Valley Bank said third-quarter earnings fell 39 percent and cited weakness in the residential housing market, although the chain hasn't been a subprime lender.

The bank earned $610,000, or 14 cents a share, during the three months that ended Sept. 30, compared with earning $986,000, or 23 cents a share, during the same period of 2006.

Ellis Gutshall, president and chief executive officer, signaled in a prepared release some easing of problems with three unidentified borrowers that have struggled to repay large commercial loans. If the company resolves those issues in coming weeks and months, it could improve the company's financial results during the October-December quarter, he said.

"The companies are trying to sell off parts of the companies or divisions or raise equity in other ways. We've seen some positive moves along those lines," Gutshall said in an interview.

Gutshall declined to say if one of the borrowers is United Home Health Care, a Roanoke medical equipment and services company. A Roanoke City Circuit Court judge earlier this month awarded Valley Bank the inventory, equipment, fixtures and accounts of United Home Health Care in connection with what Valley Bank said were two business loans during the past year and a half for $532,000 that went into default. A man who answered the phone at United Home Health Care on Friday said no one who is in charge was available to comment.

Gutshall said the normal course of business would be for Valley Bank to endeavor to turn those assets into cash. Under previous ownership, United Home Health Care, facing financial difficulties in 2005, deeded a commercial retail building on Apperson Drive in Salem to Valley Bank, which had financed its construction. Valley Bank sold the property for nearly $1.3 million, according to papers filed in U.S. Bankruptcy Court.

For the nine months of 2007, Valley Bank has earned $2 million, or 47 cents a share, compared with earning $2.7 million, or 64 cents a share, during the same period of 2006.

Gutshall said the struggles of residential borrowers in Roanoke and elsewhere are taking a toll on bank earnings, "and some industry observers are saying the worst may still be yet to come."

Valley Bank, in an effort to work with customers, extends payment terms and lowers rates in some cases. "It doesn't take too many of those to add up to a couple [of] hundred thousand dollars of exposure," he said. Valley Bank set aside an additional $482,000 to cover expected lending losses.

"On a positive note," the release said, "the company does not have any subprime mortgage loans [transactions in which the often marginally qualified borrowers have put little if any money down and yet obtained low initial interest rates] in its residential portfolio," he said. No loans are more than 90 days past due.

Shares of Valley Bank's parent company, Valley Financial Corp., closed Friday at $10.69, up 44 cents, or nearly 5 percent.