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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number: O-13653



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THE PEOPLES BANCTRUST COMPANY, INC.

(Exact name of registrant as specified on its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Alabama                                                        |  | 63-0896239                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|310 Broad Street, Selma, Alabama                               |  | 36701                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(334) 875-1000

(Registrants telephone number, including area code)



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Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter time period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark, whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act)    Yes ̈No  x



As of the close of business on November 8, 2004, 5,580,884 shares of the registrants Common Stock, par value $.10 per share, were outstanding.



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PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



THE PEOPLES BANCTRUST CO., INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                           |  |                   |         |   |                  |   |         |  
|-------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                           |  | In Thousands      |        
|                                                                           |  | September 30,2004 |         |   | December 31,2003 |  
|                                                                           |  | (Unaudited)       |         |   |                  |  
|ASSETS:                                                                    |  |                   |         |   |                  |   |         |  
|Cash and due from banks                                                    |  | $                 | 41,741  |   |                  | $ | 57,433  |  
|Federal funds sold and securities purchased under agreements to resell     |  |                   | 37,500  |   |                  |   | 2,048   |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total cash and cash equivalents                                            |  |                   | 79,241  |   |                  |   | 59,481  |  
|                                                                           |  |                  
|Securities available-for-sale                                              |  |                   | 226,717 |   |                  |   | 225,135 |  
|                                                                           |  |                  
|Loans, net of unearned discount                                            |  |                   | 434,981 |   |                  |   | 461,405 |  
|Allowance for loan losses                                                  |  |                   | (9,396  | ) |                  |   | (11,995 | )
|                                                                           |  |                   |         |   |                  |   |         |  
|Net loans                                                                  |  |                   | 425,585 |   |                  |   | 449,410 |  
|                                                                           |  |                  
|Bank premises and equipment, net                                           |  |                   | 18,045  |   |                  |   | 17,093  |  
|Goodwill                                                                   |  |                   | 6,203   |   |                  |   | 6,203   |  
|Other intangible assets                                                    |  |                   | 715     |   |                  |   | 885     |  
|Other real estate, net                                                     |  |                   | 2,985   |   |                  |   | 2,395   |  
|Other assets                                                               |  |                   | 19,775  |   |                  |   | 17,979  |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total assets                                                               |  | $                 | 779,266 |   |                  | $ | 778,581 |  
|                                                                           |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                      |  |                   |         |   |                  |   |         |  
|Noninterest-bearing deposits                                               |  | $                 | 77,960  |   |                  | $ | 74,254  |  
|Interest-bearing deposits                                                  |  |                   | 573,899 |   |                  |   | 569,503 |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total deposits                                                             |  |                   | 651,859 |   |                  |   | 643,757 |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                   |        |   |                  |   | 1,816   |  
|FHLB and other borrowed funds                                              |  |                   | 48,737  |   |                  |   | 54,874  |  
|Other liabilities                                                          |  |                   | 3,773   |   |                  |   | 5,355   |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities                                                          |  |                   | 704,369 |   |                  |   | 705,802 |  
|                                                                           |  |                  
|Commitments and contingencies (Note 1)                                     |  |                   |        |   |                  |   |        |  
|                                                                           |  |                  
|Common stock                                                               |  |                   | 558     |   |                  |   | 556     |  
|Additional paid-in-capital                                                 |  |                   | 11,349  |   |                  |   | 11,146  |  
|Accumulated other comprehensive (loss) income, net of tax                  |  |                   | (278    | ) |                  |   | 643     |  
|Retained earnings                                                          |  |                   | 63,268  |   |                  |   | 60,434  |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                 |  |                   | 74,897  |   |                  |   | 72,779  |  
|                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                 |  | $                 | 779,266 |   |                  | $ | 778,581 |  
|                                                                           |  |                   |         |   |                  |   |         |  



See notes to Unaudited Condensed
Consolidated Financial Statements



2



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THE PEOPLES BANCTRUST CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|--------------------------------------------------- |  | --------------------------------------------------------- | --------- | ------------------------------ | - | --------- |  | - | --------- | - |  | - | ---------
|                                                    |  | In Thousands, except share and per share data (Unaudited)
|                                                    |  | Three Months EndedSeptember 30,                           |           | Nine Months EndedSeptember 30,
|                                                    |  | 2004                                                      |           | 2003                           |   | 2004      |  |   | 2003     
|Interest and fees on loans                          |  | $                                                         | 6,873     |                                | $ | 7,925     |  | $ | 20,966    |   |  | $ | 24,490   
|Interest and dividends on investment securities     |  |                                                           | 2,079     |                                |   | 1,388     |  |   | 6,008     |   |  |   | 4,385    
|Other interest income                               |  |                                                           | 163       |                                |   | 148       |  |   | 398       |   |  |   | 338      
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Total interest income                               |  |                                                           | 9,115     |                                |   | 9,461     |  |   | 27,372    |   |  |   | 29,213   
|                                                    |  |                                                           |           |                               
|Interest on deposits                                |  |                                                           | 2,311     |                                |   | 2,400     |  |   | 6,604     |   |  |   | 7,248    
|Interest on borrowed funds                          |  |                                                           | 591       |                                |   | 588       |  |   | 1,711     |   |  |   | 1,828    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Total interest expense                              |  |                                                           | 2,902     |                                |   | 2,988     |  |   | 8,315     |   |  |   | 9,076    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Net interest income                                 |  |                                                           | 6,213     |                                |   | 6,473     |  |   | 19,057    |   |  |   | 20,137   
|                                                    |  |                                                           |           |                               
|Provision for loan losses                           |  |                                                           |          |                                |   | 2,280     |  |   | (149      | ) |  |   | 4,688    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Net interest income after provision for loan losses |  |                                                           | 6,213     |                                |   | 4,193     |  |   | 19,206    |   |  |   | 15,449   
|                                                    |  |                                                           |           |                               
|Deposit service charges                             |  |                                                           | 1,245     |                                |   | 1,314     |  |   | 3,640     |   |  |   | 3,912    
|Net securities gains                                |  |                                                           | 210       |                                |   | 403       |  |   | 699       |   |  |   | 970      
|Other noninterest income                            |  |                                                           | 782       |                                |   | 1,093     |  |   | 2,690     |   |  |   | 3,117    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Total noninterest income                            |  |                                                           | 2,237     |                                |   | 2,810     |  |   | 7,029     |   |  |   | 7,999    
|                                                    |  |                                                           |           |                               
|Salaries, benefits and other personnel expense      |  |                                                           | 3,510     |                                |   | 3,330     |  |   | 10,292    |   |  |   | 9,979    
|Premises and fixed assets expense                   |  |                                                           | 1,240     |                                |   | 1,481     |  |   | 3,619     |   |  |   | 3,628    
|Other noninterest expense                           |  |                                                           | 1,655     |                                |   | 1,855     |  |   | 6,227     |   |  |   | 5,220    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Total noninterest expense                           |  |                                                           | 6,405     |                                |   | 6,666     |  |   | 20,138    |   |  |   | 18,827   
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Income before income taxes                          |  |                                                           | 2,045     |                                |   | 337       |  |   | 6,097     |   |  |   | 4,621    
|                                                    |  |                                                           |           |                               
|Provision for income taxes                          |  |                                                           | 272       |                                |   | 102       |  |   | 1,427     |   |  |   | 1,387    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Net income                                          |  | $                                                         | 1,773     |                                | $ | 235       |  | $ | 4,670     |   |  | $ | 3,234    
|                                                    |  |                                                           |           |                                |   |           |  |   |           |   |  |   |          
|Basic weighted average number of shares             |  |                                                           | 5,577,472 |                                |   | 5,562,802 |  |   | 5,571,715 |   |  |   | 5,562,802
|Diluted weighted average number of shares           |  |                                                           | 5,598,472 |                                |   | 5,589,508 |  |   | 5,594,917 |   |  |   | 5,586,592
|Basic net income per share                          |  | $                                                         | 0.32      |                                | $ | 0.04      |  | $ | 0.84      |   |  | $ | 0.58     
|Diluted net income per share                        |  | $                                                         | 0.32      |                                | $ | 0.04      |  | $ | 0.83      |   |  | $ | 0.58     
|Dividends per share                                 |  | $                                                         | 0.11      |                                | $ | 0.11      |  | $ | 0.33      |   |  | $ | 0.33     



See notes to Unaudited Condensed
Consolidated Financial Statements



3



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THE PEOPLES BANCTRUST CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



|                                                                                     |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------------------------- | ----- | ---- | ------------------------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | In ThousandsThree Months EndedSeptember 30, |       |      | In Thousands Nine Months EndedSeptember 30, |       
|                                                                                     |  | (Unaudited)                                 |      
|                                                                                     |  | 2004                                        |       | 2003 |                                             |        | 2004 |  |   | 2003   |  
|Net income                                                                           |  | $                                           | 1,773 |      | $                                           | 235    |      |  | $ | 4,670  |   |  | $ | 3,234  |  
|Other comprehensive income:                                                          |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  
|Unrealized gains (losses) on securities available for sale during the period         |  |                                             | 4,592 |      |                                             | (1,247 | )    |  |   | (761   | ) |  |   | (1,089 | )
|Less: reclassification adjustment for net gains included in net income               |  |                                             | 210   |      |                                             | 403    |      |  |   | 699    |   |  |   | 970    |  
|                                                                                     |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss)                                                    |  |                                             | 4,382 |      |                                             | (1,650 | )    |  |   | (1,460 | ) |  |   | (2,059 | )
|Income tax provision (benefit) related to items of other comprehensive income (loss) |  |                                             | 1,617 |      |                                             | (503   | )    |  |   | (539   | ) |  |   | (628   | )
|                                                                                     |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss), net of tax                                        |  |                                             | 2,765 |      |                                             | (1,147 | )    |  |   | (921   | ) |  |   | (1,431 | )
|                                                                                     |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  
|Comprehensive income (loss), net of tax                                              |  | $                                           | 4,538 |      | $                                           | (912   | )    |  | $ | 3,749  |   |  | $ | 1,803  |  
|                                                                                     |  |                                             |       |      |                                             |        |      |  |   |        |   |  |   |        |  



See notes to Unaudited Condensed
Consolidated Financial Statements



4



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THE PEOPLES BANCTRUST COMPANY., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                            |  |                                 |          |   |      |   |          |  
|----------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                            |  | In Thousands (Unaudited)        |         
|                                                            |  | Nine Months Ended September 30, |         
|                                                            |  | 2004                            |          |   | 2003 |  
|Cash provided by operating activities                       |  | $                               | 1,065    |   |      | $ | 5,274    |  
|                                                            |  |                                 |          |   |      |   |          |  
|Cash flow from investing activities                         |  |                                 |          |   |      |   |          |  
|Proceeds from sales of investment securities                |  |                                 | 83,214   |   |      |   | 70,352   |  
|Proceeds from maturities and calls of investment securities |  |                                 | 40,363   |   |      |   | 64,424   |  
|Purchases of investment securities                          |  |                                 | (126,214 | ) |      |   | (178,032 | )
|Net decrease in loans                                       |  |                                 | 26,580   |   |      |   | 35,221   |  
|Purchases of bank premises and equipment                    |  |                                 | (2,497   | ) |      |   | (1,604   | )
|Proceeds from sale of bank premises and equipment           |  |                                 | 38       |   |      |   | 9        |  
|Proceeds from sale of other real estate                     |  |                                 | 1,142    |   |      |   | 869      |  
|                                                            |  |                                 |          |   |      |   |          |  
|Net cash provided by / (used in) investing activities       |  |                                 | 22,626   |   |      |   | (8,761   | )
|                                                            |  |                                
|Cash flow from financing activities                         |  |                                 |          |   |      |   |          |  
|Net increase in deposits                                    |  |                                 | 8,102    |   |      |   | 56,553   |  
|Net decrease in borrowed funds                              |  |                                 | (7,674   | ) |      |   | (8,696   | )
|Contributions to defined benefit pension plan               |  |                                 | (2,672   | ) |      |   | (849     | )
|Dividends paid                                              |  |                                 | (1,687   | ) |      |   | (1,861   | )
|                                                            |  |                                 |          |   |      |   |          |  
|Net cash (used in) / provided by financing activities       |  |                                 | (3,931   | ) |      |   | 45,147   |  
|                                                            |  |                                
|Net increase in cash and cash equivalents                   |  |                                 | 19,760   |   |      |   | 41,660   |  
|Cash and cash equivalents at beginning of period            |  |                                 | 59,481   |   |      |   | 37,583   |  
|                                                            |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                  |  | $                               | 79,241   |   |      | $ | 79,243   |  
|                                                            |  |                                 |          |   |      |   |          |  
|Cash paid for interest                                      |  | $                               | 8,327    |   |      | $ | 9,125    |  
|                                                            |  |                                 |          |   |      |   |          |  
|Cash paid for income taxes                                  |  | $                               | 1,519    |   |      | $ | 1,855    |  
|                                                            |  |                                 |          |   |      |   |          |  



See notes to Unaudited Condensed
Consolidated Financial Statements



5



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THE PEOPLES BANCTRUST COMPANY, INC. AND SUBSIDIARY



Notes to the Unaudited Condensed Consolidated Financial Statements



Accounting Policies:



The accompanying unaudited condensed consolidated financial statements of The Peoples BancTrust Company, Inc,
(BancTrust) and its subsidiary, The Peoples Bank and Trust Company (Peoples Bank), along with its subsidiaries Loan Express, Inc. and The Peoples Insurance Agency, Inc. have been prepared in accordance with generally accepted
accounting principles for interim information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations are not necessarily indicative of
the results of operations for the full year or any other interim periods. For further information refer to the consolidated financial statements and footnotes thereto included in BancTrusts Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.



Commitments and Contingencies:



BancTrust and its subsidiaries are from time to time defendants in legal
actions arising from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at September 30, 2004 will have a materially adverse effect on BancTrusts financial statements.



Earnings Per Share (EPS):



The following table reflects the reconciliation of the numerator and
denominator of the basic EPS computation to the diluted EPS computation for the three and nine months ended September 30, 2004 and 2003 respectively (in thousands, except per share data):



|                                        |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|--------------------------------------- |  | ------------------------------------- | ----- | ------------------------------------ | ----- | --------------- | - | ------ |  | ------ | ----- | --------------- | ----- |  | - | ----
|                                        |  | Three months ended September 30, 2004 |       | Nine months ended September 30, 2004
|                                        |  | Income                                |       | Shares                               |       | Per-ShareAmount |   | Income |  | Shares |       | Per-ShareAmount
|Basic EPS                               |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Income available to common stockholders |  | $                                     | 1,773 |                                      | 5,577 |                 | $ | 0.32   |  | $      | 4,670 |                 | 5,572 |  | $ | 0.84
|Effect of dilutive securities           |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Stock options                           |  |                                       |       |                                      | 21    |                 |   |        |  |        |       |                 | 23    |  |   |     
|                                        |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Diluted EPS                             |  | $                                     | 1,773 |                                      | 5,598 |                 | $ | 0.32   |  | $      | 4,670 |                 | 5,595 |  | $ | 0.83
|                                        |  |                                      
|                                        |  | Three months ended September 30, 2003 |       | Nine months ended September 30, 2003
|                                        |  | Income                                |       | Shares                               |       | Per-ShareAmount |   | Income |  | Shares |       | Per-ShareAmount
|Basic EPS                               |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Income available to common stockholders |  | $                                     | 235   |                                      | 5,563 |                 | $ | 0.04   |  | $      | 3,234 |                 | 5,563 |  | $ | 0.58
|Effect of dilutive securities           |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Stock options                           |  |                                       |       |                                      | 27    |                 |   |        |  |        |       |                 | 24    |  |   |     
|                                        |  |                                       |       |                                      |       |                 |   |        |  |        |       |                 |       |  |   |     
|Diluted EPS                             |  | $                                     | 235   |                                      | 5,590 |                 | $ | 0.04   |  | $      | 3,234 |                 | 5,587 |  | $ | 0.58



6



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Stock-Based Compensation



SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value based method of accounting for an employee stock option or similar
equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the
fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. BancTrust has elected to continue to measure compensation cost for its stock option plans
under the provisions in APB Opinion 25 and has calculated the fair value of outstanding options for purposes of pro forma disclosure utilizing the Black-Scholes method.



At September 30, 2004, BancTrust had not issued stock options in 2004 to any of its executives or directors. The majority of
stock options granted by BancTrust in 2003 become fully vested after a one year period.



BancTrusts actual and pro forma information follows (in thousands, except per share data):



|                                                                                                                    |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30, |  
|                                                                                                                    |  | 2004                            |       | 2003                           |   | 2004 |  |   | 2003  |  
|                                                                                                                    |  | (unaudited)                     |       | (unaudited)                    |  
|Net income:                                                                                                         |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|As reported                                                                                                         |  | $                               | 1,773 |                                | $ | 235  |  | $ | 4,670 |   |  | $ | 3,234 |  
|Deduct: Total stock-based compensation expense determined under fair value based methods for all awards, net of tax |  |                                 |      |                                |   | 28   |  |   | (123  | ) |  |   | (71   | )
|                                                                                                                    |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|Pro forma net income                                                                                                |  | $                               | 1,773 |                                | $ | 263  |  | $ | 4,547 |   |  | $ | 3,163 |  
|                                                                                                                    |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|Basic earnings per share:                                                                                           |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|As reported                                                                                                         |  | $                               | 0.32  |                                | $ | 0.04 |  | $ | 0.84  |   |  | $ | 0.58  |  
|Pro forma                                                                                                           |  | $                               | 0.32  |                                | $ | 0.05 |  | $ | 0.82  |   |  | $ | 0.57  |  
|Diluted earnings per share:                                                                                         |  |                                 |       |                                |   |      |  |   |       |   |  |   |       |  
|As reported                                                                                                         |  | $                               | 0.32  |                                | $ | 0.04 |  | $ | 0.83  |   |  | $ | 0.58  |  
|Pro forma                                                                                                           |  | $                               | 0.32  |                                | $ | 0.05 |  | $ | 0.81  |   |  | $ | 0.57  |  



Recent Accounting Pronouncements:



In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. In addition, the provisions of the statement, with certain exceptions, were required to be applied prospectively. The initial implementation of the Statement did not have a material affect on BancTrusts
consolidated financial position or consolidated results of operations and management does not anticipate any such impact in the future.



7



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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The
changes in this Statement require that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. In particular, the changes
in this Statement (1) is expected to result in a more complete depiction of an entitys liabilities and equity and should, thereby, assist investors and creditors in assessing the amount, timing, and likelihood of potential future cash outflows
and equity share issuances, (2) is expected to enhance the relevance of accounting information by providing more information about an entitys obligations to transfer assets or issue shares, thus, improving its predictive value to users.
Reliability of accounting information should be improved by providing a portrayal of an entitys capital structure that is unbiased, verifiable, and more representationally faithful than information reported prior to issuance of this Statement.
Those changes may result in more consistent reporting of these financial instruments. Management does not believe the provisions of this standard will have a material impact on BancTrust. On November 7, 2003, the FASB deferred the effective dates
for certain aspects of SFAS 150, as originally released or amended, related to mandatorily redeemable noncontrolling interests and financial instruments of certain nonpublic entities.



Variable Interest Entities:



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 defines a variable interest entity (VIE)
as a corporation, partnership, trust, or any other legal structure used for business purposes that has: (a) an insufficient amount of equity to permit the entity to finance its activities, without additional subordinated financial support from other
parties; or (b) a group of equity holders that lack the direct or indirect ability to make decisions about an entitys activities through voting rights or similar rights; or (c) a group of equity holders who are not obligated to absorb the
expected losses of the entity or the right to receive the expected residual returns of the entity. FIN 46 requires a VIE to be consolidated by an investor company if the investor company, regardless of voting interests, is subject to a majority
(greater than 50 percent) of the risk of the expected losses from the VIEs activities or entitled to receive a majority (greater than 50 percent) of the VIEs expected residual returns or both. Prior to FIN 46, a partially-owned entity
was only consolidated into the investor companys consolidated financial statements if it was controlled by the investor company through voting interests.



In December 2003, the FASB issued a revision of FIN 46. The Revised Interpretation codifies both the proposed modifications and other decisions
previously issued through certain FASB Staff Positions (FSPs) and supercedes the original Interpretation to include: (1) deferring the effective date of the Interpretations provisions for certain variable interests, (2) providing additional
scope exceptions for certain other variable interests, (3) clarifying the impact of troubled debt restructurings on the requirement to reconsider (a) whether an entity is a VIE or (b) which party is the primary beneficiary of a VIE, and (4) revising
Appendix B of the Interpretation to provide additional guidance on what constitutes a variable interest. The revised Interpretation is effective for financial statements of periods ending after March 15, 2004. Entities which previously adopted the
provisions of the original Interpretation have the option of continuing to apply those provisions until the effective date of the Revised Interpretation or applying the provisions of the Revised Interpretation at an earlier date. The provisions of
the Revised Interpretation will not change the accounting treatment applicable to BancTrust under the provisions of the original Interpretation.



BancTrust adopted the provisions of FIN 46 effective December 31, 2003. Consequently, BancTrust has consolidated its financial statements with those of a
low income housing project to which it is a limited partner, and entitled to 99% of its operating income or losses. For this project, total assets are approximately $2.2 million as of September 30, 2004 and BancTrusts maximum exposure to loss
is $1.1 million.



Exposure:



|                             |  |   |          
|---------------------------- |  | - | ---------
|Total partners equity       |  | $ | 653,349  
|Total loan held by BancTrust |  |   | 425,603  
|                             |  |   |          
|                             |  |   | 1,078,952



8



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Pension Plan:



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pension and Postretirement Benefits. This
statement requires additional disclosures about the assets, obligations, and cash flows of defined benefit pension and postretirement plans, as well as the expense recorded for such plans. BancTrust and its subsidiaries are participants in a pension
plan that covers most employees who have met certain age and length of service requirements. The plan provides benefits based on final average earnings, covered compensation and years of benefit service. BancTrusts policy is to contribute
annually an amount that can be deducted for federal income tax purposes using the projected unit credit method. BancTrust assesses its funded position quarterly. Actuarial computations for financial reporting purposes are based on the projected unit
credit method. Pension expense is recorded based on estimates until the final actuarially determined cost is known. The components of the net periodic benefit cost for the three and nine months ended September 30, 2004 and 2003 are shown in the
following table:



|                                              |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|--------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                              |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                              |  | 2004                            |      |   | 2003                           |   |      | 2004 |  |   | 2003 |  
|                                              |  | (In thousands)                  |     
|Service cost                                  |  | $                               | 174  |   |                                | $ | 162  |      |  | $ | 521  |   |  | $ | 425  |  
|Interest cost                                 |  |                                 | 175  |   |                                |   | 158  |      |  |   | 526  |   |  |   | 415  |  
|Expected return on plan assets                |  |                                 | (167 | ) |                                |   | (122 | )    |  |   | (502 | ) |  |   | (322 | )
|Amortization of net (gain) loss               |  |                                 | 30   |   |                                |   | 25   |      |  |   | 91   |   |  |   | 65   |  
|Amortization of prior service cost            |  |                                 | (7   | ) |                                |   | (7   | )    |  |   | (21  | ) |  |   | (18  | )
|Amortization of transition (asset) obligation |  |                                 |     |   |                                |   |     |      |  |   |     |   |  |   |     |  
|                                              |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                     |  | $                               | 205  |   |                                | $ | 215  |      |  | $ | 615  |   |  | $ | 565  |  
|                                              |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  



In December 2003, the
American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This SOP addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.
It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be
accreted (accretable yield) to the excess of the investors estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investors initial investment in the
loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits
carrying over or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an
individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The changes required by this SOP are not expected
to have a material impact on results of operations, financial position, or liquidity of BancTrust.



Financial Guarantees:



Standby
letters of credit are commitments issued by BancTrust to guarantee the performance of a customer to a third party. The total amount of standby letters of credit with off-balance sheet risks as of September 30, 2004 was $22,793,000. These guarantees
are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risks involved in issuing letters of credit are essentially the same as those associated with
extending loan facilities to customers. BancTrust holds various assets as collateral supporting those commitments for which collateral is deemed necessary. FIN 45 requires the fair value of these commitments be recorded as of January 1, 2003. The
fair value of the commitment typically approximates the fee received from the customer for issuing such commitments. The amount recorded on the balance sheet as of September 30, 2004 was not material to BancTrusts consolidated financial
condition.



9



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Reclassifications:



Certain classifications within the loan portfolio included in the consolidated balance sheets for the year ended December 31, 2003 have been reclassified,
with no effect on total loans or total consolidated assets, to be consistent with the classifications adopted for the nine months ended September 30, 2004.



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



GENERAL



The following analysis focuses on the financial condition and results of operations of BancTrust, and should be read in conjunction with the consolidated
financial statements included in this report.



Managements discussion and analysis includes certain forward-looking statements addressing, among other things, BancTrusts prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied
by, and identified with, such terms as anticipates, believes, expects, intends, and similar phrases. Managements expectations for BancTrusts future operations and financial condition
necessarily involve a number of uncertainties, assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein include, but are not limited to: substantial changes in interest rates and changes in
the general economy, as well as changes in BancTrusts strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized.



Use
of estimates in the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ 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 and deferred tax assets or liabilities.



CRITICAL ACCOUNTING POLICIES



BancTrust has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America
in the preparation of its financial statements. Significant accounting policies are described in the footnotes to the consolidated financial statements in this quarterly report on Form 10-Q and at December 31, 2003 as disclosed in BancTrusts
annual report on Form 10-K.



Certain accounting policies
involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities. Management considers these accounting policies to be critical accounting policies. The judgments and
assumptions used are based on historical experience and other factors, which management believes are reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these
judgments and estimates which could have a material impact on the carrying values of BancTrusts assets and liabilities and results of operations.



Allowance for Loan Losses - A loan is considered impaired, based on current information and events, if it is probable that BancTrust will be unable
to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at
the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral.



BancTrust uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant
loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrowers financial data, and borrowers operating factors such as cash flows, operating income or loss, etc.



10



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The allowance for loan losses is established through charges to earnings in the form of a provision for
loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the
collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are
credited to the allowance.



Managements periodic
evaluation of the adequacy of the allowance also considers impaired loans and takes into consideration BancTrusts past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral, and current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account
the views of its regulators and the current economic environment, there can be no assurance that in the future BancTrusts regulators or its economic environment will not require further increases in the allowance.



Income taxes - The determination of BancTrusts overall income
tax provision is complex and requires careful analysis. As part of the overall business strategy, BancTrust may enter into business transactions that require management to consider tax laws and regulations that apply to the specific facts and
circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management continually monitors tax developments as they affect BancTrusts overall tax
position.



Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.



FINANCIAL CONDITION



Cash and Cash Equivalents



At September 30, 2004, cash and cash equivalents had increased to
$79,241,000, compared to $59,481,000 at December 31, 2003. Increases in deposits (see Deposits) and decreases in loans (see Loans) were the primary factors contributing to this increase. The increase in cash and
cash equivalents was partially offset by a increase in investment securities (see Investments) and a decrease in borrowed funds (see Liquidity). Cash and cash equivalents primarily consist of cash and due from
banks, combined with federal funds sold and securities purchased under agreements to resell. At September 30, 2004, cash and due from banks totaled $41,741,000 compared to $57,433,000 at December 31, 2003. BancTrust held $37,500,000 of federal funds
sold and securities purchased under agreements to resell at September 30, 2004 compared to $2,048,000 at December 31, 2003.



Investments



At September 30, 2004, investment securities totaled $226,717,000 compared to $225,135,000 at December 31, 2003.



BancTrust participates in the Security for Alabama Funds Enhancement
(SAFE) program. Under this program, banks that hold deposits of the State of Alabama, or deposits of SAFE member municipalities within the State of Alabama, must pledge qualifying securities (typically United States Treasury or Agency
debt instruments) as collateral for those amounts that exceed the FDIC insurable limit. At September 30, 2004, BancTrust had securities totaling $101,947,000 pledged to the Treasurer of the State of Alabama under the SAFE program.



At year-end 2003, and at September 30, 2004, the entire investment securities
portfolio was classified as available-for-sale, resulting in the portfolio being marked-to-market. At December 31, 2003, the portfolio had a net unrealized gain (net of taxes) of $643,000 compared to a net unrealized loss (net of taxes)
of $278,000 at September 30, 2004. Increases in market interest rates between December 31, 2003 and September 30, 2004 were the primary cause of the fluctuation from a net unrealized gain (net of taxes) to a net unrealized loss (net of taxes) within
the investment securities portfolio.



11



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Loans



Total loans, net of the unearned discount, decreased $26,424,000 to $434,981,000 at September 30, 2004, from $461,405,000 at December 31, 2003. Several
large commercial credits were repaid or otherwise disposed of, that when combined with soft overall loan demand between December 31, 2003 and September 30, 2004, accounted for the reduction in total loans, net of the unearned discount. BancTrust
continues to place emphasis on originating loans secured by real estate, as well as loans to commercial and industrial interests. Particular interest is placed on originating loans secured by commercial real estate. The following table indicates
each of the major loan categories of BancTrust, and the change in volume of each when comparing September 30, 2004 to December 31, 2003.



|                                          |  |                    |         |                   |   |         |  |   |         |  
|----------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------- |  | - | ------- | -
|                                          |  | September 30, 2004 |         | December 31, 2003 |   | Change  | 
|                                          |  | (In thousands)     |        
|Commercial and industrial                 |  | $                  | 85,149  |                   | $ | 105,599 |  | $ | (20,450 | )
|Real estate - mortgage                    |  |                    |         |                   |   |         |  |   |         |  
|Commercial                                |  |                    | 217,620 |                   |   | 213,876 |  |   | 3,744   |  
|Residential                               |  |                    | 83,782  |                   |   | 89,308  |  |   | (5,526  | )
|Personal                                  |  |                    | 47,745  |                   |   | 51,765  |  |   | (4,020  | )
|Overdrafts and credit line                |  |                    | 1,462   |                   |   | 1,790   |  |   | (328    | )
|                                          |  |                    |         |                   |   |         |  |   |         |  
|Total loans                               |  |                    | 435,758 |                   |   | 462,338 |  |   | (26,580 | )
|Less:                                     |  |                    |         |                   |   |         |  |   |         |  
|Unearned discount                         |  |                    | 777     |                   |   | 933     |  |   | (156    | )
|                                          |  |                    |         |                   |   |         |  |   |         |  
|Total loans, net of the unearned discount |  | $                  | 434,981 |                   | $ | 461,405 |  | $ | (26,424 | )
|                                          |  |                    |         |                   |   |         |  |   |         |  



Commercial and
industrial loans declined from $105,599,000 at December 31, 2003 to $85,149,000 at September 30, 2004. Soft demand for, and significant customer repayments of, commercial and industrial loans were the primary contributing factors to this decline.



Real estate loans decreased $1,782,000, to $301,402,000 at
September 30, 2004, from $303,184,000 at December 31, 2003. Commercial real estate loans increased slightly, while residential real estate loans declined. Management attributes this decline in residential real estate loans primarily to customer
refinancing of existing mortgage loans, in order to benefit from the historically low, recent interest rate environment. While BancTrust does market long term fixed rate residential mortgage products, it does not retain these loans in its portfolio.
Typically, BancTrust will sell long term fixed rate residential mortgage loans it originates, while retaining a fee. Accordingly, the residential real estate mortgage loan portfolio of BancTrust has continued to decline.



Personal loans decreased from $51,765,000 at December 31, 2003 to $47,745,000
at September 30, 2004. Both increased competition from alternative sources of credit and an increased level in denials of personal loan applications were the primary causes of the decrease in the personal loan portfolio. Alternative sources of
credit primarily include credit cards and finance companies. BancTrust continues to decline a significant portion of personal loan applications, due in large part to existing debt levels of personal loan applicants.



Allowance for Loan Losses



Managements estimate of uncollectible amounts within BancTrusts
loan portfolio is represented by the allowance for loan losses. The allowance for loan losses is established through charges against earnings in the form of a provision for loan losses. A loan is charged against the allowance for loan losses when
management determines that it is probable that BancTrust will not recover the entire loan balance, either through repayment by the customer or from collateral proceeds. Should a loan that has been charged off be recovered, either partially or
entirely, it is credited back to the allowance. Periodic reviews of the loan portfolio that include analysis of such factors as current and expected economic conditions, historical loss experience and levels of non-accruing loans and delinquencies,
determine the appropriate level at which to maintain the allowance for loan losses. Because the allowance is based on assumptions and subjective judgments, it is not necessarily reflective of the charge-offs that may ultimately occur.



12



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Management monitors and evaluates all loans in an effort to identify those which currently possess, or
otherwise indicate characteristics of weakness, potential weakness or non-conformity with their original terms. A loan is evaluated in light of its performance against its original stated terms, the fair market value of the collateral securing the
loan, known or anticipated economic events and or trends, and the on-going credit worthiness of the borrower and any guarantor(s). If when a loan is evaluated, there is determined to be a deficiency (or deficiencies) in any of the aforementioned
areas, the loan is added to a list of loans which are subject to heightened scrutiny, and for which additional loss reserves are maintained, depending on the magnitude of the deficiencies. The loan continues to be monitored closely, which may
include modifications through negotiations with the borrower. Such modifications may include, but are not limited to, the assignment of additional collateral, the modification of repayment terms and the procurement of a guarantor. Only after the
loan has been paid back in full, or performs in a favorable manner for a sustained period of time with all identified deficiencies having been duly discharged and documented, will the loan no longer receive the exceptionally close and frequent
monitoring previously described.



Using input from
BancTrusts credit risk identification process, BancTrusts credit administration area analyzes and validates the loan loss reserve methodology at least quarterly. The analysis includes specific allowances for individual loans and general
allowances for certain pools of loans. The credit administration area, along with senior management, reviews and ensures the methodology is appropriate and that all risk elements have been assessed in order to determine the appropriate level of
allowance for the inherent losses in the loan portfolio at each quarter end.



The first area of the allowance for loan losses analysis involves the calculation of specific allowances for individual impaired loans as required by SFAS 114 and 118. In addition, BancTrust requires that a broad
group of loans be analyzed for impairment each quarter (this includes all loans of $500,000 and over that have internal risk ratings below a predetermined classification level). The credit administration area validates all impairment testing and
validates the reserve allocations for all impaired loans each quarter. Reserves associated with these activities are based on a thorough analysis of the most probable sources of repayment which is normally the liquidation of collateral, but also
includes discounted future cash flows or the market value of the loan itself.



The second reserve area is the general allowance for loan pools, which is assessed by applying loan loss allowance factors to groups of loans within the portfolio that have similar characteristics. This part of the
methodology is governed by SFAS 5. The general allowance factors are based upon recent and historical charge-off experience and are typically applied to the portfolio by loan type. Historical loss analyses provide the basis for factors used for
homogenous pools of smaller loans, such as residential real estate and other consumer loan categories which are not evaluated based on individual risk ratings but almost entirely based on historical losses. The statistics used in this analysis of
this second reserve element are adjusted quarterly based on loss trends and risk rating migrations.



At September 30, 2004, BancTrusts allowance for loan losses had a balance of $9,396,000, as compared to $11,995,000 at December 31, 2003. The ratio
of the allowance to total loans, net of the unearned discount, was 2.16% and 2.60% at September 30, 2004 and December 31, 2003, respectively. As a percentage of total loans, net of the unearned discount, non-accruing loans increased to .69% at
September 30, 2004, compared to .48% at December 31, 2003. The coverage of the allowance to non-accruing loans was 315% and 544% at September 30, 2004 and December 31, 2003, respectively.



Loans requiring special attention because of potential weakness (special attention loans) decreased to
$41,207,000 at September 30, 2004 from $57,449,000 at December 31, 2003. Management believes that this reduction in special attention loans is primarily attributable to its intensive efforts and focus on credit administration. It is the intent of
management to continually endeavor to reduce special attention loans, while maintaining adequate and profitable loan relationships with its customers. Special attention loans are comprised of those loans classified as substandard or
doubtful, within the classification process used by BancTrust in its loan review function. At September 30, 2004, approximately $4,882,000 of the $9,396,000 allowance for loan losses was allocated to special attention loans. The
following table indicates the loan charge-off and recovery activity of BancTrust for the three and nine months ended September 30, 2004 and 2003.



13



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|                                           |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                           |  | (Unaudited)                     |      
|                                           |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003   |  
|                                           |  | (In Thousands)                  |      
|Loans charged-off                          |  | $                               | 1,655 |   |                                | $ | 2,540 |      |  | $ | 3,540  |   |  | $ | 4,577  |  
|Recoveries of loans previously charged-off |  |                                 | (367  | ) |                                |   | (257  | )    |  |   | (1,090 | ) |  |   | (1,594 | )
|                                           |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Net loans charged-off                      |  | $                               | 1,288 |   |                                | $ | 2,283 |      |  | $ | 2,450  |   |  | $ | 2,983  |  
|                                           |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  



Deposits



Total deposits at September 30, 2004 were $651,859,000, representing an
$8,102,000 increase from the December 31, 2003 total of $643,757,000. Noninterest bearing deposits (primarily checking accounts) increased to $77,960,000 at September 30, 2004 from $74,254,000 at December 31, 2003. Interest bearing deposits
increased to $573,899,000 at September 30, 2004 from $569,503,000 at December 31, 2003. BancTrust experienced increases in interest bearing checking and savings deposits, which were more than offset by decreases in time deposits from December 31,
2003 to September 30, 2004. At September 30, 2004, interest bearing checking and savings deposits totaled $268,879,000 compared to $249,194,000 at December 31, 2003. Management believes the increase in interest bearing checking and savings deposits
was primarily attributable to some of BancTrusts customers maintaining funds in readily accessible interest earning accounts, rather than placing them in stated term accounts such as certificates of deposit.



Time deposits at September 30, 2004 totaled $305,020,000, compared to
$320,309,000 at December 31, 2003. Management believes this decrease represents a shift of funds from time deposits into other deposit types, as well as a transfer of time deposit funds out of BancTrust by customers as performance levels of the
securities markets continue to improve. Additionally, BancTrust has not aggressively pursued time deposits within its markets as liquidity levels have remained high in light of loan reductions (see Loans) and increases in other
deposit types. BancTrust was in receipt of approximately $30,000,000 of brokered deposits at each of December 31, 2003 and September 30, 2004. Brokered deposits are more likely to be withdrawn from BancTrust upon maturity than other more traditional
types of deposits. These deposits are fully insured by the Federal Deposit Insurance Corporation and are deployed by management to meet short-term funding needs.



Liquidity



Liquidity describes BancTrusts ability to meet its needs for cash. Those needs primarily include lending, withdrawal demands of customers and the
payment of operating expenses.



Liquidity management is crucial
in ensuring that BancTrust is able to conduct its day-to-day business. Without proper liquidity management, BancTrust would be restricted in its activities as a financial institution, including its ability to meet the needs of the communities it
serves.



Typically, increasing the liquidity of BancTrust would
serve to reduce its profits as a result of reduced earnings from assets with shorter maturities. Estimating liquidity needs is made more complex by the fact that certain balance sheet components are, by nature, more controllable by management than
others. For example, the maturity frequency of the securities portfolio is generally manageable at the time investment decisions are made. However, deposits flowing into and out of BancTrust are much less predictable and controllable by management.
Monitoring liquidity needs and the changing relationships between certain balance sheet components is the responsibility of BancTrusts Asset Liability Committee (ALCO) (see  Interest Rate Risk).



14



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The asset items that are BancTrusts primary sources of liquidity are cash and cash equivalents
(see- Cash and Cash Equivalents). Also, the asset base provides liquidity through interest and fee income on loans, loan repayments and the maturity or sales of other earning assets, such as securities. BancTrusts
securities are generally high grade and exchange traded. At September 30, 2004, the entire investment securities portfolio of BancTrust was classified as available-for-sale (see - Investments).



The liability base provides liquidity through deposit growth, the rollover of
maturing deposits and accessibility to external sources of funds, (borrowed funds). Borrowed funds primarily consist of advances from the Federal Home Loan Bank of Atlanta (FHLB). At September 30, 2004, borrowed funds totaled
$48,737,000 compared to $56,690,000 at December 31, 2003. In May and June, 2004, BancTrust repaid two advances to the FHLB that together totaled $7,500,000, thereby accounting for the majority of the total decrease in borrowed funds.



BancTrust has several available sources from which to borrow funds. The
predominant source of borrowed funds utilized by BancTrust is the FHLB. At September 30, 2004, BancTrust had borrowed from FHLB, $46,735,000. When combined with approximately $18,500,000 of guarantees on commercial letters of credit provided by the
FHLB, BancTrust had approximately $65,235,000 of active credit facilities at the FHLB on September 30, 2004. Total credit facilities available to BancTrust at the FHLB totaled approximately $69,925,000 on September 30, 2004. BancTrust had unused
federal funds lines of credit with correspondent financial institutions of approximately $50,000,000 at September 30, 2004.



Stockholders Equity and Regulatory Capital



At September 30, 2004, total stockholders equity was $74,897,000 compared to $72,779,000 at December 31, 2003. This change represents an increase of
$2,118,000 that is accounted for as follows: net income - $4,670,000, dividends declared and paid - $1,837,000, common stock issued - $206,000 and a decrease in accumulated other comprehensive income, net of tax of $921,000. Net income and common
stock issued had the effect of increasing stockholders equity, while dividends declared and paid as well as the decrease in accumulated other comprehensive income, net of tax had the effect of lowering stockholders equity.



The market value of investment securities is based on quoted market values
and is significantly impacted by the interest rate environment. At September 30, 2004, the effect on stockholders equity of net unrealized losses in BancTrusts investment securities portfolio was a negative $278,000, net of the related
tax effect. Market values of investment securities within BancTrusts portfolio are compared against the amortized costs of those same securities in determining the net unrealized losses or gains to be recorded in stockholders equity.
Management believes the net unrealized losses recorded at September 30, 2004 are temporary because of acceptable investment grades within the securities portfolio and the majority of securities have repayment sources of principal and interest that
are primarily government backed or government sponsored.



Risk-based capital regulations require all bank holding companies and banks to achieve and maintain a minimum total capital to risk based assets ratio of 8%, at least half of which must be in the form of Tier 1 capital (consisting of
stockholders equity less goodwill, other qualifying intangible assets and allowance for loan losses). The following table indicates the risk-based capital ratios of BancTrust and Peoples Bank at September 30, 2004.



15



---

|                                                    |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|--------------------------------------------------- |  | ------------------------------------------------------------------- | ------- |  | ------------ | - |  | - | ------- |  | ----- | -
|                                                    |  | Risk-Based Capital Ratios & Leverage RatiosAs of September 30, 2004 |        
|                                                    |  | (Dollars in Thousands)                                              |        
|                                                    |  | BancTrust                                                           |         |  | Peoples Bank |  
|RISK-BASED CAPITAL RATIOS                           |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|Tier 1 Capital                                      |  | $                                                                   | 68,416  |  | 13.99        | % |  | $ | 66,235  |  | 13.62 | %
|Tier 1 Capital  Minimum Required                   |  |                                                                     | 19,557  |  | 4.00         | % |  |   | 19,455  |  | 4.00  | %
|                                                    |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|Excess                                              |  | $                                                                   | 48,859  |  | 9.99         | % |  | $ | 46,780  |  | 9.62  | %
|                                                    |  |                                                                     |         | 
|Total Risk Based Capital                            |  | $                                                                   | 74,579  |  | 15.25        | % |  | $ | 72,367  |  | 14.88 | %
|Total Risk Based Capital  Minimum Required         |  |                                                                     | 39,114  |  | 8.00         | % |  |   | 38,910  |  | 8.00  | %
|                                                    |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|Excess                                              |  | $                                                                   | 35,465  |  | 7.25         | % |  | $ | 33,457  |  | 6.88  | %
|                                                    |  |                                                                     |         | 
|Net risk-weighted assets                            |  | $                                                                   | 488,923 |  |              |   |  | $ | 486,369 |  |       |  
|                                                    |  |                                                                     |         | 
|LEVERAGE RATIOS                                     |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|Total Tier 1 Capital                                |  | $                                                                   | 68,416  |  | 8.94         | % |  | $ | 66,235  |  | 8.67  | %
|Minimum Leverage Requirement                        |  |                                                                     | 30,614  |  | 4.00         | % |  |   | 30,567  |  | 4.00  | %
|                                                    |  |                                                                     |         |  |              |   |  |   |         |  |       |  
|Excess                                              |  | $                                                                   | 37,802  |  | 4.94         | % |  | $ | 35,668  |  | 4.67  | %
|                                                    |  |                                                                     |         | 
|Average Total Assets for leverage capital purposes, |  | $                                                                   | 765,346 |  |              |   |  | $ | 764,170 |  |       |  



Interest Rate Risk



The profitability of most financial institutions, including BancTrust, is
greatly dependent on net interest income. Given this, management believes changes in interest rates impact BancTrusts profitability to a greater extent than the effects of general inflation levels. Interest rates do not always move with the
same magnitude, or in the same direction, as inflation. When interest-earning assets are repricing to market rate levels at a different pace than interest-bearing liabilities, net interest income is affected either positively or negatively,
depending on the direction market rates are moving. When interest rates are volatile, liquidity and maturity of BancTrusts assets and liabilities is crucial in maintaining desired performance levels. Interest rates are sensitive to many
factors, including Federal Reserve monetary policies and domestic and international economic conditions such as inflation, recession, unemployment, money supply and government borrowing. Other factors beyond managements control may also affect
interest rates. Management is unable to predict the future of interest rate movements; therefore, management attempts to strike a relative balance between the interest rate sensitivity of earning assets and interest bearing liabilities. This
strategy is designed to protect BancTrusts profitability against radical shifts in interest rate levels.



The process of measuring, compiling and analyzing the maturity and repricing dynamics of interest sensitive assets and interest sensitive liabilities is
referred to as asset liability management (ALM). BancTrust has established an ALCO (see Liquidity), consisting of executive management and the Principal Accounting Officer. The ALCO is responsible for
ensuring that the relationship of interest sensitive assets and liabilities, as defined by their respective maturity and repricing characteristics, does not become so mismatched as to expose BancTrust to unacceptable levels of risk in the areas of
equity capital valuation, earnings or liquidity. ALCO achieves its objectives via regular meetings where various data relating to specific liquidity and interest rate issues are presented and discussed. At least quarterly, ALCO utilizes an interest
rate risk computer model which compiles the detailed repricing and maturity characteristics of BancTrusts interest sensitive instruments (both assets and liabilities), and produces various reports and supporting detail, which indicate
BancTrusts overall interest rate risk status.



16



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RESULTS OF OPERATIONS



Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003.



Like many financial institutions, the profitability of BancTrust is largely
dependent on the net interest income it is able to generate. Simply stated, net interest income is the difference between the interest earned on loans and investments (interest earning assets), and the interest expense paid on deposits
and borrowings (interest bearing liabilities). While overall market interest rates increased during the three months ended September 30, 2004 (2004 quarter), BancTrusts net interest income was lower than during the
three months ended September 30, 2003 (2003 quarter). The primary reason for this is that yields realized on earning assets and costs realized on interest bearing liabilities typically lag movements in market interest rates to varying
extents, depending on the repricing characteristics of BancTrusts interest sensitive balance sheet components (see  Interest Rate Risk).



Interest income for the 2004 quarter totaled $9,115,000. For the 2003 quarter interest income totaled $9,461,000. This
decrease is attributable to declines in both the average yield earned on interest-earning assets and the average volume of interest earning assets between the two periods. As BancTrust continued to experience relatively soft loan demand in the 2004
quarter (see - Loans), available funds were deployed in the lower yielding short-term investments and investment securities portfolios which contributed to lower yields. Lower average volumes of interest earning assets were
primarily the result of BancTrust using short-term, highly liquid investments to repay certain borrowed funds as contractual maturities occurred. In the 2004 quarter, the average annual yield earned on interest-earning assets was 5.06%, compared to
5.22% for the 2003 quarter. For the 2004 and 2003 quarters, the average volume of interest-earning assets totaled $714,337,000 and $718,922,000, respectively.



Interest income earned on investment securities in the 2004 quarter totaled $2,079,000, compared to $1,388,000 for the 2003 quarter. The investment
securities portfolio earned an average annual yield of 3.55% on average volume of $232,192,000 in the 2004 quarter, and 3.04% on average volume of $181,016,000 in the 2003 quarter. Given the soft demand for loans during the 2004 quarter, available
funds were placed in the investment securities portfolio in order to earn higher rates of return than would have been earned had the funds been placed in, or remained in, cash equivalent instruments such as federal funds sold or securities purchased
under agreements to resell. Consequently, the average balance of investment securities increased.



Interest and fee income earned on loans totaled $6,873,000 in the 2004 quarter, which was a decrease from the 2003 quarter total of $7,925,000. This
decrease is attributable to reductions in both the average annual yield earned, and the average volume of loans in the 2004 quarter compared to the 2003 quarter. In the 2004 quarter, the loan portfolio generated an average annual yield of 6.21% on
average volume of $439,457,000. In the 2003 quarter, the loan portfolio generated an average annual yield of 6.60% on average volume of $476,224,000. While market rates of interest generally rose during the 2004 quarter, the majority of loans in
BancTrusts portfolio bear rates of interest from previous points in time when they were originated and when interest rates were at historically low levels and in a general state of decline. Consequently, the yield earned on loans in the 2004
quarter was lower than in the 2003 quarter. The decrease in the average volume of loans was primarily attributable to continued soft loan demand (see - Loans).



In the 2004 quarter, interest and fee income on real estate loans totaled $4,820,000 compared to $5,129,000 in the 2003
quarter. This reduction is primarily attributable to a decreases in the average annual yield earned on real estate loans from the 2003 quarter to the 2004 quarter. In the 2004 quarter, real estate loans earned an average annual yield of 6.30% on
average volume of $303,701,000. In the 2003 quarter, the average annual yield earned was 6.71% on average volume of $303,434,000. The primary reason for the reduction in the average annual yield earned between the two quarters is that the majority
of real estate loans in BancTrusts portfolio were originated when market rates of interest were at historically low levels and in a general state of decline. Consequently, the yields earned on real estate loans in the 2004 quarter were lower
than in the 2003 quarter.



17



---

Interest and fee income on business loans totaled $1,042,000 in the 2004 quarter, and $1,452,000 in the
2003 quarter. Decreases in the average volume of business loans was the primary cause for the reduction in interest and fee income earned, as the average annual yield increased. Business loans earned an average annual yield of 5.07% in the 2004
quarter on average volume of $81,595,000 and 4.98% in the 2003 quarter on average volume of $115,777,000. The increased yield on business loans is primarily attributed to the fact that the prime interest rate increased three times between the 2003
and 2004 quarters. As a result, the interest rates on adjustable rate business loans that were tied to prime increased as well. Soft loan demand (see - Loans) contributed to the lower average balance of business loans.



Interest and fee income on personal loans totaled $1,012,000 and
$1,344,000 for the 2004 and 2003 quarters, respectively. This decrease was the result of declines in both the average annual yield earned and average volume in the 2004 quarter compared to the 2003 quarter. In the 2004 quarter, personal loans earned
an average annual yield of 7.42% on average volume of $54,161,000. In the 2003 quarter, personal loans earned an average annual yield of 9.35% on average volume of $57,013,000. Lower market interest rates, as well as fewer personal loan originations
(see  Loans) contributed to lower yields and average volumes in the 2004 quarter.



Interest expense on deposits in the 2004 quarter totaled $2,311,000, compared to $2,400,000 for the 2003 quarter. The largest factor in this reduction was
the average annual rate of interest paid on interest bearing deposits between the two quarters. In the 2004 quarter, the average annual rate of interest paid on interest bearing deposits was 1.60%, compared to 1.66% in the 2003 quarter. The average
volume of interest bearing deposits decreased slightly to $572,446,000 in the 2004 quarter compared to $572,698,000 in the 2003 quarter. While market rates of interest increased during the 2004 quarter, the majority of BancTrusts interest
bearing deposit accounts bore interest rates that were set when market interest rates were at historically low levels, and in a general state of decline. Consequently, the average rate of interest paid on interest bearing deposits in the 2004
quarter was lower than in the 2003 quarter.



Interest expense
on borrowed funds totaled $591,000 in the 2004 quarter and $588,000 in the 2003 quarter. In the 2004 and 2003 quarters, the average annual rate of interest paid on borrowed funds was 4.83% and 4.10%, respectively. The average volume of borrowed
funds for the 2004 and 2003 quarters was $48,551,000 and $57,348,000, respectively. BancTrust repaid $7,500,000 of FHLB advances in the second quarter of 2004 (see- Liquidity) that bore a weighted average interest rate of less
than 2%, thereby accounting for the majority of the aforementioned increase in average annual rate of interest paid on borrowed funds when comparing the 2004 quarter to the 2003 quarter.



The resulting net interest income for the 2004 quarter totaled $6,213,000, compared to $6,473,000 for the 2003 quarter. When
expressed as an average annual rate, net interest income as a percent of average earning assets is referred to as the net interest margin. The net interest margin for the 2004 quarter was 3.45%, compared to 3.57% for the 2003 quarter.
The following table illustrates the changes, and causes of those changes, in the primary components of net interest income for the 2004 quarter compared to the 2003 quarter.



18



---

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

for the three months ended September 30, 2004

(In Thousands)



|                                                                       |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|---------------------------------------------------------------------- |  | --------------------- | ------ | - | --------------------- | - | ---- | ------------------- |  | - | ------- | - |  | - | --- | -
|                                                                       |  | 2004 Compared to 2003 |       
|                                                                       |  | Total                 |        |   | Changes in Volume (1) |   |      | Changesin Rates (1) |  |   | Mix (1) |  
|Interest income on:                                                    |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|Loans                                                                  |  | $                     | (1,052 | ) |                       | $ | (612 | )                   |  | $ | (477    | ) |  | $ | 37  |  
|Investment securities                                                  |  |                       | 691    |   |                       |   | 392  |                     |  |   | 233     |   |  |   | 66  |  
|Federal funds sold and securities purchases under agreements to resell |  |                       | 15     |   |                       |   | (45  | )                   |  |   | 87      |   |  |   | (27 | )
|                                                                       |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|Total interest income                                                  |  | $                     | (346   | ) |                       | $ | (265 | )                   |  | $ | (157    | ) |  | $ | 76  |  
|                                                                       |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|Interest expense on:                                                   |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|Interest bearing deposits                                              |  | $                     | (89    | ) |                       | $ | (1   | )                   |  | $ | (88     | ) |  | $ |    |  
|Borrowed funds                                                         |  |                       | 3      |   |                       |   | (67  | )                   |  |   | 77      |   |  |   | (7  | )
|                                                                       |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  
|Total interest expense                                                 |  | $                     | (86    | ) |                       | $ | (68  | )                   |  | $ | (11     | ) |  | $ | (7  | )
|Net change in net interest income before loan losses                   |  | $                     | (260   | ) |                       |   |      |                     |  |   |         |   |  |   |     |  
|                                                                       |  |                       |        |   |                       |   |      |                     |  |   |         |   |  |   |     |  

---

|(1) | Increases (decreases) are attributed to volume changes and rate changes on the following basis: Changes in Volume = change in volume times old rate. Changes in Rates = change in
rate times old volume. The mix change = change in volume times change in rate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Typically, the provision for loan losses has the effect of reducing income, as it represents charges against income in the form of necessary additions to the allowance for loan losses during a given period (see
Allowance for Loan Losses). In the 2004 quarter however, there was no provision for loan losses charged, compared to a $2,280,000 charge in the 2003 quarter. The primary reason there was no provision for loan losses charged in the
2004 quarter is that loan quality has improved in light of the intensive efforts and resources allocated by management to the credit function of BancTrust. Analysis applied to the loan portfolio as previously described (see Allowance for
Loan Losses) did not indicate that a provision for loan losses charge was necessary at any point during the 2004 quarter.



Deposit service charges totaled $1,245,000 in the 2004 quarter, and $1,314,000 in the 2003 quarter. Management believes that this reduction is at least
partially attributable to many customers maintaining generally higher balances in transaction accounts (see- Deposits), thereby reducing or avoiding some service charges. Realized gains on securities sold totaled $210,000 in the
2004 quarter and $403,000 in the 2003 quarter.



Other
noninterest income totaled $782,000 in the 2004 quarter and $1,093,000 in the 2003 quarter. The primary reason for the reduction in other noninterest income is that in the 2003 quarter, BancTrust realized approximately $500,000 of income from a
commercial real estate property it took possession of in lieu of foreclosure that was subsequently sold in the fourth quarter of 2003.



Noninterest expense decreased from $6,666,000 in the 2003 quarter to $6,405,000 in the 2004 quarter. Salaries, benefits and other personnel expense
increased from $3,330,000 in the 2003 quarter to $3,510,000 in the 2004 quarter, primarily as a result of increased expenses associated with staff additions. Premises and fixed assets expense decreased from $1,481,000 in the 2003 quarter to
$1,240,000 in the 2004 quarter. The primary factors in this decrease were reduced expenses associated with information technology infrastructure and reduced depreciation expense between the two periods.



Other noninterest expense decreased from $1,855,000 in the 2003 quarter to
$1,655,000 in the 2004 quarter. Expenses in the 2003 quarter that were associated with the aforementioned commercial real estate property that BancTrust took possession of in lieu of foreclosure were not realized in the 2004 quarter. This
contributed significantly to the decrease in other noninterest expense between the two quarters. Decreases in certain outside service fees as well as communications related expenses also contributed the reduction in other noninterest expense.



19



---

As a percentage of income before income taxes, the provision for income taxes was lower in the 2004
quarter than in the 2003 quarter. In the 2004 quarter, the provision for income taxes equaled 13.3% of income before income taxes, compared to 30.3% in the 2003 quarter. Current year adjustments to deferred tax assets and liabilities were made in
the 2004 quarter and were offset through the provision for income taxes. It was these adjustments which account for the decrease in the effective income tax rate percentage between the two quarters.



Nine months Ended September 30, 2004 Compared to Nine months Ended September 30, 2003.



As was the case when comparing the 2004 quarter to the
2003 quarter, and for principally the same reasons, BancTrusts net interest income for the nine months ended September 30, 2004 (YTD 2004) was lower than during the nine months ended September 30, 2003 (YTD 2003).



Interest income for YTD 2004 totaled $27,372,000. For YTD
2003, interest income totaled $29,213,000. This decrease is primarily due to a decrease in the average yield earned on interest-earning assets. As BancTrust continued to experience relatively soft loan demand in YTD 2004 (see -
Loans), available funds were deployed in the lower yielding short-term investments and investment securities portfolios. In YTD 2004, the average annual yield earned on interest-earning assets was 5.06%, compared to 5.53% for YTD
2003. For YTD 2004 and YTD 2003, the average volume of interest-earning assets totaled $720,246,000 and $705,925,000, respectively.



Interest income earned on investment securities in YTD 2004 totaled $6,008,000, compared to $4,385,000 for YTD 2003. The investment securities portfolio
earned an average annual yield of 3.44% on average volume of $232,556,000 in YTD 2004, and 3.35% on average volume of $175,201,000 in YTD 2003. Given the soft demand for loans, available funds were placed in the investment securities portfolio in
order to earn higher rates of return than would have been earned had the funds been placed in, or remained in, cash equivalent instruments such as federal funds sold. Consequently, the average balance of investment securities increased.



Interest and fee income earned on loans totaled $20,966,000 in YTD 2004,
which was a decrease from the YTD 2003 total of $24,490,000. This decrease is attributable to reductions in both the average annual yield earned, and the average volume of loans in YTD 2004 compared to YTD 2003. In YTD 2004, the loan portfolio
generated an average annual yield of 6.23% on average volume of $448,164,000. In YTD 2003, the loan portfolio generated an average annual yield of 6.68% on average volume of $490,153,000. While market rates of interest generally rose during YTD
2004, the majority of loans in BancTrusts portfolio bear rates of interest from previous points in time when they were originated and when interest rates were at historically low levels and in a general state of decline. Consequently, the
yield earned on loans in YTD 2004 was lower than in YTD 2003. The decrease in the average volume of loans was primarily attributable to continued soft loan demand (see - Loans).



In YTD 2004, interest and fee income on real estate loans totaled $14,116,000
compared to $15,503,000 in YTD 2003. This reduction is attributable to decreases in both the average annual yield earned on real estate loans and the average volume of real estate loans from YTD 2003 to YTD 2004. In YTD 2004, real estate loans
earned an average annual yield of 6.25% on average volume of $300,827,000. In YTD 2003, the average annual yield earned was 6.69% on average volume of $309,872,000. The primary reason for the reduction in the average annual yield earned between the
two periods is that the majority of real estate loans in BancTrusts portfolio were originated when market rates of interest were at historically low levels and in a general state of decline. Consequently, the yields earned on real estate loans
in YTD 2004 were lower than in YTD 2003. The decrease in the average volume of real estate loans was primarily attributable to lower demand levels (see - Loans).



Interest and fee income on business loans totaled $3,611,000 in YTD 2004, and $4,689,000 in YTD 2003. Decreases in both the
average volume of business loans and the average annual yield earned contributed to the reduction. Business loans earned an average annual yield of 5.07% in YTD 2004 on average volume of $94,898,000 and an average annual yield of 5.20% in YTD 2003
on average volume of $120,664,000. Increases in the prime interest rate during 2004 did not impact YTD average annual yield comparisons to the extent as quarterly comparisons, due to the timing of the increases. Soft loan demand (see -
Loans) contributed to the lower average balance of business loans.



20



---

Interest and fee income on personal loans totaled $3,240,000 and $4,298,000 for YTD 2004 and YTD 2003,
respectively. This decrease was the result of declines in both the average annual yield earned and average volume in YTD 2004 compared to YTD 2003. In YTD 2004, personal loans earned an average annual yield of 8.23% on an average volume of
$52,440,000. In YTD 2003, personal loans earned an average annual yield of 9.64% on an average volume of $59,617,000. Lower market interest rates, as well as fewer personal loan originations (see  Loans) contributed to lower
yields and average volumes in YTD 2004.



Interest expense on
deposits in YTD 2004 totaled $6,604,000, compared to $7,248,000 for YTD 2003. The largest factor in this reduction was the average annual rate of interest paid on interest bearing deposits between the two periods. In YTD 2004, the average annual
rate of interest paid on interest bearing deposits was 1.55%, compared to 1.75% in YTD 2003. The average volume of interest bearing deposits increased to $568,537,000 in YTD 2004 compared to $555,321,000 YTD 2003. While market rates of interest
increased during YTD 2004, the majority of BancTrusts interest bearing deposit accounts bore interest rates that were set when market interest rates were at historically low levels, and in a general state of decline. Consequently, the average
rate of interest paid on interest bearing deposits in YTD 2004 was lower than in YTD 2003.



Interest expense on borrowed funds, including federal funds purchased and securities sold under agreements to repurchase, totaled $1,711,000 in YTD 2004 and $1,828,000 in YTD 2003. In YTD 2004 and YTD 2003, the
average annual rate of interest paid on borrowed funds was 4.38% and 4.12%, respectively. The average volume of borrowed funds for YTD 2004 and YTD 2003 was $52,135,000 and $59,104,000, respectively. BancTrust repaid $7,500,000 of FHLB advances in
YTD 2004 (see- Liquidity) that had a weighted average interest rate of less than 2%, thereby accounting for the majority of the aforementioned increase in average annual rate of interest paid on borrowed funds in YTD 2004.



The resulting net interest income for YTD 2004 totaled
$19,057,000, compared to $20,137,000 for YTD 2003. When expressed as an average annual rate, net interest income as a percent of average earning assets is referred to as the net interest margin. The net interest margin for YTD 2004 was
3.52%, compared to 3.81% for YTD 2003. The following table illustrates the changes, and causes of those changes, in the primary components of net interest income for YTD 2004 compared to YTD 2003.



ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

for the nine months ended September 30, 2004

(In Thousands)



|                                                                       |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|---------------------------------------------------------------------- |  | --------------------- | ------ | - | --------------------- | - | ------ | ------------------- |  | - | ------- | - |  | - | --- | -
|                                                                       |  | 2004 Compared to 2003 |       
|                                                                       |  | Total                 |        |   | Changes in Volume (1) |   |        | Changesin Rates (1) |  |   | Mix (1) |  
|Interest income on:                                                    |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|Loans                                                                  |  | $                     | (3,524 | ) |                       | $ | (2,099 | )                   |  | $ | (1,558  | ) |  | $ | 133 |  
|Investment securities                                                  |  |                       | 1,623  |   |                       |   | 1,437  |                     |  |   | 140     |   |  |   | 46  |  
|Federal funds sold and securities purchases under agreements to resell |  |                       | 60     |   |                       |   | (9     | )                   |  |   | 71      |   |  |   | (2  | )
|                                                                       |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|Total interest income                                                  |  | $                     | (1,841 | ) |                       | $ | (671   | )                   |  | $ | (1,347  | ) |  | $ | 177 |  
|                                                                       |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|Interest expense on:                                                   |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|Interest bearing deposits                                              |  | $                     | (644   | ) |                       | $ | 173    |                     |  | $ | (798    | ) |  | $ | (19 | )
|Borrowed funds                                                         |  |                       | (117   | ) |                       |   | (161   | )                   |  |   | 50      |   |  |   | (6  | )
|                                                                       |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  
|Total interest expense                                                 |  | $                     | (761   | ) |                       | $ | 12     |                     |  | $ | (748    | ) |  | $ | (25 | )
|Net change in net interest income before loan losses                   |  | $                     | (1,080 | ) |                       |   |        |                     |  |   |         |   |  |   |     |  
|                                                                       |  |                       |        |   |                       |   |        |                     |  |   |         |   |  |   |     |  

---

|(1) | Increases (decreases) are attributed to volume changes and rate changes on the following basis: Changes in Volume = change in volume times old rate. Changes in Rates = change in
rate times old volume. The mix change = change in volume times change in rate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

Typically, the provision for loan losses has the effect of reducing income, as it represents charges
against income in the form of necessary additions to the allowance for loan losses during a given period (see  Allowance for Loan Losses). In YTD 2004 however, provision for loan losses was a negative $149,000 (the provision
had an increasing effect on income) compared to an expense of $4,688,000 (the provision had a decreasing effect on income) in YTD 2003. The primary reason for the overall reduction in the provision for loan losses is that loan quality has improved
in light of the intensive efforts and resources management has allocated to the credit function of BancTrust. Specifically, the provision for loan losses was a negative amount in YTD 2004 because BancTrust sold a large commercial loan that had
approximately $760,000 reserved against it within the allowance for loan losses. Upon the disposition of this loan, its reserve amount was removed from the allowance for loan losses via a negative charge to provision, which had the effect of
increasing income.



Deposit service charges totaled $3,640,000
in YTD 2004, and $3,912,000 in YTD 2003. Management believes that this reduction is at least partially attributable to many customers maintaining generally higher balances in transaction accounts (see- Deposits), thereby reducing
or avoiding some service charges. Realized gains on securities sold totaled $699,000 in YTD 2004 and $970,000 in YTD 2003. Other noninterest income totaled $2,690,000 in YTD 2004 and $3,117,000 in YTD 2003. The primary reason for the reduction in
other noninterest income is that in YTD 2003, BancTrust realized approximately $500,000 of income from a commercial real estate property it took possession of in lieu of foreclosure that was subsequently sold in the fourth quarter of 2003.



Noninterest expense increased from $18,827,000 in YTD 2003 to
$20,138,000 in YTD 2004. Salaries, benefits and other personnel expense increased from $9,979,000 in YTD 2003 to $10,292,000 in YTD 2004, primarily as a result of personnel additions and increased expense associated with BancTrusts defined
benefit pension plan (see - Notes to the Unaudited Condensed Consolidated Financial Statements). Premises and fixed assets expense decreased slightly from $3,628,000 in YTD 2003 to $3,619,000 in YTD 2004



Other noninterest expense increased significantly from $5,220,000 in YTD 2003
to $6,227,000 in YTD 2004. The majority of this increase is accounted for in approximately $550,000 of loss realized on the sale of a large commercial loan, which produced the aforementioned negative provision for loan losses, and $330,000 of losses
realized on the disposition of properties out of BancTrusts other real estate owned portfolio. Increases in certain outside service fees, insurance premiums and sales and use taxes accounted for the balance of the increase in other noninterest
expense between YTD 2003 and YTD 2004.



As a percentage of
income before income taxes, the provision for income taxes was lower in YTD 2004 than in YTD 2003. In YTD 2004, the provision for income taxes equaled 23.4% of income before income taxes, compared to 30% in YTD 2003. Current year adjustments to
deferred tax assets and liabilities were made in YTD 2004 and were offset through the provision for income taxes. It was these adjustments which account for the decrease in the effective income tax rate percentage between the two periods.



IMPACT OF NEW ACCOUNTING STANDARDS



See Notes to the Unaudited Condensed Consolidated Financial Statements.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Interest sensitivity is one measure of the vulnerability
of earnings to changes in the general level of interest rates. Whenever interest-earning assets reprice to market interest rates at a different pace than interest-bearing liabilities, net interest income performance will be affected favorably or
unfavorably, depending on whether or not market interest rates are in a state of decline or rise. Management is unable to predict future changes in market rates and their impact on BancTrusts profitability. At September 30, 2004, management
believed that interest rates were in a general state of increase, after a prolonged period of being at historically low levels. Management believes that it is these historically low levels of market interest rates that have had significant impact
within the context of prior period comparisons of the results of operations of BancTrust. Additionally, management believes that the current relationship of interest-earning assets to interest-bearing liabilities provides adequate protection against
any potential negative impact arising from changes in market rates of interest.



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Item 4. Controls and Procedures



BancTrust carried out an evaluation, under the supervision and with the participation of its chief executive officer and
chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of September 30, 2004, pursuant to Rule 13a  15(b) of the Securities Exchange Act of 1934. Based on this evaluation,
BancTrusts chief executive officer and chief financial officer concluded that BancTrusts disclosure controls and procedures, as designed and implemented, are effective in timely alerting them to material information required to be
included in its periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of how remote.



In addition, BancTrust reviewed its internal controls. There has been no change in BancTrusts internal control over financial reporting during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, BancTrusts internal controls over financial reporting.



PART II  OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



|                 |  |                                                                                                                                                                           
|---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes  Oxley Act of 2002                                                                      
|                 | 
|Exhibit No. 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes  Oxley Act of 2002                                                                      
|                 | 
|Exhibit No. 32.1 |  | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



| | (b) | Reports on Form 8-K
| | --- | -------------------



Current Report on Form 8-K dated August 10, 2004, reporting under Item 12 announcement of BancTrusts results of operation for the quarter ended and
year to date June 30, 2004.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                       |  |                                                     
|---------------------- |  | ----------------------------------------------------
|                       |  | The Peoples BancTrust Company, Inc.                 
|                       | 
|Date: November 9, 2004 |  | /s/ Elam P. Holley, Jr.                             
|                       |  | Elam P. Holley, Jr.                                 
|                       |  | President and Chief Executive Officer               
|                       | 
|Date: November 9, 2004 |  | /s/ Andrew C. Bearden, Jr.                          
|                       |  | Andrew C. Bearden, Jr.                              
|                       |  | Executive Vice President and Chief Financial Officer
|                       | 
|Date: November 9, 2004 |  | /s/ Thomas P. Wilbourne                             
|                       |  | Thomas P. Wilbourne                                 
|                       |  | Vice President and Principal Accounting Officer     



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