(Update 1: includes updated look at mortgage exposure) Wachovia Corp (WB) said Monday morning that it lost $393 million, or $.20/share, during the first quarter of 2008 as the nation's fourth largest bank struggled with its exposure to the troubled U.S. mortgage market. The earnings miss contrasted with earnings of $2.3 billion, or $1.20/share, in the year ago period. Thomson Financial reported that analysts had been expecting earnings of $.40/share for the quarter. CEO Ken Thompson called the first quarter loss "deeply disappointing" and said that the bank would move to slash its dividend in a move to preserve capital, as a well as looking to raise $7 billion in a share sale. "The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses," he said in a press statement Monday morning. Cutting its dividend to 37.5 cents is expected to save $2 billion of capital annually, the company said. "The most painful decision was to reduce the dividend because it adversely affects our shareholders," said Thompson. "But we believe the long-term benefit to shareholder value outweighs the disadvantage of the dividend reduction as we fortify our balance sheet against continued instability in the housing and capital markets." Credit costs soar The nation's fourth largest bank said it absorbed credit losses of $2.8 billion during the quarter, which exceeded net charge-off activity totalling $2.1 billion. Continued market disruption led to write-offs and impairment charges totally $1.97 billion, Wachovia said, of which $339 million was tied to CDO and other subprime-related write-downs and another $251 million was tied to consumer mortgages. Non-performing assets -- including non-accrual loans and foreclosed properties -- surged in the first quarter. Total NPAs reached 1.74 percent of loans, or $8.3 billion, compared to 1.16 percent ($5.4 billion) one quarter earlier. On a dollar comparison basis, that's an increase in NPAs of 55.5 percent in just one quarter. Wachovia has been facing increasing trouble tied to ongoing turmoil in the U.S. mortgage market, and in particular has had problems associated with an ill-timed acquisition of option ARM mortgage specialist Golden West Financial. So-called "pick-a-pay" loans generated $240 million in charge-offs for the quarter, Wachovia said, by far the largest category of credit losses relative to other sectors. Non-performing assets in option ARMs alone rose to 3.55 percent, up from 2.31 percent just one quarter earlier. Not surprisingly, Wachovia has been looking in recent weeks to make a sharp pullback from option ARM lending, which can quickly put borrowers in a so-called "negative equity" situation (see earlier HW coverage here). During the housing slump, such an outcome is driving many borrowers to simply walk away from their homes, rather than face the often arduous and time-intensive process that can be associated with performing a loan workout. Disclosure: The author held no positions in WB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.