MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Presented below is an analysis of the consolidated financial condition and results of operations of BancTrust Financial Group, Inc., a one-bank holding company ("BancTrust"), and its wholly owned subsidiary, BankTrust (the "Bank"). As used in the following discussion, the terms "we," "us," "our" and the "Company" mean BancTrust Financial Group, Inc. and its subsidiary on a consolidated basis (unless the context indicates another meaning). This analysis focuses upon significant changes in financial condition between December 31, 2007 and September 30, 2008 and significant changes in operations for the three- and nine- month periods ended September 30, 2008 and 2007.

In October of 2007, the Company completed the acquisition of The Peoples BancTrust Company, Inc. ("Peoples"). On the acquisition date the assets of Peoples were approximately $999 million. The acquisition of Peoples was accounted for under the purchase accounting method as required by United States generally accepted accounting principles. Under this method of accounting, the financial statements and tables do not reflect the results of operations or financial condition of Peoples prior to October 15, 2007. One result of this accounting method is that certain items shown in the financial statements and tables presented in this report are less useful as a means of judging the Company's performance in 2008 compared to 2007.

Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements with respect to critical accounting policies, financial condition, liquidity, non-performing assets, results of operations and other matters. Forward-looking statements may be found in the Notes to Unaudited Consolidated Condensed Financial Statements and in the following discussion. These statements can generally be identified by the use of words such as "expect," "may," "could," "should," "intend," "plan," "project," "estimate," "anticipate" or words of similar meaning. The Company cautions readers that forward-looking statements are subject to risks and uncertainties that can cause actual results to differ materially from those indicated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated include, among others:

- Interest rate fluctuations;
- Changes in economic conditions;
- Effectiveness of the Company's marketing efforts;
- Acquisitions and the integration of acquired businesses;
- Competition;
- Changes in technology;
- Changes in law;
- Cost and availability of capital;
- Changes in fiscal, monetary, regulatory and tax policy;
- Customers' financial failures;
- Fluctuations in stock and bond markets;
- The discretion of applicable regulatory authorities;
- Changes in political conditions;
- War and terrorist acts;
- Hurricanes and other natural disasters;
- Fluctuations in real estate markets;
- Inflation; and
- Other risks and uncertainties listed from time to time in the Company's public announcements and in its filings with the SEC.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") ratified Emerging Issues Task Force ("EITF") Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF Issue No. 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee. This Issue states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under EITF Issue No. 06-4, the obligation is not settled upon entering into an insurance arrangement. Since the obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance. The Company adopted EITF Issue No. 06-4 in the first quarter of 2008. The impact of the implementation of EITF Issue No. 06-4 was a reduction in retained earnings and an increase in other liabilities of $156 thousand. The effect on net income subsequent to adoption was immaterial.

In December 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141R, Business Combinations ("SFAS No. 141R"). SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Company will account for business combinations under this Statement include: the acquisition date will be date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Company will be required to prospectively apply SFAS No. 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS No. 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented in the consolidated financial statements.

In November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings ("SAB No. 109"). SAB No. 109 rescinds SAB No. 105's prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company adopted the provisions of SAB No. 109 in the first quarter of 2008. The adoption of SAB No. 109 did not have a material impact on the results of operations or financial condition of the Company.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment SFAS No. 115 ("SFAS No. 159"), which permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The Company adopted the non-elective provisions of SFAS No. 159 in the first quarter of 2008. The impact was not material to the Company's financial condition or results of operations. No assets or liabilities were selected for fair value measurement under SFAS 159.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No. 160 requires noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside of equity. Disclosure requirements include the display of net income and comprehensive income for both the controlling and noncontrolling interests and a separate schedule that shows the effects of any transactions with the noncontrolling interests on the equity attributable to the controlling interest. The provisions of this statement are effective for fiscal years beginning after December 15, 2008. This statement will be applied prospectively except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. Management is currently evaluating this statement and its effect on the consolidated financial statements of the Company.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. The required disclosures include the fair value of derivative instruments and their gains or losses in tabular format, information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and the Company's strategies and objectives for using derivative instruments. This statement expands the current disclosure framework in SFAS No.
133. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. Management does not expect the adoption of SFAS No. 161 to have an impact on the consolidated financial statements of the Company.

In April 2008, the FASB issued FASB Staff Position ("FSP") No. SFAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This FSP applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company will adopt the provisions of FSP No. SFAS 142-3 in the first quarter of 2009, as required, but does not expect the impact to be material to the Company's financial condition or results of operations.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest is recognized in subsequent periods. This FSP is effective for fiscal years beginning after December 15, 2008. Management does not expect the adoption of FSP APB 14-1 to have an impact on the consolidated financial statements of the Company.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP addresses whether such instruments are participating securities prior to vesting and, therefore, need to be included in the EPS calculation under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. This FSP is effective for fiscal years beginning after December 15, 2008. Management does not expect the adoption of FSP EITF 03-6-1 to have an impact on the consolidated financial statements of the Company.

In October 2008, the FASB issued FSP No. 157-3 , Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS No. 157 in a market that is not active and applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with Statement 157. This FSP also provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance on October 10, 2008 and includes periods for which financial statements have not yet been issued. The adoption of FSP No. 157-3 did not have a material impact on the consolidated financial statements of the Company.

Critical Accounting Policies

Basis of Financial Statement Presentation

The financial statements included in this report have been prepared in conformity with accounting principles generally accepted in the United States of America and with general practices within the banking industry. In preparing the consolidated financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and the fair value of goodwill.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered by Management to be sufficient to absorb losses inherent in the loan portfolio. Loans and leases are charged off against the allowance for loan and lease losses when Management believes that the collection of the principal is unlikely. Subsequent recoveries are added to the allowance. BancTrust's determination of its allowance for loan losses is made in accordance with Statement of Financial Accounting Standards ("SFAS") Nos. 114 and 5. The amount of the allowance for loan losses and the amount of the provision charged to expense is based on periodic reviews of the portfolio, past loan loss experience, current economic conditions and such other factors which, in Management's judgment, deserve current recognition in estimating loan losses.

Management has developed and documented a systematic methodology for determining and maintaining an allowance for loan losses. A regular, formal and ongoing loan review is conducted to identify loans with unusual risks and probable loss. Management uses the loan review process to stratify the loan portfolio into risk grades. For higher-risk graded loans in the portfolio, Management determines estimated amounts of loss based on several factors, including historical loss experience, Management's judgment of economic conditions and the resulting impact on higher-risk graded loans, the financial capacity of the borrower, secondary sources of repayment, including collateral, and regulatory guidelines. This determination also considers the balance of impaired loans. Specific allowances for impaired loans are based on comparisons of the recorded carrying values of the loans to the fair value of the collateral. Recovery of the carrying value of loans is dependent to a great extent on economic, operating and other conditions that may be beyond the Company's control.

In addition to evaluating probable losses on individual loans, Management also determines probable losses for all other loans that are not individually evaluated. The amount of the allowance for loan losses related to all other loans in the portfolio is determined based on historical and current loss experience, portfolio mix by loan type and by collateral type, current economic conditions, the level and trend of loan quality ratios and such other factors that, in Management's judgment, deserve current recognition in estimating inherent loan losses. The methodology and assumptions used to determine the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.

Other Real Estate Owned

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan losses at the time of foreclosure. A provision is charged to earnings and a related valuation account for subsequent losses on other real estate owned is established when, in the opinion of Management, such losses have occurred. The ability of the Company to recover the carrying value of real estate is based upon future sales of the real estate. Our ability to effect such sales is subject to market conditions and other factors, all of which are beyond our control. The recognition of sales and sales gains is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred.

Goodwill

Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified intangibles are amortized over the period benefited. Goodwill is not amortized, although it is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate potential impairment. The impairment test is performed in two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, a second step analysis must be undertaken. The second step analysis compares the implied fair value of the reporting unit's goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

The fair value of our enterprise is determined using two methods, one based on the price as a multiple of tangible equity capital that similar banking companies have sold for and one based on discounted cash flow models with estimated cash flows based on internal forecasts of net income. These two methods provide a range of valuations that Management uses in evaluating goodwill for possible impairment. The Company completed its annual test of goodwill for impairment as of September 30, 2008. The results of this test indicated that none of the Company's goodwill was impaired; however, the excess of the fair value over the carrying value decreased from the previous assessment due to the decline in the Company's stock price and economic conditions prevalent in the Company's markets. If the Company's stock price continues to decline, if the Company does not produce anticipated cash flows, or if similar banking companies begin selling at significantly lower prices than in the past, the Company's goodwill may be impaired in the future.

Financial Condition at September 30, 2008 and December 31, 2007

Overview

Total assets at September 30, 2008 were $2.089 billion, a decrease of $151.2 million, or 6.7 percent, from $2.240 billion at December 31, 2007. Loans decreased by $111.0 million due to (i) the sale of our three Tuscaloosa area branches' loans of approximately $24.6 million, (ii) a decrease in loan demand in our Florida and central Alabama markets, and (iii) the transfer of approximately $39.7 million in loans to other real estate owned. Loan demand in certain of our markets remains relatively strong, especially in the Mobile/Baldwin county markets in Alabama.

We experienced a decrease in loan demand in late 2007, and this, together with a decrease in market interest rates, led us to begin offering lower rates on deposits, which, we believe, contributed to a reduction in deposits of $124.6 million from December 31, 2007 to June 30, 2008. From June 30, 2008 to September 30, 2008, deposits decreased by $16.2 million. The sale in the third quarter of 2008 of three Tuscaloosa area branches resulted in a decrease in deposits of $21.5 million; however, deposits increased during the third quarter of 2008 apart from the sale. During the second quarter of 2008 the decrease in deposits caused us to become a net borrower of overnight funds. During the third quarter of 2008 we were able to shift to our preferred position as a net seller of funds. We accomplished this in part by offering higher rates on some deposits to increase our liquidity and by offering fully insured time deposits through the CDARS program. The CDARS program allows us to increase the deposit protection offered on time deposits. Through this program, we divide customers' time deposits that are uninsured into time deposits under the FDIC insurance limit and swap the resulting time deposits with other financial institutions.

Federal Funds Sold and Interest Bearing Deposits, which together represent our overnight investments, decreased by $19.3 million from $70.6 million at December 31, 2007 to $51.4 million at September 30, 2008. Short-term borrowings decreased $3.2 million, or 77.2 percent, from $4.2 million at December 31, 2007 to $959 thousand at September 30, 2008. Our net interest margin for the first nine months of 2008 was 3.49 percent compared to 3.99 percent for the same period last year. The general decrease in interest rates due to Federal Reserve actions, the increase in non-performing assets and rate competition for deposits and commercial loans all contributed to this decrease in our net interest margin.

We continue to experience a severe downturn in the real estate market, primarily in our coastal markets of northwest Florida, and this has led to a significant increase in defaults by borrowers, a significant increase in loans charged-off and a reduction in the value of real estate serving as collateral for some of our loans. We have slowed loan growth in our Florida markets in response to the depressed real estate market; however, we have experienced loan growth in our Mobile market during 2008 due to its more stable economy, and we expect this growth to continue through the final quarter of 2008. Our loans in central Alabama have decreased due to lower demand. Management is committed to minimizing further losses in the loan portfolio. We have established a special assets committee to focus on credit quality in the Company's Florida markets and have assembled a team of senior credit officers charged with focussing on loan quality throughout the Company.

Recent Government Action

In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:

-The Emergency Economic Stabilization Act of 2008, approved by Congress and signed by President Bush on October 3, 2008, which, in part, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of mark-to-market accounting, and temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 until December 31, 2009;

-On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;

-On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Troubled Asset Relief Program ("TARP") Capital Purchase Program that encourages and allows financial institutions to obtain capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;

-On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (TLGP), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:

-Guarantee of newly-issued senior unsecured debt. This the guarantee would apply to new debt issued on or before June 30, 2009 and would provide protection until June 30, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee;

-Unlimited deposit insurance for non-interest bearing deposit transaction accounts. Financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance;

BancTrust has applied for $50 million of capital from the TARP Capital Purchase Program. If the Company's application to participate is granted and the Company chooses to proceed with the issuance, BancTrust would issue to the U.S. Treasury senior cumulative preferred stock, liquidation preference of $1,000 per share, having such terms as are required by the U.S. Treasury and approved by management of BancTrust after consultation with the Strategic Advisory Committee of the BancTrust Board of Directors. Funding is expected to occur by year-end 2008.

We plan to participate in the TLGP's enhanced deposit insurance program. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC's deposit insurance fund, we expect our deposit insurance costs to increase significantly during 2009.

Although it is likely that further regulatory actions will arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

Loans

Total loans and leases and loans held for sale, net of unearned loan income and deferred loan fees, decreased from $1.633 billion at December 31, 2007 to $1.522 billion at September 30, 2008, a decrease of $111.0 million, or 6.8 percent. The decrease in loans is attributable to the sale of the three Tuscaloosa branches, the transfer of loans to other real estate owned, loan charge-offs, loan participation payoffs and a decrease in loans in our Florida market as we have focused our attention in this market on managing our non-performing assets. We expect total loans to be lower at year end 2008 than at September 30, 2008 due to our cautious lending stance in Florida and our Gulf coast markets. We expect to focus more on credit quality than on growing loans in these markets until we see some stabilization in those economies and firming up of real estate values. In addition, we remain aggressive in moving non-performing loans through the work out process in order to minimize potential losses.

The following table shows the breakdown of loans at September 30, 2008 and December 31, 2007.

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