Tompkins Financial - 10-Q quarterly report FY2011 Q3

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______

Commission File Number 1-12709

Tompkins Financial Corporation

(Exact name of registrant as specified in its charter)

New York		16-1482357
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

The Commons, P.O. Box 460, Ithaca, NY		14851
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (607) 273-3210

Former name, former address, former fiscal year, if changed since last report: NA

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large Accelerated Filer o	Accelerated Filer x

	Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x.

Indicate the number of shares of the Registrant’s Common Stock outstanding as of the latest practicable date:

Class		Outstanding as of October 28, 2011
Common Stock, $0.10 par value		11,122,886 shares

TOMPKINS FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I -FINANCIAL INFORMATION

	Item 1 - Financial Statements (Unaudited)		PAGE

		Condensed Consolidated Statements of Condition as of	3
		September 30, 2011 and December 31, 2010

		Condensed Consolidated Statements of Income for
		the three and nine months ended September 30, 2011 and 2010	4

		Condensed Consolidated Statements of Cash Flows for the
		nine months ended September 30, 2011 and 2010	5

		Condensed Consolidated Statements of Changes in Shareholders’
		Equity for the nine months ended September 30, 2011 and 2010	6

		Notes to Unaudited Condensed Consolidated Financial Statements	7-33

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		33-51

	Item 3 - Quantitative and Qualitative Disclosures About Market Risk		51

	Item 4 - Controls and Procedures		52

PART II - OTHER INFORMATION

	Item 1 – Legal Proceedings		52

	Item 1A – Risk Factors		52

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		53

	Item 3 - Defaults Upon Senior Securities		53

	Item 4 -	(Removed and Reserved)	53

	Item 5 - Other Information		53

	Item 6 - Exhibits		54

SIGNATURES			55

EXHIBIT INDEX			56

TOMPKINS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION

(In thousands, except share and per share data) (Unaudited)	As of			As of
ASSETS	09/30/2011			12/31/2010

Cash and noninterest bearing balances due from banks	$	57,496		$	47,339
Interest bearing balances due from banks		51,173			2,226
Money market funds		100			100
Cash and Cash Equivalents		108,769			49,665

Trading securities, at fair value		20,432			22,837
Available-for-sale securities, at fair value		1,082,970			1,039,608
Held-to-maturity securities, fair value of $28,053 at September 30, 2011, and $56,064
at December 31, 2010		27,367			54,973
Loans and leases, net of unearned income and deferred costs and fees		1,951,598			1,910,358
Less: Allowance for loan and lease losses		27,878			27,832
Net Loans and Leases		1,923,720			1,882,526

Federal Home Loan Bank stock and Federal Reserve Bank stock		16,906			21,985
Bank premises and equipment, net		44,991			46,103
Corporate owned life insurance		42,656			40,024
Goodwill		43,958			41,649
Other intangible assets, net		4,318			4,207
Accrued interest and other assets		42,930			56,766
Total Assets	$	3,359,017		$	3,260,343

LIABILITIES
Deposits:
Interest bearing:
Checking, savings and money market		1,402,542			1,230,815
Time		702,716			741,829
Noninterest bearing		570,416			523,229
Total Deposits		2,675,674			2,495,873

Federal funds purchased and securities sold under agreements to repurchase		171,943			183,609
Other borrowings, including certain amounts at fair value of $12,117 at September 30, 2011
and $11,629 at December 31, 2010		138,001			244,193
Trust preferred debentures		25,063			25,060
Other liabilities		39,001			38,200
Total Liabilities	$	3,049,682		$	2,986,935

EQUITY
Tompkins Financial Corporation shareholders' equity:
Common Stock - par value $.10 per share: Authorized 25,000,000 shares; Issued:
11,158,796 at September 30, 2011; and 10,934,385 at December 31, 2010		1,116			1,093
Additional paid-in capital		206,010			198,114
Retained earnings		91,063			76,446
Accumulated other comprehensive income (loss)		12,097			(1,260	)
Treasury stock, at cost – 92,800 shares at September 30, 2011, and 92,025 shares
at December 31, 2010		(2,501	)		(2,437	)

Total Tompkins Financial Corporation Shareholders’ Equity		307,785			271,956
Noncontrolling interests		1,550			1,452
Total Equity	$	309,335		$	273,408
Total Liabilities and Equity	$	3,359,017		$	3,260,343

TOMPKINS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended						Nine Months Ended
(In thousands, except per share data) (Unaudited)	09/30/2011			09/30/2010			09/30/2011			09/30/2010
INTEREST AND DIVIDEND INCOME
Loans	$	26,134		$	26,675		$	77,718		$	80,044
Due from banks		1			5			10			27
Federal funds sold		1			5			6			14
Trading securities		213			255			668			843
Available-for-sale securities		7,524			8,215			23,110			26,009
Held-to-maturity securities		249			359			944			1,160
Federal Home Loan Bank stock and Federal Reserve Bank stock		212			230			719			731
Total Interest and Dividend Income		34,334			35,744			103,175			108,828
INTEREST EXPENSE
Time certificates of deposits of $100,000 or more		817			1,035			2,534			3,360
Other deposits		2,449			3,178			7,639			10,506
Federal funds purchased and securities sold under agreements to repurchase		1,204			1,336			3,743			4,069
Trust preferred debentures		405			407			1,197			1,210
Other borrowings		1,546			1,924			4,655			5,770
Total Interest Expense		6,421			7,880			19,768			24,915
Net Interest Income		27,913			27,864			83,407			83,913
Less: Provision for loan and lease losses		4,870			3,483			7,785			7,074
Net Interest Income After Provision for Loan and Lease Losses		23,043			24,381			75,622			76,839
NONINTEREST INCOME
Investment services income		3,425			3,423			11,090			10,764
Insurance commissions and fees		3,573			3,365			10,406			9,722
Service charges on deposit accounts		2,165			2,115			6,256			6,602
Card services income		1,271			1,105			3,785			3,147
Mark-to-market gain on trading securities		55			177			170			558
Mark-to-market loss on liabilities held at fair value		(461	)		(323	)		(488	)		(940	)
Other income		1,998			1,401			5,217			3,887
Net other-than-temporary impairment losses1		0			(34	)		0			(34	)
Net gain (loss) on securities transactions		286			(2	)		381			173
Total Noninterest Income		12,312			11,227			36,817			33,879
NONINTEREST EXPENSES
Salaries and wages		11,190			10,611			33,225			31,618
Pension and other employee benefits		3,374			3,616			11,063			10,970
Net occupancy expense of premises		1,721			1,820			5,321			5,427
Furniture and fixture expense		1,088			986			3,325			3,312
FDIC insurance		475			978			2,057			2,747
Amortization of intangible assets		137			186			453			586
Other operating expense		5,988			6,655			18,908			19,202
Total Noninterest Expenses		23,973			24,852			74,352			73,862
Income Before Income Tax Expense		11,382			10,756			38,087			36,856
Income Tax Expense		3,490			3,233			11,956			11,818
Net Income attributable to Noncontrolling Interests and Tompkins Financial Corporation		7,892			7,523			26,131			25,038
Less: Net income attributable to noncontrolling interests		33			33			98			98
Net Income Attributable to Tompkins Financial Corporation	$	7,859		$	7,490		$	26,033		$	24,940
Basic Earnings Per Share	$	0.71		$	0.69		$	2.37		$	2.31
Diluted Earnings Per Share	$	0.71		$	0.69		$	2.36		$	2.30

1 During the three and nine months ended September 30, 2010, net other-than-temporary impairment ("OTTI") on securities available-for-sale totaling $385,000 in unrealized gains, and $872,000 in unrealized gains, respectively, were recognized, which included $351,000 and $838,000, respectively, in unrealized gains, recognized in accumulated other comprehensive income (AOCI), net of tax and $34,000 of OTTI losses recognized in earnings.
See accompanying notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	09/30/2011			09/30/2010
OPERATING ACTIVITIES
Net income attributable to Tompkins Financial Corporation	$	26,033		$	24,940
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		7,785			7,074
Depreciation and amortization of premises, equipment, and software		3,553			3,484
Amortization of intangible assets		453			586
Earnings from corporate owned life insurance		(1,118	)		(1,025	)
Net amortization on securities		6,446			2,946
Other than temporary impairment loss		0			34
Mark-to-market gain on trading securities		(170	)		(558	)
Mark-to-market loss on liabilities held at fair value		488			940
Net gain on available-for-sale securities		(381	)		(173	)
Net gain on sale of loans		(378	)		(685	)
Proceeds from sale of loans		20,727			31,501
Loans originated for sale		(19,693	)		(30,376	)
Net gain on sale of bank premises and equipment		(8	)		(39	)
Stock-based compensation expense		998			850
(Increase) decrease in accrued interest receivable		(1,204	)		940
Decrease in accrued interest payable		(417	)		(608	)
Proceeds from maturities and payments of trading securities		2,530			7,767
Contribution to pension plan		(2,750	)		0
Other, net		10,600			7,242
Net Cash Provided by Operating Activities		53,494			54,840
INVESTING ACTIVITIES
Proceeds from maturities, calls and principal paydowns of available-for-sale securities		274,728			273,384
Proceeds from sales of available-for-sale securities		59,927			13,959
Proceeds from maturities, calls and principal paydowns of held-to-maturity securities		33,379			15,496
Proceeds from sales of held-to-maturity securities		0			382
Purchases of available-for-sale securities		(362,934	)		(329,699	)
Purchases of held-to-maturity securities		(5,763	)		(14,169	)
Net increase in loans		(49,635	)		(2,426	)
Net decrease in Federal Home Loan Bank stock and Federal Reserve Bank stock		5,079			711
Proceeds from sale of bank premises and equipment		48			48
Purchases of bank premises and equipment		(2,607	)		(2,652	)
Net cash used in acquisitions		(243	)		0
Other, net		(726	)		(2,026	)
Net Cash Used in Investing Activities		(48,747	)		(46,992	)
FINANCING ACTIVITIES
Net increase in demand, money market, and savings deposits		218,915			112,364
Net decrease in time deposits		(39,114	)		(23,700	)
Net decrease in Federal funds purchases and securities sold under agreements to repurchase		(11,666	)		(1,334	)
Increase in other borrowings		45,880			0
Repayment of other borrowings		(152,560	)		(26,980	)
Cash dividends		(11,416	)		(10,682	)
Cash paid in lieu of fractional shares - 10% stock dividend		0			(7	)
Shares issued for dividend reinvestment plan		2,435			2,088
Shares issued for employee stock ownership plan		1,053			1,278
Net proceeds from exercise of stock options		837			1,548
Tax benefit from stock option exercises		(7	)		212
Net Cash Provided by Financing Activities		54,357			54,787
Net Increase in Cash and Cash Equivalents		59,104			62,635
Cash and cash equivalents at beginning of period		49,665			45,462
Total Cash & Cash Equivalents at End of Period		108,769			108,097
Supplemental Information:
Cash paid during the year for - Interest	$	20,185		$	25,523
Cash paid during the year for - Taxes		8,123			15,078
Transfer of loans to other real estate owned		457			1,845
Non-cash investing and financing activities:
Fair value of non-cash assets other than goodwill acquired in purchase acquisitions		64			0
Fair value of liabilities assumed in purchase acquisition		31			0
Goodwill related to acquisition		2,309			0
Fair value of shares issued for acquisition		2,535			0
See accompanying notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
			Additional Paid-in Capital					Accumulated Other Comprehensive (Loss) Income						Non-controlling Interests
	Common				Retained						Treasury
(in thousands except share and per share data)	Stock				Earnings						Stock					Total
Balances at January 1, 2010	$	978	$	155,589	$	92,402		$	(3,087	)	$	(2,326	)	$	1,452	$	245,008
Net income attributable to noncontrolling
interests and Tompkins Financial Corporation						24,940									98		25,038
Other comprehensive income									11,162								11,162
Total Comprehensive Income																	36,200
Cash dividends ($0.99 per share)						(10,682	)										(10,682	)
Exercise of stock options and
related tax benefit (62,638 shares, net)		6		1,754													1,760
Effect of 10% stock dividend (988,664 shares)1		98		35,301		(35,399	)										0
Cash paid in lieu of fractional shares						(7	)										(7	)
Stock-based compensation expense				850													850
Shares issued for dividend reinvestment plan
(51,734 shares)		5		2,083													2,088
Shares issued for employee stock ownership plan
(34,436 shares)		4		1,274													1,278
Directors deferred compensation plan
(812 shares)				47								(47	)				0
Forfeiture of restricted shares (330 shares)
Balances at September 30, 2010	$	1,091	$	196,898	$	71,254		$	8,075		$	(2,373	)	$	1,550	$	276,495

Balances at January 1, 2011	$	1,093	$	198,114	$	76,446		$	(1,260	)	$	(2,437	)	$	1,452	$	273,408
Net income attributable to noncontrolling
interests and Tompkins Financial Corporation						26,033									98		26,131
Other comprehensive income									13,357								13,357
Total Comprehensive Income																	39,488
Cash dividends ($1.04 per share)						(11,416	)										(11,416	)
Exercise of stock options and
related tax benefit (25,757 shares, net)		2		828													830
Stock-based compensation expense				998													998
Shares issued for dividend reinvestment plan
(61,262 shares)		6		2,429													2,435
Shares issued for employee stock ownership plan
(25,139 shares)		3		1,050													1,053
Directors deferred compensation plan
(775 shares)				64								(64	)				0
Net shares issued related to restricted stock
awards (37,725 shares)		4															4
Stock issued for purchase acquisition (75,188 shares)		8		2,527													2,535
Forfeiture of restricted shares (660 shares)
Balances at September 30, 2011	$	1,116	$	206,010	$	91,063		$	12,097		$	(2,501	)	$	1,550	$	309,335
1 Included in the shares issued for the 10% stock dividend in 2010 were treasury shares of 3,264, and director deferred compensation plan shares of 4,620.

Cash dividends per share have been retroactively adjusted to reflect 10% stock dividend paid on February 15, 2010.

See notes to consolidated financial statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Business

Tompkins Financial Corporation, (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, insurance, and brokerage services. The Company’s subsidiaries include: three wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile, The Mahopac National Bank (“Mahopac National Bank”) and AM&M Financial Services, Inc., a wholly owned registered investment advisor (“AM&M”); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). AM&M and the trust division of the Trust Company provide a full array of investment services under the Tompkins Financial Advisors division, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at The Commons, Ithaca, New York, 14851, and its telephone number is (607) 273-3210. The Company’s common stock is traded on the NYSE-Amex under the Symbol “TMP.”

2. Basis of Presentation

The unaudited condensed consolidated financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. In the application of certain accounting policies management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited condensed consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for loan and lease losses, the expenses and liabilities associated with the Company’s pension and post-retirement benefits, and the review of its securities portfolio for other than temporary impairment.

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2011. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes to the Company’s accounting policies from those presented in the 2010 Annual Report on Form 10-K. Refer to Note 3- “Accounting Standards Updates” of this Report for a discussion of recently issued accounting guidelines.

Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.

The Company has evaluated subsequent events for potential recognition and/or disclosure and determined that no further disclosures were required.

The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited condensed consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. All significant intercompany balances and transactions are eliminated in consolidation.

3. Accounting Standards Updates

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011, and are disclosed in Note 5 “Loans and Leases”.

ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of whether a Restructuring Is a Troubled Debt Restructuring”. ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company on July 1, 2011, and did not have a significant impact on the Company’s financial statements.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles-Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

4. Securities

Available-for-Sale Securities
The following table summarizes available-for-sale securities held by the Company at September 30, 2011:
	Available-for-Sale Securities
September 30, 2011	Amortized Cost1		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
(in thousands)
U.S. Treasury securities	$	2,026	$	62	$	0	$	2,088
Obligations of U.S. Government sponsored entities		350,220		14,488		21		364,687
Obligations of U.S. states and political subdivisions		56,046		2,781		13		58,814
Mortgage-backed securities – residential, issued by
U.S. Government agencies		131,668		6,386		0		138,054
U.S. Government sponsored entities		486,387		20,218		0		506,605
Non-U.S. Government agencies or sponsored entities		7,002		0		510		6,492
U.S. corporate debt securities		5,019		189		0		5,208
Total debt securities		1,038,368		44,124		544		1,081,948
Equity securities		1,022		0		0		1,022
Total available-for-sale securities	$	1,039,390	$	44,124	$	544	$	1,082,970
1 Net of other-than-temporary impairment losses recognized in earnings.

The following table summarizes available-for-sale securities held by the Company at December 31, 2010:
	Available-for-Sale Securities
December 31, 2010	Amortized Cost1		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
(in thousands)
U.S. Treasury securities	$	2,043	$	86	$	0	$	2,129
Obligations of U.S. Government sponsored entities		402,057		7,372		1,989		407,440
Obligations of U.S. states and political subdivisions		60,707		2,339		9		63,037
Mortgage-backed securities – residential, issued by
U.S. Government agencies		143,319		3,233		539		146,013
U.S. Government sponsored entities		393,331		13,568		1,421		405,478
Non-U.S. Government agencies or sponsored entities		9,636		3		356		9,283
U.S. corporate debt securities		5,024		179		0		5,203
Total debt securities		1,016,117		26,780		4,314		1,038,583
Equity securities		1,025		0		0		1,025
Total available-for-sale securities	$	1,017,142	$	26,780	$	4,314	$	1,039,608
1 Net of other-than-temporary impairment losses recognized in earnings.

Held-to-Maturity Securities
The following table summarizes held-to-maturity securities held by the Company at September 30, 2011:

September 30, 2011	Held-to-Maturity Securities
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. states and political subdivisions	$	27,367	$	686	$	0	$	28,053
Total held-to-maturity debt securities	$	27,367	$	686	$	0	$	28,053

The following table summarizes held-to-maturity securities held by the Company at December 31, 2010:

December 31, 2010	Held-to-Maturity Securities
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. states and political subdivisions	$	54,973	$	1,155	$	64	$	56,064
Total held-to-maturity debt securities	$	54,973	$	1,155	$	64	$	56,064

Realized gains on available-for-sale securities were $286,000 and $495,000 in the third quarter and nine months ending September 30, 2011, respectively, and $1,000 and $176,000 in the same periods of 2010; realized losses on available-for-sale securities were $0 and $114,000 in the third quarter and nine months ending September 30, 2011, respectively, and $1,000 and $0 in the same time periods of 2010.

Realized losses on held-to-maturity securities were $2,000 in the third quarter and the first nine months of 2010. The Company sold $382,000 of municipal securities that were downgraded by a rating agency. There were no sales of held-to-maturity securities in 2011.

The following table summarizes available-for-sale securities that had unrealized losses at September 30, 2011:

	Less than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government sponsored
entities	$	7,155	$	21	$	0	$	0	$	7,155	$	21
Obligations of U.S. states and political
subdivisions		1,138		13		0		0		1,138		13

Mortgage-backed securities – residential,
issued by
Non-U.S. Government agencies or
sponsored entities		2,302		184		4,190		326		6,492		510
Total available-for-sale securities	$	10,595	$	218	$	4,190	$	326	$	14,785	$	544

As of September 30, 2011, there were no held-to-maturity securities with unrealized losses.

The following table summarizes available-for-sale securities that had unrealized losses at December 31, 2010:

	Less than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government sponsored
entities	$	93,167	$	1,989	$	0	$	0	$	93,167	$	1,989
Obligations of U.S. states and political
subdivisions		1,771		9		0		0		1,771		9

Mortgage-backed securities – residential,
issued by
U.S. Government agencies		44,288		539		0		0		44,288		539
U.S. Government sponsored entities		119,102		1,421		0		0		119,102		1,421
Non-U.S. Government agencies or
sponsored entities		0		0		8,343		356		8,343		356
Total available-for-sale securities	$	258,328	$	3,958	$	8,343	$	356	$	266,671	$	4,314

The following table summarizes held-to-maturity securities that had unrealized losses at December 31, 2010:

	Less than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. states and political
subdivisons	$	14,947	$	63	$	14	$	1	$	14,961	$	64

Total held-to-maturity securities	$	14,947	$	63	$	14	$	1	$	14,961	$	64

The gross unrealized losses reported at September 30, 2011 and December 31, 2010 for mortgage-backed securities-residential relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association, and non U.S. Government agencies or sponsored entities. Total gross unrealized losses were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and generally not due to the credit quality of the investment securities.

The Company does not intend to sell the securities that are in an unrealized loss position and it is not more-likely-than not that the Company will be required to sell these available-for-sale investment securities, before recovery of their amortized cost basis, which may be at maturity. Accordingly, as of September 30, 2011, and December 31, 2010, management believes the unrealized losses detailed in the tables above are not other-than-temporary.

Ongoing Assessment of Other-Than-Temporary Impairment

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, the Company then assesses whether the unrealized loss is other-than-temporary. An unrealized loss on a debt security is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value, discounted at the security’s effective rate, of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that the Company does not intend to sell the underlying debt security and it is more-likely-than not that the Company would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Company intended to sell any securities with an unrealized loss or it is more-likely-than not that the Company would be required to sell the investment securities, before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings.

The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover.

-	The length of time and the extent to which the fair value has been less than the amortized cost basis;

-	The level of credit enhancement provided by the structure which includes, but is not limited to, credit subordination positions, excess spreads, overcollateralization, and protective triggers;

-	Changes in the near term prospects of the issuer or underlying collateral of a security, such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

-	The level of excess cash flow generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

-	Any adverse change to the credit conditions of the issuer or the security such as credit downgrades by the rating agencies.

was recognized in other comprehensive income in the consolidated statements of condition and changes in shareholders’ equity. In 2010, the Company recorded an additional credit loss component of other-than-temporary charge of $34,000. The Company’s review of these securities as of September 30, 2011 determined that no additional impairment charges were necessary. As of September 30, 2011, the carrying value of these securities exceeded their fair value by $510,000. A continuation or worsening of current economic conditions may result in additional credit loss component of other-than-temporary impairment losses related to these investments.

The following table summarizes the roll-forward of credit losses on debt securities held by the Company for which a portion of an other-than-temporary impairment is recognized in other comprehensive income:

	Three Months Ended				Nine Months Ended
(in thousands)	09/30/2011		09/30/2010		09/30/2011		09/30/2010
Credit losses at beginning of the period	$	180	$	146	$	180	$	146
Credit losses related to securities for which an other-than-temporary impairment was not
previously recognized		0		0		0		0
Credit losses related to securities for which an
other-than-temporary impairment was previously
recognized		0		34		0		34
Ending balance of credit losses on debt securities held for which a portion of an other-than-temporary impairment was recognized in other comprehensive income	$	180	$	180	$	180	$	180

The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

September 30, 2011
(in thousands)	Amortized Cost1		Fair Value
Available-for-sale securities:
Due in one year or less	$	8,224	$	8,316
Due after one year through five years		239,891		251,531
Due after five years through ten years		155,764		161,264
Due after ten years		9,432		9,686
Total		413,311		430,797
Mortgage-backed securities		625,057		651,151
Total available-for-sale debt securities	$	1,038,368	$	1,081,948
1 Net of other-than-temporary impairment losses recognized in earnings.

December 31, 2010
(in thousands)	Amortized Cost1		Fair Value
Available-for-sale securities:
Due in one year or less	$	7,770	$	7,867
Due after one year through five years		309,193		312,952
Due after five years through ten years		143,682		147,546
Due after ten years		9,186		9,444
Total		469,831		477,809
Mortgage-backed securities		546,286		560,774
Total available-for-sale debt securities	$	1,016,117	$	1,038,583
1 Net of other-than-temporary impairment losses recognized in earnings.

September 30, 2011
(in thousands)	Amortized Cost		Fair Value
Held-to-maturity securities:
Due in one year or less	$	11,586	$	11,628
Due after one year through five years		11,309		11,798
Due after five years through ten years		3,451		3,606
Due after ten years		1,021		1,021
Total held-to-maturity debt securities	$	27,367	$	28,053


December 31, 2010
(in thousands)	Amortized Cost		Fair Value
Held-to-maturity securities:
Due in one year or less	$	34,645	$	34,692
Due after one year through five years		15,378		16,157
Due after five years through ten years		3,765		4,024
Due after ten years		1,185		1,191
Total held-to-maturity debt securities	$	54,973	$	56,064

The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock and non-marketable Federal Reserve Bank (“FRB”) stock, both of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLBNY stock is tied to the Company’s borrowing levels with the FHLBNY. Holdings of FHBLNY stock and FRB stock totaled $14.8 million and $2.1 million at September 30, 2011, respectively, and $19.9 million and $2.1 million at December 31, 2010, respectively. The FHLBNY continues to pay dividends and repurchase its stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY stock.

Trading Securities
The following summarizes trading securities, at estimated fair value, as of:
(in thousands)	09/30/2011		12/31/2010

Obligations of U.S. Government sponsored entities	$	12,912	$	13,139
Mortgage-backed securities – residential, issued by
U.S. Government sponsored entities		7,520		9,698
Total	$	20,432	$	22,837

The net gain on trading account securities, which reflects mark-to-market adjustments, totaled $55,000 and $170,000 for the three and nine months ended September 30, 2011, respectively, and $177,000 and $558,000 for the three and nine months ended September 30, 2010, respectively.

5. Loans and Leases
Loans and Leases at September 30, 2011, and December 31, 2010 were as follows:
(in thousands)	09/30/2011			12/31/2010
Commercial and industrial
Agriculture	$	48,557		$	65,918
Commercial and industrial other		416,484			409,432
Subtotal commercial and industrial		465,041			475,350
Commercial real estate
Construction		45,010			58,519
Agriculture		52,785			48,485
Commercial real estate other		669,411			619,458
Subtotal commercial real estate		767,206			726,462
Residential real estate
Home equity		161,710			164,765
Mortgages		485,212			462,032
Subtotal residential real estate		646,922			626,797
Consumer and other
Indirect		34,783			41,668
Consumer and other		31,617			31,757
Subtotal consumer and other		66,400			73,425
Leases		7,244			9,949
Total loans and leases		1,952,813			1,911,983
Less: unearned income and deferred costs and fees		(1,215	)		(1,625	)
Total loans and leases, net of unearned income and deferred costs and fees	$	1,951,598		$	1,910,358

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 5 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes in these policies and guidelines. As such, these policies are reflective of new originations as well as those balances held at September 30, 2011. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deem the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.

An age analysis of past due loans, segregated by class of loans, as of September 30, 2011 is provided below.
	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
(in thousands)	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
Commercial and industrial
Agriculture	$	39	$	0	$	48,518	$	48,557		$	0	$	144
Commercial and industrial other		816		626		415,042		416,484			0		8,999
Subtotal commercial and industrial		855		626		463,560		465,041			0		9,143
Commercial real estate
Construction		7		7,827		37,176		45,010			0		7,924
Agriculture		186		207		52,392		52,785			0		382
Commercial real estate other		4,194		5,280		659,937		669,411			0		14,465
Subtotal commercial real estate		4,387		13,314		749,505		767,206			0		22,771
Residential real estate
Home equity		262		1,242		160,206		161,710			379		1,236
Mortgages		3,551		6,573		475,088		485,212			0		7,004
Subtotal residential real estate		3,813		7,815		635,294		646,922			379		8,240
Consumer and other
Indirect		84		231		34,468		34,783			0		14
Consumer and other		762				30,855		31,617			0		240
Subtotal consumer and other		846		231		65,323		66,400			0		254
Leases		15		0		7,229		7,244			0		11
Total loans and leases		9,916		21,986		1,920,911		1,952,813			379		40,419
Less: unearned income and
deferred costs and fees		0		0		0		(1,215	)		0		0
Total loans and leases, net of
unearned income and deferred costs and fees	$	9,916	$	21,986	$	1,920,911	$	1,951,598		$	379	$	40,419

An age analysis of past due loans, segregated by class of loans, as of December 31, 2010 is provided below.
	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
(in thousands)	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
Commercial and industrial
Agriculture		50		118		65,750		65,918			0		165
Commercial and industrial other		3,131		1,443		404,858		409,432			842		7,106
Subtotal commercial and industrial		3,181		1,561		470,608		475,350			842		7,271
Commercial real estate
Construction		8		176		58,335		58,519			0		13,003
Agriculture		189		0		48,296		48,485			0		0
Commercial real estate other		1,943		4,094		613,421		619,458			0		11,788
Subtotal commercial real estate		2,140		4,270		720,052		726,462			0		24,791
Residential real estate
Home equity		262		1,434		163,069		164,765			368		1,429
Mortgages		4,709		6,257		451,066		462,032			0		7,682
Subtotal residential real estate		4,971		7,691		614,135		626,797			368		9,111
Consumer and other
Indirect		926		311		40,431		41,668			7		309
Consumer and other		0		0		31,757		31,757			0		0
Subtotal consumer and other		926		311		72,188		73,425			7		309
Leases		0		0		9,949		9,949			0		19
Total loans and leases		11,218		13,833		1,886,932		1,911,983			1,217		41,501
Less: unearned income and
deferred costs and fees		0		0		0		(1,625	)		0		0
Total loans and leases, net of
unearned income and deferred costs and fees	$	11,218	$	13,833	$	1,886,932	$	1,910,358		$	1,217	$	41,501

The principal balances of nonperforming loans and leases, including impaired loans and leases are detailed in the table below.

(in thousands)	09/30/2011		12/31/2010
Loans 90 days past due and accruing	$	379	$	1,217
Nonaccrual loans		40,419		41,501
Troubled debt restructurings not included above		441		2,564
Nonperforming loans and leases	$	41,239	$	45,282

6. Allowance for Loan and Lease Losses

Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues and allowance allocations are calculated in accordance with ASC Topic 310, Receivables and ASC Topic 450, Contingencies.

The Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming loans, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a regular basis.

At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”, “doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon customer’s expected future cash flow, operating results, and financial condition; the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors.

At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated special mention or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or present value of expected future cash flows discounted at the original effective interest rate of each loan. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance. In determining and assigning historical loss factors to the various homogeneous portfolios, the Company calculates average net losses over a period of time and compares this average to current levels and trends to ensure that the calculated average loss factor is reasonable.

Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. While management’s evaluation of the allowance as of September 30, 2011, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase the allowance.

The following tables detail activity in the allowance for loan and lease losses by portfolio segment for the three and nine months ended September 30, 2011 and 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Three months ended September 30, 2011
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases			Total
Allowance for credit losses:

Beginning balance	$	7,840		$	14,444		$	4,425		$	1,605		$	47		$	28,361

Charge-offs		(2	)		(5,014	)		(308	)		(168	)		0			(5,492	)
Recoveries		14			52			1			72			0			139
Provision		717			4,371			(109	)		(101	)		(8	)		4,870
Ending Balance	$	8,569		$	13,853		$	4,009		$	1,408		$	39		$	27,878

Three months ended September 30, 2010
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases			Total
Allowance for credit losses:

Beginning balance	$	7,277		$	13,459		$	3,507		$	2,215		$	72		$	26,530

Charge-offs		(1,255	)		(25	)		(70	)		(176	)		0			(1,526	)
Recoveries		39			15			52			91			0			197
Provision		1,872			1,459			100			58			(6	)		3,483
Ending Balance	$	7,933		$	14,908		$	3,589		$	2,188		$	66		$	28,684

Nine months ended September 30, 2011
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases			Total
Allowance for credit losses:

Beginning balance	$	7,824		$	14,445		$	3,526		$	1,976		$	61		$	27,832

Charge-offs		(1,259	)		(5,383	)		(1,503	)		(436	)		0			(8,581	)
Recoveries		407			157			33			245			0			842
Provision		1,597			4,634			1,953			(377	)		(22	)		7,785
Ending Balance	$	8,569		$	13,853		$	4,009		$	1,408		$	39		$	27,878

Nine months ended September 30, 2010
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases			Total
Allowance for credit losses:

Beginning balance	$	7,304		$	11,119		$	3,616		$	2,230		$	81		$	24,350

Charge-offs		(2,245	)		(347	)		(432	)		(709	)		0			(3,733	)
Recoveries		417			214			85			277			0			993
Provision		2,457			3,922			320			390			(15	)		7,074
Ending Balance	$	7,933		$	14,908		$	3,589		$	2,188		$	66		$	28,684

At September 30, 2011 and December 31, 2010, the allocation of the allowance for loan and lease losses summarized on the basis of the Company's impairment methodology was as follows:

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total

September 30, 2011
Individually evaluated for
impairment	$	2,338	$	509	$	0	$	0	$	0	$	2,847
Collectively evaluated for
impairment		6,231		13,344		4,009		1,408		39		25,031
Ending balance	$	8,569	$	13,853	$	4,009	$	1,408	$	39	$	27,878

December 31, 2010
Individually evaluated for
impairment	$	682	$	2,554	$	0	$	0	$	0	$	3,236
Collectively evaluated for
impairment		7,142		11,891		3,526		1,976		61		24,596
Ending balance	$	7,824	$	14,445	$	3,526	$	1,976	$	61	$	27,832

The recorded investment in loans and leases summarized on the basis of the Company's impairment methodology as of September 30, 2011 and December 31, 2010 was as follows:


(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total

September 30, 2011
Individually evaluated for
impairment	$	8,387	$	21,184	$	0	$	0	$	0	$	29,571
Collectively evaluated for
impairment		456,654		746,022		646,922		66,400		7,244		1,923,242
Total	$	465,041	$	767,206	$	646,922	$	66,400	$	7,244	$	1,952,813

December 31, 2010
Individually evaluated for
impairment	$	5,617	$	29,622	$	0	$	0	$	0	$	35,239
Collectively evaluated for
impairment		469,733		696,840		626,797		73,425		9,949		1,876,744
Total	$	475,350	$	726,462	$	626,797	$	73,425	$	9,949	$	1,911,983

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The majority of impaired loans are collateral dependant impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.

Impaired loans are set forth in the tables below as of September 30, 2011 and December 31, 2010.

September 30, 2011
(in thousands)	Recorded Investment			Unpaid Principal Balance		Related Allowance		Average Recorded Investment				Interest Income Recognized
								Quarter to date		Year to date		Quarter to date		Year to date
With no related allowance

Commercial and industrial
Commercial and industrial other		$	3,395	$	3,816	$	0	$	2,978		2,875	$	0		0
Commercial real estate
Construction			7,400		13,187		0		10,027		10,400		0		0
Commercial real estate other			13,275		13,308		0		9,956		11,640		14		24
Residential real estate other			387		387		0		375		399		0		0
Subtotal		$	24,457	$	30,698	$	0	$	23,336		25,314	$	14		24

With related allowance

Commercial and industrial
Commercial and industrial other			4,992		4,992		2,338		2,226		1,350		0		0
Commercial real estate
Commercial real estate other			509		509		509		1,922		864		0		0
Subtotal		$	5,501	$	5,501	$	2,847	$	4,148		2,214	$	0		0
Total		$	29,958	$	36,199	$	2,847	$	27,484		27,528	$	14		24

December 31, 2010
(in thousands)	Recorded Investment			Unpaid Principal Balance		Related Allowance
With no related allowance

Commercial and industrial
Agriculture		$	724	$	724	$	0
Commercial and industrial other			3,393		4,336		0
Commercial real estate
Commercial real estate other			15,675		15,831		0
Subtotal		$	19,792	$	20,891	$	0

With related allowance

Commercial and industrial
Commercial and industrial other			1,500		1,500		682
Commercial real estate
Construction			12,816		13,400		1,927
Commercial real estate other			1,131		1,303		627
Subtotal		$	15,447	$	16,203	$	3,236
Total		$	35,239	$	37,094	$	3,236

The average recorded investment in impaired loans and leases for the three and nine months ended September 30, 2010 was $30.4 million and $32.4 million, respectively, and interest income recognized on these impaired loans and leases, all collected in cash, was $42,000 and $147,000 for the same period.

Loans are considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity.

The following tables present loans by class modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2011.

Troubled Debt Restructuring

September 30, 2011	Three months ended						Nine months ended
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
(in thousands)
Commercial and industrial
Commercial and industrial other		4		2,115		2,115		6		2,694		2,694

Commercial real estate
Commercial real estate other		14		8,023		8,023		14		8,023		8,023

Residential real estate
Mortgages		2		387		387		2		387		387


Total		20	$	10,525	$	10,525		22	$	11,104	$	11,104

The Company recognized TDRs with a balance of $10.6 million and $11.1 million for the three and nine month periods ended September 30, 2011. Specific reserves with an ending balance of $509,000 have been allocated to customers whose loan terms have been modified in TDRs as of September 30, 2011. The loans requiring these specific reserves were impaired prior to the troubled debt restructuring and there was no change in the specific reserve related to these loans. The Company is not committed to lend additional amounts as of September 30, 2011 to customers with outstanding loans that are classified as TDRs.

There were no charge-offs taken on these TDRs for the three and nine months ended September 30, 2011.

A loan that was restructured as a TDR is considered to be in payment default once it is 90 days contractually past due under the modified terms. During the three and nine months ended September 30, 2011, only one TDR, a commercial mortgage loan with a recorded balance of $184,000 that had been restructured in the 12 months prior to September 30, 2011, became 91 days past due.

The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of September 30, 2011 and December 31, 2010.

September 30, 2011
	Commercial and Industrial Other			Commercial and Industrial Agriculture			Commercial Real Estate Other			Commercial Real Estate Agriculture			Commercial Real Estate Construction			Total

(in thousands)
Internal risk grade:
Pass		$	380,253		$	44,455		$	592,910		$	46,892		$	27,218		$	1,091,728
Special Mention			15,672			3,437			33,832			3,376			10,380			66,697
Substandard			20,559			665			42,160			2,517			7,412			73,313
Doubtful			0			0			509			0			0			509
Total		$	416,484		$	48,557		$	669,411		$	52,785		$	45,010		$	1,232,247

December 31, 2010
	Commercial and Industrial Other			Commercial and Industrial Agriculture			Commercial Real Estate Other			Commercial Real Estate Agriculture			Commercial Real Estate Construction			Total

(in thousands)
Internal risk grade:
Pass		$	355,153		$	53,302		$	537,195		$	37,894		$	45,703		$	1,029,247
Special Mention			28,478			3,570			43,138			5,734			0			80,920
Substandard			25,801			9,046			39,125			4,857			12,816			91,645
Doubtful			0			0			0			0			0			0
Total		$	409,432		$	65,918		$	619,458		$	48,485		$	58,519		$	1,201,812

The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of September 30, 2011 and December 31, 2010.

September 30, 2011
(in thousands)	Residential Home Equity			Residential Mortgages			Consumer Indirect			Consumer Other			Total
Performing		$	160,095		$	478,208		$	34,769		$	31,377		$	704,449
Nonperforming			1,615			7,004			14			240			8,873
Total		$	161,710		$	485,212		$	34,783		$	31,617		$	713,322

December 31, 2010
(in thousands)	Residential Home Equity			Residential Mortgages			Consumer Indirect			Consumer Other			Total
Performing		$	162,968		$	454,350		$	41,352		$	31,757		$	690,427
Nonperforming			1,797			7,682			316			0			9,795
Total		$	164,765		$	462,032		$	41,668		$	31,757		$	700,222

7. Earnings Per Share

The Company follows the provisions of FASB ASC Topic 260, Earnings Per Share (“EPS”). A computation of Basic EPS and Diluted EPS for the three and nine months ending September 30, 2011, and 2010 is presented in the table below.

Three months ended September 30, 2011
(in thousands except share and per share data)	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS:
Net income attributable to Tompkins Financial Corporation	$	7,859		11,049,831	$	0.71

Effect of potentially dilutive common shares:				74,500

Diluted EPS:

Net income attributable to Tompkins Financial Corporation plus assumed conversions	$	7,859		11,124,331	$	0.71

The effect of dilutive securities calculation for the three-month period ended September 30, 2011, excludes stock options and stock appreciation rights covering an aggregate of 755,428 shares of common stock because they are anti-dilutive.

Three months ended September 30, 2010
(in thousands except share and per share data)	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS:
Net income attributable to Tompkins Financial Corporation	$	7,490		10,845,106	$	0.69

Effect of potentially dilutive common shares:				48,536

Diluted EPS:

Net income attributable to Tompkins Financial Corporation plus assumed conversions	$	7,490		10,893,642	$	0.69

The effect of dilutive securities calculation for the three-month period ended September 30, 2010, excludes stock options and stock appreciation rights covering an aggregate of 690,249 shares of common stock because they are anti-dilutive.

Nine months ended September 30, 2011
(in thousands except share and per share data)	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS:
Net income attributable to Tompkins Financial Corporation	$	26,033		10,977,446	$	2.37

Effect of potentially dilutive common shares:				50,774

Diluted EPS:

Net income attributable to Tompkins Financial Corporation plus assumed conversions	$	26,033		11,028,220	$	2.36

The effect of dilutive securities calculation for the nine-month period ended September 30, 2011, excludes stock options and stock appreciation rights covering an aggregate of 713,354 shares of common stock because they are anti-dilutive.

Nine months ended September 30, 2010
(in thousands except share and per share data)	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS:
Net income attributable to Tompkins Financial Corporation	$	24,940		10,791,714	$	2.31

Effect of potentially dilutive common shares:				53,166

Diluted EPS:

Net income attributable to Tompkins Financial Corporation plus assumed conversions	$	24,940		10,844,880	$	2.30

The effect of dilutive securities calculation for the nine-month period ended September 30, 2010, excludes stock options and stock appreciation rights covering an aggregate of 706,348 shares of common stock because they are anti-dilutive.

8. Comprehensive Income
	Three Months Ended						Nine Months Ended
(in thousands)	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Net income attributable to noncontrolling interests and
Tompkins Financial Corporation	$	7,892		$	7,523		$	26,131		$	25,038

Other comprehensive income loss, net of tax:

Unrealized gain on available-for-sale securities:
Net unrealized holding gain on available-for-sale
securities arising during the period.		3,772			1,618			12,900			9,923
Memo: Pre-tax net unrealized holding gain		6,284			2,697			21,495			16,536

Reclassification adjustment for net realized (gain) loss
on sale included in of available-for-sale securities		(172	)		1			(229	)		(104	)
Memo: Pre-tax net realized (gain)/loss		(286	)		2			(381	)		(173	)

Other-than-temporary impairment on available-for-sale
securities1		-			211			-			503
Memo: Pre-tax unrealized loss		-			351			-			838

Employee benefit plans:
Amortization of actuarial losses, prior service cost, and transition obligation		122			280			686			840
Memo: Pre-tax amounts		203			467			1,143			1,400

Other comprehensive income		3,722			2,110			13,357			11,162

Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation		11,614			9,633			39,488			36,200
Less: Other comprehensive income attributable to noncontrolling interests		(33	)		(33	)		(98	)		(98	)
Total comprehensive income attributable to Tompkins Financial Corporation	$	11,581		$	9,600		$	39,390		$	36,102

1 During the three and nine months ended September 30, 2010, net other-than-temporary impairment ("OTTI") on securities available-for-sale totaling $385,000 in unrealized gains, and $872,000 in unrealized gains, respectively, were recognized, which included $351,000 and $838,000, respectively, in unrealized gains, recognized in accumulated other comprehensive income ("AOCI"), net of tax and $34,000 of OTTI losses recognized in earnings.

9. Employee Benefit Plan

The following table sets forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans (“SERP”) including the following components: service cost; interest cost; expected return on plan assets for the period; amortization of the unrecognized transitional obligation or transition asset; and the amounts of recognized gains and losses, prior service cost recognized, and gain or loss recognized due to settlement or curtailment.

Components of Net Period Benefit Cost

	Pension Benefits						Life and Health				SERP Benefits
	Three Months Ended						Three Months Ended				Three Months Ended
(in thousands)	09/30/2011			09/30/2010			09/30/2011		09/30/2010		09/30/2011		09/30/2010
Service cost	$	589		$	538		$	22	$	23	$	50	$	46
Interest cost		734			646			95		96		155		147
Expected return on plan assets for the period		(951	)		(675	)		0		0		0		0
Amortization of transition liability		0			0			17		17		0		0
Amortization of prior service cost		(31	)		(29	)		6		4		25		25
Amortization of net loss		147			463			8		0		33		26
FAS 88 curtailment gain		0			(39	)		0		0		0		0
Net periodic benefit cost	$	488		$	904		$	148	$	140	$	263	$	244


	Pension Benefits						Life and Health				SERP Benefits
	Nine Months Ended						Nine Months Ended				Nine Months Ended
(in thousands)	09/30/2011			09/30/2010			09/30/2011		09/30/2010		09/30/2011		09/30/2010
Service cost	$	1,723		$	1,614		$	88	$	70	$	150	$	139
Interest cost		2,073			1,938			285		288		465		441
Expected return on plan assets for the period		(2,762	)		(2,025	)		0		0		0		0
Amortization of transition liability		0			0			51		50		0		0
Amortization of prior service cost		(93	)		(88	)		12		12		75		76
Amortization of net loss		993			1,389			9		0		98		77
FAS 88 curtailment gain		0			(116	)		0		0		0		0
Net periodic benefit cost	$	1,934		$	2,712		$	445	$	420	$	788	$	733

The Company realized approximately $686,000 and $840,000, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive income, for the nine months ended September 30, 2011 and 2010, respectively.

The Company is not required to contribute to the pension plan in 2011, but it may make voluntary contributions. The Company contributed $2.8 million to the pension plan in the first nine months of 2011.

In the first quarter of 2010, the Company stopped admitting new employees to its noncontributory defined-benefit retirement and pension plan. Employees hired after January 1, 2010 participate in a defined contribution plan. Effective July 1, 2011 the Company split the noncontributory defined-benefit retirement and pension plan, with no change in benefits to any participants. Current employees who are still receiving credits and/or benefit accruals remain in the existing plan. All other participants in the plan were placed into a new plan. The above disclosures reflect the combined costs of the two defined benefit plans.

10. Stock Plans

Under Tompkins Financial Corporation 2009 Equity Plan (“2009 Equity Plan”), the Company may grant incentive stock options, non-qualified stock options, stock appreciation rights, shares of restricted stock and restricted stock units covering up to 820,000 common shares to certain officers, employees, and nonemployee directors. Prior to the adoption of the 2009 Equity Plan, the Company had similar stock option plans, which remain in effect solely with respect to unexercised options issued under these plans. The Company granted 155,725 equity awards to its employees in the third quarter of 2011. The third quarter 2011 awards included 37,725 shares of restricted stock and 118,000 shares of stock appreciation rights. The Company’s practice is to issue original issue shares of its common stock upon exercise of equity awards rather than treasury shares.

The Company uses the Black-Scholes option-valuation model to determine the fair value of each incentive stock option and stock appreciation right at the date of grant. This valuation model estimates fair value based on the assumptions listed in the table below. The risk-free interest rate is the interest rate available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the share option at the time of grant. The expected dividend yield is based on dividend trends and the market price of the Company’s stock price at grant. Volatility is largely based on historical volatility of the Company’s stock price. Expected term is based upon historical experience of employee exercises and terminations as well as the vesting term of the grants. The fair values of the grants are expensed over the vesting period.

	2011			2010			2009
Weighted per share average fair value at granted date	$	9.26		$	13.12		$	13.12
Risk-free interest rate		1.28	%		2.90	%		2.90	%
Expected dividend yield		4.10	%		3.13	%		3.13	%
Volatility		39.19	%		40.03	%		40.03	%
Expected life (years)		6.50			6.50			6.50

For the three and nine months ended September 30, 2011, stock-based compensation expense was $367,000 and $998,000 compared to $281,000 and $850,000 for the same periods in 2010.

The Company granted 1,800 equity awards to its employees in 2010, including 1,600 stock appreciation rights and 200 shares of restricted stock.

11. Other Income and Operating Expense

Other income and operating expense totals are presented in the table below. Components of these totals exceeding 1% of the aggregate of total noninterest income and total noninterest expenses for any of the years presented below are stated separately.

	Three Months Ended				Nine Months Ended
(in thousands)	09/30/2011		09/30/2010		09/30/2011		09/30/2010
Noninterest Income
Other service charges	$	598	$	546	$	1,703	$	1,627
Increase in cash surrender value of corporate owned life insurance		357		314		1,118		1,025
Net gain on sale of loans		78		346		378		685
Miscellaneous Investments		42		54		739		134
Other income		923		141		1,279		416
Total other income	$	1,998	$	1,401	$	5,217	$	3,887
Noninterest Expenses
Marketing expense	$	926	$	936	$	2,709	$	2,955
Professional fees		626		835		2,072		2,628
Software licensing and maintenance		870		875		2,735		2,693
Cardholder expense		502		472		1,467		1,345
Other expenses		3,064		3,537		9,925		9,581
Total other operating expense	$	5,988	$	6,655	$	18,908	$	19,202

12. Financial Guarantees

The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of September 30, 2011, the Company’s maximum potential obligation under standby letters of credit was $54.6 million compared to $54.4 million at December 31, 2010. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.

13. Segment and Related Information

The Company manages its operations through 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, including holding company activities, are considered banking. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the Banks and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the 2010 Annual Report on Form 10-K.

Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking and financial services segments.

As of and for the three months ended September 30, 2011
(in thousands)	Banking		Financial Services		Intercompany			Consolidated
Interest income	$	34,241	$	68	$	25		$	34,334
Interest expense		6,396		0		25			6,421
Net interest income		27,845		68		0			27,913
Provision for loan and lease losses		4,870		0		0			4,870
Noninterest income		5,402		7,221		(311	)		12,312
Noninterest expense		18,734		5,550		(311	)		23,973
Income before income tax expense		9,643		1,739		0			11,382
Income tax expense		2,839		651		0			3,490
Net Income attributable to noncontrolling interests and
Tompkins Financial Corporation		6,804		1,088		0			7,892
Less: Net income attributable to noncontrolling interests		33		0		0			33
Net Income attributable to Tompkins Financial
Corporation	$	6,771	$	1,088	$	0		$	7,859

Depreciation and amortization	$	1,104	$	73	$	0		$	1,177
Assets		3,332,350		31,049		(4,382	)		3,359,017
Goodwill		23,600		20,358		0			43,958
Other intangibles, net		2,587		1,731		0			4,318
Net loans and leases		1,923,720		0		0			1,923,720
Deposits		2,679,675		0		(4,001	)		2,675,674
Total equity		284,705		24,630		0			309,335

As of and for the three months ended September 30, 2010
(in thousands)	Banking		Financial Services		Intercompany			Consolidated
Interest income	$	35,662	$	81	$	1		$	35,744
Interest expense		7,879		0		1			7,880
Net interest income		27,783		81		0			27,864
Provision for loan and lease losses		3,483		0		0			3,483
Noninterest income		4,458		6,774		(5	)		11,227
Noninterest expense		19,471		5,386		(5	)		24,852
Income before income tax expense		9,287		1,469		0			10,756
Income tax expense		2,699		534		0			3,233
Net Income attributable to noncontrolling interests and
Tompkins Financial Corporation		6,588		935		0			7,523
Less: Net income attributable to noncontrolling interests		33		0		0			33
Net Income attributable to Tompkins Financial
Corporation	$	6,555	$	935	$	0		$	7,490

Depreciation and amortization	$	1,063	$	68	$	0		$	1,131
Assets		3,223,266		28,239		(4,394	)		3,247,111
Goodwill		23,600		17,989		0			41,589
Other intangibles, net		2,939		1,377		0			4,316
Net loans and leases		1,885,380		0		0			1,885,380
Deposits		2,532,526		0		(3,998	)		2,528,528
Total equity		254,750		21,745		0			276,495

For the nine months ended September 30, 2011
(in thousands)	Banking		Financial Services		Intercompany			Consolidated
Interest income	$	102,974	$	209	$	(8	)	$	103,175
Interest expense		19,775		1		(8	)		19,768
Net interest income		83,199		208		0			83,407
Provision for loan and lease losses		7,785		0		0			7,785
Noninterest income		15,974		21,805		(962	)		36,817
Noninterest expense		58,274		17,040		(962	)		74,352
Income before income tax expense		33,114		4,973		0			38,087
Income tax expense		10,156		1,800		0			11,956
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation		22,958		3,173		0			26,131
Less: Net income attributable to noncontrolling interests		98		0		0			98
Net Income attributable to Tompkins Financial Corporation	$	22,860	$	3,173	$	0		$	26,033

Depreciation and amortization	$	3,328	$	225	$	0		$	3,553

For the nine months ended September 30, 2010
(in thousands)	Banking		Financial Services		Intercompany			Consolidated
Interest income	$	108,596	$	241	$	(9	)	$	108,828
Interest expense		24,922		2		(9	)		24,915
Net interest income		83,674		239		0			83,913
Provision for loan and lease losses		7,074		0		0			7,074
Noninterest income		13,924		20,439		(484	)		33,879
Noninterest expense		57,881		16,465		(484	)		73,862
Income before income tax expense		32,643		4,213		0			36,856
Income tax expense		10,264		1,554		0			11,818
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation		22,379		2,659		0			25,038
Less: Net income attributable to noncontrolling interests		98		0		0			98
Net Income attributable to Tompkins Financial Corporation	$	22,281	$	2,659	$	0		$	24,940

Depreciation and amortization	$	3,277	$	207	$	0		$	3,484

14. Fair Value

FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between leveling categories, when determined to be appropriate, are recognized at the end of each reporting period.

The three levels of the fair value hierarchy under FASB ASC Topic 820 are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2011, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.

Recurring Fair Value Measurements
September 30, 2011
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	09/30/2011		(Level 1)		(Level 2)		(Level 3)
Trading securities
Obligations of U.S. Government sponsored
entities	$	12,912	$	12,912	$	0	$	0
Mortgage-backed securities – residential
U.S. Government sponsored entities		7,520		7,520		0		0
Available-for-sale securities
U.S. Treasury securities		2,088		2,088		0		0
Obligations of U.S. Government sponsored
entities		364,687		0		364,687		0
Obligations of U.S. states and political subdivisions		58,814		0		58,814		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies		138,054		0		138,054		0
U.S. Government sponsored entities		506,605		0		506,605		0
Non-U.S. Government agencies or sponsored entities		6,492		0		6,492		0
U.S. corporate debt securities		5,208		0		5,208		0
Equity securities		1,022		0		0		1,022

Borrowings
Other borrowings		12,117		0		12,117		0

Recurring Fair Value Measurements
December 31, 2010
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	12/31/2010		(Level 1)		(Level 2)		(Level 3)
Trading securities
Obligations of U.S. Government sponsored
entities	$	13,139	$	13,139	$	0	$	0
Mortgage-backed securities – residential
U.S. Government sponsored entities		9,698		9,698		0		0
Available-for-sale securities
U.S. Treasury securities		2,129		2,129		0		0
Obligations of U.S. Government sponsored
entities		407,440		0		407,440		0
Obligations of U.S. states and political subdivisions		63,037		0		63,037		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies		146,013		0		146,013		0
U.S. Government sponsored entities		405,478		0		405,478		0
Non-U.S. Government agencies or sponsored entities		9,283		0		9,283		0
U.S. corporate debt securities		5,203		0		5,203		0
Equity securities		1,025		0		0		1,025

Borrowings
Other borrowings		11,629		0		11,629		0

There were no significant transfers between Levels 1 and 2 for the three and nine months ended September 30, 2011.

There was no significant change in the fair value of the $1.0 million of available-for-sale securities valued using significant unobservable inputs (Level 3), between January 1, 2011 and September 30, 2011.

The Company determines fair value for its trading securities using independently quoted market prices. The Company determines fair value for its available-for-sale securities using an independent bond pricing service for identical assets or very similar securities. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Based on the inputs used by our independent pricing services, we identify the appropriate level within the fair value hierarchy to report these fair values.

Fair values of borrowings are estimated using Level 2 inputs based upon observable market data. The Company determines fair value for its borrowings using a discounted cash flow technique based upon expected cash flows and current spreads on FHLB advances with the same structure and terms. The Company also receives pricing information from third parties, including the FHLB. The pricing obtained is considered representative of the transfer price if the liabilities were assumed by a third party. The Company’s potential credit risk did not have a material impact on the quoted settlement prices used in measuring the fair value of the FHLB borrowings at September 30, 2011.

Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, collateral dependent impaired loans, and other real estate owned. During the third quarter of 2011, certain collateral dependent impaired loans and other real estate owned were remeasured and reported at fair value through a specific valuation allowance for loan and lease losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based upon observable market data.

Non-Recurring Fair Value Measurements
September 30, 2011
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	09/30/2011		(Level 1)		(Level 2)		(Level 3)
Collateral dependent impaired loans	$	13,074	$	0	$	13,074	$	0
Other real estate owned		1,632		0		1,633		0

Non-Recurring Fair Value Measurements
December 31, 2010
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	12/31/2010		(Level 1)		(Level 2)		(Level 3)
Collateral dependent impaired loans	$	17,691	$	0	$	17,691	$	0
Other real estate owned		1,256		0		1,256		0

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.

The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and does not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.

Estimated Fair Value of Financial Instruments	09/30/2011				12/31/2010
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:

Cash and cash equivalents	$	108,769	$	108,769	$	49,665	$	49,665
Securities – trading		20,432		20,432		22,837		22,837
Securities – available-for-sale		1,082,970		1,082,970		1,039,608		1,039,608
Securities – held-to-maturity		27,367		28,053		54,973		56,064
Loans and leases, net 1		1,923,720		1,988,935		1,882,526		1,928,287
FHLB and FRB stock		16,906		16,906		21,985		21,985
Accrued interest receivable		12,717		12,717		11,513		11,513

Financial Liabilities:
Time deposits	$	702,716	$	706,395	$	741,829	$	746,434
Other deposits		1,972,958		1,972,958		1,754,044		1,754,044
Securities sold under agreements to repurchase		171,943		183,304		183,609		193,510
Other borrowings		125,884		140,589		232,564		245,891
Other borrowings (valued at fair value)		12,117		12,117		11,629		11,629
Trust preferred debentures		25,063		25,312		25,060		25,513
Accrued interest payable		1,386		1,386		1,803		1,803

1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.

The following methods and assumptions were used in estimating fair value disclosures for financial instruments.

CASH AND CASH EQUIVALENTS: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.

SECURITIES: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

LOANS AND LEASES: The fair values of residential loans are estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans are estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair value of loans held for sale are determined based upon contractual prices for loans with similar characteristics.

FHLB AND FRB STOCK: The carrying amount of FHLB and FRB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.

ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: The carrying amount of these short term instruments approximate fair value.

DEPOSITS: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values. Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings. For securities sold under agreements to repurchase where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.

OTHER BORROWINGS: The fair values of other borrowings are estimated using discounted cash flow analysis, discounted at the Company’s current incremental borrowing rate for similar borrowing arrangements. For other borrowings where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.

TRUST PREFERRED DEBENTURES: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.

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

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. The Company is a locally-oriented, community-based financial services organization that offers a full array of financial products and services, including commercial and consumer banking, leasing, trust and investment services, financial planning and wealth management, insurance and brokerage services. Tompkins subsidiaries include: three wholly-owned community banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile and The Mahopac National Bank; a wholly-owned registered investment advisor, AM&M Financial Services, Inc. (“AM&M”); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). AM&M and the trust division of the Trust Company provide a full suite of investment services under the Tompkins Financial Advisors division, including investment management, trust and estate, financial and tax planning as well as life, disability and long term care insurance services. Unless the context otherwise requires, the term “Company” refers collectively to Tompkins Financial Corporation and its subsidiaries.

The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches and financial services businesses. The Company has identified 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 12 “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. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, and concentrations of credit, loan delinquencies, and nonperforming and potential problem loans.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold without recourse and in accordance with standard secondary market loan sale agreements. The Company primarily sells loans to the Federal Home Loan Mortgage Corporation. These residential real estate loans are subject to normal representations and warranties, including representations and warranties related to gross fraud and incompetence. The Company has not had to repurchase any loans as a result of these representations and warranties. The Company reviews the risks in residential real estate lending related to representations and warranties, title issues, and servicing. The Company determined that these risks are immaterial and do not require any reserves on the Company’s statements of condition.

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.

Financial services consists of providing insurance, financial planning and wealth management, and trust services to individuals and businesses in the Company’s market areas. The Company has expanded its financial services segment over the past ten years through internal growth and acquisitions. In 2006, Tompkins acquired AM&M, a financial planning and wealth management company, to complement its existing trust and investment services businesses. In 2010, the Company unified the branding of its trust and investment services businesses and began marketing these services under the name “Tompkins Financial Advisors”. Tompkins Financial Advisors has office locations at all three of the Company’s subsidiary banks.

The Company provides property and casualty insurance services, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York, and offers property and casualty insurance to individuals and businesses located primarily in Western New York. Over the past ten years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. 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.

In June 2011, Tompkins Insurance acquired all the outstanding shares of Olver & Associates, Inc, (“Olver”), a property and casualty insurance agency located in Ithaca, New York. The two principal officers and staff continued with Olver after the acquisition. The acquisition-date fair value of the consideration paid was $3.2 million and included $250,000 of cash and 75,188 shares of Tompkins’ common stock. Including the present value of expected contingent payments, the Company recorded the following intangible assets as a result of the acquisition: goodwill ($2.3 million), customer related intangible ($403,000) and a covenant-not-to-compete ($190,000). The values of the customer related intangible and covenant-not-to-compete are being amortized over 15 years and 5 years, respectively. The goodwill is not being amortized but will be evaluated at least annually for impairment. The goodwill is not deductible for taxes. The agreement also provided for the possibility of annual contingent post-closing payments, based upon certain criteria being met. Maximum contingent payments are $100,000 and are payable in Tompkins’ common stock.

Competition for commercial banking and other financial services is strong in the Company’s market areas. 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 highly regulated. As a financial holding company with three community banks and an investment advisor, the Company and its subsidiaries are 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 Department of Financial Services. Additionally, the Company is subject to examination and regulation from the Department of Financial Services, the Securities and Exchange Commission (“SEC”) 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. Weak economic conditions over the past several years have contributed to increases in the Company’s past due loans and leases, nonperforming assets, and net loan and lease losses, as well as decreases in certain fee-based products and services. Although nonperforming loans and leases and criticized and classified loans continue to be higher than historical levels, the Company has seen some early signs of improving economic conditions within the market areas in which it operates, which has contributed to some improvement in its credit quality metrics in recent quarters including some decreases in the level of internally classified assets and nonperforming assets. With the strength of the economic recovery uncertain, there is no assurance that these conditions may not adversely affect the credit quality of the Company’s loans and leases, results of operations, and financial condition going forward. Refer to the section captioned “Financial Condition- Allowance for Loan and Lease Losses and Nonperforming Assets” below for further details on asset quality.

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, 2011. 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, 2010, and the Unaudited Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

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, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III; 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; financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses, and other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in other reports we file with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. 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 make 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 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, 2010. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2010. Refer to Note 3 – “Accounting Standards Updates” 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.

In this Report there are comparisons of the Company’s performance to that of a peer group. Unless otherwise stated, this peer group is comprised of the group of 89 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s “Bank Holding Company Performance Report” for June 30, 2011 (most recent report available).

OVERVIEW

Net income for the three months ended September 30, 2011 totaled $7.9 million, an increase of 4.9% compared to $7.5 million reported for the three months ended September 30, 2010. Net income totaled $26.0 million for the first nine months of 2011, compared to $24.9 million for the same period in 2010. Diluted earnings per share for the three and nine months ended September 30, 2011 were $0.71 and $2.36, respectively, compared to $0.69 and $2.30 reported for the same periods in 2010. Improvement in fee-based businesses as well as an increase in other income contributed to the improved performance in 2011.

Return on average assets (“ROA”) for the quarter ended September 30, 2011 was 0.95% and was in line with the quarter ended September 30, 2010. Return on average shareholders’ equity (“ROE”) for the third quarter of 2011 was 10.29%, compared to 10.86% for the same period in 2010. For the nine month period ended September 30, 2011 ROA was 1.06% compared to 1.05% for the same period in 2010. ROE for the nine months ended September 30, 2011, was 12.0% compared to 12.77% for the same period in 2010. Tompkins’ ROA and ROE continue to compare favorably to peer ratios, ranking in the 88th percentile for ROA and the 89th percentile for ROE.

Total revenues, consisting of net interest income and noninterest income, were $40.2 million in the third quarter of 2011 and $120.2 million for the first nine months of 2011, up 2.9% and 2.1% over the comparable periods in 2010. Noninterest income for the three and nine months ended September 30, 2011 was up 9.7% and 8.7%, respectively, while net interest income was relatively flat when compared to the same periods in 2010.

The provision for loan and lease losses totaled $4.9 million and $7.8 million, respectively, in the third quarter and year to date periods of 2011, up 39.8% and 10.1% when compared to the $3.5 million and $7.1 million reported for the same periods in 2010.

Noninterest expenses for the three months ended September 30, 2011 were down 3.5% when compared to the same period in 2010, and were relatively flat for the year-to-date period ended September 30, 2011 compared to the same period prior year. Contributing to the variance was lower FDIC insurance expense and other operating expense.

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 $6.8 million for the third quarter of 2011, up $216,000 or 3.3% from net income of $6.6 million for the same period in 2010. For the current year to date period, net income was $22.9 million, an increase of $579,000 or 2.6% over the same period last year. The increases in net income in the quarter and year to date periods were the result of higher noninterest income due to an increase in card services income, net gains on securities transactions and an increase in non-core investment income. These factors were partially offset by increases in noninterest expense led by higher salaries and employee benefits costs.

Net interest income for the three and nine months ended September 30, 2011, was down $62,000 or 0.2% and $475,000 or 0.6%, respectively, driven mainly by declines in average earning assets yields which could not be fully offset by the decrease in funding costs, and increase in average earning assets, as growth in average earning assets and lower funding cost did not offset the decrease in average earning asset yields.

The provision for loan and lease losses totaled $4.9 million and $7.8 million for the three and nine months ended September 30, 2011, respectively compared to $3.5 million and $7.1 million for the same periods in 2010. The increase in the provision for loan and lease losses was largely the result of an increase in loan charge-offs during the quarter, which included a $5.0 million charge-off on a single commercial customer.

Noninterest income for the three and nine months ending September 30, 2011, was up $944,000 or 21.2% and $2.1 million or 14.7%, respectively, over the same periods in 2010. Contributing to the increase in 2011 over the prior year was higher card services income. Card service income was up $165,000 and $638,000 in the current quarter and year to date periods compared to the same periods last year, due to higher transaction volume and lower than anticipated redemption rates on a debit card rewards program benefits for cardholders. In addition, a $404,000 gain from the sale of a bank-owned property, and a $286,000 gain on the sale of available-for-sale securities contributed to the higher noninterest income figures in the current quarter.

Noninterest expenses for the three months ended September 30, 2011, were down $737,000 or 3.8% from the same period in 2010. Year to date noninterest expenses were up $393,000 or 0.7% versus the prior year. The quarterly decrease was mainly due to a decline in FDIC expense of $690,000 due to lower assessment rates and a $156,000, one-time reimbursement of second quarter foreclosure costs from a commercial relationship. The year over year increase was a result of increases in salaries and other benefit related accruals, reflecting mainly annual merit increases, and healthcare insurance, partially offset by a $690,000 reduction year to date reduction in FDIC insurance expense.

Financial Services Segment

The financial services segment had net income of $1.1 million in the third quarter of 2011, an increase of $153,000 or 16.4% from net income of $935,000 in the same quarter of the prior year. Year to date net income rose $514,000 or 19.3% over the prior year. Noninterest income for the three months ended September 30, 2011, was up $447,000 or 6.6% over the same period in 2010. Year to date non-interest income increased $1.4 million or 6.7% over the prior year. The increase in noninterest income in the third quarter and year to date periods were mainly a result of higher investment services fees and insurance commissions/fees. Investment services fees are largely based on the market value of assets within each account. Account retention and new account generation contributed to an increase in the fair value of assets under management and related investment fees. Noninterest expenses for the three months and nine months ended September 30, 2011, were up

$164,000 or 3.0% and $575,000 or 3.5% compared to the same period in the prior year. The increases were mainly the result of increases in salary and wages, reflecting annual merit increases, and other employee benefit costs.

Average Consolidated Balance Sheet and Net Interest Analysis
	Quarter Ended								Year to Date Period Ended								Year to Date Period Ended
	September 30, 2011								September 30, 2011								September 30, 2010
	Average								Average								Average
	Balance					Average			Balance					Average			Balance					Average
(Dollar amounts in thousands)	(QTD)		Interest			Yield/Rate			(YTD)		Interest			Yield/Rate			(YTD)		Interest			Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks	$	3,597	$	1			0.11	%	$	9,987	$	10			0.13	%	$	30,112	$	27			0.12	%
Money market funds		100		-			0.00	%		100		-			0.00	%		100		-			0.00	%
Securities (1)
U.S. Government securities		972,856		6,903			2.81	%		955,022		21,119			2.96	%		837,883		23,710			3.78	%
Trading securities		20,856		213			4.05	%		21,650		668			4.13	%		28,569		843			3.95	%
State and municipal (2)		82,592		1,175			5.64	%		99,220		3,987			5.37	%		105,441		4,581			5.81	%
Other securities (2)		13,541		155			4.54	%		14,369		503			4.68	%		17,855		654			4.90	%
Total securities		1,089,845		8,446			3.07	%		1,090,261		26,277			3.22	%		989,748		29,788			4.02	%
Federal Funds Sold		5,868		1			0.07	%		6,238		6			0.13	%		10,956		14			0.17	%
FHLBNY and FRB stock		17,907		211			4.67	%		18,303		719			5.25	%		19,526		731			5.01	%
Loans, net of unearned income (3)
Real estate		1,404,516		18,759			5.30	%		1,386,097		55,738			5.38	%		1,340,032		56,878			5.67	%
Commercial loans (2)		454,602		6,266			5.47	%		454,306		18,440			5.43	%		462,442		18,749			5.42	%
Consumer loans		66,884		1,150			6.82	%		69,245		3,593			6.94	%		81,818		4,271			6.98	%
Direct lease financing		7,027		103			5.81	%		7,883		348			5.90	%		11,044		498			6.03	%
Total loans, net of unearned income		1,933,029		26,278			5.39	%		1,917,531		78,119			5.45	%		1,895,336		80,396			5.67	%
Total interest-earning assets		3,050,346		34,937			4.54	%		3,042,420		105,131			4.62	%		2,945,778		110,956			5.04	%

Other assets		235,813								227,910								228,545

Total assets		3,286,159								3,270,330								3,174,323

LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money market		1,336,593		1,239			0.37	%		1,333,934		3,694			0.37	%		1,217,756		4,776			0.52	%
Time deposits > $100,000		312,583		817			1.04	%		315,265		2,534			1.07	%		333,814		3,360			1.35	%
Time deposits < $100,000		393,637		1,210			1.22	%		406,554		3,924			1.29	%		432,415		5,382			1.66	%
Brokered time deposits < $100,000		219		0			0.00	%		2,309		21			1.22	%		27,968		348			1.66	%
Total interest-bearing deposits		2,043,032		3,266			0.63	%		2,058,062		10,173			0.66	%		2,011,953		13,866			0.92	%
Federal funds purchased & securities sold under
agreements to repurchase		167,845		1,204			2.85	%		174,816		3,743			2.86	%		183,521		4,069			2.96	%
Other borrowings		155,636		1,546			3.94	%		160,340		4,655			3.88	%		192,551		5,770			4.01	%
Trust preferred debentures		25,063		405			6.41	%		25,062		1,197			6.39	%		25,057		1,210			6.46	%
Total interest-bearing liabilities		2,391,576		6,421			1.06	%		2,418,280		19,768			1.09	%		2,413,082		24,915			1.38	%

Noninterest bearing deposits		551,532								524,888								458,931
Accrued expenses and other liabilities		39,190								37,236								41,122
Total liabilities		2,982,298								2,980,404								2,913,135

Tompkins Financial Corporation Shareholders’ equity		302,786								288,579								259,687
Noncontrolling interest		1,075								1,347								1,501
Total equity		303,861								289,926								261,188

Total liabilities and equity	$	3,286,159							$	3,270,330							$	3,174,323
Interest rate spread							3.48	%							3.53	%							3.66	%
Net interest income/margin on earning assets				28,516			3.71	%				85,363			3.75	%				86,041			3.91	%

Tax Equivalent Adjustment				(603	)							(1,956	)							(2,128	)

Net interest income per consolidated financial statements			$	27,913							$	83,407							$	83,913

(1) Average balances and yields on available-for-sale securities are based on historical amortized cost.
(2) Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and Federal effective income tax rate
of 40% to increase tax exempt interest income to taxable-equivalent basis.
(3) Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1
of the Company’s consolidated financial statements included in Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 69.4% of total revenues for both the three and nine months ended September 30, 2011, compared to 71.3% and 71.2%, respectively, from the same periods in 2010. The decrease reflects the growth in noninterest income sources and the slight decrease in net interest income. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The Company’s net interest income over the past several years has benefitted from steady growth in average earning assets, as well as the low interest rate environment. With deposit rates currently at low levels, the downward pricing of these liabilities has slowed, while interest earning assets continue to reprice downward at a steady rate. This has contributed to a decrease in net interest margin for the three and nine months ended September 30, 2011, compared to the same periods in 2010. The taxable equivalent net interest margins of 3.71% and 3.75% for the three and nine month periods in 2011, are below the same periods in 2010, of 3.85% and 3.91%, respectively. The decrease in the net interest margin was also partly due to the growth in interest earning assets over the prior year being concentrated in lower yielding securities rather than higher yielding loans.

The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Taxable-equivalent net interest income for the three and nine months ended September 30, 2011 were $28.5 million and $85.4 million, respectively, and were in line with the same periods in 2010.

Taxable-equivalent interest income for the third quarter of 2011 was $34.9 million, down 4.1% when compared to the third quarter of 2010. Taxable-equivalent interest income for the nine months ending September 30, 2011 was $105.1 million, down $5.8 million or 5.3% compared to the first nine months of 2010. The decrease in taxable-equivalent interest income was mainly a result of the decrease in the yield on average earnings assets. Average earnings assets were up 3.8% and 3.3% for the three and nine month periods of 2011 compared to the same periods in 2010; however, the yield on average earning assets decreased by 38 basis points and 42 basis points, respectively, over the same periods. The yield on average earning assets was impacted by the low rate environment as well as growth being concentrated in lower yielding securities as a result of soft loan demand. Average securities balances for the third quarter of 2011 were up $98.9 million or 10.0% over average balances in the third quarter of 2010, while average yields were down 69 basis points. For the nine months ended September 30, 2011 average securities balances increased $100.5 million or 10.2% from the same period in 2010, while yields declined 80 basis points.

Interest expense for the third quarter of 2011 was down $1.5 million or 18.5% compared to the third quarter of 2010, reflecting lower average rates paid on deposits and borrowings. The average rate paid on interest bearing deposits during the third quarter of 2011 of 0.63% was 22 basis points lower than the average rate paid in the third quarter of 2010. Interest expense for the nine months ending September 30, 2011 was $19.8 million, down $5.1 million or 20.7% compared to 2010. The rates paid were lower across all deposit categories. The lower cost of deposits was partially offset by growth in interest-bearing deposits. Average interest-bearing deposit balances in the third quarter of 2011 increased by $69.1 million or 3.5% compared to the same period in 2010. For the nine months ending September 30, 2011, average interest-bearing deposits increased $46.1 million or 2.3% compared to the previous year. Total funding costs also benefitted from the growth in average noninterest bearing deposit balances. For the three and nine months of 2011, average noninterest bearing deposits of $551.5 million and $524.9 million were up 14.9% and 14.4%, respectively, over the same periods in 2010. Average other borrowings for the third quarter were down $32.5 million or 17.3% compared to prior year, and $32.2 million or 16.7% for the nine months ending September 30, 2011.

Provision for Loan and Lease Losses

The provision for loan and lease losses represents management’s estimate of the amount necessary to maintain the allowance for loan and lease losses at an adequate level. The provision for loan and lease losses was $4.9 million for the third quarter of 2011 and $7.8 million for the nine months ending September 30, 2011, compared to $3.5 million and $7.1 million for the respective periods in 2010. The increase in the provision for loan and lease losses in 2011 compared to 2010, was largely a result of an increase in loan charge-offs during the third quarter of 2011. Third quarter charge-offs totaled $5.5 million, and included a $5.0 million charge-off on a single commercial customer. The Company has seen some improvement in its loan portfolio credit quality metrics over the past several quarters and current levels are down from the same period prior year. Nonperforming loans totaled $41.2 million at September 30, 2011, down 23.6% from September 30, 2010, and loans internally classified Special Mention, Substandard, and Doubtful totaled $140.5 million, down 21.3% from the third quarter of 2010. The allowance for loan and lease losses as a percentage of period end loans and leases was 1.43% at September 30, 2011, compared to 1.50% at September 30, 2010. The section captioned “Financial Condition-Allowance for Loan and Lease Losses” below has further details on the allowance for loan and lease losses.

Noninterest Income

Noninterest income totaled $12.3 million and $36.8 million for the three and nine months ended September 30, 2011, compared with $11.2 million and $33.9 million for the same periods in 2010. Noninterest income represented 30.6% of total revenues for the both the three and nine months ended September 30, 2011, compared to 28.7% and 28.8% for the same periods in 2010. The increases over prior periods were mainly due to growth in noninterest income sources coupled with flat to slightly lower net interest income.

Investment services income was $3.4 million in the third quarter of 2011, which is in line with the third quarter of 2010. Investment services income totaled $11.1 million for the first nine months of 2011, up 3.0% over the same period in 2010. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The fair value of assets managed by, or in custody of, Tompkins was $2.8 billion at September 30, 2011, up 7.7% from $2.6 billion at September 30, 2010. These figures include $896.8 million and $780.5 million, respectively, of Company-owned securities where Tompkins Financial Advisors is custodian. The increase in fair value of assets reflects successful business development initiatives resulting in customer retention when compared to the same period in 2010.

Insurance commissions and fees for the three and nine months ended September 30, 2011, increased by $208,000 or 6.2% and $684,000 or 7.0%, respectively as compared to the same periods in 2010. Revenues for commercial insurance lines, personal insurance lines, and health and benefit related insurance products were up for both the quarter and year to date periods ended September 30, 2011, compared to the same periods in 2010. Both commercial lines and personal lines benefitted from the June 1, 2011 acquisition of Olver & Associates, Inc. The Olver acquisition has added about $184,000 of commercial lines revenue and $80,000 of personal lines revenue in 2011. Health and benefit related insurance products continue to be a main source of internal growth for 2011, increasing by $146,000 or 21.0% for the nine months ended September 30, 2011, over the same period prior year.

Service charges on deposit accounts were $2.2 million in the third quarter of 2011, up 2.4% compared to the third quarter of 2010, and down $346,000 or 5.2% for the nine months ended September 30, 2011 compared to prior year. The largest component of this category is overdraft fees, which is largely driven by customer activity. Regulatory changes which became effective in the third quarter of 2010 impacted earning capability in overdraft fees. The Federal Reserve Board rule prohibits financial institutions from charging consumer fees for paying overdrafts on automated teller machines and one-time debit transactions, unless the consumer consents, or opts in, to the overdraft service for these types of transactions.

Card services income for the three and nine months ended September 30, 2011 was up $166,000 or 15.0% and $638,000 or 20.3%, respectively, over the same periods in 2010. The increase was mainly in debit card income and reflects a higher transaction volume, increase in the number of cardholders, and a 2011 adjustment to an accrual rate related to a points reward program offered to debit card customers. As discussed in the section captioned “Supervision and Regulation” included in Item 1. Business of the Company’s 2010 Report on form 10-K, the Dodd-Frank Act requires the Federal Reserve Board to establish rules regarding interchange fees charged in electronic debit card transaction by payment users. Currently these rules only apply to banks with total assets exceeding $10.0 billion, which exempts the Company. However, the long term impact of any new regulations is uncertain.

Net mark-to-market losses on securities and borrowings held at fair value totaled $406,000 in the third quarter of 2011, compared to net mark-to-market losses of $146,000 in the third quarter of 2010. For the nine month period ending September 30, 2011 net mark-to-market losses totaled $318,000 compared to net market-to-market losses of $382,000 for the first nine months of 2010. Mark-to-market losses or gains relate to the change in the fair value of securities and borrowings where the Company has elected the fair value option. These unrealized amounts are primarily impacted by changes in interest rates.

For the three months ended September 30, 2011, net gains from securities transactions totaled $286,000 compared to net losses of $2,000 for the same period in 2010. Year-to-date net gains totaled $381,000 in 2011 compared to $173,000 in 2010. The Company may periodically sell available-for-sale securities for liquidity purposes, to improve yields or to adjust the risk profile of the portfolio.

Other income of $2.0 million in the third quarter of 2011 was up 42.6% from the third quarter of 2010. For the nine months ended September 30, 2011 other income of $5.2 million was up 34.2% compared to prior year. Third quarter 2011 other income included approximately $600,000 in nonrecurring gains on the sale of real estate and other assets. The other primary components of other income are other service charges, increases in cash surrender value of corporate owned life insurance (”COLI”), gains on the sales of residential mortgage loans, and income from miscellaneous equity investments, including the Company’s investment in a Small Business Investment Company (“SBIC”).

Other service charge income, included in other income on the consolidated statements of income, of $598,000 in the third quarter of 2011 was up $52,000 or 9.5% from the same period in 2010. Other service charges for the nine months ending September 30, 2011 were up $76,000 or 4.7% compared to the same period in 2010.

Net gains on sale of loans, included in other income on the consolidated statements of income, of $78,000 in the third quarter of 2011 were down by $268,000 or 77.5% compared to the third quarter of 2010. Net gains on sale of loans totaled $378,000 in the first nine months of 2011, compared to $685,000 in the same period 2010. The decrease in gains in 2011 compared to 2010 is consistent with the decrease in volume of loans sold in 2011 compared to 2010. To manage interest rate risk exposures, the Company sells certain fixed rate loan originations that have rates below or maturities greater than the standards set by the Company’s Asset/Liability Committee for loans held in the portfolio.

Increases in the value of COLI net of mortality expenses, included in other income on the consolidated statements of income, were $357,000 in the third quarter of 2011, up $43,000 or 13.7% for the third quarter of 2010. For the nine months ended September 30, 2011 the increase in value was $1.1 million, up $93,000 or 9.1% compared to the nine months ended September 30, 2010. COLI relates to life insurance policies covering certain senior officers of the Company and its subsidiaries. The Company’s average investment in COLI was $41.6 million during the first nine months of 2011, and $36.5 million during the same period in 2010.

Miscellaneous investment income in the three and nine months ended September 30, 2011 of $42,000 and $739,000 related to an investment in a SBIC. The nine month period ending September 30, 2011 included a $504,000 gain recognized and distributed by the SBIC. The SBIC periodically recognizes gains related to investments held in its portfolio and distributes these gains to its investors. The Company believes that, as of September 30, 2011, there were no impairments with respect to its investment in the SBIC.

Noninterest Expense

Noninterest expense for the third quarter of 2011 was $24.0 million, down $879,000 or 3.5% compared to the same period prior year. For the nine months ending September 30, 2011 noninterest expenses totaled $74.4 million, and was up less than 1.0% when compared to the same period prior year.

Personnel-related expense increased by $337,000 or 2.4% in the third quarter of 2011 over the same period in 2010. For the first nine months of 2011, personnel-related expenses totaled $44.3 million, an increase of 4.0% over the same period prior year. For the three and nine months ended September 30, 2011, salaries and wages were up $579,000 or 5.5%, and $1.6 million or 5.1%, respectively, over the same periods in 2010, mainly reflecting annual merit increases. Year-to-date September 30, 2011 average full time equivalents (“FTEs”) of 722 were in line with year-to-date September 30, 2010 average FTEs of 727. Pension and other employee related benefits were down $242,000 or 6.7% in the third quarter of 2011 compared to the third quarter of 2010, and were in line with prior period for the nine months ended September 30, 2011. FDIC deposit insurance expense decreased by $503,000 and $690,000 for the three and nine months ended September 30, 2011, over the same prior year periods as a result of changes to the FDIC assessment method that took effect in the second quarter of 2011, and will continue through the remainder of 2011.

Other operating expenses for the third quarter 2011 decreased by $667,000 or 10.0% compared to prior year, and $294,000 or 1.5% for the year-to-date period ending September 30, 2011. Contributing to the decrease in the third quarter 2011 over the third quarter 2010 were the following: professional fees (down $209,000), and miscellaneous other expense (down $473,000). For the nine months ended September 30, 2011 the main contributors were as follows: professional fees (down $556,000), and marketing (down $246,000); partially offset by an increase in miscellaneous other expense (up $344,000).

Income Tax Expense

The provision for income taxes provides for Federal and New York State income taxes. The provision for the third quarter of 2011 was $3.5 million, and was $257,000 or 8.0% over the same period prior year. For the nine month period ending September 30, the tax provision totaled $12.0 million in 2011 and $11.8 million in 2010. The Company’s effective tax rate for the third quarter of 2011 was 30.7% compared to 30.1% for the third quarter of 2010. For the nine month period ending September 30, the Company’s effective tax rate was 31.4% in 2011 and 32.1% in 2010.

FINANCIAL CONDITION

Total assets were $3.4 billion at September 30, 2011, up $98.7 million or 3.0% over December 31, 2010, and up $111.9 million or 3.4% over September 30, 2010. The growth over year end was mainly due to increases in cash and cash equivalents, which were up $59.1 million, and available for sale securities, which were up $43.4 million or 4.2%. Loans were up $41.2 million or 2.2% at September 30, 2011 compared to year end and up $37.5 million or 2.0% over September 30, 2010. Offsetting these increases was a decrease in held to maturity securities which declined $27.6 million or 50.2% from year end. Total deposits were up $179.8 million or 7.2% over year-end with the majority of growth centered in checking, savings and money market deposits. Deposit growth was used to reduce other borrowings, mainly short-term borrowings with the FHLB as loan demand remains relatively flat.

Securities

As of September 30, 2011, total securities were $1.1 billion or 33.7% of total assets, compared to $1.1 billion or 34.3% of total assets at year-end 2010, and $1.1 billion or 32.4% at September 30, 2010. The following table details the composition of securities available-for-sale and securities held-to-maturity.

Available-for-Sale Securities
	09/30/2011				12/31/2010
	Amortized Cost1		Fair Value		Amortized Cost1		Fair Value
(in thousands)
U.S. Treasury securities	$	2,026	$	2,088	$	2,043	$	2,129
Obligations of U.S. Government sponsored entities		350,220		364,687		402,057		407,440
Obligations of U.S. states and political subdivisions		56,046		58,814		60,707		63,037
Mortgage-backed securities – residential
U.S. Government agencies		131,668		138,054		143,319		146,013
U.S. Government sponsored entities		486,387		506,605		393,331		405,478
Non-U.S. Government agencies or sponsored entities		7,002		6,492		9,636		9,283
U.S. corporate debt securities		5,019		5,208		5,024		5,203
Total debt securities		1,038,368		1,081,948		1,016,117		1,038,583
Equity securities		1,022		1,022		1,025		1,025
Total available-for-sale securities	$	1,039,390	$	1,082,970	$	1,017,142	$	1,039,608

1 Net of other-than-temporary impairment losses recognized in earnings

Held-to-Maturity Securities
	09/30/2011				12/31/2010
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Obligations of U.S. states and political subdivisions	$	27,367	$	28,053	$	54,973	$	56,064
Total held-to-maturity debt securities	$	27,367	$	28,053	$	54,973	$	56,064

The growth in the available-for-sale portfolio was mainly in mortgage backed securities issued by U.S. Government sponsored entities and driven by yield and duration considerations. Management’s policy is to purchase investment grade securities that on average have relatively short duration, which helps to mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The decrease in the held-to-maturity portfolio was due to maturities and calls during the year.

The Company has no investments in preferred stock of U.S. government sponsored entities and no investments in pools of Trust Preferred securities. Quarterly, the Company evaluates all investment securities with a fair value less than amortized cost to identify any other-than-temporary impairment as defined under generally accepted accounting principles.

As of September 30, 2011, the Company held five mortgage backed securities, with a fair value of $6.5 million, that were not issued by U.S. Government agencies or U.S. Government sponsored entities. In 2009, the Company determined that three of these non-U.S. Government mortgage backed securities were other-than-temporarily impaired based on an analysis of the above factors for these three securities. As a result, the Company recorded other-than-temporary impairment charges of $2.0 million in 2009 on these investments. The credit loss component of $146,000 was recorded as other-than-temporary impairment losses in the consolidated statement of income, while the remaining non-credit portion of the impairment loss was recognized in other comprehensive income (loss) in the consolidated statements of condition and changes in shareholders’ equity. In 2010 the Company determined that an additional credit loss component of other-than-temporary impairment charge of $34,000 related to the three non-U.S. Government mortgage backed securities was necessary. The Company’s review of these securities as of September 30, 2011 concluded that no additional impairment charges were necessary. As of September 30, 2011, the carrying value of these three securities exceeded their fair value by $510,000. A continuation or worsening of current economic conditions may result in an additional credit loss component of other-than-temporary impairment losses related to these investments.

The Company maintains a trading portfolio with a fair value of $20.4 million as of September 30, 2011, compared to $22.8 million at December 31, 2010. The decrease in the trading portfolio reflects maturities or payments during 2011. For the nine months ended September 30, 2011, net mark-to-market gains related to the securities trading portfolio were $170,000, compared to net mark-to-market gains of $558,000 for the same period in 2010. For the three months ended September 30, 2011, net mark-to-market gains related to the securities trading portfolio were $55,000 compared to net mark-to-market gains of $177,000 for the same three months of 2010.

Loans and Leases
Loans and Leases at September 30, 2011 and December 31, 2010 were as follows:
(in thousands)	09/30/2011			12/31/2010
Commercial and industrial
Agriculture	$	48,557		$	65,918
Commercial and industrial other		416,484			409,432
Subtotal commercial and industrial		465,041			475,350
Commercial real estate
Construction		45,010			58,519
Agriculture		52,785			48,485
Commercial real estate other		669,411			619,458
Subtotal commercial real estate		767,206			726,462
Residential real estate
Home equity		161,710			164,765
Mortgages		485,212			462,032
Subtotal residential real estate		646,922			626,797
Consumer and other
Indirect		34,783			41,668
Consumer and other		31,617			31,757
Subtotal consumer and other		66,400			73,425
Leases		7,244			9,949
Total loans and leases		1,952,813			1,911,983
Less: unearned income and deferred costs and fees		(1,215	)		(1,625	)
Total loans and leases, net of unearned income and deferred costs and fees	$	1,951,598		$	1,910,358

Total loans and leases of $1.95 billion, at September 30, 2011, are up $41.2 million, compared to year-end 2010 balances, with growth in commercial real estate loans mainly offset by lower balances in commercial loans and consumer loans. As of September 30, 2011 total loans and leases represented 58.1% of total assets compared to 58.6% of total assets at December 31, 2010. In general, weak economic conditions continue to soften the demand for some lending products.

Residential real estate loans, including home equity loans, of $646.9 million at September 30, 2011 increased by $20.1 million or 3.2% from $626.8 million at year-end 2010, and comprised 33.1% of total loans and leases at September 30, 2011.

The Company has not originated any hybrid loans, such as payment option ARMs. The Company underwrites residential real estate loans in accordance with secondary market standards in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. The Company does not underwrite low or reduced documentation loans other than those that meet secondary market standards for low or reduced documentation loans. In those instances, W-2’s and paystubs are used instead of sending Verification of Employment forms to employers to verify income and bank deposit statements are used instead of Verification of Deposit forms mailed to financial institutions to verify deposit balances.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. Loans are generally sold to the Federal Home Loan Mortgage Corporation (“FHLMC”) or the State of New York Mortgage Agency (“SONYMA”). These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties. While in the past in rare circumstances the Company agreed to sell residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans is insignificant. The Company has never had to repurchase a loan sold with recourse.

During the first nine months of 2011 and 2010, the Company sold residential mortgage loans totaling $20.3 million and $30.4 million, respectively, and realized gains on these sales of $378,000 and $685,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights, at amortized basis, totaled $1.4 million and $1.5 million at September 30, 2011 and December 31, 2010, respectively.

Commercial real estate loans increased by $40.7 million, or 5.6%, from $726.5 million at year-end 2010, to $767.2 million or 39.3% of total loans at September 30, 2011. Commercial and industrial loans totaled $465.0 million at September 30, 2011, which is a 2.2% decrease from commercial loans of $475.4 million at December 31, 2010. Demand for commercial and commercial real estate loans continues to be soft in 2011, reflecting weak economic conditions. As of September 30, 2011, agriculturally-related loans totaled $101.3 million or 5.2% of total loans and leases. The decrease in agriculturally-related loans from year-end 2010 reflects some seasonal loan demand at year-end that is repaid during the first part of the year. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.

The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $66.4 million at September 30, 2011, down from $73.4 million at December 31, 2010. The decrease is mainly in indirect automobile loans and reflects competition as well as softened demand.

The lease portfolio decreased by 27.2% to $7.2 million at September 30, 2011 from $9.9 million at December 31, 2010. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. More aggressive competition for automobile financing has led to a decline in the consumer lease portfolio over the past several years. Management continues to review leasing opportunities, primarily commercial leasing and municipal leasing. As of September 30, 2011, commercial leases and municipal leases represented 98.3% of total leases, while consumer leases made up the remaining 1.7%. As of December 31, 2010, commercial leases and municipal leases represented 96.8% of total leases, while consumer leases made up the remaining 3.2%.

The Company’s loan and lease customers are located primarily in the New York communities served by its three subsidiary banks. Although operating in numerous communities in New York State, the Company is still dependent on the general economic conditions of New York. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.

The Allowance for Loan and Lease Losses

At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”, “doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon the customer’s expected future cash flow, operating results, and financial condition; value of the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors.

At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated as special mention or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or present value of expected future cash flows discounted at the original effective rate of each loan. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance.

Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. Based on its evaluation of the allowance as of September 30, 2011, management considers the allowance to be appropriate. Under adversely different conditions or assumptions, the Company would need to increase the allowance.

The table below provides, as of the dates indicated, an allocation of the allowance for probable and inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.


(in thousands)	09/30/2011		12/31/2010		09/30/2010

Commercial and industrial	$	8,569	$	7,824	$	7,933
Commercial real estate		13,853		14,445		14,908
Residential real estate		4,009		3,526		3,589
Consumer and other		1,408		1,976		2,188
Leases		39		61		66
Total	$	27,878	$	27,832	$	28,684

The allowance has increased annually since 2007, reflecting higher allocations driven by deterioration in asset quality metrics, including: higher levels of net charge-offs, internally-classified commercial and commercial real estate loans, and nonperforming loans and leases; weak economic conditions; soft real estate markets; and growth in the loan portfolio. The increase in the Company’s net charge-offs during 2010, 2009, and 2008 led to higher historical loss factors in the allowance model. These historical loss factors were also adjusted upwards to reflect weak and uncertain economic conditions, including pressure on real estate values, and high unemployment. The allocations assigned to the internally-classified loans were also up in 2010, a result of an increase in the volume of loans internally-classified and higher historical loss factors.

As of September 30, 2011, the overall allowance is up slightly over year-end 2010, driven by higher allocations for residential loans, reflecting concern over continued high unemployment and soft real estate values in some of the Company’s market areas. The decrease in the allocation for consumer loans is mainly a result of a decrease in the outstanding balance for this portfolio.

As of September 30, 2011, the overall allowance is up slightly over year-end 2010. Reserve allocations for residential loans were up over year-end 2010 amid concern over continued high unemployment and soft real estate values in some of the Company’s market areas. The increase in the allocation for commercial and industrial loans was primarily related to allocations for specific loans, partially offset by a decrease in classified loans. The decrease in the allocation for commercial real estate was mainly a result of a decrease in allocations for specific loans and a decrease in the level of classified loans. The Company had a $5.0 million partial charge off of a commercial real estate development loan during the third quarter. This loan was identified in prior quarters and had a specific allocation assigned in those prior quarters based upon the facts and circumstances in effect in those prior quarters. As a result of events that occurred during the third quarter, the Company recorded the $5.0 million charge-off related to this loan of which $1.9 million was specifically reserved for at June 30, 2011. At September 30, 2011 there was no specific reserve on this loan due to the charge-off noted above. The decrease in the allocation for consumer loans is mainly a result of a decrease in the outstanding balance for this portfolio.

Activity in the Company’s allowance for loan and lease losses during the first nine months of 2011 and 2010, and for the twelve months ended December 31, 2010 is illustrated in the table below.

Analysis of the Allowance for Loan and Lease Losses

(in thousands)	09/30/2011			12/31/2010			09/30/2010
Average loans outstanding during year	$	1,917,531		$	1,897,983		$	1,895,336
Balance of allowance at beginning of year		27,832			24,350			24,350

LOANS CHARGED-OFF:
Commercial and industrial		1,259			3,265			2,245
Commercial real estate		5,383			1,167			347
Residential real estate		1,503			791			432
Consumer and other		436			912			709
Total loans charged-off	$	8,581		$	6,135		$	3,733

RECOVERIES OF LOANS
PREVIOUSLY CHARGED-OFF:
Commercial and industrial		407			464			417
Commercial real estate		157			225			214
Residential real estate		33			85			85
Consumer and other		245			336			277
Total loans recovered	$	842		$	1,110		$	993
Net loans charged-off		7,739			5,025			2,740
Additions to allowance charged to operations		7,785			8,507			7,074
Balance of allowance at end of year	$	27,878		$	27,832		$	28,684
Annualized net charge-offs to average total loans and leases		0.54	%		0.26	%		0.19	%

As of September 30, 2011 the allowance was $27.9 million or 1.43% of total loans and leases outstanding, compared with $27.8 million or 1.46% at December 31, 2010 and $28.7 million or 1.50% at September 30, 2010. The allowance for loan and lease losses has increased since the economic downturn which began in 2008. Weak economic conditions contributed to increases in internally classified assets, nonperforming assets and net charge-offs in 2009 and 2010 and contributed to provisions for loan and lease losses in 2009 and 2010 that were higher than historical levels. Although nonperforming loans and leases and criticized and classified loans continue to be higher than historical levels, the Company has seen some early signs of improving economic conditions within the market areas in which it operates. The Company has seen some improvement in credit quality metrics over the past several quarters and current levels are down from the same period prior year. Nonperforming loans totaled $41.2 million at September 30, 2011, down 23.6% from September 30, 2010, and loans internally identified as Special Mention, Substandard, and Doubtful totaled $140.5 million, down 21.3% from the third quarter of 2010. However, with the strength of the economic recovery uncertain, there is no assurance that weak economic conditions may not adversely affect the credit quality of the Company’s loans and leases, results of operations, and financial condition going forward.

The provision for loan and lease losses was $4.9 million and $7.8 million, respectively, for the three and nine months ended September 30, 2011, compared to $3.5 million and $7.1 million, respectively, for the same periods in 2010. The increase in the provision for loan and lease losses in 2011 was largely the result of an increase in loan charge-offs during the third quarter, which included a $5.0 million charge-off related to a single commercial real estate customer. Net charge-offs for the three and nine months ended September 30, 2011 were $5.4 million and $7.7 million compared to $1.3 million and $2.7 million in the comparable year ago periods. Annualized net charge-offs for the first nine months of 2010 represent 0.54% of average loans, up from 0.19% for the first nine months of 2010, but is favorable to our peer group ratio of 1.01% at June 30, 2011.

Analysis of Past Due and Nonperforming Loans
(dollar amounts in thousands)	09/30/2011			12/31/2010			09/30/2010
Loans 90 days past due and accruing
Commercial and industrial	$	0		$	842		$	1,019
Commercial real estate		0			0			717
Residential real estate		379			368			0
Leases		0			7			0
Total loans 90 days past due and accruing		379			1,217			1,736
Nonaccrual loans
Commercial and industrial		9,143			7,271			8,640
Commercial real estate		22,771			24,791			32,491
Residential real estate		8,240			9,111			7,337
Consumer and other		254			309			479
Leases		11			19			20
Total nonaccrual loans		40,419			41,501			48,967
Troubled debt restructurings not included above		441			2,564			3,264
Total nonperforming loans and leases		41,239			45,282			53,967
Other real estate owned		1,632			1,255			1,845
Total nonperforming assets	$	42,871		$	46,537		$	55,812
Allowance as a percentage of loans and leases outstanding		1.43	%		1.46	%		1.50	%
Allowance as a percentage of nonperforming loans and leases		67.60	%		61.46	%		53.15	%
Total nonperforming assets as percentage of total assets		1.28	%		1.43	%		1.72	%

Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. Nonperforming assets represented 1.28% of total assets at September 30, 2011, compared to 1.43% at December 31, 2010, and 1.72% at September 30, 2010. In general, nonperforming assets increased in 2009 and 2010 reflective of weak economic conditions which began in the latter part of 2008. The Company has seen the level of nonperforming assets decrease from 2010. Nonperforming assets are down 7.9% from year-end 2010 and 23.2% from the third quarter of 2010. While the overall strength of the economy remains uncertain, there are signs of improvement in national and local economic conditions, which have contributed to some improvements in the financial conditions of several of the Company’s commercial and agricultural customers. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 3.24% at June 30, 2011.

Nonperforming loans represented 2.11% of total loans at September 30, 2011, compared to 2.37% of total loans at December 31, 2010, and 2.82% of total loans at September 30, 2010. A breakdown of nonperforming loans by portfolio segment is shown above. The decrease in nonperforming loans from year-end 2010 is mainly in residential real estate and commercial real estate loans. Commercial real estate loans represent the largest component of nonperforming loans. Nonperforming commercial real estate loans include one relationship totaling $7.4 million at September 30, 2011 and $12.4 million at December 31, 2010. The decrease reflects the $5.0 million charge-off during the third quarter of 2011. This loan is on nonaccrual and as of September 30, 2011 payments were past due 90 days or more.

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter include loans that meet the definition of a TDR but are performing in accordance with the modified terms.

In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured. As of September 30, 2011 and December 31, 2010, the Company was regularly receiving payments on over 60% of the loans categorized as nonaccrual.

The Company recorded investment in loans and leases that are considered impaired totaled $30.0 million at September 30, 2011, and $35.2 million at December 31, 2010. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, loans that are 90 days or more past due, and all TDRs. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.

The average recorded investment in impaired loans and leases was $27.1 million at September 30, 2011, $36.9 million at December 31, 2010, and $32.4 million at September 30, 2010. At September 30, 2011, $5.5 million of impaired loans had specific reserve allocations of $2.8 million and $24.5 million had no specific reserve allocation. At December 31, 2010, $15.4 million of impaired loans had specific reserve allocations of $3.2 million and $19.8 million had no specific reserve allocation. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserve because of the amount of collateral support with respect to these loans and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Interest income recognized on impaired loans and leases, all collected in cash, was $24,000 for the nine months ended September 30, 2011 and $147,000 for December 31, 2010.

The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 0.69 times at September 30, 2011, compared to 0.61 times at December 31, 2010, and was in line with September 30, 2010. The slight improvement in the ratio compared to year-end 2010 reflects an increase in the balance of the allowance and a decrease in the balance of nonperforming loans. The Company’s ratio is below our peer group ratio of 0.84 times as of June 30, 2011. The Company’s nonperforming loans are mostly made up of collateral dependent impaired loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs.

Management reviews the loan portfolio continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its internal loan review function, identified 59 commercial relationships totaling $42.6 million at September 30, 2011, that were classified as Substandard and continue to accrue interest. This presents an improvement from the 65 commercial relationships totaling $69.7 million at December 31, 2010, which were classified as Substandard, and continued to accrue interest. Of the 59 commercial relationships that were Substandard, there are 12 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $31.9 million, the largest of which is $10.1 million. Over the past few years, the Company has seen an increase in potential problem loans as weak economic conditions have strained borrowers’ cash flows and collateral values. The decrease in the dollar volume of potential problem loans since year-end 2010 was mainly due to the upgrade of several large commercial credits, including agriculturally-related loans, to a risk grading better than Substandard. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.

Capital

Total equity was $309.3 million at September 30, 2011, an increase of $35.9 million or 13.1% from December 31, 2010, mainly a result of net income of $26.0 million less cash dividends paid of $11.4 million and a $13.4 million increase in accumulated other comprehensive income.

Additional paid-in capital increased by $7.9 million, from $198.1 million at December 31, 2010, to $206.0 million at September 30, 2011, reflecting $2.5 million attributed to shares issued for an acquisition, $1.1 million related to shares issued for the employee stock ownership plan, $2.4 million related to shares issued for dividend reinvestment plans, $828,000 related to stock option exercises and related tax benefits, and $998,000 related to stock-based compensation. Retained earnings increased by $14.6 million from $76.4 million at December 31, 2010, to $91.1 million at September 30, 2011, reflecting net income of $26.0 million less dividends paid of $11.4 million. Accumulated other comprehensive loss declined from a net unrealized loss of $1.3 million at December 31, 2010 to a net unrealized gain of $12.1 million at September 30, 2011; reflecting a $12.7 million increase in unrealized gains on available-for-sale securities due to lower market rates, and an $687,000 decrease related to postretirement benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.

Cash dividends paid in the first nine months of 2011 totaled approximately $11.4 million, representing 43.9% of year to date 2011 earnings. Cash dividends of $1.04 per common share paid in the first nine months of 2011 were up 5.1% over cash dividends of $0.99 per common share paid in the first nine months of 2010.

On October 25, 2011, the Company’s Board of Directors authorized a new stock repurchase plan for the Company to repurchase up to 335,000 shares of the Company’s common stock. Purchases may be made on the open market or in privately negotiated transactions over the next 24 months. The repurchase program may be suspended, modified, or terminated at any time for any reason.

The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. The table below reflects the Company’s capital position at September 30, 2011, compared to the regulatory capital requirements for “well capitalized” institutions.

REGULATORY CAPITAL ANALYSIS September 30, 2011
	Actual					Well Capitalized Requirement
(dollar amounts in thousands)	Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	274,928		14.11	%	$	213,845		10.00	%
Tier 1 Capital (to risk weighted assets)	$	301,676		12.86	%	$	128,307		6.00	%
Tier 1 Capital (to average assets)	$	301,676		8.55	%	$	160,819		5.00	%

As illustrated above, the Company’s capital ratios on September 30, 2011 remain above the minimum requirements for well capitalized institutions. Total capital as a percent of risk weighted assets increased 71 basis points from 13.4% at December 31, 2010. Tier 1 capital as a percent of risk weighted assets increased 66 basis points from 12.2% at the end of 2010. Tier 1 capital as a percent of average assets increased 55 basis points from 8.0% at December 31, 2010. The increase in capital ratios over year-end 2010 reflects earnings growth out pacing asset growth.

During the first quarter of 2010, the Comptroller of the Currency (“OCC”) notified the Company that it was requiring Mahopac National Bank, one of the Company’s three banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations. The OCC is requiring Mahopac to maintain a Tier 1 capital to average assets ratio of 8.0%, a Tier 1 risk-based capital to risk-weighted capital ratio of 10.0% and a Total risk-based capital to risk-weighted assets ratio of 12.0%. Mahopac exceeded these minimum requirements at the time of the notification and continues to maintain ratios above these minimums. As of September 30, 2011, Mahopac had a Tier 1 capital to average assets ratio of 9.2%, a Tier 1 risk-based capital to risk-weighted capital ratio of 12.7% and a Total risk-based capital to risk-weighted assets ratio of 14.0%.

As of September 30, 2011, the capital ratios for the Company’s other two subsidiary banks also exceeded the minimum levels required to be considered well capitalized.

In December 2010, the oversight body of the Basel Committee on Banking Supervision published the final rules on capital, leverage and liquidity. Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to future requirements for financial institutions. The Company continues to monitor and evaluate the impact that Basel III may have on our capital ratios.

Deposits and Other Liabilities

Total deposits of $2.7 billion at September 30, 2011 increased $179.8 million or 7.2% from December 31, 2010, due primarily to an $171.7 million increase in interest checking, savings and money market balances and a $47.2 million increase in noninterest bearing deposits offset by a $39.1 million decrease in time deposits. Growth in personal and business deposits accounted for a majority of the increase in savings and money market balances from year end 2010.

Total deposits were up $147.1 million or 5.8% over September 30, 2010. The increase was due to a $145.7 million increase in interest checking, savings and money market accounts of which $128.4 million was attributable to growth in personal and business segments and $69.7 million of growth in noninterest bearing deposits. This was offset by a decline in time deposits of $68.3 million compared to September 30, 2010, mainly attributable to declines in time deposits less than $100,000.

The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $51.9 million at September 30, 2011, and $43.6 million at December 31, 2010. Management generally views local repurchase agreements as an alternative to large time deposits. The Company’s wholesale repurchase agreements are primarily with the FHLB and amounted to $120.0 million at September 30, 2011, comparable to $140.0 million at December 31, 2010.

The Company’s other borrowings totaled $138.0 million at September 30, 2011, down $106.2 million or 43.5% from $244.2 million at December 31, 2010. Borrowings at September 30, 2011 included $125.0 million in FHLB term advances and a $10.8 million advance from another financial institution. Borrowings at year-end 2010 included $144.0 million in FHLB term advances, $79.0 million of overnight FHLB advances, and a $19.4 million advance from another financial institution. The decrease in borrowings reflects the pay down of FHLB borrowings as a result of deposit growth and soft loan demand. Of the $125.0 million in FHLB term advances at September 30, 2011, $90.0 million are due over one year. In 2007, the Company elected the fair value option under FASB ASC Topic 825 for a $10.0 million advance with the FHLB. The fair value of this advance increased by $488,000 (net mark-to-market loss of $488,000) over the nine months ended September 30, 2011. This loss can be primarily attributed to volatile market forces in the 3rd quarter of 2011 in which the value of the advance increased $461,000.

Liquidity

The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.

Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $100,000 or more, brokered time deposits, municipal money market deposits, securities sold under agreements to repurchase and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources decreased by $82.3 million or 8.2% from December 31, 2010 to $923.5 million at September 30, 2011. Non-core funding sources, as a percentage of total liabilities, were 30.3% at September 30, 2011, compared to 33.7% at December 31, 2010. The decrease in non-core funding sources was mainly due to the decline of brokered time deposits, FHLB advances, and securities sold under agreements to repurchase, partially offset by an increase in municipal interest checking, savings and money market balances and time deposits of $100,000 or more. With the growth in core deposits and soft loan demand over the past several quarters, the Company has paid down non-core funding sources.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $789.7 million and $682.2 million at September 30, 2011 and December 31, 2010, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 69.8% of total securities at September 30, 2011, compared to 67.6% of total securities at December 31, 2010.

Cash and cash equivalents totaled $108.8 million as of September 30, 2011, up from $49.7 million at December 31, 2010. Short-term investments, consisting of securities due in one year or less, decreased $20.4 million to $22.1 million from $42.5 million at December 31, 2010. The Company also has $20.4 million of securities designated as trading securities.

Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $651.1 million at September 30, 2011 compared with $560.8 million at December 31, 2010. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $720.6 million at September 30, 2011 as compared to $710.6 million at December 31, 2010. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At September 30, 2011, the unused borrowing capacity on established lines with the FHLB was $1.0 billion. As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At September 30, 2011, total unencumbered residential mortgage loans of the Company were $199.2 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.

The Company continues to evaluate the potential impact on liquidity management of regulatory proposals, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter, the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within levels approved by the Company’s Board of Directors. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.

The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the simulation analysis performed as of August 31, 2011 a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year increase in net interest income from the base case of approximately 0.02%, while a 100 basis point parallel decline in interest rates over a one-year period would result in a decrease in one-year net interest income from the base case of 0.55%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.

The neutral exposure in a rising interest rate environment is mainly driven by the repricing assumptions of the Company’s core deposit base which currently match increases in asset yields in the short-term. Longer-term, the impact of a rising rate environment is slightly negative as assumed funding costs increase in the model. The moderate exposure in the 100 basis point decline scenario results from the Company’s assets repricing downward to a greater degree than the rates on the Company’s interest-bearing liabilities, mainly deposits. Rates on savings and money market accounts are at low levels as a result of the historically low interest rate environment experienced in recent years. In addition, the model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.

In our most recent simulation, the base case scenario, which assumes interest rates remain unchanged from the date of the simulation, showed a slight increase in net interest margin over the next twelve months. This is a result of the bank investing a large portion of the cash that was forecasted as earning the federal funds rate in the previous model assessment.

Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company’s interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.

In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of September 30, 2011. The Company’s one-year net interest rate gap was a negative $93.8 million or 2.79% of total assets at September 30, 2011, compared with a negative $152.8 million or 4.69% of total assets at December 31, 2010. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is more vulnerable to an increasing rate environment than it is to a prolonged declining interest rate environment. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.

Condensed Static Gap – September 30, 2011						Repricing Interval

(in thousands)	Total		0-3 months			3-6 months			6-12 months			Cumulative 12 months

Interest-earning assets1	$	3,079,599	$	730,837		$	179,611		$	330,216		$	1,240,664
Interest-bearing liabilities		2,440,265		976,076			160,215			198,214			1,334,505
Net gap position				(245,239	)		19,396			132,002			(93,841	)
Net gap position as a percentage of total assets				(7.30	%)		0.58	%		3.93	%		(2.79	%)

1 Balances of available secrities are shown at amortized cost

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2011. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Report on Form 10-Q the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2011, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is involved in legal proceedings in the normal course of business, none of which are expected to have a material adverse impact on the financial condition or results of operations of the Company.

Item 1A.

Risk Factors

There have been no material changes in the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds

Issuer Purchases of Equity Securities
	Total Number of Shares Purchased (a)		Average Price Paid Per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (c)		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (d)

July 1, 2011 through July 31, 2011		1,699	$	39.65		0		0

August 1, 2011 through August 31, 2011		513		43.37		0		0

September 1, 2011 through September 30, 2011		0		0		0		0

Total		2,212	$	40.51		0		0

Included in the table above are 1,699 shares purchased in July 2011, at an average cost of $39.65 and 513 shares purchased in August 2011, at an average cost of $43.37 by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, and were part of the director deferred compensation under that plan.

Recent Sales of Unregistered Securities

On June 1, 2011, 75,188 shares of the Company’s common stock were issued to one shareholder in a transaction exempt from registration pursuant to Section 4(2). On June 1, 2011, Tompkins Insurance acquired all the outstanding shares of Olver & Associates, Inc, a property and casualty insurance agency located in Ithaca, New York.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

(Removed and Reserved)

Item 5. Other Information

None

Item 6.	Exhibits

31.1	Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2	Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1	Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350.

32.2	Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350.

101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated Statements of Condition as of September 30, 2011 and December 31, 2010; (ii) condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010; (iii) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010; (iv) condensed Consolidated Statements of Changes in shareholders’ Equity for the six months ended September 30, 2011 and 2010; and, (v) Notes to unaudited Condensed Consolidated Financial Statements.

*	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 09, 2011

TOMPKINS FINANCIAL CORPORATION

By:	/s/ Stephen S. Romaine
	Stephen S. Romaine
	President and Chief Executive Officer (Principal Executive Officer)


By:	/s/ Francis M. Fetsko
	Francis M. Fetsko
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

Exhibit Number	Description	Pages


31.1	Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	57

31.2	Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	58

32.1	Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350	59

32.2	Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350	60

101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated Statements of Condition as of September 30, 2011 and December 31, 2010; (ii) condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010; (iii) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010; (iv) condensed Consolidated Statements of Changes in shareholders’ Equity for the six months ended September 30, 2011 and 2010; and, (v) Notes to unaudited Condensed Consolidated Financial Statements.	60

*	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Tompkins Financial - 10-Q quarterly report FY2011 Q3

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