Forward-Looking Information

The following provides a narrative discussion and analysis of significant changes in our results of operations and financial condition for the three months ended March 31, 2009. Certain information included in this discussion contains forward-looking statements and information that are based on management's beliefs, expectations and conclusions, drawn from certain assumptions and information currently available. The Private Securities Litigation Act of 1995 encourages the disclosure of forward-looking information by management by providing a safe harbor for such information. This discussion includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that the expectations and conclusions reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties, which could cause the actual results to differ materially from our expectations. When used in this discussion, the words "anticipate," "believe," "estimate," "expect," "objective," "project," "forecast," "goal" and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements include, among others, increased competition, regulatory factors, economic conditions, changing interest rates, changing market conditions (including specifically the downturn in the U. S. real estate market), availability or cost of capital, changes in accounting standards and practices, employee workforce factors, ability to achieve cost savings and enhance revenues, the assimilation of acquired operations and establishing credit practices and efficiencies therein, acts of war or acts of terrorism or geopolitical instability and other effects of legal and administrative proceedings, changes in federal, state or local laws and regulations and other factors identified in Item 1A, "Risk Factors," and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2008, and that may be discussed from time to time in other reports filed with the Securities and Exchange Commission subsequent to this report. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Corporation. Any such statement speaks only as of the date the statement was made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions or other factors affecting such statements.

For purposes of the following discussion and analysis of the Corporation's financial condition and results of operations, the words the "Corporation," "we," "us" and "our" refer to the combined entities of Cadence Financial Corporation and Cadence, unless the context suggests otherwise.

Introduction and Management Overview

The Corporation is a bank holding company that owns Cadence. Cadence operates in the states of Mississippi, Alabama, Tennessee, Florida and Georgia. Cadence's primary business is providing traditional commercial and retail banking services to customers. Cadence also provides other financial services, including trust services, mortgage services, insurance and investment products. Our stock is traded on The NASDAQ Global Select Market ("NASDAQ") under the ticker symbol of "CADE".

Our net interest income declined from $14.5 million in the first quarter of 2008 to $12.4 million in the first quarter of 2009. For the first quarter of 2009, our net interest margin was 2.73%, compared to 3.23% for the first quarter of 2008. Our yield on earning assets declined by 156 basis points during this period, but was offset somewhat by a 1.3% increase in average earning assets.

Our loan yields declined by 175 basis points as compared to the first three months of 2008, partly due to the 200 basis point reduction in interest rates between March 31, 2008 and March 31, 2009. Our loan portfolio is composed of approximately 63% variable rate loans and 37% fixed rate loans. Also, in recent quarters, we have made a concerted effort to reduce our concentration in commercial real estate loans, particularly real estate development loans, which typically have higher yields. Overall, our average loan balances declined by approximately $33.4 million, or 2.5%, from the first quarter of 2008 to the first quarter of 2009.

Our average securities portfolio balances increased by $23.9 million, or 5.4%, between the first quarter of 2008 and the first quarter of 2009. However, our yield on securities declined by 54 basis points over this same period.

Our overall cost of funds declined by 124 basis points between the first quarter of 2008 and the first quarter of 2009. Average interest-bearing deposits increased 8.3% to $1.3 billion for the first quarter of 2009, compared to $1.2 billion for the first quarter of 2008, somewhat offset by a decline of $49.6 million, or 13.5%, in average borrowed funds.

Our provision for loan losses was $32.8 million for the first quarter of 2009, as compared to $3.0 million for the first quarter of 2008. We incurred $14.4 million in net charge-offs for the first quarter of 2009, compared to $2.9 million for the first quarter of 2008. Most of the increase in net charge-offs is attributable to two real estate development loans to one borrower. Also, we significantly increased our allowance for loan losses during the first quarter of 2009. Our allowance for loan losses was $39.1 million at March 31, 2009, compared with our allowance for loan losses at December 31, 2008 of $20.7 million. We have experienced an increase in non-performing loans, mostly due to commercial real estate construction and development loans. During the first quarter of 2009, we noted increased weakness in our Middle Tennessee and Florida markets.

Noninterest income, exclusive of securities gains and losses, was relatively flat between the first quarter of 2008 and the first quarter of 2009. The growth of noninterest income continues to be an important part of our strategic goals; however, many of our sources of noninterest income have been negatively impacted by the current economy.

Another goal of management in 2009 is to continue to control the level of noninterest expenses. During the first quarter of 2009, total noninterest expenses increased by $67.7 million from the same period of 2008. Included in this increase is a $66.8 million impairment loss on goodwill. The remaining increase resulted primarily from increases in FDIC insurance premiums and expenses relating to other real estate owned ("OREO").

In January 2009, the Corporation completed the sale of $44 million of non-voting preferred stock to the U.S. Treasury Department under the Capital Purchase Program ("CPP"). During the first quarter of 2009, we incurred $322,000 in dividend and accretion costs related to the preferred stock.

For the first quarter of 2009, we reported a net loss applicable to common shareholders of $84.5 million, or $7.09 per common share, compared to net income of $2.8 million, or $.23 per common share, for the first quarter of 2008.

We anticipate weak loan demand for the remainder of 2009 and expect our loan balances to continue to decrease as we focus on reducing our commercial real estate exposure. If rates remain flat as we currently expect, it will be difficult for us to expand our margin. However, we also expect our deposits and wholesale funding balances to decline, as we intend to use our excess liquidity to absorb maturing liabilities to reduce interest expense.

We continue to look for ways to grow noninterest income; however, the growth of noninterest income will remain a challenge under current economic conditions. We will also continue our efforts to control noninterest expenses by working to achieve maximum efficiencies. Effective June 1, 2009, we are suspending our 401(k) matching contributions. Also, we have frozen salaries for all employees at 2008 levels, except for the Chief Executive Officer and Chief Operating Officer, who reduced their salaries by 10%. The Board of Directors also took a 10% reduction in their board and committee fees. However, we expect our costs for FDIC insurance premiums to remain high for 2009, and we expect additional increases in OREO expenses based on recent additions.

We believe that credit quality represents our largest challenge for 2009. We are aggressively managing our credit issues to protect our future earnings. In management's opinion, the current level of the allowance for loan losses is sufficient for the level of anticipated losses in our current loan portfolio.

Our participation in the CPP has further strengthened our capital base. While the dividend and accretion costs related to the preferred stock will clearly be dilutive to earnings applicable to common shareholders in 2009, we anticipate that the additional capital could enhance our ability to execute our strategic initiatives as the economy improves.

Critical Accounting Policies

Our accounting and financial reporting policies conform to United States generally accepted accounting principles and to general practices within the banking industry. Note A of the Notes to Consolidated Financial Statements in our annual report contains a summary of our accounting policies. Management is of the opinion that Note A, read in conjunction with all other information in our annual report on Form 10-K for the year ended December 31, 2008, and the information in this quarterly report, including this Management's Discussion and Analysis, should be sufficient to provide the reader with the information needed to understand our financial condition and results of operations.

It is management's opinion that the areas of the financial statements that require the most difficult, subjective and complex judgments, and, therefore, contain the most critical accounting estimates, are the provision for loan losses and the resulting allowance for loan losses; the liability and expense relating to our pension and other postretirement benefit plans; issues relating to other-than-temporary impairment losses in the securities portfolio; and goodwill and other intangible assets.

Provision and Allowance for Loan Losses

Our provision for loan losses is utilized to replenish the allowance for loan losses on the balance sheet. The allowance is maintained at a level deemed adequate by management after its evaluation of the risk exposure contained in our loan portfolio. Our senior credit officers and our loan review staff perform the methodology used to make this determination of risk exposure on a quarterly basis. As a part of this evaluation, certain loans are individually reviewed to determine if there is an impairment of our ability to collect the loans and the related interest. This determination is generally made based on collateral value securing such loans. If the senior credit officers and loan review staff determine that impairments exist, specific portions of the allowance are allocated to these individual loans. We group all other loans into homogeneous pools and determine risk exposure by considering the following non-exclusive list of factors: historical loss experiences; trends in delinquencies and non-accruals; and national, regional and local economic conditions. These economic conditions would include, but not be limited to, general real estate conditions, the current interest rate environment and trends, unemployment levels and other information, as deemed appropriate. Additionally, management looks at specific external credit risk factors that bring additional risk into the portfolio. As of March 31, 2009, we identified the following three external risk factors: (1) a general decline in overall economic conditions;
(2) increased risk associated with commercial real estate credits; and (3) a general slowdown in the real estate market impacting the portfolio as a whole. These external risk factors are re-evaluated on a quarterly basis. Management makes its estimates of the credit risk in the portfolio and the amount of provision needed to keep the allowance for loan losses at an appropriate level using what management believes are the best and most current sources of information available at the time of the estimates; however, many of these factors can change quickly and with no advance warning. If management significantly misses its estimates in any period, it can have a material impact on the results of operations for that period and for subsequent periods.

Pension and Other Postretirement Benefit Plans

Another area that requires subjective and complex judgments is the liability and expense relating to our pension and other postretirement benefit plans. We maintain several benefit plans for our employees. They include a defined benefit pension plan, a defined contribution pension plan, a 401(k) plan and a deferred compensation plan. All contributions are made when due.

The defined benefit pension plan is the only plan that requires multiple assumptions to determine the liability under the plan. This plan has been frozen to new participants for several years. Management evaluates, reviews with the plan actuaries, and updates as appropriate the assumptions used in the determination of pension liability, including the discount rate, the expected rate of return on plan assets, and increases in future compensation. Actual experience that differs from the assumptions could have a significant impact on our financial position and results of operations. The discount rate and the expected rate of return on the plan assets have a significant impact on the actuarially computed present value of future benefits that is recorded on the financial statements as a liability and the corresponding pension expense.

In selecting the expected rate of return, management, in consultation with the plan trustees, selected a rate based on assumptions compared to recent returns and economic forecasts. We consider the current allocation of the portfolio and the probable rates of return of each investment type. In selecting the appropriate discount rate, management, with the assistance of actuarial consultants, performs an analysis of the plan's projected benefit cash flows against discount rates from a national Pension Discount Curve (a yield curve used to measure pension liabilities).

FASB Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," requires us to recognize the funded status of the plan (defined as the difference between the fair value of plan assets and the projected benefit obligation) on the balance sheet and to recognize in other comprehensive income any gains or losses and prior service costs or benefits not included as components of periodic benefit cost.

Other-Than-Temporary Impairment of Investment Securities

A third area that requires subjective and complex judgments on the part of management is the review of the investments in the securities portfolio for other-than-temporary impairments. EITF Issue 03-01 and FASB FSP FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," require us to review our investment portfolio and determine if it has impairment losses that are other-than-temporary. In making its determination, management considers the following items: (1) the length of time and extent to which the current market value is less than cost;
(2) evidence of a forecasted recovery; (3) financial condition and the industry environment of the issuer, including whether the issuer is a government or government-backed agency (all of the mortgage-backed securities and collateralized mortgage obligations held in our portfolio are issued by government-backed agencies); (4) downgrades of the securities by rating agencies; (5) whether there has been a reduction or elimination of dividends or interest payments; (6) whether we have the intent or ability to hold the securities for a period of time sufficient to allow for anticipated recovery of fair value; and (7) interest rate trends that may impact recovery and realization.

As of March 31, 2009, our securities portfolio included certain securities that were impaired by definition, but based on our review and consideration of the criteria listed above, we determined that none of the impairments were other-than-temporary.

Goodwill and Other Intangible Assets

FASB Statement No. 142, "Goodwill and Other Intangible Assets," eliminated the requirement to amortize goodwill; however, it does require periodic testing for impairment using a two-step approach. If the results of the first step of testing indicate that impairment does not exist, the test is complete; however, if the results of the first step indicate that impairment could exist, the second step of testing must be performed. We completed our periodic impairment test in accordance with FASB Statement No. 142 as of September 30, 2008. Based on the results of the first step of testing, we concluded that no impairment writedown was warranted as of September 30, 2008.

FASB Statement No. 142 requires that goodwill be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Several events occurred during the first quarter of 2009 that we felt triggered an additional test of

goodwill for impairment. These events included our results of operations for the three months ended March 31, 2009, the changes in credit quality of our loan portfolio, and the continued general decline in the economy. We engaged a third party to perform this additional goodwill impairment testing. Due primarily to the decline in the market value of our stock and the decline in prices paid in comparable bank acquisition transactions between September 30, 2008 and March 31, 2009, the first step of the goodwill impairment test indicated that potential impairment existed and the second step of testing should be performed to determine the amount of impairment. In the second step of the test, our consolidated balance sheet was marked to market to determine the current fair value of the goodwill that should be recorded on the balance sheet. As a result of this testing, we concluded that our goodwill was fully impaired as of March 31, 2009, and we recognized a goodwill impairment charge of $66.8 million for the quarter ended March 31, 2009. This charge eliminated all goodwill previously reflected on our balance sheet.

Other Accounting/Regulatory Issues

Cadence has entered into an agreement with the Office of the Comptroller of the Currency ("OCC"), effective April 17, 2009, to enhance its risk management and planning processes. In the agreement, Cadence and its Directors will work with the OCC to formalize enhanced risk management programs to monitor problem loans, update the Bank's strategic plan to address the current economic environment, and reduce the Bank's concentration of commercial real estate, among other practices and procedures. In anticipation of the agreement, Cadence's Board of Directors appointed a compliance committee to oversee these enhancements, and that committee has made significant progress toward its objectives.

In the normal course of business, Cadence makes loans to related parties, including our directors and executive officers and their relatives and affiliates. We make these loans on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties. Also, the loans are consistent with sound banking practices and within applicable regulatory and lending limitations. Please see Note O in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and our proxy statement for additional details concerning related party transactions.

Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits loans to executive officers. However, the rule does not apply to any loan made or maintained by an insured depository institution if the loan is subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act. All loans that the Bank makes to executive officers are subject to the above referenced section of the Federal Reserve Act.

We own NBC Capital Corporation (MS) Statutory Trust I, which was organized under the laws of the State of Connecticut for the purpose of issuing trust preferred securities. In accordance with FASB Interpretation No. 46 (revised December 2003), the trust, which is considered a variable interest entity, is not consolidated into our financial statements because the only activity of the variable interest entity is the issuance of the trust preferred securities.

Results of Operations

For the first quarter of 2009, we reported a net loss applicable to common shareholders of $84.5 million, or $7.09 per common share, compared to earnings of $2.8 million, or $.23 per common share, for the first quarter of 2008.

Net interest income for the first quarter of 2009 was $12.4 million, compared to $14.5 million for the same quarter of 2008, a decrease of 14.9%. During the first quarter of 2009, the net interest margin was 2.73%, compared to 3.23% for the same period of 2008. This 50 basis point decrease in margin resulted primarily from our loan yields declining at a faster rate than the cost of funds. When comparing the first quarter of 2009 to the same quarter of 2008, we lost 175 basis points of yield on our loans but only reduced the cost of funds by 124 basis points. A slight increase of $23.4 million, or 1.3%, in our average earning assets partially offset the effect of the declining margin on our net interest income for the first quarter of 2009. For additional information, please see the table entitled "Analysis of Net Interest Earnings" at the end of this section.

The provision for loan losses increased from $3.0 million during the first quarter of 2008 to $32.8 million in the first quarter of 2009. This increase was due to a higher level of net charge-offs ($14.4 million in the first quarter of 2009 as compared to $2.9 million in the first quarter of 2008), as well as a significant increase in classified loans. Two loans to a single borrower accounted for substantially all of the increase in net charge-offs in 2009. Also contributing to the increase in the provision for loan losses for the first quarter of 2009 was the updating of the three-year average historical loss factors included in our allowance for loan losses methodology. The 2008 losses were significantly higher than the 2005 losses that they replaced, which caused an increase in our estimate of the required allowance for loan losses as of March 31, 2009.

Noninterest income includes various service charges, fees and commissions, including insurance commissions earned by GCM. It has been, and continues to be, one of our strategic objectives to diversify our other income sources so that we can be less dependent on net interest income. Our noninterest income, exclusive of securities gains and losses, declined by $56,000, or 1.0%, from the first quarter of 2008 to the first quarter of 2009. The following table reflects the details of this change:

                                                      Quarter Ended March 31,
       (In thousands)                                2009        2008     Change
       Service charges on deposit accounts        $    2,005    $ 2,137   $  (132 )
       Insurance commissions, fees and premiums        1,306      1,379       (73 )
       Trust Department income                           466        564       (98 )
       Mortgage loan fees                                210        360      (150 )
       Other income                                    1,757      1,360       397

       Total other income                         $    5,744    $ 5,800   $   (56 )

The decline in service charge fee income can be attributed to fewer insufficient funds fees charged during the first quarter of 2009. Trust Department income was impacted by a decline in the market value of investments under management, and mortgage loan fees were affected by fewer home sales, lower demand for refinancings, and more conservative underwriting requirements. Our other noninterest income increased 29.2% from the first quarter of 2008 to the first quarter of 2009, primarily due to insurance proceeds from a bank owned life insurance policy of approximately $645,000 received in the first quarter of 2009 and $150,000 from the reversal of an accrual that was established at the time of our most recent acquisition. During the first quarter of 2008, we recognized a $232,000 gain on the sale of an asset held by the Corporation and $110,000 in proceeds from the redemption of stock in VISA.

We recognized $63,000 in securities gains during the first quarter of 2009, compared to gains of $203,000 during the first quarter of 2008.

Noninterest expense represents ordinary overhead expenses. Noninterest expenses increased by $67.7 million during the first quarter of 2009, compared with the first quarter of 2008. The following table reflects the details of this change:

                                                 Quarter Ended March 31,
           (In thousands)                       2009       2008      Change
           Salaries and employee benefits     $  7,900   $  7,967   $    (67 )
           Premises and fixed asset expense      1,979      1,996        (17 )
           Impairment loss on goodwill          66,846         -      66,846
           Other expense                         4,818      3,868        950

           Total other expense                $ 81,543   $ 13,831   $ 67,712

Salaries and employee benefits and premises and fixed asset expenses declined slightly from the first quarter of 2008 to the first quarter of 2009. However, our other noninterest expenses increased by $950,000, or 24.6%, from

the first quarter of 2008 to the first quarter of 2009, due primarily to increases in FDIC insurance premiums and expenses relating to OREO. FDIC insurance premiums increased from $64,000 in the first quarter of 2008 to $915,000 in the first quarter of 2009. OREO-related expenses increased from $157,000 in the first quarter of 2008 to $562,000 in the first quarter of 2009. The 2009 expenses include approximately $320,000 in losses on the sale of OREO.

In accordance with the provisions of FASB Statement No. 142 and based on the results of a third party analysis, we recognized a $66.8 million impairment loss on goodwill for the quarter ended March 31, 2009. This impairment charge eliminated all goodwill from our balance sheet.

. . .