BUSINESS

Tompkins Financial Corporation ("Tompkins" or the "Company") is a registered financial holding company incorporated in 1995 under the laws of the State of New York and its common stock is listed on the NYSE-Amex (Symbol: TMP). Tompkins is headquartered at The Commons, Ithaca, New York. Tompkins is the corporate parent of three community banks: Tompkins Trust Company ("Trust Company"), The Bank of Castile and The Mahopac National Bank; an insurance agency, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"); and a fee-based financial planning and wealth management firm, AM&M Financial Services, Inc. ("AM&M"). Unless the context otherwise requires, the term "Company" refers collectively to Tompkins Financial Corporation and its subsidiaries.

The Company operates in two business segments, banking and financial services. Financial services activities include the results of the Company's trust, financial planning, wealth management and broker-dealer services, risk management, and insurance agency operations. All other activities are considered banking. Information about the Company's business segments is included in Note 11- "Segment and Related Information," in the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I of this Quarterly Report on Form 10-Q.

Banking services consist primarily of attracting deposits from the areas served by the Company's 45 banking offices and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases. Residential real estate mortgage loans are generally underwritten in accordance with Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, which enhance the liquidity of these lending products. The Company's subsidiary banks have sold residential mortgage loans to FHLMC over the past several years to manage exposure to changing interest rates and to take advantage of favorable market conditions. The Company's subsidiary banks retain the servicing of the loans sold to FHLMC and record a servicing asset at the time of sale. The Company's principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan and lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.

The Company provides property and casualty insurance services through Tompkins Insurance and life, long-term care and disability insurance through AM&M. Tompkins Insurance is headquartered in Batavia, New York, and offers property and casualty insurance to individuals and businesses primarily in Western New York. Over the past several years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company's banking subsidiaries. Tompkins Insurance offers services to customers of the Company's banking subsidiaries by sharing offices with The Bank of Castile and Trust Company. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, and two stand-alone offices in Tompkins County, New York.

AM&M is headquartered in Pittsford, New York and offers fee-based financial planning services through three operating companies: (1) AM&M Planners, Inc., which provides fee based financial planning and wealth management services for corporate executives, small business owners and high net worth individuals; (2) Ensemble Financial Services, Inc., an independent broker-dealer and leading outsourcing company for financial planners and investment advisors; and (3) Ensemble Risk Solutions, Inc., which creates customized risk management plans using life, disability and long-term care insurance products.

Competition for commercial banking and other financial services is strong in the Company's market area. Competition includes other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment companies, and other financial intermediaries. The Company differentiates itself from its competitors through its full complement of banking and related financial services, and through its community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized banking services. Banking and financial services are also highly regulated. As a financial holding company of three community banks, the Company is subject to examination and regulation by the Federal Reserve Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency, and the New York State Banking Department. Additionally, the Company is subject to examination and regulation from the New York State Insurance Department, the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

Other external factors affecting the Company's operating results are market rates of interest, the condition of financial markets, and both national and regional economic conditions. Economic conditions continue to be weak in the Company's market areas, as evidenced by higher unemployment rates and a slowdown in real estate sales. Unemployment rates for the third quarter of 2009 in the Company's markets are up significantly over the third quarter of 2008, but remain below state and national averages. During the third quarter of 2009, the Company experienced some deterioration in asset quality measures; however, asset quality measures continue to compare favorably to peer ratios. A continuation or worsening of the current economic situation may result in further declines in asset quality measures and increases in loan losses. Refer to the section captioned "Financial Condition- Allowance for Loan and Lease Losses and Nonperforming Assets" below for further details on asset quality.

During the second quarter of 2009, Tompkins issued $18.6 million aggregate liquidation amount of 7.0% cumulative trust preferred securities (the "Trust Preferred Securities"), through a newly-formed subsidiary, Tompkins Capital Trust I, a wholly-owned Delaware statutory trust ("Tompkins Capital Trust I"). The Trust Preferred Securities were offered and sold in reliance upon the exemption from registration provided by Rule 506 of Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). The proceeds from the issuance of the Trust Preferred Securities, together with Tompkins' capital contribution to the trust, were used to acquire Tompkins' Subordinated Debentures that are due concurrently with the Trust Preferred Securities. The net proceeds of the offering are being used to support business growth and for general corporate purposes. For further discussion of the Trust Preferred Securities, see "Financial Condition-Capital" below.

The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and nine months ended September 30, 2009. It should be read in conjunction with the Company's Audited Consolidated Financial Statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and the Unaudited Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

The Company is making this statement in order to satisfy the "Safe Harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed and/or implied by such forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the development of an interest rate environment that may adversely affect the Company's interest rate spread, other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, insurance companies, bank holding companies and/or financial holding companies; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; protection and validity of intellectual property rights; reliance on large customers; and financial resources in the amounts, at the times and on the terms required to support the Company's future businesses. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, including interest rate and currency exchange rate fluctuations, and other factors.

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company's consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company's results of operations and financial position.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to makes assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company's financial statements. Management considers the accounting policies relating to the allowance for loan and lease losses ("allowance"), pension and postretirement benefits and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company's results of operations.

For additional information on critical accounting policies and to gain a greater understanding of how the Company's financial performance is reported, refer to Note 1 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financials Statements to the Company's Audited Consolidated Financial Statements, and the section captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes in the Company's application of critical accounting policies since December 31, 2008. Refer to Note 3 - "Accounting Pronouncements" in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting guidelines.

OVERVIEW

Net income for the third quarter of 2009 was $8.5 million, an increase of 6.6% over $7.9 million for the third quarter of 2008. Diluted earnings per share of $0.86 for the third quarter of 2009 were up 6.2% over $0.81 for the third quarter of 2008. For the year to date period, net income was $23.6 million or $2.41 per diluted share in 2009, up from $22.6 million or $2.32 per diluted share in 2008. Diluted per share results for the first nine months of 2009 reflect an increase of 3.9% over the same period in 2008. For the year-to-date period, the growth rates over prior period were impacted by special events in the second quarter of 2009 and the first quarter of 2008. The second quarter of 2009 included a $1.4 million expense ($0.09 per diluted share) related to the FDIC's special deposit insurance assessment, while the first quarter of 2008 included nonrecurring pre-tax income of $1.6 million ($0.10 per diluted share) related to the Visa, Inc. initial public offering (the "Visa IPO"). Additionally, growth in average assets and average liabilities and growth in certain revenue and expense categories were impacted by the May 2008 acquisition of Sleepy Hollow Bancorp, Inc. ("Sleepy Hollow").

Return on average assets ("ROA") for the quarter ended September 30, 2009 was 1.12% compared to 1.17% for the quarter ended September 30, 2008. Return on average shareholders' equity ("ROE") for the third quarter of 2009 was 14.37%, compared to 15.10% for the same period in 2008. For the nine month period ended September 30, 2009, ROA was 1.06%, compared to 1.17% for the same period in 2008. ROE for the nine months ended September 30, 2009, was 13.79%, compared to 14.39% for the same period in 2008. As of June 30, 2009, the Company ranked in the 84th percentile for ROA and the 93rd percentile for ROE of its peer group.

Total revenues, consisting of net interest income and noninterest income, were $38.4 million in the third quarter of 2009 and $113.2 million for the first nine months of 2009, up 8.2% and 11.8% over the comparable periods in 2008. Both periods benefited from growth in net interest income. The Company's fee-based businesses continue to be impacted by weaknesses in the economy and financial markets, which has affected noninterest income levels compared to prior years.

The provision for loan and lease losses totaled $2.1 million and $6.5 million, respectively, in the third quarter and year to date period of 2009, compared to $1.5 million and $3.3 million for the same periods in 2008. An increase in net charge-offs, and nonperforming loans combined with weak general economic conditions all contributed to the higher provision expense.

Noninterest expenses were up 6.9% for the third quarter of 2009 and 11.4% for the first nine months of 2009 over the same periods in 2008. A large contributor to the increase in 2009 over the prior year was the increase in FDIC deposit insurance assessments as a result of higher deposit premiums in 2009, and a special deposit insurance assessment of $1.4 million in the second quarter of 2009. In addition, salaries and benefit related expenses, and occupancy expenses were up over the prior year.

Segment Reporting

The Company operates in two business segments, banking and financial services. Financial services activities consist of the results of the Company's trust, financial planning and wealth management, broker-dealer services, and risk management operations. All other activities are considered banking.

Banking Segment

The banking segment reported net income of $7.6 million for the third quarter of 2009, up $798,000 or 11.8% from net income of $6.8 million in 2008. For the year to date period, net income was $21.0 million, an increase of $1.5 million or 7.8% over the same period in 2008. The increase in net income in both the quarter and year to date period in 2009 over the same periods in the prior year was mainly the result of an increase in net interest income due to an improved net interest margin and growth in average earning assets as discussed in more detail below under "Net Interest Income". The Company's net interest margin has benefited from disciplined deposit pricing, which has resulted in funding costs decreasing more rapidly than asset yields. For the year-to-date period, the growth rate over the prior year period was impacted by special events in the second quarter of 2009 and the first quarter of 2008. The second quarter of 2009 included a $1.4 million expense related to the FDIC's special deposit assessment, while the first quarter of 2008 included nonrecurring pre-tax income of $1.6 million related to the Visa IPO. Year-over-year comparisons are also impacted by the acquisition of Sleepy Hollow in May 2008, which added $269.1 million of total assets and five staffed branch offices.

The provision for loan and lease losses for the three and nine months ended September 30, 2009, was $2.1 million and $6.5 million, compared to $1.5 million and $3.3 million for the same periods in 2008. An increase in net charge-offs and nonperforming assets, combined with weak general economic conditions all contributed to the higher provision expense.

Noninterest income for the three and nine months ended September 30, 2009, was up $279,000 or 5.5%, and down $1.3 million or 7.9%, respectively, over the same periods in 2008. The increase in the third quarter 2009 over the third quarter 2008 was mainly a result of increased card services income; gains on the sales of residential loans; net mark-to-market gains on trading securities and borrowings held at fair value, driven by favorable interest rate movements; and gains on the sales of available-for-sale securities. For the year-to-date period 2009, favorable variances compared to the same period prior year in gains on sales of residential loans and net mark-to-market gains on trading securities and liabilities held at fair value were more than offset by lower service charges on deposit accounts, mainly overdraft fees, lower earnings on corporate-owned life insurance, lower loan related fees, and a net other-than-temporary impairment loss. In addition, noninterest income for the first nine months of 2008 included $1.6 million of nonrecurring income related to the Visa IPO.

Noninterest expenses for the three and nine months ended September 30, 2009, were up $1.2 million or 7.0% and $6.9 million or 13.8%, respectively, over the same periods in 2008. The increase was mainly in FDIC insurance expense, salaries and other benefit related accruals, and occupancy expense. The increase in FDIC insurance expense was primarily due to higher FDIC deposit insurance assessments in 2009 over 2008, and a special deposit insurance assessment of $1.4 million in the second quarter of 2009.

Financial Services Segment

The financial services segment had net income of $893,000 in the third quarter of 2009, a decrease of $271,000 or 23.3% from net income of $1.2 million in the same quarter of the prior year. For the year to date period, net income was $2.6 million, a decrease of $464,000, or 15.0% over the same period in 2008. Noninterest income for the three and nine months ended September 30, 2008, was down $46,000 or 0.7% and $253,000, or 1.3%, respectively, over the same periods in 2008. The decrease in noninterest income was mainly a result of lower investment services fees. Investment services fees are largely based on the market value of assets within each account. Volatility in the equity and bond markets resulted in a decrease in the market value of assets and related investment fees. Noninterest expenses for the three and nine months ended September 30, 2009, were up $375,000 or 7.9% and $489,000 or 3.3%, respectively, over the same periods in the prior year. The increase was mainly in salary and wages, reflecting annual merit increases and other incentive compensation accruals, and other operating expenses.

Average Consolidated Balance Sheet and Net Interest Analysis


                                         Quarter Ended                     Year to Date Period Ended                Year to Date Period Ended
                                      September 30, 2009                       September 30, 2009                       September 30, 2008
                               Average                                 Average                                  Average
(Dollar amounts in             Balance                   Average       Balance                    Average       Balance                    Average
thousands)                      (QTD)      Interest    Yield/Rate       (YTD)       Interest    Yield/Rate       (YTD)       Interest    Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances
due from banks               $    11,181    $      3          0.11 %  $     9,730   $      15          0.21 %  $     6,876   $     124          2.41 %
Money market funds           $    24,572    $      7          0.11 %  $    19,447   $      35          0.24 %  $    11,073   $     224          2.70 %
Securities (1)
U.S. Government Securities       702,606       7,757          4.38 %      700,549      23,605          4.51 %      603,517      21,467          4.75 %
Trading Securities                34,131         342          3.98 %       35,851       1,049          3.91 %       45,112       1,517          4.49 %
State and municipal (2)          106,664       1,611          5.99 %      112,657       5,111          6.07 %      108,154       4,886          6.03 %
Other Securities (2)              40,880         540          5.24 %       41,470       1,413          4.56 %       39,226       1,842          6.27 %

Total securities                 884,281      10,250          4.60 %      890,527      31,178          4.68 %      796,009      29,712          4.99 %
Federal Funds Sold                 5,509           2          0.14 %        7,642          10          0.17 %        7,003         115          2.19 %
Loans, net of unearned
income (3)
Real Estate                    1,291,725      18,865          5.79 %    1,273,356      56,447          5.93 %    1,051,557      49,110          6.24 %
Commercial Loans (2)             474,795       6,423          5.37 %      460,777      18,756          5.44 %      416,496      22,057          7.07 %
Consumer Loans                    87,348       1,532          6.96 %       87,239       4,525          6.93 %       81,661       4,342          7.10 %
Direct Lease Financing            12,908         192          5.90 %       13,269         602          6.07 %       14,471         631          5.82 %

Total loans, net of
unearned income                1,866,776      27,012          5.74 %    1,834,641      80,330          5.85 %    1,564,185      76,140          6.50 %

Total interest-earning
assets                         2,792,319      37,274          5.30 %    2,761,987     111,568          5.40 %    2,385,146     106,315          5.95 %


Other assets                     207,642                                  205,370                                  187,394


Total assets                   2,999,961                                2,967,357                                2,572,540

LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market        1,103,365       2,059          0.74 %    1,106,931       6,632          0.80 %      889,022       9,993          1.50 %
Time Dep > $100,000              317,366       1,352          1.69 %      295,104       4,156          1.88 %      280,406       7,155          3.41 %
Time Dep < $100,000              416,617       2,208          2.10 %      419,254       7,151          2.28 %      370,460       9,566          3.45 %
Brokered Time Dep <
$100,000                          41,529         201          1.92 %       42,493         645          2.03 %        3,886         109          3.75 %

Total interest-bearing
deposits                       1,878,877       5,820          1.23 %    1,863,782      18,584          1.33 %    1,543,774      26,823          2.32 %

Federal funds purchased &
securities sold under
agreements to repurchase         192,116       1,560          3.22 %      188,403       4,690          3.33 %      204,104       5,760          3.77 %
Other borrowings                 195,134       2,051          4.17 %      207,496       6,229          4.01 %      180,691       5,987          4.43 %
Trust preferred debentures        23,017         347          5.98 %       15,260         725          6.35 %        2,103          93          5.91 %

Total interest-bearing
liabilities                    2,289,144       9,778          1.69 %    2,274,941      30,228          1.78 %    1,930,672      38,663          2.67 %

Noninterest bearing
deposits                         434,357                                  423,588                                  396,676
Accrued expenses and other
liabilities                       42,925                                   39,919                                   35,763

Total liabilities              2,766,426                                2,738,448                                2,363,111

Tompkins Financial
Corporation Shareholders'
equity                           232,001                                  227,408                                  205,632
Noncontrolling interest            1,534                                    1,501                                    3,797

Total equity                     233,535                                  228,909                                  209,429

Total liabilities and
equity                       $ 2,999,961                              $ 2,967,357                              $ 2,572,540

Interest rate spread                                          3.61 %                                   3.62 %                                   3.28 %

Net interest income/margin
on earning assets                             27,496          3.91 %                   81,340          3.94 %                   67,652          3.79 %

Tax Equivalent Adjustment                       (716 )                                 (2,201 )                                 (2,046 )

Net interest income per
. . .