July 17 (Reuters) -

U.S. Bancorp ( USB ) beat second-quarter profit estimates on Thursday, as the bank set aside

less money to cover potential loan defaults.

Shares of the lender fell 3.7% in premarket trading due to a third-quarter interest

income forecast that fell short of expectations.

Resilient credit quality and steady consumer spending have helped stave off a sharp increase

in bad loan provisions across the banking sector.

The Minnesota-based bank's provisions for credit losses declined 12% to $501 million in

the quarter, driven by improved credit quality and loan portfolio sales, beating analysts'

average expectation of $610.3 million in bad loan provisions, according to estimates compiled by

LSEG.

The sale of certain loans in the quarter resulted in a $53 million reserve release.

Credit quality remained stable to improving, despite ongoing economic uncertainty, the bank

said.

On an adjusted basis, net income attributable to the lender was $1.11 per share in the three

months ended June 30, beating expectations of $1.07.

"Both loans and NII were down fractionally, but over time we would expect USB to get its

share of loan growth," Oppenheimer analyst Chris Kotowski said.

INTEREST INCOME LAGS

Net interest income, or the difference between loan earnings and deposit payments, totaled

$4.05 billion in the quarter, missing estimates of $4.12 billion.

The bank said NII was partially hit by lower noninterest-bearing deposit balances in the

reported quarter.

Chief Financial Officer John Stern said last month that with rate cuts pushed out, NII

was expected at the lower end of the $4.1 billion to $4.2 billion range.

U.S. Bancorp ( USB ) expects third-quarter interest income between $4.1 billion and $4.2 billion,

compared with expectations of $4.24 billion.

Net interest margin, a key measure of lending profitability, narrowed to 2.66%, from 2.67% a

year earlier.