July 17 (Reuters) - U.S. Bancorp's ( USB ) adjusted

profit fell about 10% in the second quarter on Wednesday, hurt

by a decline in interest income due to higher deposit costs and

muted loan demand.

Lenders in the U.S. have been offering higher interest

rates to retain deposits in recent months as customers

increasingly seek better returns by placing their money in

higher-yielding alternatives such as money-market funds.

Meanwhile, borrowers have also put off taking loans until

the interest rates normalize, further pressuring consumer-facing

banks.

U.S. Bancorp's ( USB ) net interest income (NII), the difference

between what banks pay customers on deposits and earn as

interest on loans, fell about 9% to $4.05 billion in the quarter

versus a year earlier.

The bank forecast NII to be stable in the current quarter

versus the second quarter levels.

The Minneapolis, Minnesota-based bank also reported a 3.6%

decline in average loans to $374.7 billion.

Net interest margin - a key measure of lending profitability

- contracted to 2.67%, compared with 2.90% in the year-ago

period.

"This quarter, credit metrics continued to perform in line

with expectations, and we believe our reserve levels are

appropriate for future losses. All capital and liquidity ratios

remain strong," CEO Andy Cecere said in a statement.

Net income attributable to the lender, on an adjusted basis,

fell to $1.62 billion or 98 cents per diluted share in the three

months ended June 30. That compares with $1.79 billion or $1.12

per diluted share, a year earlier.

U.S. Bancorp's ( USB ) stock is flat so far this year, and is the

worst performer on a key index tracking rivals. The S&P 500

Banks Index has gained 17.33% over the same period.