Dennis Smiley, doing business as HDS Holdings LLC, was sued March 25 by Delta Trust & Bank in Benton County, over a personal loan default – it was latest shoe to drop in an unfolding saga surrounding Smiley’s sudden resignation March 13 as president of Arvest Bank Benton County.
He also faces a loan fraud investigation first reported by Arkansas Business on April 2. This report claims one of the loan payments did not clear Smiley’s bank account on March 10, which raised a red flag that led to his resignation.
Sources who asked for anonymity have told The City Wire that numerous Arkansas banks had lent Smiley money over the past four years and he each time he pledged the same restricted Arvest shares for collateral. Smiley reportedly borrowed an estimated $4.5 million from more than a dozen Arkansas banks dating back to 2009, according to Uniform Commercial Code filings with Arkansas Security of State.
On Feb. 20, Delta Trust & Bank made its loan to HDS Holdings — H. Dennis Smiley Jr. of Benton County and his father H. Dennis Smiley Sr. of DeQueen — in the amount of $245,126. Smiley pledged 4,264 shares of Arvest Bank stock for collateral. The lawsuit claims Smiley failed to make the first installment on March 20.
“The defendants have confessed that they are either unable or unwilling to pay the obligations to the lender. The defendants have caused the collateral to be substantially impaired and they are in nonmonetary default under the express terms of the note and security agreement and guarantee,” the complaint states.
The bank has asked for a judgment in the amount of $245,126, accruing interest until the debt is paid.
Co-defendant Henry Dennis Smiley Sr. is chairman of First State Bank of De Queen, also on the list of banks involved in the federal fraud probe. The Sr. Smiley told Arkansas Business he was brokenhearted and could not talk about his son's financial and legal problems.
In an information age, one has to ask how this could happen given that banks are supposed to file certain protocol when making a secured a loan.
“When a banker makes a loan that is collateralized with securities, they are to file a UCC Financing Statement with the Arkansas Secretary of State. But they are also supposed to check to make sure that collateral has not already been pledged for other loans. When possible, banks like to hold the title or proof of title in their vaults until the loan is repaid,” said Phil Knight, a Northwest Arkansas-based banking consultant and loan broker.
The Uniform Commercial Code finance statements, which are available online, indicate loans dating back to February 2011 where H. Dennis Smiley pledged shares of Arvest Bank Group Stock, which are bestowed to top executives as bonus pay. These shares had value of just under $400,000, according to the last loan made by Delta Trust & Bank. At least 10 banks claimed all or part of the same collateral for loans made between 2011 and 2014.
“Using fraudulent collateral is nothing new. It can happen when banks don’t do their homework and follow through with the proper protocol for loans,” said John Dominick, banking consultant and professor of finance at the University of Arkansas. “This won’t be the last time.”
Garland Binns, attorney with Little Rock-based Dover Dixon & Horne, said banks make loans on good faith and it may be difficult to determine wrongful intentions in advance. He also points to the UCC Finance Statements as the proper protocol for banks to register their interest as lien holders, a record open to the public.
Knight said lenders typically would require a letter of guaranty from the stock issuer in a situation where the stock is nonassignable, such as restricted or closely held stock like Arvest Bank Group.
“Absent that guaranty, or banks asking for it, is done more than you might think. Bankers like to make to loans, and they are unsuspecting of their friends and people they have known for years,” he said.
Arvest has been mostly silent on the high profile resignation, except to say it was of a personal nature.
Dominick said it is not uncommon for bankers to borrow from other institutions, they do so for independence.
“A bank has be careful not to make too many loans to its own officers,” he said.
During the Northwest Arkansas real estate boom it was not uncommon for bankers to secure loans from other institutions, especially those dabbling in real estate market themselves.
Knight said there is never problem until the loan can’t be repaid. He said regulators will also look past these loans as long as they are in good-standing. But, when things go south, there is nowhere to hide.
“Banks have zero tolerance for officers who default on loans made with other banks,” he added.
The Delta Bank & Trust is the first civil lawsuit filed, but given the scope of the investigation Smiley could face criminal fraud charges.
It is unclear how many banks are involved and to what extent. Based on the UCC Financing Statements four banks made loans to Smiley since Nov. 27, each pledging the same collateral.
• First Western Bank, Booneville
• First National Bank, Fort Smith
• First State Bank NWA, Huntsville
• Delta Bank & Trust, Little Rock
Legacy National Bank in Springdale also is encumbered by Smiley’s actions, but Legacy President Don Gibson, chose not to comment. Legacy did not file a UCC Financing Statement so it is unclear to what extent that bank is involved.
Other banks known to be involved include:
• First Security Bank
• Chambers Bank
• Bank of Fayetteville
• Signature Bank
• First State Bank DeQueen
• First National Bank of Mountain Home