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Thanks to $7 Billion Settlement and Business Difficulties, Citigroup Earnings Plummet

Along with a $7 billion settlement that was also announced this morning, Citigroup (NYSE: C  )  reported earnings of $0.03 per share in the second quarter, versus $1.25 in the second quarter of last year. The company did report that excluding the mortgage settlement and other adjustments, its earnings stood at $1.24.

The settlement has been long speculated and widely reported. Citigroup agreed to pay $4 billion in cash to the Department of Justice and an additional $500 million to the attorneys general of various states and the Federal Deposit Insurance Corporation. In addition Citigroup agreed to provide $2.5 billion to consumers, which will include financing for construction and preservation of affordable housing, as well as principal reduction and forbearance for residential loans.

As a result of the settlement, Citigroup took a pretax charge of $3.8 billion in the second quarter, as its net income stood at just $181 million, versus $4.2 billion last year. But the company did say that after excluding the settlement cost and credit and debit valuation adjustments (CVA/DVA) -- which account for changes in the risks of the counterparts it interacts with as well as changes in the prices of its own debt -- its adjusted net income actually rose by 1% to stand at $3.9 billion.

"We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past," noted Citigroup CEO Michael Corbat in the announcement of the settlement. Corbat said the settlement ends all pending civil investigations related to its handling of mortgage-backed securities.

Altogether, on a somewhat troubling note, while the adjusted net income of Citigroup was up by 1%, its core operations -- known as Citicorp, which consists of its Global Consumer Banking, Institutional Clients Group, and Corporate and Other businesses -- saw its adjusted net income fall by 18%, as shown in the chart below:

Source: Company Investor Relations

The bank noted the reason behind this was lower revenues and higher expenses. Its consumer business saw its expenses rise by $175 million, and its revenue from its North American unit fell by $275 million thanks to declining refinancing activity.

The bank also saw major reductions in the revenue from its institutional group, as its revenue dipped by 11% relative to the second quarter of last year, to $8.5 billion. This was almost entirely attributable to its Markets and Securities Services business -- fixed income and equity markets divisions -- as revenue fell by $785 million, or 21% year over year.

"Our businesses showed resilience in the face of an uneven economic environment," said Corbat of the results in the second quarter. "During the quarter, we continued to grow loans in our core businesses, reduce operating expenses by simplifying our products and processes and utilize our deferred tax assets."

While the adjusted income of $1.24 per share beat the $1.06 per share expectations of analysts according to FactSet, the declining results across its core businesses is something to pay attention to.

-- Material from The Associated Press was used in this report.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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