Bank stocks, you may have noticed, weren’t exactly in favor in 2023. Which begs the question of why look at a bank at all? My answer is when a bank doesn’t act like a typical bank, but more like an asset allocator, which Westamerica Bancorporation (WABC) is exceptionally good at, highlights Kelley Wright, editor of Investment Quality Trends.

WABC does make loans, sort of. Loans only make up 15% of earning assets, however, and only to borrowers that have pristine credit and can borrow from anywhere they choose. WABC’s preference is to gather deposits that they outsource and diversify credit risk by investing in a portfolio of mortgage-backed, government-backed, municipal, corporate, and collateralized debt securities.

WABC has an almost next-to-nothing cost funding base (seriously, like 0.08%), as most of its deposits are from local businesses, and with about half of its deposit base comprised of non-interest-bearing deposits. These business operating accounts are harder-to-move accounts where customers do not really expect to earn much interest.

Due to its large securities portfolio, WABC will benefit as interest rates decline, which will add a growth component to its bottom line. Based on its historically repetitive dividend yield boundaries, WABC is Undervalued by IQ Trends standards.

The Return on Invested Capital is 18%, and the Free Cash Flow Yield is 5%. Trading recently in the $53 area, which is significantly below its Economic Book Value of $88 per share, along with a dividend yield of 3.31%, WABC is a high-quality option in a still beaten down sector that offers substantial upside potential.

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