Story updated with additional information.

NEW YORK ( TheStreet) -- Citigroup ( C - Get Report) reported a 22% year-over-year increase in second-quarter earnings, as the company beat Wall Street's expectations.

Driven by a continued release of loan loss reserves, Citi reported net income of $3.3 billion, or $1.09 a share for the second quarter, compared to $3 billion, or a dollar a share (adjusted for the May 6 one-for-ten reverse split) in the first quarter and $2.7 billion, or 90 cents a share, in the second quarter of 2010.
Citigroup CEO Vikram S. Pandit

The second-quarter results compared to net income of $3.0 billion, or a dollar a share (adjusted for the May 6 one-for-ten reverse split) in the first quarter and $2.7 billion, or 90 cents a share, in the second quarter of 2010, driven by a continued release of loan loss reserves, as well as very strong international consumer banking and transaction services revenues.

The consensus estimate among analysts polled by Thomson Reuters was for Citigroup to post second-quarter earnings of 97 cents a share.

CEO Vikram Pandit said the company "produced growth in both loans and deposits in Citicorp, reduced assets in Citi Holdings, continued to invest in our core businesses, and improved our financial strength." He added that "although the near-term macroeconomic outlook is uneven, Citi is consistently profitable and we remain focused on producing responsible growth by serving our clients."

Investors were likely to cheer a comment by CFO John Gerspach that the company expected to "begin returning capital to shareholders next year and end that year with an 8%-9% Tier 1 Common Capital Ratio under Basel III."

During the second quarter, Citigroup's earnings were boosted by a $2 billion release of credit reserves. This compares to reserve releases of $3.3 billion the previous quarter and $1.5 billion a year earlier.

International consumer banking revenues increased 12% year-over-year to $4.8 billion, as the company reported "growth in virtually all significant consumer banking drivers."

Transaction services revenue increased 6% year-over-year to $2.7 billion, with strength in trading and securities products "particularly in emerging markets?

As expected by analysts, trading revenue continued to weaken, with total securities and banking revenue of $5.5 billion during the second quarter, declining from $6 billion, billion in both the first quarter and in the second quarter of 2010.

Net credit losses for the second quarter totaled $5.1 billion, declining for the eighth-straight quarter, from $6.3 billion in the first quarter and $8.0 billion in the second quarter of 2010.

Second-quarter operating expenses increased 9% year-over-year, to $12.9 billion, "the impact of foreign exchange translation, volume-related expenses in Citicorp, legal and related expenses and ongoing investment spending, which were partially offset by ongoing reengineering benefits and lower expenses in Citi Holdings. "

Citi Holdings is the repository for the company's discontinued operations place in run-off, under Pandit's ongoing effort to trim Citigroup's noncore assets.

The company's Basel I Tier 1 common equity ratio was 11.6% as of June 30, increasing from 11.3% in March and 9.7% in June 2010.

Like all of the other large U.S. banks, Citi's earnings have been padded by large releases of loan loss reserves over the past year. JPMorgan Chase ( JPM - Get Report) reported second-quarter earnings of $5.4 billion, boosted by a $1.2 billion reduction in its allowance for loan and lease losses.

For Citigroup, despite the $2 billion reserve release, the company's ratio of loan loss reserves to nonaccrual loans increased to 260% as of June 30, from 247% the previous quarter and 186% a year earlier.

As of June 30, nonaccrual loans were 2.04% of total loans, down from 2.32% the previous quarter and 3.96% in June 2010.The ratio of loan loss reserves to nonaccrual loans was 260% as of June 30, increasing from 247% in March and 186% in June 2010.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.