners have finished with them. Examiners should endeavor to interfere as little as pos sible with the routine of the Institution. I- CASH. A. Tellers or counter cash-should be verified first. B. Reserve cash, being under seal, may be counted at the convenience of the examiner. In this respect, however, it is customary to consult the wishes of the bank officials. C. II* Checks and other cash items: 1. Exchanges to other banks should be placed in a sealed envelope with verification blank enclosed. 2* Other cash items should be carefully scrut inized and verified and detailed memorandum taken of all items held in cash other than those intended for the next day’s business. LOANS AND DISCOUNTS. ■A. All notes should be kept under the control of the examiner until desired information has been obtained. B. If possible to arrange it, no entries should be made on liability ledger until examiner has com pleted his work. C. Notes for current day*s business should be ex amined and released. Inquiry should be made as t-i! t «_> -2- to whether there are any notes he!- for account of other hanks or individuals incl' .ed with the notes of the institution under e::n: nati on. D. Proof. 1. E. HI- IV. V. Independent machine list should be made and compared with the figures as called for by the bank records. An examination of each note should be care fully made to ascertain whether the, notes are in proper negotiable form and whether the bank has title to them. - If guarantees held pro tect rights of bank (continuing or specific). Proper corporate authorization on file. COLLATERAL LOANS. A. Proof should be made and compared with the bank records. B. Collateral called for by notes or cards should be checked and accounted for and care exercised to see that the collateral securities have been properly assigned, either in blank or to the bank. A memorandum should be made of loans secured by stock or bonds of small, close or private corpora tions, in order that proper investigation may be made to determine the value. Care should be used to ascertain whether or not the mortgages or secur ities have been properly assigned and recorded, in order to give the bank proper title. In case of doubt as to priority of mortgages, title insurance policy or abstract of title should be called for.I . V Overdrafts should be carefully checked and care should be used to see if special privileges are given to favored in terests. INVESTMENTS. A. Actual securities should be counted and compared with the records of bank. In case of registered securities the certificates should be properly as signed in order to give the bank good title. A let ter should be addressed to the institutions holding -3securities for the account of the bank under examination, requesting that a list be furnish ed and also inquiry made as to whether the sec urities so held are subject to an offset of any kind * VI* BANKING HOUSE. VII- A. Real estate deeds should be examined and title should be in the name of the institution and pro perly recorded. Proof or abstract title examined to ascertain mortgages or liens. Appraised value, when and by whom appraised. Is building used ex clusively for bank. Has any allowance been made for depreciation. Has property been marked up. What is considered the present valuation of the property, B. Furniture and fixtures, actual cost. What al lowance has been made for depreciation, OTHER REAL ESTATE. A* * How acquired, prior mortgages, assessed valua tion, income, taxes, expenses, interest. Appraisea valuation, when and by whom made- VIII* DUE FROM RESERVE DEPOSITORIES * A. IX- Last statement should be reconciled- If not possible to obtain special statement during the course of the examination, transcript should be taken from the date of the last reconcilement * In case of active account request should be made that statement of account be furnished in order that it may be reconciled. In the case of Inact ive accounts, regular reconcilements should be sent to other institutions * (Reconcilement forms will be furnished by the Federal Reserve Board.) OTHER RESOURCES. A. Accrued interest not entered upon books* Esti mate should be made of accrued interest on demand loans, investment:.;securities and real estate rentals* f € _4 - X. LIABILITIES. A. Capital stock proof should be made from the stock certificate books and also stock ledger. Each stock certificate should be accounted for. XI. SURPLUS * XII. UNDIVIDED PROFITS. Should be checked. Represents the amount of profits as shown by the books, plus earning accounts and accrued interest not entered on the books; less current expense, interest and taxes paid, accrued interest and taxes and expenses not entered upon the books and estimate of unearned dis count. If possible, an analysis should be made of the Expenses and Earnings. XIII. DUE TO BANKS Statements should be sent to each bank with the return reconcilement blank; In this connection forms and en velopes will be furnished by the Federal Reserve Board, Envelopes may be used only,when examination is being made under the direction of the Federal Reserve Board. XIV a DIVIDENDS UNPAID. Pro6f should be made from the cancelled checks and check stub book. All cancelled checks should beCaccounted for. XV. DEPOSITS. A. Individual. Independent proof of ledger should be made. If time will permit proof should be taken of balances say one month back. In inspecting ledger accounts Examiner should be careful to see if any special privileges are being accorded to favored interests in permitting overdrafts or drawings against un collected items. Check kiting operations. Charges against inactive accounts. In case it is customary for bank bookkeeper to take off a proof every two weeks or at longer periods, the examiner may check the machine list made by bank employees, but an in dependent footing must be made by the examiner. It is better, wherever possible, to take off an inde pendent proof. — B* c^— Certificate of Deposit* Proof should be made from cancelled cer tificates and stub book. C. Certified checks. Proof should be made from the certified check book. Arrangements should be made to have all certified checks which are paid during the course of the examination returhed to the examiner be fore being given to bookkeepers. In this way it will be possible to check up the outstanding amounts. D. Cashiers checks outstanding. Proof should be made in certificates of deposit. course of the examination the examiner befohe being B. the same manner as Items paid during the should be inspected by given to the bookkeeper. Savings deposits or deposits in interest or savings department. If pdssible an independent proof should be taken df the savings ledgers. If time will not permit last proof taken by bank bookkeepers may be checked, provided an independent footing is made by the examiner. As a general rule, no with drawals are permitted on these accounts except on presentation of pass book. Some examiners have made it a point to require that all pass books presented during the course of the examination be in spected and balance compared by examiner or his assistant. Comment should be made in case the cash and ledgers of the savings or interest department are under single control. . F. Certificate of Deposit (Time) Should be verified in the same manner as demand certificates. XVI* NOTES AND BILLS REDISCOUNTED. AND BILLS PAYABLE. INCLUDING CERTIFICATES OF DEPOSIT. REPRESENTING MONEY BORROWED. A communication should be addressed to the institutions » -6- from which loans have been obtained, requesting advice as to the amount of indebtedness and the assets which have been pledged as security therefor* Investigation should be made in order to ascertain if the amount as shorn by the books represents the full amount of borrowings* XVII. MORTGAGES ON BANKING HOUSE AND ON OTHER REAL ESTATE OWNEDMay be ascertained from title insurance policy or from abstract of title* If papers are not on file the bank officials should be requested to obtain the necessary certificates to set forth the facts. XVIII* OTHER LIABILITIES. A. Accrued interest, taxes and expenses not enter ed on the books * Apportion to date of examination amount of inter est due on deposit accounts, certificates of depos its, taxes* Apportion amount taxes due on real es tate owned and franchise and income taxes* B. Expenses. Estimate to date of examination amount of un paid expenses, salaries, rentals, miscellaneous, etc. C* Estimate unearned discount * This is intended to represent an estimate of the amount which has been credited to discount earned but which has not yet been earned* Some examiners use the following method to determine the item; If the average time of notes in a cer tain bank appears to be 4 months and the average rate of discount the unearned discount is estimated at the rate of 5/6 of lf0 of the total amount of discounts. That is, the banks have credited up as -7 - earnings in advance of actual earn ings, an amount equal to 5/6 of 1% on the total discounts. Average length of time of notes 120 days Average maturity at any one time 60 " Average rate for year 5% Monthly proportion 5/l2 of 1% — 5/l2 plus 2 Average maturity at any one time multi plied by average monthly rate equals 5/6 of 1% XIX, In connection with the examination it is customary to read the proceedings of the Board of Directors and Executive Com mittee meetings. This may be dispensed with in the examina tion by Federal Reserve examiners if it is considered advis able to do so. XX, The general purpose is to make the examination thorough but to interfere as little as possible with the regular bank routine.