Question: This chapter notes that First Republic Bank, the largest banking concern in Texas, experienced serious financial problems in 1988 because many of its outstanding loans

This chapter notes that First Republic Bank, the largest banking concern in Texas, experienced serious financial problems in 1988 because many of its outstanding loans were not performing. It also points out that writing off these loans had caused certain financial ratios to drop, which could trigger the calling of approximately $270 million of the company’s long-term debt. These problems influenced the bank’s auditor to question whether the bank could continue in its present form. REQUIRED:

a. What does it mean to call a debt, and why would this present a problem for First Republic Bank?

b. Explain how loan write-offs could cause financial ratios to drop and trigger the calling of debt.

c. Would the bank’s auditors be likely to issue an unqualified opinion on First Republic Bank? Why or why not?

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