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, 2008 and March 31, 2009 and significant changes in operations for the three-month periods ended March 31, 2009 and 2008.

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's ability to accurately project results or predict the future effects of its plans and strategies is inherently limited. Although Management believes that the expectations reflected in the Company's forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from the predictions set forth in the forward-looking statements. The Company's forward-looking statements are based on information presently available to Management and are subject to various risks and uncertainties, in addition to the inherent uncertainty of predictions, that may cause actual results to differ materially from the projections contained in the Company's 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 and regulation;
- Changes in the terms of the Company's agreements related to its preferred stock issued to the U.S. Treasury;
- 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

See Note B in the notes to unaudited condensed consolidated financial statements.

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 and lease 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 and Lease Losses

The allowance for loan and lease losses is maintained at a level considered by Management to be sufficient to absorb losses inherent in the loan and lease 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 and lease losses is made in accordance with Statement of Financial Accounting Standards ("SFAS") Nos. 114 and 5. The amount of the allowance for loan and lease losses and the amount of the provision charged to expense is based on periodic reviews of the portfolio, past loan and lease loss experience, current economic conditions and such other factors which, in Management's judgment, deserve current recognition in estimating loan and lease losses.

Management has developed and documented a systematic methodology for determining and maintaining an allowance for loan and lease losses. A regular, formal and ongoing loan and lease review is conducted to identify loans and leases with unusual risks and probable loss. Management uses the loan and lease review process to stratify the loan and lease portfolio into risk grades. For higher-risk graded loans and leases 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 and leases, the financial capacity of the borrower, secondary sources of repayment, including collateral, and regulatory guidelines. This determination also considers the balance of impaired loans and leases. Specific allowances for impaired loans and leases are based on comparisons of the recorded carrying values of the loans and leases to the fair value of the collateral. Recovery of the carrying value of loans and leases 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 and leases, Management also determines probable losses for all other loans and leases that are not individually evaluated. The amount of the allowance for loan and lease losses related to all other loans and leases in the portfolio is determined based on historical and current loss experience, portfolio mix by loan and lease type and by collateral type, current economic conditions, the level and trend of loan and lease quality ratios and such other factors that, in Management's judgment, deserve current recognition in estimating inherent loan and lease 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 and lease 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.

Management tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Management engages external valuation specialists to assist in its goodwill assessments. The Company completed its annual test of goodwill for impairment as of September 30, 2008. Management updated it test for impairment of goodwill at December 31, 2008 due to the decline in the price of our common stock and net earnings in the fourth quarter of 2008. The results of these tests indicated that none of the Company's goodwill was impaired. At March 31, 2009, due to the decline in the price of our common stock and the net loss in the first quarter of 2009, Management again tested for impairment of goodwill. The fair value of our enterprise was determined using two methods. The first is a market approach based on the price at which shares of similar companies are exchanged. The second is an income approach based on discounted cash flow models with estimated cash flows based on internal forecasts of net income. Both methods are used to estimate the fair value of the Company. The aforementioned market approach approximated the Company's actual average market capitalization, adjusted by an estimated control premium, for a period of time at or near March 31, 2009. These two methods provide a range of valuations that Management uses in evaluating goodwill for possible impairment. At March 31, 2009, Management determined that the carrying amount of the reporting unit exceeds its fair value, and Management performed a second step analysis to compare the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The results of this second step analysis supported the carrying amount of our goodwill and therefore no impairment loss has been recorded. If the Company's stock price continues to decline or remains significantly below book value, if the Company does not produce anticipated cash flows, if estimated future cash flows are discounted at a higher interest rate based on risk perceptions of the banking industry and/or the Company's common stock specifically, or if similar banking companies begin trading at significantly lower prices than in the past, the Company's goodwill may be impaired in the future.

Financial Condition at March 31, 2009 and December 31, 2008

Overview

Total assets at March 31, 2009 were $2.186 billion, an increase of $97.5 million, or 4.7 percent, from $2.088 billion at December 31, 2008. Interest bearing deposits increased by $118.5 million, primarily due to the increase in deposits of $108.5 million or 6.5 percent.

From December 31, 2008 to March 31, 2009, deposits increased by $108.5 million. We attribute this increase, at least in part, to our offering higher rates on some deposits to increase our liquidity. Brokered deposits increased by $11.7 million. We have brokered deposits maturing in the second quarter of 2009 that will bring our brokered deposits back down to the December 31, 2008 level. We used the proceeds from the increase in customer deposits to increase our interest-bearing deposits in other banks, which represent our overnight investments. Interest-bearing deposits in other banks increased by $118.5 million from $42.4 million at December 31, 2008 to $160.9 million at March 31, 2009.

Our net interest margin for the first three months of 2009 was 2.83 percent compared to 3.62 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 all contributed to this decrease in our net interest margin.

We continue to experience the adverse effects of 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. Loan demand in our Florida markets has remained weak. Our loans in central Alabama have decreased slightly 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.

Loans

Total loans and leases and loans held for sale, net of unearned loan income and deferred loan fees, decreased from $1.534 billion at December 31, 2008 to $1.532 billion at March 31, 2009, a decrease of $1.8 million, or 0.1 percent. The decrease in loans is attributable to 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 continue to decrease in part due to anticipated foreclosures on non-performing loans which will result in the transfer of these loans to other real estate and also due to our cautious lending stance in Florida and our Gulf Coast markets. We plan to emphasize credit quality rather than loan growth in these markets until we see economic stabilization and stabilization of real estate values on the coast. In addition, we remain aggressive in moving non-performing loans through the workout process in order to minimize potential losses.

The following table shows the breakdown of loans and leases at March 31, 2009 and December 31, 2008.

                                                March 31, 2009   December 31, 2008
(In thousands)
Commercial, Financial and Agricultural                $340,221            $349,897
Real Estate - Construction                             420,164             439,425
Real Estate - Mortgage                                 694,570             663,423
Installment                                             79,822              84,787
Total Loans, Loans Held for Sale, and Leases         1,534,777           1,537,532
Unearned Discount on Leases                            (4,751)             (5,204)
Unearned Loan Income and Deferred Loan Cost,
Net                                                      1,977               1,478
Total Loans, Loans Held for Sale, and Leases
Net of Unearned Income and Deferred Loan Costs      $1,532,003          $1,533,806

Investment Securities

The composition of the investment portfolio by carrying amount is 0.21 percent U.S. Treasuries, 26.17 percent U.S. securities of government sponsored enterprises, 13.62 percent securities of state and political subdivisions, and 60.00 percent mortgage-backed securities at March 31, 2009. The tax-equivalent yield of the portfolio at March 31, 2009 and December 31, 2008, was 4.60 percent and 5.26 percent, respectively. The average maturity of the portfolio, excluding mortgage-backed securities (as these have monthly principal payments), at March 31, 2009 and December 31, 2008, was 4.94 years and 5.46 years, respectively. We hold no trading securities or securities that are classified as held-to-maturity. The net unrealized gain on securities available-for-sale decreased by $2.8 million from December 31, 2008 to March 31, 2009, primarily due to our sale of investment securities which resulted in a realized gain of $2.3 million. The Company does not believe any other-than-temporary impairments exist related to these investment securities because the Company has the ability and positive intent to hold the securities until maturity. The Company does not own, and has not owned, preferred or common stock issue by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

Deposits

Total deposits increased from $1.662 billion at December 31, 2008 to $1.771 billion at March 31, 2009, an increase of $108.5 million, or 6.5 percent. Core deposits, considered to be total deposits less time deposits of $100 thousand or more, increased by $41.6 million, or 3.4 percent. We have had customers withdraw funds due to concerns about balances above FDIC insurance limits. To retain deposits, we have expanded our use of the CDARS program, which allows us to offer to our customers fully insured time deposits. We believe the increase in FDIC insurance coverage from $100 thousand to $250 thousand for interest bearing accounts and to an unlimited amount for non-interest bearing transaction accounts, will help stabilize our deposit base. Our primary focus continues to be attracting and retaining core deposits from customers who will use other products and services we offer. During 2009, due to liquidity considerations, we plan to replace non-core funding sources such as brokered deposits and other borrowed funds such as Federal Home Loan Bank ("FHLB") advances as they mature, but we do not plan to increase the amount of funding from these sources. At March 31, 2009, we had $59.9 million in brokered time deposits and $48.8 million of CDARS brokered time deposits compared to $48.2 million and $58.9 million, respectively, at December 31, 2008. The increase in brokered time deposits is due to our replacing, prior to maturity, some brokered deposits that will mature in the second quarter of 2009. The decrease in CDARS brokered time deposits is due in part to some customers transferring out of the CDARS program and back into bank time deposits due to higher rates offered on bank time deposits and the increased amount of FDIC deposit insurance. We expect our brokered deposits at the end of the second quarter to be back down to December 31, 2008 amounts. We also had FHLB advances of $58.3 million at March 31, 2009 compared to $58.5 million at December 31, 2008.

The following table shows the breakdown of deposits at March 31, 2009 and December 31, 2008.

(In thousands)                                 March 31, 2009             December 31, 2008
Non-Interest-Bearing Demand Deposits           $     218,234                   $      212,260
Interest-Bearing Demand Deposits                     507,033                          479,634
Savings Deposits                                     115,168                          105,631
Large Denomination Time Deposits (of $100            495,169                          428,291
or more)
Other Time Deposits                                  435,329                          436,661
Total Deposits                                    $1,770,933                       $1,662,477

Federal Home Loan Bank Advances, Short-Term Debt and Long-Term Debt

As of March 31, 2009, our debt consisted of advances from the FHLB of $58.3 million, a loan from an unaffiliated bank of $20.0 million, $34.0 million in junior subordinated notes issued by BancTrust to statutory trust subsidiaries in connection with offerings of $34.0 million of trust preferred securities and $858 thousand of other long term debt. These amounts are relatively unchanged from December 31, 2008.

As of March 31, 2009, the ratio of non-performing assets to total loans and other real estate owned was 9.99%, which exceeds the 5.00% allowed by the Loan Agreement governing the $20 million loan from Silverton Bank. Also at March 31, 2009, the debt coverage ratio was (0.17), which is lower than the 1.25 allowed by the Loan Agreement, and total classified assets were $187.939 million, which is higher than the $144.134 million allowed by the Loan Agreement. The stock of our subsidiary bank is pledged as collateral for this loan. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank. The FDIC was appointed as Receiver for Silverton Bank, and Silverton Bridge Bank, N.A. has been formed to take over the operations of Silverton Bank. The Company has been granted a waiver of these breaches of the loan covenants. This waiver only applies to the covenant breaches as of March 31, 2009, and the situation will be reviewed again as of June 30, 2009. If the Company remains in breach of these covenants and is unable to obtain a waiver or amendment of the loan agreement, the holder of the loan would have the right to give notice of default. If the Company is unable to cure the default within ninety days of notice, then the holder of this loan would have the right to declare the entire balance of the loan due and payable, which could have a material adverse effect on the Company's liquidity and ability to pay dividends. Management intends to work with the holder of this loan to actively pursue a prompt favorable resolution of this issue.

Asset Quality and Allowance for Loan and Lease Losses

Non-performing assets include accruing loans and lease 90 days or more past due, loans and leases on non-accrual, and other real estate owned. Commercial, business and installment loans and leases are classified as non-accrual by Management upon the earlier of: (i) a determination that collection of interest is doubtful, or (ii) the time at which such loans become 90 days past due, unless collateral or other circumstances reasonably assure full collection of principal and interest.

The following table is a summary of non-performing assets.

(Dollars in Thousands)
                                                                        March 31, 2009  December 31, 2008
Accruing loans 90 days or more past due
      Non-farm non-residential property loans                                    $ 232                $ -
      Commercial and industrial loans                                                -                  -
      Consumer loans                                                                 9                  1
                      Total accruing loans 90 days or more past due                241                  1
Loans on non-accrual
      Construction, land development and other land loans                       77,435             56,884
      1-4 family residential loans                                               8,576              8,229
      Multifamily residential loans                                                339                  -
      Non-farm non-residential property loans                                   13,159              4,298
      Commercial and industrial loans and leases                                 7,567              2,316
      Consumer loans                                                               670                750
      Other loans                                                                   20                 21
                      Total loans and leases on non-accrual                    107,766             72,498
Total non-performing loans and leases                                          108,007             72,499
Other real estate owned
      Construction, land development and other land                             45,925             46,252
      1-4 family residential properties                                          3,493              1,638
      Non-farm non-residential properties                                          626              3,012
                      Total other real estate owned                             50,044             50,902
Total non-performing assets                                                   $158,051           $123,401

Accruing loans 90 days or more past due as a percentage of loans and             0.02%              0.00%
leases
Total non-performing loans and leases as a percentage of loans and leases        7.05%              4.73%
Total non-performing assets as a percentage of loans, leases and other
real estate owned                                                                9.99%              7.79%


The following table contains a break out by location of non-performing assets at
March 31, 2009.

                        Non-performing Loans
(Dollars in Thousands)            and Leases   Other Real Estate Owned       Total

Central Alabama                     $ 15,024                   $ 5,891    $ 20,915
Southern Alabama                       3,282                    13,747      17,029
Northwest Florida                     76,301                    29,344     105,645
Other                                 13,400                     1,062      14,462
Total                               $108,007                   $50,044    $158,051

Loans on non-accrual at March 31, 2009 increased by $35.3 million from December 31, 2008 due to primarily to our very challenging market conditions. Most of this increase occurred in our Florida market. Other real estate owned decreased by $858 thousand from year-end 2008 to March 31, 2009. We are continuing to work through very difficult real estate markets, especially in Florida and along the Alabama coast. Most of our non-performing assets are located in the northwest Florida coastal markets and consist primarily of loans for land acquisition, construction and land development.

Not included in the non-performing assets table are potential problem loans totaling $90.5 million at March 31, 2009, which compares to $43.0 million at December 31, 2008. Potential problem loans are loans as to which Management has serious doubts as to the ability of the borrowers to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, non-performing assets. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect BancTrust's interest. Most of these loans are residential and commercial real estate development loans in our primary markets.

Management is continuing to closely monitor the value of real estate serving as collateral for our loans, especially in our coastal markets, due to Management's concern that the significant slowing of real estate sales activity in those markets will continue to have a negative impact on the value of real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition of certain of our borrowers. In many situations, adverse market conditions have placed stress on borrower liquidity levels, and collateral values have declined.

The allowance for loan losses represents Management's assessment and estimates of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain the allowance for loan losses at a level believed to be adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, Management reviews the size, quality and risk characteristics of loans in the portfolio. Management also considers such factors as our loan loss experience, the amount of past due and non-performing loans, specific known risks, the status, amounts and values of non-performing assets (including loans), underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for loan losses. . . .