Shares of Bank of America (NYSE:BAC) are trading higher after the nation's second-biggest bank by assets reported better-than-expected third-quarter earnings Wednesday morning, fueled largely by lower legal expenses. It earned $0.37 per share in the three months ended Sept. 30 compared to a consensus estimate of $0.37 per share.

The Charlotte, North Carolina-based bank generated a total of $4.51 billion in income before taxes in the third quarter. That was lower than the $5.32 billion it earned in the second quarter, but it marked a substantial year-over-year improvement. In the same period last year, its pre-tax earnings were only $431 million.

Bank of America made progress on multiple fronts during the quarter:

  • Although its return on equity came in lower than it did in the second quarter, 0.82% vs. 0.99%, respectively, the figure is generally moving in the direction of Bank of America's 1% target.
  • The bank held the line on core operating expenses, one of its primary objectives since the beginning of 2010. Noninterest expenses weighed in at $12.7 billion, the same as last quarter, but a drop of $100 million compared to the third quarter of 2014.
  • Bank of America continued to reduce the size of its legacy assets and servicing unit, which was created in the aftermath of the financial crisis to administer toxic and noncore assets. The number of full-time employees in the division fell to 11,000 from 13,000 in the second quarter.
  • Litigation expenses also seem to suggest that the worst of the financial crisis may finally be behind Bank of America. They came in at $200 million compared to $6 billion in the year-ago period.
  • Despite warnings that trading income could fall by as much as 5% to 6% due to high volatility in the quarter, the actual decline amounted to only 1.8% compared to the second quarter.
  • Finally, while total loans edged down slightly, residential mortgage and home equity originations surged by 14% relative to last year, and the bank issued 1.3 million new credit cards.

These positive developments aside, Bank of America's performance in the third quarter underscored that its biggest challenge right now is to grow revenue. The bank's top line ($20.8 billion) fell on sequential and year-over-year bases by 6.5% and 2.5%, respectively.

Lower interest rates continued to plague Bank of America's performance, contributing to a nearly $1 billion drop in net interest income compared to the second quarter. It isn't alone in this regard, as the entire banking industry is suffering along with it. However, Bank of America seems to be relying excessively on a future increase in rates to meet its profitability targets.

Slightly more disappointing was the fact that noninterest income declined, as well. The drop in this regard was due to lower investment banking income, a $31 million loss from equity investment income, and a 27% drop in income from mortgage servicing, among other things. 

"We saw solid results this quarter by continuing to execute our long-term strategy," said Chairman and CEO Brian Moynihan. "The key drivers of our business -- deposit taking and lending to both our consumer and corporate clients -- moved in the right direction this quarter and our trading results on behalf of clients remained fairly stable in challenging capital markets conditions."

Ultimately, Bank of America's results show, again, that its turnaround efforts are ongoing. With expenses and legal costs now seemingly under control, the $2.2 trillion bank continues to move in the direction of once again generating earnings that are commiserate with its commanding position in the financial industry.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.