AMENDMENT NO. 1
TO THE SETTLEMENT AGREEMENT AND MUTUAL RELEASES
 
This AMENDMENT NO. 1 TO THE SETTLEMENT AGREEMENT AND MUTUAL RELEASES (the
"Amendment") is made and entered into, as of the date on which it is fully
executed, as indicated by the signatures below, by and among the Stilwell Group
(as defined in the Settlement Agreement and Mutual Releases (the "Agreement")),
Spencer L. Schneider, an individual, First Financial Northwest, Inc., a
Washington corporation (the "Company"), Raymond J. Riley, an individual, Carl T.
Hagberg and Associates, a sole proprietorship registered in New Jersey, and
Victor Karpiak, an individual (collectively, "the parties" and each a "party").
 
RECITALS
 
WHEREAS, the parties entered into the Agreement as of December 20, 2012;
 
WHEREAS, the Agreement requires, inter alia, that Mr. Schneider be appointed to
the Boards of Directors of the Company, First Savings Bank Northwest (the
"Bank"), and First Financial Diversified Corporation ("Diversified");
 
WHEREAS, the parties desire to modify the Agreement to provide for the
appointment of Kevin D. Padrick to the Boards of Directors of the Company, the
Bank, and Diversified in lieu of the appointment of Mr. Schneider to those
boards, and otherwise to modify the Agreement to accommodate the substitution of
Mr. Padrick for Mr. Schneider; and
 
WHEREAS, Mr. Padrick is a Senior Principal and co-founder of Obsidian Finance
Group, LLC, with offices at 5 Centerpointe Drive, Suite 590, Lake Oswego, Oregon
97035;
 
NOW, THEREFORE, in consideration of the mutual promises, representations,
covenants and agreements of the parties contained herein, and for other good and
valuable consideration, the receipt and legal sufficiency of which the parties
hereby acknowledge, the parties hereto, intending to be legally bound, agree as
follows:
 
TERMS
 
1.  
Substitution of Mr. Padrick for Mr. Schneider

 
(a)           In the heading to Section 1.1, the reference to "Mr. Schneider" is
changed to "Mr. Padrick."
 
(b)           Restyle Sections 1.1(b), 1.1(c) and 1.1(d), respectively, as
Sections 1.1(c), 1.1(d) and 1.1(e), respectively, and insert the following new
Section 1.1(b) following Section 1.1(a):
 

 (b)    The Board, having voted on December 19, 2012, to increase the size of
the Board by one (1) director to a total of nine (9) directors and to appoint
Mr. Schneider to fill that new position; and the parties having agreed that
Mr. Padrick shall be substituted for Mr. Schneider as a   

 

 
 
 

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   member of the Board; the Board no later than January 16, 2013, shall withdraw
the appointment of Mr. Schneider as a director of the Company and appoint
Mr. Padrick to serve as a director of the Company until the later of the date of
the Annual Meeting of Shareholders of the Company in 2013 (the "2013 Annual
Meeting") or the date on which his successor should be elected and qualified,
the effectiveness of such appointment and Board vote in favor of Mr. Padrick's
appointment to be subject only to:  (i) if necessary, Mr. Padrick receiving all
approvals by the Washington Department of Financial Institutions, the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of San Francisco, or
their successors, necessary for him to serve as a director of the Company and of
the Bank, and (ii) Mr. Schneider and the Stilwell Group fully complying with
their obligations under this Agreement.  

 

(c)           At lines 1-2 of former Section 1.1(b) of the Agreement, now
restyled as Section 1.1(c), the phrase "No later than fifteen business days
after the execution of this Agreement by all parties" is deleted and replaced
with "No later than January 28, 2013."
 
(d)           At the last two lines of former Section 1.1(b) of the Agreement,
now restyled as Section 1.1(c), the phrase "and withdrawing any previous
objections to Mr. Schneider's appointment to such boards" is deleted.
 
(e)           In former Sections 1.1(b) and 1.1(c) of the Agreement, now
restyled respectively as Sections 1.1(c) and 1.1(d), all remaining references to
"Mr. Schneider" are changed to "Mr. Padrick."
 
(f)           Section 1.1(d) of the Agreement, now restyled as Section 1.1(e),
is deleted and replaced with the following:
 

(e)  
The Company, Mr. Padrick and all members of the Stilwell Group (including Joseph
Stilwell in his individual capacity) shall enter into a Non-Disclosure
Agreement, substantially in the form attached as Exhibit A hereto, which shall
remain in force through Mr. Padrick's tenure on the Board.
 

 
(Exhibit A to this Amendment is unchanged from Exhibit A to the Agreement,
except for the substitution of Mr. Padrick's name for Mr. Schneider's name.)
 
(g)           In the heading to Section 1.2 and in Sections 1.2(a) and 1.2(b) of
the Agreement, all references to "Mr. Schneider" are changed to "Mr. Padrick."
 
(h)           At lines 5-6 of Section 1.2(b) of the Agreement, the parenthetical
phrase "(or ceases to represent the Stilwell Group as an attorney)" is deleted.
 
 
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(i)           In Section 1.3 of the Agreement, the reference to "Mr. Schneider"
is changed to "Mr. Padrick."
 
(j)           In Section 1.4 of the Agreement, the first two references to
"Mr. Schneider" (found in the second line of the first paragraph of Section 1.4)
are changed to "Mr. Padrick."
 
(k)           In Section 5.1 of the Agreement, the reference to "Mr. Schneider"
is changed to "Mr. Padrick."
 
2.  
Effective Date

 
In Section 5.1 of the Agreement, both references to "February 15, 2013" are
changed to "March 1, 2013."
 
3.  
Joint Motion for Extension of Stay

 
No later than three court days following the execution of this Amendment by all
parties, counsel for the parties shall cause to be filed in the Litigation a
joint motion to extend the stay of the Litigation, and all proceedings or
deadlines therein, until the Effective Date, as modified by this Amendment, has
or has not occurred.
 
4.  
Communications

 
The parties agree that the Joint Press Release attached to this Amendment as
Exhibit B will be issued upon execution of this Amendment; and that the Company
will file with the U.S. Securities and Exchange Commission ("SEC") a Form 8-K
announcing the Amendment, to which copies of this Amendment and the Joint Press
Release will be attached as exhibits.
 
5.  
Miscellaneous

 
(a)           This Amendment and the Agreement shall be read together, as one
document, and together constitute the entire agreement among the parties
regarding its subject matter and supersede any prior oral or written agreements
among them (other than the Agreement as revised by this Amendment) regarding the
subject matter contained herein.
 
(b)           Except as specifically provided herein, all terms and conditions
of the Agreement shall remain in full force and effect, without waiver or
modification.  In the event of any inconsistencies, the terms of this Amendment
shall govern.
 
(c)           All capitalized terms used in this Amendment and not otherwise
defined herein have the same meanings as when used in the Agreement.
 
(d)           To facilitate execution, this Amendment may be executed in any
number of counterparts (including by facsimile and email/pdf transmission), each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same Amendment binding on all the parties,
notwithstanding that not all parties are signatories to the same counterpart.
 
 
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(e)           This Amendment shall be governed and construed in accordance with
the laws of the State of Washington, without regard to the conflict of law
principles thereof.  Should any dispute arise between or among the parties
regarding the interpretation or performance of this Amendment, the parties agree
that such dispute shall be resolved in the Superior Court for the State of
Washington in King County.
 
IN WITNESS WHEREOF, the parties have duly executed this Amendment No. 1 as of
the last date shown below.
 

 
VICTOR KARPIAK
      /s/Victor Karpiak                                              
Date:  January 16, 2013                                                FIRST
FINANCIAL NORTHWEST, INC.       By: /s/Victor
Karpiak                                           [Print Name]Victor
Karpiak                                Title: President and
CEO                                              Date:  January 16,
2013                                                  RAYMOND J. RILEY      
/s/Raymond J. Riley                                           
Date:  1/16/13                                                                 
CARL T. HAGBERG AND ASSOCIATES
      By: /s/Carl T. Hagberg                                         [Print
Name] Carl T. Hagberg                                Title:
Chairman                                                    Date: January 16,
2013                                    

 
 
 
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THE STILWELL GROUP
 
Joseph Stilwell;
Stilwell Value Partners II, L.P.;
Stilwell Value Partners V, L.P.;
Stilwell Value Partners VI, L.P.;
Stilwell Value Partners VII, L.P.;
Stilwell Partners, L.P.;
Stilwell Associates, L.P.;
Stilwell Associates Insurance Fund of the
      S.A.L.I. Multi-Series Fund, L.P.;
Stilwell Value LLC; and
 
Stilwell Advisers LLC
     
By: /s/Joseph Stilwell                                            
  [Print Name] Joseph Stilwell                                 
Title: Manager                                                            
Date: 1/16/13                                                                   
      SPENCER SCHNEIDER               /s/Spencer
Schneider                                       Date:
1/16/13                                                          

 
 
 

 
 
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Exhibit A
 

 
NON-DISCLOSURE AGREEMENT
 
THIS NON-DISCLOSURE AGREEMENT (this "Agreement"), is made and entered into as of
the date on which it is fully executed, as indicated by signatures below,  by
and among First Financial Northwest, Inc. (the "Company"), the Stilwell Group
(composed of Stilwell Associates, L.P., Stilwell Partners, L.P., Stilwell Value
Partners II, L.P., Stilwell Value Partners V, L.P., Stilwell Value Partners VI,
L.P., Stilwell Value Partners VII, L.P., Stilwell Value LLC, Stilwell Associates
Insurance Fund of The S.A.L.I. Multi-Series Fund L.P., Stilwell Advisers LLC,
and Joseph Stilwell, an individual, and their employees and representatives),
and Kevin D. Padrick, a director nominee of the Stilwell Group ("Padrick").
 
WHEREAS, the Company has agreed to place Padrick on its board of directors,
subject to approval by interested state and federal regulatory agencies;
 
WHEREAS, the Company, the Stilwell Group and Padrick have agreed that it is in
their mutual interests to enter into this Agreement as hereinafter described.
 
NOW THEREFORE, for good and valuable consideration, the parties hereto mutually
agree as follows:
 
1.           In connection with Padrick serving on the Company's board, Padrick
and other Company employees, directors, and agents may divulge nonpublic
information concerning the Company and its subsidiaries to the Stilwell Group
and such information may be shared among the Stilwell Group's employees and
agents who have a need to know such information.  The Stilwell Group expressly
agrees to maintain all nonpublic information concerning the Company and its
subsidiaries in confidence.  The Stilwell Group expressly acknowledges that
federal and state securities laws may prohibit a person from purchasing or
selling securities of a company, or from communicating such information to any
other person under circumstances in which it is reasonably foreseeable that such
other person is likely to purchase or sell such securities, while the
first-mentioned person is in possession of material nonpublic information about
such company.  The Stilwell Group agrees to comply with the Company's insider
trading and disclosure policies, as in effect from time to time, to the same
extent as if it were a director of the Company.  To the extent the nonpublic
information concerning the Company and its subsidiaries received by the Stilwell
Group is material, this Agreement is intended to satisfy the confidentiality
agreement exclusion of Regulation FD of the Securities and Exchange Commission
(the "SEC") set forth in Section 243.100(b)(2)(ii) of Regulation FD.
 
2.           Each of the Stilwell Group and Padrick represents and warrants to
the Company that this Agreement has been duly and validly authorized (in the
case of the entity members of the Stilwell Group), executed and delivered by
them, and is a valid and binding agreement enforceable against them in
accordance with its terms.
 
3.           Padrick hereby further represents and warrants to the Company that:
(a) he satisfies all of the qualifications to be a director of the Company as
set forth in Article III,
 
 
 

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Section 4 of the Company's bylaws and any additional applicable qualifications
under the laws of the State of Washington or under the regulations of any bank
regulatory authority, and that he is not in any way precluded from serving as a
director by order or other action of any court, regulatory or other governmental
authority; and (b) no event has occurred with respect to Padrick that would
require disclosure in a document filed by the Company with the SEC pursuant to
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, under Item 401(f) of SEC Regulation S-K.
 
4.           The Stilwell Group acknowledges that with regard to its obligations
to maintain the confidentiality of nonpublic information of the Company and its
subsidiaries, monetary damages may not be a sufficient remedy for any breach or
threatened breach of this Agreement and that, in addition to all other remedies,
the Company may be entitled to seek specific performance and injunctive or other
equitable relief as a remedy for such breach, and in conjunction therewith the
Company shall not be required to post any bond.
 
5.           This Agreement constitutes the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions of the
parties in connection therewith not referred to herein.
 
6.           This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Washington, without regard to choice of law
principles that may otherwise compel the application of the laws of any other
jurisdiction.  Each of the parties hereby irrevocably consents to the exclusive
jurisdiction of the state and federal courts sitting in the State of Washington
to resolve any dispute arising from this Agreement and waives any defense of
inconvenient or improper forum.
 
7.           The terms and provisions of this Agreement shall be deemed
severable and, in the event any term or provision hereof or portion thereof is
deemed or held to be invalid, illegal or unenforceable, such provision shall be
conformed to prevailing law rather than voided, if possible, in order to achieve
the intent of the parties, and, in any event, the remaining terms and provisions
of this Agreement shall nevertheless continue and be deemed to be in full force
and effect and binding upon the parties.
 
8.           All representations, warranties, covenants and agreements made
herein shall survive the execution and delivery of this Agreement.
 
9.           This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by all of the parties hereto.
 
10.           This Agreement may be executed in counterparts, each of which
shall be an original, but all of which together shall constitute one and the
same agreement.
 
 
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by duly
authorized officers of the undersigned as of the day and year first above
written.
 
THE STILWELL GROUP
 
 
 
FIRST FINANCIAL NORTHWEST, INC.
  /s/Joseph Stilwell                                        /s/Victor
Karpiak                                           
By:
Date
Joseph Stilwell
1/16                    , 2013
 
By:
 
 
Date
Victor Karpiak, President, Chief
    Executive Officer and Chairman
    of the Board
January 16                              , 2013

 
KEVIN D. PADRICK
 
/s/Kevin D. Padrick                                   

Date:  January 14th                 , 2013
 
 
 
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Exhibit B
 

 
JOINT PRESS RELEASE
 
**For Immediate Release**
 

 
For more information, contact:
For First Financial Northwest, Inc.:
  Victor Karpiak, President and Chief Executive Officer,
  (425) 255-4400
For The Stilwell Group:
  Ms. Megan Parisi, (212) 269-1551

 
FIRST FINANCIAL NORTHWEST, INC. AND THE STILWELL GROUP ANNOUNCE AMENDMENT TO
LITIGATION SETTLEMENT
 
Renton, Washington – January 17, 2013 – First Financial Northwest, Inc. (the
"Company") (NASDAQ GS: FFNW) and the Stilwell Group announced that they have
amended the agreement that was entered into to settle the litigation in which
the Stilwell Group challenged the counting of votes in a contested director
election at the Company's 2012 Annual Meeting of Shareholders.
 
The original settlement agreement provided, among other things, that Spencer L.
Schneider would be seated on the Company's Board of Directors after receiving
any required regulatory approvals.  The Company and the Stilwell Group have now
agreed that the Company will instead appoint Kevin D. Padrick to its Board,
subject to any required regulatory approvals, and will then nominate Mr. Padrick
at the 2013 Annual Meeting of Shareholders for a full three-year term.  Mr.
Padrick is a Senior Principal of Obsidian Finance Group, LLC, whose offices are
located in Lake Oswego, Oregon.  All other significant terms of the settlement
remain the same.
 
First Financial Northwest, Inc. is the parent company of First Savings Bank
Northwest, a Washington chartered stock savings bank headquartered in Renton,
Washington, serving the Puget Sound Region through its full-service banking
office.  The Company is a part of the ABA NASDAQ Community Bank Index.  For
additional information about the Company, please visit www.fsbnw.com and click
on the "Investor Relations" section.
 
The Stilwell Group is a New York-based money management firm which currently
owns approximately 9.41% of the Company's outstanding shares of common stock.
 
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