First Midwest Bancorp, Itasca, Ill., said Thursday that it had agreed to buy Heritage Financial Services, Tinley Park, Ill., for $411 million in stock.
The combination would create a banking company with nearly $5 billion of assets, 56 branches, and the No. 1 or No. 2 market share in three suburban Chicago counties.
The deal for $1.3 billion-asset Heritage is expected to close during the second quarter. The price is 3.3 times Heritage's estimated yearend book value and 23 times its estimated 1997 earnings.
Stockholders would get 0.77 of a First Midwest share for each Heritage Financial share. First Midwest said it would issue 9.7 million shares to complete the deal.
"With this acquisition we are creating the premier independent suburban Chicago banking franchise," said Robert P. O'Meara, president and chief executive officer of $3.6 billion-asset First Midwest.
He said the deal would likely dilute earnings by 3.5% in 1998, but would add to earnings the following year.
Analysts saw benefits for both companies.
"First Midwest is paying a fair price, but they're not betting the farm," said Joseph A. Stieven, a bank analyst at Stifel Nicolaus & Co. in St. Louis.
But one local consultant who works closely with the two banks said the deal's price is too high for the Chicago market. For example, said the consultant, who requested anonymity, Alliance Bancorp, Hinsdale, Ill., announced last month it would pay $90 million in stock, or two times book value, for Southwest Bancshares, Hometown, Ill.
Stephen Skiba, a bank analyst at ABN Amro Chicago Corp., said the deal is a sign that First Midwest is bulking itself up to be an attractive buyout candidate. "This is probably First Midwest's last acquisition," he said.
With Heritage in its fold, First Midwest would have the top market share in Will County, a fast-growing county southwest of Chicago's Cook County, and the No. 2 positions in Lake and McHenry counties to the north and northwest.
Mr. Skiba said First Midwest would be attractive to regional banking companies such as Associated Bancorp., Green Bay, Wis.; National City Corp., Cleveland; or Fifth Third Bancorp, Cincinnati.
Mr. Stieven said he expects more $1 billion-asset companies such as Heritage to sell in the next few months.
The cost of updating technology to prevent year-2000 computer glitches is becoming too much for banks that size, he said.
