(Corrects paragraph 13 to show KeyCorp made an acquisition last year; removes statement that First Niagara purchase would be its first since 1993)
* KeyCorp says to pay $4.1 bln in cash and stock
* KeyCorp offers equivalent of $11.40 per share
* Offer pitched at 9.8 pct premium
* First Niagara shares trading at $10.68 premarket
* KeyCorp shares down 3.2 pct
By Rachel Chitra and Dan Freed
Oct 30 (Reuters) - Cleveland-based KeyCorp has agreed to buy First Niagara Financial Group Inc of Buffalo for $4.1 billion in the biggest deal this year between two U.S. regional banks.
The deal announced on Friday, which will create the 13th biggest U.S.-based commercial bank, is the latest in a string of mergers among smaller U.S. banks spurred by years of historically low interest rates and higher costs related to stricter regulations imposed since the financial crisis.
KeyCorp offered the equivalent of $11.40 per share for First Niagara - 0.68 of its own shares and $2.30 in cash, a premium of 9.8 percent to First Niagara’s closing price on Thursday.
First Niagara’s stock was trading at $10.68 before the bell on Friday, while KeyCorp was down 3.2 percent at $12.95.
While many small banks have been acquired in the last few years, acquisitions of banks with more than $1 billion in assets were scarce until this year.
The KeyCorp-First Niagara deal followed an announcement on Thursday that New York Community Bancorp Inc would buy Astoria Financial Corp for about $2 billion.
Both banks are based in New York State.
In the biggest deal involving a regional bank this year, Royal Bank of Canada agreed to buy Los Angeles-based City National Corp for $5.4 billion.
By some measures, things are looking up for the smaller banks. Credit has improved, moderate loan growth has resumed and they have added to their capital cushions while taking less risk on their balance sheets.
Sustained low interest rates, however, have depressed earnings and banks have lost fee income for debit card transactions and overdraft protection due to new regulations.
KeyCorp said the combined company would have about $99.8 billion in deposits, $83.6 billion in loans and 1,366 branches across 15 states.
With about $135 billion in assets, the combined KeyCorp-First Niagara would be the 13th-largest commercial bank headquartered in the United States, KeyCorp said.
Last year KeyCorp acquired Pacific Crest Securities, a small technology-focused investment bank and capital markets firm based in Portland, Oregon.
First Niagara has binged on acquisitions that in retrospect look poorly timed.
The largest of these was in May 2012, when it bought 137 branches from HSBC in secondary and tertiary markets throughout New York State and Connecticut.
The deal proved problematic as it was based on the assumption that interest rates would rise faster than they did.
Morgan Stanley and KeyBanc Capital Markets are financial advisers to KeyCorp. J.P. Morgan Securities advised First Niagara. (Reporting by Rachel Chitra and Sruthi Shankar in Bengaluru and Dan Freed in New York; Editing by Savio D’Souza, Robin Paxton and Ted Kerr)