Wells Fargo (WFC) is seeing early signs of improvement in its lending portfolios as it reports an unexpected fourth-quarter profit.

Wells Fargo & Co. says that while loan losses remain elevated, the bank's confidence is growing that the worst of the cycle is over.The San Francisco bank said Wednesday it earned $394 million, or 8 cents per share, in the last three months of 2009. It lost $3.02 billion, or 84 cents per share, a year ago. Earnings were reduced by 47 cents per share tied to the repayment of $25 billion in government bailout money.

Analysts were expecting a loss of 1 cent per share.

Wells Fargo set aside $5.91 billion for loan losses during the quarter, down 30 percent from a year earlier.