UPDATE 2-People's United Q2 profit down 36 pct, reserves rise

* Q2 EPS $0.08 vs $0.13 yr-ago

* Q2 net interest income down 10 pct at $141.2 mln

* Q2 bad-loan provision up 6-fold at $14 mln (Recasts; adds details, analysts' comments)

By Anurag Kotoky

BANGALORE, July 16 (Reuters) - People's United Financial Inc (PBCT.O) posted a 36 percent fall in second-quarter profit, hurt by margin pressure, and said provision for loan losses rose six-fold for the period.

"Although the provision was higher than we expected, they took the opportunity to increase the reserves by using securities gains they had in the quarter," said Amanda Larsen, a research associate at Raymond James.

The company, one of the better-capitalized banks in the United States, said profit for the quarter was $27.4 million, or 8 cents a share, compared with $43 million, or 13 cents a share, a year earlier.

Analysts on average were looking for a profit of 6 cents a share, excluding items, according to Reuters Estimates.

The company said quarterly results included net security gains of $12.0 million and an FDIC special assessment charge of $8.4 million.

People's United, which competes with Northwest Bancorp NWSB.O, The Bancorp (TBBK.O) and First Niagara Financial Group (FNFG.O), said net interest income for the quarter fell 10 percent to $141.2 million.

The Bridgeport, Connecticut-based company, which was added to the S&P 500 Index .SPX last November, said net interest margin fell 44 basis points to 3.12 percent.

Stifel Nicolaus analyst Collyn Gilbert said, "It looks like they had a big slug of deposits coming in for the quarter and they just reinvested it at very low rates, and that drove the margin lower."

Raymond James' Larsen said additional margin pressure could have come due to the company's inability to deploy funds fast enough for a company, which saw a strong growth in core deposits for the period.

Net interest margin is the difference between what the bank earns on loans and pays on deposits, and is a measure of profitability.

Gilbert added margins are not likely to improve until the company do a deal and interest rates have to grow higher.

People's United, with billions of dollars in excess cash, was actively seeking acquisitions of "like-minded banks in the corridor from Maine to Washington D.C.", a company spokesman told Reuters in April.

Morgan Stanley analyst Ken Zerbe said the market is not crediting People's United for its $2.5 billion of excess capital and a clean balance sheet, especially as many of its peers are experiencing significant credit problems.

"Given the company's cash position, we believe a sizable acquisition is plausible. If done correctly, it could be highly accretive and a positive stock catalyst," Zerbe said in a note to clients.

Shares of the company fell 32 cents to $15.42 in trading after the bell. The shares closed at $15.74 Thursday on Nasdaq. (Editing by Unnikrishnan Nair, Saumyadeb Chakrabarty)