On the surface, W Holding (NYSE:WHI), the bank holding company for Westernbank, could be a great bargain. While the Puerto Rican bank is struggling with lower earnings because of the flattened yield curve, the Federal Reserve's decisions about interest rates are clearly outside management's control.

Still, W Holding shares sell for about 10 times earnings per share, the bank's 33.7% efficiency ratio is one of the industry's best, and the balance sheet boasts the equivalent of $5.66 per share in cold, hard cash ... while the stock trades at $7.12. What we've got here is either a "back up the truck" value or a classic value trap that Shannon Zimmerman recently wrote about.

Going broke over brokered deposits?
The No. 1 issue concerning Westernbank is its heavy use of brokered deposits. As the following comparison of Westernbank with its top Puerto Rican competitor and two regional banks should clearly illustrate, you cannot invest in Westernbank's future without coming to terms with the financial impact of its reliance on brokered deposits.

Company Brokered Deposits
March 31, 2006		 % of Total Dep. March 31, 2006 Brok.
Dep. Sept. 30, 2005

% of Total Dep.
Sept. 30, 2005
Westernbank

$6,497M

73.3%

$5,502M

70.2%

Banco Popular (NASDAQ:BPOP)

$1,033M

4.4%

$1,290M

5.6%

New York Community Bancorp
 (NYSE:NYB)

$1,951M

15.5%

$217.6M

1.9%

BB&T
 (NYSE:BBT)

$3,656M

4.7%

$4,654M

6.1%
Source: Federal Deposit Insurance Corporation

The data may be dated a few months, but there is no reason to expect this month's numbers to look much different. First of all, let's explain brokered deposits for those who, like me when I invested in W Holding, are not familiar with them. Basically, a financial institution is employing the services of a broker to provide deposits, which could be a good practice since more deposits means that more loans can be made. However, last I checked, brokers don't work for free, so it's naturally more expensive to use brokered deposits in lieu of obtaining those deposits directly from your own clients. The company also indicates in its 10-Q that brokered deposits are highly sensitive to interest rates and can be an "unstable source of funding."

Competition for new deposits in Puerto Rico is very tough, and one could argue that management's strategy of aggressive loan portfolio growth requires drawing deposits through brokers. For what it's worth, lower delinquent and charged-off loans indicate that Westernbank is making good loans. However, return on assets fell below 1.0% last quarter while return on equity continued a downward trend. Meanwhile, other banks like BB&T, Washington Mutual (NYSE:WM), and U.S. Bancorp (NYSE:USB) sport healthier return on assets and rising returns on equity, even during the rising interest rate environment of the past two to three years.

I definitely cannot recommend buying W Holding since there are banks with far better fundamentals. Meanwhile, since I already own the shares, Selena Maranjian's recent article "When to Sell and Reap Gains" seems quite timely.

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Fool contributorJason Ramage looks forward to hearing your feedback. He owns shares of Westernbank Holding.The Fool has an ironclad disclosure policy.