Ellis Gutshall, president and chief executive officer of Valley Bank, had warned in October that a problem loan to an unidentified local company could ruin Valley Financial Corp.'s 2006 earnings if the debt wasn't resolved in the fourth quarter. His concern was valid.

The Roanoke-based bank holding company departed from nearly a decade of steady growth and profitability by reporting Friday that fourth-quarter net income plunged 86 percent to $156,000, or 4 cents a common share, from $1.1 million, or 27 cents a share, in the same time period a year ago.

For the full year, Valley's profit fell 15 percent to $2.9 million, or 68 cents a share, from $3.4 million, or 80 cents.

Founded in 1995, the company, headquartered downtown, has added seven other locations. It achieved annual profitability in 1997 and the earnings had increased every year until 2006. Now it's trying to collect a $4.1 million debt that exceeds the bank's entire 2005 profit.

The stock, which is held by about 700 to 800 individuals and institutional investors, is traded on the Nasdaq. It closed Friday at $13.69 a share, unchanged.

The earnings statement was sent to The Roanoke Times after the stock markets had closed.

The delinquent commercial loan that caused the lower earnings isn't to the same debtor that Gutshall alluded to in October, when he said Valley's 2006 performance was "largely dependent" on resolving potential exposure that existed then. That debt wasn't resolved, and the bank set aside $1.2 million earlier in 2006 to cover the loss.

But since then another local company has begun missing its payments on a $4.1 million loan for which the interest alone totals about $25,000 a month, and some of the principal is past due, Gutshall said.

He said the company has received more time to pay. But repayment of that loan is uncertain, Gutshall allowed. "We're pushing toward a forebearance arrangement in which we all agree to set some targets of where we want this to go." The next step, usually, if a commercial lender can't pay, is a so-called workout agreement that forces the borrower to liquidate certain assets.

But the return on such financial fire sales isn't guaranteed. Gutshall was quoted using terse language in the printed statement, "At this time, we believe the loans (five to one borrower) are not adequately secured; therefore, a special provision was made to the loan loss reserve in the amount of $776,200 to reflect the potential exposure that we deem exists."

Banks don't discuss the financial details of clients without their permission, and Gutshall has declined to answer questions from The Roanoke Times about either the identity of the debtors that have made the loans delinquent or the specific nature of the difficulties.

The poor loan performance has prompted a restructuring of the company's lending operation, Gutshall said Friday, still in his office at almost 7 p.m. "Catherine Hartman, our chief credit officer, now reports directly to me," he said. She previously reported to Randy Woodson, executive vice president and chief operating officer.

Asked about his future at Valley, Gutshall said he plans to stay on the job. "I'm taking this one by the horns," he said.

Wayne Lewis, a board member who retired as the bank's former executive vice president in July 2005, declined to elaborate on Friday's news release. Asked if he was satisfied with current management, Lewis said, "We have every confidence in Ellie Gutshall."

In Friday's printed release, there were few additional details, all attributed to Gutshall: "Five loans aggregating an approximate outstanding principal balance of $4.1 million."

Ironically, focusing loans on local companies is precisely the strategy that banks have been urged by regulators and analysts to follow. But problem loans have backfired on a Roanoke bank before, sinking Dominion Bankshares after a first-quarter 1992 loss of $27.8 million. That blood on the balance sheet attracted buyers and Dominion was soon acquired by First Union, which later became part of Wachovia.

rob.johnson@roanoke.com 981-3234

jeff.sturgeon@roanoke.com 981-3251