EMPLOYMENT AGREEMENT TERRY A. PETERSON

EMPLOYMENT AGREEMENT

TERRY A. PETERSON

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is dated as of the 19 day of June, 2008, by and between WSB FINANCIAL GROUP, INC. and WESTSOUND BANK (hereinafter jointly referred to as “Westsound”) and TERRY A. PETERSON (“Executive”) and is effective retroactively to April 15, 2008. Westsound and Executive are sometimes collectively referred to herein as “the Parties.”

RECITALS

     WHEREAS, Executive has been recruited to serve as the new President and Chief Executive Officer of Westsound substantially under the terms of the Term Sheet dated March 2008; and

     WHEREAS, the Parties now wish to enter into a definitive agreement setting forth the terms and conditions of Executive’s employment with Westsound;

     NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

     1. Term of Employment. Subject to earlier termination of Executive’s employment pursuant to paragraphs 8 and 9, Westsound hereby employs Executive, and Executive hereby accepts such employment, for the period commencing on April 15, 2008 (the “Effective Date”) and ending April 30, 2011 (the “Term of Employment”); provided, however, that the Term of Employment shall be automatically extended for an additional year on the first anniversary of the Effective Date and on each anniversary of the Effective Date thereafter, unless written notice of non-extension is provided by either party to the other party at least one hundred twenty (120) days prior to the applicable succeeding anniversary date.

     2. Duties. Executive is engaged as President and Chief Executive Officer of Westsound Bank and WSB Financial Group, Inc., and is responsible for the overall operation and conduct of Westsound’s business, in accordance with the laws of the State of Washington and the federal government and pursuant to the general guidelines and directions as established from time to time by the Board of Directors of Westsound (the “Board”). As long as Executive serves as President and CEO of Westsound Bank and WSB Financial Group, Inc., he shall be nominated to serve as a member of the Board of Directors of Westsound Bank and WSB Financial Group, Inc.

     3. Exclusive Services and Best Efforts. Executive shall render services solely on behalf of Westsound, and in no event shall he render services directly to a customer of Westsound for the individual gain of Executive, without Westsound’s prior written consent. Executive shall devote his full time, attention and energies, during regular business hours, to the business of Westsound. Executive further agrees that he shall perform any and all duties to the

best of his abilities. In addition to any other responsibilities which Westsound may from time to time require him to perform, Executive shall:

          (a) Use his diligent efforts to promote the business and further the goals of Westsound;

          (b) Conduct his business so as to maintain and increase the goodwill and reputation of Westsound and its business;

          (c) Comply with all codes of ethics, personnel and other policies of Westsound, federal, state and local laws and regulations, including but not limited to those related to banking and securities, and the rules of the NASDAQ Stock Market (“NASDAQ”);

          (d) Not render to others, during his employment with Westsound, services of any kind or promote, participate or engage in any other business activity which would interfere with the performance of his duties under this Agreement, including, without limitation, providing consulting services or otherwise engaging in business with any person or entity which directly or indirectly competes with Westsound, unless he first obtains Westsound’s prior written consent to engage in such outside activities.

     Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations (subject to the reasonable approval of the Board), (ii) engaging in charitable activities and community affairs, and (iii) managing Executive’s personal investments and affairs, provided that such activities do not materially interfere with the proper performance of Executive’s duties and responsibilities as an executive officer of Westsound.

     4. Compensation. Westsound shall pay Executive, as compensation for his full-time services during the Term of Employment, the following:

          (a) Base Salary. Executive shall receive a base salary of $300,000 per annum (“Base Salary”), partial years prorated, payable in substantially equal periodic payments, which shall be made no less frequently than monthly during the period of the Executive’s employment hereunder. Executive’s Base Salary shall be reviewed and set annually by the Compensation Committee. Notwithstanding anything to the contrary in this paragraph 4(a), Executive’s Base Salary shall be at least $300,000 per annum during the term of this Agreement.

          (b) Bonus; Incentives. Executive shall receive an annual discretionary bonus or cash incentives based on an incentive pay plan established from time to time by the Compensation Committee with the approval of the Board of Directors (“Bonus”). In determining the amount of the Bonus, if any, the Compensation Committee shall consider earnings, asset quality, factors affecting shareholder value and such other factors as the Compensation Committee shall deem appropriate. Any discretionary bonus shall be paid not later than 2 ^1/2 months after the year in which the Executive obtains a legally binding right to the bonus. If the

discretionary bonus cannot be paid by that date, then it shall be paid on the next following April 15, or such other date during the year as permitted under Section 409A.

          (c) Benefit Plans. During the Term of Employment, Executive shall be entitled to participate in any and all employee benefit plans, including, but not be limited to the Westsound Bank 401(k) Plan, the WSB Financial Group, Inc. 1999 Stock Option Plan, and employee welfare and health benefit plans which may be established by Westsound from time to time for the benefit of all executives of Westsound. Executive shall be required to comply with the conditions attendant to coverage by such plans and shall comply with and be entitled to benefits only in accordance with the terms and conditions of such plans as they may be amended from time to time.

          (d) Vacations; Leave. The Executive shall be entitled to (i) an annual paid vacation of not less than four (4) weeks (20 business days) per year and otherwise in accordance with the policies established by the Board for executive officers, and (ii) voluntary leaves of absences, with or without pay, from time to time at such times and upon such conditions as the Board may determine.

     5. Business Expenses. Westsound will pay or reimburse Executive for reasonable and necessary business expenses incurred by Executive, which are directly related to the performance of his duties of employment, including travel, professional memberships and professional development, subject to documentation by Executive and approval of the Chairman of the Audit Committee. Westsound will pay Executive’s dues to such clubs as the Board deems appropriate and beneficial to Westsound.

     6. Automobile. Executive shall provide his own automobile, and Westsound shall provide him an automobile allowance of $600 per month for use of such automobile incident to his duties as President and Chief Executive Officer of Westsound. The automobile allowance may be increased from time to time as deemed appropriate by the Board.

     7. Working Facilities. Executive shall be furnished with such working facilities as are reasonably required by Executive to perform his duties as President and Chief Executive Officer of Westsound, which working facilities shall include, but not be limited to, an office and secretarial and staff support.

     8. Separation From Service. Notwithstanding paragraph 1, this Agreement may be terminated by Westsound upon written notice to Executive, and by Executive upon ninety (90) days written notice to Westsound. If Executive resigns from Westsound, he will receive only his compensation, benefits earned and expenses reimbursable through the date this Agreement is terminated. If Executive’s employment is terminated by Westsound, he shall receive the compensation provided hereafter.

          (a) Termination Without Cause. If Executive is involuntarily separated from service by Westsound, except for cause as provided in paragraph 8(b), subject to paragraphs 24 and 25, Executive shall receive as a severance benefit a severance payment equal to six (6) months’ W-2 income before salary deferrals and excluding gains, if any, from exercise of stock

options, which amount shall be increased by one (1) month’s W-2 income for each month of employment after six (6) months up to a maximum of twelve (12) months. Such payment shall be subject to applicable payroll withholding, and payable in a lump sum immediately following termination, provided the timing of any such payment shall be made in compliance with Section 409A of the Internal Revenue Code of 1986, as amended (“Code”).

          (b) Termination for Cause. The compensation payable upon separation from service, as provided in paragraph 8(a), shall not be payable in the event that the Executive is involuntarily separated from service for cause. Involuntary separation from service shall be determined to be for cause only in the event: (i) Executive is convicted of a felony or crime involving moral turpitude, or charged with a felony or crime involving moral turpitude if the Board, in its sole discretion, determines that the adverse publicity/notoriety stemming from such charge will make it difficult for Executive to perform his duties and/or Westsound to carry on its normal business activities; (ii) Executive fails or refuses, after written request, to comply with any material policies adopted by the Board; (iii) Executive is terminated for fraud, embezzlement, or willful misconduct (including, but not limited to, violation of Westsound’s anti-discrimination and harassment policies); or (iv) Executive is removed from office by the Board in order to comply with a requirement, request or recommendation from the Supervisor of Banking for the State of Washington or the Federal Deposit Insurance Corporation (“FDIC”).

          (c) Death or Disability. This Agreement will terminate immediately upon Executive’s death. If Executive is unable to perform his duties and obligations under this Agreement as a result of a Disability and cannot continue to perform his duties with reasonable accommodation, the Board may terminate this Agreement. If termination occurs due to Executive’s death, his estate will be entitled to receive the compensation, benefits earned, and expenses reimbursable through the date this Agreement is terminated. If termination occurs due to Executive’s Disability, he shall continue to receive his Base Salary until payments under Westsound’s long-term disability insurance plan commence, or in the event Westsound has no long-term disability insurance plan on the date of disability, Executive’s Base Salary shall continue for a period of six (6) months.

     9. Change of Control. Notwithstanding paragraph 1, if after a Change of Control, (i) Executive is involuntarily separated from service, except for cause pursuant to paragraph 8(b), or (ii) Executive voluntarily separates from service for Good Reason within twelve (12) months after such Change of Control, subject to paragraphs 24 and 25, Executive shall receive an amount equal to two (2) times his Base Salary plus Bonus before salary deferrals over the twelve (12) month period prior to the Change of Control, reduced by any amount received under paragraph 8(a), payable in a lump sum within 30 days of the Executive’s separation from service, subject to applicable payroll withholding; provided, however, that if Executive is a Specified Employee as of the date Executive’s employment terminated, then any amounts that are not considered separation pay under Code Section 409A will be paid to Executive not sooner than the first day of the seventh calendar month following the termination of Executive’s employment and not later than the 30th day of such calendar month. No payment shall be made under this Section 9 of amounts that would be considered deferred compensation under Code Section 409A unless the Executive’s separation from service qualifies as such under Code Section 409A and

the regulations thereunder, taking into account all rules and presumptions provided for thereunder.

     10. Certain Definitions.

          “Change of Control” shall mean (i) a change in the ownership of Westsound; (ii) a change in the effective control of Westsound; or (iii) a change in ownership of a substantial portion of the assets of Westsound, within the meaning of the regulations promulgated by the Internal Revenue Service under section 409A of the Code.

          “Disability” shall mean (i) Executive is unable to engage in any substantial gainful activity by reason of any medically determinable, physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, or (ii) he is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of Westsound. Further, Executive will be deemed disabled if determined to be totally disabled by the U.S. Social Security Administration or in accordance with a disability insurance plan if the definition of disability applied under such disability insurance plan complies with the requirements of the foregoing clause (i) or clause (ii).

          “Good Reason” means the occurrence of one or more of the following conditions arising without the consent of Executive: