CHICAGO - First Chicago Corp. on Monday agreed to buy $1.2 billion-asset Lake Shore Bancorp in a stock swap deal worth $304 million.

The acquisition, expected to close in the second quarter, would be the first sizable one in five years for the nation's 10th-largest banking company.

Chicago-based Lake Shore is a top-performing bank, boasting sound credit quality and a 1.33% annualized return on assets in 1993's first nine months.

Richard L. Thomas, First Chicago's chairman and chief executive, said in an interview that he would like to make more acquisitions, in Chicago and elsewhere in the Midwest.

But he acknowledged that progress is difficult, "because the prices being demanded by targets are high."

A Steep Price

Indeed, based on trading values at Monday's close, the Lake Shore deal is worth a lush 2.4 times book value, or 19.5 times Lake Shore's annualized earnings for the nine months.

"That's clearly on the upper end of the price range," said Kenneth Puglisi, a banking analyst with Chicago Corp. "First Chicago will have to boost both efficiency and revenues to make the deal work."

Mr. Thomas defended what he acknowledged is a steep price.

"When you go after a highquality bank operating in an attractive market, it is going to demand a premium," he said.

Big Economies Foreseen

First Chicago's stock fell following the announcement, losing 3.7% on Monday to close at $42.375 per share. Lake Shore's stock fell 5.4%, closing at $28.375.

Projected cost savings from the merger exceed 40% of Lake Shore's annual noninterest expense, or roughly $14 million.

The deal will dilute First Chicago's earnings per share "by less than 5%" in 1994, the company said, but will boost earnings beginning in 1995.

Mr. Thomas said he could not comment on what role, if any, would be played by Lake Shore's chief executive, James W. Aldrich, after the deal's completion. He said talks are under way.

First Chicago last purchased a healthy institution in 1988, landing Gary Wheaton Corp., a community bank company operating in Chicago's western suburbs.

Credit Quality Problems

Massive lending woes confined First Chicago to two cash purchases of failed thrifts in 1990 and 1991.

Held back by credit quality problems and a weak stock price, First Chicago watched from the sidelines as chunks of the Illinois market were snapped up by regional rivals, including Ohio's Banc One Corp., Minnesota's First Bank Systems Inc., Michigan's NBD Bancorp and Old Kent Financial Corp.

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