People’s United Financial Inc. reported a 27 percent rise in second-quarter profit as it set aside less money to cover bad loans, but the lender’s margins contracted in the low interest rate environment.

Net income rose to $64.8 million, or 19 cents a share, up from $51.2 million, or 15 cents a share, a year earlier.

On an operating basis, the bank earned 20 cents a share.

Bad loan provisions fell by a quarter to $10.6 million.

However, the Bridgeport, Conn.-based lender’s net interest margin — the difference between the rate it charges on loans and pays out on deposits — fell to 3.97 percent, from 4.13 percent a year earlier.

The margin also narrowed from the first quarter, highlighting the problem banks face as they deal with the prolonged low interest rates and the lack of loan demand.

"The decline in the net interest margin this quarter on both a GAAP and operating basis reflects the overall reduction in interest rates and slower loan growth," Chief Financial Officer Kirk W. Walters said in a statement.

The bank, which has been expanding into the New York market, is the exclusive provider of banking services at 140 Stop & Shop stores in Long Island, southern New York state and Connecticut.

People’s United shares, which have fallen 10 percent in the last year on margin contraction fears, closed at $11.97 on Thursday on Nasdaq.