ITEM 1. BUSINESS
REGISTRANT AND ITS SUBSIDIARIES
West Suburban Bancorp, Inc., an Illinois corporation (the "Company"), is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and a thrift holding company registered under the Home Owner's Loan Act, as amended (the "HOLA"). The Company's operating subsidiaries consist of: West Suburban Bank, Lombard, Illinois; West Suburban Bank of Downers Grove/Lombard, Downers Grove, Illinois; West Suburban Bank of Darien, Darien, Illinois; West Suburban Bank of Carol Stream/Stratford Square, Bloomingdale, Illinois; and West Suburban Bank of Aurora, F.S.B., Aurora, Illinois. West Suburban Bank, West Suburban Bank of Downers Grove/Lombard, West Suburban Bank of Darien and West Suburban Bank of Carol Stream/Stratford Square may be referred to collectively as the "Bank Subsidiaries," West Suburban Bank of Aurora, F.S.B. may be referred to as "WSB Aurora" and the Bank Subsidiaries and WSB Aurora may be referred to collectively as the "Subsidiaries."
The Company was incorporated in 1986 and became the parent bank holding company of the Bank Subsidiaries in 1988. On July 13, 1990, the Company acquired WSB Aurora, a federally-chartered thrift, thereby also becoming a thrift holding company.
The Subsidiaries are headquartered in the near western suburbs of Chicago among some of the faster growing areas in Illinois. Due to the nature of the market areas served by the Subsidiaries, the Subsidiaries provide a wide range of financial services to individuals and small and medium sized businesses. The western suburbs of Chicago have a diversified economy, with many new corporate headquarters and numerous small and medium sized industrial and non-industrial businesses providing employment.
The Subsidiaries engage in a general full service retail banking business and offer a broad variety of consumer and commercial products and services. The Subsidiaries also offer trust services, safe deposit boxes and extended banking hours, including Sunday hours and 24-hour banking through either a proprietary network of 36 automated teller machines ("ATMs") or Tele-Bank 24, a bank-by- phone system. Other consumer related services are available including financial services and a competitively priced VISA card through West Suburban Bank Card Services. During 1995, the Subsidiaries began to offer their customers a debit card called the West Suburban Bank Check Card. The West Suburban Bank Check Card allows customers to make purchases with funds from their checking accounts without writing checks.
Although each Subsidiary operates under the direction of its own board of directors, the Company has standard operating policies regarding asset/liability management, liquidity management, investment management, lending practices and deposit structure management. The Company has historically centralized certain operations where economies of scale can be achieved.
The following table sets forth financial and other information concerning the Subsidiaries as of December 31, 1995:
SUBSIDIARIES OF WEST SUBURBAN BANCORP, INC. (1) (Dollars in thousands)
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(1) The data presented in this table is not intended to present the Company's consolidated financial results for 1995. The Company's consolidated financial statements are provided in this Form 10-K in response to Item 14.
(2) The number of locations reflected for the Bank Subsidiaries includes all facilities at which customers of any Bank Subsidiary can conduct their banking business, and includes a facility which consists solely of a proprietary stand-alone ATM facility.
COMPETITION
The Company encounters competition in all areas of its business pursuits. It competes for loans, deposits, fiduciary and other services with financial and other institutions located both within and outside of its market area. In order to compete effectively, to develop its market base, to maintain flexibility and to move in pace with changing economic and social conditions, the Company continuously refines and develops its products and services. The principal methods of competition in the financial services industry are price, service and convenience.
EMPLOYEES
The Company employed 646 persons (505 full time equivalent employees) on December 31, 1995. The Company believes that its relations with its employees are good.
SUPERVISION AND REGULATION
General
The growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the policies of various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the Illinois Commissioner of Banks and Trust Companies (the "Commissioner"), the Office of Thrift Supervision (the "OTS"), the Internal Revenue Service, the Illinois Department of Revenue and the Securities and Exchange Commission (the "SEC"). Financial institutions and their holding companies are extensively regulated under federal and state law. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions, such as the Company, regulate the scope of business, investments, loans, deposit insurance, reserves against deposits, capital adequacy, the establishment of branches, mergers, consolidations, dividends and other aspects of their operations. The system of supervision and regulation applicable to the Company and the Subsidiaries establishes a comprehensive framework for the operations of the Company and the Subsidiaries and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions.
The following references to material statutes and regulations affecting the Company and the Subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company.
Recent Regulatory Developments
On August 8, 1995, the FDIC amended its regulations to change the range of deposit insurance assessments charged to members of the Bank Insurance Fund (the "BIF"), such as the Bank Subsidiaries, from the then-prevailing range of .23% to .31% of deposits, to a range of .04% to .31% of deposits. Additionally, because the change in BIF-assessments was applied retroactively to June 1, 1995, BIF- member institutions, including the Bank Subsidiaries, received a refund of the difference between the amount of assessments previously paid at the higher assessment rates for the period from June 30, 1995, and the amount that would have been paid for that period at the new rates. In the case of the Bank Subsidiaries, this refund totaled $495,276. The FDIC did not, however, change the assessment rates charged to members of the Savings Association Insurance Fund (the "SAIF"), such as WSB Aurora, and SAIF-insured institutions continue to pay assessments ranging from .23% to .31% of deposits. As a result of the change in the assessment rates charged to BIF-member institutions, WSB Aurora currently pays significantly higher deposit insurance assessments as a member of the SAIF than members of the BIF.
The difference between the deposit insurance assessments paid by BIF-member institutions and those paid by SAIF-member institutions will increase further in calendar year 1996. On November 14, 1995, the FDIC reduced the deposit insurance assessments for BIF-member institutions by four basis points. As a result, the range of BIF assessments for the semi-annual assessment period commencing January 1, 1996 will be between 0% and .27% of deposits. BIF-member institutions which qualify for the 0% assessment category will, however, still have to pay the $1,000 minimum semi-annual assessment required by federal statute.
The FDIC changed the range for BIF-member deposit insurance assessments to their current levels because the ratio of the insurance reserves of the BIF to total BIF-insured deposits exceeds the statutorily designated reserve ratio of 1.25%. Because the SAIF does not meet this designated reserve ratio, the FDIC is prohibited by federal law from reducing the deposit insurance assessments charged to SAIF-member institutions to the same levels currently charged to BIF- member institutions. Legislative proposals pending before the Congress would recapitalize the SAIF to the designated reserve ratio by imposing a special
assessment against SAIF-insured institutions, payable in a single installment, sufficient in the aggregate to increase the ratio of the insurance reserves of the SAIF to total SAIF-insured deposits to 1.25%. Based upon the information currently available to the Company with respect to the manner in which any such special assessment would be calculated under the pending legislation, the Company estimates that the imposition of a special assessment under the pending legislation would result in a one-time charge to WSB Aurora of approximately $1.0 million. At such time as the SAIF meets the designated reserve ratio of 1.25%, the assessment rates charged SAIF-member institutions could be reduced to levels consistent with those charged to BIF-member institutions. Legislation has also been introduced in the Congress that would, among other things, require federal thrift institutions to convert to state or national banks and merge the BIF and the SAIF into a single deposit insurance fund administered by the FDIC. At this time, it is not possible to predict whether, or in what form, any such legislation will be adopted or the impact, if any, such legislation if adopted would have on the Company, the Bank Subsidiaries or WSB Aurora.
The Company
GENERAL. The Company, as the controlling shareholder of the Bank Subsidiaries, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the FRB under the BHC Act. In accordance with FRB policy, the Company is expected to act as a source of financial strength to the Bank Subsidiaries and to commit resources to support the Bank Subsidiaries in circumstances where the Company might not do so absent such policy. Under the BHC Act, the Company is subject to periodic examination by the FRB and is required to file periodic reports of its operations and such additional information as the FRB may require.
Because the Company's principal place of business is in Illinois, the Company is also subject to the requirements of the Illinois Bank Holding Company Act. Further, due to the Company's ownership of WSB Aurora, a federally chartered savings association, the Company is a savings and loan holding company within the meaning of the HOLA and, as such, is subject to the examination, supervision, reporting and enforcement requirements of the OTS.
INVESTMENTS AND ACTIVITIES. Under the BHC Act, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
Prior to September 29, 1995, the BHC Act prohibited the FRB from approving any direct or indirect acquisition by a bank holding company of more than 5% of the voting shares, or of all or substantially all of the assets, of a bank located outside of the state in which the operations of the bank to be acquired is located specifically authorized such an acquisition. Pursuant to amendments to the BHC Act which took effect September 29, 1995, the FRB may now allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain other acceptable conditions, if any, imposed by that state that apply to all holding companies, including, for example, limitations on the aggregate amount of deposits that may be held by a holding company and all of its insured depository institutions.
The BHC Act also prohibits, with certain exceptions noted below, the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries, except that bank holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the FRB, the Company and any non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, mortgage banking and mortgage brokerage. The BHC Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies.
The HOLA prohibits a savings and loan holding company, such as the Company, directly or indirectly or through any subsidiary, from: acquiring control of, or acquiring by merger or purchase of assets, another savings association or savings and loan holding company without the prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of the voting shares of a non-subsidiary savings association, a non-subsidiary savings and loan holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured.
Federal law also prohibits the acquisition of "control" of a bank or bank holding company, such as the Company, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as the acquisition of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. The FRB uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders' equity). The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% to 5% for all others.
The risk-based and leverage standards presently used by the FRB are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (I.E., Tier 1 capital less all intangible assets), well above the minimum levels.
As of December 31, 1995, the Company had regulatory capital in excess of the FRB's minimum requirements, with a Tier 1 risk-based capital ratio of 11.92%, a total risk-based capital ratio of 12.90% and a leverage ratio of 9.72%.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies. In the policy statement, the FRB expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
In addition to the restrictions on dividends imposed by the FRB, the Illinois Business Corporation Act, as amended, prohibits the Company from paying a dividend if, after giving effect to the dividend, the Company would be insolvent or the net assets of the Company would be less than zero or less than the maximum amount then payable to shareholders of the Company who would have preferential distribution rights if the Company were liquidated.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
The Subsidiaries
GENERAL. The Bank Subsidiaries are Illinois-chartered banks, the deposit accounts of which are insured by the BIF of the FDIC. As BIF-insured, Illinois- chartered banks, the Bank Subsidiaries are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois banks, and the FDIC, as administrator of the BIF.
WSB Aurora is a federally chartered savings association, the deposits of which are insured by the SAIF of the FDIC. As a SAIF-insured, federally chartered savings association, WSB Aurora is subject to the examination, supervision, reporting and enforcement requirements of the OTS, as the chartering authority for federal savings associations, and the FDIC as administrator of the SAIF. WSB Aurora is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE. As FDIC-insured institutions, the Bank Subsidiaries and WSB Aurora are required to pay deposit insurance premium assessments to the FDIC. The amount each FDIC-insured institution pays for deposit insurance coverage is determined in accordance with a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy, pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. For the semi-annual assessment period ended December 31, 1995, BIF assessments ranged from .04% to .31% of deposits, while SAIF assessments ranged from .23% to .31% of deposits. The premiums currently paid by WSB Aurora for membership in the SAIF are substantially higher than the premiums currently paid by the Bank Subsidiaries for membership in the BIF. See "Recent Regulatory Developments." Risk classification of all insured institutions is made by the FDIC for each semi- annual assessment period.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of any of the Bank Subsidiaries or WSB Aurora.
CAPITAL REQUIREMENTS. The FDIC has established the following minimum capital standards for state-chartered insured non-member banks, such as the Bank Subsidiaries: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others and a total risk-based capital requirement consisting of a minimum ratio of total capital to total risk- weighted assets of 8%, at least one-half of which must be Tier 1 capital.
The OTS has established the following minimum capital standards for savings associations, such as WSB Aurora: a core capital requirement, consisting of a minimum ratio of core capital (consisting primarily of stockholders' equity) to total assets of 3%; a tangible capital requirement consisting of a minimum ratio of tangible capital (defined as core capital minus all intangible assets other than a specified amount of purchased mortgage servicing rights) to total assets of 1.5%; and a risk-based capital requirement, consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must consist of core capital.
The capital requirements described above are minimum requirements. Higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the FDIC and the OTS provide that additional capital may be required to take adequate account of the risks posed by concentrations of credit, nontraditional activities and the institution's ability to manage such risks.
Further, a savings association may be required to maintain additional capital to account for its interest rate risk ("IRR") exposure. Under OTS regulations, the OTS quantifies each savings association's level of IRR exposure based on data reported by each association, using an OTS model designed to measure the change in the net present value of the association's assets, liabilities and off- balance sheet positions resulting from a hypothetical 200 basis point increase or decrease in interest rates. IRR exposure, as measured by the OTS, is used as the basis for determining whether the association must hold additional risk- based capital to account for IRR.
Similarly, on August 2, 1995, the FDIC published amendments to its risk-based capital standards designed to take into account IRR exposure. The amendments provide that a bank's exposure to declines in the economic value of its capital due to changes in interest rates will be among the factors considered by the FDIC in evaluating a bank's capital adequacy. Although the IRR amendments do not establish a system for measuring IRR exposure, concurrently with the adoption of the amendments, the FDIC, together with the FRB and the Office of the Comptroller of the Currency, issued a proposed joint policy statement setting out a framework that would be used to measure the IRR exposure of individual banks. The proposed policy statement would generally require banks to quantify their level of IRR exposure using a measurement system developed by the regulators that weights a bank's assets, liabilities and off-balance sheet positions by risk factors designed to reflect the approximate change in each instrument's value that would result from 200 basis point changes in interest rates. The level of IRR exposure reflected by this measurement system, would then be considered by the agencies in assessing a bank's capital adequacy. Although it is not presently possible to predict whether, or in what form, the proposed policy statement will be adopted, management does not anticipate that the adoption of a policy statement substantially in the form proposed would have a material adverse effect on the ability of the Bank Subsidiaries to maintain compliance with applicable capital requirements.
During the year ended December 31, 1995, none of the Bank Subsidiaries or WSB Aurora was required by the FDIC or the OTS, respectively, to increase its capital to an amount in excess of the minimum regulatory requirement. As of December 31, 1995, each of the Bank Subsidiaries and WSB Aurora exceeded its minimum regulatory capital requirements.
The following table sets forth selected regulatory capital ratios of the Bank Subsidiaries at December 31, 1995:
At December 31, 1995, WSB Aurora maintained a core capital ratio of 10.77%, a tangible capital ratio of 12.91% and a total risk-based capital ratio of 13.93%.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC insured depository institutions in danger of default.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks may not pay, without prior regulatory approval, dividends in excess of their adjusted profits.
OTS regulations impose limitations upon all capital distributions by thrifts, including cash dividends. The rule establishes three tiers of institutions. An institution that exceeds all fully phased-in capital requirements before and after the proposed capital distribution ("Tier 1 Institution") could, after prior notice to, but without the approval of, the OTS, make capital distributions during a calendar year of up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent preceding four quarter period. Any additional capital distributions would require prior regulatory approval. As of December 31, 1995, WSB Aurora was a Tier 1 Institution.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Company, the Bank Subsidiaries and WSB Aurora each exceeded its minimum capital requirements under applicable guidelines as of December 31, 1995. As of December 31, 1995, approximately $20.7 million was available to be paid as dividends to the Company by the Bank Subsidiaries and WSB Aurora.
INSIDER TRANSACTIONS. The Bank Subsidiaries and WSB Aurora are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company and the Subsidiaries, on investments in the stock or other securities of the Company and the Subsidiaries and the acceptance of the stock or other securities of the Company or the Subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank Subsidiaries and WSB Aurora to their respective directors and officers, to directors and officers of the Company and the Subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of the Subsidiaries or a principal stockholder of the Company may obtain credit from banks with which one of the Bank Subsidiaries or WSB Aurora maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. On July 10, 1995, the federal banking regulators, including the FDIC and the OTS, published final guidelines establishing operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines, which took effect on August 9, 1995, establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines prescribe the goals to be achieved in each area, and each institution will be responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from any institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. Failure to submit an acceptable compliance plan, or failure to adhere to a compliance plan that has been accepted by the appropriate regulator, would constitute grounds for further enforcement action. The federal banking agencies have also published for comment proposed asset quality and earnings standards which, if adopted, would be added to the safety and soundness guidelines. This proposal, like the final guidelines, would establish the goals to be achieved with respect to asset quality and earnings,
and each institution would be responsible for establishing its own procedures to meet such goals.
BRANCHING AUTHORITY. All banks located in Illinois have traditionally been restricted as to the number and geographic location of branches which they may establish. On June 7, 1994, Governor Edgar signed into law legislation eliminating all branching restrictions. Accordingly, as of that date, the Bank Subsidiaries were allowed to establish branches anywhere in Illinois without regard to the location of other bank main offices or the number of branches previously maintained by the Bank Subsidiaries establishing the branch. Federal savings associations, such as WSB Aurora, have for some time had similar branching rights.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of DE NOVO interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of- state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allows individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Illinois has enacted legislation permitting interstate bank mergers beginning on June 1, 1997. Federal savings associations, such as WSB Aurora, currently have nationwide interstate branching authority under the HOLA and OTS regulations.
STATE BANK ACTIVITIES. Under federal law, as implemented by final regulations adopted by the FDIC, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time-frames set by the FDIC in accordance with federal law. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank Subsidiaries.
QUALIFIED THRIFT LENDER TEST. Under the HOLA, as implemented by OTS regulations, WSB Aurora is required to satisfy a qualified thrift lender ("QTL") test. In order to meet the current QTL test WSB Aurora generally is required to invest at least 65% of its portfolio assets in "qualified thrift investments," as measured on a monthly average basis in nine out of every 12 months. Qualified thrift investments for purposes of the current QTL test consist principally of residential mortgage loans, mortgage-backed securities and other housing and consumer-related investments. The term "portfolio assets" is statutorily defined to mean a savings association's total assets less goodwill and other intangible assets, the association's business property and a limited amount of its liquid assets. As of December 31, 1995, WSB Aurora satisfied the QTL test.
LIQUIDITY REQUIREMENTS. OTS regulations currently require each savings association to maintain, for each calendar month, an average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to at least 5% of the average daily balance of its net withdrawable accounts plus short-term borrowings (those repayable in 12 months or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to an amount within a range of 4% to 10% of such accounts and borrowings, depending upon economic conditions and the deposit flows of savings associations. OTS regulations also require each savings association to maintain, for each calendar month, an average daily balance of short-term liquid assets (generally liquid assets having maturities of 12 months or less) equal to at least 1% of the average daily balance of its net withdrawable accounts plus short-term borrowings during the preceding calendar month. Penalties may be imposed for failure to meet liquidity ratio requirements. At December 31, 1995, WSB Aurora was in compliance with OTS liquidity requirements, with an overall liquidity ratio of 5.54% and a short-term liquidity ratio of 4.45%.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of the executive officers of the Company, along with a brief description of the business experience of each such person, during the past five years, and certain other information is set forth below:
STATISTICAL DATA
The statistical data required by Securities and Exchange Act of 1934, as amended (the "1934 Act") Industry Guide 3, "Statistical Disclosure By Bank Holding Companies," has been incorporated by reference from the Company's 1995 Annual Report to Shareholders (attached as Exhibit 13.1 hereto) or is set forth below. This data should be read in conjunction with the Company's 1995 Consolidated Financial Statements and related notes, and the discussion included in Management's Discussion and Analysis of Financial Condition and Results of Operations as set forth in the Company's 1995 Annual Report to Shareholders. All dollar amounts of the statistical data included below are expressed in thousands.
Investment Securities
The following table sets forth by category the amortized cost of securities at December 31 (dollars in thousands):
The following table sets forth by contractual maturity the amortized cost and weighted average yield (not tax-effected) of investment securities available for sale at December 31, 1995 (dollars in thousands):
The following table sets forth, by contractual maturity, the amortized cost and weighted average yield of investment securities held to maturity at December 31, 1995. Yields on tax-exempt securities represent actual coupon yields (dollars in thousands):
Loan Portfolio
The following table sets forth the major loan categories at December 31 (dollars in thousands):
The following table sets forth the maturity and interest rate sensitivity of selected loan categories at December 31, 1995 (dollars in thousands):
Nonperforming Loans
The following table sets forth the aggregate amount of nonperforming loans and selected ratios at December 31 (dollars in thousands):
The Company's normal policy is to discontinue accruing interest on a loan when it becomes 90 days past due or when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of principal or interest is doubtful. In some circumstances a loan that is more than 90 days past due can remain on accrual status if it can be established that payment will be received within another 90 days or if it is adequately secured. When a loan has been placed on nonaccrual status, interest that has been earned but not collected is charged back to the appropriate interest income account. When payments are received on nonaccrual loans they are first applied to principal, then to expenses incurred for collection and finally to interest income. The gross amount of interest that would have been recorded if all nonperforming loans had been accruing interest at their original terms was approximately fifty-three thousand dollars for the year ended December 31, 1995 and no interest was recorded in operations for the year ended December 31, 1995.
As of December 31, 1995, due to information regarding possible credit problems of borrowers or possible deficits in the cash flow of property given as collateral, management had doubts as to the ability of certain borrowers to comply with the present repayment terms of loans, which are not nonaccrual and not nonperforming, with an aggregate principal amount of $4.9 million. Accordingly, management may be required to categorize some or all of these loans as nonperforming assets in the future.
Allowance for Loan Losses
The allowance for loan losses reduces the level of gross loans outstanding by an estimate of uncollectible loans. When management determines that loans are uncollectible, they are charged-off against the allowance. Periodically, a provision for loan losses is charged against current income. Management attempts to maintain the allowance for loan losses at a level adequate to absorb anticipated loan losses. The amount of the allowance is established based upon past loan loss experience and other factors which, in management's judgment, deserve consideration in estimating loan losses. Other factors considered by management in this regard include growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans and economic conditions in the Company's market area. Based on such reviews, management at this time does not anticipate any increase in nonperforming assets that will have a significant effect on its operations because the estimated exposure to losses has already been substantially reflected in its allowance for loan losses. This could, however, change dramatically if a significant decline in the real estate market area served by the Company occurs.
The following table sets forth the activity in the allowance for loan losses for the years ended and at December 31 (dollars in thousands):
The entire allowance for loan losses is available to absorb losses in any particular category of loans, notwithstanding management's allocation of the allowance. The following table sets forth the allocation of allowance for loan losses and the percentage of loans in each category to total loans at December 31 (dollars in thousands):
Deposits
The following table sets forth by category average daily deposits and rates for the years ended December 31 (dollars in thousands):
The following table sets forth by maturity time deposits $100 and over at December 31 (dollars in thousands):
------- Within Three months $42,605 After 3 months but within 12 months 12,673 After 1 year but within 5 years -- After 5 years 12,785 ------- Total $68,063 ------- -------
Return on Equity and Assets and Other Financial Ratios
The following table sets forth selected financial ratios at and for the years ended December 31:
ITEM 2.

ITEM 2. PROPERTIES
The Company and the Subsidiaries occupy a total of approximately 219,000 square feet in 32 locations. The Company's principal offices are located in approximately 32,500 square feet of office space at 711 South Meyers Road, Lombard, Illinois. As indicated below, West Suburban Bank also operates the facility located at 711 South Meyers Road, Lombard, Illinois as a branch.
The following table sets forth certain information concerning the facilities of the Subsidiaries:
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or the Subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized and outstanding equity securities consist of Class A Common Stock, no par value, and Class B Common Stock, no par value. Except as required by law, rights and privileges of the holders of the Class A Common Stock and Class B Common Stock are identical.
The Company's per share book value as of the end of each quarter and dividend information for each quarter is set forth in the following table:
The Company's common stock is not traded on any national or regional exchange. While there is no established trading market for the Company's common stock, the Company is aware that from time to time limited or infrequent quotations are made with respect to the Company's common stock and that there occurs limited trading in the Company's common stock resulting from private transactions not involving brokers or dealers. Transactions in the Company's common stock have been infrequent. As of March 15, 1996, the Company had 347,015 shares of Class A Common Stock outstanding and approximately 943 shareholders of record, and had 85,480 shares of Class B Common Stock outstanding and approximately 236 shareholders of record. Management is aware of approximately 28 transactions during 1995 involving the sale of approximately 973 shares of Class A Common Stock and approximately 3 transactions during 1995 involving the sale of approximately 108 shares of Class B Common Stock. The average sale price in such transactions was approximately $251.85.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The Company hereby incorporates by reference the information called for by Item 6 of this Form 10-K from the section entitled "Selected Financial Data" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (attached as Exhibit 13 hereto).
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company hereby incorporates by reference the information called for by Item 7 of this Form 10-K from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (attached as Exhibit 13 hereto).
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company hereby incorporates by reference the information called for by Item 8 of this Form 10-K from the Consolidated Financial Statements and from the section entitled "Selected Quarterly Financial Data" as set forth in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (attached as Exhibit 13 hereto).
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL MATTERS
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information called for by Item 10 of this Form 10-K regarding directors of the Company from the section entitled "Election of Directors" of the Company's 1996 Proxy Statement.
Section 16(a) of the of 1934 Act requires that the Company's executive officers and directors and persons who own more than 10% of their Company's common stock file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the exchange on which the Company's shares of common stock are traded. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms furnished to the Company and, if appropriate, representations made to the Company by any such reporting person concerning whether a Form 5 was required to be filed for the 1995 fiscal year, the Company is not aware that any of its directors and executive officers or 10% shareholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1995 through December 31, 1995 except that Mr. Howard failed to file his Form 4, reporting August, 1995 transactions, on a timely basis.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information called for by Item 11 of this Form 10-K from the section entitled "Executive Compensation" of the Company's 1996 Proxy Statement; provided, however, Report of the Board of Directors on Executive Compensation is specifically not incorporated into this Form 10-K.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information called for by Item 12 of this Form 10-K from the section entitled "Security Ownership of Certain Beneficial Owners" of the Company's 1996 Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information called for by Item 13 of this Form 10-K from the section entitled "Transactions with Directors, Officers and Associates" of the Company's 1996 Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM (A)1 AND 2. FINANCIAL STATEMENTS
WEST SUBURBAN BANCORP, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following audited Consolidated Financial Statements of the Company and its subsidiaries and related notes and independent auditors' report are incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (attached as Exhibit 13 hereto).
Annual Report Page No. --------------
Report of Independent Auditors 5
Consolidated Balance Sheets - December 31, 1995 and 1994 6
Consolidated Statements of Income - Years Ended December 31, 1995, 1994 and 1993 7
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1995, 1994 and 1993 8
Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 9
Notes to Consolidated Financial Statements 11
The following Condensed Financial Information-Parent Only is incorporated by reference from Note 16 to the Company's audited Consolidated Financial Statements as set forth in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (attached as Exhibit 13).
Annual Report Page No. --------------
Condensed Balance Sheets - December 31, 1995 and 1994 21
Condensed Statements of Income - Years Ended December 31, 1995, 1994 and 1993 21
Condensed Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 22
SCHEDULES
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable or the required information is shown in the financial statements incorporated by reference or notes thereto.
ITEM 14(a)3. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-K and are listed on the "Index to Exhibits" immediately following the signature page.
ITEM 14(b). REPORTS ON FORM 8-K
None
***
Upon written request to the Chairman of the Board of West Suburban Bancorp, Inc., 711 South Meyers Road, Lombard, Illinois, 60148, copies of the exhibits listed above are available to shareholders of the Company by specifically identifying each exhibit desired in the request. A fee of $.20 per page of exhibit will be charged to shareholders requesting copies of exhibits to cover copying and mailing costs.
FORM 10-K SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WEST SUBURBAN BANCORP, INC. (Registrant)
By /s/ John A. Clark ----------------------------- John A. Clark Chief Executive Officer
Date: March 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of March, 1996.
SIGNATURE TITLE --------- -----
/s/ Kevin J. Acker 3/28/96 Chairman of the Board - ----------------------------- ---------- and Director Kevin J. Acker Date
/s/ John A. Clark 3/28/96 Chief Executive - ----------------------------- ---------- Officer and John A. Clark Date Director
/s/ Duane G. Debs 3/28/96 Chief Financial - ----------------------------- ---------- Officer and Chief Duane G. Debs Date Accounting Officer
/s/ David Bell 3/28/96 Director - ----------------------------- ---------- David Bell Date
/s/ Peggy P. LoCicero 3/28/96 Director - ----------------------------- ----------- Peggy P. LoCicero Date
/s/ Charles P. Howard 3/28/96 Director - ----------------------------- ----------- Charles P. Howard Date
The foregoing includes all of the Board of Directors of the Company.
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
3.1 Articles of Incorporation - Incorporated by reference N/A from Exhibit 3.1 of Form S-1 of the Company dated November 10, 1988, under Registration No. 33-25225
3.2 Form of Certificate of Amendment to Articles of N/A Incorporation - Incorporated by reference from Exhibit 3.2 of Form S-1 of the Company dated November 10, 1988, under Registration No. 33-25225
3.3 Certificate of Amendment to Articles of Incorporation N/A dated May 10, 1990 - Incorporated by reference from Exhibit 3.3 of the Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
3.4 By-Laws - Incorporated by reference to Exhibit 3.3 of N/A Form S-1 of the Company dated November 10, 1988, Registration No. 33-25225
4.1 Specimen of Class A Common Stock certificate Incorporated N/A by reference from Exhibit 4.1 of the Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
4.2 Specimen of Class B Common Stock certificate - Incorporated N/A by reference from Exhibit 4.1 of the Form S-1 of the Company dated November 10, 1988, Registration No. 33-25225
4.3 Articles of Incorporation of the Company (see Exhibits 3.1, N/A 3.2, 3.3 and 3.4 above)
4.4 By-Laws of the Company (see Exhibit 3.4 above) N/A
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.1 Employment Agreement between one of the N/A Company's subsidiaries and Ralph Acker, dated December 31, 1985 - Incorporated by reference from Exhibit 10.1 of Form S-1 of the Company dated November 10, 1988, Registration No. 33-25225
10.2 Employment Agreement between one of the N/A Company's subsidiaries and John A. Clark, dated May 10, 1989 - Incorporated by reference from Exhibit 10.2 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.3 Employment Agreement between one of the Company's N/A subsidiaries and Keith W. Acker, dated November 10, 1989 - Incorporated by reference from Exhibit 10.3 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.4 Employment Agreement between one of the Company's N/A subsidiaries and Craig R. Acker, dated May 10, 1989 - Incorporated by reference from Exhibit 10.4 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.5 Employment Agreement between one of the Company's N/A subsidiaries and Alana S. Acker, dated May 9, 1989 - Incorporated by reference to Exhibit 10.5 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.6 Employment Agreement between one of the Company's N/A subsidiaries and Kevin J. Acker, dated May 9, 1989 - Incorporated by reference from Exhibit 10.6 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.7 Employment Agreement between one of the Company's N/A subsidiaries and Gregory Ruffolo, dated May 9, 1989 - Incorporated by reference from Exhibit 10.7 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.8 Employment Agreement between one of the Company's N/A subsidiaries and Michael P. Brosnahan, dated May 10, 1989 - Incorporated by reference from Exhibit 10.8 of Form 10-K of the Company dated March 28, 1990, Commission File No. 0-17609
10.9 Employment Agreement between one of the Company's N/A subsidiaries and Gregory L. Young, dated November 14, 1990 - Incorporated by reference from Exhibit 10.9 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.10 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and John A. Clark, dated November 14, 1990 - Incorporated by reference from Exhibit 10.10 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.11 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Keith W. Acker, dated November 14, 1990 - Incorporated by reference from Exhibit 10.11 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.12 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Craig R. Acker, dated November 14, 1990 - Incorporated by reference from Exhibit 10.12 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.13 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Michael P. Brosnahan, dated November 14, 1990 - Incorporated by reference from Exhibit 10.13 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.14 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Gregory L. Young, dated November 14, 1990 - Incorporated by reference from Exhibit 10.14 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.15 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Alana S. Acker, dated November 13, 1990 - Incorporated by reference from Exhibit 10.15 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.16 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Gregory M. Ruffolo, dated November 13, 1990 - Incorporated by reference from Exhibit 10.16 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.17 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Kevin J. Acker, dated November 13, 1990 - Incorporated by reference from Exhibit 10.17 of Form 10-K of the Company dated March 28, 1991, Commission File No. 0-17609
10.18 Employment Agreement between one of the Company's subsidiaries N/A and Stanley C. Celner, Jr., dated December 10, 1991 - Incorporated by reference from Exhibit 10.18 of Form 10-K of the Company dated March 28, 1992, Commission File No. 0-17609
10.19 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Stanley C. Celner, Jr., dated December 10, 1991 - Incorporated by reference from Exhibit 10.19 of Form 10-K of the Company dated March 28, 1992, Commission File No. 0-17609
10.20 Employment Agreement between one of the Company's subsidiaries N/A and Duane G. Debs, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.20 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.21 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Duane G. Debs, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.21 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.22 Employment Agreement between one of the Company's subsidiaries N/A and Jacqueline R. Weigand, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.22 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.23 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Jacqueline R. Weigand, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.23 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.24 Employment Agreement between one of the Company's subsidiaries N/A and Timothy P. Dineen, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.24 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.25 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Timothy P. Dineen, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.25 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.26 Employment Agreement between one of the Company's subsidiaries N/A and Pamela N. Greening, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.26 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.27 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Pamela N. Greening, dated as of March 8, 1993 - Incorporated by reference from Exhibit 10.27 of Form 10-K of the Company dated March 28, 1994, Commission File No. 0-17609
10.28 Employment Agreement between one of the Company's subsidiaries N/A and Steven A. Jennrich, dated as of January 12, 1994 - Incorporated by reference from Exhibit 10.28 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.29 Deferred Compensation Agreement between one of the Company's N/A subsidiaries and Steven A. Jennrich, dated as of January 12, 1994 - Incorporated by reference from Exhibit 10.29 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.30 Amended Employment Agreement between one of the Company's N/A subsidiaries and Jacqueline R. Weigand, dated as of August 9, 1994 - Incorporated by reference from Exhibit 10.30 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.31 Amended Employment Agreement between one of the Company's N/A subsidiaries and Timothy P. Dineen, dated as of August 9, 1994 - Incorporated by reference from Exhibit 10.31 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.32 Employment Agreement between one of the Company's N/A subsidiaries and George E. Ranstead, dated as of November 9, 1994 - Incorporated by reference from Exhibit 10.32 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.33 Deferred Compensation Agreement between one Company's N/A subsidiaries and George E. Ranstead, dated as of November 9, 1994 - Incorporated by reference from Exhibit 10.33 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.34 Employment Agreement between one of the Company's N/A subsidiaries and David S. Orr, dated as of November 9, 1994 - Incorporated by reference from Exhibit 10.34 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
INDEX TO EXHIBITS (continued)
Exhibit Sequential Number Description Page No. - ------- ----------- ----------
10.35 Deferred Compensation Agreement between one of the N/A Company's subsidiaries and David S. Orr, dated as of November 9, 1994 - Incorporated by reference from Exhibit 10.35 of Form 10-K of the Company dated March 28, 1995, Commission File No. 0-17609
10.36 Employment Agreement Amendment entered into between a 35 Subsidiary of the Company and each of John A. Clark, Kevin J. Acker, Craig R. Acker, Keith W. Acker and Alana S. Acker, each agreement dated as of August 8, 1995.
10.37 Employment Agreement Amendment entered into between a 41 Subsidiary of the Company and each of Michael P. Brosnahan, Duane G. Debs, Stanley C. Celner, Jr., Timothy P. Dineen, Pamela N. Greening, Steven A. Jennrich, David S. Orr, George Ranstead, Gregory M. Ruffolo, Jacqueline R. Weigand and Gregory L. Young, each agreement dated as of August 8, 1995.
11 Statement regarding computations of earnings per share 47 for the Registrant
13 Annual Report to Shareholders of the Company for fiscal 48 year ended December 31, 1995
21 Subsidiaries of Registrant 88
27 Financial Data Schedule 89


ITEM 2. PROPERTIES.
The Company's manufacturing, research and general office operations are conducted at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York. This plant was financed by an industrial development bond issue and the bond is secured by a lien on the land and building and other assets acquired with the bond proceeds.
The Company also leases small amounts of office space for its regional distribution center in Hixson, Tennessee, and Auburn, California.
Internationally, the Company has leased a 70,000 square foot manufacturing facility in Southeast Asia and has branch offices/distribution centers located in Australia, France and Hong Kong.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
On January 26, 1995, the Company reached a settlement with C & K Systems on patent infringement suits commenced in fiscal 1993. The settlement was reached through an exchange of patent rights.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the Company's fourth quarter ending March 31, 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The Company's common stock trades on The Nasdaq Stock Market under the symbol: DETC. The information regarding the price range of the Company's Common Stock presented on page 16 of the Company's 1995 Annual Report to Shareholders ("Annual Report") is incorporated herein as Exhibit 1. On June 23, 1995, the closing price, as reported by The Nasdaq Stock Market, was $6.625 per share.
The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain all future earnings, if any, for the operation and expansion of its business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future.
The Company's industrial development bond issued to finance the Company's Fairport plant limits the amount of dividends the Company may declare or pay in any fiscal year to 50% of its net income for the preceding fiscal year.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Interim quarterly results for the Company over the past three years were as follows (thousands of dollars, except per share data):
INCOME Fiscal Year Ending NET GROSS NET PER March 31, SALES MARGIN INCOME SHARE - ------------------ ------ ------ ------ ----- Fourth Quarter $8,075 $3,193 $ 27 -- Third Quarter 9,416 3,759 569 $.20 Second Quarter 8,672 3,362 460 .16 First Quarter 8,173 3,192 458 .16
Fourth Quarter $8,145 $3,069 $402 $.14 Third Quarter 8,300 3,257 437 .15 Second Quarter 8,589 3,272 431 .15 First Quarter 6,321 2,215 5 --
Fourth Quarter $8,265 $3,399 $517 $.18 Third Quarter 7,485 2,796 339 .12 Second Quarter 6,732 2,473 216 .08 First Quarter 6,949 2,728 365 .13
The Company's five year summary of operations is included as Exhibit 10 to this Form 10-K.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and results of operations is included as Exhibit 2 of this Form 10-K.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pages 17 through 24 of the Company's Annual Report for the year ended March 31, 1995 contain the information required by Item 8 of Form 10-K. This information is also included as Exhibit 3 of this Form 10-K.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name and Age Position, Offices Held and Year Appointed Karl H. Kostusiak (56) President (1968)
David B. Lederer (55) Executive Vice President, (1968)
George E. Behlke (37) Vice President, Engineering (1995)
R. Wayne Carlton (58) Vice President, National Sales (1993)
Frank J. Ryan (41) Vice President, Secretary and Treasurer (1982)
Lawrence R. Tracy (48) President, Detection Systems, International, Inc., a subsidiary of Detection Systems, Inc. (1995)
Each officer is elected to serve until the first meeting of the Board of Directors held after the next annual meeting of shareholders and until his successor is elected and has qualified. There is no family relationship between any of the above officers.
Messrs. Kostusiak and Lederer have been President and Executive Vice President of the Company since it was formed in 1968. Mr. Ryan has been employed by the Company in various financial positions since 1980 and was promoted to Vice President in 1989. Mr. Carlton has been employed by the Company in various sales positions since 1975 and was promoted to Vice President in 1994. Mr. Tracy was hired in February 1995 as President of the Company s Detection Systems, International, Inc. subsidiary. Mr. Behlke has been employed by the Company in various engineering positions since 1977 and was promoted in May 1995 to Vice President.
The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the other information required by Item 10 of Form 10- K. That information is incorporated in this report as Exhibit 5.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the information required by Item 11 of Form 10-K. That information is incorporated in this report as Exhibit 5.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has stock purchase agreements with Messrs. Kostusiak and Lederer which could in the future result in a change of control of the registrant. These agreements are included as Exhibit 4 of this Form 10-K.
The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the information required by Item 12 of Form 10-K. The Proxy is included in this Form 10-K as Exhibit 5.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the last fiscal year the Company and its subsidiaries contracted with Adair & Stoner, of which Mr. Adair, a Director of the Company, is a partner, for legal services rendered for the Company and its ECI subsidiary. In addition, Mr. McIrvine, another Director of the Company, performed consulting work for the Company during the last fiscal year. Messrs. Adair and McIrvine also serve as members of the compensation and stock option committees of the Board of Directors.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(I) and (2) The financial statements and schedules are included in Exhibit 3 of this Report on Form 10-K. (a)(3) See Exhibit Index attached to this Report on Form 10-K.
(b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DETECTION SYSTEMS, INC. (Registrant)
Date: June 27, 1995 By: /s/ Karl H. Kostusiak Karl H. Kostusiak President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Karl H. Kostusiak President and Director June 27, 1995 Karl H. Kostusiak (Principal Executive Officer)
Frank J. Ryan Vice President June 27, 1995 Frank J. Ryan Secretary/Treasurer (Principal Financial Officer and Principal Accounting Officer)
Donald R. Adair Director David B. Lederer Director
By: /s/ Karl H. Kostusiak Attorney-in-Fact June 27, 1995 Karl H. Kostusiak
EXHIBIT INDEX
Item Exhibits Location
3 Certificate of Incorporation Incorporated by reference to Exhibits 3(a) of the Company's 1993 Annual Report on Form 10-K
3 By-Laws as amended Incorporated by reference to Exhibits 3(b) of the Company's 1993 Annual Report on Form 10-K
4(a) Rights of Holders of common Incorporated by reference to Exhibit 4 stock - 1981 plan of the Company's 1993 Annual Report on Form 10-K
6 5-year summary of operations Included as Exhibit 11 of this Form 10-K.
10(a)Non-employee director stock Incorporated by reference to Exhibit option plan (warrant plan) 10(a) of the Company's 1994 Annual Report on Form 10-K
10(b) Medical reimbursement plan Incorporated by reference to Exhibit 10(b) of the Company's 1994 Annual Report on Form 10-K
10(c) Employee stock purchase plan Incorporated by reference to Exhibit 10(c) of the Company's 1994 Annual Report on Form 10-K
10(d) Line of credit agreements Included as Exhibit 6 of this Form 10K
10(e) Industrial Development Bond Incorporated by reference to Exhibit 10 Purchase Agreement, Bond, of the Company's fiscal 1982 Annual Lease Agreement, Mortgage Report on Form 10-K and Guaranty
10(f) Deferred Compensation Plan Incorporated by reference to Exhibit 10 of the Company's 1993 Annual Report on Form 10-K
10(g) 1992 Stock Option Plan Incorporated by reference to Exhibit 10(c) of the Company's 1994 Annual Report on Form 10-K
10(h) Key employee bonus plan Incorporated by reference to Exhibit 10(h) of the Company's 1994 Annual Report on Form 10-K
10(i) Executive employment Included as Exhibits 7 and 8 of this contracts Form 10-K
10(j) License and Mfg. Agreement Incorporated by reference to Exhibit Amendment No. 1 w/ ECI 10(j) of the Company's 1994 Annual Report on Form 10-K
10(k) Shareholders Agreements w/ Incorporated by reference to Exhibit ECI and AMS 10(k) of the Company's 1994 Annual Report on Form 10-K
11 Statement re: Computation Included as Exhibit 9 of this Form 10-K of Per Share Earnings
12 Stock Purchase Agreements Included as Exhibit 4 of this Form 10-K
17 Proxy Statement Included as Exhibit 5 of this Form 10-K
24 Report of Independent Included as Exhibit 12 of this Form Accountants of Financial 10-K Statement Schedules
25 Powers of Attorney Included as Exhibit 10 of this Form 10-K
26 Annual Report to Shareholders Incorporated by reference to paper copies of the Company's Annual Report to Shareholders mailed to the Securities and Exchange Commission and The Nasda Stock Market on June 22, 1995.
Schedule 8 - Reserves Included as Exhibit 13 of this Form 10-K
Computation of Net Income Included as Exhibit 9 of this Form 10-K
EDGAR EXHIBITS
Exhibit 1 Price Range of Common Stock
Exhibit 2 Management Discussion and Analysis
Exhibit 3 Financial and other Reports from 1995 Annual Report --Report of Independent Accountant Consolidated Balance Sheet --Consolidated Statement of Income and Retained Earnings --Consolidated Statement of Cash Flows --Notes to Consolidated Financial Statements
Exhibit 4 Stock Purchase Agreements --Karl H. Kostusiak --David B. Lederer
Exhibit 5 1995 Proxy Statement
Exhibit 6 Credit Agreements --Fleet Bank (previously Norstar Bank) --Chemical Bank
Exhibit 7 Employment Agreements --Karl H. Kostusiak --David B. Lederer
Exhibit 8 Employment Agreement --Lawrence R. Tracy
Exhibit 9 Computation of Per Share Earnings Statement
Exhibit 10 Powers of Attorney --Donald R. Adair --Mortimer B. Fuller III --Edward C. McIrvine
Exhibit 11 5-Year Summary of Operations
Exhibit 12 Report of Independent Accountants of Financial Statement Schedules
Exhibit 13 Schedule 8 Reserves Statement
Exhibit 27 Financial Data Schedule