JPMorgan Chase & Co. said Wednesday morning before market open that net income dropped 34 percent from year-ago levels to $3.0 billion in the fourth quarter, down from $4.5 billion in Q4 2006. Bloomberg reported that earnings missed analyst expectations. Driving the drop in earnings was a $1.3 billion write down on the Wall Street bank's subprime positions, including CDOs. "We remain extremely cautious as we enter 2008," CEO Jamie Dimon said in a press statement. "If the economy weakens substantially from here – for which, as a company, we need to be prepared – it will negatively affect business volumes and drive credit costs higher." Credit costs, of course, are already high. JPMorgan's retail banking segment saw reserves for loan losses jump to $1.1 billion during the quarter, compared with $262 million in the prior year and an increase of $395 million from the third quarter. Citing weakness in home equity loans, the company said it had charged off $248 million of HELs in the fourth quarter. Subprime charge-offs registered $71 million. Mortgage banking activity sees improvement Despite increasing reserves and an accelerating pace of charge-offs, JPMorgan said its retail banking segment posted a 5 percent gain in net income during the fourth quarter as due to "improved results" in mortgage banking. Mortgage loan originations were $40.0 billion during the fourth quarter, up 34 percent from year-ago production and a 2 percent gain from the third quarter, the company said. Servicing revenue also took a big jump in the fourth quarter, driven primarily by a gain in the estimated value of the company's mortgage servicing rights as well as growth in the servicing portfolio. Third-party servicing grew 17 percent during the quarter, JPMorgan reported, driving growth of $67 million in servicing revenue. Mortgage servicing rights gained $499 million in value, JPMorgan said, due a decrease in estimated future prepayment activity. While it's clear the company isn't avoiding entirely the credit mess being driven by the mortgage industry, the relative success of JPMorgan's mortgage operations has led many to speculate that it may look to buy a weaker competitor during 2008. Washington Mutual, among others, have been cited by analysts as potential targets. Disclosure: At the time this story was published, the author held various put options on WM; no positions in JPM.