First, the raised hammer has more potential energy since it has the potential to go higher or lower. Second, when you hit the hammer on the table, the stored potential energy is converted to kinetic energy as the hammer is falling. (It's the falling hammer that has kinetic energy)
Explanation:
Another example-When rolling a ball down a ramp the ball at its highest point has potential energy but when it rolls down the ramp it converts to kinetic energy
