UPDATE: Wells Fargo CEO Sees Bad Loans Rising

Wells Fargo & Co. (WFC) Chief Executive John Stumpf reiterated Wednesday that he expects the San Francisco bank's nonperforming assets, or troubled loans, to increase next quarter. He also said the bank has used 21% of its credits for losses tied to some commercial and foreign loans from Wachovia Corp., which Wells Fargo purchased last year.

Speaking at a financial services conference in New York hosted by Barclays PLC (BCS), Stumpf said Wells Fargo has used $2.2 billion of an available $10.4 billion in credits for losses from the most troubled of Wachovia's commercial and foreign loans. Wells Fargo has a remaining $8.2 billion to cover future losses from the loans, which include mortgages tied to commercial properties like office buildings and housing developments.

Separately, Stumpf said he expects the bank's levels of nonperforming loans, or loans that may become uncollectable, to increase.

"Considering the current economic environment, we would expect our nonperforming assets to continue to increase," Stumpf said.

Wells Fargo issued a similar forecast when it reported its earnings for the second quarter.

Stumpf's message is a contrast to remarks on Tuesday from the chief executive of Regions Financial Corp (RF), C. Dowd Ritter, who said nonperforming loans at his regional bank, based in Birmingham, Ala., likely peaked in the second quarter.

Shares in Wells Fargo were recently up 3% to $29.43 in composite morning trading.

Wells Fargo bought its teetering rival, Charlotte's Wachovia, for $12.7 billion at the end of last year after Wachovia began to crumble under losses from billions in risky home loans. A crucial component of Wells Fargo's merger of the two banks is whether Wachovia's piles of risky real estate loans perform as Wells Fargo initially expected over the coming quarters and years.

During this decade, Wachovia expanded aggressively into mortgages for commercial properties such as housing developments and office buildings. Analysts widely expect commercial real estate loans to hit banks with heavy losses over the coming year since losses from commercial loans typically rise months or years after losses from home loans surface.

At the time of the purchase, Wells Fargo was permitted by accounting rules to declare $96.2 billion of Wachovia's loans as "credit-impaired," or likely to produce losses. Wells Fargo was allowed to immediately write off the $40.9 billion losses it expected those loans to generate in order to prevent the bank from being damaged by Wachovia's loan troubles.

Of the $40.9 billion in credits for Wachovia losses, Wells Fargo said Wednesday that it has used $3.8 billion thus far to offset losses on Pick-A-Pay loans, a risky type of home mortgage.

"Overall, our impaired loans, including Pick-A-Pay and commercial real estate, have performed in line with our original expectations," Stumpf said. He called those loans "the two loan portfolios of most interest to investors."

Wachovia issued more than $120 billion of the risky home loans, which offered borrowers the option of four monthly payments, including a minimum payment that increased the loan's balance.

Wells Fargo expects the most troubled Pick-A-Pay loans, whose losses can be covered by the credits, to generate another $22.7 billion in losses.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; [e-mail]