Updated from 10:48 a.m. EDT

Citigroup ( C) continued to suffer for its bubble-era ethics Thursday, reporting its worst quarter in years thanks to the cost of paying off the angry former owners of WorldCom and Enron.

Despite all the bad headlines and legal reserves, however, the world's biggest financial services firm continued to earn money at a breathtaking pace.

Few companies could absorb the $4.95 billion provision Citi recorded in the second quarter and still walk away with a profit of $1.14 billion, or 22 cents a share. Citigroup pulled it off by leveraging a broad franchise that continues to fire on all cylinders and is largely untroubled by the prospects of higher interest rates.

Backing out the charges, the bank earned $5.34 billion, $1.02 a share, a 24% jump over the previous year. That's roughly 5 cents a share above estimates, although the number was arguably inflated by a reserve reversal and the stock was down $1.05, or 2.3%, to $44.05 at midday.

On a conference call with analysts and investors, CEO Charles Prince said the second-quarter charge was painful but that "it feels very good to clear the decks and put those issues behind us."

"It's a lot of money but one of my jobs personally is to make sure we're clearing the decks for future growth," he said.

On the revenue front, total revenue rose 15% to $22.3 billion, coming in ahead of the consensus estimate of $21.7 billion. The revenue figure, however, included a one-time $1 billion gain from the previously announced sale of Citigroup's 20% stake in Samba Financial Group. It's not clear if all analysts factored it in.

During the call, Prince said the company would continue to divest "non-strategic" businesses. "Things that don't fit core operations and especially things where the returns on the investment do not satisfy our criteria, I think you're going to see those things moved out of the organization," he said.

Just about every business at Citigroup posted strong double-digit income gains compared with a year ago. Income from credit cards rose 34% to $1 billion. Profits from consumer finance were up 14% to $594 million. Capital markets earnings soared 28% to $1.5 billion. Income from the sale of life insurance products rose 15% to $230 million.

The weak link was the bank's asset-management group, which recorded a 16% drop in income to $69 million.

With operations around the globe, the only region of Citigroup's empire that continues to show softness is Japan, where the consumer group continues to lag. Net income from consumer lending in Japan fell 25% to $147 million for a year ago. But overall, net profits from the bank's Japanese operations rose 13% to $258 million.

Outside of Japan, the rest of Asia, where Citigroup has stepped up its operations, is one of the bank's strong suits, with earnings rising 50% to $644 million. Mexico is another bright spot, with earnings rising 49% to $431 million.

Things continue to improve at Citigroup on the bad loan front, something that had cut into earnings during the bear market. In the quarter, the bank released $350 million from it loan loss reserve, reflecting a reduction in bad outstanding corporate loans.

Citigroup also released $212 million from its consumer credit reserve. Prudential analyst Mike Mayo said that without the releases, Citigroup would have missed analysts' operating estimates by 2 cents a share.

"While there could be other offsets (positive or negative), the reserve releases make it look like a stretch to make this quarter's number on a core basis," he wrote in a research note.

Analysts also noted that the bank's sequential operating expenses were up slightly more than revenue in the quarter due to investments in technology and a lackluster trading environment. Still, Citi's credit outlook "improved markedly in the period," according to Deutsche Bank analyst Richard Strauss.

Shares of Citigroup were recently down 78 cents, or 1.8%, at $44.32.

Meanwhile, several other big banks, including Wachovia ( WB), Comerica ( CMA) and Fifth Third ( FITB), all posted higher profits in the quarter.

Wachovia, the nation's fourth-largest bank, posted a 21% profit gain in the quarter, fueled by continued growth in its consumer lending business. The Charlotte, N.C.-based bank earned $1.25 billion, or 95 cents share, compared to $1 billion, or 77 a share, in the year ago period.

Excluding merger-related charges, the bank earned 98 cents a share. By that measurement, Wachovia exceeded the First Call estimate of 96 cents. But it fell a bit shy on the revenue front. While revenue rose 16% to $5.5 billion, analysts had the bank posting $5.66 billion.

Detroit-based Comerica posted the most impressive numbers of the day, announcing its profits rose 13%, as the bank easily surpassed analyst estimates.

Comerica earned $192 million, or $1.10 a share, compared to $170 million, or 97 cents a share, a year ago. Analysts had the bank, which benefited from a sharp reduction in money set aside from loan losses, earning 93 cents a share.

Cincinnati-based Fifth Third posted an 8% profit gain. It earned $447.5 million, or 79 cents a share, compared to $415.3 million, or 71 cents a share, a year ago. The bank matched the analyst estimate.
Senior writer Rebecca Byrne contributed to this story.