Sept. 16 (Bloomberg) -- Wells Fargo & Co., the nation’s biggest home lender, expects unpaid loans to increase, adding to signs that the U.S. real-estate crunch will squeeze bank profits the rest of this year.

Wells Fargo wasn’t accruing interest on $15.8 billion of loans as of June 30, or 1.9 percent of the total, Chief Executive Officer John Stumpf said at an investor conference today in New York. So far, Wells Fargo has taken $7.3 billion of the $41 billion in loan losses predicted when it acquired Wachovia Corp. last year, and costs tied to the takeover are likely to be less than the estimated $7.9 billion, he said.

Executives of Bank of America Corp., SunTrust Banks Inc. and Fifth Third Bancorp have told attendees at the two-day conference sponsored by Barclays Capital they’re expecting higher loan losses tied to real estate. Billionaire investor Warren Buffett, whose Berkshire Hathaway Inc. holds the biggest stake in San Francisco-based Wells Fargo, said today on CNBC the worst may be over for the residential market.

“We have forgiven over $1.8 billion in principal balances,” Stumpf said. “The loan modification efforts we’re making should help reduce the future losses.”

The 24-company KBW Bank Index rallied 65 percent from March 31 through yesterday and Wells Fargo doubled as concern faded that lenders might not survive the worst economic slump since the Great Depression. Shares of U.S. regional banks gained as much as 12 percent today, buoyed by Buffett’s outlook.

Risks Declining

Stumpf said risks facing Wells Fargo from the $89 billion in option adjustable-rate mortgages obtained through the Wachovia purchase have been reduced. Option-ARMs allow borrowers to defer interest while making payments on principal loan balances. The loans can backfire during a housing slump because the mortgage increases while the home price falls, boosting a lender’s potential loss.

“Not all option-ARM portfolios are alike,” Stumpf said. Interest deferred by borrowers who typically pay the minimum amount on their option-ARMs declined 7 percent this year through Aug. 31, to $4 billion, he said.

The bank’s risk from its $127 billion in commercial real estate is mitigated by experienced executives and better market conditions than during previous recessions, Stumpf said. “We’re not dealing with an outsized, overbuilt market,” he said.

Stumpf affirmed Wells Fargo’s plan to repay a $25 billion investment from the U.S. Troubled Asset Relief Program as soon as practical. Regulators told the bank in May to bolster its balance sheet after stress tests found a $13.7 billion capital gap tied to projected loan losses. The bank boosted capital by $14.2 billion with profits and the sale of common shares.

‘Shareholder-Friendly’

Wells Fargo will repay the U.S. bank bailout program “in a shareholder-friendly way,” Stumpf said.

Fifth Third Bancorp, Ohio’s largest lender, said today it would post about $775 million in uncollectible debt for the third quarter and recognize about $3.4 billion in assets no longer collecting interest.

Commercial loans, with “growth driven primarily by commercial real estate,” accounted for about $500 million to $525 million in charges, Fifth Third said in a filing today.

Bank of America, the biggest U.S. lender, and SunTrust, Georgia’s biggest bank, made presentations yesterday. Berkshire holds stakes in both companies.

“It’s clear that the banking industry faces several challenges in the near term,” Joe Price, chief financial officer at Bank of America, said yesterday at the conference. “Charge-offs remain on the upswing trajectory and there will likely be further increases to the reserve.”

Wells Fargo rose 76 cents to $29.34 in 1:51 p.m. New York Stock Exchange composite trading. Bank of America added 42 cents to $17.21. Fifth Third fell 5 cents to $10.25 on the Nasdaq Stock Market.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: September 16, 2009 14:10 EDT