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BTFG > SEC Filings for BTFG > Form 10-Q on 13-Nov-2012All Recent SEC Filings




Quarterly Report


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, 2011 and September 30, 2012 and significant changes in operations for the three- and nine- month periods ended September 30, 2012 and 2011.

Cautionary Notice Concerning 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," "contemplate," "intend," "plan," "project," "estimate," "will," "believe," "continue," "predict," "anticipate" or words of similar meaning. The Company's forward-looking statements are based on information presently available to Management and assumptions that Management believes to be reasonable. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, in addition to the inherent uncertainty of predictions, which may be beyond our control and which may cause the actual results, performance, capital, ownership or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated include, among others:

- the risk that indications of an improving economy may prove to be premature;

- the risks presented by the recent economic recession and the slow recovery of the economy, which could continue to adversely affect credit quality, collateral values, including the value of 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;

- 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 U.S. 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 probable loan and lease losses, loan impairments 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;

- competitors may have greater financial resources and develop products that enable our competitors to compete more successfully than we can compete;

- specifically with respect to the pending Trustmark merger, such factors also include:

o the risk that BancTrust or Trustmark may be unable to obtain governmental and regulatory approvals required for the merger, or required governmental and regulatory approvals may delay the merger or result in the imposition of conditions that could cause the parties to abandon the merger;
o the risk that a condition to closing of the merger may not be satisfied;
o the timing to consummate the proposed merger;
o the risk that the businesses will not be integrated successfully;
o the risk that the cost savings and any other synergies from the transaction may not be fully realized or may take longer to realize than expected;
o disruption from the transaction making it more difficult to maintain relationships with customers, employees or suppliers; and
o the diversion of Management time on merger-related issues;

- If the merger agreement is terminated, we may be compelled to seek additional capital to augment capital levels or ratios or improve liquidity, and capital or liquidity may not be available when needed or on favorable terms;

- we may not be able to effectively manage the risks involved in the foregoing.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary notice and by those risks and uncertainties described under "Item 1A. Risk Factors" of this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2011 under "Special Cautionary Notice Regarding Forward-Looking Statements" and "Risk Factors," and by those risks and uncertainties otherwise disclosed in our Securities and Exchange Commission ("SEC") reports and filings. Such reports are available upon request from the Company, including through the Company's website at under the "Investor Relations" tab. These reports are also available from the SEC, including through the SEC's website at

We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date such statements were made. We do not intend to update or revise, and we assume no responsibility for updating or revising, any forward-looking statement attributable to us.

Pending Merger with Trustmark Corporation

On May 29, 2012, BancTrust and Trustmark Corporation ("Trustmark") announced the signing of a definitive merger agreement pursuant to which BancTrust has agreed to merge into Trustmark. Under the terms of the merger agreement, which has been approved unanimously by the Boards of Directors of BancTrust and Trustmark, and which has been approved by BancTrust common shareholders at a special meeting held on September, 26, 2012, holders of BancTrust common stock will receive 0.125 of a share of Trustmark common stock for each share of BancTrust common stock in a tax-free exchange. In connection with the merger Trustmark intends to repurchase the $50.0 million of BancTrust preferred stock and associated warrant issued to the U. S. Department of Treasury under the Capital Purchase Program.

On October 5, 2012, the Company and Trustmark entered into an amendment to the merger agreement. Pursuant to the amendment, the parties agreed to (1) close the merger of BancTrust with and into Trustmark on the later to occur of (a) the fifth business day following satisfaction or waiver (subject to applicable law) of the last to occur of the closing conditions (other than those conditions that by their nature are to be satisfied or waived at the closing), and (b) January 25, 2013, and (2) extend the outside closing date from December 31, 2012 to February 28, 2013. This extension provides additional time to receive regulatory approval and to ensure a smooth transition and operational conversion to Trustmark systems in early 2013. All other material aspects of the merger agreement remain unchanged.

Recent Accounting Pronouncements

See Note 2 in the notes to unaudited condensed consolidated financial statements.

Critical Accounting Policies

Basis of Financial Statement Presentation

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and general practices within the banking industry in the preparation of our financial statements. Certain accounting policies require Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. A description of what we deem to be our critical accounting policies is set forth below.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained at a level considered by Management to be adequate 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 determined in accordance with GAAP and other regulatory guidance. 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 uses a documented 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 guarantors, 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 for collateral-dependent loans, the present value of these loans' and leases' estimated cash flows discounted at each loan's or lease's effective interest rate, or the loan's or lease's observable market price. 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 assumptions and resulting allowance level are adjusted accordingly as these factors change.

Other Real Estate Owned Valuation

Other real estate owned ("OREO") is carried at the lower of the recorded investment in the loan or fair value, as determined by Management, less costs to dispose. 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 the carrying value of OREO is adjusted 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. The ability to effect such sales is subject to market conditions and other factors, some of which are beyond the Company's control. The recognition of sales and sales gains or losses 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 such requirements are not met, sale and gain recognition would be deferred.

Ongoing Valuation Assessments of Allowance for Loan and Lease Losses and Other Real Estate Owned

As discussed above, the allowance for loan and lease losses is based in part on the fair value of the real estate and other collateral underlying our collateral-based loans, and the carrying value of OREO is established at the lower of the recorded investment in the loan or fair value, whichever is lower. The "fair value" of collateral and OREO is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the date such value is determined. The fair value of real estate collateral and OREO is determined by Management, and that determination is necessarily based on assumptions about how market participants would price such real estate collateral and OREO. Among the factors that Management considers when making such assumptions and determining fair value are:

? the expected time period that the Company can hold an asset before being required to sell the asset;

? the anticipated future economic prospects of our market areas;

? investor interest in our assets; and

? the anticipated future economic development that will occur in our market areas.

Throughout each year, Management conducts evaluations of our allowance for loan and lease losses and carrying value of OREO. In conducting evaluations in the first quarter of 2012, we determined that certain factors supporting our previous assumptions used in determining fair value were no longer accurate, and that those fair value assumptions needed to be reevaluated. The factors include:

? Guarantor support for certain loans was no longer available, due to the decline in financial condition of guarantors;

? The oil spill in the Gulf of Mexico caused a stagnation in the real estate market, slowing the recovery of real estate values, particularly in our Florida and South Alabama markets;

? The economic recession that began in 2008 persisted longer than expected, and recovery from the recession has been slower than expected;

? The second home market was devastated in the recession and has been slower to recover than expected;

? The value of subdivision lots and raw land has dramatically declined, and the new home construction and development market has been slower to recover than anticipated; and

? The amount of non-performing assets carried on the Company's books has dramatically increased, which requires the Company to either dispose of non-performing assets or raise additional capital to maintain an acceptable classified asset to capital ratio; and, because we were unable to complete a capital raise transaction, our assumed time period for disposal of non-performing assets has shortened.

Because of these and other factors, the Company reevaluated its assessment of fair value of OREO and the allowance for loan and lease losses, and made significant charge offs throughout 2011. Then, in the first quarter of 2012, in conjunction with the proposed capital raise transaction Management conducted an extensive review of the value of collateral underlying certain impaired loans and the value of OREO. During that review, Management encountered market data from external sources that led us to conclude that, at December 31, 2011, significant discounts were needed to the carrying value of OREO and that the value of collateral underlying those impaired loans was significantly less than previously estimated. Because our allowance for loan and lease losses is based, in part, on the value of that underlying collateral, charge offs were also needed in the allowance for loan and lease losses.

Since the majority of the Company's impaired loans are collateral dependent, Management concluded that a material weakness existed at December 31, 2011 in its internal control over financial reporting relating to the valuation, documentation and review of impaired loans and OREO. In response, Management implemented a remediation plan during the first quarter of 2012 which included obtaining external appraisals and independent external appraisal reviews on all impaired loans and OREO exceeding $1 million on an annual basis, more robust internal evaluations and quarterly valuation meetings to discuss current market data and further potential impairment. As this remediation plan is implemented over time, we may experience volatility attributable to varying Level 3 fair value measurements of these non-performing assets.

Income Taxes

Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, Management assesses the relative merits and risk of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments. Judgment is also exercised in assessing the realization of deferred tax assets and any needed valuation allowances. Accounting principles require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. In making such judgment, significant weight is given to evidence that can be objectively verified. After weighing the positive and negative evidence, Management determined that the "more likely than not" standard had not been met as of December 31, 2011 and September 30, 2012 and, accordingly, established a full valuation allowance for the net deferred tax asset.

Changes in the estimate of income tax liabilities occur periodically as a result of changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation, guidance, and income tax accounting pronouncements.

Financial Condition at September 30, 2012 and December 31, 2011


Total assets at September 30, 2012 were $1.955 billion, a decrease of $77.355 million, or 3.8% from December 31, 2011. Customer deposits decreased $31.178 million, primarily in the time deposit categories. Interest-bearing deposits in other financial institutions (overnight funds) increased $61.466 million, funded by the decrease in loans of $93.295 million. Time deposits decreased during 2012 due to our efforts to lower our cost of funds. In the first nine months of 2012, we experienced growth in non-interest-bearing and interest-bearing demand deposits and savings deposits. Time deposits over $100,000 decreased by $44.555 million, due in part to our efforts to lower our cost of funds.

Our net interest margin for the first nine months of 2012 decreased to 3.12 percent compared to 3.22 percent for the same period last year due to lower rates earned on investment securities and loans. Average interest earning assets decreased to $1.830 billion for the nine months ended September 30, 2012 from $1.944 billion for the same period in 2011 and this resulted in net interest revenue decreasing to $42.671 million for the first nine months of 2012 compared to $46.739 million for the same period in 2011. We estimate that our high level of non-performing assets resulted in our net interest margin for the first nine months of 2012 being approximately 50 basis points lower than it would have been if these assets had been earning interest.


Total loans and leases at September 30, 2012 were down $92.948 million from December 31, 2011. Most of the decrease was within the commercial and residential real estate portfolio, the majority of which was the result of paydowns, charge-offs, and transfers to other real estate. Economic conditions have continued to diminish loan demand in the third quarter of 2012. BankTrust is seeking new credit relationships and renewing existing ones, but the overall demand level has been insufficient to overcome the effect of repayments, maturities, and the problem loan resolution process of work-outs, charge-offs, and transfers to other real estate.

The following table shows loan and lease balances by loan type at September 30, 2012, and at the end of the four prior quarters.

                                                     2012                                    2011
                                     Sept. 30         June 30        March 31         Dec. 31        Sept. 30
                                                                (In thousands)
Commercial, financial and
   Commercial and industrial      $   266,015     $   269,376     $   282,581     $   278,032     $   274,764
   Agricultural                         1,223           1,284           1,237           1,028           2,897
   Equipment leases                     9,541          11,749          11,831          12,814          14,720
Total commercial, financial and
agricultural                          276,779         282,409         295,649         291,874         292,381
Commercial real estate:
Commercial construction,
  land and land
  development                         228,220         235,280         247,231         250,859         265,215
 Other commercial real estate         391,197         404,894         412,016         424,690         430,585
Total commercial real estate          619,417         640,174         659,247         675,549         695,800

Residential real estate:
Residential construction               13,624          15,349          15,829          13,509          15,328
Residential mortgage                  228,588         233,017         237,244         245,180         250,477
Total residential real estate:        242,212         248,366         253,073         258,689         265,805

Consumer, installment and
    single pay:
Consumer                               41,151          43,344          43,251          44,713          47,158
Other                                   4,583           4,166           5,222           6,265           6,442
Total consumer, installment
    and single pay                     45,734          47,510          48,473          50,978          53,600

    Total                           1,184,142       1,218,459       1,256,442       1,277,090       1,307,586
Less unearned discount leases            (725 )          (860 )        (1,009 )        (1,173 )        (1,355 )
Less deferred cost (unearned
loan fees), net                         1,024           1,050           1,057           1,132           1,145
                                  $ 1,184,441     $ 1,218,649     $ 1,256,490     $ 1,277,049     $ 1,307,376

For further discussion of these loan types and a more detailed breakdown of the types of loans in our portfolio, see "Risk Management in the Loan and Lease Portfolio and the Allowance for Loan and Lease Losses" below. The following table shows the distribution of loans by the geographic regions from which the loans and leases are serviced at September 30, 2012 and December 31, 2011.

                                                             September 30, 2012
                                           Southern       Central      Northwest
                                            Alabama       Alabama       Florida          Total
                                                           (Dollars in thousands)

Commercial, financial and agricultural:
Commercial and industrial                  $ 198,666     $  59,636     $    7,713     $   266,015
Agricultural                                     629           594              0           1,223
Equipment leases                                   0         9,541              0           9,541
Total commercial, financial and
agricultural                                 199,295        69,771          7,713         276,779
Commercial real estate:
Commercial construction, land and land
development                                   82,738        43,124        102,358         228,220
Other commercial real estate                 213,919       131,823         45,455         391,197
    Total commercial real estate             296,657       174,947        147,813         619,417

Residential real estate:
Residential construction                       7,790         5,250            584          13,624
  Residential mortgage                       104,505        83,754         40,329         228,588
Total residential real estate                112,295        89,004         40,913         242,212

Consumer, installment and single pay:
Consumer                                      20,945        19,392            814          41,151
Other                                            477         4,106              0           4,583
Total consumer, installment and single
pay                                           21,422        23,498            814          45,734
    Total                                  $ 629,669     $ 357,220     $  197,253     $ 1,184,142
   Percent of total                               53 %          30 %           17 %           100 %

                                                             December 31, 2011
                                           Southern       Central      Northwest
. . .
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