The CEO of First Northwest Bancorp is vowing to fight a lawsuit that seeks to recover $107 million from the Port Angeles, Washington-based lender in connection with a bankrupt client's alleged Ponzi scheme.
The suit was filed Friday in a Washington state court by 352 Capital Group LLC, a hedge fund operated by Jefferies Financial Group. The hedge fund alleges that Everett, Washington-based Water Station Management used proceeds from a 2022 bond sale to repay preexisting creditors, including the $2.2 billion-asset First Northwest, when the money was supposed to go toward improving and expanding the company.
According to the lawsuit, First Northwest's banking subsidiary, First Fed Bank, participated in the malfeasance.
In an interview Monday, First Northwest President and CEO Matthew Deines said his company regrets its decision to enter into a business relationship with Water Station but also denied that the bank played a role in its client's wrongdoing.
"First Fed played no part in the fraud perpetuated on numerous financial institutions and investors by Water Station," Deines said. "We are a victim of this wrongdoing and are going to fight this all the way."
So-called aiding-and-abetting lawsuits, which have been filed against a number of banks in recent years, are "an emerging risk," according to Deines.
"It's not one that was on our radar," he said. "I find it hard to understand how an unrelated third party who took a loss could hold us responsible. … It's very difficult to wrap our heads around this."
In a filing with the Securities and Exchange Commission, First Northwest said that it "strongly disputes" the lawsuit's allegations and promised to mount a vigorous defense.
The suit against First Northwest comes a month after the bank revised its first-quarter earnings to include $7.7 million in net charge-offs for loans connected to Water Station, as well as the creation of a $5.8 million legal reserve. Those moves swung First Northwest from a previously reported profit of $1.5 million to a $9 million loss.
Feddie Strickland, who covers First Northwest for Hovde, noted "the uncertainty regarding the outcome of any legal case," but nonetheless reaffirmed his outperform rating in a research note. Strickland cited First Northwest's improving credit picture and ample capital, along with positive trends in its core community banking business. 
"Loan pipelines remain solid with new loans at higher rates helping to drive better yields," Strickland wrote. "Deposits are also repricing with significant opportunity for net interest margin expansion over the next several quarters."
In 2024, First Northwest reported a $6.6 million loss, attributable to a sharp rise in problem loans. It earned $2.3 million the previous year.
352 Capital has sued Water Station and founder Ryan Wear in federal court, claiming they misappropriated more than $100 million invested by the fund. The hedge fund has alleged that one of its managers, Jason Chirico, assisted Water Station in perpetrating the fraud after he invested $7 million in the Everett-based firm.
Water Station sold thousands of water vending machines to nearly 200 investors nationwide, according to a statement of charges filed last month by Washington's Department of Financial Institutions, which alleged that many of the machines existed only on paper, and others were not where Water Station promised to put them.
Water Station sold the bonds, which were ultimately acquired by 352 Capital, in 2022 and 2023.
Creditors of Water Station, which the Department of Financial Institutions said raised more than $250 million between 2016 and 2023, filed an involuntary bankruptcy petition against the company in August 2024.

Wash. bank denies accusation that it abetted Ponzi scheme

First Northwest Bancorp denies involvement in a Ponzi scheme allegedly committed by its client, Water Station Management, as a $107 million lawsuit is filed against the bank. The lawsuit, filed by 352 Capital Group LLC, alleges that the bank aided the client's fraud, prompting the bank to revise its financial reports and defend itself in court.