In normal times, interest rate cuts tend to boost banks.
But this year's eight cuts by the Federal Open Market Committee are starting to hurt some midsize regional banks that in the past have benefited from falling rates. 
From looking at the companies' own estimates of their second-quarter performance in Securities and Exchange Commission filings, analysts say regional banks like Union Planters Corp., Regions Financial Corp., and AmSouth Corp. could be in for a margin squeeze rather than a lift.
"There are banks that have been liability-sensitive that are becoming more asset-sensitive because of the extent to which rates have dropped," said Rosalind Looby, an analyst at Credit Suisse First Boston, who named Union Planters and Regions as two examples.
Asset-sensitive banking companies are those scrambling to reduce rates on loans but finding they cannot do the same on the rates they pay for deposits - largely because their deposits carry very low rates already. As a result, their profits from lending are being pinched.
Often, banks can mitigate this risk. But many others fall into the asset-sensitive trap because they get a large portion of their funding from low-interest or noninterest- bearing accounts. A big pool of prime rate loans on the books, which reprice quickly after rates drop, can also make a bank asset-sensitive.
For example, San Francisco's UnionBanCal Corp., historically an asset-sensitive regional bank, gets 39% of its funding from noninterest-bearing deposits.
Because of the way UnionBanCal's funding is structured, "when rates go down, the assets reprice ahead of the liabilities," said Jack Rice, the head of investor relations for the $34 billion-asset company, 64% of which is owned by Japan's Bank of Tokyo-Mitsubishi.
The Fed's interest rate cuts in the second quarter helped push UnionBanCal's profit margin on lending down 35 basis points, to 4.86%. But the number and rapid adoption of interest rate cuts are making balance sheets at banks on the other side of the fence - the historically liability-sensitive institutions - behave more like UnionBanCal's.
In a quarterly report filed in November for the third quarter of 2000, Regions Financial of Birmingham, Ala., said that a 100-basis-point-drop in rates during the succeeding 12 months would boost its margin by 2.22%, or $31 million. But by the time it filed its report for the second quarter of this year, the $45 billion-asset banking company said that a similar drop in rates would instead reduce its net interest income by 1.67%, or $25 million. Since the end of the second quarter, the Fed has slashed rates by 75 basis points.
"Yields are coming down," said Charles N. Ernst, an analyst who covers Regions for Putnam Lovell Securities. Banks, he said, "can't do anything on the funding side."
Indeed the rates banks pay customers for deposits have little room to drop.
The national average on interest-bearing checking accounts was 0.81% a year ago. It is now 0.62%, the lowest ever, according to Bankrate.com of North Palm Beach, Fla.
"Interest checking and money market accounts that had a low yield to begin with have gone from low to lower," said Greg McBride, an analyst at Bankrate.com. Even higher-yielding products have fallen considerably from a year earlier.
The national average for one-year certificates of deposit - 3.19% - had not been so low since 1994.
"There is an ultimate floor to which you can move some accounts," said Jefferson Harralson, an analyst who covers Union Planters for SunTrust Robinson Humphrey, the capital markets unit of SunTrust Banks Inc. in Atlanta.
The pinch caused by falling interest rates and a large base of cheap deposits is of course overshadowed by the longer-term benefits of paying less for funding. Opening more checking accounts and reducing dependence on wholesale borrowing is one of the Holy Grails of banking.
"In the big picture, it's a positive thing to have a lot of core deposits," Mr. Harralson said.
And falling rates, in the long run, can help even asset-sensitive banks by helping the economy - which in turn prevents loan defaults and spurs loan growth.
But for now banks - many of which were expecting rates to stabilize - may see margins pinched.
Before the Sept. 11 attacks on the World Trade Center and Pentagon, Wall Street had thought the Fed was nearly done with its efforts to stimulate the economy by cutting rates. After five rounds of 50-basis-point reductions in the federal funds rate since January, the Fed started in late June to throttle back, making cuts of only 25 basis points then and in August.
"It seemed like we were getting close to the end, or maybe there would be one more," said Jennifer Thompson, a banking analyst at Putnam Lovell.
Union Planters, which gets 65% of its operating revenues from net interest income, was also expecting an end to the cuts.
In an August filing with the SEC, the Memphis banking company said that "the most likely scenario" as of June 30 was that the federal funds rate would be eased 25 basis points to 3.5% during the third quarter and then remain flat for nine months.
Using those projections, the $34 billion-asset company said it would expect a slight drop in net operating earnings - of 0.2% - in the 12 months succeeding June 30.
But the Fed's 50-basis-point cut last week, part of an effort to boost consumer buying and business borrowing in the wake of the terrorist attacks, brought the federal funds rate to 3%, its lowest since early 1994. Market observers are now saying they expect another 50-basis-point cut by yearend.
"We are now slightly asset-sensitive," said Barb Zipperian, the senior vice president of investor relations at Union Planters.
AmSouth of Birmingham is another historically liability-sensitive bank that has become increasingly asset-sensitive. In its second-quarter SEC filing, it said a 100-basis-point rate decline would reduce its net interest income by 0.3%. A year earlier, AmSouth had forecast that the opposite would happen if rates declined 100 basis points - net income would rise 1.4%, it predicted then.
The change comes in part from a restructuring of its balance sheet last year, said List Underwood, the head of investor relations at AmSouth. "We feel like we're very well positioned and balanced in rate sensitivity," he said. "I wouldn't characterize us as asset-sensitive."
Mr. Ernst said that, whereas last quarter's falling rates bumped up the margin by 19 basis points, which boosted earnings, "there just isn't the catalyst there anymore."
Union Planters said its decision this year to restructure the company's balance sheet to make it less liability-sensitive has also contributed to its current situation.
"With everything we have got going on in the balance sheet, it's not totally because of interest rates" dropping last week, said Ms. Zipperian.
Though the rate cuts are weighing on the banking company's margin, Union Planters may be able to offset this compression with mortgage originations, said Robinson Humphrey's Mr. Harralson. Declining rates have spurred many homeowners to refinance mortgages, he noted, which has boosted mortgage origination profits this year.
