Introduction

Presented below is an analysis of the consolidated financial condition and results of operations of BancTrust Financial Group, Inc., a 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 September 30, 2009 and significant changes in operations for the three- and nine-month periods ended September 30, 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," "will," "believe," "continue," "predict," "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:

- the risks presented by a continued economic recession, which could continue to adversely affect credit quality, collateral values, including real estate collateral and other real estate owned, investment values, liquidity and loan originations, reserves for loan losses, charge offs of loans and loan portfolio delinquency rates;
- we may be compelled to seek additional capital in the future to augment capital levels or ratios or improve liquidity, but capital or liquidity may not be available when needed or on acceptable terms;
- the reputation of the financial services industry could further deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
- existing regulatory requirements, changes in regulatory requirements, including accounting standards, and legislation and our inability to meet those requirements, including capital requirements and increases in our deposit insurance premiums, could adversely affect the businesses in which we are engaged, our results of operations and financial condition;
- changes in monetary and fiscal policies of the US government may adversely affect the business in which we are engaged;
- the frequency and magnitude of foreclosure of our loans may increase;
- the assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates may be inaccurate;
- competitive pressures among depository and other financial institutions may increase significantly;
- changes in the interest rate environment may reduce margins, reduce net interest income and negatively affect funding sources;
- we may be unable to obtain required shareholder or regulatory approval for any proposed acquisitions or financings or capital-raising transactions;
- we may be unable to achieve anticipated results from mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions and, integrating operations as part of these transaction; possible failures to achieve expected gain, revenue growth and/or expense savings from such transactions; and greater than expected deposit attrition, customer loss or revenue loss;
- competitors may have greater financial resources and develop products that enable them to compete more successfully than we can compete;
- adverse changes may occur in the capital markets; and
- we may not be able to effectively manage the risks involved in the foregoing.

The cautionary statements in this report on Form 10-Q and the risks and uncertainties listed from time to time in the Company's public announcements and in its filings with the SEC also identify important factors and possible events that involve risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date such statements were made.

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 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 applicable accounting standards. The amount of the allowance for loan and lease losses and the amount of the provision charged to expense are 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 for subsequent losses on other real estate owned when market conditions indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond our control, and future declines in the value of the real estate would result in a charge to earnings. 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 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 which test indicated that none of the Company's goodwill was impaired. Management updated its 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 this test 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 results of this test indicated that none of the Company's goodwill was impaired.

At June 30, 2009 the Company again tested its goodwill for impairment due to the further decline in the value of the Company's stock and due to the net loss in the second quarter of 2009. The fair value of our enterprise at June 30, 2009 was determined using two methods. The first is a market approach based on the actual market capitalization of the Company, adjusted for a control premium. 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 were used to estimate the fair value of the Company. These two methods provide a range of valuations that Management uses in evaluating goodwill for possible impairment. At March 31, 2009 and June 30, 2009, Management determined that the carrying amount of the Company's sole reporting unit exceeded 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 at March 31, 2009 supported the carrying amount of our goodwill, and, therefore, no impairment loss was recorded in the first quarter of 2009. The results of this second step analysis at June 30, 2009 indicated that all of the Company's goodwill was impaired, and, therefore, the Company recorded a charge of $97.4 million in the second quarter of 2009 to write off all of its goodwill.

The Company's stock price at March 31, 2009 was $6.31 per share. At June 30, 2009, the Company's stock price had declined 53 percent to $2.98 per share. Additionally, the average stock price for the quarter had declined 38 percent from $8.06 per share from the first quarter of 2009 to $4.97 per share for the second quarter of 2009. The values determined using the discounted cash flow model decreased by approximately $79.5 million from March 31, 2009 to June 30, 2009, primarily due to the increase in the projected loss for the year 2009 and the use of a higher discount rate. We used a higher discount rate of 19.49 percent at June 30, 2009 versus 16.00 percent at March 31, 2009 to compensate for increased risk due to the higher levels on non-performing loans, higher loan charge-offs and the continued weakness in our Florida market. These decreases led to a lower estimated fair value of equity at June 30, 2009 compared to March 31, 2009.

The Company's methodology for its step 1 testing in 2009 was consistent with tests performed in 2008, subject to refinements each quarter based on changing market conditions. The first and second quarter 2009 step 2 fair value allocations utilized consistent methodologies.

This write off of goodwill has no effect on our cash flows, our regulatory capital, the operation of our business or our ability to service our customers.

Income Taxes

Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of "other assets" in the consolidated balance sheets. The calculation of the Company's income tax expense is complex and requires the use of many estimates and judgments in its determination.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management's determination of the realization of the net deferred tax asset is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company's income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes. Management believes that the Company will generate sufficient operating earnings to realize the deferred tax benefits.

Financial Condition at September 30, 2009 and December 31, 2008

Overview

Total assets at September 30, 2009 were $2.036 billion, a decrease of $52.1 million, or 2.5 percent, from $2.088 billion at December 31, 2008. The decrease in total assets is due to the write-off of $97.4 million in goodwill during the second quarter of 2009. From December 31, 2008 to September 30, 2009, deposits increased by $76.0 million. We attribute this increase, at least in part, to our offering higher rates on some deposits to increase our liquidity. Brokered deposits decreased by $23.1 million. We used the proceeds from the increase in customer deposits to increase our interest-bearing deposits in other banks, which represent our overnight investments, and to increase our investment in securities available for sale. Interest-bearing deposits in other banks increased by $15.7 million and investment securities increased by $82.6 million from December 31, 2008 to September 30, 2009.

Our net interest margin for the first nine months of 2009 was 2.80 percent compared to 3.49 percent for the same period last year. Our net interest margin for the third quarter of 2009 was 2.92 percent compared to 3.25 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, a reduction in the value of real estate serving as collateral for some of our loans, and decrease in values of foreclosed real estate. 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. During the second quarter we hired two seasoned veteran executives in Florida, one of whom serves as area president, to manage this market, with a charge to focus on problem assets. We also engaged a commercial real estate consultant and a local realtor to assist with the disposition of our other real estate in northwest Florida. 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 focusing 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 $1.496 billion at September 30, 2009, a decrease of $37.5 million, or 2.4 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. Although we continue to make new loans in the markets we serve, 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. The foreclosure process will allow us to more readily market and dispose of non-performing assets. 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 September 30, 2009 and December 31, 2008.

                                                September 30, 2009   December 31, 2008
(In thousands)
Commercial, Financial and Agricultural                    $320,668            $349,897
Real Estate - Construction                                 395,373             439,425
Real Estate - Mortgage                                     697,615             663,423
Installment                                                 84,828              84,787
Total Loans, Loans Held for Sale, and Leases             1,498,484           1,537,532
Unearned Discount on Leases                                (3,591)             (5,204)
Unearned Loan Income and Deferred Loan Cost,
Net                                                          1,365               1,478
Total Loans, Loans Held for Sale, and Leases
Net of Unearned Income and Deferred Loan Costs          $1,496,258          $1,533,806

Investment Securities

The composition of the investment portfolio by carrying amount is 0.47 percent U.S. Treasuries, 25.85 percent U.S. securities of government sponsored enterprises, 6.03 percent securities of state and political subdivisions, and 67.65 percent mortgage-backed securities at September 30, 2009. All mortgage-backed securities are backed by one-to-four-family mortgages, and approximately 98.2 percent of the mortgage-backed securities represent U.S. Government-sponsored enterprise securities. The tax-equivalent yield of the portfolio at September 30, 2009 and December 31, 2008, was 3.74 percent and 5.26 percent, respectively. The average maturity of the portfolio, excluding mortgage-backed securities (as these have monthly principal payments), at September 30, 2009 and December 31, 2008, was 7.31 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 $1.8 million from December 31, 2008 to September 30, 2009, primarily due to our sale of investment securities which resulted in a realized gain of $3.1 million.

The Company recorded an impairment charge related to potential credit loss of $150 thousand in the third quarter of 2009 related to one investment security. The Company has credit support from subordinate tranches of this security, but the Company has concluded that its unrealized loss position is other-than-temporary. The amount related to credit loss was determined based on a discounted cash flow method that takes into account several factors including default rates, prepayment rates, delinquency rates, and foreclosure and loss severity of the underlying collateral. Changes in these factors in the future could result in an increase in the amount deemed to be credit-related other-than-temporary impairment which would result in the Company recognizing additional impairment charges to earnings for this security. Management will continue to closely monitor this security. The security has an estimated fair value of $3.6 million and an unrealized loss of $1.2 million at September 30, 2009. The Company does not believe that any non-credit other-than-temporary impairments exist related to these investment securities. 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 $1.738 billion at September 30, 2009, an increase of $76.0 million, or 4.6 percent. Core deposits, considered to be total deposits less time deposits of $100 thousand or more, increased by $45.4 million, or 3.7 percent. Earlier this year, we had some customers withdraw funds due to concerns about balances above FDIC insurance limits. To retain deposits, we 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, has helped 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 the remainder of 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, with similar non-core funding sources, but we do not plan to increase the amount of funding from these sources. At September 30, 2009, we had $31.6 million in brokered time deposits and $52.3 million of CDARS brokered time deposits compared to $48.2 million and $58.9 million, respectively, at December 31, 2008. 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. Brokered deposits, including CDARS deposits, accounted for 4.83 percent of total deposits at September 30, 2009 compared to 6.44 percent at December 31, 2008. We also had FHLB advances of $58.2 million at September 30, 2009 compared to $58.5 million at December 31, 2008. We replaced one $22 million FHLB Advance in the second quarter of 2009.

The following table shows the breakdown of deposits at September 30, 2009 and December 31, 2008.

(In thousands)                                 September 30, 2009            December 31, 2008
Non-Interest-Bearing Demand Deposits           $        225,917                   $      212,260
Interest-Bearing Demand Deposits                        498,554                          479,634
Savings Deposits                                        127,868                          105,631
Large Denomination Time Deposits (of $100               458,801                          428,291
or more)
Other Time Deposits                                     427,290                          436,661
Total Deposits                                       $1,738,430                       $1,662,477

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

As of September 30, 2009, our debt consisted of advances from the FHLB of $58.2 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 trust preferred securities and $848 thousand of other long-term debt. These amounts are relatively unchanged from December 31, 2008.

Beginning as of March 31, 2008 and continuing through June 30, 2009, the Company was in breach of one or more financial covenants in its loan agreement with Silverton Bank, N.A. (formerly The Bankers Bank, N.A.), which loan agreement was assumed by Federal Deposit Insurance Corporation as Receiver for Silverton Bank, N.A. The current outstanding principal balance of the loan is $20 million, and the stock of our subsidiary bank is pledged as collateral. Each quarter we have obtained a waiver of these covenant breaches from Silverton or the FDIC as Receiver, as applicable. On October 28, 2009 the FDIC as Receiver for Silverton . . .