Bank of America Corp. (BAC) said Monday that net income fell to $1.21 billion, $0.23/share, in the first quarter of 2008, compared to earnings of $5.26 billion, or $1.16/share, in the year ago period -- numbers that were well below investor and analyst expectations. Shares of the North Carolina-based financial giant were off nearly 2 percent in early trading, as a result. Driving the steep drop in income were continuing problems in mortgages, as well as increasing stress in more general consumer lending categories -- not to mention emerging credit quality issues in key commercial lending sectors. In particular, large losses tied to residential home equity lending, and another $1.9 billion in write-downs spanning CDOs to leveraged loans, drove a significant increase in both charge-off activity as well as loss provisioning. Home equity a problem Consumer and small business lending, 77 percent of the bank's revenue base during Q1, saw losses mount as more consumers found themselves unable to manage their outstanding debt, resulting in increased losses on mortgages, home equity lending, and credit cards. BofA provisioned a whopping $6.5 billion for expected credit losses in its consumer-facing businesses, compared to $2.4 billion one year earlier -- the vast majority of which was tied to credit cards. Nonetheless, $1.9 billion of that total was reserved in Q1 for expected losses tied to residential mortgages and home equity lending, the bank said, up dramatically from $687 million provisioned for expected losses just one quarter earlier. Home equity lending proved especially problematic. BofA's allowance for loan losses in home equity lending jumped from $963 million to $2.6 billion in one quarter, as net charge offs rose 177 percent to $496 million. More than $1.78 billion of home equity loans were nonperforming in Q1, compared to $1.3 billion in the fourth quarter of 2007. Much of the home equity losses absorbed by Bank of America are stemming from problems in California and Florida, the bank said on a call with analysts and investors. 39 percent of the bank's HE portfolio is in these two states, yet they represent they represent more than half of all charge-offs. Residential mortgages saw their share of trouble during the quarter as well, with charge offs more than doubling, although the total was a smaller $66 million for the first quarter; BofA had recorded $27 million is such charge-off activity during the fourth quarter of last year. Non-performing residential mortgages, however, grew surprisingly fast -- reaching nearly $2.6 billion during Q1, up nearly 30 percent in one quarter. 10 percent of the mortgage portfolio includes borrowers now at 90 percent or greater loan-to-value, BofA said. CEO Kenneth Lewis said that charge-offs will remain an issue going forward, likely signaling further earnings pressure in future quarters. "Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year," he said. Disclosure: The author held no positions in BAC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.