Memorandum on findings

BORREGO SPRINGS BANK, NATIONAL ASSOCIATION

7777 ALVARADO ROAD
LA MESA, California 91942

STAR RATING: 3
Predictive Indicator neutral
As of December 31, 2012
Federal Reserve System Identifier 962265

HOLDING COMPANY INFORMATION

(Based on data from the previous quarter.)

This bank is not owned by a holding company.

INTRODUCTION

U.S. commercial banks are chartered under either federal or state jurisdiction for the purposes of accepting funds for deposit and extending loans to either individual or business borrowers. Banks are subject to credit, interest rate, and operational risk, and, because of both their public purpose and their importance to the nation’s economy, banks become the object of intense regulatory scrutiny.

U.S. thrift institutions are chartered under either federal or state jurisdiction for the primary purpose of utilizing deposited funds to issue loans secured by real estate. Currently, real estate-backed loans account for approximately 45% of total thrift industry assets, and one-to-four family residential mortgages comprise nearly 65% of the industry’s real estate loan portfolio. Thrift institutions are subject to credit, interest rate, and operational risk, and, during the last twenty years, thrifts have made great strides toward reducing historic mismatches between asset and liability maturities.

Recent Changes to thrift call reporting may impact institution ratings as a result of altered peer groupings as well as other factors.

The Bankrate proprietary commercial bank rating model analyzes capitalization, asset quality, earnings, and liquidity and produces composite and component "Star" ratings that can be used as a measure of the rated entity's financial safety and soundness. Additionally, early warning components of the model highlight operating characteristics of immediate concern and recommended follow-up actions. "The analyses are not adjusted for TARP funding and those institutions receiving funds may receive ratings that would differ were the TARP funds adjusted out of the analyses. You can check whether or not this institution has received TARP funding and whether or not they have paid it back at http://bailout.propublica.org/main/list/index."

COMPONENT HIGHLIGHTS

Institution Commentary

OVERVIEW of Institution
BORREGO SPRINGS BANK, NATIONAL ASSOCIATION is a nationally chartered banking institution, which, as of December 31, 2012, reported $141.7080 million in total assets. At that date, loans and deposits held by the bank amounted to $96.9790 million and $121.0750 million, respectively. The bank's December 31, 2012 equity base of $15.9650 million produced an Equity/Assets ratio of 11.27%, as of that date.

COMPOSITE SUMMARY
Bankrate believes that, as of December 31, 2012, this bank exhibited a generally satisfactory condition, characterized by normal overall, sustainable profitability, very questionable asset quality, strong capitalization and seemingly ample liquidity.

EARNINGS ANALYSIS
For the twelve months ended December 31, 2012, the bank recorded net income of $940.00 thousand. The bank experienced a return on average assets (ROA) of 0.66% over the latest four quarters. Year earlier twelve month results amounted to a net profit of $1.0320 million, or a 0.73% ROA over the most recent four quarters at that time. An ROA of at least 1.0% is deemed satisfactory in accordance with banking industry standards, and the industry's annualized ROA for the twelve months of 2012 was approximately 1.00% for commercial banks and 1.06% for thrift institutions. We have concluded that for the four quarters ending December 31, 2012, the bank achieved a very healthy return on equity. We deem net interest margin to have been strong. Noninterest income was solid. We also observed overhead ratios that were significantly higher than average, and the composition of overhead should be thoroughly analyzed. Importantly, net interest margins, noninterest income components, and overhead expense levels represent operating factors that combine to impact overall operating results.

ASSET QUALITY ANALYSIS
The bank revealed, as previously stated, very questionable asset quality. Our conclusion with respect to asset quality incorporates our analysis of data depicting regional economic conditions as well as our computations of a substantially higher than standard December 31, 2012 nonperforming asset ratio, below normal reserve coverage for nonperforming loans; and much greater than average holdings of commercial real estate and construction loans, two categories that can intensify credit risk. The bank's current level of nonperforming assets could lead to sharp write-downs and consequent substantial loss provisions. Hence, careful monitoring and additional inquiry are warranted.

Commercial real estate and construction loans should be examined for:

• Loan underwriting and appraisal standards that differ from normal bank guidelines.
• Loan-to-value benchmarks deemed not in conformance with prudent underwriting requirements.
• Speculative construction activity.
• The deferral of interest payments during construction periods.
• The funding of the entire amount of construction costs and land valuation.

Other asset categories, such as farm and consumer loans, which may carry more than usual default potential, should not have a substantial negative impact upon future results.

Loan yield can measure financial reward versus credit risk. Excessive loan yield may be an indicator of existing or future problems. Our loan review indicates that the bank has assumed a seemingly prudent position between credit risk and financial reward.

CAPITAL ANALYSIS
For the one year period ended December 31, 2012, the bank reported a strong rate of growth in equity capital. Balance sheet structural changes, through the one year period of time ended December 31, 2012, have highly improved the bank's capital position. Our analytical methodology does take into account the quantity, quality, and durability of net worth, and, as set forth above, we have determined, based upon our series of tests, that the bank demonstrates strong capitalization. We have calculated the bank's December 31, 2012 Total Risk-Based Capital position, a computation used by industry regulators, and have concluded that this bank exceeded the requirement, set by regulation, for this test.

LIQUIDITY ANALYSIS
As of December 31, 2012, the bank displayed Substantially Below Normal balance sheet liquidity and a No Greater Than Average Dependence upon wholesale, or non-core liabilities, which include all borrowings, such as Federal Home Loan Bank Advances, and CD's greater than $250,000.

Accounting principles require some securities to be categorized as "Available-for-Sale." Changes in market value of these securities are reflected through the GAAP (Generally Accepted Accounting Principles) net worth of the institution. Based upon the bank's present balance sheet, changes in the value of the current level of securities reported as "Available-for-Sale" might not have a substantial impact upon future net worth of the bank.

INSTITUTION SUMMARY
This bank has been rated generally satisfactory.

Negative factors that impacted that rating follow:

• Asset Quality

As noted previously, early warning indicators, possibly requiring specific investigation include:

• Overhead
• Nonperforming Assets
• Commercial Real Estate and Construction Lending

PREDICTIVE INDICATOR
As stated, we have determined a composite Star rating for this bank of 3 , indicative of a generally satisfactory financial condition. At times, financial conditions of banks change rapidly and significantly. Hence, our Safe & Sound Star ratings should not be deemed predictive of likely future ratings. However, in view of early warning indicators set forth within this report, in combination with the institution's financial data, we believe that the Star rating for this institution is unlikely to change within the ensuing twelve month period.