American Riviera Bank (OTC BB: ARBV.OB) on Wednesday reported healthy capital levels and continued growth in deposits and net interest margin during the third quarter.

“We are pleased with the core performance of American Riviera Bank demonstrated by the growth in our net interest income and margin,” president and CEO Jeff DeVine said. “As expected, in response to economic conditions we bolstered loan loss provision in the third quarter; however, our loan relationships continue to be well managed and closely monitored. We believe the bank is well-positioned for continued growth and consistent profitability when credit conditions improve.”

American Riviera Bank’s deposits grew 5 percent during the quarter, reaching $109.2 million at Sept. 30, with nearly 80 percent representing core deposits and a 71 percent increase in deposits from Sept. 30, 2008. The bank’s cost of funds decreased to 1.73 percent for the quarter from 2.22 percent in the second quarter ended June 30.

The bank, at 1033 Anacapa St. in downtown Santa Barbara, reported total loans of $104.8 million as of the third quarter, an increase of 34 percent, or $24.9 million, from the same quarter in 2008. The bank’s net interest income increased 38 percent to $2.6 million for the nine-month period ended Sept. 30 compared with the same period last year. The bank’s net interest margin was 4.17 percent for the third quarter, up from 3.95 percent for the second quarter, which contributed to an increase in net interest income of $101,000 for the quarter.

During the third quarter, American Riviera Bank identified specific weaknesses in certain loans and took appropriate and conservative actions. The bank made a decision to move $6.4 million of loans to nonaccrual and charged off $826,000 in loan principal. Remaining principal on such loans is fully supported by real estate collateral at current appraised value. The Bank had only $124,000 in loans past due greater than 30 days that were still accruing interest.

In response to economic and credit conditions, the bank provided an additional $1,089,000 in loan loss provision during the third quarter and increased the allowance for loan loss to total loan ratio to 1.61 percent compared with 1.38 percent for the second quarter. Management believes the allowance for loan loss is adequate to provide for probable losses inherent in the loan portfolio at this time based on the historical performance of the loan portfolio to date and the extensive monitoring and value testing recently performed.

The bank reported an unaudited net loss for the quarter of $1,024,000, which includes $1,089,000 in provision for loan losses and a $312,000 reduction in fair value of other real estate owned. Excluding those items, the bank would have generated earnings of $377,000 for the quarter. The bank continues to maintain a strong capital position with a Tier 1 Leverage ratio of 13.6 percent, well above the regulatory guideline of 5 percent for well-capitalized institutions.

— Michelle Martinich is senior vice president and chief financial officer for American Riviera Bank.