UPDATE 3-People's United Q1 profit lags Wall Street

(Recasts; adds details; updates share movement)

BANGALORE, April 17 (Reuters) - People's United Financial Inc (PBCT.O) posted a quarterly profit below market estimates as the saving and loan holding company raised its provision for loan losses, partly to level reserves with recently acquired Chittenden.

Shares of the company fell as much as 7 percent earlier in the day, but then recovered some of their losses to trade down more than 2 percent at $17.59 in afternoon trade on the Nasdaq.

Net interest margin was squeezed as interest rates were cut by the U.S. Federal Reserve, the company said. The Fed has cut its benchmark interest rate thrice since January this year to 2.25 percent from 4.25 percent.

However, People's United raised its quarterly dividend by 12.5 percent to 15 cents a share.

The dividend raise comes at a time when small- and medium-sized regional banks are looking to improve capital levels by cutting their dividend and issuing shares.

The company also said its board approved the buyback of about 17.3 million, or up to 5 percent, of its shares.

PROVISIONS HURT RESULTS

The Bridgeport, Connecticut-based company's first-quarter net income fell to $15.1 million, or 5 cents a share, from $33.6 million, or 11 cents a share, a year earlier. First-quarter results include merger-related expenses of $41.0 million, among other things.

Excluding items, earnings were 15 cents a share.

Analysts expected the company to earn 18 cents a share, before special items, according to Reuters Estimates.

Provision for loan losses jumped more than ten-fold to $8.3 million from $0.8 million, of which $4.5 million was increased to align reserve methodologies across the combined organizations.

Net interest income increased 75 percent to $166.7 million.

Non-performing assets, as a percentage of total loans, real estate owned and repossessed assets, rose to 0.50 percent from 0.21 percent.

Net loan charge-offs totaled $2.8 million for the first quarter.

In July 2007, Barron's had said shares of People's United Financial (PBCT.O) could rise because cost savings from its acquisition of Chittenden Corp might be more than expected.

People's United recently completed its $1.9 billion acquisition of Chittenden, combing one of Connecticut's largest banks with one of Vermont's largest.

Shares of the company, which competes with Northwest Bancorp NWSB.O, The Bancorp (TBBK.O), Downey Financial DSL.N and First Niagara Financial Group (FNFG.O), have risen 12 percent over the last three months. (Reporting by Sweta Singh; Editing by Pratish Narayanan, Dinesh Nair)