(Repeats to fix Breakingviews link, no changes to text)
* 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 $10.40
* KeyCorp shares down 6.6 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 will create the 13th biggest U.S.-based commercial bank and is the latest in a string of mergers among smaller U.S. banks, spurred by years of near-zero 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 nearly flat at $10.40 on Friday, while KeyCorp was down 6.7 percent at $12.49.
“Expansion into similar, contiguous markets makes sense, but the size of the deal is surprising,” said Jefferies analyst Ken Usdin.
“It will take tight execution with a deal of this size and long time for it to be accretive to earnings.”
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 follows New York Community Bancorp Inc’s announcement on Thursday that it would buy Astoria Financial Corp for about $2 billion. Both are New York-based banks.
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 U.S.-based commercial bank, KeyCorp said.
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 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 Robin Paxton, Ted Kerr and Savio D'Souza