(Corrects spelling of Buffett in the last paragraph.)

July 15 (Bloomberg) -- U.S. Bancorp, Minnesota's biggest bank, said second-quarter earnings slumped 18 percent and predicted bad loans will continue to rise as more customers fall behind on payments.

Net income declined to $950 million, or 53 cents a share, from $1.16 billion, or 65 cents, in the same period a year earlier, the Minneapolis-based lender said in a statement today. A survey of 19 analysts by Bloomberg estimated a 59-cent profit. Securities and credit losses trimmed earnings by 11 cents a share, the company said.

U.S. Bancorp expects increased net charge-offs in the third quarter, and ``despite this upward trend, credit costs are expected to be manageable,'' Chief Executive Officer Richard Davis said in the statement.

The lender has been building its fee-based businesses as lending became less profitable and the bank said credit costs ate into higher revenue from those operations. The lender got more than 26 percent of its revenue from its payment processing unit in 2007. U.S. consumer borrowing in the first quarter rose by $34 billion, the most since 2001, when the economy was headed into a recession.

U.S. Bancorp has some sort of ``safe haven status, that kind of leaves them a little less room for any uncertainty or weakness,'' said Sandler O'Neill & Partners LP analyst Scott Siefers. ``The good news is when you generate the kind of profitability U.S. Bancorp does, `manageable' means you can really manage pretty significant deterioration and still turn a profit,'' he said.

Provisions Tripled

U.S. Bancorp fell 13 cents to $23.20 at 12:08 p.m. in New York Stock Exchange composite trading. Earlier the stock slumped as much as 12 percent. The lender was the fifth-best performing stock tracked by the 24-company KBW Bank Index this year.

The bank more than tripled its provision for credit losses to $596 million from $191 million second-quarter 2007. Assets for which U.S. Bancorp no longer received interest rose 34 percent to $1.14 billion from last year as more homebuilders and homeowners fell behind on their payments.

Credit deterioration is beginning to spread outside of residential real estate into commercial loans and credit cards, BMO Capital Markets analyst Peter Winter said.

``You can really see the evidence of it this quarter,'' Winter said, adding that he doesn't think the lender will need to cut its dividend or raise capital. ``It's in line with any commercial bank.''

U.S. Bancorp said the amount of debt it doesn't expect to recoup more than doubled to $396 million from $191 million a year earlier.

Davis is trying to revive profit growth after the bank missed earnings targets last year, depriving him of a bonus during his first year on the job. U.S. Bancorp's largest shareholder is billionaire Warren Buffett's Berkshire Hathaway Inc.

(U.S. Bancorp will hold a conference call to discuss the results at 2 p.m. Eastern Daylight Time. To participate, dial 866-316-1409 and use passcode 52522493.)

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: July 15, 2008 13:34 EDT