Updated from 9:02 a.m. EDT

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Nearly 220 years after its founding, the

Bank of New York

(BK) - Get Report

still relies on the biggest business of the city it is named for.

That business is securities, and despite its posting lower quarterly earnings Thursday, investors looking for signs of the industry's recovery had much to latch on to in the bank's numbers.

Bank of New York derives roughly 43% of its revenue from securities-processing work. In bullish times, revenues should surge at Bank of New York, and fall when stock traders run for cover.

In the second quarter, revenue from the bank's securities-processing business posted a strong 25% gain to $598 million. And the bank said it should be able to build on those gains, if the recent resurgence in the stock market continues.

"We are well positioned to benefit from further strengthening in the capital markets,'' said Thomas Renyi, the bank's chairman and CEO, in the company's earnings release.

Outperformer

While that bodes well for Wall Street, it is a trend that hasn't gone unnoticed among investors. Bank of New York shares are up 28% this year, compared to an 18% gain in the Philadelphia KBW Bank Index. At around $30, it trades at an estimated 2003 price/earnings ratio of 18, according to Thomson First Call. The stock also trades at 3.3 times its book value.

By comparison,

Citigroup

(C) - Get Report

, one of the world's most profitable financial services firms, trades at an estimated 2003 PE of 14 and at a multiple that's 2.7 times the bank's book value.

That higher multiple scares away some investors who think Bank of New York is now too dependent on the Wall Street revival continuing.

"It's too much of a pure play,'' said Michael Stead, a Wells Capital Management portfolio manager, who invests mainly in financial stocks but doesn't own any Bank of New York shares. "That's not a bad thing. But I get more confidence from financial institutions with multiple revenue lines that are able to offset one another.''

Bottom Line

On balance, Bank of New York's earnings report contained more bad news than good, and the stock was recently down 51 cents, or 1.6%, to $30.69.

In the quarter, the bank earned $295 million, or 39 cents a share, compared to $361 million, or 50 cents a share, a year ago.

The 18% slide reflected a 6% decline in net interest income -- the money the bank made from its lending operation. Like other financial institutions, Bank of New York is seeing low interest rates cut into the profitability of its loans.

On an operating basis, which excludes costs related to the bank's recent acquisition of stock-clearing outfit

Pershing

, Bank of New York earned 41 cents a share. Wall Street analysts were focusing on the operating number, and the 41-cent figure matched the Thomson First Call consensus estimate.

The Pershing acquisition is expected to be a key driver of future earnings at Bank of New York. Indeed, without Pershing, the bank's net interest income would have been worse. The bank said Pershing accounted for $11 million of the $398 million in net interest income the bank generated in the second quarter.

Also weighing down earnings was a 19% jump in salaries and benefits, to $499 million. Presumably, much of that spike is due to the acquisition of Pershing, which Bank of New York bought from

Credit Suisse First Boston

.

Last year, earnings at Bank of New York suffered a double whammy as they were hit by the slump in stock trading and a rise in telecom loan defaults. In a sign that the bad commercial loans in Bank of New York's portfolio may be stabilizing, it reported that nonperforming loans -- those more than 90 days past due -- remained largely unchanged from the first quarter of this year at $437 million.

It's worth noting, however, that

J.P. Morgan Chase

(JPM) - Get Report

, a big bank that also has been saddled with a mountain of bad loans, reported Wednesday a significant decline in its portfolio of bad credits. The nation's second-biggest bank said nonperforming loans and other assets declined by 7% from the first quarter to $4 billion.

"The one surprise for Bank of New York in the quarter was the nonimprovement in the nonperformers,'' said Gerard Cassidy, an analyst at RBC Capital Market who rates the stock sector perform and doesn't own any shares. Unfortunately, Cassidy said, since Bank of New York provides few details about its commercial loan portfolio, "we don't really have an empirical answer why nonperforming assets didn't go down.''