Two of the nation's biggest banks are taking further financial steps to deal with mounting office property distress.

Wells Fargo, the U.S. bank considered to have the most to lose in a stressed commercial real estate market, had wider losses related to offices in a sign that economic challenges are still affecting more than just the property industry.

The third-largest bank as measured by assets reported nonperforming assets in the second quarter were up $410 million, or 5%, from the first quarter, driven by higher business property nonaccrual loans, predominantly in its office portfolio.

This type of loss draws attention because a loan designated as nonaccrual indicates it is no longer generating its stated interest rate as a result of no payment having been made by the borrower for 90 days or more. Persistent inflation and elevated interest rates are proving challenging for owners looking to sell, investors seeking to buy and lenders expecting payments in the commercial real estate industry.

The nation's biggest bank by assets, New York's JPMorgan, reported $164 million of net charge-offs in its commercial and investment banking business, of which about half was for office commercial real estate loans.

That amount compares to $32 million in the previous quarter, reflecting JPMorgan's need to recognize more bad debt. A charge-off means the bank has removed the value of the loans from its books and charged them against loss reserves.

Wells Fargo charged off $84 million more commercial real estate loans in the second quarter, the bank said when delivering second-quarter results. Total charge-offs now stand at $271 million. The increase in charge-offs mainly reflects higher losses in its commercial real estate office portfolio as the bank said it had braced itself ahead of time.

The bank's office real estate portfolio "is playing out no worse than we would have expected," Wells Chief Executive Charlie Scharf said Friday during a conference call. “But there's still uncertainty there. So, we're maintaining the coverage. Overall, in terms of our expectations, there's really no real change from what we're seeing in the [commercial real estate] portfolio, which is where the loss content is actually coming through.”

Wells Fargo, based in San Francisco, has been working to reduce its office loan office exposure and reported it has moved down from 13% of loan volume a year earlier to 9% this past quarter.

Wells Fargo, JPMorgan Chase and Citigroup were the first of the largest U.S. banks to disclose second-quarter results.

Citigroup did not provide details on commercial or residential real estate loans in its second-quarter earnings release, presentation and conference call on Friday.

Late last month, the Federal Reserve released the results of its annual supervisory stress test, which assesses how large banks are likely to perform under challenging hypothetical economic conditions. The stress test helps ensure large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession.

Overall, the 2024 stress test showed the nation’s largest 31 banks have sufficient capital to absorb nearly $685 billion in losses and continue lending.

Large bank exposure to commercial real estate debt, however, was cited as an area of focus for Fed supervisors.

The severely adverse scenario for 2024 features heightened stress in commercial real estate, including a 40% decline in commercial real estate prices. The projected loss rate stood at $77 billion for banks.

“While there has been an increase in projected losses on loans to office properties, reflecting deteriorating fundamentals in the office segment, these are offset by a decline in projected losses on loans to hotels and retail properties, for which market fundamentals have improved over the last year,” the Fed said in its stress test report.

Of the 31 banks examined, Wells Fargo stood to lose the most, at $13.4 billion. JPMorgan’s projected commercial real estate loss was $4.8 billion, and Citigroup was $2.2 billion.

CoStar News reporter Andy Peters contributed to this report.