Leveraged Buyout Believed a Possibility for Home Lender Hammond Co.

Something’s in the wind over at the Hammond Co., a Newport Beach mortgage banker.

The company’s stock normally trades over the counter at only a fraction of its book value. And last month the price dipped still further, sparking speculation that management may be tempted to buy it all.

Asked about this possibility, Chairman Thomas T. Hammond was uncharacteristically reticent.

“I have no comment on that,” said Hammond, citing federal Securities and Exchange Commission regulations. Among other prohibitions, those regulations bar management from commenting on pending changes in a company’s ownership.

A couple of things have kept the price of the stock down lately, Hammond said.

With interest rates on the rise--which normally means a downturn for the housing market--investors aren’t wild about real estate-related stocks.

And home lending--Hammond’s business--has not had a good year. In fact, home loans dropped nationwide from a record $450 billion in 1986 to $350 billion last year.

Then in mid-February one of the three stock brokerages that made a market in Hammond stock stopped doing so. The price dropped from $3 to $2.375, a dip of 21% in one day.

The drop underscores the problems of companies with only a small number of shares, in this case a little more than 2 million.

A big blue-chip company, by contrast, may have issued hundreds of millions of shares. Such a company’s shares are traded on one of the major exchanges, and the frequency of trading ensures a ready market for buyers and sellers of the stock.

Making a market in a stock is simply financial jargon that means an investor can always buy or sell the stock at the brokerage for a certain price. This keeps the stock liquid, meaning investors can count on having a place to buy or sell it.

When a company such as Hammond loses one of the few brokers making a market in its stock, it quite often means a drop in price for the shares. That’s because investors worry that they might not be able to unload the stock if the company falters.

In Hammond’s case, a small New York brokerage that had made a market in the stock for a big customer was said to have stopped because the volume of trades was too small to keep it interested.

The stock has been stuck at $2.50 since mid-February.

On the bright side, there’s nothing fundamentally wrong with the company, said Mark Matheson, a stock analyst at Newport Beach investment banker Cruttenden & Co.

In fact, the $2.50 price is only a little less than half book value, or the company’s own assessment of its worth that it carries on its books.

And if Hammond were broken up tomorrow and its assets sold, the price might amount to as much as $9 a share, Matheson estimates. Even at the stock’s normal price of $3, that makes it something of a bargain if an investor is willing to risk holding such thinly traded shares.

None of these facts, of course, are lost on Hammond’s management. The company has been slowly buying back a portion of its stock, but Hammond won’t discuss why the pace has been so lethargic, again citing SEC regulations.

“Why let the stock price languish so far below the market value?” said Matheson, the analyst. “Why not buy it back? They haven’t been overly active in their buyback program.”

As of late February, the company had purchased only about 77,000 shares under the buyback program, fewer than 5% of the shares outstanding.

It’s those sort of things that prompt Matheson to speculate that a leveraged buyout may be in the works.

In such buyouts, the company’s assets and future earnings are pledged against the loans used to buy it.

Meanwhile, what do investors get for their $2.50 a share now? Hammond is one of the few publicly held mortgage bankers, companies which make home loans to customers and then bundle the loans into bunches for sale to investors.

Mortgage bankers make a profit from fees for originating the loans and for continuing to collect the monthly payments for investors after the loans are sold.

This normally quiet company made a bit of a splash last year, when Chairman Hammond lashed out at the Federal Home Loan Bank Board for denying the company the right to buy Mission Savings & Loan Assn., a Riverside thrift.

He continued to belt the bank board into the new year, when the company announced in January that it had lost $219,000 for the 9 months ended Dec. 31.

In his message to shareholders, Hammond blamed the loss on the $450,000 cost of the company’s legal battle in “getting (the board) to do their work.”

During the 16 months the company tussled with federal regulators, the bank board “did not deal in good faith, disguised its intentions and demonstrated an unusual amount of procrastination,” Hammond wrote.

He blamed “a certain regulator’s personal views rather than any financial, structural or regulatory reasons” for the denial of Hammond’s application.

While the bank board officials’ ears may still be burning, the outspoken Hammond says now that after three tries he has given up on trying to buy a thrift.