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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, 2008
 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 or other jurisdiction 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
 þ
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 ItemNumber
    
    
    
    PagePART I1
    
    Business
    
    1 - 211A
    
    Risk Factors
    
    21 - 281B
    
    Unresolved Staff Comments
    
    282
    
    Properties
    
    283
    
    Legal Proceedings
    
    294
    
    Submission of Matters to a Vote of Stockholders
    
    29PART II5
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    306
    
    Selected Financial Data
    
    31 - 327
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    327A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    328
    
    Financial Statements and Supplementary Data
    
    329
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    329A(T)
    
    Controls and Procedures
    
    32 - 339B
    
    Other Information
    
    33PART III10
    
    Directors, Executive Officers and Corporate Governance
    
    3411
    
    Executive Compensation
    
    3412
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    3413
    
    Certain Relationships and Related Transactions, and Director
Independence
    
    3414
    
    Principal Accountant Fees and Services
    
    34PART IV15
    
    Exhibits and Financial Statement Schedules
    
    35Signatures
    
    36 - 37EX-11EX-13EX-21EX-23EX-31.1EX-31.2EX-32.1EX-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, maintaining 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 client
service.
  Our Business Activities
  1




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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,
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.
 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 $6.5
million at December 31, 2008.
 Loan Grading and Loan Review.
   
    
    random reviews of the loan portfolio conducted by loan administration;
    
    reviews conducted by an outside loan reviewer;
    
    bank regulatory examinations; or
    
    quarterly action plans submitted to loan administration by the responsible
lending officers for each credit graded 4-7.
 5




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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
    
    provide a suitable balance of quality and diversification to our assets.
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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, Inc.
  Deposits.
    
    
    expanding long-term business client relationships, including referrals from our
clients; and
    
    building deposit relationships through our branch relationship officers.
 Other Borrowings.
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Other Products and Services
  
    
    Courier Services.We offer courier services to our business clients. Courier
services permit us to provide the convenience and personalized service that our clients
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 clients to access detailed account information and manage their accounts,
including on-line balance transfers and bill payment. These services enable our clients
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 clients 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 clients, to
discontinue ATMs at our branches and instead offer ATM fee reimbursement to our
clients, allowing them to use ATMs nationwide without paying a per transaction fee.
Each checking and deposit account has a monthly reimbursement limit.
    
    Other Products.We offer other banking-related specialized products and
services to our clients, such as cashiers checks, debit/credit cards, wire transfers,
and safe deposit services.
 Our Concentrations/Clients
   Percent of TotalTier 1 Capital
    
    Percent of Total LoansActual
    
    PolicyLimit
    
    ActualReal EstateConstruction
    
    
    283
    %
    
    
    50.0
    %
    
    
    32
    %Land development
    
    
    142
    %
    
    
    25.0
    %
    
    
    16
    %Commercial real estate
    
    
    189
    %
    
    
    40.0
    %
    
    
    22
    %Residential real estate
    
    
    144
    %
    
    
    40.0
    %
    
    
    16
    %Commercial and industrial
    
    
    114
    %
    
    
    50.0
    %
    
    
    13
    %Consumer
    
    
    9
    %
    
    
    25.0
    %
    
    
    1
    %
 8




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Risk Management
   
    
    Continuing and ongoing updates and enhancements to our lending policies and
procedures to give lending personnel clear guidance on loan management, approval, and
collection processes.
    
    Continuing and ongoing enhancements of reporting for management, the board of
directors, and our independent auditor for the purpose of adequately monitoring the loan
quality of the Bank.
    
    The special assets department, which was created in late 2007, is becoming a
seasoned and cohesive team responsible for collection and restructuring of
under-performing and non-performing loans.
    
    Two seasoned full time consultants joined the Bank in April 2008 and October
2008. One is an attorney who specializes in loan collection activity and the second
consultant helps to oversee all of the Banks lending activities. Both consultants
report directly to the President and CEO.
    
    Charles L. Turner, appointed to Chief Lending Officer in 2007, oversees all
lending activities, special credits, loan policy and procedures, loan documentation
activities, board and management reporting, and is responsible for recommending
Allowance for Loan and Lease Losses.
    
    A management loan committee was formed in the first quarter of 2009 as an
adjunct to the directors loan committee.
    
    We are working with area law firms to help the bank
minimize lender liability concerns while aggressively collecting on
under-performing and non-performing loans.
  Training Program
  Information Technology Systems
   9




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Our Market Area
  Kitsap County
   Clallam County
  Seattle Metropolitan Statistical Area
  10




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Our Competition
     Employees
  SUPERVISION AND REGULATION
  General
  11




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Compliance
  Federal Bank Holding Company Regulation
 General.
   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.
  12




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Restrictions on Ownership of WSB Financial Group, Inc.
 Holding Company Control of Nonbanks.
 Transactions with Affiliates.
 Tying Arrangements.
 Support of Subsidiary Banks.
 Federal and State Regulation of Westsound Bank
 General.
 Lending Limits.
 Control of Financial Institutions.
 Community Reinvestment.
 13




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Insider Credit Transactions.
 Regulation of Management.
 Safety and Soundness Standards.
 Dividends.
  Other Regulations.
 Federal Laws Applicable to Credit Transactions.
 
    
    National Flood Insurance Act, requiring notices to borrowers and mandating
insurance for properties in flood zones;
    
    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;
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
    
    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 clients 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;
    
    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.
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Federal Home Loan Bank System.
  Mortgage Banking Operations.
 Commercial Real Estate Guidance.
 Privacy
  
    
    initial notices to clients 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 clients; and
    
    a reasonable method for clients to opt out of disclosures to nonaffiliated
third-parties.
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Interstate Banking And Branching
    Deposit Insurance
        17




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Capital Adequacy
 Regulatory Capital Guidelines.
 Tier I and Tier II Capital.
 Risk-based Capital Ratios.
 Leverage Ratio.
 Prompt Corrective Action.
 Regulatory
Actions, Business Plan and Going Concern Considerations.
 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
    
    AgeTerry A. Peterson
    
    President, Chief Executive Officer, Director, WSB Financial
Group, Inc. and Westsound Bank
    
    
    53Mark D. Freeman
    
    Executive Vice President of Finance and Operations, Chief
Financial Officer, WSB Financial Group, Inc. and Westsound
Bank
    
    
    56Veronica R. Colburn
    
    Senior Vice President, Corporate Secretary, WSB Financial
Group, Inc. and Westsound Bank
    
    
    46Charles L. Turner
    
    Senior Vice President, Chief Lending Officer, Westsound Bank
    
    
    48Robin A. Seelye
    
    Senior Vice President, Operations, Westsound Bank
    
    
    38
 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;
    
    the extent and duration of continued economic, credit and financial market
disruptions and governmental actions to address these disruptions;
    
    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;
    
    due to the significant operating losses incurred in 2008 and 2007, the resulting
deteriorating capital position of the Company and the Bank and the FDIC order, we
believe there is substantial doubt about our ability to continue as a going concern.
Managements plans in regard to these matters are also discussed in Note 2 to the
consolidated financial statements;
    
    we may be required to pay significantly higher FDIC premiums in the future;
 20




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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. In addition, we may make certain statements in future
SEC filings, in press releases and in oral and written statements
that are not statements of historical fact and may constitute forward-looking statements.
 
 Item 1A. Risk Factors
  Risks Relating to Our Business and Market
 The continued downturn in our real estate market areas and weakness in the economy could adversely
affect our financial condition and profitability.
   We are experiencing deterioration in our loan portfolio, particularly in our real estate
construction and land development loans.
  21




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Our allowance for loan losses may not be adequate to cover actual
losses.
  Defaults and related losses in our residential construction and land development loan portfolio
could result in a significant increase in other real estate owned (OREO) balances and the number
of properties to be disposed of, which would adversely affect our financial results.
  We may  elect or be compelled by our regulators to raise additional capital which may not be available or may adversely affect existing
stockholders. Alternatively, we may have to pursue other strategies such as selling assets and looking for a merger partner.
  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
actions or restrictions.
  22




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We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
  Market and other constraints on our construction loan origination volume are expected to lead to
decreases in our interest and fee income that are not expected to be fully offset by reductions in
our noninterest expenses.
  The value of certain securities in our portfolio may be negatively affected by disruptions in the
market for these securities.
  Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
  23




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Concern of clients over deposit insurance and adverse publicity in our market area related to the
legal and regulatory actions in which we are involved may cause a decrease in our deposits.
  Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
  Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due
is substantially dependent on capital distributions from Westsound Bank, and these distributions
are subject to regulatory limits and other restrictions.
  Strong competition within our market areas may limit our growth and adversely affect our operating
results.
  24




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We will be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC)
premiums in the future.
  Our controls and procedures may fail or be circumvented.
  We continually encounter technological change.
  We are subject to operational risk, which may result in incurring financial and reputation losses.
   We are exposed to risk of environmental liabilities with respect to properties to which we take
title.
  25




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We may not be able to attract and retain skilled people.
  Our earnings may be affected by changes in accounting principles and tax laws.
   Severe weather, natural disasters, acts of war or terrorism and other external events could
significantly impact our business.
  Risks Associated With Our Common Shares
 The market price and trading volume of our common shares may be volatile and the value of our other
securities may decline as a result of adverse changes in our financial performance, the economy,
market conditions and other factors.
  26




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Current levels of market volatility are unprecedented.
  Recent legislative and regulatory initiatives to address difficult market and economic conditions
may not stabilize the U.S. banking system or economy or benefit us.
    Stockholders interests may be diluted by future equity offerings or transactions.
  27




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You may not receive any dividends on WSB Financial common shares.
  There is a possibility that our common stock may be delisted and as a result, become more volatile
and less liquid.
  
 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 storage 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.
  
    
    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 2013. Our
current monthly rent is $2,100.
    
    Silverdale branch located at 3035 NW Bucklin Hill Road, Silverdale, Washington,
which is 2,700 square feet. This lease is for a five-year term expiring in September
2013. Our current monthly rent is $7,750, which increases to $8,430 by the end of the
lease.
    
    Gig Harbor branch located at 5775 Soundview Drive, Gig Harbor, Washington,
which is 2,500 square feet. The lease is for a five-year term, expiring April 2010. Our
current monthly rent is $3,238, which increases to $3,335 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 $9,309, which increases to $9,452 by the end of the lease.
    
    Port Townsend branch located at 2500 West Sims Way, Port Townsend, Washington,
which is 1,300 square feet. Our current monthly rent is $2,673 per month. The lease is
for a three year term, expiring February 2010.
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Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Stockholders
  29




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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
    
    Average Volume
    
    Low/High1st 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
 Quarter of Trade
    
    Average Volume
    
    Low/High1st 08
    
    
    55,400
    
    
    
    4.35/6.392nd 08
    
    
    86,400
    
    
    
    1.60/6.403rd 08
    
    
    105,600
    
    
    
    0.40/2.284th 08
    
    
    59,800
    
    
    
    0.31/1.31
   Recent Sales of Unregistered Securities.
 Securities Issued Upon Exercise of Stock Options.
  Dividends.
   Initial Public Offering.
 30




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Item 6. Selected Financial Data
   Years Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands, except share and per share data)Consolidated Balance Sheet Data:Cash and due from banks
    
    $
    13,515
    
    
    $
    10,026
    
    
    $
    9,048
    
    
    $
    8,158
    
    
    $
    2,534Federal funds sold
    
    
    32,500
    
    
    
    56,900
    
    
    
    17,150
    
    
    
    18,400
    
    
    
    8,650Investment securities
    
    
    18,443
    
    
    
    8,832
    
    
    
    8,244
    
    
    
    8,235
    
    
    
    4,558Loans, net(1)
    
    
    265,780
    
    
    
    393,436
    
    
    
    340,208
    
    
    
    207,172
    
    
    
    117,623Total assets
    
    
    365,210
    
    
    
    489,333
    
    
    
    386,754
    
    
    
    249,998
    
    
    
    137,416Deposits
    
    
    330,031
    
    
    
    421,445
    
    
    
    315,022
    
    
    
    224,167
    
    
    
    123,593Junior subordinated debt
    
    
    8,248
    
    
    
    8,248
    
    
    
    8,248
    
    
    
    8,248
    
    
    
    0Stockholders equity
    
    
    24,316
    
    
    
    56,720
    
    
    
    61,657
    
    
    
    16,006
    
    
    
    12,912Consolidated Income Data:Interest income
    
    $
    20,384
    
    
    $
    37,396
    
    
    $
    28,342
    
    
    $
    15,693
    
    
    $
    7,943Interest expense
    
    
    16,541
    
    
    
    17,514
    
    
    
    11,785
    
    
    
    5,182
    
    
    
    1,705Net interest income
    
    
    3,843
    
    
    
    19,882
    
    
    
    16,557
    
    
    
    10,511
    
    
    
    6,238Provision for loan losses
    
    
    17,379
    
    
    
    15,879
    
    
    
    1,523
    
    
    
    1,351
    
    
    
    654Net interest income (loss) after
provision for loan losses
    
    
    (13,536
    )
    
    
    4,003
    
    
    
    15,034
    
    
    
    9,160
    
    
    
    5,584Non-interest income
    
    
    796
    
    
    
    4,531
    
    
    
    4,672
    
    
    
    5,241
    
    
    
    2,806Non-interest expense
    
    
    18,458
    
    
    
    16,494
    
    
    
    13,854
    
    
    
    10,692
    
    
    
    6,370Income (loss) before income taxes
    
    
    (31,198
    )
    
    
    (7,960
    )
    
    
    5,852
    
    
    
    3,709
    
    
    
    2,020Provision (benefit) for income taxes
    
    
    1,454
    
    
    
    (2,760
    )
    
    
    1,967
    
    
    
    1,297
    
    
    
    680Net Income (loss)
    
    $
    (32,652
    )
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,340Share Data:Earnings (loss) per share-basic
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    0.91
    
    
    $
    0.59Earnings (loss) per share  diluted
    
    
    (5.86
    )
    
    
    (0.93
    )
    
    
    1.18
    
    
    
    0.82
    
    
    
    0.55Book Value per share
    
    $
    4.36
    
    
    $
    10.17
    
    
    $
    11.12
    
    
    $
    5.88
    
    
    $
    4.98Shares outstanding at period end
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,545,673
    
    
    
    2,722,048
    
    
    
    2,594,485Weighted average shares
outstanding  basic
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    2,870,022
    
    
    
    2,642,628
    
    
    
    2,270,211Weighted average shares
outstanding  diluted
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    3,285,622
    
    
    
    2,925,092
    
    
    
    2,429,577Selected Performance Ratios:Return on average assets
    
    
    -7.28
    %
    
    
    -1.17
    %
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.37
    %Return on average stockholders equity
    
    
    -73.1
    %
    
    
    -8.4
    %
    
    
    19.6
    %
    
    
    16.6
    %
    
    
    13.6
    %Net interest margin
    
    
    1.08
    %
    
    
    4.62
    %
    
    
    5.65
    %
    
    
    5.90
    %
    
    
    6.77
    %Efficiency ratio
    
    
    397.9
    %
    
    
    67.6
    %
    
    
    65.3
    %
    
    
    67.9
    %
    
    
    70.4
    %Selected Liquidity and Assets Ratios:Net Loans to deposit ratio
    
    
    80.5
    %
    
    
    93.4
    %
    
    
    108.0
    %
    
    
    92.4
    %
    
    
    95.2
    %Average stockholders equity to average assets
    
    
    10.0
    %
    
    
    14.0
    %
    
    
    6.5
    %
    
    
    7.8
    %
    
    
    10.1
    %
 31




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##### Table of Contents



Years Ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in thousands, except share and per share data)Risk-based capital ratios:Leverage capital
    
    
    8.1
    %
    
    
    13.9
    %
    
    
    19.8
    %
    
    
    9.3
    %
    
    
    10.6
    %Tier 1 risk-based capital
    
    
    10.5
    %
    
    
    15.4
    %
    
    
    20.2
    %
    
    
    10.2
    %
    
    
    11.2
    %Total risk-based capital
    
    
    11.8
    %
    
    
    16.7
    %
    
    
    21.4
    %
    
    
    12.8
    %
    
    
    12.2
    %Selected Asset Quality Ratios:Non-performing loans to total loans
    
    
    39.43
    %
    
    
    6.12
    %
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.09
    %Non-performing assets to total assets
    
    
    36.11
    %
    
    
    5.38
    %
    
    
    0.06
    %
    
    
    0.05
    %
    
    
    0.09
    %Allowance for loan losses to total loans
    
    
    6.47
    %
    
    
    4.71
    %
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.00
    %Allowance for loan losses to
non-performing loans
    
    
    150.5
    %
    
    
    77.1
    %
    
    
    1813.7
    %
    
    
    1968.8
    %
    
    
    1189.0
    %Net charge-offs (recoveries) to average loans
    
    
    5.27
    %
    
    
    0.08
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
 
 (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
  
 Item 9A(T). Controls and Procedures
 Evaluation of Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
   Limitations on Controls
   32




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##### Table of Contents



Changes in Internal Control Over Financial Reporting.
  
    
    Continuing and ongoing updates and enhancements of our credit administration,
lending policies and procedures to give lending personnel clear guidance on loan
management, approval, and collection processes.
    
    Continuing and ongoing enhancements of reporting for management, the board of
directors, and our financial auditor for the purpose of adequately monitoring the loan
quality of the Bank.
    
    Our chief lending officer, Charles L. Turner, oversees all lending activities,
special credits, loan policy and procedures, loan documentation activities, board and
management reporting, and is responsible for recommending allowance for loan losses.
    
    A management loan committee was formed in the first quarter of 2009 as an adjunct
to the directors loan committee.
    
    Increased internal controls over loan portfolio review.
    
    Engaged an independent third party consultant to design, document and test our
internal control program, including the analysis and calculation of our allowance for
loan losses.
   
 Item 9B. Other Information
  33




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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 ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in thePlan Category
    
    and rights
    
    
    and rights
    
    
    first column)Equity compensation
plans approved by
security holders
    
    
    717,098
    
    
    $
    7.76
    
    
    
    540,660Total
    
    
    717,098
    
    
    $
    7.76
    
    
    
    540,660
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  34




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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
    
    *Consolidated Statement of Financial Condition  December 31, 2008 and
December 31, 2007
    
    *Consolidated Statement of Operations  Fiscal years 2008, 2007, and 2006
    
    *Consolidated Statement of Changes in Stockholders Equity  Fiscal
years 2008, 2007, and 2006
    
    *Consolidated Statement of Cash Flows  Fiscal years 2008, 2007, and 2006
    
    *Notes
to Consolidated Financial Statements
    
    *
 
 *
    
    Incorporated by reference to the Annual Report to Shareholders for the fiscal year ended
December 31, 2008. This portion of the Annual Report to Shareholders is included as Exhibit 13
to this Report.  (a)(2) Financial Statement Schedules.
  (a)(3) Exhibits.
  35




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##### Table of Contents



SIGNATURES
  WSB FINANCIAL GROUP, INC.
(Registrant)By:
    /s/ Terry A. PetersonTerry A. PetersonPresident and Chief Executive Officer(Principal Executive Officer)   /s/ TERRY A. PETERSON

Terry A. Peterson
    
    President and Chief Executive
Officer (Principal Executive
Officer)
    
    April 3, 2009

Date/s/ MARK D. FREEMAN

Mark D. Freeman
    
    Executive Vice President of
Finance and Operations and
Chief Financial Officer
(Principal Financial Officer)
    
    April 3, 2009

Date/s/ JANET M. HOBSON

Janet M. Hobson
    
    Vice President, Chief
Accounting Officer (Principal
Accounting Officer)
    
    April 3, 2009

Date/s/ DONALD F. COX, JR.

Donald F. Cox, Jr.
    
    Director, Chairman of the Board
    
    April 3, 2009

Date/s/ LARRY C. WESTFALL

Larry C. Westfall
    
    Vice Chairman of the Board
    
    April 3, 2009

Date/s/ RICHARD N. CHRISTOPHERSON

Richard N. Christopherson
    
    Director
    
    April 3, 2009

Date
 36




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##### Table of Contents



/s/ JAMES H. LAMB

James H. Lamb
    
    Director
    
    April 3, 2009

Date/s/ DEAN REYNOLDS

Dean Reynolds
    
    Director
    
    April 3, 2009

Date/s/ DONALD H. TUCKER

Donald H. Tucker
    
    Director
    
    April 3, 2009

Date
 37




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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 Terry A. Peterson10.14*+
    
    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




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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, 2008.13
    
    Portions of the Annual Report to Shareholders for the fiscal year ended December 31,
2008, 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 LLP31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.32.1
    
    Certification (of Terry A. Peterson) 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.++
    
    Previously filed with the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008, filed with the Securities and
Exchange Commission on August 12, 2008.