EMPLOYMENT AGREEMENT

Exhibit 10.1

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this _____ day of __________ 2007 by and between First Financial Northwest, Inc. (the “Company”), and its wholly owned subsidiary, First Savings Bank Northwest (the “Savings Bank”), and Victor Karpiak (the “Employee”).

          WHEREAS, the Employee is currently serving as the President and Chief Executive Officer of the Company and of the Savings Bank;

          WHEREAS, the Employee has made and will continue to make a major contribution to the success of the Company and the Savings Bank in the position of President and Chief Executive Officer;

          WHEREAS, the board of directors of the Company and the board of directors of the Savings Bank (collectively, the “Board of Directors”) recognize that the possibility of a change in control of the Savings Bank or the Company may occur and that such possibility, and the uncertainty and questions which may arise among management, may result in the departure or distraction of key management to the detriment of the Company, the Savings Bank and their respective stockholders;

          WHEREAS, the Board of Directors believes that it is in the best interests of the Company and the Savings Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Company and its subsidiaries; and

          WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee;

          NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:

          1.     Definitions.

                         (a)          The term “Change in Control” means (1) an offeror other than the Company purchases shares of stock of the Company or the Savings Bank pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or the Savings Bank within the meaning of the  Savings and Loan Holding Company Act under 12 U.S.C. Section 1467a and 12 C.F.R. Part 574 (or any successor statute or regulation) or requires the filing of a change of control notice with the Office of Thrift Supervision (“OTS”) or the Federal Deposit Insurance Corporation (“FDIC”); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities  Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or the Savings Bank representing 25% or more of the combined voting power of the Company’s or the Savings Bank’s outstanding securities; (4) individuals who are members of the board of directors of the Company immediately following the Effective Date or who are members of the board of directors of the Savings Bank immediately following the Effective Date (in each case, the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least

three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s or the Savings Bank’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar transaction in which the Company is not the resulting entity,  provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of the Savings Bank or the Company.

                         (b)          The term “Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the “Code”), without regard to subsection (b) thereof) that includes the Savings Bank, including but not limited to the Company.

                         (c)          The term “Date of Termination” means the date upon which the Employee experiences a Separation from the Company or the Savings Bank or both, as specified in a notice of termination pursuant to Section 8 of this Agreement or the date a succession becomes effective under Section 10.

                         (d)          The term “Effective Date” means the date of this Agreement.

                         (e)          The term “Involuntary Termination” means the Employee’s Separation from Service (i) by either the Company or the Savings Bank or both without the Employee’s express written consent; or (ii) by the Employee by reason of a material diminution of or interference with his duties, responsibilities or benefits, including (without limitation) any of the following actions unless consented to in writing by the Employee:  (1) a requirement that the Employee be based at any place other than Renton, Washington, or within a radius of 35 miles from the location of the Company’s administrative offices as of the Effective Date, except for reasonable travel on Company or Savings Bank business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Employee, other than as part of a Savings Bank- or Company-wide reduction in staff; (4) a reduction in the Employee’s salary or a material adverse change in the Employee’s perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Savings Bank or the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee; or (6) the failure of the board of directors of the Company (or a board of directors of a successor of the Company) to elect him as President and Chief Executive Officer of the Company (or a successor of the Company) or any action by the board of directors of the Company (or a board of directors of a successor of the Company) removing him from such office, or the failure of the board of directors of the Savings Bank (or any successor of the Savings Bank) to elect him as President and Chief Executive Officer of the Savings Bank (or any successor of the Savings Bank) or any action by such board (or a board of a successor of the Savings Bank) removing him from such office.  The term “Involuntary Termination” does not include Termination for Cause, Separation from Service due to death or permanent disability pursuant to Section 7(f) of this Agreement, retirement or suspension

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or temporary or permanent prohibition from participation in the conduct of the Savings Bank’s affairs under Section 8 of the Federal Deposit Insurance Act (“FDIA”).

                         (f)          The term “Section 409A” shall mean Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.

                         (g)          The term “Separation from Service” shall have the same meaning as in Section 409A.

                         (h)          The terms “Termination for Cause” and “Terminated For Cause” mean Employee’s Separation from Service with either the Company or the Savings Bank, as the case may be, because of the Employee’s personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement.  No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company or the Savings Bank.  The Employee shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee’s counsel, to be heard before the Board), stating that in the good faith opinion of the Board of Directors the Employee has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail.

          2.     Term.     The term of this Agreement shall be a period of three years commencing on the Effective Date, subject to earlier termination as provided herein.  Beginning on the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that (i) neither the Employee nor the Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further; and (ii) prior to such anniversary, the Board of Directors, or a committee of the Board of Directors which has been delegated authority to act on such matters by the Board of Directors (“Committee”), explicitly reviews and approves the extension.  Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

          3.     Employment.     The Employee shall be employed as the President and Chief Executive Officer of the Company and as the President and Chief Executive Officer of the Savings Bank.  As such, the Employee shall render all services and possess the powers as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Board of Directors may prescribe from time to time.  The Employee shall also render services to any subsidiary or subsidiaries of the Company or the Savings Bank as requested by the Company or the Savings Bank from time to time consistent with his executive position.  The Employee shall devote his best efforts and reasonable time and attention to the business and affairs of the Company

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and the Savings Bank to the extent necessary to discharge his responsibilities hereunder.  The Employee may (i) serve on charitable or civic boards or committees and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors or a Committee, which approval shall not be withheld unreasonably and (ii) manage personal investments, so long as such activities do not interfere materially with performance of his responsibilities hereunder or give rise to violations of applicable securities laws.

          4.     Cash Compensation.

                         (a)          Salary.     The Company and the Savings Bank jointly agree to pay the Employee during the term of this Agreement a base salary (the “Salary”) the annualized amount of which in any year shall be not less than the annualized aggregate amount of the Employee’s base salary from the Company and any Consolidated Subsidiaries in effect at the Effective Date; provided that any amounts of salary actually paid to the Employee by any Consolidated Subsidiaries shall reduce the amount to be paid by the Company and the Savings Bank to the Employee.  The Salary shall be paid no less frequently than monthly and shall be subject to customary tax withholding.  The amount of the Employee’s Salary shall be increased (but shall not be decreased) from time to time in accordance with the amounts of salary approved by the Board of Directors or the Committee or the board of directors or the appropriate committee of any of the Consolidated Subsidiaries after the Effective Date.  The amount of the Salary shall be reviewed by the Board of Directors or the Committee at least annually during the term of this Agreement.

                         (b)          Bonuses.     The Employee shall be entitled to participate in an equitable manner with all other executive officers of the Company and the Savings Bank in such performance-based and discretionary bonuses, if any, as are authorized and declared by the Board of Directors or the Committee for executive officers.

                         (c)          Expenses.     The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and the Savings Bank, provided that the Employee accounts for such expenses as required under such policies and procedures.

          5.     Benefits.

                         (a)          Participation in Benefit Plans.  The Employee shall be entitled to participate, to the same extent as executive officers of the Company and the Savings Bank generally, in all plans of the Company and the Savings Bank relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof.  In addition, the Employee shall be entitled to be considered for benefits under all of the stock, stock option, and equity-based plans in which the Company’s or the Savings Bank’s executive officers are eligible or become eligible to participate.

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                         (b)          Fringe Benefits.     The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company’s or the Savings Bank’s executive officers, including but not limited to supplemental retirement, deferred compensation program, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services.

          6.     Vacations; Leave.     The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors or the Committee for executive officers, and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors or the Committee may determine in its discretion.

          7.     Termination of Employment.

                         (a)          Involuntary Termination.     The Board of Directors may terminate the Employee’s employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Employee’s right to compensation or other benefits under this Agreement.  In the event of Involuntary Termination other than after a Change in Control which occurs during the term of this Agreement, the Company and the Savings Bank jointly shall (i) if the Involuntary Termination occurs prior to the first anniversary of the Effective Date, pay to the Employee a lump-sum severance amount equal to one year’s Salary as in effect prior to the Date of Termination, or (ii) if the Involuntary Termination occurs after the first anniversary of the Effective Date, pay to the Employee during the remaining term of this Agreement the Salary at the rate in effect immediately prior to the Date of Termination, including the pro rata portion of any incentive award, payable in such manner and at such times as the Salary would have been payable to the Employee under Section 4(a) if the Employee had continued to be employed by the Company and the Savings Bank, and (iii) regardless of when the Involuntary Termination occurs, provide to the Employee during the remaining term of this Agreement substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and his dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him, as if he had not suffered Involuntary Termination.  Notwithstanding the foregoing, if (but for this sentence) (i) the taxable payments under this Section 7(a) would extend over a period of time sufficient for such payments not to be considered severance payments under Section 409A (and as such considered deferred compensation), then the final payment that could be made without causing the payments to be considered deferred compensation under Section 409A shall include the present value of the remaining payments, with such present value determined using the applicable discount rate used for purposes of determining present value under Section 280G of the Code, and (ii) if the sum of the taxable payments exceeds that amount which is permitted to be considered as severance pay under Section 409A (the excess being referred to herein as “Excess Separation Payment”), and if at the time of the Employee’s Separation from Service the Employee is a “specified employee” within the meaning of Section 409A, then no portion of the Excess