Updated from 8:29 a.m. EDT

US Bancorp ( USB) beat meager expectations with its earnings report on Tuesday, though the 51% profit decline due to higher loan losses will not go unnoticed by wary investors.

The Minneapolis-based bank reported a first-quarter profit of $419 million, or 24 cents per share, down from $1.1 billion, or 62 cents per share, a year earlier. Results topped the average analyst estimate by 4 cents per share, according to Thomson Reuters, though analysts largely underestimated bank results last quarter.

US Bancorp shares traded higher on its earnings report, recently up 8.3% at $17.26.

US Bancorp's net charge-offs grew by 25% during the quarter, as nonperforming assets increased by 30%. The company boosted its provision for future loan losses by $530 million, saying it expects conditions to deteriorate further throughout the year across commercial and consumer lines of credit. Those provisions now account for 2.37% of US Bancorp's loan book, vs. 2.09% at the end of last year.

CEO Richard Davis said during a conference call that deterioration in asset quality was spread across a wide array of businesses, though the most significant charge-offs came from lease financing, and construction and development loans, as well as credit cards. However, the company's future losses on assets of two recently acquired California banks are mitigated by a loss-sharing agreement with the Federal Deposit Insurance Corp.

Davis said that going forward, he doesn't expect reserve building against losses to halt over the next couple of quarters, but believes "we're going to find loans to start to moderate in that regard."

The bank also lost $198 million in securities value, which it attributed to the downgrade of a "large domestic bank" in which it holds perpetual preferred stock. While US Bancorp also gained $92 million from a corporate real estate transaction, the net results from these special items was a 28-cent deduction from earnings per share.

On a positive note, the bank benefitted from record mortgage business, as lower interest rates spurred a refinancing boom across the country, and combined with sharply lower home values, has brought new buyers into the market. US Bancorp posted record loan application volume of $25 billion, of which it produced $13.4 billion in mortgage loans.

The firm's decision in March to slash its dividend to 5 cents per share from 42.5 cents also helped boost the closely scrutinized metric of tangible common equity to 3.7% of tangible assets from 3.2% at the end of 2008.

Average deposits climbed 23% over the first quarter, or 12%, excluding acquisitions. Despite a sharp decline in bank borrowing costs, US Bancorp, posted a 3.1% drop in net interest income, to $2.1 billion from $2.2 billion, which it attributed to less volatility in short-term rates, as well as its acquisitions of Downey and PFF. Net interest margins dropped to 3.59% from 3.81%.

Davis said he is "very proud" of the results, given economic headwinds and continued financial-market stress.

"These results clearly demonstrated our company's ability to produce strong core operating earnings despite a very challenging economic environment," Davis said in a statement. He later adds that "results showed the distinct advantage of our company's diversified revenue stream and mix of businesses."

Key's earnings report was received well by the market, although investors have grown more leery of results recently reported by major companies like Wells Fargo ( WFC), Goldman Sachs ( GS), Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C) and General Electric ( GE), which all exceeded expectations. An easing of accounting standards that allowed companies to mark up depleted assets, combined with a generally favorable interest-rate environment, boosted the bottom line, although core banking operations still struggled under tough credit conditions.

Davis took time on the call to address criticism that banks have recently received for not deploying government funds into new loans for consumers and businesses. US Bancorp received $6.6 billion in TARP dollars in exchange for preferred stock, on which it is paying dividends.

Davis said on the call that banks have put a special priority on prudent lending amid the economic downturn, and that consumers and businesses have been less driven to take on new debt as well.

"We have not denied a single credit-worthy customer since the beginning of this downturn for any reasons of either capital or appetite," Davis said. "We have continued to be prudent with our underwriting... and I think there is a reason to believe that as the cycle matures, people are becoming a little more careful. But for those who are asking for loans, there is still plenty of money out there, and I think the banks are willing to make those loans."

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