Columbia Bancorp in The Dalles, Ore., is shuttering its mortgage division and slashing about 18% of its work force in response to the housing slowdown in the Pacific Northwest, though analysts say it remains exposed to credit deterioration in other sectors.

The $1.1 billion-asset Columbia said Friday that it will close its mortgage division within 60 days, laying off about 39 employees. Additionally, it will cut 20 positions across all its divisions, and it has already eliminated 15 jobs through attrition.

"You never like to cut great people as the market contracts, but we have to take the appropriate steps to make the bank viable in the long term," Roger L. Christensen, Columbia's president and chief executive officer, said in an interview Friday. Closing the mortgage division is meant to "allow us to focus on our core business services."

In the second quarter Columbia lost $206,000 after posting a $5.7 million provision for bad residential construction and development loans. It has taken several measures to reduce costs in recent months. It slashed its quarterly dividend by 9 cents, to a penny a share. It has also suspended directors' fees and reduced Mr. Christensen's compensation by 23% for the rest of the year.

Columbia, a commercial lender, is heavily focused on commercial real estate lending. As of June 30 such loans made up roughly 72% of its $941.6 million portfolio, while mortgages made up 7%.

Chris Stulpin, an analyst at D.A. Davidson & Co., said Columbia's continuing exposure to residential construction loans, which make up the bulk of its nonperformers, is of particular concern and could deplete capital levels.

As of June 30, Columbia's Tier 1 capital ratio was 9.41%.

In the second quarter its nonperforming loans rose nearly tenfold, to $42.2 million, or 3.81% of total assets. That ratio had been 0.44% a year earlier and 1.13% in the first quarter.

Mr. Stulpin said one option for Columbia would be to sell its riskier residential construction loans. "It'll be difficult," to sell the loans, "but it's still easier than trying to raise additional capital — that market is closed now."

Joe Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said he also expects further credit deterioration "most immediately in its residential construction portfolio."

In addition, the deterioration could spread to other types of commercial real estate loans and commercial and industrial credits, Mr. Morford said.

Addressing those concerns Friday, Mr. Christensen said that the broad commercial real estate market is holding up, and that residential construction will eventually recover. "People are still moving to Oregon, and businesses are continuing to open," he said. Being a commercial banking company focusing on real estate and construction in particular is "the best model to have in this market." While it waits for the broader market to recover, Columbia continues to preserve capital by slowing loan growth and shrinking its balance sheet, Mr. Christensen said, and it is "always looking for ways to obtain the highest profitability you can." He would not say whether there would be any more significant cost cuts.

Columbia expects to incur a third-quarter charge of $139,000 related to severance expenses, but over the long term, the job cuts are expected to save the company about $4.2 million annually.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.