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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-33188
 
 WSB Financial Group, Inc.
 (Exact name of registrant as specified in its charter)
 Washington(State of incorporation or organization)
    
    20-3153598(I.R.S. Employer Identification No.)607 Pacific Avenue 
Bremerton, Washington(Address of principal executive offices)
    
    98337(Zip Code)
 (360) 405-1200
  Title of each class
    
    Name of each exchange on which registeredCommon Stock ($1.00 par value)
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer  þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 ItemNumber
    
    
    
    PagePART I1
    
    Business
    

1
  211A
    
    Risk Factors
    

21
 261B
    
    Unresolved Staff Comments
    
    
    262
    
    Properties
    

26
 273
    
    Legal Proceedings
    
    
    274
    
    Submission of Matters to a Vote of Stockholders
    
    
    27PART II5
    
    Market for Registrants Common Equity and Related Stockholder Matters
    

28  296
    
    Selected Financial Data
    

29
 307
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    307A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    308
    
    Financial Statements and Supplementary Data
    
    
    309
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    309A(T)
    
    Controls and Procedures
    

31
 329B
    
    Other Information
    
    
    32PART III10
    
    Directors, Executive Officers and Corporate Governance
    
    
    3311
    
    Executive Compensation
    
    
    3312
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    3313
    
    Certain Relationships and Related Transactions, and Director
Independence
    
    
    3314
    
    Principal Accountant Fees and Services
    
    
    33PART IV15
    
    Exhibits and Financial Statement Schedules
    
    
    34Signatures
    

35  36EXHIBIT 11EXHIBIT 13EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I
  
 Item 1. Business
    Our Business Strategy
  
    
    Focusing on our compliance, internal audit and risk management function,
including our interest, credit and operational risks.
    
    Proactively managing loan collections, credit quality and internal controls
within loan operations, to correct deficiencies and comply with the FDIC order. See
Part II, Item 9A(T) of this report.
    
    Expanding our business and commercial lending activities, including our
commercial and industrial, or C&I, lending and diversifying our loan portfolio through
our existing branches.
    
    Managing our liquidity and maintain and improving our capital position on a
risk-adjusted basis in compliance with regulatory guidelines, while exploring prudent
means to grow our business internally.
    
    Growing our local, core deposits in order to fund loans and help maintain our net interest margins.
    
    Retaining well-trained, motivated personnel who provide superior customer service.
  1




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Our Business Activities
   Lending
   
    
    Real estate developers and contractors in need of land, construction and
permanent financing for commercial and residential developments;
    
    Small- to medium-sized businesses in need of secured and unsecured lines of
credit or permanent C&I loans;
    
    Individuals in need of residential mortgage products and consumer loan
products; and
    
    Professionals and professional firms, such as architectural, engineering, and
insurance and financial firms, in need of operating facilities.
  Real Estate:
  Construction and Development Loans.
 2




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Commercial Mortgage Loans.
    Residential Mortgage Loans.
  Commercial and Consumer:
 Commercial and Industrial Loans.
  3




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Consumer Loans.
    Credit Policies:
  4




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Debt Service Coverage.
 Monitor Concentration Levels.
 Strict Approval and Underwriting Procedures.
 
    
    Individual Authorities. Individual loan officers have approval authority of
various levels based on experience and abilities up to $100,000 for secured and
unsecured loans.The chief lending officer has approval authority of up to $250,000 for
secured and unsecured loans.
    
    Senior Loan Committee.The senior loan committee consists of the chief
executive officer and the chief lending officer. The committee has approval authority
up to $500,000 for secured and unsecured loans.
    
    Directors Loan Committee.The directors loan committee consists of three
directors of Westsound Bank, the chief executive officer and the chief lending officer.
It has approval authority up to our legal lending limit, which was approximately $12.6
million at December 31, 2007.
 Loan Grading and Loan Review.
   
    
    random reviews of the loan portfolio conducted by loan administration;
    
    annual reviews conducted by an outside loan reviewer;
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
    
    bank regulatory examinations; or
    
    quarterly action plans submitted to loan administration by the responsible
lending officers for each credit graded 4-7.
 Loan Delinquencies.
 Classified Assets.
  
    
    Special Mention  Grade 4.These assets have potential weaknesses that may
result in deterioration of the repayment prospects and, therefore, deserve the
attention of management. Usually, these assets are long-term problems that are likely
to remain and require management action plans. These loans exhibit an increasing
reliance on collateral for repayment.
    
    Substandard  Grade 5.These assets are inadequately protected by the current
worth and paying capacity of the borrower or of the collateral pledged, if any.
Although loss may not be imminent, if the weaknesses are not corrected, there is a good
possibility that we will sustain some loss.
    
    Doubtful  Grade 6.These assets have all the weaknesses inherent in an asset
classified as substandard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, condition
and values, highly questionable and improbable. At the point where a loss is
identified, all or that portion deemed a loss is immediately classified as Loss and
charged off.
    
    Loss  Grade 7.These assets have been determined to have identifiable,
uncollectible components. Typically, a partial charge-off of the loss will have
occurred, and the balance remaining would be reflective of managements best estimate
of collectibility.
 Our Investment Activities
   
    
    maintain collateral for pledging requirements;
    
    achieve an acceptable asset/liability gap position (based on our separate
policy related to asset/liability management that provides guidance for how investments
are to be used to manage asset/liability gaps); and
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
    
    provide a suitable balance of quality and diversification to our assets.
 Deposit Products and Other Sources of Funds
  
    
    deposits;
    
    maturities and principal and interest payments on loans and securities;
    
    other borrowings; and
    
    funds down-streamed into Westsound Bank from time to time by WSB Financial Group.
  Deposits.
    
    
    expanding long-term business customer relationships, including referrals from our customers; and
    
    building deposit relationships through our branch relationship officers who are
compensated based upon the profitability of such relationships.
 Other Borrowings.
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Other Products and Services
  
    
    Courier Services.We offer courier services to our business customers. Courier
services permit us to provide the convenience and personalized service that our
customers require by scheduling pick-ups of deposits and facilitating other banking
transactions.
    
    Telephone and Internet Banking.We believe there is a strong demand within our
market for telephone and Internet banking. These services allow both consumer and
business customers to access detailed account information and manage their accounts,
including on-line balance transfers and bill payment. These services enable our
customers to conduct their banking business and monitor their bank accounts from remote
locations and at any time. We believe our telephone and Internet banking services are
invaluable in attracting and retaining customers and encourage them to consider
Westsound Bank for all their banking and financial needs.
    
    Automatic Teller Machines (ATM).In 2005 we analyzed our ATM services and found
that it would be more cost effective for us, and more beneficial to our customers, to
discontinue ATMs at our branches and instead offer ATM fee reimbursement to our
customers, allowing them to use ATMs nationwide without paying a per transaction fee.
Each checking and deposit account has a monthly reimbursement limit.
    
    Real Estate Services.We offer certain fee-based services to real estate
contractors, including project inspections and mortgage banking consulting.
    
    Other Products.We offer other banking-related specialized products and
services to our customers, such as cashiers checks, money orders, debit/credit cards,
wire transfers, travelers checks and safe deposit services. While we sell many of our
consumer and commercial real estate term loans, we have not engaged in any
securitizations of loans.
 Our Concentrations/Customers
   10




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Percent ofTotal Tier1 Capital
    
    Percent of Total LoansActual
    
    Policy Limit
    
    ActualReal EstateConstruction
    
    
    307
    %
    
    
    50.0
    %
    
    
    47
    %Land development
    
    
    93
    %
    
    
    25.0
    %
    
    
    14
    %Commercial real estate
    
    
    114
    %
    
    
    40.0
    %
    
    
    17
    %Residential real estate
    
    
    84
    %
    
    
    40.0
    %
    
    
    13
    %Commercial and industrial
    
    
    50
    %
    
    
    50.0
    %
    
    
    8
    %Consumer
    
    
    6
    %
    
    
    25.0
    %
    
    
    1
    %
 Risk Management
   
    
    The board of directors appointed Charles L. Turner as the Banks chief lending
officer in mid 2007. Credit administration has been staffed to maintain all credit
policies and procedures, loan documentation, board and management reporting,
disbursement of loan proceeds and to review the integrity of the credit risk rating
system;
    
    Credit administration has been enhanced by the creation of the special assets
department in late 2007. This department is responsible for the identification of
problem loans. The primary duties of the department include tracking maturing, past due
and non accrual loans, analyzing current collateral values, analyzing current financial
status of borrower, the collection of non-performing loans and the foreclosure
process; and
    
    Loan operations support has been enhanced by the selection of a new loan
operations manager in late 2007 that is well versed in the loan and audit documentation
area. The department also created a new position in early 2008 focusing on quality
control within the loan department.
  Training Program
   Information Technology Systems
  9




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Our Market Area
  Kitsap County
    10




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Clallam County
  Seattle Metropolitan Statistical Area
    Our Competition
     11




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Employees
  SUPERVISION AND REGULATION
  General
  Compliance
  Federal Bank Holding Company Regulation
 General.
   12




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Acquisition of Banks.
 
    
    acquiring direct or indirect ownership or control of any voting shares of any
bank if, after the acquisition, the bank holding company will directly or indirectly
own or control more than 5% of the banks voting shares;
    
    acquiring all or substantially all of the assets of any bank; or
    
    merging or consolidating with any other bank holding company.
  Restrictions on Ownership of WSB Financial Group.
 Holding Company Control of Nonbanks.
 Transactions with Affiliates.
 Tying Arrangements.
 Support of Subsidiary Banks.
 13




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Federal and State Regulation of Westsound Bank
  Lending Limits.
 Control of Financial Institutions.
 Community Reinvestment.
 Insider Credit Transactions.
 Regulation of Management.
 Safety and Soundness Standards.
 Dividends.
  Other Regulations.
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Federal Laws Applicable to Credit Transactions.
 
    
    Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
    
    Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of
the community it serves;
    
    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
    
    Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
    
    Fair Debt Collection Practices Act, governing the manner in which consumer
debts may be collected by collection agencies;
    
    Servicemembers Civil Relief Act, which amended the Soldiers and Sailors Civil
Relief Act of 1940, governing the repayment terms of, and property rights underlying,
secured obligations of persons in military service; and
    
    the rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
 Federal Laws Applicable to Deposit Operations.
 
    
    the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for complying
with administrative subpoenas of financial records; and
    
    the Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board to implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
 Brokered Deposits.
 Check Clearing for the 21st Century Act.
 
    
    allowing check truncation without making it mandatory;
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
    
    demanding that every financial institution communicate to accountholders in
writing a description of its substitute check processing program and their rights under
the law;
    
    legalizing substitutions for and replacements of paper checks without agreement
from consumers;
    
    retaining in place the previously mandated electronic collection and return of
checks between financial institutions only when individual agreements are in place;
    
    requiring that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and
    
    requiring recrediting of funds to an individuals account on the next business
day after a consumer proves that the financial institution has erred.
  Federal
Home Loan Bank System.
  Mortgage Banking Operations.
 Commercial Real Estate Guidance.
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Privacy
  
    
    initial notices to customers about their privacy policies, describing the
conditions under which they may disclose nonpublic personal information to
nonaffiliated third-parties and affiliates;
    
    annual notices of their privacy policies to current customers; and
    
    a reasonable method for customers to opt out of disclosures to nonaffiliated third-parties.
  Interstate Banking And Branching
    Deposit Insurance
    17




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
    
    raised the deposit insurance limit on certain retirement accounts to $250,000
and indexes that limit for inflation;
    
    requires the FDIC and National Credit Union Administration boards, starting in
2010 and every succeeding five years, to consider raising the standard maximum deposit
insurance; and
    
    eliminated the current fixed 1.25 percent Designated Reserve Ratio and provides
the FDIC with the discretion to set the DRR within a range of 1.15 to 1.50 percent for
any given year.
 Capital Adequacy
 Regulatory Capital Guidelines.
 Tier I and Tier II Capital.
 Risk-based Capital Ratios.
 Leverage Ratio.
 Prompt Corrective Action.
 State Corporate Law Restrictions
  Corporate Governance and Accounting Legislation
 Sarbanes-Oxley Act of 2002.
 18




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Anti-terrorism Legislation
 USA Patriot Act of 2001.
 Effects of Government Monetary Policy
  Nonbank Subsidiary
  Available Information of the Registrant
   19




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Executive Officers of the Registrant
  Name
    
    Position with the Company
    
    AgeMark D. Freeman
    
    Interim President and Chief Executive
Officer, Executive Vice President of Finance
and Operations, Chief Financial Officer
    
    
    55Veronica R. Colburn
    
    Senior Vice President, Chief Risk Officer
    
    
    45Charles L. Turner
    
    Senior Vice President, Chief Lending Officer
    
    
    47Robin A. Seelye
    
    Senior Vice President, Operations
    
    
    37
 Notice About Forward-Looking Statements
 This annual report on Form 10-K includes forward-looking statements. These statements may be
identified by the use of forward-looking terminology such as anticipate, believe, continue,
could, estimate, expect, intend, may, might, plan, potential, predict, should
or will or the negative thereof or other variations thereon or comparable terminology. We have
based these forward-looking statements on our current expectations, assumptions, estimates and
projections. While we believe these expectations, assumptions, estimates and projections are
reasonable, such forward-looking statements are only predictions and involve known and unknown
risks and uncertainties, many of which are beyond our control. These and other important factors,
including those discussed in this report under the headings Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and Business may cause
our actual results, performance or achievements to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking statements. Some of the
key factors that could cause actual results to differ from our expectations are:
 
    
    changes in general economic conditions, either nationally or locally in the
west Puget Sound and Seattle Metropolitan Statistical Area;
    
    inflation, interest rate, market and monetary fluctuations;
    
    legislative or regulatory changes or changes in accounting principles, policies or guidelines;
    
    the adequacy of our credit risk management and the allowance for loan losses,
Westsound Banks asset quality, and our ability to collect on delinquent loans,
including the residential construction loans;
    
    the availability of and costs associated with sources of liquidity;
    
    changes in real estate values generally, within the markets in which we
generate loans, which could adversely affect the demand for loans and may adversely
affect collateral held on outstanding loans;
    
    our ability to successfully defend against claims asserted against us in
lawsuits arising out of, or related to, our lending operations or any regulatory action
taken against us, as well as any unanticipated litigation, regulatory, or other
judicial proceedings;
    
    our ability to successfully operate under the terms of the FDIC order;
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
    
    the success of the Company at managing the risks involved in the foregoing; and
    
    other risks which may be described in our future filings with the SEC under the
Securities Exchange Act of 1934.
 Given these risks and uncertainties, you are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included or incorporated by reference
into this report are made only as of the date hereof. We do not undertake and specifically decline
any obligation to update any such statements or to publicly announce the results of any revisions
to any such statements to reflect future events or developments.
 
 Item 1A. Risk Factors
  Risks Relating to Our Business and Market
 Restrictions imposed by regulatory actions could have an adverse effect on us and failure to comply
with any of their provisions could result in further regulatory action or restrictions.
     Our future prospects and competitive position could be diminished and our profitability could be
reduced, as a result of adverse conditions in the markets in which we operate.
  Over 91% of our loans are real estate related, including loans for construction and land
development projects and for the purchase, improvement or refinancing of residential and commercial
real estate. An adverse change in the real estate market could cause collateral for loans made by
us to decline in value, and loan delinquencies and problem assets to increase.
  Over 61.2% of our loans are real estate construction and development loans, which have a higher
degree of risk and a greater potential for losses that would reduce our earnings.
  21




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Our allowance for loan losses may not be adequate to cover actual losses.
  We serve a limited geographic area, and an economic downturn in the west Puget Sound or Seattle
Metropolitan Statistical Area could limit our growth and reduce our profitability.
   Our loan portfolio is concentrated in real estate and a substantial majority of our loans and
operations are in west Puget Sound, and therefore our business is particularly vulnerable to a
downturn in the local real estate market.
  22




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We have a relatively high percentage of unseasoned credits, which are considered to pose a
potential greater repayment risk than loans that have been outstanding for a longer period of time.
  We are subject to extensive government regulation. Non-compliance with or material changes to
existing regulations could adversely affect our business, financial condition, results of
operations or cash flows.
  Our profitability depends on interest rates generally, and we may be adversely affected by changes
in market interest rates.
   23




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We face strong competition from banks and other financial services providers that offer banking
services, which may limit our ability to attract and retain banking clients.
  If we need additional capital in the future, we may not be able to obtain it on terms that are
favorable. This could negatively affect our performance and the value of our common stock.
  The unexpected loss of key officers would materially and adversely affect our ability to execute
our business strategy, and diminish our future prospects.
  We are exposed to risk of environmental liabilities with respect to properties to which we take
title.
  24




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Our future earnings will be significantly affected by the legal and regulatory actions taken
against us, as well as those legal actions that we have and may pursue.
   Our future liquidity depends in part on our ability to attract and retain deposits, which could be
adversely affected by adverse publicity in our market area related to the legal and regulatory
actions in which we are involved.
  We may be unable to, or choose not to, pay dividends on our common stock.
  
    
    we may not have sufficient earnings since our primary source of income, the
payment of dividends to us by our subsidiary, Westsound Bank, is subject to federal and
state laws that limit the ability of the Bank to pay dividends;
    
    Federal Reserve Board policy requires bank holding companies to pay cash
dividends on common stock only out of net income available over the past year and only
if prospective earnings retention is consistent with the organizations expected future
needs and financial condition;
    
    we are also restricted from paying dividends on our common stock if we have
deferred payments of the interest on, or an event of default has occurred with respect
to, our junior subordinated debentures; and
    
    our board of directors may determine that, even though funds are available for
dividend payments, retaining the funds for internal uses, such as expansion of our
operations, is a better strategy.
  We face a variety of threats from technology based frauds and scams.
  25




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We rely on our information technology and telecommunications systems and third-party servicers, and
the failure of these systems could adversely affect our business.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
    
    Headquarters located at 607 Pacific Avenue, Bremerton, Washington, which is
20,196 square feet. Our headquarters and administrative offices are located in the main
branch.
    
    Bremerton support facility located at 190 Pacific Avenue, Bremerton,
Washington, which is 6,668 square feet.
    
    Port Angeles branch located at 602 E. Front Street, Port Angeles, Washington,
which is 2,358 square feet.
    
    Poulsbo branch located at 21895 Viking Way NW, Poulsbo, Washington, which is
2,000 square feet.
    
    Sequim branch located at 1320 W. Washington, Sequim,
Washington, which is 6,480
square feet.
 We lease four of our branches:
 
    
    Port Orchard branch located at 100 Bethel Avenue, Port Orchard, Washington,
which is 1,400 square feet. The lease is for a five-year term, expiring May 2008. Our
current monthly rent is $2,100.
    
    Silverdale branch located at 9960 Silverdale Way NW, Silverdale, Washington,
which is 6,031 square feet. The lease expires in October 2011. Our current monthly rent
is $6,869, which increases to $7,874 by the end of the lease.
    
    Gig Harbor branch located at 5775 Soundview Drive, Gig Harbor, Washington,
which is 3,950 square feet. The lease is for a five-year term, expiring April 2010. Our
current monthly rent is $4,967, which increases to $5,296 by the end of the lease.
    
    Federal Way branch located at 2505 South 320th Street, Federal Way, Washington,
which is 3,420 square feet. The lease is for a five-year term, expiring June 2010. Our
current monthly rent is $9,167, which increases to $9,452 by the end of the lease.
 26




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
    
    Port Townsend branch located at 2500 West Sims Way, Port Townsend, Washington,
which is 1,300 square feet. Our current monthly rent is $2,282 per month. The lease is
for a three year term, expiring February 2010.
  
 Item 3. Legal Proceedings.
      
 Item 4. Submission of Matters to a Vote of Stockholders
  27




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PART II
 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
 Market for Registrants Common Stock.
 Quarter of Trade
    
    Number of Shares
    
    Price Per Share1st 06
    
    
    112
    
    
    
    10.742nd 06
    
    
    3,600
    
    
    
    12.143rd 06
    
    
    3,225
    
    
    
    12.064th 06(through 12/31/06)
    
    
    14,068
    
    
    
    13.15
 Quarter of Trade
    
    Average Volume
    
    Low/High12/14/06 through 12/31/06)
    
    
    981,700
    
    
    18.56/19.201st 07
    
    
    30,700
    
    
    17.40/20.822nd 07
    
    
    59,500
    
    
    14.93/18.443rd 07
    
    
    59,900
    
    
    11.20/15.984th 07
    
    
    236,200
    
    
    4.03/12.48
   Recent Sales of Unregistered Securities.
 Securities Issued Upon Exercise of Stock Options.
  Dividends.
   28




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Initial Public Offering.
 
 Item 6. Selected Financial Data
   Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands, except share and per share data)Consolidated Balance Sheet Data:Cash and due from banks
    
    $
    10,026
    
    
    $
    9,048
    
    
    $
    8,158
    
    
    $
    2,534
    
    
    $
    2,852Federal funds sold
    
    
    56,900
    
    
    
    17,150
    
    
    
    18,400
    
    
    
    8,650
    
    
    
    6,500Investment securities
    
    
    8,832
    
    
    
    8,244
    
    
    
    8,235
    
    
    
    4,558
    
    
    
    6,273Loans, net(1)
    
    
    393,436
    
    
    
    340,208
    
    
    
    207,172
    
    
    
    117,623
    
    
    
    58,222Total assets
    
    
    489,333
    
    
    
    386,754
    
    
    
    249,998
    
    
    
    137,416
    
    
    
    76,012Deposits
    
    
    421,445
    
    
    
    315,022
    
    
    
    224,167
    
    
    
    123,593
    
    
    
    68,003Junior subordinated debt
    
    
    8,248
    
    
    
    8,248
    
    
    
    8,248
    
    
    
    0
    
    
    
    0Stockholders equity
    
    
    56,720
    
    
    
    61,657
    
    
    
    16,006
    
    
    
    12,912
    
    
    
    7,901Consolidated Income Data:Interest income
    
    $
    37,396
    
    
    $
    28,342
    
    
    $
    15,693
    
    
    $
    7,943
    
    
    $
    4,396Interest expense
    
    
    17,514
    
    
    
    11,785
    
    
    
    5,182
    
    
    
    1,705
    
    
    
    1,110Net interest income
    
    
    19,882
    
    
    
    16,557
    
    
    
    10,511
    
    
    
    6,238
    
    
    
    3,286Provision for loan losses
    
    
    15,879
    
    
    
    1,523
    
    
    
    1,351
    
    
    
    654
    
    
    
    231Net interest income after
provision for loan losses
    
    
    4,003
    
    
    
    15,034
    
    
    
    9,160
    
    
    
    5,584
    
    
    
    3,055Non-interest income
    
    
    4,531
    
    
    
    4,672
    
    
    
    5,241
    
    
    
    2,806
    
    
    
    293Non-interest expense
    
    
    16,494
    
    
    
    13,854
    
    
    
    10,692
    
    
    
    6,370
    
    
    
    2,384Income (loss) before income taxes
    
    
    (7,960
    )
    
    
    5,852
    
    
    
    3,709
    
    
    
    2,020
    
    
    
    964Provision (benefit) for income taxes
    
    
    (2,760
    )
    
    
    1,967
    
    
    
    1,297
    
    
    
    680
    
    
    
    333Net Income (loss)
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,340
    
    
    $
    631Share Data:Earnings (loss) per share-basic
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    0.91
    
    
    $
    0.59
    
    
    $
    0.36Earnings (loss) per share  diluted
    
    
    (0.93
    )
    
    
    1.18
    
    
    
    0.82
    
    
    
    0.55
    
    
    
    0.35Book Value per share
    
    $
    10.17
    
    
    $
    11.12
    
    
    $
    5.88
    
    
    $
    4.98
    
    
    $
    3.91Shares outstanding at period end
    
    
    5,574,853
    
    
    
    5,545,673
    
    
    
    2,722,048
    
    
    
    2,594,485
    
    
    
    2,019,171
 29




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##### Table of Contents



Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands, except share and per share data)Weighted average shares
outstanding  basic
    
    
    5,565,123
    
    
    
    2,870,022
    
    
    
    2,642,628
    
    
    
    2,270,211
    
    
    
    1,734,434Weighted average shares
outstanding  diluted
    
    
    5,565,123
    
    
    
    3,285,622
    
    
    
    2,925,092
    
    
    
    2,429,577
    
    
    
    1,801,667Selected Performance Ratios:Return on average assets
    
    
    -1.17
    %
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.37
    %
    
    
    1.04
    %Return on average stockholders equity
    
    
    -8.4
    %
    
    
    19.6
    %
    
    
    16.6
    %
    
    
    13.6
    %
    
    
    9.9
    %Net interest margin
    
    
    4.62
    %
    
    
    5.65
    %
    
    
    5.90
    %
    
    
    6.77
    %
    
    
    5.71
    %Efficiency ratio
    
    
    67.6
    %
    
    
    65.3
    %
    
    
    67.9
    %
    
    
    70.4
    %
    
    
    66.6
    %Selected Liquidity and Assets Ratios:Net Loans to deposit ratio
    
    
    93.4
    %
    
    
    108.0
    %
    
    
    92.4
    %
    
    
    95.2
    %
    
    
    85.6
    %Average stockholders equity to average assets
    
    
    14.0
    %
    
    
    6.5
    %
    
    
    7.8
    %
    
    
    10.1
    %
    
    
    10.4
    %Risk-based capital ratios:Leverage capital
    
    
    13.9
    %
    
    
    19.8
    %
    
    
    9.3
    %
    
    
    10.6
    %
    
    
    11.8
    %Tier 1 risk-based capital
    
    
    15.4
    %
    
    
    20.2
    %
    
    
    10.2
    %
    
    
    11.2
    %
    
    
    13.1
    %Total risk-based capital
    
    
    16.7
    %
    
    
    21.4
    %
    
    
    12.8
    %
    
    
    12.2
    %
    
    
    14.0
    %Selected Asset Quality Ratios:Non-performing loans to total loans
    
    
    6.12
    %
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.09
    %
    
    
    0.00
    %Non-performing assets to total assets
    
    
    5.38
    %
    
    
    0.06
    %
    
    
    0.05
    %
    
    
    0.09
    %
    
    
    0.04
    %Allowance for loan losses to total loans
    
    
    4.71
    %
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.00
    %
    
    
    0.98
    %Allowance for loan losses to non-performing loans
    
    
    77.1
    %
    
    
    1813.7
    %
    
    
    1968.8
    %
    
    
    1189.0
    %
    
    
    N/ANet charge-offs (recoveries) to average loans
    
    
    0.08
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    -0.01
    %
 
 (1)
    
    Includes loans held for sale. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  30




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##### Table of Contents



Item 9A(T). Controls and Procedures
 Evaluation of Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal ControlIntegrated Framework.
  Limitations on Controls
   Changes in Internal Control Over Financial Reporting.
   
    
    the audit committee has engaged the services of Young and Associates to perform
a compensation analysis to include a peer analysis for the board of directors, senior
management and department heads.
    
    the Bank retained an experienced credit manager that had recently been hired
from outside the Bank as a regional manager, as chief lending officer in June, 2007 to
manage its loan origination and approval process, credit administration and controls,
timely identification of risk and problem loans and emerging risks in the loan
portfolio in compliance with company policies and procedures and banking laws and
regulations. Credit administration now validates loan grades through an internal loan
approval process developed by the chief lending officer. The chief lending officer
reports to the Banks chief executive officer.
    
    in November, 2007 the Bank established a new special assets department managed
by a new vice president and manager of special assets recruited from outside the Bank.
The Special Assets Department is responsible for construction, commercial real estate
and commercial loan collections, reporting to the chief lending officer and the board.
The Company plans to hire additional personnel needed to fully staff the special assets
department in 2008.
    
    the Company retained a new independent loan consulting firm in the fourth
quarter of 2007 to perform external reviews of the Companys loan portfolio.
    
    the chief lending officer is revising lending policies and developing a series
of new or improved reports for credit administration to better monitor credit risks
internally and provide more detail about loans and credits to senior management, the
Board and its loan committee, including but not limited to,
 31




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##### Table of Contents



concentrations, exceptions to loan policies, special assets and OREO reports, and
monthly delinquent, non-accrual, classified loans and exposure.
    
    a comprehensive risk assessment of the Bank was performed by Audit One, an
independent auditor, in first quarter 2008. As a result of this assessment, the
preliminary audit plan has been adopted by the audit committee, focusing on the lending
area.
    
    the audit committee and the Board have made changes to the internal audit
function. Rather than add staff to our internal audit department and take the time to
train, we chose to engage third party firms that are strong, reputable companies that
will provide an independent and timely audit, including Audit One and Young and
Associates. All third party firms will report directly to the audit committee.
    
    the audit committee has or will engage several companies, such as accounting,
audit, compliance and information technology consultants to conduct extensive internal
audits in the operational and lending area. The scope of the audit will be identified
and approved by the audit committee and will include loan process review, procedural
review, compliance with consumer regulations, privacy, loan documentation, information
reporting, reserve for loan and lease loss methodology and calculations, enterprise
risk assessment, holding company activities, administrative activities, liquidity,
central operations, compliance with the Bank Secrecy Act. Internal audit results are
reported regularly to the audit committee on a continual basis using a modified
tracking system. The department head is responsible for providing a management response
to the audit committee if there are weaknesses noted in their area. Tracking of the
audits will be performed by the Companys chief risk officer.
    
    establishing a communications procedure for reporting progress in all areas to
the FDIC and DFI.
   
 Item 9B. Other Information
  32




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Equity Compensation Plan InformationNumber of securitiesremaining available forfuture issuance underNumber of securities to
    
    
    Weighted-average
    
    
    equity compensationbe issued upon exercise
    
    
    exercise price of
    
    
    plans (excludingof outstanding options,
    
    
    outstanding options,
    
    
    securities reflected in thePlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    first column)Equity compensation
plans approved by security holders
    
    
    887,080
    
    
    $
    7.99
    
    
    
    370,678Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    887,080
    
    
    $
    7.99
    
    
    
    370,678
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  33




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1) Financial Statements.
  Annual ReportReferenceReport of Moss Adams LLP, Independent Registered Public Accountant
    
    2007 Annual Report Consolidated Financial StatementsConsolidated Statement of Financial Condition  December 31, 2007 and
December 31, 2006
    
    2007 Annual Report Consolidated Financial StatementsConsolidated Statement of Operations  Fiscal years 2007, 2006, and 2005
    
    2007 Annual Report Consolidated Financial StatementsConsolidated Statement of Changes in Stockholders Equity and Other Comprehensive Income (Loss)  Fiscal
years 2007, 2006, and 2005
    
    2007 Annual Report Consolidated Financial StatementsConsolidated Statement of Cash Flows  Fiscal years 2007, 2006, and 2005
    
    2007 Annual Report Consolidated Financial StatementsNotes to Consolidated Fiscal Statements  December 31, 2007
    
    2007 Annual Report Consolidated Financial Statements
 
 *
    
    Incorporated by reference to the Annual Report to Shareholders for the fiscal year ended
December 31, 2007. This portion of the Annual Report to Shareholders is included as Exhibit 13
to this Report.  (a)(2) Financial Statement Schedules.
  (a)(3) Exhibits.
  34




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##### Table of Contents



SIGNATURES
  WSB FINANCIAL GROUP, INC.(Registrant)By:
    
    /s/ Mark D. Freeman

David K. JohnsonInterim President and Chief Executive Officer(Principal Executive Officer)
   /s/ MARK D. FREEMAN
    
    
    
    March 31, 2008Mark D. Freeman
    
    Interim President and Chief Executive
    
    DateOfficer (Principal Executive Officer)/s/ MARK D. FREEMAN
    
    
    
    March 31, 2008Mark D. Freeman
    
    Executive Vice President of Finance
    
    Dateand Operations and Chief FinancialOfficer (Principal Financial Officer)/s/ JANET M. HOBSON
    
    
    
    March 31, 2008Janet M. Hobson
    
    Vice President, Chief Accounting
    
    DateOfficer (Principal Accounting Officer)/s/ LOUIS J. WEIR
    
    
    
    March 31, 2008Louis J. Weir
    
    Director, Chairman of the Board
    
    Date/s/ LARRY C. WESTFALL
    
    
    
    March 31, 2008Larry C. Westfall
    
    Vice Chairman of the Board
    
    Date/s/ RICHARD N. CHRISTOPHERSON
    
    
    
    March 31, 2008Richard N. Christopherson
    
    Director
    
    Date
 35




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##### Table of Contents



/s/ DONALD F. COX, JR.
    
    
    
    March 31, 2008Donald F. Cox, Jr.
    
    Director
    
    Date/s/ JAMES H. LAMB
    
    
    
    March 31, 2008James H. Lamb
    
    Director
    
    Date/s/ BRIAN B. McLELLAN
    
    
    
    March 31, 2008Brian B. McLellan
    
    Director
    
    Date/s/ DEAN REYNOLDS
    
    
    
    March 31, 2008Dean Reynolds
    
    Director
    
    Date/s/ DONALD H. TUCKER
    
    
    
    March 31, 2008Donald H. Tucker
    
    Director
    
    Date
 36




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##### Table of Contents



ExhibitNumber
    
    Exhibit Index3.1+
    
    Articles of Incorporation of WSB Financial Group, Inc.3.2+
    
    Articles of Amendment3.3+
    
    Bylaws of WSB Financial Group, Inc.3.4+
    
    Amendment to Bylaws10.1*+
    
    1999 Stock Option Plan10.2*+
    
    Forms of 1999 Incentive Stock Option Plan Agreements(a)+
    
    Directors(b)+
    
    Employees10.3+
    
    Lease for Port Orchard branch, dated May 28, 200110.4+
    
    Lease for Silverdale branch, dated October 1, 2001 and October 1, 200310.5+
    
    Lease for Gig Harbor branch, dated March 2, 200410.6+
    
    Lease for Federal Way branch, dated March 30, 200510.7+
    
    Lease for Port Townsend LPO, dated August 18, 200610.8+
    
    Agreement between Westsound Bank and Fiserv Solutions Inc. dated August 11, 200610.9*+
    
    Westsound Bank 401(k) Profit Sharing Plan10.10+
    
    Placement Agreement among the registrant, WSB Financial Group Trust I and Cohen
Bros. & Company dated July 25, 200510.11+
    
    Indenture by and between the registrant and JPMorgan Chase Bank, National
Association, dated July 27, 200510.12+
    
    Guarantee Agreement by and between the registrant and JPMorgan Chase Bank, National
Association, dated July 27, 200510.13*+
    
    Employment Agreement with David K. Johnson10.14*+
    
    Employment Agreement with Mark D. Freeman10.15*+
    
    Form of Employment Agreement with other executive officers10.16+
    
    Form of Indemnification Agreement with directors10.17+
    
    Audit Committee Charter10.18+
    
    Compensation Committee Charter
 37




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##### Table of Contents



ExhibitNumber
    
    Exhibit Index10.19+
    
    Corporate Governance/Nominating Committee Charter10.20*
    
    Separation Agreement with David K. Johnson (previously filed with the Securities and
Exchange Commission on Form 8-K on February 4, 2008)11
    
    Schedule setting forth computation of earnings per share for the five fiscal years
ended December 31, 2006.13
    
    Portions of the Annual Report to Shareholders for the fiscal year ended December 31,
2006, are incorporated by reference herein.14
    
    Code of Ethics and Professional Conduct (previously filed with the Companys Annual
Report on Form 10-K for the year ended December 31, 2006).21+
    
    Subsidiaries of the registrant23
    
    Consent of Independent Registered Public Accounting Firm, Moss Adams LLP24
    
    A power of attorney is set forth on the signature page of this registration statement31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.32.1
    
    Certification (of Mark D. Freeman) pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification (of Mark D. Freeman) pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Compensatory plan or arrangement
    
    Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.+
    
    Previously filed with the Companys Amendment No. 5 to the S-1
registration statement filed with the Securities and Exchange
Commission on December 8, 2006, file no. 333-137058. 38