"HMC's disclosure statement approved"

"New bidder for Hilo Hattie"

"HawnTel rebuffs Isle firm's $400M bid"

All three stories are about established local institutions that wound up in bankruptcy.

Each of them found their way in bankruptcy court in different ways.

Hawaii Medical Center, which acquired St. Francis Medical Centers in 2007, has been struggling with lower federal Medicare and Medicaid disbursements while sales at Hilo Hattie heav sagged as the local tourism market faltered.

Despite its monopoly status, Hawaiian Telcom Inc. has lost thousands of customers to wireless and other providers and has strained under its mountainous debt.

All three of these companies were bought and sold during the 2000-2007 boom years. They were highly leveraged and had very little wiggle room once the local economy softened.

Hilo Hattie, HMC and Hawaiian Telcom weren't the only leveraged buyouts made during the good times. Expect more bankruptcies to follow as the local economy struggles to hit bottom.

Last year, a Probate Court-appointed panel recommended increasing board members’ pay between 65 percent and 123 percent.

Instead, Kamehameha Schools trustees Robert Kihune, Douglas Ing, Nainoa Thompson, Diane Plotts and Corbett Kalama took a 10 percent pay cut, citing the trust’s weakened financial condition.

Now, Probate Judge Colleen Hirai has approved payments of more than $135,000 to Mercer Inc., the compensation expert that recommended the ill-fated pay raises.

Mercer is the San Francisco-based executive pay consulting firm  that recommended increasing board members’ pay from $100,000 to about $187,000.

Compensation for the board’s chair would rise from $97,000 to $217,500 under the study.

Mercer is a unit of Marsh & McLennan Companies, which received hefty fees as the Kamehameha Schools insurance company during the 1980s and during the 1990s trust scandal.

In its trustee pay report, Mercer argued that Kamehameha Schools board members spends more than twice as much time on trust matters - 21/2 to 3 days a week - than do the boards of comparable nonprofit organization and for-profit corporations.

Mercer said its recommendations also were based on an analysis of board pay at multi-billion dollar foundations, publicly traded corporations, for-profit real estate investment trusts and some local publicly traded companies such as Bank of Hawaii Corp. and Alexander & Baldwin Inc.

The Mercer study did not include the pay policies of local nonprofit boards due to “lack of comparability,” the committee said.

Board members of most local nonprofits receive no pay for their work.
The issue of trustee compensation played a major role in the late 1990s turmoil at Kamehameha Schools.

The Internal Revenue Service threatened to revoke the trust's tax-exempt status due in part to the $1 million a year paid to then-board members Richard "Dickie" Wong, Henry Peters, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

The IRS later settled with the estate after board members resigned and the trust reformed its governance and pay policies.

Mercer’s findings did not sit well with many members of the Kamehameha Schools ohana, whose memories of the 1990s trust scandal are still fresh.

It’s one thing to argue for overdue pay increases, it’s another to advocate for 65 percent pay raises when the value of Kamehameha School’s endowment has dropped by at least $1.7 billion.

While the $135,000 may look like a drop in the bucket for a multi-billion dollar trust but from a microeconomic standpoint, it’s the cost of educating nearly five Hawaiian kids for a year.

In May, parent Territorial Bancorp Inc. hired Keefe, Bruyette & Woods Inc. as its financial advisor for the offering, in which the company will issue 10.6 million to 12.3 million shares of common stock.

The $10 per share offering is expected to raise $75 million to $120 million, which will be used to expand the bank's branch operations and pay off short-term borrowings and other obligations.

Bank stocks are a tough sell these days given the turmoil in the nation's finanical markets. But 88-year-old Territorial is an interesting contrarian play.

It has no exposure to the subprime lending crisis and its portfolio of commercial and construction loans is only a tiny portion of its overall loans, about 3.3 percent.

It's also profitable. According to a prospectus filed with the Securities and Exchange Commission, Territorial earned $7.2 million in 2008, up from $5.7 million in 2007.

For the first three months this year, the company's net income is up 47 percent to $2.7 million.

To be sure, the company's 2008 and 2009 performance compares with a weak 2007 when income fell by 25.2 percent to $5.8 million. But over the long term, the company is showing strong loan growth and interest income has risen.

What's interesting is that this is a subscription stock offering, meaning that depositors and borrowers -- not some big institutional investor -- get first crack at the stock. Once the offering its complete, shares will be traded on the Nasdaq market.

Hawaiian Airlines emerged from Chapter 11 bankruptcy in 2005 only after the company froze workers' defined pension plans and require them to take lesser pay raises.

Aloha Airlines' employees got a worse deal. During the airline's first bankruptcy, management dumped workers' pensions and forced them to take tens of millions of dollars worth of concessions.

Hawaiian Telcom's 152-page reorganization disclosure statement makes no references to wage concessions, job cuts or benefit reductions.

Instead, the plan adopts a $6 million bonus plan for its 1,400 management and rank and file workers.

The bonuses, which have already been approved by U.S. Bankruptcy Judge Lloyd King, includes $2 million for union members and $3.6 million in incentive pay for non-senior management employees.

Investors will bear the brunt of the losses. Hawaiian Telcom's reorganization will wipe out the entire $428 million value of phone company stock owned by The Carlyle Group. Carlyle is the Washington, D.C.-based private investment firm that bought the local phone company in 2005.

Investors who purchased $500 million worth of company bonds also will lose the entire value of their holdings.

Of course, a lot can happen before Hawaiian Telcom emerges from its reorganization.

Hawaiian Telcom's bank lenders and other secured creditors still have a big say on how the company emerges from bankruptcy and can push for concessions.

But for now, workers should feel secure that management isn't seeking any take backs.

Jim Romig, who founded the aloha-wear company in 1963, received $308,869 in compensation from September 2007 to October 2008 while Paul deVille, former President and CEO of Hilo Hattie’s parent Pomare Ltd., earned $358,277 during the same period, according to a bankruptcy court filing.

John Reed, another former CEO, earned $341,476 while Lena Young, the company’s former vice president of human resources received $198,798, the filing said.

Romig sold the company in July 2008 for $25,000 plus monthly payments of an undisclosed sum to a California investor group led by Ted Nelson, who through another company owns franchise rights to Fantastic Sams hair salons in Hawaii and California.

Nelson placed Pomare in bankruptcy reorganization three months later amid the slowdown in Hawaii’s tourism industry.

Creditor Maui Divers Jewelry is offering to buy Hilo Hattie out of bankruptcy for $1 million.

Not all of the compensation to the former executives was for salaries.
According to its bankruptcy filing, the company made $20,000 in payments to Reed for a promissory note prior to the bankruptcy. Young received $45,987 and deVille got more than $307,000 in promissory note payments before the bankruptcy filing.

As part of the sale, the company issued at least $1.5 million in promissory notes to current and former executives.

While it doesn't look like the former executives will be required to disgorge the payments, they expect to receive the unpaid balances on those notes.

Last November, I blogged about how the two financial institutions were neck-and-neck when it came to size. (See:) Filings with the Securities and Exchange Commission now give Central Pacific a decided edge.

While Central Pacific's assets remained flat at $5.4 billion during the first quarter, American Savings' assets tumbled 5.1 percent to $5.1 billion, the SEC filings show.

(The top two local financial institutions are First Hawaiian Bank with assets of $13.4 billion and Bank of Hawaii Corp. which lists assets of nearly $11.5 billion.)

Central Pacific had more deposits but American Savings boasted more loans.

Part of American Savings' shrinkage has to do with the sale of more than $1 billion in government-backed mortgage securities.

The sale reduced American Savings' expenses and boosted productivity.

American Savings still managed to best Central Pacific in the most important arena: profits.

American Savings said it earned $10.9 million during the three months ending March 31, whereas Central Pacific netted $2.6 million.

Jay Bybee, former head of the U.S. Justice Department's Office of Legal Counsel, will be among the U.S. 9th Circuit Court of Appeal's three-judge panel that will hold hearings here May 11-15.

Last month, the Obama administration released a series of memos that detailed the legal rationale for the CIA to apply techniques such as waterboarding, sleep deprivation on captured Al Qaeda figures.

According to the New York Times, Bybee is being investigated by the Justice Department on his professional standards.

The Times reported yesterday that the Justice Department draft report concluded that Bybee and fellow co-authors of the torture memos committed lapsed of judgement but should not be criminally prosecuted. (See:)

For his part, Bybee has told the Times that his memos represent a good faith analysis of the law. (See:)

Bybee's appearances have attracted demonstrations elsewhere. I'm told at least one peace activist group is organizing a protest.

As the Dow Jones Industrial Average has tumbled, local investors are turning to cash, swelling local depositories. For instance:

-- First Hawaiian Bank said its deposits rose by 5.8 percent to $9.5 million during the first quarter,

-- Bank of Hawaii's deposit base is up nearly $1 billion to $9.2 billion during the same period,

--  Central Pacific Bank's deposits are up 2.4 percent to 3.9 billion. CPB's increase is noteworthy since the bank only last year reported a record $138.4 million loss in 2008.

If the trend continues, it should benefit the local economy.

Assuming that the banks  haven't gotten too strict in their lending standards, the increased deposits will allow them to make more loans and expand their own business.

Last week, a Probate Court-appointed Trustee Screening Committee offered the names of Department of Hawaiian Homes Lands Chairman Micah Kane, Hawaii Community Development Authority Executive Director Anthony Ching and former Kamehameha Schools executive and ex-DHHL chairman Ray Soon as finalist for the post, which pays about $90,000 a year. (See:)

All three -- who were selected from a pool of 68 applicants --  have strong management skills and are well-regarded in the local community.

But will they make a good trustee?

Several members of the Kamehameha ohana that I've spoken to think otherwise.

They said they were disappointed that an educator or a female wasn't among the finalist.

Some well-known Hawaiian candidates -- including two female attorneys and the head of a social services agency serving underprivileged Hawaiians (also female) were not seriously considered, they said.

The new trustee has a hard act to follow. It's a post once held by financial titans like Hung Wo Ching and Matsuo Takabuki, social services icons like Myron "Pinky" Thompson and legal pioneers like former state Supreme Court Chief Justice William Richardson.

Retired Adm. Kihune was one of the five interim trustees who negotiated a settlement agreement with the Internal Revenue Service, which essentially saved the trust from financial ruin in wake of the late 1990s trust scandal.

Roy Benham, a former president of the Kamehameha Schools Alumni Association, said he would have preferred to see someone with more financial expertise than the three finalists.

He noted that Kamehameha Schools disclosed in January that the value of its endowment had declined by more than $1.7 billion during the first four months of its current fiscal year because of the meltdown in the nation's financial markets.

Members of the public have until May 26 to submit their comments about these candidates before Probate Judge Colleen Hirai selects Kihune's replacement.

Based on my telephone calls, the committee is probably going to get a earful.

In a filing in U.S. Bankruptcy Court last week, Aloha’s court-appointed trustee Dane Field said that most of the money will be used to fund former Aloha employees’ pension benefits, which were terminated by the company in 2006.

“The proposed settlement ... is in the best interest of the creditors of the estate,” Field said.

The U.S. Labor Department and the federal Pension Benefit Guaranty Corp. had been investigating the airline since 2006 for using $10 million pension assets held by the airline’s machinists and transport workers unions to acquire the company’s preferred stock.

Proceeds from the sale were used pay back bank loans.

The stock became worthless when Aloha filed for bankruptcy for the first time in 2004. Aloha shut down on March 31, 2008 after filing for bankruptcy for the second time 11 days earlier.

Under federal law, Aloha is barred from using workers’ pension money to pay for the company's business expenses, including bank loans. Pension money must be used to pay for employee benefits designated by the retirement plans.

Field said the $5.5 million settlement will be paid by Aloha’s insurer. Had the case not been settled, he said that the Labor Department and the PBGC could have filed a lawsuit seeking $14.6 million in damages.

The deal requires the approval of U.S. Bankruptcy Judge Lloyd King.