July 19 (Reuters) - Several U.S. mid-sized and regional

banks reported a fall in their second-quarter profit, as income

from charging customers interest was squeezed by higher deposit

costs and tepid demand for loans.

Most U.S. banks are expecting a decline in net interest

income (NII) this year as high interest rates have impeded loan

activity, while efforts to retain customers have pushed up

deposit costs.

"High interest rates, an uncertain economic outlook and

alternative financing challenge continue softening demand for

traditional bank lending," said Chris Stanley, banking industry

practice lead, Moody's.

"Banks of all sizes must critically examine growth

assumptions amid these conditions," Stanley added.

Net interest margin, a key measure of banking profitability

that takes into account earnings from interest on loans and

payments on deposits, also contracted across the industry for

the third straight quarter.

Huntington Bancshares ( HBAN ), Fifth Third Bancorp ( FITB )

, Regions Financial ( RF ) and Comerica ( CMA ) joined

rivals in reporting lower second-quarter profit on Friday.

Shares in Fifth Third fell 1.5% before the bell, while

Regions and Comerica ( CMA ) declined 3% and 11%, respectively.

Several banking executives have said they were actively

working to lower expenses to counter interest income headwinds.

Lenders' loan books are also under investor scrutiny since

turmoil at New York Community Bancorp ( NYCB/PA ) earlier this year

and more recently at First Foundation ( FFWM ) put the spotlight

on stress in the commercial real estate sector, particularly

office and multi-family portfolios.

CRE pressures and weakening consumer health amid higher

rates have also prompted banks to build up their allowances for

credit losses or the buffer of capital lenders put aside to

cover potential loan defaults.

The U.S. Federal Reserve's stress test also showed that

banks' credit card loans and corporate credit portfolios could

be tricky.

Earnings from NYCB and First Foundation ( FFWM ) late next week will

round-out what has so far been a dull second quarter for smaller

lenders.