Wells Fargo & Co. (WFC) Chief Executive John Stumpf said Wednesday that he expects the San Francisco bank's badly past-due loans to increase next quarter. He also said the bank has used 21% of its credits for losses tied to commercial property 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 in credits for losses from Wachovia's commercial mortgages, or one-fifth of the $10.4 billion in total losses it expects from those loans. Stumpf made the announcement at a financial services conference in New York.

Separately, Stumpf said he expects the bank's levels of nonperforming loans, or those nearing permanent loss, to increase. Stumpf's message threatens to cool a rally in regional banks shares, which rose sharply Tuesday after the chief executive of Regions Financial Corp. (RF) said his Birmingham, Ala.-based bank's nonperforming loans likely peaked in the second quarter.

Shares in Wells Fargo were recently up 0.8% to $28.81 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's used $3.8 billion thus far to offset losses on Pick-A-Pay loans, a risky type of home mortgage.

Wachovia wrote 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 troubled Pick-A-Pay loans to generate another $22.7 billion in losses.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com