Charter One Financial's $1.2 billion deal to buy St. Paul Bancorp would give the Cleveland-based banking company access to Chicago's large working- class population and the chance to exploit heavy expense cuts.

Charles "Bud" Koch, Charter One's chairman and chief executive officer, said the purchase of the $6 billion-asset thrift, announced late Monday, makes perfect sense.

"We cater to middle-income America," he said. "St. Paul's market is absolutely tailor-made for the stuff we do well."

Wall Street also appeared to approve of the deal. St. Paul's shares closed Tuesday's trading at $26.375, up $1.6875, while Charter One's stock fell $1.6875, to $29.125.

At 18.8 times St. Paul's 1999 estimated earnings and 2.3 times its book value, analysts deemed the transaction a fair one.

"It may look rich but that's because St. Paul does not have a large earnings stream. You need to think of the potential," said Michael M. Moran of Roney Capital Markets in Detroit.

The pact to sell St. Paul comes after many months of shareholder discontent. Harry V. Keefe, whose New York hedge fund, Keefe Managers, owns 2.5% of St. Paul's stock, began criticizing the thrift's performance in 1998 when it reported lackluster midyear earnings.

In its most recent quarter, St. Paul notched a 7% gain in net income, to $14.8 million, but its efficiency ratio soared to 62%, substantially above its peers.

The sale would give Charter One the opportunity to wield a sharp knife on back-office operations and other expenses.

The company expects to eliminate up to 35% of St. Paul's costs beginning immediately after the transaction closes in October. Charter One plans to cut at least $20 million in salaries and benefits, $9 million in professional services, and $12 million in building leases and equipment. Charter One would not say how many positions it plans to eliminate.

Slashing these expenses should help bring St. Paul's efficiency ratio in line with Charter One's. The $25 billion-asset company predicts its ratio of expenses to revenues will be 42% by yearend, down from its current 43%.

Once the cost cutting is complete, Charter One plans to beef up St. Paul's top line by introducing new products, such as debit cards, and by making more consumer and commercial loans.

Charter One predicts the deal would add $20 million to $30 million to yearly profits beginning in 2000.

"They have always executed on their game plan," Mr. Moran said. "There are tremendous economies that can and will be recognized."

The transaction is similar to Charter One's 1995 acquisition of Firstfed Michigan, which gave the company a foothold in Michigan, Mr. Koch said.

Since that merger closed, Charter One has increased the number of its Michigan checking accounts by 59% and boosted revenue per account there to $96, from $50.

"Since we entered the Detroit market four years ago, we have had outstanding success," Mr. Koch said. "Michigan now contributes a disproportionate amount of revenue for the company."

Mr. Koch said agitation by Mr. Keefe influenced the timing of Charter One's agreement to buy St. Paul.

The pact came nine days before Mr. Keefe was set to confront St. Paul's management at the Chicago thrift's annual meeting.

Mr. Koch said he called Joseph C. Scully, St. Paul's chairman and chief executive, in late March to discuss a merger, and the two met for the first time on March 31. The two companies settled on terms over the weekend of May 9.

"This deal probably came together the quickest of any I've done," Mr. Koch said. "We wanted to avoid leaks. If we were going to do this, and given the Harry Keefe situation, we should go forward quickly."

Keefe Managers president John Lyons said the firm and Mr. Keefe are pleased with the resolution.

"We know Charter One very well, and we like the currency," he said. "This is a horse we feel very comfortable riding."

Robert E. Williams, a spokesman for St. Paul, said the company was pleased to agree to a sale before its annual meeting, when a vote could have forced a bidding war. "It wasn't a public auction (or a) damaged-goods process," Mr. Williams said.

This acquisition and another deal announced earlier this month would make Charter One the 30th-largest bank holding company in the nation, with assets of $30.8 billion and 414 branches stretching from Chicago to Vermont.

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