It was in March that I added to my Special Situations portfolio's position in First Financial Northwest (FFNW), and I'm back now to buy more. The stock trades well below what it should, and a buyout of the bank could be in the offing.

First Financial is trading at a discount to tangible book value, with shares trading hands at less than 90% of tangible book. That discount offers a margin of safety. And yes, the bank is profitable. And yes, it's well overcapitalized, even massively.

But even better, it has a huge catalyst, in the form of Joe Stilwell.

Bank activist extraordinaire Joe Stilwell came in to help clean up the mess, and he ran a proxy contest for a seat on the board. His platform was to clean up the bank and then sell it as soon as possible for as much as possible. Stilwell's record in the small-financials space is unparalleled. I expect him to succeed.

In the meantime, there's plenty of value-creating actions.

A few months ago, the bank announced yet another buyback, authorizing a purchase of 10% of the company's stock. If the bank undertook the repurchase like it did 2013's buybacks – i.e., aggressively and quickly – then I expect them to already have completed it. They announce earnings next week, and we should find out the situation then.

Is that all? I don't think so. We could very well see another buyback announcement following earnings. The bank remains way overcapitalized, and that cash could be used for more repurchases. That would also help boost return on equity, which has sagged due to the overcapitalization.

And one other thing – CEO Joe Kiley received a sweetened change-of-control agreement at the end of last year – a "golden parachute" to us mortal nonexecutives. That would pay him three times his annual salary in the event of a buyout, up from just one times his salary.

Foolish bottom line
First Financial Northwest already comprises 7.5% of my Special Situations portfolio, but I'm adding another $500 to the position, taking it to over 8%, on the next market day. This remains a low-risk stock with a reasonable chance of significant near-term upside.

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