Shares of Bank of America (NYSE:BAC) climbed nearly 5% on Oct. 14 after the second-largest bank by assets in the U.S. reported third-quarter earnings results that beat expectations. Meanwhile, shares of other big banks, such as JPMorgan Chase and Wells Fargo, struggled to follow suit that day. The bank reported diluted earnings per share of $0.85 on revenue of almost $22.8 billion, both of which beat analysts' estimates. Here are four reasons why the market liked Bank of America's Q3 results.

1. Net interest income back on track

Net interest income, or interest earned on loans and securities after deducting interest costs on deposits and other liabilities, finally showed signs of life in the third quarter. This key driver of bank revenue was about $11.2 billion in the third quarter, up by about $1 billion from the third quarter of 2020 and by about $900 million from this year's second quarter. While there was some loan growth in the quarter, net interest income benefited from an additional day in the quarter, more deposit growth, lower premium amortization expense, and more than $300 million of interest income from Paycheck Protection Program loans. Chief Financial Officer Paul Donofrio said on the bank's earnings conference call that Bank of America is back on track to hit the projection it made at the start of 2021, when it said fourth-quarter net interest income should exceed the first quarter's $10.3 billion by $1 billion.

For the fourth quarter, Donofrio said he expects less interest income from Paycheck Protection Program loans, but that decline should be offset by modest loan growth, by investing more excess liquidity into securities, and slightly lower expenses from premium amortization.

One man showing another man a chart.

Image source: Getty Images.

2. Lowest quarter of expenses this year

For the first time in several quarters, high expenses were not the focal point of Bank of America's earnings call. Sure, they were discussed, but the analysts weren't as concerned about them, largely because Bank of America had a much better quarter. Expenses in the latest period were $14.4 billion, about $600 million lower than the second quarter, and the bank had an efficiency ratio, or total expenses as a percentage of total revenue, of 63% (lower is better).

Bank of America expenses and efficiency ratio.

Image source: Bank of America investor presentation.

Investors and analysts would like to see that efficiency ratio get below 60%, but this was definitely an improvement. Management attributed the better quarter to the absence of some one-time expenses in the quarter and the reduction of pandemic-related costs. And for the first time since the pandemic began, the bank boosted revenue faster than expenses, raising operating leverage. Management believes there are still some expenses related to COVID-19 that the bank can carve out. The goal is to limit net expense growth to 1% to 2% per year as revenue increases faster, further increasing operating leverage.

3. Credit is superb

In what seems to be an industrywide trend, credit quality at Bank of America keeps getting better. Net charge-offs (debt unlikely to be repaid and a good indicator of actual losses) of total loans fell from 0.27% in the second quarter to 0.2% in Q3. Donofrio said that's the lowest the bank has seen in 50 years. With credit quality improving and the economic outlook still positive, the bank released $1.1 billion from reserves previously set aside for loan losses. This went back into earnings, providing a net benefit of $624 million. There could also be more reserve releases on the horizon with the bank's total allowance for credit losses still higher than before the pandemic.

4. Investment banking is humming

Bank of America's global banking unit, which houses its investment banking activities, continued to put up very strong results. Firmwide investment banking fees came in at $2.2 billion in the quarter, driven by rising merger and acquisition activity, a trend seen across the investment banking industry. Third-quarter investment banking fees were the second highest ever, falling just short of the record fees the bank generated in this year's first quarter. Bank of America now has a 6.9% market share of investment banking fees, ranking fourth, the bank said. Looking ahead, CFO Donofrio said the investment banking pipeline remains strong.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.