Tostadas, Tortilla Chips, and Bank Loans: Wells Fargo and Salinas y Salinas

1. Tostadas, Tortilla Chips, and Bank Loans:Wells Fargo and Salinas y Salinas ________________________________________ Power Point to accompany Opportunities and Challenges of Workplace Diversity by Kathryn A. Cañas and Harris Sondak Prepared by Levi Baker, Kathryn A. Cañas, and Harris Sondak

2. Case Overview • The Situation • Background on Salinas & Salinas • Challenges in Company’s Early Years • S&S Management Value System • Albert Gomez, Commercial Loan Officer • John Murillo, VP of Community Banking • Background on Wells Fargo • Latino Influence on U.S. Economy and Culture • A Complicated Financial History • The Salinas Family and Wells Fargo • A Major Capital Expansion for S&S • Gomez’s Assumptions and Analysis • Discussion Questions

3. The Situation • Albert Gomez, a Wells Fargo loan officer, developed a relationship with the Salinas family for over 3 years. • Salinas y Salinas requested a $4.25 MM loan for a new state-of-the-art tortilla factory. • Wells Fargo almost lost the account due to mistrust of the former manager.

4. The Situation • Management’s perception of high risk because of lack of familiarity with the Latino business culture. • Management’s perception of bias due to the close relationship between Gomez and the Salinas family. Obstacles:

5. Background on Salinas y Salinas Financial data at the time of the loan request: • Annual revenues: $5.1 MM • Compensation rate on revenue: 25% • Net income over past 3 years: 10% • Plant running at full capacity 24 hours a day, 6 days a week • Market growing at a rate of 3%

6. Challenges in the Early Years • Family finances mixed with business • Major competitors: Gruma Bimbo Minsa • Suppliers: • Prices fluctuated within the commodities market. • S&S had no hedging strategy. • S&S lacked direct control of the supply-chain.

7. S&S Management Value System • Hands-on • Family • Spiritual values • Positive “can do” mindset • 50-cent fine • Trucker gospel

8. Albert GomezBusiness Banking Commercial Loan Officer “A Rising Star in Business Banking” • Ranked top 10 for commercial loan officers. • Put himself through school at USC. • Grew up in East L.A.; speaks Spanish and English fluently.

9. Murillo took Gomez to meet with the Salinas family. The initial meeting lasted several hours, and Spanish was spoken throughout the discussion. Plant $1,787,000 Apartments $504,000 Trucks $80,000 John MurilloVice President and District Manager, Community Banking Murillo estimated S&S assets as follows:

10. Wells Fargo Company (NYSE: WFC)Background Information • $370 billion in assets • 134,000 employees • 5,800 branches in North America • Bank motto: “Out-local the nationals and out-national the locals.” • Top executives committed to serving the Latino market • Murillo catered to the Latino market by offering: • Signage in Spanish • Background music from Spanish radio stations • Decorations and artwork consistent with Latino cultural background • A welcome atmosphere for children in the store

11. Latino Influence on U.S. Economy and Culture • Latino population increased 53% in the 1980s and 58% in the 1990s. • In 1991, salsa trumped ketchup as top selling condiment in the U.S. • U.S. Hispanic spending projected to grow at 9% until 2020, outpacing 6% average. • Consumer market projected to climb from 7% to 13% in 2000.

12. A Complicated Financial History • Non-professional atmosphere in the S&S facilities. • Salinas family mistrust toward government institutions, including large financial banks. • Poor credit due to default on cosigned “family” loans. • Tax minimization strategies that lowered income reporting, thereby reducing credit potential. • Multiple income-earners, as opposed to traditional lending protocol (two income-earner standard).

13. The Salinas Family and Wells Fargo • Although S&S showed no profits, Gomez secures 100k line of credit. • Salinas family agrees to hire professional accountants and avoid tax minimization. • S&S hires corporate attorneys to limit personal liability. • S&S qualifies for a line of credit to expand existing capacity. • Raphael Salinas scouts out a nearby property and applies for a large-scale loan.

14. A Major Capital Expansion for S&S • Raphael Salinas believed that he had tapped only 5% of the total Latino market in L.A. • The new facility would expand from 5 to 17 production lines, tripling revenues. • Increased production could meet the demand of large mainstream distributors. • The property was located nearby, allowing employee retention.

15. Gomez’s Assumptions • 9.18% APR with a 2% spread • 20-year new building loan • Straight-line amortization over 20 years • Quarterly compounded interest • No loans outside Wells Fargo • Depreciation of 590K per year • Allowed Salinas family residual personal income of about 75 % that could be used to service loan

16. Discussion Questions • Why was the personal relationship between Murillo and Gomez and the Salinas so important? • Why have Murillo and Gomez been so successful in working with the Hispanic community? • Why was careful attention to the Latino market a significant aspect of Wells Fargo’s strategy? • What cultural factors did Gomez fear would undermine the confidence of his managers in the Salinas’ business? • What other examples can you identify of cultural misunderstandings that might hinder a business transaction?