Summary of TRUSTCO BANK CORP N Y

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company") during the three-month and nine-month periods ended September 30, 2009, with comparisons to 2008 as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2008 Annual Report to Shareholders should be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.

The third quarter of 2009 saw a mix of continued improvement in many financial markets, particularly in equities, but more subdued news in terms of underlying economic conditions. The sharp volatility in markets that had been occurring through much of 2008 and into the first quarter of 2009 was generally absent in the third quarter of 2009. While the pace of bank failures has remained significantly elevated in 2009, the focus has mostly been on smaller institutions, and have been more the result of capital and asset quality problems, rather than the liquidity issues that resulted in the failures and near-failures of some of the largest financial institutions in the world during the preceding quarters. The 2008 and early 2009 period saw unprecedented intervention by governments in markets and the financial services industry as the United States saw the two largest bank failures in its history in 2008 as well as failures of other major financial institutions, forced mergers and massive government bailouts. The United States Government responded to these events with legislation, including the Emergency Economic Stabilization Act of 2008, which authorized the Troubled Asset Relief Program ("TARP"), and the American Recovery and Reinvestment Act of 2009 ("ARRA") more commonly known as the economic stimulus or economic recovery package, which was intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, the Federal Reserve Bank ("FRB"), implemented a variety of major initiatives, including a sharp easing of monetary policy and direct intervention in a number of financial markets, and the Federal Deposit Insurance Corporation ("FDIC"), the Treasury Department and other bank regulatory agencies also instituted a wide variety of programs. The economic outlook for the balance of 2009 remains relatively weak. Although many economists expect stabilization and even improvement in 2010, major uncertainties remain.

TrustCo's long-term focus on traditional banking services has enabled the Company to avoid significant impact from asset quality problems and the Company's strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company has experienced an increase in nonperforming loans, although management believes the level remains readily manageable. To the extent that housing values continue to decline on a national basis, any housing lender is subject to some increase in the level of risk. While the Company does not see a significant increase in the inherent risk of loss in its loan portfolios at September 30, 2009, should general housing prices and other economic measures in the Company's market areas deteriorate, the Company may experience an increase in the level of risk and/or charge-offs in its loan portfolios.

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In addition, the natural flight to quality that occurs in financial crisis, cuts in targeted interest rates and liquidity injections by the Federal government have served to reduce yields available on both short term liquidity (federal funds and cash equivalents) as well as the low risk types of securities that the Company typically invests in. During the quarter, the slope of the yield curve was relatively positive, showing limited change compared to the second quarter. The future course of interest rates is subject to significant uncertainty, as various indicators are providing contradicting signals. The sheer volume of government financing that is expected in the coming quarters is likely to be a factor in the direction and level of rates.

Forward-looking Statements
Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, including the Risk Factors described in Item 1A of TrustCo's Annual Report on Form 10-K for the year ended December 31, 2008, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment and in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, (5) real estate and collateral values, and (6) changes in market area and general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Following this discussion is the table "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three-months and nine-months ended September 30, 2009 and 2008.

Overview
TrustCo recorded net income of $7.9 million, or $0.103 of diluted earnings per share for the three months ended September 30, 2009, as compared to net income of $9.0 million or $0.119 of diluted earnings per share in the same period in 2008. For the nine months ended September 30, 2009 TrustCo recorded net income of $19.6 million or $0.257 per share compared to $26.9 million of net income and $0.356 earnings per share in the first nine months of 2008.

The primary factors accounting for the year to date changes were:

· Increase in the average balance of interest earning assets of $120.7 million to $3.44 billion for the first nine months of 2009 compared to the same period in 2008,

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· Increase in the average balance of interest bearing liabilities of $113.4 million to $3.00 billion for the first nine months of 2009 as compared to 2008,

· Increase in net interest margin from 3.00% for the first nine months of 2008 to 3.20% for the nine months of 2009,

· Increase in the provision for loan losses from $2.0 million for the first nine months of 2008 to $7.9 million in the comparable period in 2009,

· Increase in noninterest income (excluding net gains on securities transactions and net trading (losses) / gains) from $13.1 million for the first nine months of 2008 to $13.7 million for the comparable period in 2009. Excluded from noninterest income were $439 thousand of net gains on securities transactions for the first nine months of 2008 compared to net gains of $962 thousand for the same period in 2009, and $229 thousand of net trading losses in the 2008 period compared to $350 thousand of net losses in the first nine months of 2009, and

· An increase of $13.9 million in noninterest expense for the first nine months of 2009 as compared to the first nine months of 2008, with $5.0 million of the increase due to higher FDIC insurance assessments.

Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits, funding a prudent mix of earning assets. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis.

TrustCo's results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and more generally in the national economy, financial market conditions and the regulatory environment. Each of these is dynamic and changes in any area can have an impact on TrustCo's results. Included in the Annual Report to Shareholders for the year ended December 31, 2008 is a description of the effect interest rates had on the results for the year 2008 compared to 2007. Many of the same market factors discussed in the 2008 Annual Report continued to have a significant impact on the year to date 2009 results.

TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations, and rates paid on deposits and charged on loans. The absolute level of interest rates, changes in rates and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.

Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to control national economic policy is the "Federal Funds" rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008, with the reductions occurring throughout the year. The target range has not been changed thus far in 2009. The effective, or actual Federal Funds rate was often below the targeted rate, particularly in the latter part of 2008. Traditionally interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate; however during 2008 highly competitive conditions in the banking industry resulted in rates on deposit accounts not declining in line with the Federal Funds rate. Continued low rates on US Treasuries and the failure of several significant competitors has led to an improvement in the rate environment thus far in 2009 in some areas, and the moderation of deposit rates experienced in the first half of 2009 generally continued in the third quarter of 2009 relative to prior periods. Please refer to the statistical disclosures in the table below entitled "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential."

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As noted previously, the yield on other financial instruments, including the 10 year Treasury bond rate did not change in-line with the Federal Funds rate. Despite the Federal Funds rate declining by approximately 400 basis points, the yield on the 10 year Treasury declined only 179 basis points, from 4.04% to 2.25% during 2008. In the third quarter of 2009, the 10 year Treasury rate generally trended up for the first half of the quarter and then downward through quarter-end. The yield peaked at 3.89% in early August and ended the period at 3.31%. There was significant rate volatility during the quarter. The rate on the 10 year treasury bond and other long-term interest rates has a significant influence on the rates for new residential real estate loans. The FRB is also attempting to influence rates on mortgage loans by other means, including direct intervention in the mortgage-backed securities market, through purchasing these securities in an attempt to raise prices and reduce yields. The FRB will eventually halt these purchases, which may contribute to higher rates. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short term instruments as well as on interest expense on deposits and borrowings. As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10 year treasury. The Federal Funds sold portfolio and other short term investments are affected primarily by changes in the Federal Funds target rate. Deposit interest rates are most affected by short term market interest rates. Also, changes in interest rates have an effect on the recorded balance of the trading portfolio and the securities available for sale portfolio, which are recorded at fair value. Generally, as interest rates increase the fair value of these securities will decrease. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. The principal loan product for TrustCo is residential real estate loans. Because TrustCo is a portfolio lender and does not generally sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Financial market volatility and the problems faced by the financial services industry have somewhat lessened the influence of the secondary market, however various programs initiated by arms of the Federal government have had an impact on rate levels for certain products. Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above.

The net effect of these interest rate changes is that the yields earned on both short term investments and longer term investments generally remain below historic norms. As noted, deposit costs have declined over the first nine months of 2009.

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While TrustCo has been affected somewhat by aspects of the overall changes in financial markets, it has not been directly affected in a significant way by the mortgage crisis effecting some banks and financial institutions in the United States. The crisis revolves around actual and anticipated higher levels of delinquencies and defaults on mortgage loans, in many cases arising from lenders with overly liberal underwriting standards, changes in the types of mortgage loans offered, significant upward resets on adjustable rate loans, fraud and other factors. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in portfolio there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo's loan portfolio and non-performing loans, please refer to the discussions under "Loans" and "Nonperforming Assets," respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a very significant level of liquidity on the asset side of the balance sheet.

For the third quarter of 2009, the net interest margin increased to 3.42% from 3.04% for the third quarter of 2008. The margin also improved relative to the 3.24% recorded in the second quarter of 2009. The quarterly results reflect the following significant factors:

- The average balance of federal funds sold and other short-term investments decreased by $234.9 million and the average yield decreased 57 basis points to 1.50% in the third quarter of 2009 compared to the same period in 2008. The decrease in yield on federal funds sold and other short-term investments is attributable to the decrease in the target federal funds rate. The decline in the average balance reflects the decision to reallocate into securities as a result of the low returns generally available on federal funds and short-term investments.

- The average balance of securities available for sale, held-to-maturity securities and trading securities increased by $266.8 million and the average yield decreased to 3.38% from 4.22% for the third quarter of 2009 compared to the same period in 2008. The increase in balances is primarily the result of a shift from federal funds, as noted.

- The average loan portfolio grew by $160.4 million to $2.20 billion and the average yield decreased 42 basis points to 5.66% in the third quarter of 2009 compared to the same period in 2008. The decline in the average yield reflects the decline in market interest rates on new loans and variable rate loans.

- The average balance of interest bearing liabilities (primarily deposit accounts) increased $184.1 million and the average rate paid decreased 88 basis points to 1.49% in the third quarter of 2009 compared to the same period in 2008. The decline in the rate paid on interest bearing liabilities reflects the decline in market interest rates and changes in competitive conditions.

During the third quarter of 2009 the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates as the rate environment changed. Management believes that the TrustCo residential real estate loan product is very competitive compared to local and national competitors. As noted, the widespread disruptions in the mortgage market have not had a significant impact on TrustCo, partly because the Company has not originated the types of loans that have been responsible for many of the problems causing the disruptions as well as the fact that housing prices in the Company's primary markets have not experienced the declines realized in other areas of the country. The withdrawal from the market of some of the troubled lenders that did focus on subprime and similar loans has slightly improved competitive conditions for the type of residential mortgage loans that TrustCo focuses on. As noted, the average balance of federal funds sold and other short-term investments decreased, reflecting a shift towards a larger held-to-maturity portfolio of investment securities, a larger available-for-sale portfolio and continued loan growth. More significant reductions in trading securities were also reflective of the shift towards a larger held-to-maturity portfolio.

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The strategy on the funding side of the balance sheet continues to be to attract deposit customers to the Company based upon a combination of service, convenience and interest rate. The Company offered attractive long-term deposit rates as part of a strategy to lengthen deposit lives. The decline in the federal funds rate and slightly lessened competitive conditions has led to lower deposit rates offered by most depository institutions, including TrustCo, during much of the quarter. However, the decline in deposit costs has lagged the decline in the Federal Funds target rate.

Earning Assets
Total average interest earning assets increased from $3.34 billion in the third quarter of 2008 to $3.53 billion in the same period of 2009 with an average yield of 5.11% in 2008 and 4.72% in 2009. Interest income on average earning assets declined from $42.6 million in the third quarter of 2008 to $41.7 in the third quarter of 2009, on a tax equivalent basis, as the decline in yields more than offset the growth in average earning assets.

Loans
The average balance of loans was $2.20 billion in the third quarter of 2009 and $2.04 billion in the comparable period in 2008. The yield on loans decreased 42basis points to 5.66%. The higher average balances slightly more than offset the lower yield, leading to an increase in the interest income on loans from $31.1 million in the third quarter of 2008 to $31.2 million in the third quarter of 2009.

Compared to the third quarter of 2008, the average balance of the loan portfolio during the third quarter of 2009 increased in residential and home equity loans, but declined in commercial and consumer loans. The average balance of residential mortgage loans was $1.65 billion in 2009 compared to $1.51 billion in 2008, an increase of 9.0%. The average yield on residential mortgage loans decreased by 21 basis points to 5.92% in the third quarter of 2009 compared to 2008.

TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on treasury securities, the federal funds rate and rates set by competitors and secondary market participants. As noted earlier, market interest rates have changed significantly as a result of national economic policy in the United States, as well as due to disruptions in the mortgage market. During this period of changing interest rates, TrustCo aggressively marketed the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include extremely low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan product will continue to attract customers in the residential mortgage loan area.

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Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $10.7 million to an average balance of $284.1 million in the third quarter of 2009 over the prior year. The average yield on this portfolio decreased 59 basis points to 5.94% over the same period. The decline in yield reflects the reduction in the federal funds rate and the associated reduction in the prime rate.

The average yield on home equity credit lines decreased 139 basis points to 3.60% during the third quarter of 2009 compared to 2008. The decline in yield was primarily the result of the decline in the underlying index rate in step with the decline in the fed funds rate as well as low initial rates for new lines. The average balances of home equity lines increased 15.7% to $268.4 million in the third quarter of 2009 as compared to the prior year.

Securities Available-for-Sale

The average balance of the securities available-for-sale portfolio for the third quarter of 2009 was $612.9 million compared to $546.5 million for the comparable period in 2008. The average yield was 3.70% for the third quarter of 2009 and 5.00% for the third quarter of 2008. This portfolio is primarily comprised of bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), municipal bonds, mortgage-backed securities and collateralized mortgage obligation bonds. These securities are recorded at fair value with any adjustment included in other comprehensive income.

Trading Securities
The average balance of trading securities for the third quarter of 2009 was $1.0 million, compared to $220.8 million in the comparable period of 2008. The decline in balances was due to maturities and calls of securities. The average yield on trading securities was 4.44% for the third quarter of 2009, compared to 2.57% for the comparable period in 2008. The sole remaining security held as trading securities is a short term municipal bond. The balance for this bond is recorded at fair value with any such adjustment recorded to the income statement. TrustCo does not own any equity securities of Fannie Mae or Freddie Mac in any of its portfolios.

Held-to-Maturity Securities
The average balance of held-to-maturity securities was $560.8 million for the third quarter of 2009 and the period-end balance was $552.1 million. At year-end 2008, the balance was $264.7 million. The average yield was 3.02% for the 2009 period compared to 3.77% for the year earlier period. TrustCo expects to hold the securities in this portfolio until they mature or are called.

The securities in this portfolio include bonds issued by government sponsored enterprises, mortgage-backed securities and corporate bonds. The balances for these bonds are recorded at amortized cost.

Securities Portfolios
The unrealized gain in the available-for-sale securities portfolios increased from $494 thousand at December 31, 2008 to $6.8 million as of September 30, 2009 primarily due to changes in interest rates.

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Federal Funds Sold and Other Short-term Investments The 2009 third quarter average balance of federal funds sold and other short-term investments was $149.4 million, a $234.9 million decline from the $384.3 million average for the same period in 2008. The portfolio yield decreased from 2.07% in 2008 to 1.50% in 2009. Changes in the yield resulted from changes in the target rate set by the Federal Reserve Board for federal funds sold. Interest income from this portfolio decreased by approximately $1.4 million from $2.0 million in 2008 to $0.6 million in 2009, due to both the decline in yield and the lower average balance.

The federal funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.

Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company's funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking and time deposit accounts.

Total average interest-bearing deposits (which includes interest-bearing checking, money market accounts, savings, and certificates of deposit) increased from $2.81 billion during the third quarter of 2008 to $2.99 billion in the third quarter of 2009, and the average rate paid decreased from 2.39% for 2008 to 1.48% for 2009. Total interest expense on these deposits decreased $5.7 million to $11.2 million in the third quarter of 2009 compared to the year earlier period.

Average short-term borrowings for the quarter were $104.5 million in 2009 compared to $100.1 million in 2008. The average rate decreased during this time period from 1.92% in 2008 to 1.60% in 2009. Rates on short-term borrowings tend to change with the Federal Funds rate.

Net Interest Income
Taxable equivalent net interest income increased by $4.8 million to $30.1 million in the third quarter of 2009 as compared to the same period in 2008. The net interest spread increased from 2.74% in the third quarter of 2008 to 3.23% in 2009. The net interest margin increased by 38 basis points to 3.42% for the third quarter of 2009.

Nonperforming Assets
Nonperforming assets include nonperforming loans, which are those loans in a nonaccrual status, loans that have been restructured in a troubled debt restructuring, and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real . . .