U.S. Bancorp , one of the 10 largest U.S. banks, reported higher-than-expected quarterly earnings on Tuesday on record revenue from mortgages, sending its shares up almost 21 percent.

The strong mortgage activity helped to offset losses from lease financing, construction and development loans, and credit cards.

The bank also put aside $1.3 billion for loan losses, $833 million more than a year earlier, as declining home prices affected both consumer and commercial loan portfolios. Chief Executive Richard Davis expects to set aside similar amounts in the next two quarters, before loan losses start to moderate toward year end.

I don't expect us to stop reserve-building until which time we see strength in the reduction of (losses), he said on a call with analysts.

Shares soared on the results to finish up 20.9 percent at $19.27.

Our credit costs are elevated like the rest of the industry but we were able to offset that with our core businesses, Chief Financial Officer Andrew Cecere said in an interview.

The bank in November took over failed California lenders Downey Financial Corp and PFF Bancorp Inc
, with support from the federal government.

I would expect to see more of the same, but nothing large, Cecere said, when asked about future acquisitions.

First-quarter profit for common stockholders fell to $419 million, or 24 cents per share, from $1.08 billion, or 62 cents per share, a year earlier.

Analysts on average were expecting the Minneapolis-based company to earn 20 cents a share.

DECLINING LOAN INTEREST

Like Wells Fargo & Co and JPMorgan Chase & Co , which both reported last week, U.S. Bancorp saw record mortgage production revenues from new applications and refinancing.

But broader interest in loans started to decrease in the second half of the quarter, Davis said on the call, attributing this to customers becoming more careful.

There are a number of customers who are neither as qualified as they were a year ago, nor are they interested in (more) debt, he said.

U.S. Bancorp received $6.6 billion in taxpayer funds under the U.S. government's Troubled Asset Relief Program last year, and TARP recipients have been under fire for not extending this money to customers.

We have not denied a single credit-worthy customer since the beginning of this downturn, Davis said. The bank hopes to repay the $6.6 billion once regulators approve, he said.

(Reporting by Elinor Comlay; Editing by John Wallace, Lisa Von Ahn, Phil Berlowitz)