Hemlock Federal Financial Corp., Oak Forest, Ill., agreed this week to buy Midwest Savings Bank, Bolingbrook, Ill. - much to the astonishment of its largest shareholder, who recently made a bid to buy the company.

John H. Daly, president of Tara Enterprises, a Chicago investment fund, offered Hemlock's board at least $16.50 per share in a "friendly" offer two weeks ago. Tara owns 9.9% of Hemlock, a $221 million-asset thrift with four branches in suburban Chicago.

Mr. Daly said he would vote against Hemlock's $3.36 million deal for Midwest, criticizing it as overpriced. Under the deal's terms, Hemlock would pay book value for the thrift's shares. But Midwest is a poor performer. Through the first nine months of 1999, the $47 million-asset savings bank reported a return on assets of 0.17% and a return on equity of 2.45%. Its earnings fell 51%, to $61,000, from the year earlier.

In an interview, Mr. Daly questioned whether the Midwest deal is an attempt to brush aside his bid. "I'm in shock," he said. "They're buying a distressed company … it just seems ridiculous."

Hemlock officials did not return phone calls seeking comment on the deal or on Mr. Daly's bid. But in a press release, the company said the Midwest transaction would add to earnings within a year, improve return on equity, and deploy some excess capital.

Maureen G. Partynski, Hemlock's chairman and chief executive officer, also sent a letter to Mr. Daly saying it is in the "best interests of the company's shareholders to pursue the existing business plan and remain independent."

Some outside observers also challenged Mr. Daly's objection to the Midwest transaction, calling it a fair deal and a good use of Hemlock's excess capital. They also said his bid for Hemlock may be too low. It would pay shareholders a premium of 14% on the company's closing stock price of $14.50 on Wednesday.

"I think that the company feels a $16.50 bid wouldn't do justice to its shareholders," said Daniel Cardenas, an analyst at Howe Barnes Investments in Chicago.

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