It's not every day you find a bank that has a larger balance of short-term investments than market cap. Yes, you read that correctly, and it's why I've had my eye on Trustco Bank Corp (NASDAQ:TRST) and its $1.2 billion in short-term investments. This is greater than its $940 million market cap and does not include cash and equivalents.

Trustco is a small bank that focuses on making home loans, which it normally holds to maturity. This has worked very well for Trustco. Last year, Trustco had a return on equity of 26% and a return on assets of 2% (very good for a bank). It currently offers a dividend yield of 4.7%. To top it off, Trustco keeps a tight rein on costs, which can be seen in its efficiency ratio of 38%.

The large short-term investments balance is a recent anomaly caused by customers refinancing their mortgages. As customers have refinanced, Trustco received lump sums of cash instead of the constant stream of payments. As rates rise, it should allow Trustco to return to more normal lending terms.

Trustco operates in the fairly competitive New York capital region with Keycorp (NYSE:KEY), HSBC Holdings (NYSE:HBC), Bank of America (NYSE:BAC), and the largest branch presence in the region, First Niagara Financial Group (NASDAQ:FNFG), as competitors. The firm has thrived in this environment by offering great customer service and keeping a lid on costs.

As you might expect, all of this great performance hasn't gone unnoticed as Trustco trades at more than four times book value. Contrast that with Income Investor selection Amsouth Bancorp (NYSE:ASO), which is also a solid performer in all of the metrics above, but trades for a more reasonable 2.7 times book value.

Aside from valuation, investors will also want to pay attention to dividend increases and free cash flow at Trustco. The company suspended dividend increases during 2001 in order to fund an expansion outside of its home market and into downstate New York and Florida. Local newspaper coverage of the company's annual meeting reports that the expansion is going well and dividend increases should return in 2005.

In addition, the company pays out a large percentage of free cash flow as dividends. It is possible to have too much of a good thing, and last-year dividend payments were greater than free cash flow.

I'm intrigued by Trustco's solid metrics and expansion plans, but today's prices are too rich for this Fool. For now, I'll keep an eye on how things pan out and hope for a more attractive valuation.

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Fool contributor Nathan Parmelee owns none of the companies mentioned.