1
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St. Paul Bancorp
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2
ST. PAUL FEDERAL BANK LOGO
JOSEPH C. SCULLY
Chairman of the Board
and Chief Executive Officer
April 30, 1999
Revised
DEAR FELLOW SHAREHOLDER:
I am pleased to report that the first quarter of 1999 was a period of
significant accomplishment for St. Paul Bancorp. Your Company achieved
substantial growth in earnings per share, return on equity and return on assets,
exceeding the expectations of professional securities analysts who follow our
Company. ST. PAUL'S FINANCIAL ACHIEVEMENTS, WHICH ALSO INCLUDE SIGNIFICANT
EXPENSE REDUCTIONS, ARE CLEAR AND CONVINCING EVIDENCE THAT OUR STRATEGIC PLAN IS
WORKING AND WILL FURTHER ENHANCE SHAREHOLDER VALUE.
Last year we devoted our energies to implementing our long-term plan
including our goal of achieving 15% return on equity by next year's end. We are
confident that we have now established significant momentum and remain on
schedule to reach our goal. We urge you to take a closer look at your Company's
first quarter achievements.
ST. PAUL REPORTS INCREASED 1ST QUARTER EARNINGS
Implementation of your Company's strategic business plan has resulted in
St. Paul's improved performance for the 1st Quarter of 1999. UNDER THE
LEADERSHIP OF YOUR BOARD OF DIRECTORS AND MANAGEMENT, ST. PAUL'S 1ST QUARTER
FINANCIAL ACCOMPLISHMENTS INCLUDE THE FOLLOWING:
- INCREASED OPERATING EARNINGS PER SHARE. St. Paul Bancorp reported
operating income of $15.3 million, or $.37 per diluted share, for
the first three months of the year, an increase of 10% versus the
comparable period in 1998.
- INCREASED NET INTEREST MARGIN. The Company's net interest margin
was 2.94% for the three-month period ended March 31, 1999, an
increase of 15 basis points from the amount recorded during the
fourth quarter of 1998.
- DECREASED OPERATING EXPENSES. Operating expenses declined 4.3% or
$1.4 million during 1999's first quarter, excluding $700,000 of
non-recurring costs associated with our systems conversions.
3
- CONTINUED EXCELLENT CREDIT QUALITY. Nonperforming assets as of
March 31, 1999 were $22.9 million, or less than one-half of one
percent of the Company's total assets. St. Paul remains among the
industry leaders in this important category.
- IMPLEMENTATION OF ST. PAUL'S STOCK REPURCHASE PLAN. As part of St.
Paul's capital management initiatives, in January your Board
authorized a stock repurchase plan. As of late April, the Company
has repurchased 1,032,000 shares of its common stock, with existing
Board authorization to repurchase an additional 968,000 shares of
stock.
ANNUAL MEETING SHAREHOLDER PROPOSAL
With our annual meeting approaching, now is an appropriate time to comment
on the non-binding shareholder proposal appearing on our agenda. Indeed, St.
Paul shareholders recently received a letter from Harry V. Keefe, a New York
based hedge fund manager, seeking your support to force a quick sale or merger
of your Company. AFTER CAREFULLY CONSIDERING THIS PROPOSAL, YOUR DIRECTORS, 80%
OF WHOM ARE INDEPENDENT, NON-EMPLOYEE DIRECTORS, REJECTED THE PROPOSAL AS
CONTRARY TO YOUR BEST INTERESTS AND UNANIMOUSLY RECOMMENDED A VOTE "AGAINST" ITS
ADOPTION.
We believe Mr. Keefe's sole ambition is to put St. Paul "in play" in an
effort to improve his own short-term results without regard to the long-term
interests of St. Paul's other shareholders. As such, you should even expect Mr.
Keefe to criticize our first quarter achievements in his efforts to win your
support. Do not be misled! In casting an informed vote, shareholders should
consider the following facts:
- - ST. PAUL'S BOARD IS COMMITTED TO MAXIMIZING VALUE FOR SHAREHOLDERS AND WILL
PURSUE WHATEVER COURSE OF ACTION THAT WILL, IN THE BOARD'S JUDGMENT, BEST
ACHIEVE THAT OBJECTIVE.
Contrary to what Mr. Keefe would have you believe, St. Paul is well aware
of the consolidation taking place in its industry. On a regular basis, your
Board reviews all alternatives, including the possible sale or merger of the
Company. Your Board is not categorically averse to any strategic alternative,
including a sale or merger of the Company. Consider for yourself my remarks at a
recent analyst conference:
"INDEPENDENCE FOR THE SAKE OF INDEPENDENCE IS NOT
A BUSINESS STRATEGY AND I ASSURE YOU IT IS NOT OURS."
In our view, and after consultation with our financial advisors, Merrill
Lynch, the public auction process that Mr. Keefe is pushing towards would
severely damage the Company's ability to obtain the best price for our
shareholders, with no assurance that an adequate price could be obtained. YOUR
BOARD REMAINS COMMITTED TO MAXIMIZING VALUE FOR ALL ST. PAUL SHAREHOLDERS, NOT
MERELY TO PLACATE MR. KEEFE SEEKING HIS OWN QUICK, SHORT-TERM GAIN.
4
- - ST. PAUL'S STRATEGIC PLAN IS WORKING TO ENHANCE SHAREHOLDER VALUE.
St. Paul's strategic plan, implemented in 1998, was adopted with a singular
goal -- to maximize shareholder value. Asset growth, cost reductions,
investments in technology, successful accretive acquisitions, and capital
management initiatives, including stock repurchases and dividend increases, are
significant components of our value-driven strategy. St. Paul's profitable
growth, as demonstrated by our recent earnings and enhanced prospects,
illustrates that our senior management team is successfully implementing our
plan. While Mr. Keefe cites the competitive marketplace as another reason to
sell, NONE OF THE COMPETITORS CITED BY MR. KEEFE ARE NEW. ST. PAUL HAS COMPETED
SUCCESSFULLY IN THE CHICAGO MARKETPLACE FOR OVER 100 YEARS AND HAS THE ADDED
ADVANTAGE OF A LONG ESTABLISHED BRAND NAME.
St. Paul has also successfully diversified its business and sources of
revenue through its entry into commercial banking. Although Mr. Keefe criticizes
our entry into commercial banking, it is only a small part of our balance sheet.
Mr. Keefe conveniently fails to tell you that as of December 31, 1998, only 1%
of St. Paul's loan portfolio consisted of commercial loans not secured by real
estate. As you probably know, real estate is the area of St. Paul's greatest
management experience and expertise. Again, we urge you not to be misled by Mr.
Keefe's ill-founded criticisms.
Another significant part of our strategic plan, St. Paul's capital
initiatives, are generating immediate returns to shareholders. In January we
increased your dividend by 33% and initiated an open market share repurchase
program, pursuant to which we repurchased 1,032,000 shares of common stock in
just four months. An additional 968,000 shares can be repurchased, subject to
market conditions, under your Board's current authorization.
In formulating and establishing our strategic plan, St. Paul rigorously
examined every aspect of its business with the goal of maximizing value for all
of our shareholders. On schedule, we remain confident that we will achieve our
goal of 15% return on equity next year.
SUPERIOR SHAREHOLDER RETURNS
Ultimately a Company and its management must, and should, be judged on the
performance of its stock -- and St. Paul is proud to stand on its record.
Astonishingly, Mr. Keefe calls this fundamental measure of shareholder
value -- and the very item he seeks to capitalize on -- "an odd measuring stick
to use for management's performance. . ." If you've invested your own
hard-earned money in St. Paul, we're certain you will disagree. CONSIDER ST.
PAUL'S LONG-TERM RECORD OF SUPERIOR RETURNS:
- FOR THE FIVE YEAR PERIOD FROM JANUARY 1, 1994 THROUGH DECEMBER 31,
1998, ST. PAUL'S COMMON STOCK PRODUCED A CUMULATIVE TOTAL RETURN OF
OVER 200%.*
- SINCE MAY 29, 1987 (SHORTLY AFTER ST. PAUL WENT PUBLIC) AND THROUGH
MARCH 31, 1999, ST. PAUL'S COMMON STOCK PRODUCED A CUMULATIVE TOTAL
RETURN OF 604%, COMPARED TO A CUMULATIVE TOTAL RETURN OF 514% FOR
THE S&P 500 INDEX DURING THE SAME PERIOD.**
- ------------------------------
*Source: NASDAQ/Bridge Information Systems, Inc.
**Source: Bloomberg, L.P.
5
Your Board of Directors remains committed to maximizing shareholder value
through all available means and we believe that the actions we have taken will
continue to benefit shareholders. Our goals are aligned with yours, as evidenced
by director, officer and employee ownership in excess of 10% of St. Paul's
stock. Accordingly, we urge you to reject Mr. Keefe's short-sighted and
self-motivated objectives. PLEASE VOTE AGAINST THE STOCKHOLDER PROPOSAL, ITEM 2
ON YOUR PROXY CARD, THEN SIGN, DATE AND MAIL IT IN THE ENVELOPE PROVIDED. YOUR
VOTE IS IMPORTANT, SO PLEASE ACT TODAY.
The many expressions of support from St. Paul shareholders are appreciated.
On behalf of your Board of Directors, thank you.
Sincerely,
/s/ JOSEPH C. SCULLY
---------------------------
Joseph C. Scully
Chairman of the Board and
Chief Executive Officer
IMPORTANT
----------------------------------------------------------------------------
Your vote is important! Accordingly, you are urged to sign, date and mail
your proxy at your earliest convenience. If you have previously voted and
do not wish to change your vote, please disregard this request and accept
our thanks. Please note that after printing our letter of April 30, 1999
we spotted an inconsistency, so we are distributing revised copy to make
certain you are properly informed. If you have any questions or need
assistance in voting, please contact St. Paul Bancorp at (773) 804-2284.
You may also call the firm assisting us, D.F. King & Co., Inc., toll-free,
at (800) 431-9643.
- -------------------------------------------------------------------------------
6
ST. PAUL FEDERAL BANK LOGO
JOSEPH C. SCULLY
Chairman of the Board
and Chief Executive Officer
April 30, 1999
DEAR FELLOW SHAREHOLDER:
I am pleased to report that the first quarter of 1999 was a period of
significant accomplishment for St. Paul Bancorp. Your Company achieved
substantial growth in earnings per share, return on equity and return on assets,
exceeding the expectations of professional securities analysts who follow our
Company. ST. PAUL'S FINANCIAL ACHIEVEMENTS, WHICH ALSO INCLUDE SIGNIFICANT
EXPENSE REDUCTIONS, ARE CLEAR AND CONVINCING EVIDENCE THAT OUR STRATEGIC PLAN IS
WORKING AND WILL FURTHER ENHANCE SHAREHOLDER VALUE.
Last year we devoted our energies to implementing our long-term plan
including our goal of achieving 15% return on equity by next year's end. We are
confident that we have now established significant momentum and remain on
schedule to reach our goal. We urge you to take a closer look at your Company's
first quarter achievements.
ST. PAUL REPORTS INCREASED 1ST QUARTER EARNINGS
Implementation of your Company's strategic business plan has resulted in
St. Paul's improved performance for the 1st Quarter of 1999. UNDER THE
LEADERSHIP OF YOUR BOARD OF DIRECTORS AND MANAGEMENT, ST. PAUL'S 1ST QUARTER
FINANCIAL ACCOMPLISHMENTS INCLUDE THE FOLLOWING:
- INCREASED OPERATING EARNINGS PER SHARE. St. Paul Bancorp reported
operating income of $15.3 million, or $.37 per diluted share, for
the first three months of the year, an increase of 10% versus the
comparable period in 1998.
- INCREASED NET INTEREST MARGIN. The Company's net interest margin
was 2.94% for the three-month period ended March 31, 1999, an
increase of 15 basis points from the amount recorded during the
fourth quarter of 1998.
- DECREASED OPERATING EXPENSES. Operating expenses declined 4.3% or
$1.4 million during 1999's first quarter, excluding $700,000 of
non-recurring costs associated with our systems conversions.
7
- CONTINUED EXCELLENT CREDIT QUALITY. Nonperforming assets as of
March 31, 1999 were $22.9 million, or less than one-half of one
percent of the Company's total assets. St. Paul remains among the
industry leaders in this important category.
- IMPLEMENTATION OF ST. PAUL'S STOCK REPURCHASE PLAN. As part of St.
Paul's capital management initiatives, in January your Board
authorized a stock repurchase plan. As of late April, the Company
has repurchased 1,032,000 shares of its common stock, with existing
Board authorization to repurchase an additional 968,000 shares of
stock.
ANNUAL MEETING SHAREHOLDER PROPOSAL
With our annual meeting approaching, now is an appropriate time to comment
on the non-binding shareholder proposal appearing on our agenda. Indeed, St.
Paul shareholders recently received a letter from Harry V. Keefe, a New York
based hedge fund manager, seeking your support to force a quick sale or merger
of your Company. AFTER CAREFULLY CONSIDERING THIS PROPOSAL, YOUR DIRECTORS, 80%
OF WHOM ARE INDEPENDENT, NON-EMPLOYEE DIRECTORS, REJECTED THE PROPOSAL AS
CONTRARY TO YOUR BEST INTERESTS AND UNANIMOUSLY RECOMMENDED A VOTE "AGAINST" ITS
ADOPTION.
We believe Mr. Keefe's sole ambition is to put St. Paul "in play" in an
effort to improve his own short-term results without regard to the long-term
interests of St. Paul's other shareholders. As such, you should even expect Mr.
Keefe to criticize our first quarter achievements in his efforts to win your
support. Do not be misled! In casting an informed vote, shareholders should
consider the following facts:
- - ST. PAUL'S BOARD IS COMMITTED TO MAXIMIZING VALUE FOR SHAREHOLDERS AND WILL
PURSUE WHATEVER COURSE OF ACTION THAT WILL, IN THE BOARD'S JUDGMENT, BEST
ACHIEVE THAT OBJECTIVE.
Contrary to what Mr. Keefe would have you believe, St. Paul is well aware
of the consolidation taking place in its industry. On a regular basis, your
Board reviews all alternatives, including the possible sale or merger of the
Company. Your Board is not categorically averse to any strategic alternative,
including a sale or merger of the Company. Consider for yourself my remarks at a
recent analyst conference:
"INDEPENDENCE FOR THE SAKE OF INDEPENDENCE IS NOT
A BUSINESS STRATEGY AND I ASSURE YOU IT IS NOT OURS."
In our view, and after consultation with our financial advisors, Merrill
Lynch, the public auction process that Mr. Keefe is pushing towards would
severely damage the Company's ability to obtain the best price for our
shareholders, with no assurance that an adequate price could be obtained. YOUR
BOARD REMAINS COMMITTED TO MAXIMIZING VALUE FOR ALL ST. PAUL SHAREHOLDERS, NOT
MERELY TO PLACATE MR. KEEFE SEEKING HIS OWN QUICK, SHORT-TERM GAIN.
8
- - ST. PAUL'S STRATEGIC PLAN IS WORKING TO ENHANCE SHAREHOLDER VALUE.
St. Paul's strategic plan, implemented in 1998, was adopted with a singular
goal -- to maximize shareholder value. Asset growth, cost reductions,
investments in technology, successful accretive acquisitions, and capital
management initiatives, including stock repurchases and dividend increases, are
significant components of our value-driven strategy. St. Paul's profitable
growth, as demonstrated by our recent earnings and enhanced prospects,
illustrates that our senior management team is successfully implementing our
plan. While Mr. Keefe cites the competitive marketplace as another reason to
sell, NONE OF THE COMPETITORS CITED BY MR. KEEFE ARE NEW. ST. PAUL HAS COMPETED
SUCCESSFULLY IN THE CHICAGO MARKETPLACE FOR OVER 100 YEARS AND HAS THE ADDED
ADVANTAGE OF A LONG ESTABLISHED BRAND NAME.
St. Paul has also successfully diversified its business and sources of
revenue through its entry into commercial banking. Although Mr. Keefe criticizes
our entry into commercial banking, it is only a small part of our balance sheet.
Mr. Keefe conveniently fails to tell you that as of December 31, 1998, only 1%
of St. Paul's loan portfolio consisted of commercial loans not secured by real
estate. As you probably know, real estate is the area of St. Paul's greatest
management experience and expertise. Again, we urge you not to be misled by Mr.
Keefe's ill-founded criticisms.
Another significant part of our strategic plan, St. Paul's capital
initiatives, are generating immediate returns to shareholders. In January we
increased your dividend by 33% and initiated an open market share repurchase
program, pursuant to which we repurchased 1,032,000 shares of common stock in
just four months. An additional 968,000 shares can be repurchased, subject to
market conditions, under your Board's current authorization.
In formulating and establishing our strategic plan, St. Paul rigorously
examined every aspect of its business with the goal of maximizing value for all
of our shareholders. On schedule, we remain confident that we will achieve our
goal of 15% return on equity next year.
SUPERIOR SHAREHOLDER RETURNS
Ultimately a Company and its management must, and should, be judged on the
performance of its stock -- and St. Paul is proud to stand on its record.
Astonishingly, Mr. Keefe calls this fundamental measure of shareholder
value -- and the very item he seeks to capitalize on -- "an odd measuring stick
to use for management's performance. . ." If you've invested your own
hard-earned money in St. Paul, we're certain you will disagree. CONSIDER ST.
PAUL'S LONG-TERM RECORD OF SUPERIOR RETURNS:
- FOR THE FIVE YEAR PERIOD FROM JANUARY 1, 1994 THROUGH DECEMBER 31,
1998, ST. PAUL'S COMMON STOCK PRODUCED A CUMULATIVE TOTAL RETURN OF
OVER 200%.*
- SINCE MAY 29, 1987 (SHORTLY AFTER ST. PAUL WENT PUBLIC) AND THROUGH
MARCH 31, 1999, ST. PAUL'S COMMON STOCK PRODUCED A CUMULATIVE TOTAL
RETURN OF 604%, COMPARED TO A CUMULATIVE TOTAL RETURN OF 514% FOR
THE S&P 500 INDEX DURING THE SAME PERIOD.**
- ------------------------------
*Source: NASDAQ/Bridge Information Systems, Inc.
**Source: Bloomberg, L.P.
9
Your Board of Directors remains committed to maximizing shareholder value
through all available means and we believe that the actions we have taken will
continue to benefit shareholders. Our goals are aligned with yours, as evidenced
by director, officer and employee ownership in excess of 10% of St. Paul's
stock. Accordingly, we urge you to reject Mr. Keefe's short-sighted and
self-motivated objectives. PLEASE VOTE AGAINST THE STOCKHOLDER PROPOSAL, ITEM 2
ON YOUR PROXY CARD, THEN SIGN, DATE AND MAIL IT IN THE ENVELOPE PROVIDED. YOUR
VOTE IS IMPORTANT, SO PLEASE ACT TODAY.
The many expressions of support from St. Paul shareholders are appreciated.
On behalf of your Board of Directors, thank you.
Sincerely,
/s/ JOSEPH C. SCULLY
-------------------------------
Joseph C. Scully
Chairman of the Board and
Chief Executive Officer
IMPORTANT
- --------------------------------------------------------------------------------
Your vote is important! Accordingly, you are urged to sign, date and mail
your proxy at your earliest convenience. If you have previously voted and
do not wish to change your vote, please disregard this request and accept
our thanks. If you have any questions or need assistance in voting, please
contact St. Paul Bancorp at (773) 804-2284. You may also call the firm
assisting us, D.F. King & Co., Inc., toll-free, at (800) 431-9643.
- --------------------------------------------------------------------------------