UPDATE 3-Webster Financial to cut costs; Q3 beats

* Q3 EPS $0.45 vs est $0.40

* Provision for loan losses falls 75 pct

* Q3 net interest margin at 3.45 pct

* Shares drop 4.6 pct

* Plans to axe 14 branches, reducing total to 168

By Sharanya Hrishikesh

Oct 14 (Reuters) - Webster Financial Corp's move to cut costs and prune branches is likely to be followed by other U.S. regional lenders facing pressure on their loan yields amid low interest rates.

Shares of New England's largest lender fell more than 5 percent as it warned of a future margin squeeze as banks fight for business loans.

That stiff competition and pricing for loans have hurt regional banks as they struggle to grow revenue and deal with new rules that cut into the fees they can charge for overdraft protection. In response, banks jettisoned free checking accounts and lost some customers.

Webster said it lost 5 percent of customer checking households when it eliminated free checking, and would try to attract customers who would bring more profitable relationships to the bank.

"We're casting a narrower net to attract customer segments we believe to be attractive," Chief Executive Jim Smith said on a post-earnings conference call.

"The bottom line is that higher-value customers are delivering a better return for our investment, and our strategy will pave the way to economic profit in the retail bank," Smith added.

Helped by improving credit quality, Waterbury, Connecticut-based Webster posted July-September income of $41.5 million, or 45 cents per share, up from $33.4 million, or 36 cents per share, a year ago.

Analysts on average had expected the company to earn 40 cents a share, according to Thomson Reuters I/B/E/S.

Provisions for loan losses declined to $5 million from $20 million a year ago.

Shares of the company fell 4.6 percent to $17.38 in morning trade on the New York Stock Exchange, after having closed on Thursday at a 10-week high.