The bank did say problems remain in lending portfolios and that another downturn in the economy would hurt profitability. But unlike the extremely cautious tone banks such as JPMorgan Chase & Co. and Citigroup Inc. have taken in recent days, Wells Fargo provided a brighter picture for 2010.
Mike Loughlin, Wells Fargo's chief credit and risk officer, said, "while losses remained elevated during the quarter as expected, a more favorable economic outlook and improved credit statistics in several portfolios further increase our confidence that our credit cycle is turning."
Analysts weren't as sure about Wells Fargo's statements on a potential recovery.
"I think it's still too early to make that prediction," said Adam Barkstrom, a managing director at Sterne Agee. Barkstrom said the bank is still highly exposed to risky mortgage markets like Florida and California.
Economists and investors also have doubts about consumers' ability to pay their bills because many banks are still reporting a high number of loan defaults. But Wells Fargo said it was seeing improvement.
"We think the consumer is getting a little bit better now," Howard Atkins, Wells Fargo's chief financial officer, said during an interview with The Associated Press. He said the pace of that improvement is likely to be slow in 2010 and will depend on unemployment, which remained at 10 percent in December.
The San Francisco-based bank earned $394 million after paying preferred dividends, or 8 cents per share, when analysts polled by Thomson Reuters were expecting a loss of 1 cent per share. Earnings were reduced by 47 cents per share because of costs tied to repaying $25 billion in government bailout money.
Wells Fargo lost $3.02 billion, or 84 cents per share, during the final quarter of 2008 when the credit crisis peaked.
Quarterly revenue exceeded expectations. Wells Fargo generated $22.7 billion in revenue during the quarter, compared to analysts' forecasts of $21.97 billion.
The company's shares initially rose on the news, then turned lower as the overall market declined, trading down 31 cents at $27.97.
Loughlin did say deterioration in the broader economy could hinder a further recovery in the bank's performance. Losses on loans are still a problem as people default on debt including mortgages and credit cards.
Loans written off as being uncollectable nearly doubled from the year-ago period to $5.9 billion. However, the most recent quarter's results include the additional loans acquired when Wells Fargo bought Wachovia Corp. just over a year ago.
Wells Fargo set aside $5.91 billion for loan losses during the quarter, a 30 percent decline from the same period a year earlier.
Credit losses are lower than the bank projected when it acquired Wachovia. The purchase of Charlotte, N.C.-based Wachovia added a big pool of risky mortgages that were among the worst-performing types of loans during the recession. Wachovia's portfolio was considered riskier than Wells Fargo's.
Atkins said Wells Fargo's aggressive approach to tightening lending standards and managing risk in its portfolios over the past two or three years is one of the primary reasons the bank believes it will see improvement in 2010. Wells Fargo was able to significantly write down the value of Wachovia's risky mortgage portfolio immediately after it bought the bank.
The bank said losses on bad loans could peak even earlier than previously expected based on its fourth-quarter performance. After the third quarter, Wells Fargo said consumer loan losses would peak in the first half of 2010 and commercial loan defaults would peak during the second half of the year.
Wells Fargo issued new stock during the last quarter of 2009 as part of its repayment of government bailout money. The bank was one of the final large, national banks to pay back the $25 billion it received as part of the Troubled Asset Relief Program.
Wells Fargo was able to more than offset continued loan losses and the charges tied to repaying TARP through growing fee-based revenues, such as mortgage banking and credit and debit card fees.
For the full year, Wells Fargo reported a profit of $7.99 billion after paying preferred dividends, or $1.75 per share. It earned $2.37 billion, or 70 cents per share, in 2008.
Excluding dividends, Wells Fargo reported record yearly profit of $12.28 billion.