Citigroup (NYSE: C) averted a potentially disastrous second quarter — although it takes quite a bit of work to see that.

Distractions are abundant. There's the $7 billion settlement of the government's probe into mortgage-backed bonds, for starters. Then there's the fraud uncovered at a Mexican subsidiary and the Fed's rejection of its capital plan this year.

Yet through it all, Citi reported results that include some indications of light at the end of the tunnel.

"Things were better than we feared," says Ken Usdin, an analyst at Jefferies.

Chief Executive Michael Corbat and Chief Financial Officer John Gerspach went to great lengths during a conference call Monday to point out the gems amid all of the rubble.

"As we think about the second half of the year, certainly on a sequential basis we're feeling better," Corbat said. "If you look at the underlying drivers and fundamentals of the business, deposits, loans … what's going on … [with] investment banking … parts of the firm are performing well, and we think in the second half there's some continued revenue uplift there."

Investors seemed to buy Corbat's argument, with Citi shares having risen 3.1% to $48.45 in afternoon trading Monday. Citi's stock was one of the worst performers among the 50 largest banking companies in the first half of the year, falling nearly 10% to $47.10, according to KBW data.

Some measurements of Citigroup's basic banking operations were positive. Loans grew 8% to $585 billion from a year earlier, on improvements in both commercial and consumer lending. Credit quality also improved, with Citi's total cost of credit falling 15% to $1.7 billion. And capital markets revenue fell, though not as sharply as projected.

"They're still seeing loan growth internationally," says Jeffery Harte, an analyst at Sandler O'Neill "They're still getting growth in the consumer banking franchise, and it seems as though their [problems with margin compression] have bottomed."

Net interest margin climbed to 2.87% from 2.85% from a year earlier, but it fell from 2.9% in the previous quarter.

Citi's capital position strengthened in the second quarter, even with the legal settlement, as its Tier 1 common ratio rose to 10.6% from 10% a year earlier, largely because Citi used $1.1 billion of deferred tax assets.

Other facets of the second quarter's results were more concerning. Excluding Citi Holdings (the portion of Citigroup's business that have been marked as being up for sale or divestiture), the company's revenue fell 6% to $19.3 billion from a year earlier on lower fixed-income trading and lower mortgage refinancing volume.

At one point during Monday's conference call, Jim Mitchell, an analyst at Buckingham Research, asked Gerspach if Citi still expected to reach its goals for cost-cutting, in spite of revenue growing slower than expected.

"The weaker revenues don't give you pause?" Mitchell asked.

Gerspach laughed, then hesitated before responding, "I don't want to be so cavalier about it, Jim, to say we don't consider the weaker revenues. We've taken all that into consideration when we say that we're still committed" to meeting Citi's targets for improving its efficiency ratio.

Of course, the never-ending cost of legal settlements is the elephant in the room for Citi.

Mike Mayo, an analyst at CLSA, criticized Corbat and Gerspach for the $7 billion settlement cost announced on Monday, which he said "was a lot more than I expected, or was more than almost any shareholder that I spoke with expected." Later, Mayo tried to pin down the executives on what additional legal settlement costs should be expected. The executives provided few details in response.

"What remains?" Mayo asked. "I assume [foreign exchange] and Libor are the big ones. How should we think about that potential exposure? Or am I correct in assuming those are the two big remaining legal exposures?"

"We don't comment, Mike, in terms of forward-looking legal," Corbat responded.

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