Conventional wisdom holds that rising interest rates are bad for bank stocks, but some mortgage lenders actually stand to benefit from an uptick in rates.
Take Anchor Bancorp, for example The company's slock has been knocked down in the last few months from a high of $16.50 a share to its current rice of about $12, mainly because of its high level of mortgage prepayments.
"They have some capitalized servicing on the books, and since prepayment levels were high, they've had to amortize or write down that capitalized value," said Kevin Timmons, senior bank analyst at First Albany Corp.
In the third quarter, Anchor amortized $5.1 million, which is about twice what Mr. Timmons said he expects going forward, assuming flat or rising rates.
Anchor also has a large portfolio of mortgage-backed securities on its books, some of which were purchased at premiums, Mr. Timmons noted. "When the underlying mortgages on the securities are prepaid, not only does the bank lose a higher-yielding asset but it also has to write down the premium it paid above par."
Anchor did riot disclose the amount of excess premium amortization, but Mr. Timmons estimated that it might have been as much as $1 million in the third quarter.
For Anchor - or any other bank in a similar situation - the gush of prepayments should subside and the extra charges that the bank is taking should diminish if interest rates remain flat or rise slightly, the First Albany analyst said.
Benefits of Liquidity
Mr. Timmons said Allbank Financial illustrates another way that a savings banks could benefit from an uptick in international rates.
The $2.8 billion-asset Albany-based thrift, which went public in April 1992, has structured its balance sheet so it has a "ton of liquidity," said Mr. Timmons.
Allbank has the flexibility to redeploy its holdings if rates rise, he said. Further flexibility is offered by Allbank's mortgage portfolio. Of the single-family home loans outstanding, 75% carry adjustable rates.
"Allbank is selling for about 85% of tangible book value, compared with about 100% for the Northeast thrift universe I follow," Mr. Timmons said.
He rates both Anchor and Allbank as "buys."
Mr. Timmons estimated that Anchor will earn $1.65 a share for the fiscal year ended June 30, 1994, and $1.90 in fiscal 1995.
The bank earned $2.22 a share in fiscal 1993.
Anchor's stock currently is selling about 7.3 times estimated 1994 earnings, and both 1994 and 1995 estimates include amortization of goodwill, which penalizes earnings by about 25 cents a share, Mr. Timmons said.
"Anchor's management has turned the company around, and the restructuring is nearly complete," he said.
Buyer or Seller
He pointed out that in the current climate of consolidation the bank could either be a buyer or seller, which could benefit shareholders.
Mr. Timmons' target price for Anchor is in the high teens. The stock closed Tuesday at $12.375, up 25 cents.
Allbank should earn about $1.90 a share in 1994 and $2 in 1995, the analyst said. "The company has a lot of earnings potential because it still has excess capital from its IPO."
His 12-month target for the stock is in the mid-20s. Allbank closed Tuesday up 25 cents to $19.75.