UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X	Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2012 or
	Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
	For the transition period from ______ to _______

Commission File Number: 0-15423

BANCTRUST FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Alabama	63-0909434
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

107 St. Francis Street, Mobile, Alabama	36602
(Address of principal executive offices)	(Zip Code)

(251) 431-7800

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

______________________

Indicate by 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 for such shorter 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    X      No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer ____	Accelerated filer ____	Non-accelerated filer ____	Smaller reporting company     X
		(Do not check if a
		smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ____   No    X   

Shares of common stock ($0.01 par) outstanding at November 8, 2012: 17,966,308

i

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10 - Q

PART  I.	Financial Information		Page Number
	Item 1 - Financial Statements
		Unaudited Condensed Consolidated Statements of Condition - September 30, 2012 and December 31, 2011	1
		Unaudited Condensed Consolidated Statements of Operations - Three Months Ended September 30, 2012 and 2011	2
		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended September 30, 2012 and 2011	3
		Unaudited Condensed Consolidated Statements of Operations - Nine Months Ended September 30, 2012 and 2011	4
		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - Nine Months Ended September 30, 2012 and 2011	5
		Unaudited Condensed Consolidated Statements of Shareholders' Equity - Nine Months Ended September 30, 2012 and 2011	6
		Unaudited Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011	7
		Notes to Unaudited Condensed Consolidated Financial Statements – September 30, 2012 and 2011	8
	Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		36
	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		67
	Item 4 - Controls and Procedures		68
PART II.	Other Information		70
	Item 1A. – Risk Factors		70
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		71
	Item 6 - Exhibits		72
	Signatures		73
	Exhibit Index		74

ii

PART I. FINANCIAL INFORMATION

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONDITION

(Dollars and shares in thousands, except per share amounts)	September 30, 2012			December 31, 2011
ASSETS
Cash and Due from Banks	$	37,349		$	37,911
Interest-Bearing Deposits in Other Financial Institutions		123,408			61,942
Securities Available for Sale, at Fair Value		497,606			517,213
Loans Held for Sale		2,708			2,021
Loans and Leases		1,181,733			1,275,028
Allowance for Loan and Lease Losses		(57,435	)		(42,156	)
Loans and Leases, Net		1,124,298			1,232,872
Premises and Equipment, Net		69,259			71,298
Accrued Income Receivable		5,703			6,227
Other Intangible Assets		2,841			3,519
Cash Surrender Value of Life Insurance		18,045			17,654
Other Real Estate Owned		53,750			57,387
Other Assets		19,555			23,833
Total Assets	$	1,954,522		$	2,031,877
LIABILITIES
Non-Interest-Bearing Demand Deposits	$	281,033		$	257,169
Interest-Bearing Demand Deposits		581,589			558,199
Savings Deposits		149,343			136,281
Large Denomination Time Deposits (of $100 or more)		403,237			447,792
Other Time Deposits		365,293			412,232
Total Deposits		1,780,495			1,811,673
Short-Term Borrowings		20,000			20,000
Federal Home Loan Bank Advances and  Long-Term Debt		45,326			70,539
Other Liabilities		15,226			15,383
Total Liabilities		1,861,047			1,917,595
SHAREHOLDERS' EQUITY
Preferred Stock - No Par Value, 500 Shares Authorized, 50 Shares
Outstanding in 2012 and 2011		49,198			48,730
Common Stock – Par Value $0.01 Per Share, 100,000 Shares
Authorized, Shares Issued:    2012- 18,217;  2011-18,210		182			182
Additional Paid in Capital		194,641			194,636
Accumulated Other Comprehensive Loss, Net		(4,836	)		(5,172	)
Deferred Compensation Payable in Common Stock		1,011			949
Accumulated  Deficit		(143,302	)		(121,686	)
Treasury Stock of 256 Common Shares in 2012 and 2011, at Cost		(2,408	)		(2,408	)
Common Stock Held in Grantor Trust, 228 Shares in 2012 and
182 Shares in 2011		(1,011	)		(949	)
Total Shareholders' Equity		93,475			114,282
Total Liabilities and Shareholders' Equity	$	1,954,522		$	2,031,877

(See accompanying notes to unaudited condensed consolidated financial statements.)

1

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars and shares in thousands, except per share amounts)	Three Months Ended September 30,
	2012			2011
Interest Revenue:
Loans and Leases	$	13,780		$	16,855
Securities Available for Sale:Taxable		2,390			3,294
Non-Taxable		12			19
Other		52			45
Total Interest Revenue		16,234			20,213
Interest Expense:
Deposits		2,224			3,729
Short-Term Borrowings		421			277
FHLB Advances and Long-Term Debt		343			400
Total Interest Expense		2,988			4,406
Net Interest Revenue		13,246			15,807
Provision for Loan and Lease Losses		9,500			6,000
Net Interest Revenue after Provision for Loan and Lease Losses		3,746			9,807
Non-Interest Revenue:
Service Charges on Deposit Accounts		1,449			1,581
Trust Income		873			945
Securities Gains		1,117			1,086
Total impairment losses on securities		0			(772	)
Portion of loss recognized in other comprehensive income		0			722
Net impairment losses recognized in earnings		0			(50	)
Other Income		1,640			1,711
Total Non-Interest Revenue		5,079			5,273
Non-Interest Expense:
Salaries		5,018			5,314
Pensions and Employee Benefits		1,613			1,492
Net Occupancy Expense		1,754			1,567
Furniture and Equipment Expense		810			862
Intangible Amortization		226			292
Losses on Other Real Estate Owned		3,464			1,461
Losses (Gains) on Repossessed and Other Assets		199			(1	)
ATM Processing Expense		255			236
FDIC Assessments		675			356
Telephone and Data Line Expense		446			467
Legal Expense		1,014			240
Other Real Estate Carrying Cost Expense		536			438
Merger/Capital Raise Costs		16			0
Other Expense		2,301			2,442
Total Non-Interest Expense		18,327			15,166
Loss Before Income Taxes		(9,502	)		(86	)
Income Tax (Benefit) Expense		0			(117	)
Net (Loss) Income		(9,502	)		31
Effective Preferred Stock Dividend		792			774
Net Loss to Common Shareholders	$	(10,294	)	$	(743	)
Basic Loss Per Common Share	$	(0.57	)	$	(0.04	)
Diluted Loss Per Common Share	$	(0.57	)	$	(0.04	)
Weighted-Average Common Shares Outstanding – Basic		17,961			17,953
Weighted-Average Common Shares Outstanding – Diluted		17,961			17,953

 (See accompanying notes to unaudited condensed consolidated financial statements.)

2

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended
(in thousands)	September 30,
	2012			2011
Net (loss) income	$	(9,502	)	$	31
Other comprehensive income (loss), net of taxes:
Noncredit portion of other-than-temporary impairment losses:
Noncredit portion of other-than-temporary impairment losses, net of taxes of $0 and $308, respectively		0			(514	)
Less: reclassification adjustment of credit portion included in net income, net of taxes of $0 and ($19), respectively		0			31
Net noncredit portion of other-than-temporary impairment losses		0			(483	)
Recognized pension net periodic benefit cost, net of taxes of $0 and ($41), respectively		298			69
Less reclassification adjustments for gains included in net income, net of taxes of $0 and $407, respectively		(1,117	)		(679	)
Net change in fair value of securities available for sale, net of taxes of $0 and $(1,597), respectively		317			2,663
Other comprehensive (loss) income		(502	)		1,570
Comprehensive (loss) income	$	(10,004	)	$	1,601

(See accompanying notes to unaudited condensed consolidated financial statements.)

3

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars and shares in thousands, except per share amounts)	Nine Months Ended September 30,
	2012			2011
Interest Revenue:
Loans and Leases	$	44,335		$	50,780
Securities Available for Sale:Taxable		7,890			10,202
Non-Taxable		41			73
Other		151			160
Total Interest Revenue		52,417			61,215
Interest Expense:
Deposits		7,493			12,307
Short-Term Borrowings		1,090			791
FHLB Advances and Long-Term Debt		1,163			1,378
Total Interest Expense		9,746			14,476
Net Interest Revenue		42,671			46,739
Provision for Loan and Lease Losses		26,800			14,500
Net Interest Revenue after Provision for Loan and Lease Losses		15,871			32,239
Non-Interest Revenue:
Service Charges on Deposit Accounts		4,360			4,606
Trust Income		2,742			3,035
Securities Gains		3,083			2,449
Total impairment losses on securities		0			(772	)
Portion of loss recognized in other comprehensive income		0			722
Net impairment losses recognized in earnings		0			(50	)
Other Income		5,053			5,159
Total Non-Interest Revenue		15,238			15,199
Non-Interest Expense:
Salaries		15,359			16,196
Pensions and Employee Benefits		4,759			4,712
Net Occupancy Expense		5,011			4,522
Furniture and Equipment Expense		2,470			2,593
Intangible Amortization		677			876
Losses on Other Real Estate Owned		3,464			2,187
Losses (Gains) on Repossessed and Other Assets		212			(158	)
ATM Processing Expense		748			739
FDIC Assessments		2,019			2,528
Telephone and Data Line Expense		1,375			1,429
Legal Expense		2,002			1,011
Other Real Estate Carrying Cost Expense		1,589			1,399
Mortgage Recourse Settlement		3,520			0
Merger/Capital Raise Costs		2,384			0
Other Expense		7,027			7,284
Total Non-Interest Expense		52,616			45,318
(Loss) Income Before Income Taxes		(21,507	)		2,120
Income Tax (Benefit) Expense		(672	)		263
Net (Loss) Income		(20,835	)		1,857
Effective Preferred Stock Dividend		2,351			2,314
Net Loss to Common Shareholders	$	(23,186	)	$	(457	)
Basic Loss Per Common Share	$	(1.29	)	$	(0.03	)
Diluted Loss Per Common Share	$	(1.29	)	$	(0.03	)
Weighted-Average Common Shares Outstanding – Basic		17,958			17,886
Weighted-Average Common Shares Outstanding – Diluted		17,958			17,886

 (See accompanying notes to unaudited condensed consolidated financial statements.)

4

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Nine Months Ended
(in thousands)	September 30,
	2012			2011
Net (loss) income	$	(20,835	)	$	1,857
Other comprehensive income (loss), net of taxes:
Noncredit portion of other-than-temporary impairment losses:
Noncredit portion of other-than-temporary impairment losses, net of taxes of $0 and $308, respectively		0			(514	)
Less: reclassification adjustment of credit portion included in net income, net of taxes of $0 and ($19), respectively		0			31
Net noncredit portion of other-than-temporary impairment losses		0			(483	)
Recognized pension net periodic benefit cost, net of taxes of $0 and ($125), respectively		892			209
Less reclassification adjustments for gains included in net income, net of taxes of $0 and $918, respectively		(3,083	)		(1,531	)
Net change in fair value of securities available for sale, net of taxes of $0 and $(4,204), respectively		2,527			7,008
Other comprehensive income		336			5,203
Comprehensive (loss) income	$	(20,499	)	$	7,060

(See accompanying notes to unaudited condensed consolidated financial statements.)

5

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

  For the Nine Months Ended September 30, 2012 and 2011

(Dollars and shares in thousands, except per share amounts)	Preferred Stock		Common Stock Shares Issued		Common Stock Amount		Additional Paid in Capital		Accumulated Other Compre-hensive Income (Loss), Net			Deferred Compensation Payable in Common Stock			Accumu- lated  Deficit			Treasury Stock			Common Stock Held in Grantor Trust			Total
Balance, January  1, 2012	$	48,730		18,210	$	182	$	194,636	$	(5,172	)	$	949		$	(121,686	)	$	(2,408	)	$	(949	)	$	114,282
Net loss																(20,835	)								(20,835	)
Recognized net periodic   pension benefit cost, net of   taxes										892															892
Change in fair value of   securities available for sale,   net of taxes										(556	)														(556	)
Amortization of preferred   stock discount		468														(468	)								0
Dividends-preferred																(313	)								(313	)
Purchase of deferred   compensation shares													98									(98	)		0
Deferred compensation paid in   common stock held in   grantor trust													(36	)								36			0
Stock compensation expense								5																	5
Restricted stock fully vested				7
Balance, September 30, 2012	$	49,198		18,217	$	182	$	194,641	$	(4,836	)	$	1,011		$	(143,302	)	$	(2,408	)	$	(1,011	)	$	93,475
Balance, January 1, 2011	$	48,140		17,895	$	179	$	193,901	$	(5,132	)	$	826		$	(70,750	)	$	(2,408	)	$	(826	)	$	163,930
Net income																1,857									1,857
Recognized net periodic   pension benefit cost, net of   taxes										209															209
Change in fair value of   securities available for sale,   net of taxes										4,994															4,994
Amortization of preferred   stock discount		439														(439	)
Dividends-preferred																(1,876	)								(1,876	)
Purchase of deferred   compensation shares													108									(108	)		0
Deferred compensation paid in   common stock held in   grantor trust													(14	)								14			0
Stock compensation expense								52																	52
Shares issued under dividend   reinvestment plan				18
Common stock issued				297		3		702																	705
Balance, September 30, 2011	$	48,579		18,210	$	182	$	194,655	$	71		$	920		$	(71,208	)	$	(2,408	)	$	(920	)	$	169.871

(See accompanying notes to unaudited condensed consolidated financial statements.)

6

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
(Dollars in thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(20,835	)	$	1,857
Adjustments to reconcile net (loss) income  to net cash provided by operating activities:
Depreciation of premises and equipment		2,935			3,249
Amortization and accretion of premiums and discounts, net		2,922			2,100
Amortization of intangible assets		677			876
Provision for loan losses		26,800			14,500
Securities gains, net		(3,083	)		(2,449	)
Other-than-temporary impairment on securities		0			50
Loss on other real estate owned		3,464			2,187
Losses (gains) on repossessed and other assets		212			(158	)
Gain on sale of loans originated for sale		(691	)		(488	)
Stock compensation expense		5			52
Increase in cash surrender value of life insurance		(391	)		(454	)
Changes in operating assets and liabilities:
Loans originated for sale		(39,084	)		(34,646	)
Loans sold		39,088			37,466
Decrease in accrued income receivable		524			220
Decrease in other assets		4,066			9,052
Increase (decrease) in other liabilities		736			(573	)
Net cash provided by operating activities		17,345			32,841
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits in other financial institutions		(61,466	)		52,713
Net decrease in loans and leases		73,795			41,947
Proceeds from sales of other real estate owned, net		8,719			3,232
Purchases of premises and equipment		(896	)		(864	)
Proceeds from sales of securities available for sale		272,900			136,532
Proceeds from maturities of securities available for sale		59,446			76,446
Purchases of securities available for sale		(313,701	)		(287,907	)
Net cash provided by  investing activities		38,797			22,099
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(31,178	)		(21,962	)
Payments of FHLB advances and long-term debt		(25,213	)		(22,207	)
Issuance of common stock		0			705
Dividends paid		(313	)		(1,876	)
Net cash used in financing activities		(56,704	)		(45,340	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(562	)		9,600
Cash and cash equivalents at beginning of period		37,911			25,852
Cash and cash equivalents at end of period	$	37,349		$	35,452
Supplemental disclosures of cash flow information:
Interest paid		9,805		$	15,453
Income taxes paid (received), net		(323	)		(5,974	)
Supplemental schedule of non-cash investing and financing activity
Loans transferred to other real estate owned		8,546			12,883

(See accompanying notes to unaudited condensed consolidated financial statements.)

7

BANCTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012 AND 2011

Note 1: General Information

The accompanying unaudited condensed consolidated financial statements of BancTrust Financial Group, Inc. and its subsidiary bank (referred to collectively in this discussion as "BancTrust," "the Company," "our," "us" or "we") have been prepared in accordance with U.S. generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for audited financial statements.  The information furnished reflects all adjustments and consolidating entries, consisting of normal and recurring accruals, which in the opinion of management of the Company ("Management") are necessary for a fair presentation of the results for the interim periods.  Results for interim periods may not necessarily be indicative of results to be expected for the year or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2011.

Estimates

In preparing the consolidated financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

A substantial portion of the Company's loans are secured by real estate in the southern two-thirds of Alabama and northwest Florida. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in market conditions in these areas. Management believes that the allowance for losses on loans and leases is adequate. Management uses available information to recognize losses on loans and leases, and future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to make changes to the allowance based on their judgment about information available to them at the time of their examination.

Reclassifications

Certain reclassifications of 2011 balances have been made to conform to classifications used in 2012. These reclassifications did not change shareholders' equity or net income (loss).

8

Note 2: Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standards relating to fair value measurement for the purpose of amending current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This update, which is a joint effort between the FASB and the International Accounting Standards Board (“IASB”), amends existing fair value measurement guidance to converge the fair value measurement guidance in U.S. GAAP and IFRS. This update clarifies the application of existing fair value measurement requirements, changes certain principles in existing guidance and requires additional fair value disclosures. The update permits measuring financial assets and liabilities on a net credit risk basis if certain criteria are met, increases disclosure surrounding company-determined market prices (Level 3) for financial instruments, and also requires the fair value hierarchy disclosure of financial assets and liabilities that are not recognized at fair value in the financial statements, but are included in disclosures at fair value.   This update was effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The adoption of this standard did not have a material impact on the Company’s financial statements.

In June 2011, the FASB issued an update to the accounting standards relating to the presentation of comprehensive income, which allows financial statement issuers to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently, in December, 2011, the FASB issued another update to defer the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income as previously established in the June 2011 update.  This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively.  The provisions of these updates affected the Company’s financial statement format, but did not impact the Company’s financial condition, results of operations or liquidity.

In July 2012, the FASB issued an update to the accounting standards relating to testing for impairment of indefinite-lived intangible assets. The update is intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The update also enhances the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

9

Note 3: Securities Available for Sale

The Company classifies all of its investment securities as available for sale. The following summary sets forth the amortized cost and the corresponding fair value of investment securities available for sale at September 30, 2012 and December 31, 2011:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2012
U.S. Treasury securities	$	504	$	5	$	0	$	509
Obligations of U.S. Government sponsored enterprises		172,834		1,180		161		173,853
Obligations of states and political subdivisions		880		2		0		882
Mortgage-backed securities		320,081		3,472		1,191		322,362
Total	$	494,299	$	4,659	$	1,352	$	497,606
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2011
U.S. Treasury securities	$	507	$	6	$	0	$	513
Obligations of U.S. Government sponsored enterprises		181,624		181		185		181,620
Obligations of states and political subdivisions		1,325		4		0		1,329
Mortgage-backed securities		329,853		4,902		1,004		333,751
Total	$	513,309	$	5,093	$	1,189	$	517,213

Securities available for sale with a carrying value of approximately $200.315 million at September 30, 2012 and $254.042 million at December 31, 2011 were pledged to secure deposits of public funds and trust deposits.

For the nine months ended September 30, 2012, proceeds from the sales of securities available for sale were $272.900 million. Gross realized gains on the sale of these securities were $3.808 million, and gross realized losses were $725 thousand. For the nine months ended September 30, 2011, proceeds from the sales of securities available for sale were $136.532 million. Gross realized gains on the sale of these securities were $2.449 million and there were no gross realized losses. The Company recorded an other-than-temporary impairment charge of $50 thousand in the first nine months of 2011. No such charge was recorded during the first nine months of 2012.

Maturities of securities available for sale as of September 30, 2012, were as follows:

(in thousands)	Amortized Cost		Fair Value
Due in 1 year or less	$	26,117	$	26,249
Due in 1 to 5 years		20,664		20,727
Due in 5 to 10 years		42,812		43,184
Due in over 10 years		84,625		85,084
Mortgage-backed securities		320,081		322,362
Total	$	494,299	$	497,606

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The following table shows the Company's combined gross unrealized losses on, and fair value of, investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011.

(in thousands)	September 30, 2012
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government    sponsored enterprises	$	18,052	$	161	$	0	$	0	$	18,052	$	161
Mortgage-backed securities		84,908		637		7,277		554		92,185		1,191
Total	$	102,960	$	798	$	7,277	$	554	$	110,237	$	1,352
	December 31, 2011
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government    sponsored enterprises	$	69,852	$	166	$	6,207	$	19	$	76,059	$	185
Mortgage-backed securities		57,615		268		2,789		736		60,404		1,004
Total	$	127,467	$	434	$	8,996	$	755	$	136,463	$	1,189

At September 30, 2012, the Company had 16 investment securities that were in an unrealized loss position or impaired for the less than 12 months time frame and 2 investment securities in an unrealized loss position or impaired for the more than 12 months time frame. The Company has one bond whose impairment was deemed in 2009 and again in 2011 to be other-than-temporary. All other investment securities' impairments are deemed by Management to be temporary. All mortgage-backed securities are backed by one-to-four-family mortgages, and approximately 99.1 percent of the mortgage-backed securities represent U.S. Government-sponsored enterprise securities. These securities have fluctuated with the changes in market interest rates on home mortgages. Additionally, the fair value of the Company’s only non-U.S. government-sponsored enterprise mortgage-backed security has been negatively affected by liquidity risk considerations and by concerns about potential default and delinquency risk of the underlying individual mortgage loans. The Company concluded in 2009 and again in 2011 that a portion of its unrealized loss position of this security is other-than-temporary. Accordingly, the Company recorded an impairment charge related to potential credit loss of $400 thousand in 2009 and $200 thousand in 2011 on this security. The amount related to credit loss was determined based on a discounted cash flow method that takes into account several factors including default rates, prepayment rates, delinquency rates, and foreclosure and loss severity of the underlying collateral. Changes in these factors in the future could result in an increase in the amount deemed to be credit-related other-than-temporary impairment, which would result in the Company recognizing additional impairment charges to earnings for this security. Additionally, the Company recorded $522 thousand and $736 thousand in accumulated other comprehensive loss (pre-tax) related to this security at September 30, 2012 and December 31, 2011, respectively.  No credit-related other-than-temporary impairment occurred during the nine-month period ended September 30, 2012. Management will continue to closely monitor this security. The security has an estimated fair value of $2.774 million and represents 94.10 percent of the unrealized losses at September 30, 2012 in the greater than 12 months category. Management believes that the fair value of obligations of U.S. government sponsored enterprises and obligations of state and political subdivisions has changed due to current market conditions and not due to credit concerns related to the issuers of the securities. The Company does not believe any credit-related other-than-temporary impairments exist related to these investment securities.  As of September 30, 2012, there was no intent to sell any of the securities classified as available for sale. Furthermore, Management does not believe it is likely that the Company will be required to sell such securities before a recovery of the carrying value.

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The following table summarizes the changes in the amount of credit losses on the Company's investment securities recognized in earnings for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2012		2011		2012		2011
Beginning balance of credit losses previously recognized in earnings	$	600	$	400	$	600	$	400
Amount related to credit loss for securities as to which an other-than-temporary impairment was not previously recognized in earnings		0		0		0		0
Amount related to credit loss for securities as to which an other-than-temporary impairment was recognized in earnings		0		50		0		50
Ending balance of cumulative credit losses recognized in earnings	$	600	$	450	$	600	$	450

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Note 4. Loans, Leases and Other Real Estate Owned

A summary of loans and leases follows:

	September 30,			December 31,
	2012			2011
	(Dollars in thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	266,015		$	278,032
Agricultural		1,223			1,028
Equipment leases		9,541			12,814
Total commercial, financial and agricultural		276,779			291,874
Commercial real estate:
Commercial construction, land and land development		228,220			250,859
Other commercial real estate		391,197			424,690
Total commercial real estate		619,417			675,549
Residential real estate:
Residential construction		13,624			13,509
Residential mortgage		228,588			245,180
Total residential real estate		242,212			258,689
Consumer, installment and single pay:
Consumer		41,151			44,713
Other		4,583			6,265
Total consumer, installment and single pay		45,734			50,978
Total loans and leases		1,184,142			1,277,090
Less unearned discount leases		(725	)		(1,173	)
Less deferred cost (unearned loan fees), net		1,024			1,132
Total loans and leases, net	$	1,184,441		$	1,277,049

Loans include loans held for sale of $2.708 million at September 30, 2012 and $2.021 million at December 31, 2011 which are accounted for at the lower of cost or market value, in the aggregate.

The following section describes the composition of the various categories in our loan and lease portfolio and discusses management of risk in these categories.

Commercial and Industrial loans, or C and I loans, include loans to commercial customers for use in business to finance working capital needs, equipment purchases, or other expansion projects.  These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment, or receivables, or secured in whole or in part by real estate unrelated to the principal purpose of the loan, and are generally guaranteed by the principals of the borrower.  Variable rate loans in this portfolio have interest rates that are periodically adjusted.  Risk is minimized in this portfolio by requiring adequate cash flow to service the debt and the personal guaranties of principals of the borrowers.  The portfolio of C and I loans decreased $12.017 million, or 4.3 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns primarily in the south Alabama region.

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Agricultural loans include loans to fund seasonal production and longer term investments in land, buildings, equipment, and breeding stock.  The repayment of agricultural loans is dependent on the successful production and marketing of a product.  Risk is minimized in this portfolio by performing a review of the borrower’s financial data and cash flow to service the debt, and by obtaining personal guaranties of principals of the borrower.  This type of lending represents $1.223 million, or less than one percent, of the total loan portfolio.  The portfolio of agricultural loans increased $195 thousand, or 19.0 percent, from December 31, 2011 to September 30, 2012, as a result of new loan activity primarily in the south Alabama region.

Equipment Leases include leases that were acquired during the acquisition of The Peoples Bank and Trust Company.  BankTrust is not actively engaged in equipment leasing.  These leases paid down $3.273 million from December 31, 2011 to September 30, 2012.  Management does not believe this portfolio represents a significant credit risk, since these loans are secured by the equipment being leased, and the lessees continue to maintain a strong level of creditworthiness.

Commercial Real Estate loans include commercial construction loans, land and land development loans, and other commercial real estate loans.

Commercial construction, land, and land development loans include loans for the development of residential housing projects, loans for the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower.  The Bank’s lenders work to cultivate long-term relationships with established developers.  The Bank disburses funds for construction projects as pre-specified stages of construction are completed.  The portfolio of commercial construction loans decreased $22.639 million, or 9.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns and charge-offs.

Other commercial real estate loans include loans secured by commercial and industrial properties, apartment buildings, office or mixed-use facilities, strip shopping centers, and other commercial property. These loans are generally guaranteed by the principals of the borrower.  The portfolio of commercial real estate loans decreased $33.493 million, or 7.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns.

Risk is minimized in this portfolio by requiring a review of the borrower’s financial data and verification of the borrower’s income prior to making a commitment to fund the loan.  Personal guaranties are obtained for substantially all construction loans to builders.  Personal financial statements of guarantors are obtained as part of the loan underwriting process.  For construction loans, regular site inspections are performed upon completion of each construction phase, prior to advancing additional funds for additional phases.  Commercial construction and commercial real estate lending has been curtailed over the past three years as a result of a combination of factors, including a decline in demand, lack of qualified borrowers and regulatory pressures on all banks to curtail lending in the commercial real estate market.

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Residential Construction loans include loans to individuals for the construction of their residences, either primary or secondary, where the borrower is the owner and independently engages the builder.  Residential construction loans also include loans to builders for the construction of one-to-four family residences for which the collateral, a proposed one-to-four family dwelling, is the primary source of repayment.  These loans are made to builders to finance the construction of homes that are either pre-sold or those that are built on a speculative basis, although speculative lending in this category has been strictly limited and controlled over the past three years.  Loan proceeds are to be disbursed incrementally as construction is completed.  The portfolio of residential construction loans increased $115 thousand, or 0.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of increased loan activity with local builders in the northwest Florida region.

Residential Mortgageloans include conventional mortgage loans on one-to-four family residential properties.  These properties may serve as the borrower’s primary residence, vacation home, or investment property.  We sell the majority of our residential mortgage loans originated with terms to maturity of 15 years or greater in the secondary market.  We generally originate fixed and adjustable rate residential mortgage loans using secondary market underwriting and documentation standards.  Also included in this portfolio are home equity loans and lines of credit.  This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home.  Risk is minimized in this portfolio by reviewing the borrower’s financial data and ability to meet both existing financial obligations and the proposed loan obligation, and by verification of the borrower’s income.  The portfolio of residential mortgage loans decreased $16.592 million, or 6.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns, charge-offs, and foreclosures.

Consumer loans include a variety of secured and unsecured personal loans including automobile loans, marine loans, loans for household and personal purpose, and all other direct consumer installment loans.  Risk is minimized in this portfolio by reviewing the borrower’s financial data, ability to meet existing obligations and the proposed loan obligation, and verification of the borrower’s income.  The portfolio of consumer loans decreased $3.562 million, or 8.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns.  Repossessions and charge-offs have been minimal in this portfolio since December 31, 2011.

Other loans comprise primarily loans to municipalities to fund operating expenses during periods prior to revenue collection and to fund capital projects.  The portfolio of other loans decreased $1.682 million, or 26.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns.

Non-Accrual Loans

At September 30, 2012 and December 31, 2011, non-accrual loans totaled $143.877 million and $96.592 million, respectively, which included non-accruing restructured loans of $3.738 million and $5.296 million, respectively. The allowance for loan and lease losses allocated to restructured loans at September 30, 2012 and December 31, 2011 was $2.195 million and $392 thousand, respectively. The amount of interest income that would have been recorded during the first nine months of 2012, if all non-accrual loans had been current in accordance with their original terms, was $5.864 million. The amount of interest income actually recognized on these loans during the first nine months of 2012 was $1.209 million. At September 30, 2012 and December 31, 2011, performing restructured loans totaled $8.611 million and $7.253 million, respectively. There was no material effect on interest income recognition as a result of the modification of these loans.

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Non-accrual loans at September 30, 2012 and December 31, 2011, segregated by class of loans, were as follows:

LOANS ON NON-ACCRUAL

	September 30,		December 31,
	2012		2011
	(Dollars in thousands)
Non-accrual loans:
Commercial, financial and agricultural	$	7,644	$	2,372
Commercial real estate:
Construction, land and land development		102,176		59,382
Other		17,230		15,275
Consumer		659		651
Residential:
Construction		484		497
Mortgage		15,684		18,415
Total non-accrual loans	$	143,877	$	96,592

An age analysis of past due loans, segregated by class of loans, as of September 30, 2012 and December 31, 2011, was as follows:

AGE ANALYSIS OF PAST DUE LOANS

September 30, 2012

(Dollars in thousands)
	30-89 days past due		90 days or more past due		Total past due		Current		Total loans		Loans 90 days or more past due and accruing
Loans:
Commercial, financial and agricultural	$	3,543	$	7,644	$	11,187	$	265,592	$	276,779	$	0
Commercial real estate:
Construction, land and land development		5,787		102,176		107,963		120,257		228,220		0
Other		6,010		17,230		23,240		367,957		391,197		0
Consumer		618		659		1,277		44,457		45,734		0
Residential
Construction		337		484		821		12,803		13,624		0
Mortgage		10,011		15,696		25,707		202,881		228,588		12
Total	$	26,306	$	143,889	$	170,195	$	1,013,947	$	1,184,142	$	12

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December 31, 2011

(Dollars in thousands)
	30-89 days past due		90 days or more past due		Total past due		Current		Total loans		Loans 90 days or more past due and accruing
Loans:
Commercial, financial and agricultural	$	2,288	$	2,372	$	4,660	$	287,214	$	291,874	$	0
Commercial real estate:
Construction, land and land development		1,493		59,382		60,875		189,984		250,859		0
Other		3,687		15,275		18,962		405,728		424,690		0
Consumer		546		651		1,197		49,781		50,978		0
Residential
Construction		0		497		497		13,012		13,509		0
Mortgage		5,954		18,663		24,617		220,563		245,180		248
Total	$	13,968	$	96,840	$	110,808	$	1,166,282	$	1,277,090	$	248

Impaired Loans

Loans are considered impaired when, based on current information, it is probable that all amounts contractually due, including scheduled principal and interest payments, are not likely to be collected. Factors considered by Management in determining if a loan is impaired include payment status, probability of collecting scheduled principal and interest payments when due and value of collateral for collateral dependent loans. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All loans placed on non-accrual status are considered to be impaired.  If a loan is impaired, a specific valuation allowance is allocated, if necessary, based on the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if repayment is expected solely from the collateral.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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IMPAIRED LOANS September 30, 2012									Nine Months Ended September 30, 2012
(Dollars in thousands)
	Unpaid Principal Balance		Partial Charge-offs to Date		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans:
With no related allowance recorded:
Commercial, financial and agricultural	$	831	$	360	$	471	$	0	$	561	$	0
Commercial real estate construction, land and land development		45,511		13,410		32,101		0		39,071		79
Commercial real estate other		12,527		618		11,909		0		14,396		53
Consumer		0		0		0		0		0		0
Residential construction		114		0		114		0		122		0
Residential mortgage		6,312		707		5,605		0		8,141		12
Total		65,295		15,095		50,200		0		62,291		144
With a related allowance recorded:
Commercial, financial and agricultural		6,461		695		5,766		1,625		2,800		77
Commercial real estate construction, land and land development		79,433		9,527		69,906		26,083		40,921		819
Commercial real estate other		10,218		117		10,101		2,925		5,893		65
Consumer		119		0		119		60		123		0
Residential construction		370		0		370		120		369		0
Residential mortgage		8,847		437		8,410		2,943		6,364		50
Total		105,448		10,776		94,672		33,756		56,470		1,011
Total commercial		154,981		24,727		130,254		30,633		103,642		1,093
Total consumer		119		0		119		60		123		0
Total residential		15,643		1,144		14,499		3,063		14,996		62
Total Impaired Loans	$	170,743		25,871	$	144,872	$	33,756	$	118,761	$	1,155

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IMPAIRED LOANS September 30, 2012	Three Months Ended September 30, 2012
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized
Impaired Loans:
With no related allowance recorded:
Commercial, financial and agricultural	$	471	$	0
Commercial real estate construction, land and land development		28,370		19
Commercial real estate other		11,656		45
Consumer		0		0
Residential construction		118		0
Residential mortgage		6,215		9
Total		46,830		73
With a related allowance recorded:
Commercial, financial and agricultural		3,627		77
Commercial real estate construction, land and land development		57,076		799
Commercial real estate other		8,994		46
Consumer		120		0
Residential construction		370		0
Residential mortgage		8,300		39
Total		78,487		961
Total commercial		110,194		986
Total consumer		120		0
Total residential		15,003		48
Total Impaired Loans	$	125,317	$	1,034

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IMPAIRED LOANS December 31, 2011									Year Ended December 31, 2011
(Dollars in thousands)
	Unpaid Principal Balance		Partial Charge-offs to Date		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans:
With no related allowance recorded:
Commercial, financial and agricultural	$	831	$	360	$	471	$	0	$	652	$	7
Commercial real estate construction, land and land development		60,974		21,233		39,741		0		28,959		200
Commercial real estate other		18,073		2,235		15,838		0		11,180		372
Consumer		0		0		0		0		0		0
Residential construction		128		0		128		0		790		0
Residential mortgage		11,492		1,796		9,696		0		8,645		59
Total		91,498		25,624		65,874		0		50,226		638
With a related allowance recorded:
Commercial, financial and agricultural		1,618		696		922		206		1,252		5
Commercial real estate construction, land and land development		23,668		2,488		21,180		4,446		41,023		156
Commercial real estate other		2,798		0		2,798		333		4,562		68
Consumer		125		6		119		60		183		0
Residential construction		369		0		369		11		441		0
Residential mortgage		5,255		94		5,161		2,259		6,185		36
Total		33,833		3,284		30,549		7,315		53,646		265
Total commercial		107,962		27,012		80,950		4,985		87,628		808
Total consumer		125		6		119		60		183		0
Total residential		17,244		1,890		15,354		2,270		16,061		95
Total Impaired Loans	$	125,331	$	28,908	$	96,423	$	7,315	$	103,872	$	903

Credit Quality Indicators

A risk grading matrix is utilized to assign a risk grade to each loan.  Loans are graded on a scale of 1 to 9.  A description of the general characteristics of the 9 risk grades follows:

●       Grades 1 and 2 – These grades include “excellent” loans which are virtually risk-free and are secured by cash-equivalent instruments or readily marketable collateral, or are within guidelines to borrowers with liquid financial statements.  These loans have excellent sources of repayment with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and regulations.

●       Grade 3 – This grade includes “guideline” loans that have excellent sources of repayment, with no significant identifiable risk of collection, and that conform to Bank policy, guidelines, underwriting standards, and regulations.  These loans have documented historical cash flow that meets or exceeds minimum guidelines and have adequate secondary sources to repay the debt.

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●       Grade 4 – This grade includes “satisfactory” loans that have adequate sources of repayment with little identifiable risk of collection.  These loans generally conform to Bank policy, guidelines, and underwriting standards with limited exceptions that have been adequately mitigated by other factors, and they have documented historical cash flow that meets or exceeds minimum guidelines and adequate secondary sources to repay the debt.

●       Grade 5 – This grade includes “low satisfactory” loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.  These loans have additional exceptions to Bank policy, guidelines, or underwriting standards that have been properly mitigated by other factors, unproved or insufficient primary sources of repayment that appear sufficient to service the debt at the time, or marginal or unproven secondary sources to repay the debt.

Consumer loans with grades 1 through 5 are identified as “Pass.”

●       Grade 6 – This grade includes “special mention” loans that are currently protected but are potentially weak.  These loans have potential or actual weaknesses that may weaken the asset or inadequately protect the Bank’s credit position at some future date.  These loans may have well-defined weaknesses in the primary repayment source but are protected by the secondary source of repayment.

●       Grade 7 – This grade includes “substandard” loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●       Grade 8 – This grade includes “doubtful” loans that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

●       Grade 9 – This grade includes “loss” loans that are considered uncollectible and of such little value that their continued reporting as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be realized in the future.

The Bank did not have any loss (grade 9) loans at September 30, 2012 or December 31, 2011.

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The tables below set forth credit exposure for the commercial and consumer residential portfolio based on internally assigned grades, and the consumer portfolio based on payment activity at September 30, 2012 and December 31, 2011.  These tables reflect continuing issues with credit quality in the construction, land and land development portfolio.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

	Commercial, Financial and Agricultural				Commercial Real Estate- Construction, Land and Land Development				Commercial Real Estate- Other
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2012		2011		2012		2011		2012		2011
	(Dollars in thousands)
Grade:
Excellent	$	5,992	$	6,299	$	265	$	281	$	1,305	$	1,520
Guideline		60,480		72,836		16,195		18,346		89,503		99,354
Satisfactory		78,851		74,984		21,569		21,721		96,581		116,696
Low satisfactory		93,285		110,891		65,457		83,910		157,529		164,826
Special mention		24,456		14,833		6,503		9,107		14,876		12,996
Substandard		13,715		12,031		118,231		117,494		31,403		29,298
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
Total	$	276,779	$	291,874	$	228,220	$	250,859	$	391,197	$	424,690

CONSUMER RESIDENTIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

	Residential - Construction				Residential - Prime
	September 30,		December 31,		September 30,		December 31,
	2012		2011		2012		2011
	(Dollars in thousands)
Grade:
Pass	$	11,632	$	13,012	$	191,330	$	205,700
Special mention		1,218		0		9,832		8,841
Substandard		774		497		27,268		30,452
Doubtful		0		0		158		187
Total	$	13,624	$	13,509	$	228,588	$	245,180

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CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BASED ON PAYMENT ACTIVITY

	Consumer
	September 30,		December 31,
	2012		2011
	(Dollars in thousands)
Grade:
Performing	$	45,075	$	50,327
Non-performing		659		651
Total	$	45,734	$	50,978

The following table sets forth certain information with respect to the Company’s recorded investment in loans and the allocation of the Company’s allowance for loan and lease losses, charge-offs and recoveries by loan category as of September 30, 2012 and December 31, 2011.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The Company continues to experience the adverse effects of a severe downturn in the real estate markets in which it operates, and this has led to a significant increase in defaults by borrowers compared to historical periods, a significant increase in loans charged-off, and a reduction in the value of real estate serving as collateral for some of the Company's loans.

23

ALLOWANCE FOR LOAN AND LEASE LOSSES AND RECORDED INVESTMENT IN LOANS

For the Three Months Ended September 30, 2012
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated		Total
Allowance for loan and lease losses -
Balance at beginning of period	$	4,591		$	37,960		$	8,168		$	420		$	1,414	$	52,553
Charge-offs		(305	)		(3,857	)		(483	)		(111	)		0		(4,756	)
Recoveries		57			19			29			33			0		138
Provision charged to operating expense		1,117			5,769			924			10			1,680		9,500
Balance at end of period	$	5,460		$	39,891		$	8,638		$	352		$	3,094	$	57,435

For the Nine Months Ended September 30, 2012
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total
Allowance for loan and lease losses -
Balance at beginning of period	$	5,151		$	23,280		$	7,713		$	584		$	5,428		$	42,156
Charge-offs		(1,354	)		(7,227	)		(3,195	)		(246	)		0			(12,022	)
Recoveries		108			49			254			90			0			501
Provision charged to operating expense		1,555			23,789			3,866			(76	)		(2,334	)		26,800
Balance at end of period	$	5,460		$	39,891		$	8,638		$	352		$	3,094		$	57,435

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,625	$	29,008	$	3,063	$	60	$	0	$	33,756
Other loans not individually evaluated		3,835		10,883		5,575		292		3,094		23,679
Ending balance	$	5,460	$	39,891	$	8,638	$	352	$	3,094	$	57,435
Loans -
Loans individually evaluated for impairment	$	6,237	$	124,017	$	14,499	$	119	$	0	$	144,872
Other loans not individually evaluated		270,542		495,400		227,713		45,615		0		1,039,270
Ending balance	$	276,779	$	619,417	$	242,212	$	45,734	$	0	$	1,184,142

24

For the Three Months Ended September 30, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total
Allowance for loan and lease losses -
Balance at beginning of period	$	4,569		$	26,298		$	6,430		$	887		$	2,095		$	40,279
Charge-offs		(35	)		(3,033	)		(328	)		(48	)		0			(3,444	)
Recoveries		158			48			33			43			0			282
Provision charged to operating expense		591			4,623			991			(3	)		(202	)		6,000
Balance at end of period	$	5,283		$	27,936		$	7,126		$	879		$	1,893		$	43,117

For the Nine Months Ended September 30, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total
Allowance for loan and lease losses -
Balance at beginning of period	$	5,429		$	31,431		$	6,669		$	890		$	3,512		$	47,931
Charge-offs		(2,271	)		(15,930	)		(1,902	)		(156	)		0			(20,259	)
Recoveries		229			520			79			117			0			945
Provision charged to operating expense		1,896			11,915			2,280			28			(1,619	)		14,500
Balance at end of period	$	5,283		$	27,936		$	7,126		$	879		$	1,893		$	43,117

Period-end amount allocated to:
Loans individually evaluated for impairment	$	208	$	11,273	$	1,835	$	325	$	0	$	13,641
Other loans not individually evaluated		5,075		16,663		5,291		554		1,893		29,476
Ending balance	$	5,283	$	27,936	$	7,126	$	879	$	1,893	$	43,117
Loans -
Loans individually evaluated for impairment	$	1,396	$	93,003	$	15,658	$	386	$	0	$	110,443
Other loans not individually evaluated		290,985		602,797		250,147		53,214		0		1,197,143
Ending balance	$	292,381	$	695,800	$	265,805	$	53,600	$	0	$	1,307,586

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December 31, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural		Commercial Real Estate		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses -
Period-end amount allocated to:
Loans individually evaluated for impairment	$	206	$	4,779	$	2,270	$	60	$	0	$	7,315
Other loans not individually evaluated		4,945		18,501		5,444		523		5,428		34,841
Ending balance	$	5,151	$	23,280	$	7,714	$	583	$	5,428	$	42,156
Loans -
Loans individually evaluated for impairment	$	1,393	$	79,557	$	15,354	$	119	$	0	$	96,423
Other loans not individually evaluated		290,481		595,992		243,335		50,859		0		1,180,667
Ending balance	$	291,874	$	675,549	$	258,689	$	50,978	$	0	$	1,277,090

Troubled Debt Restructurings

The following table presents a breakdown of troubled debt restructurings that occurred during the three- and nine-month periods ended September 30, 2012 by loan class and whether the loan remains on accrual or nonaccrual status.  All of the troubled debt restructurings that occurred during the time period presented below included concessions relating to extended payment terms. No concessions were made to lower interest rates to a below market rate.

(Dollars in thousands)	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Accruing Loans
Commercial, financial and agricultural		0	$	0	$	0		1	$	19	$	19
Commercial construction, land and land development		0		0		0		1		237		237
Other commercial real estate		1		2,900		2,900		1		2,900		2,900
Total		1	$	2,900	$	2,900		3	$	3,156	$	3,156
Nonaccrual Loans
Consumer		0	$	0	$	0		1	$	11	$	11
Total		0	$	0	$	0		1	$	11	$	11
Total
Commercial, financial and agricultural		0	$	0	$	0		1	$	19	$	19
Commercial construction, land and land development		0		0		0		1		237		237
Other commercial real estate		1		2,900		2,900		1		2,900		2,900
Consumer		0		0		0		1		11		11
Total		1	$	2,900	$	2,900		4	$	3,167	$	3,167

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No troubled debt restructurings made within the previous twelve months defaulted during the three or nine months ended September 30, 2012.  Once a loan has been modified as a troubled debt restructuring, it is considered an impaired loan.  A specific valuation allowance is allocated to that loan in the allowance for loan and lease losses, if necessary, based on the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if repayment is expected solely from the collateral.

Other Real Estate Owned

A summary of other real estate owned follows:

	September 30,		December 31,
	2012		2011
	(Dollars in thousands)
Construction, land development, lots and other land	$	39,351	$	46,565
1-4 family residential properties		3,688		4,118
Multi-family residential properties		2,910		1,817
Non-farm non-residential properties		7,801		4,887
Total other real estate owned	$	53,750	$	57,387

The Company carries its other real estate owned at the estimated fair value less any cost to dispose. Since 2007, there has been a substantial slowdown in the real estate markets across the U.S., including in the markets where the Company does business.  This slowdown, together with other factors (as discussed in Note 1), has resulted in a substantial decrease in the value of the Company’s other real estate owned.  This decrease in value has materially and adversely affected the Company’s earnings and capital.  If real estate values in the Company’s markets remain depressed or decline further, the Company could experience further adverse effects.  Other real estate owned activity is summarized as follows:

	Nine Months Ended
	September 30,
	2012			2011
	(Dollars in thousands)
Balance at the beginning of the year	$	57,387		$	82,419
Loan foreclosures		8,546			12,883
Property sold		(8,719	)		(3,232	)
Losses on sale and write-downs		(3,464	)		(2,187	)
Balance at the end of the period	$	53,750		$	89,883

Note 5: Retirement Plans

	Three Months Ended
	September 30, 2012			September 30, 2011
(in thousands)
Service cost	$	251		$	236
Interest cost		446			447
Expected return on plan assets		(691	)		(565	)
Amortization of prior service cost		0			1
Amortization of net loss		298			112
Net periodic pension cost	$	304		$	231

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	Nine Months Ended
	September 30, 2012			September 30, 2011
(in thousands)
Service cost	$	755		$	708
Interest cost		1,341			1,341
Expected return on plan assets		(2,076	)		(1,692	)
Amortization of prior service cost		0			3
Amortization of net loss		892			333
Net periodic pension cost	$	912		$	693

The Company currently expects to contribute a minimum of $1.080 million to its pension plans in 2012, of which $1.021 million was contributed in the first nine months of 2012. The weighted-average discount rate assumed in the actuarial calculation of the benefit obligation for 2012 was 4.50 percent.

Note 6: Loss Per Share

Basic loss per share for the three- and nine- month periods ended September 30, 2012 and 2011 was computed by dividing net loss to common shareholders by the weighted-average number of shares of common stock outstanding, which consists of issued shares less treasury stock.

Diluted loss per share for the three- and nine- month periods ended September 30, 2012 and 2011 was computed by dividing net loss to common shareholders by the weighted-average number of shares of common stock outstanding and the dilutive effect of the shares awarded under the Company's stock option plans and the warrants issued in connection with the issuance of preferred stock to the U.S. Treasury, assuming the exercise of all in-the-money options and warrants, based on the treasury stock method using an average fair market value of the stock during the respective periods.

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The following tables present the loss per share calculations for the three-month periods ended September 30, 2012 and 2011. The Company excluded all options and warrants for the calculations of diluted loss per share for the quarters ended September 30, 2012 and 2011 because such common stock equivalents would be antidilutive to the loss per share.

	Three Months Ended
Basic Loss Per Common Share	September 30, 2012			September 30, 2011
(in thousands, except per share amounts)
Net loss to common shareholders	$	(10,294	)	$	(743	)
Weighted average common shares outstanding		17,961			17,953
Basic loss per common share	$	(0.57	)	$	(0.04	)

	Three Months Ended
Diluted Loss Per Common Share	September 30, 2012			September 30, 2011
(in thousands, except per share amounts)
Net loss to common shareholders	$	(10,294	)	$	(743	)
Weighted average shares outstanding		17,961			17,953
Dilutive effects of assumed conversion and exercise of common stock options, warrants and restricted stock		0			0
Weighted average common and dilutive potential common shares outstanding		17,961			17,953
Diluted loss per common share	$	(0.57	)	$	(0.04	)

The following tables present the loss per share calculations for the nine-month periods ended September 30, 2012 and 2011. The Company excluded all options and warrants for the calculations of diluted loss per share for the nine-months ended September 30, 2012 and 2011 because such common stock equivalents would be antidilutive to the loss per share.

	Nine Months Ended
Basic Loss Per Common Share	September 30, 2012			September 30, 2011
(in thousands, except per share amounts)
Net loss to common shareholders	$	(23,186	)	$	(457	)
Weighted average common shares outstanding		17,958			17,886
Basic loss per common share	$	(1.29	)	$	(0.03	)

	Nine Months Ended
Diluted Loss Per Common Share	September 30, 2012			September 30, 2011
(in thousands, except per share amounts)
Net loss to common shareholders	$	(23,186	)	$	(457	)
Weighted average shares outstanding		17,958			17,886
Dilutive effects of assumed conversion and exercise of  common stock options, warrants and restricted stock		0			0
Weighted average common and dilutive potential common shares outstanding		17,958			17,886
Diluted loss per common share	$	(1.29	)	$	(0.03	)

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Note 7:  Commitments

The Company, as part of its ongoing business operations, issues financial guaranties in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. A financial standby letter of credit is a commitment by the Company to guarantee a customer's repayment of an outstanding loan or financial obligation. In a performance standby letter of credit, the Company guarantees a customer's performance under a contractual non-financial obligation for which it receives a fee. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the life of the standby letter of credit. At September 30, 2012, the Company had standby letters of credit outstanding with maturities ranging from less than one year to three years. The maximum potential amount of future payments the Company could be required to make under its standby letters of credit at September 30, 2012 was $19.217 million, and that sum represents the Company's maximum credit risk under these arrangements. At September 30, 2012, the Company had $192 thousand of liabilities associated with standby letter of credit agreements.

On July 2, 2012, BankTrust entered into a Final Settlement Agreement (the “Agreement”) with Countrywide Home Loans, Inc. (“Countrywide”). Pursuant to the Agreement, BankTrust paid Countrywide $3.520 million as full and final settlement of any and all claims and disputes related to mortgage loans sold by BankTrust or its predecessors in interest to Countrywide prior to July 2, 2012 pursuant to loan purchase agreements between BankTrust, or its predecessors in interest, and Countrywide. The Agreement contains a mutual release whereby BankTrust and Countrywide fully, finally and completely release each other and their respective related parties from any claims and disputes related to the mortgage loans transferred by BankTrust or its predecessors in interest to Countrywide. The Agreement was made to compromise and settle the claims and disputes at issue and is not an admission of liability or any other matter by either BankTrust or Countrywide. This settlement resulted in the Company recognizing an expense of $3.520 million in the first nine months of 2012.

Note 8: Fair Value Measurement and Fair Value of Financial Instruments

Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Accounting standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The applicable standard describes three levels of inputs that may be used to measure fair value:  Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.  Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.  Level 3:  Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels.  For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level.  For the nine months ended September 30, 2012 and the year ended December 31, 2011, there were no transfers between levels.

30

The Company utilizes a third-party valuation service provider to value its available for sale investment securities portfolio. Despite most of these securities being U.S. Government agency debt obligations, agency mortgage-backed securities and municipal securities traded in active markets, the fair values are determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications.  Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items.  These are inputs used by a third-party pricing service used by the Company.  To validate the appropriateness of the valuations provided by the third party, the Company regularly updates its understanding of the inputs used and compares valuations to an additional third party source. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as Level 2.

Assets and Liabilities Measured on a Recurring Basis:

Assets and liabilities measured at fair value on a recurring basis are summarized below.

September 30, 2012
(In thousands)
	Carrying Value in Balance Sheet		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	509	$	0	$	509	$	0
Obligations of U.S. Government sponsored enterprises		173,853		0		173,853		0
Obligations of states and political subdivisions		882		0		882		0
Mortgage-backed securities		322,362		0		322,362		0
Available-for-sale securities	$	497,606	$	0	$	497,606	$	0

December 31, 2011
(In thousands)
	Carrying Value in Balance Sheet		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	513	$	0	$	513	$	0
Obligations of U.S. Government sponsored enterprises		181,620		0		181,620		0
Obligations of states and political subdivisions		1,329		0		1,329		0
Mortgage-backed securities		333,751		0		333,751		0
Available-for-sale securities	$	517,213	$	0	$	517,213	$	0

31

Assets and Liabilities Measured on a Nonrecurring Basis:

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below.

September 30, 2012
(In thousands)
	Carrying Value in Balance Sheet		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	60,916	$	0	$	0	$	60,916
Other real estate owned	$	53,750	$	0	$	0	$	53,750

December 31, 2011
(In thousands)
	Carrying Value in Balance Sheet		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	23,234	$	0	$	0	$	23,234
Other real estate owned	$	57,387	$	0	$	0	$	57,387

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors.  After evaluating the underlying collateral, the fair value of the impaired loans is determined and specific reserves are allocated from the allowance for loan and lease losses.  The recorded fair value reflects the loan balance less the specifically allocated reserve.  Impaired loans for which no reserve has been specifically allocated are not included in the table above.

Other real estate owned (“OREO”) is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. Updated appraisals or evaluations are obtained at least annually for all OREO properties. These appraisals are used to update fair value estimates.  A provision is charged to earnings for subsequent losses on OREO when these updates indicate such losses have occurred. The ability of the Company to recover the carrying value of OREO is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond the Company’s control, and future declines in the value of the real estate could result in a charge to earnings.  The recognition of sales and sales gains is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements.  If those requirements are not met, sale and gain recognition is deferred.

32

Fair value measurements for impaired loans and other real estate owned include the use of external appraisals obtained annually for impaired loans and other real estate owned over $1 million.  Impaired loans and other real estate owned under $1 million require a current internal property evaluation and external appraisals are obtained biannually.  This process was implemented during the first quarter of 2012, will be completed by the end of 2012, and will be continued on an ongoing basis.  Once an appraisal has been obtained, the fair value is determined based on appraised value less estimated costs to sell.  For impaired loans that have not yet received a current appraisal, discounted appraisals less estimated costs to sell have been used to determine fair value.  Discounts have predominantly been in the range of 0% to 25%, with isolated instances up to 60%.

Accounting standards require disclosure of fair value information about financial instruments, whether or not recognized in the Statements of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to Management as of September 30, 2012 and December 31, 2011.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

CASH, DUE FROM BANKS, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

SECURITIES AVAILABLE FOR SALE - Fair value for securities available for sale is primarily estimated using market prices for similar securities. For any Level 3 securities, the Company generally uses a discounted cash flow methodology. There were no Level 3 securities at September 30, 2012 or December 31, 2011.

LOANS AND LEASES - For equity lines and other loans or leases with short-term or variable rate characteristics, the carrying value reduced by an estimate for credit losses inherent in the portfolio is a reasonable estimate of fair value. The fair value of all other loans and leases is estimated by discounting their future cash flows using interest rates currently being offered for loans and leases with similar terms, reduced by an estimate of credit losses inherent in the portfolio. The discount rates used are commensurate with the interest rate and prepayment risks involved for the various types of loans. The estimated fair value also includes an estimate of certain liquidity risk.

DEPOSITS - The fair value disclosed for demand deposits (i.e., interest- and non-interest-bearing demand, savings and money market savings) is equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair value for certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated monthly maturities.

33

SHORT-TERM BORROWINGS - The fair value for these short-term liabilities is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

FHLB ADVANCES AND LONG-TERM DEBT - The fair value of the Company's fixed rate borrowings is estimated using discounted cash flows, based on the Company's current incremental borrowing rates for similar borrowing arrangements.

 COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The value of these unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. Since no significant credit exposure existed, and because such fee income is not material to the Company's financial statements at September 30, 2012 and December 31, 2011, the fair value of these commitments is not presented.

Many of the Company's assets and liabilities are short-term financial instruments whose carrying amounts reported in the Statement of Condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold, other short-term borrowings and accrued interest receivable and payable balances. The estimated fair value of the Company's remaining on-balance sheet financial instruments as of September 30, 2012 and December 31, 2011 is summarized below.

	September 30, 2012
(In thousands)
	Carrying Value		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	37,349	$	37,349	$	37,349	$	0	$	0
Interest-bearing deposits		123,408		123,408		123,408		0		0
Securities available for sale		497,606		497,606		0		497,606		0
Loans and leases, net		1,127,006		1,108,278		0		0		1,108,278
Accrued interest receivable		5,703		5,703		0		0		5,703
Financial liabilities:
Deposits	$	1,780,495	$	1,783,403	$	0	$	0	$	1,783,403
Short-term borrowings		20,000		20,433		0		0		20,433
FHLB advances and long-term debt		45,326		29,005		0		0		29,005
Accrued interest payable		2,857		2,857		0		0		2,857

34

(In thousands)	December 31, 2011
	Carrying Value		Estimated Fair Value
Financial assets:
Cash, due from banks and federal funds sold	$	37,911	$	37,911
Interest-bearing deposits		61,942		61,942
Securities available for sale		517,213		517,213
Loans and leases, net		1,234,893		1,213,983
Accrued interest receivable		6,227		6,227
Financial liabilities:
Deposits	$	1,811,673	$	1,815,613
Short-term borrowings		20,000		20,676
FHLB advances and long-term debt		70,539		54,096
Accrued interest payable		2,916		2,916

Certain financial instruments and all non-financial instruments are excluded from fair value disclosure requirements. The disclosures also do not include certain intangible assets, such as customer relationships and deposit base intangibles. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Note 9: Deferred Interest and Dividend Payments

As previously reported, commencing with its April 30, 2012 interest payment, the Company began deferring the payment of quarterly interest payments on both issues of junior subordinated debentures relating to its outstanding trust preferred securities, and, commencing with its May 15, 2012 dividend, the Company suspended the payment of quarterly cash dividends on its preferred stock issued to the US Treasury.  The Company continues to account for these deferred or suspended obligations.  Although the Company has suspended the declaration and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared because of their cumulative nature. As of September 30, 2012, the cumulative amount of dividends owed to the US Treasury and the cumulative amount of interest deferred on the subordinated debentures were $1.570 million and $568 thousand, respectively.

Note 10: Pending Merger with Trustmark Corporation

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

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

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

Introduction

Presented below is an analysis of the consolidated financial condition and results of operations of BancTrust Financial Group, Inc., a bank holding company ("BancTrust"), and its wholly owned subsidiary, BankTrust (the "Bank"). As used in the following discussion, the terms "we," "us," "our" and the "Company" mean BancTrust Financial Group, Inc. and its subsidiary on a consolidated basis (unless the context indicates another meaning). This analysis focuses upon significant changes in financial condition between December 31, 2011 and September 30, 2012 and significant changes in operations for the three- and nine- month periods ended September 30, 2012 and 2011.

Cautionary Notice Concerning Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements with respect to critical accounting policies, financial condition, liquidity, non-performing assets, results of operations and other matters.  Forward-looking statements may be found in the Notes to Unaudited Consolidated Condensed Financial Statements and in the following discussion.  These statements can generally be identified by the use of words such as "expect," "may," "could," "should," “contemplate,” "intend," "plan," "project," "estimate," "will," "believe," "continue," "predict," "anticipate" or words of similar meaning.  The Company's forward-looking statements are based on information presently available to Management and assumptions that Management believes to be reasonable.  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, in addition to the inherent uncertainty of predictions, which may be beyond our control and which may cause the actual results, performance, capital, ownership or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated include, among others:

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

- the risks presented by the recent economic recession and the slow recovery of the economy, which could continue to adversely affect credit quality, collateral values, including the value of real estate collateral and other real estate owned, investment values, liquidity and loan originations, reserves for loan losses, charge-offs of loans and loan portfolio delinquency rates;

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- the reputation of the financial services industry could further deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;

- existing regulatory requirements, changes in regulatory requirements, including accounting standards and legislation, and our inability to meet those requirements, including capital requirements, and increases in our deposit insurance premiums, could adversely affect the businesses in which we are engaged, our results of operations and financial condition;

- changes in monetary and fiscal policies of the U.S. government may adversely affect the business in which we are engaged;

- the frequency and magnitude of foreclosure of our loans may increase;

- the assumptions and estimates underlying the establishment of reserves for probable loan and lease losses, loan impairments and other estimates may be inaccurate;

- competitive pressures among depository and other financial institutions may increase significantly;

- changes in the interest rate environment may reduce margins, reduce net interest income and negatively affect funding sources;

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

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

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

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

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

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

Pending Merger with Trustmark Corporation

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

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

Recent Accounting Pronouncements

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

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Critical Accounting Policies

Basis of Financial Statement Presentation

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

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained at a level considered by Management to be adequate to absorb losses inherent in the loan and lease portfolio. Loans and leases are charged off against the allowance for loan and lease losses when Management believes that the collection of the principal is unlikely. Subsequent recoveries are added to the allowance. BancTrust’s determination of its allowance for loan and lease losses is determined in accordance with GAAP and other regulatory guidance. The amount of the allowance for loan and lease losses and the amount of the provision charged to expense are based on periodic reviews of the portfolio, past loan and lease loss experience, current economic conditions and such other factors which, in Management’s judgment, deserve current recognition in estimating loan and lease losses.

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

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

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Other Real Estate Owned Valuation

Other real estate owned (“OREO”) is carried at the lower of the recorded investment in the loan or fair value, as determined by Management, less costs to dispose. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. A provision is charged to earnings and the carrying value of OREO is adjusted when, in the opinion of Management, such losses have occurred. The ability of the Company to recover the carrying value of real estate is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors, some of which are beyond the Company’s control. The recognition of sales and sales gains or losses is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If such requirements are not met, sale and gain recognition would be deferred.

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

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

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

●     the anticipated future economic prospects of our market areas;

●     investor interest in our assets; and

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

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

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

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

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

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

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

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

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

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

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Income Taxes

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

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

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

Overview

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

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

Loans

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

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

	2012									2011
	Sept. 30			June 30			March 31			Dec. 31			Sept. 30
	(In thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	266,015		$	269,376		$	282,581		$	278,032		$	274,764
Agricultural		1,223			1,284			1,237			1,028			2,897
Equipment leases		9,541			11,749			11,831			12,814			14,720
Total commercial, financial and agricultural		276,779			282,409			295,649			291,874			292,381
Commercial real estate:
Commercial construction,    land and land    development		228,220			235,280			247,231			250,859			265,215
Other commercial real estate		391,197			404,894			412,016			424,690			430,585
Total commercial real estate		619,417			640,174			659,247			675,549			695,800
Residential real estate:
Residential construction		13,624			15,349			15,829			13,509			15,328
Residential mortgage		228,588			233,017			237,244			245,180			250,477
Total residential real estate:		242,212			248,366			253,073			258,689			265,805
Consumer, installment and         single pay:
Consumer		41,151			43,344			43,251			44,713			47,158
Other		4,583			4,166			5,222			6,265			6,442
Total consumer, installment         and single pay		45,734			47,510			48,473			50,978			53,600
Total		1,184,142			1,218,459			1,256,442			1,277,090			1,307,586
Less unearned discount leases		(725	)		(860	)		(1,009	)		(1,173	)		(1,355	)
Less deferred cost (unearned loan fees), net		1,024			1,050			1,057			1,132			1,145
	$	1,184,441		$	1,218,649		$	1,256,490		$	1,277,049		$	1,307,376

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

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	September 30, 2012
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	198,666		$	59,636		$	7,713		$	266,015
Agricultural		629			594			0			1,223
Equipment leases		0			9,541			0			9,541
Total commercial, financial and agricultural		199,295			69,771			7,713			276,779
Commercial real estate:
Commercial construction, land and land development		82,738			43,124			102,358			228,220
Other commercial real estate		213,919			131,823			45,455			391,197
Total commercial real estate		296,657			174,947			147,813			619,417
Residential real estate:
Residential construction		7,790			5,250			584			13,624
Residential mortgage		104,505			83,754			40,329			228,588
Total residential real estate		112,295			89,004			40,913			242,212
Consumer, installment and single pay:
Consumer		20,945			19,392			814			41,151
Other		477			4,106			0			4,583
Total consumer, installment and single pay		21,422			23,498			814			45,734
Total	$	629,669		$	357,220		$	197,253		$	1,184,142
Percent of total		53	%		30	%		17	%		100	%

	December 31, 2011
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	208,113		$	61,013		$	8,906		$	278,032
Agricultural		349			679			0			1,028
Equipment leases		0			12,814			0			12,814
Total commercial, financial and agricultural		208,462			74,506			8,906			291,874
Commercial real estate:
Commercial construction, land and land development		90,207			50,832			109,820			250,859
Other commercial real estate		219,148			155,025			50,517			424,690
Total commercial real estate		309,355			205,857			160,337			675,549
Residential real estate:
Residential construction		8,110			5,271			128			13,509
Residential mortgage		109,002			88,468			47,710			245,180
Total residential real estate		117,112			93,739			47,838			258,689
Consumer, installment and single pay:
Consumer		22,345			21,671			697			44,713
Other		379			5,886			0			6,265
Total consumer, installment and single pay		22,724			27,557			697			50,978
Total	$	657,653		$	401,659		$	217,778		$	1,277,090
Percent of total		52	%		31	%		17	%		100	%

Our portfolio of Commercial and Industrial (“C and I”) loans decreased $12.017 million, or 4.3 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns primarily in the southern Alabama region.

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Our C and I loan portfolio at September 30, 2012 was diversified over a range of industries, including manufacturing (15.1 percent), construction (11.8 percent), retail trade (10.7 percent), real estate (9.5 percent), wholesale trade (5.4 percent), other services (4.6 percent), agriculture (4.3 percent), transportation (4.2 percent), and finance and insurance (4.2 percent).  Approximately 74.7 percent of the C and I portfolio is serviced in the southern Alabama region, primarily in the Mobile office.

At September 30, 2012, approximately 52.3 percent of our loan portfolio was comprised of commercial real estate, primarily commercial construction, land, land development, and non-residential and commercial mortgages.

Project financing is an important component of our commercial real estate loan portfolio, which was impacted by charge-offs and foreclosures.  Management expects the economic and portfolio conditions discussed above to limit this type of lending in the immediate future, particularly in northwest Florida.

The following table shows the composition of our real estate – construction, land and land development portfolio at September 30, 2012 and December 31, 2011, distributed by the geographic region in which the loans are serviced.

	September 30, 2012
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Construction:
Commercial	$	5,726		$	764		$	10,572		$	17,062
Residential		7,790			5,250			584			13,624
Land development		38,656			22,826			52,440			113,922
Land		38,356			19,534			39,346			97,236
Other		0			0			0			0
Total	$	90,528		$	48,374		$	102,942		$	241,844
Percent of total		37	%		20	%		43	%		100	%

	December 31, 2011
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Construction:
Commercial	$	4,729		$	1,016		$	10,170		$	15,915
Residential		8,110			5,271			128			13,509
Land development		42,864			28,687			58,812			130,363
Land		42,614			21,129			40,838			104,581
Other		0			0			0			0
Total	$	98,317		$	56,103		$	109,948		$	264,368
Percent of total		37	%		21	%		42	%		100	%

The construction, land, and land development portfolio is comprised primarily of land and land development loans. Approximately 43.5 percent of land and land development loans are serviced by the northwest Florida region.

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Non-Performing Assets

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

Non-performing assets were $197.639 million at September 30, 2012 compared to $154.227 million at year-end 2011. Restructured loans on non-accrual at September 30, 2012 were $3.738 million compared to $5.296 million at December 31, 2011.  Management classifies loans as restructured when certain modifications are made to the loan terms and concessions are granted to the borrowers as a result of financial difficulty experienced by those borrowers. At September 30, 2012, we had $8.611 million in restructured loans which were accruing interest and which we consider performing.  The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income or through liquidation of assets.  Generally, these loans are restructured to provide the borrower additional time to execute upon its plans.  The performing restructured loans were not placed in nonaccrual status prior to the restructuring, and, since the Company expects the borrowers to perform after the restructuring (based on modified note terms), the loans continue to accrue interest at the restructured rate.  The Company will continue to closely monitor these loans and will cease accruing interest on them if Management believes that the borrowers are unable to continue performing based on the restructured note terms.  All restructured loans are considered to be impaired and are evaluated as such in the quarterly allowance calculation. As of September 30, 2012 and December 31, 2011, the allowance for loan and lease losses allocated to restructured loans totaled $2.195 million and $392 thousand, respectively. The increase in the allowance allocation was attributable to declines in collateral values supporting these loans.

Non-performing loans increased to $143.889 million at September 30, 2012, from $96.840 million at December 31, 2011, as a result of ten significant relationships moving to non-accrual status during the first nine months of 2012.  One significant relationship located in northwest Florida represented approximately $36 million of the increase in non-performing loans.  Of this amount, $28 million consisted of a residential real estate development project in the Freeport area of northwest Florida.  At this time, the developer has been unable to proceed with the development project.  However, the developer is currently in negotiations to sell all or part of this property.

Since 2007, there has been a substantial slowdown in the real estate markets across the U.S., including in the markets where we do business.  This slowdown has resulted in a substantial decrease in the value of our loans, the real estate collateral securing our loans and our OREO.  As the economy slowed, we increased our monitoring and supervision of problem loans, and Management continues to monitor these non-performing loans and other real estate loans in our portfolio.  Management also meets regularly with local Bank personnel to discuss and evaluate these non-performing loans, other potential problem loans and the overall economic conditions within our markets. Throughout 2011, Management carefully evaluated the assumptions used to estimate the fair value of our loans, the real estate collateral securing our loans and OREO, and determined that the value of certain of these assets had further deteriorated to the point that additional write downs of their fair value was warranted.  In addition, external market data received in connection with the capital raise led Management to conclude that significant additional write downs were needed in the fourth quarter of 2011 to align our fair value estimates with the applicable market.  For further information on the policies underlying our valuation of non-performing assets, refer to “Critical Accounting Policies and Estimates – Changes to Valuation of Allowance for Loan and Lease Losses and Other Real Estate Owned,” above.

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In order to ensure that our estimates of fair value of non-performing assets are aligned with the market’s valuation of these assets, Management implemented an action plan during the first quarter of 2012.  Under this new plan, external appraisals on impaired loans exceeding $1 million are required on an annual basis; external appraisals on impaired loans and other real estate owned below $1 million are required on a biennial basis; external appraisal reviews on appraisals exceeding $1 million are submitted to an independent third party for review; internal evaluations are reviewed for more robust external market data; and quarterly valuation meetings are held to discuss current developments and potential further impairment.  The implementation of this action plan is targeted to be complete by the end of 2012. Increases in specific allowances for impaired loans, especially land and land development loans, were made as we continue to experience economic deterioration in our markets as well as increases in non-performing loans. The uncertainty arising from one significant real estate development project in northwest Florida during the third quarter of 2012 has also impacted the level of the allowance for loan and lease losses.  As a result of these factors, the allowance for loan and lease losses as a percentage of loans increased from 3.30 percent at December 31, 2011, to 4.85 percent at September 30, 2012.

The Company’s objective is to dispose of OREO in a timely manner while also maximizing net sales proceeds to the Company.  While there is not a set timeline for the sale of OREO, OREO is marketed through real estate brokers.  Sales are made as acceptable buyers are identified and acceptable purchase terms are negotiated.

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The following table is a summary of non-performing assets at September 30, 2012 and December 31, 2011.

(Dollars in Thousands)
	September 30, 2012			December 31, 2011
Accruing loans 90 days or more past due
1-4 family residential loans	$	12		$	248
Total accruing loans 90 days or more past due		12			248
Restructured loans on non-accrual
Construction, land development and other land loans		2,568			2,587
1-4 family residential loans		435			435
Non-farm non-residential property loans		664			2,195
Commercial and industrial loans and leases		29			29
Consumer loans		42			50
Total restructured loans		3,738			5,296
Loans on non-accrual
Construction, land development and other land loans		100,092			57,291
1-4 family residential loans		15,249			17,980
Multifamily residential loans		1,398			1,700
Non-farm non-residential property loans		15,168			11,380
Commercial and industrial loans and leases		7,615			2,343
Consumer loans		617			602
Total loans and leases on non-accrual		140,139			91,296
Total non-performing loans and leases		143,889			96,840
Other real estate owned
Construction, land development and other land		39,351			46,565
1-4 family residential properties		3,688			4,118
Multifamily residential		2,910			1,817
Non-farm non-residential properties		7,801			4,887
Total other real estate owned		53,750			57,387
Total non-performing assets	$	197,639		$	154,227
Accruing loans 90 days or more past due as a percentage of loans and leases		0.00	%		0.02	%
Total non-performing loans and leases as a percentage of loans and leases		12.15	%		7.58	%
Total non-performing assets as a percentage of loans, leases and other real estate owned		15.96	%		11.56	%

The following tables contain a summary by location of non-performing assets at September 30, 2012 and December 31, 2011.

September 30, 2012
(Dollars in Thousands)	Southern Alabama		Central Alabama		Northwest Florida		Other		Total
Non-performing loans	$	17,364	$	27,024	$	94,258	$	5,243	$	143,889
Other real estate owned		6,259		17,515		21,938		8,038		53,750
Total	$	23,623	$	44,539	$	116,196	$	13,281	$	197,639

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December 31, 2011
(Dollars in Thousands)	Southern Alabama		Central Alabama		Northwest Florida		Other		Total
Non-performing loans	$	11,090	$	20,554	$	63,634	$	1,562	$	96,840
Other real estate owned		5,105		18,683		25,710		7,889		57,387
Total	$	16,195	$	39,237	$	89,344	$	9,451	$	154,227

Not included in the non-performing assets tables are potential problem loans totaling $50.668 million at September 30, 2012, with a related allowance of $6.546 million. This compares with potential problem loans of $104.589 million at December 31, 2011, with a related allowance of $7.927 million.  The decline in potential problem loans is primarily the result of loans moving to non-accrual status and foreclosures.  Potential problem loans are loans as to which Management has serious doubts as to the ability of the borrowers to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, non-performing assets. Management, however, classifies potential problem loans as either special mention, watch, or substandard.  These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect the Company’s interests.

Risk Management in the Loan and Lease Portfolio and the Allowance for Loan and Lease Losses

Credit risk is managed mainly through compliance with credit underwriting and administration policies established by the Board of Directors and through the efforts of the credit administration function to oversee the uniform application and monitoring of these policies throughout the Company.  The first line of responsibility for the monitoring of credit quality and the assignment of risk grades based on policy guidelines to individual loans is the loan officer.  The loan review function, which reports to the Board of Directors, assesses the accuracy of risk grading and performs periodic reviews of the overall credit and underwriting process.

The evaluation of credit risk in the loan portfolio is quantified as the allowance for loan and lease losses that is reported in the Company’s financial statements.  The overall determination of the allowance for loan and lease losses involves significant judgment.  Factors that affect this judgment are reviewed quarterly in response to changing conditions.

The recorded allowance is comprised of amounts Management believes are needed for losses on criticized loans and amounts Management believes are needed to cover historical losses on homogeneous groups of loans not subject to criticism.  Historical loss factors are modified based on general economic conditions and other environmental risk factors.

Loans subject to criticism through the Company’s risk grading process totaled $249.956 million at September 30, 2012, representing 21.1 percent of total loans and an increase of $12.976 million from December 31, 2011.  The range of risk grades identifies criticized loans on a spectrum from loans that warrant close monitoring due to potential weakness to loans with a high probability of loss.  The increase in criticized loans is the primary result of the downgrade of four significant relationships.

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Criticized loans are further classified as doubtful, substandard, or special mention.  Criticized loans are those loans which Management considers to have greater risk that the borrower will not repay in full all contractual principal and interest.  All non-performing loans are classified as criticized loans.  Performing loans may be classified as criticized loans based on payment history, the financial condition of the borrower, or other factors Management considers to raise doubt as to the borrower’s willingness and ability to repay.  A deterioration of collateral values underlying the loans does not in itself lead to a loan being criticized.  An individual report on each criticized loan over $1 million is completed quarterly by Bank personnel.  This report provides an update on information about the loan as well as an update of the action plan for the ultimate collection of the loan.  This report includes information on the value of underlying collateral and allows us to closely monitor insufficient collateral positions and make necessary changes to loss reserve allocations.  Real estate collateral is valued primarily based on outside appraisals although some real estate collateral valuations are based on an internal evaluation.

Management concluded that a material weakness existed at December 31, 2011 in its internal control over financial reporting relating to the valuation, documentation and review of impaired loans and OREO.  In response, Management implemented a remediation plan during the first quarter of 2012, whereby external appraisals on impaired loans and OREO exceeding $1 million are required on an annual basis; external appraisals on impaired loans and OREO below $1 million are required on a biennial basis; external appraisals exceeding $1 million are submitted to an independent third party for review; internal evaluations are reviewed for more robust external market data; and quarterly valuation meetings are held to discuss current developments and potential further impairment.

The geographic concentration of criticized loans in the northwest Florida region was the direct result of the deterioration in real estate values in this area.  The majority of criticized loans in northwest Florida were comprised of land and land development loans.  Once the rapid deterioration in real estate values commenced, many developers in this area were no longer able to complete projects, and conversion of their properties could not be completed.  Total charge-offs in the northwest Florida region were approximately $3.767 million, which represented 31.3 percent of total charge-offs during the first nine months of 2012.  This resulted from one foreclosure and declines in collateral values.

To monitor the movement in collateral values of real estate properties in the northwest Florida region, Management undertook a study in 2011 to determine to what extent real estate values had deteriorated in this market based on type of property.  From this analysis, Management discounted prior appraisals to estimate current collateral values.  These values were then compared to current loan balances in order to establish a loss reserve allocation.  As discussed above, in the second quarter of this year, Management implemented an action plan relating to more frequent external appraisals and independent appraisal reviews, more robust internal evaluations, and quarterly valuation meetings to discuss current market developments.

The majority of criticized loans in the central Alabama region were commercial real estate, mostly construction, land, and land development loans.  The majority of criticized construction, land, and land development loans which originated in the central Alabama region were located in the Montgomery County, Autauga County, and Lake Martin areas of Alabama, and Escambia County, Florida, which also saw significant declines in real estate values.  Total charge-offs in the central Alabama region were approximately $3.183 million, which represented 26.5 percent of total charge-offs during the first nine months of 2012.  The majority of these charge-offs were related to declines in collateral values.

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Total charge-offs in the southern Alabama region were approximately $5.072 million, which represented 42.2 percent of total charge-offs during the first nine months of 2012.  The majority of these charge-offs were related to declines in collateral values.

The following tables show the composition of criticized loans at September 30, 2012 and December 31, 2011, distributed by the geographic region in which the loans are serviced.  Commercial construction, land, and land development loans represent 49.9 percent of the total criticized loans.  Approximately 48.8 percent of criticized loans are serviced by Florida, with 68.0 percent of the Florida region's criticized loans comprised of commercial construction, land, and land development loans.

	September 30, 2012
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Commercial and industrial	$	29,326		$	4,621		$	4,214		$	38,161
Residential construction		1,219			369			404			1,992
Commercial construction, land and land development		27,049			14,690			82,994			124,733
Other commercial real estate		17,982			9,952			18,345			46,279
Agricultural		10			0			0			10
Residential mortgage		13,091			8,124			16,113			37,328
Consumer		911			524			18			1,453
Total	$	89,588		$	38,280		$	122,088		$	249,956
Percent of total		36	%		15	%		49	%		100	%

	December 31, 2011
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Commercial and industrial	$	19,856		$	2,903		$	4,080		$	26,839
Residential construction		0			369			128			497
Commercial construction, land and land development		26,099			12,970			87,336			126,405
Other commercial real estate		13,396			9,251			19,646			42,293
Agricultural		25			0			0			25
Residential mortgage		13,207			9,184			17,089			39,480
Consumer		867			532			42			1,441
Total	$	73,450		$	35,209		$	128,321		$	236,980
Percent of total		31	%		15	%		54	%		100	%

We experienced an increase in total criticized loans from December 31, 2011 to September 30, 2012.  This increase was primarily attributable to downgrades of two significant relationships in the southern Alabama region.

The following tables show the composition of the criticized construction, land, and land development loans at September 30, 2012 and December 31, 2011, distributed by the geographic region in which the loans are serviced.  The majority of criticized loans in this category are serviced by the northwest Florida region, and they are primarily land and land development loans.

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	September 30, 2012
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Construction:
Commercial	$	0		$	0		$	10,573		$	10,573
Residential		1,219			369			404			1,992
Land development		14,164			12,973			43,643			70,780
Land		12,885			1,717			28,778			43,380
Total	$	28,268		$	15,059		$	83,398		$	126,725
Percent of total		22	%		12	%		66	%		100	%

	December 31, 2011
	Southern Alabama			Central Alabama			Northwest Florida			Total
	(Dollars in Thousands)
Construction:
Commercial	$	0		$	0		$	10,169		$	10,169
Residential		0			369			128			497
Land development		16,909			11,023			49,715			77,647
Land		9,190			1,947			27,452			38,589
Total	$	26,099		$	13,339		$	87,464		$	126,902
Percent of total		21	%		10	%		69	%		100	%

Total criticized construction, land, and land development loans remained at consistent levels from December 31, 2011 to September 30, 2012.

The allowance for loan and lease losses represented 39.92 percent of non-performing loans and leases at September 30, 2012, and 43.53 percent of non-performing loans and leases at December 31, 2011. The allowance for loan and lease losses as a percentage of loans and leases, net of unearned income, was 4.85 percent at September 30, 2012, and 3.30 percent at December 31, 2011. The increase in this percentage was the result of the increase in the allowance for loan and lease losses, as we recorded an increased provision for loan and leases losses to provide specific allowances for impaired loans, especially for certain land and land development loans in the northwest Florida region. This action was taken in response to recent appraisals and independent appraisal reviews. At September 30, 2012 and December 31, 2011, the unallocated reserve portion of the allowance for loan and lease losses was $3.094 million and $5.428 million, respectively.

Management reviews the adequacy of the allowance for loan and lease losses on a continuous basis by assessing the quality of the loan and lease portfolio, including non-performing loans and leases and classified loans and leases, and adjusting the allowance when appropriate. Management considered the allowance for loan and lease losses adequate at September 30, 2012 to absorb probable losses inherent in the loan and lease portfolio.  However, adverse economic circumstances or other events, including additional loan and lease review, future regulatory examination findings, changes in borrowers' financial conditions, or further declines in collateral values, could result in increased losses in the loan and lease portfolio or in the need for increases in the allowance for loan and lease losses.

The following section describes the composition of the various categories in our loan and lease portfolio and discusses management of risk in these categories.

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Commercial and Industrial loans, or C and I loans, include loans to commercial customers for use in business to finance working capital needs, equipment purchases, or other expansion projects.  These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment, or receivables, or secured in whole or in part by real estate unrelated to the principal purpose of the loan, and are generally guaranteed by the principals of the borrower.  Variable rate loans in this portfolio have interest rates that are periodically adjusted.  Risk is minimized in this portfolio by requiring adequate cash flow to service the debt and the personal guaranties of principals of the borrowers.  The portfolio of C and I loans decreased $12.017 million, or 4.3 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns primarily in the southern Alabama region.
 

Agricultural loans include loans to fund seasonal production and longer term investments in land, buildings, equipment, and breeding stock.  The repayment of agricultural loans is dependent on the successful production and marketing of a product.  Risk is minimized in this portfolio by performing a review of the borrower’s financial data and cash flow to service the debt, and by obtaining personal guaranties of principals of the borrower.  This type of lending represents $1.223 million, or less than one percent, of the total loan portfolio.  The portfolio of agricultural loans increased $195 thousand, or 19.0 percent, from December 31, 2011 to September 30, 2012, as a result of new loan activity primarily in the southern Alabama region.

Equipment Leases include leases that were acquired during the acquisition of The Peoples Bank and Trust Company.  BankTrust is not actively engaged in equipment leasing.  These leases paid down $3.273 million from December 31, 2011 to September 30, 2012.  Management does not believe this portfolio represents a significant credit risk, since these loans are secured by the equipment being leased, and the lessees continue to maintain a strong level of creditworthiness.

Commercial Real Estate loans include commercial construction loans, land and land development loans, and other commercial real estate loans.

Commercial construction, land, and land development loans include loans for the development of residential housing projects, loans for the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower.  The Bank’s lenders work to cultivate long-term relationships with established developers.  The Bank disburses funds for construction projects as pre-specified stages of construction are completed.  The portfolio of commercial construction loans decreased $22.639 million, or 9.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns and charge-offs.

Other commercial real estate loans include loans secured by commercial and industrial properties, apartment buildings, office or mixed-use facilities, strip shopping centers, and other commercial property. These loans are generally guaranteed by the principals of the borrower.  The portfolio of commercial real estate loans decreased $33.493 million, or 7.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns.

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Risk is minimized in this portfolio by requiring a review of the borrower’s financial data and verification of the borrower’s income prior to making a commitment to fund the loan.  Personal guaranties are obtained for substantially all construction loans to builders.  Personal financial statements of guarantors are obtained as part of the loan underwriting process.  For construction loans, regular site inspections are performed upon completion of each construction phase, prior to advancing additional funds for additional phases.  Commercial construction and commercial real estate lending has been curtailed over the past three years as a result of a combination of factors, including a decline in demand, lack of qualified borrowers and regulatory pressures on all banks to curtail lending in the commercial real estate market.

Residential Construction loans include loans to individuals for the construction of their residences, either primary or secondary, where the borrower is the owner and independently engages the builder.  Residential construction loans also include loans to builders for the construction of one-to-four family residences for which the collateral, a proposed one-to-four family dwelling, is the primary source of repayment.  These loans are made to builders to finance the construction of homes that are either pre-sold or those that are built on a speculative basis, although speculative lending in this category has been strictly limited and controlled over the past three years.  Loan proceeds are to be disbursed incrementally as construction is completed.  The portfolio of residential construction loans increased $115 thousand, or 0.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of increased loan activity with local builders in the northwest Florida region.

Residential Mortgageloans include conventional mortgage loans on one-to-four family residential properties.  These properties may serve as the borrower’s primary residence, vacation home, or investment property.  We sell the majority of our residential mortgage loans originated with terms to maturity of 15 years or greater in the secondary market.  We generally originate fixed and adjustable rate residential mortgage loans using secondary market underwriting and documentation standards.  Also included in this portfolio are home equity loans and lines of credit.  This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Loans in this category totaled $42.794 million at September 30, 2012, a decrease of $5.917 million from December 31, 2011. Risk is minimized in this portfolio by reviewing the borrower’s financial data and ability to meet both existing financial obligations and the proposed loan obligation, and by verification of the borrower’s income.  The portfolio of residential mortgage loans decreased $16.592 million, or 6.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns, charge-offs, and foreclosures.

Consumer loans include a variety of secured and unsecured personal loans including automobile loans, marine loans, loans for household and personal purpose, and all other direct consumer installment loans.  Risk is minimized in this portfolio by reviewing the borrower’s financial data, ability to meet existing obligations and the proposed loan obligation, and verification of the borrower’s income.  The portfolio of consumer loans decreased $3.562 million, or 8.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns.  Repossessions and charge-offs have been minimal in this portfolio since December 31, 2011.

Other loans comprise primarily loans to municipalities to fund operating expenses during periods prior to revenue collection and to fund capital projects.  The portfolio of other loans decreased $1.682 million, or 26.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns.

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The following table shows a more detailed risk profile of the loan and lease portfolio by breaking down the loan and lease categories described above into more specific categories of loans and leases and showing the related percentage of non-performing loans at September 30, 2012 and December 31, 2011 for each specific category.  Commercial real estate continued to be our largest loan category at September 30, 2012, comprising 52.3 percent of total loans.  Commercial real estate also represented the majority of non-performing loans at 83.0 percent, with approximately 71.5 percent of non-performing loans consisting of land development and vacant land loans.  The downturn in the real estate market, primarily in the northwest Florida region, has had a significant impact on the commercial real estate portfolio as explained in the discussion above regarding criticized loans.

	September 30, 2012						December 31, 2011
	Loans and Leases as a Percentage of Total Loans Outstanding			Non- performing Loans and Leases as a Percentage of Total Non- performing Loans			Loans and Leases as a Percentage of Total Loans Outstanding			Non- performing Loans and Leases as a Percentage of Total Non- performing Loans
Multi-family		2.1	%		1.0	%		2.1	%		1.8	%
Churches		1.9	%		0.0	%		1.6	%		0.0	%
Hotels		5.4	%		1.6	%		5.3	%		1.6	%
Office buildings		6.3	%		2.8	%		6.7	%		3.9	%
Shopping centers		3.7	%		2.3	%		3.7	%		3.6	%
Warehouses		3.3	%		1.6	%		3.1	%		1.6	%
Convenience stores		2.0	%		0.9	%		2.2	%		0.4	%
Healthcare		1.2	%		0.0	%		1.0	%		0.0	%
Commercial development		1.4	%		0.0	%		1.2	%		0.0	%
Other owner-occupied commercial real estate		4.0	%		1.1	%		4.2	%		0.9	%
Other commercial real estate		2.5	%		0.2	%		2.5	%		1.3	%
Total Investment Property		33.8	%		11.5	%		33.6	%		15.1	%
Land acquisition & development		9.6	%		45.4	%		10.2	%		34.8	%
Vacant land/non-development		6.6	%		21.1	%		6.5	%		21.3	%
Vacant land/future development		1.1	%		4.2	%		1.2	%		5.2	%
Farmland & timberland		1.2	%		0.8	%		1.3	%		0.8	%
Total Land Portfolio		18.5	%		71.5	%		19.2	%		62.1	%
Total Commercial Real Estate		52.3	%		83.0	%		52.8	%		77.2	%
Commercial & Industrial Portfolio		22.5	%		5.3	%		21.8	%		2.5	%
Total Commercial and Industrial Loans		22.5	%		5.3	%		21.8	%		2.5	%
Home equity		3.6	%		0.5	%		3.8	%		1.0	%
1-4 family construction		1.2	%		0.3	%		1.1	%		0.5	%
Residential mortgages		15.7	%		10.4	%		15.4	%		18.1	%
Total 1-4 Family Properties		20.5	%		11.2	%		20.3	%		19.6	%
Consumer loans		3.5	%		0.5	%		3.5	%		0.7	%
Total Retail		24.0	%		11.7	%		23.8	%		20.3	%
Agricultural loans		0.1	%		0.0	%		0.1	%		0.0	%
Other loans		0.4	%		0.0	%		0.5	%		0.0	%
Lease financing		0.7	%		0.0	%		1.0	%		0.0	%
TOTAL LOAN AND LEASE  PORTFOLIO		100.0	%		100.0	%		100.0	%		100.0	%

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Investment Securities

At September 30, 2012, the composition of the investment portfolio by carrying amount was 0.10 percent U.S. Treasuries, 34.94 percent securities of U.S. government-sponsored enterprises, 0.18 percent securities of state and political subdivisions, and 64.78 percent mortgage-backed securities. All mortgage-backed securities are backed by one-to-four-family mortgages, and approximately 99.1 percent of the mortgage-backed securities represent U.S. government-sponsored enterprise (“GSE”) securities. The tax-equivalent yield of the portfolio was 2.11 percent at September 30, 2012 and 2.34 percent at December 31, 2011. The average life of the portfolio at September 30, 2012 and December 31, 2011, was 6.67 years and 7.16 years, respectively. We hold no trading securities or securities that are classified as held-to-maturity. At September 30, 2012, our securities available-for-sale had a net unrealized gain of $3.307 million, a decrease of $597 thousand from our net unrealized gain of $3.904 million at December 31, 2011. During the first nine months of 2012, we sold available-for-sale securities which resulted in a realized gain of $3.083 million.

The Company recorded impairment charges related to potential credit loss of $400 thousand during 2009 and $200 thousand in 2011 on our only non-U.S. GSE mortgage-backed security. The Company concluded in 2009 and again in 2011 that a portion of its unrealized loss position was other-than-temporarily impaired. The amount related to credit loss was determined based on a discounted cash flow method that takes into account several factors including default rates, prepayment rates, delinquency rates, and foreclosure and loss severity of the underlying collateral. Changes in these factors in the future could result in an increase in the amount deemed to be credit-related other-than-temporary impairment, which would result in the Company recognizing additional impairment charges to earnings for this security. Management will continue to closely monitor this security. The security has an estimated fair value of $2.774 million and an unrealized loss of $522 thousand at September 30, 2012, after all cumulative other-than-temporary impairment charges. Management concluded that the value of this security is temporarily impaired based on liquidity risk.The amount related to credit loss was determined based on a discounted cash flow method that takes into account several factors including default rates, prepayment rates, delinquency rates, and foreclosure and loss severity of the underlying collateral. Changes in these factors in the future could result in an increase in the amount deemed to be credit-related other-than-temporary impairment which would result in the Company recognizing additional impairment charges to earnings for this security. The Company believes it has addressed all of its other-than-temporary impairments in its investment portfolio as of September 30, 2012 with the other-than-temporary impairment charges the Company took during 2009 and in 2011. The Company does not own, and has not owned, preferred or common stock issued by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). The Company does not own any trust preferred securities.

Deposits

Total deposits decreased from $1.812 billion at December 31, 2011 to $1.780 billion at September 30, 2012, a decrease of $31.178 million, or 1.7 percent. Total deposits were lower in the most recent quarter compared with the prior year due to our efforts to reduce our exposure to large certificates of deposit and to lower our cost of funds by lowering the rates we pay on deposits. Core deposits, considered to be total deposits less time deposits of $100 thousand or more, increased by $13.377 million. We believe the increase in FDIC insurance coverage from $100 thousand to $250 thousand for interest bearing accounts and to an unlimited amount for non-interest bearing transaction accounts, has helped stabilize our deposit base. The Dodd-Frank Act has permanently increased deposit insurance from $100 thousand to $250 thousand per depositor and has extended the unlimited coverage for non-interest bearing transaction accounts until December 31, 2012. Our primary focus continues to be attracting and retaining core deposits from customers who will use other products and services we offer. During the second quarter of 2012 we had $25.000 million in Federal Home Loan Bank ("FHLB") advances mature and, due to our strong liquidity position, we did not replace these funds with similar non-core funding sources.  At September 30, 2012, we had no brokered time deposits other than $42.575 million of CDARS brokered time deposits, which we consider core deposits, compared to $35.145 million of CDARS time deposits at December 31, 2011.

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The table below shows the breakdown of deposits at September 30, 2012 and December 31, 2011.

(In thousands)	September 30, 2012		December 31, 2011
Non-Interest-Bearing Demand Deposits	$	281,033	$	257,169
Interest-Bearing Demand Deposits		581,589		558,199
Savings Deposits		149,343		136,281
Large Denomination Time Deposits (of $100 or more)		403,237		447,792
Other Time Deposits		365,293		412,232
Total Deposits	$	1,780,495	$	1,811,673

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

As of September 30, 2012, our debt consisted of advances from the FHLB of $10.437 million, a note payable to the FDIC as receiver for an unaffiliated bank of $20.000 million, referred to as the “Silverton Note”, $34.021 million in junior subordinated notes issued by BancTrust to statutory trust subsidiaries in connection with offerings of trust preferred securities, and $868 thousand of other long-term debt. We had $25.000 million in FHLB advances mature in the second quarter of 2012, which we paid-off and did not replace. All other amounts are relatively unchanged from December 31, 2011.

As of September 30, 2012, the only short-term borrowing we had is the Silverton Note, which is secured by the stock of our subsidiary bank.  In 2007, we obtained a $38 million three-year term loan which we used to finance a portion of the purchase price for a significant acquisition.  In December 2008, we prepaid $18 million of the loan, leaving a $20 million outstanding principal balance.  The lender has, at our request, agreed several times to extend the maturity and alter the repayment schedule of this loan.  The FDIC as receiver for Silverton Bank, N.A. is the holder of the loan.  On March 28, 2012, we entered into an agreement to again modify the terms of the Silverton Note.  The modification relieves the Company from having to make any principal payments under the note prior to maturity, which is April 16, 2013, or such earlier date as the Company completes a merger, consolidation, sale of substantially all of the Company’s assets or a similar transaction.  This modification also increases the interest rate on the loan from one-month LIBOR plus 5% to one-month LIBOR plus 7%; however, it fixes the amount of quarterly interest payments that the Company is required to make until maturity of the loan at $270,000 each.  Accrued but unpaid interest, which will include the difference between quarterly interest accruals and the fixed quarterly payments, together with a fee of $200,000, is to be paid to the lender upon maturity of the note.  The modification also required the Company to establish an escrow account with the lender in the amount of $1,080,000 to fund the first four quarterly payments following the execution and delivery of the modification of the loan documents. The Company made the quarterly interest payments due on April 15, 2012 and July 15, 2012 and the funds for the remaining two interest payments due before the maturity of the note are being held in an escrow account established for the purpose of making those payments. There is currently no default under any of the terms of this loan.  To be able to repay this loan, Management believes that BancTrust must either raise additional capital or complete a strategic merger.  On May 28, 2012, we entered into an Agreement and Plan of Reorganization with Trustmark pursuant to which we have agreed, subject to regulatory approval, which remains outstanding, and other customary closing conditions, to be acquired by Trustmark. On October 5, 2012, the Company and Trustmark entered into an amendment to the merger agreement. Any further renewal or extension of the Silverton Note would require FDIC approval.  In addition, we are currently required to obtain approval from the Federal Reserve Bank of Atlanta prior to incurring additional debt or modifying or refinancing the terms of existing debt.

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Capital Resources

Our shareholders’ equity as a percentage of total assets at September 30, 2012 was 4.78 percent, a decrease from 5.62 percent at December 31, 2011 due to our net loss in the first nine months of 2012.

We are required by our various banking regulators to maintain certain capital-to-asset ratios under the regulators' risk-based capital guidelines.  These guidelines are intended to provide an additional measure of a financial institution's capital adequacy by assigning weighted levels of risk to various components of the institution's assets, both on and off the statement of condition. Under these guidelines capital is measured in two tiers.  These capital tiers are used in conjunction with "risk-weighted" assets in determining "risk-weighted" capital ratios.  If we fail to meet minimum capital adequacy requirements, our banking regulators could take regulatory action against us that could have a direct material adverse effect on our consolidated financial statements.

Our Tier 1 capital, the components of which are listed in the following table, was $126.628 million at September 30, 2012 and $149.248 million at December 31, 2011.  Our Tier 2 capital, which consists of the allowable portion of the allowance for loan losses and debt related to issuance of trust preferred securities not includable in Tier 1 capital, was $18.732 million at September 30, 2012 and $18.100 million at December 31, 2011.  Total capital, which is Tier 1 capital plus Tier 2 capital, was $145.360 million at September 30, 2012, and $167.348 million at December 31, 2011.  Our consolidated Tier 1 and Total capital ratios, expressed as a percentage of total risk-weighted assets, were 9.66 percent and 11.09 percent, respectively, at September 30, 2012, and 10.48 percent and 11.75 percent, respectively, at December 31, 2011.  Both the September 30, 2012 and December 31, 2011 ratios exceed the minimum ratios of four percent and eight percent for Tier 1 and Total capital, respectively, required by our regulators.

We closely monitor the adequacy of regulatory capital and strive to maintain adequate capital at our Bank and on a consolidated basis. At September 30, 2012, the Bank was considered "well capitalized" by regulatory definitions. The Bank has assured its regulators that it intends to maintain a Tier 1 leverage capital ratio of not less than 8.00 percent and to maintain its Tier 1 risk-based capital ratio and total risk-based capital ratios at “well-capitalized” levels, which are 6.00 percent and 10.00 percent, respectively. At September 30, 2012, the Bank’s risk-based capital ratios exceeded these target ratios with a Tier 1 Capital to risk-weighted assets ratio of 11.56 percent and a total capital to risk-weighted assets ratio of 12.85 percent; however, the Bank’s Tier 1 leverage capital ratio was slightly below the 8.00 percent target at 7.73 percent.

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The components of the Company’s risk-based capital calculations at September 30, 2012 are shown below:

September 30, 2012
(Dollars in Thousands)
Tier 1 capital-
Preferred stock	$	49,198
Allowable common shareholders' equity		46,272
Debt related to issuance of trust preferred securities		31,158
Total Tier 1 capital		126,628
Tier 2 capital
Allowable portion of the allowance for loan losses		16,890
Debt related to issuance of trust preferred securities not includable in Tier 1 capital		1,842
Total Tier 2 capital		18,732
Total capital (Tiers 1 and 2)	$	145,360
Risk-weighted assets	$	1,310,625
Quarterly average assets		1,964,283
Risk-based capital ratios:
Tier 1 capital ratio		9.66	%
Total capital ratio (Tiers 1 and 2)		11.09	%

The Company did not declare a dividend on its common stock in the first nine months of 2012. During the first quarter of 2012, the Company determined that it would cease paying dividends on its preferred stock for the near future.  Until the preferred stock dividends are brought current, we may not declare a dividend on our common stock.  If the dividend on the preferred stock is not paid for an aggregate of six dividend periods (six fiscal quarters), whether or not consecutive, the number of directors on the Company’s Board of Directors automatically increases by two, and the U.S. Treasury, the holder of our preferred stock, will elect two new directors to the Board of Directors.  The directors elected by the Treasury will continue to serve until all accrued and unpaid dividends on the preferred stock are paid.

We have determined that it is in the best interests of the Company and its shareholders to defer future interest payments on its two outstanding series of trust preferred securities.  Under the terms of the subordinated debentures, our deferral of interest payments for up to 20 consecutive quarters (through the first quarter of 2016) does not constitute an event of default under the applicable indentures for both series of trust preferred securities.

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Liquidity

Liquidity management involves the ability to meet the day-to-day cash flow requirements of customers, primarily depositors' withdrawals and borrowers' requirements for funds, in a cost efficient and timely manner. Appropriate liquidity management is achieved by carefully monitoring anticipated liquidity demands and the amount of available liquid assets to meet those demands. Liquid assets (cash and cash items, interest-bearing deposits in other financial institutions, federal funds sold and securities available for sale, excluding pledged assets) totaled $457.038 million at September 30, 2012, an increase from $362.824 million at December 31, 2011 due primarily to the increase in our interest-bearing deposits in other financial institutions and to the decrease in our pledging requirement. Management believes that in the current economic environment it is very important to maintain a high level of liquidity. As a result, liquid assets represented 23.38 percent of total assets at September 30, 2012, and 17.86 percent at December 31, 2011.  The net change in cash and cash equivalents for the nine-month period ended September 30, 2012 was a decrease of $562 thousand, or 1.5 percent. Cash includes currency on hand and demand deposits with other financial institutions. Cash equivalents are defined as short-term and highly liquid investments, which are readily convertible to known amounts of cash and so near maturity that there is no significant risk of changes in value due to changes in interest rates.  We had available unused federal fund lines of credit and FHLB lines of credit totaling approximately $52.779 million at September 30, 2012, and these lines constitute one element of our liquidity management plan. The Company has not borrowed federal funds in 2012 and did not borrow federal funds in 2011 or 2010.

BancTrust’s liquidity, on an unconsolidated basis, is dependent on the holding company’s ability to pay its commitments as they come due. BancTrust’s most significant recurring commitments consist of interest payments on debt obligations, dividends on the preferred stock held by the U.S. Treasury and operating costs. BancTrust typically relies on dividends from the Bank to fund these payments. BancTrust has no cash or liquidity available to it other than dividends from the Bank.  The Bank is currently unable to pay dividends without regulatory approval.  In addition, we are unable to declare dividends on our preferred stock held by the U.S. Treasury without prior approval from the Federal Reserve Bank of Atlanta. The Bank requested and received permission to pay dividends in the amount of $2.1 million to BancTrust in 2011, and we were, through February 15, 2012, able to obtain Federal Reserve approval for the declaration of dividends on our preferred stock held by the U.S. Treasury.  However, on March 21, 2012, we announced that we determined that it was in the best interests of the Company and its shareholders to defer future interest payments on the Company’s two outstanding series of trust preferred securities.  This deferral is permitted under the applicable indentures for both series of trust preferred securities for up to five years without penalty or default.  BancTrust also, beginning in the second quarter of 2012, ceased to declare and make dividend payments on its preferred stock held by the U.S. Treasury.  This is also a permitted deferral.  We have $540 thousand in quarterly interest payments due over the next approximately 7 months on our $20 million Silverton Note to the FDIC as Receiver for Silverton Bank, N.A.  We obtained the necessary regulatory approvals to enable a dividend from the Bank to the holding company to allow the holding company to establish a escrow reserve to fund these payments.  This loan matures in April of 2013.  To be able to repay this loan, Management believes that BancTrust must either raise additional capital or complete a strategic merger.  On May 28, 2012, we entered into an Agreement and Plan of Reorganization with Trustmark, pursuant to which we have agreed, subject to regulatory approval, which remains outstanding, and other customary closing conditions, to be acquired by Trustmark. On October 5, 2012, the Company and Trustmark entered into an amendment to the merger agreement.

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Results of Operations

Three Months Ended September 30, 2012 and 2011

Net Income

The Company recorded a net loss to common shareholders of $10.294 million, or $0.57 per basic and diluted common share, during the third quarter of 2012, compared to a net loss to common shareholders in the third quarter of 2011 of $743 thousand, or $0.04 per basic and diluted common share. Net loss before the preferred stock dividend was $9.502 million in the third quarter of 2012 compared to net income before the preferred dividend of $31 thousand in the third quarter of 2011. The loss in the third quarter of 2012 was caused primarily by the $9.500 million provision for loan and lease losses and to $3.464 million in losses on other real estate owned.

Net Interest Revenue

Net interest revenue, the difference between amounts earned on interest-earning assets and the amounts paid on interest-bearing liabilities, is the most significant component of earnings for a financial institution. Major factors influencing net interest revenue are changes in interest rates, changes in the volume of assets and liabilities and changes in the asset/liability mix.

Quarterly average interest-earning assets decreased to $1.812 billion for the third quarter of 2012 from $1.913 billion in the third quarter of 2011, a decrease of $100.667 million, or 5.3 percent. This decrease was primarily a result of the decrease in deposits and FHLB advances. Our quarterly net interest margin was 2.91 percent for the third quarter of 2012 compared to 3.28 percent for the third quarter of 2011. Net interest revenue decreased by $2.561 million, or 16.2 percent, from the third quarter of 2011 to the third quarter of 2012. The decreases in net interest margin and net interest revenue were due primarily to the decrease in average loans. We estimate that non-performing assets resulted in our net interest margin being approximately 55 basis points lower than it would have been if these assets had been earning interest. Interest rate cuts, response to future competitive deposit pricing pressures, or increases in our non-performing assets could have the effect of decreasing our margins.

The following table presents an analysis of net interest revenue, weighted-average yields on interest-earnings assets and weighted-average yields on interest-bearing liabilities for the three months ended September 30, 2012 and 2011.

(Dollars in Thousands)	Three Months Ended September 30, 2012								Three Months Ended September 30, 2011
	Average Amount Outstanding			Average Rate			Interest Earned/ Paid		Average Amount Outstanding			Average Rate			Interest Earned/ Paid
Interest-earning assets:
Taxable securities	$	505,869			1.88	%	$	2,390	$	524,561			2.49	%	$	3,294
Non-taxable securities		1,070			4.41			12		1,634			4.52			19
Total securities		506,939			1.89			2,402		526,195			2.50			3,313
Loans and leases(1)		1,203,775			4.55			13,780		1,318,652			5.07			16,855
Interest-bearing deposits		101,270			0.20			52		67,804			0.26			45
Total interest-earning assets		1,811,984			3.56			16,234		1,912,651			4.19			20,213
Non-interest-earning assets
Cash and due from banks		34,904								33,410
Premises and equipment, net		69,777								73,375
Other real estate owned, net		57,486								89,684
Other assets		44,532								53,906
Intangible assets, net		2,989								3,931
Allowance for loan and leases losses		(54,548	)							(43,183	)
Total assets	$	1,967,124							$	2,123,774
Interest-bearing liabilities:
Interest-bearing demand deposits	$	563,623			0.32	%	$	454	$	531,201			0.43	%	$	569
Savings deposits		148,875			0.29			109		138,895			0.39			137
Time deposits		787,459			0.84			1,661		924,363			1.30			3,023
Short-term borrowings		20,000			8.36			421		20,000			5.50			277
FHLB advances and long-term debt		45,389			3.01			343		70,603			2.25			400
Total interest-bearing liabilities		1,565,346			0.76			2,988		1,685,062			1.03			4,406
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		284,150								253,677
Other liabilities		15,605								15,619
Total non-interest bearing liabilities		299,755								269,296
Common shareholders’ equity		52,929								120,934
Preferred stock		49,094								48,482
Shareholders’ equity		102,023								169,416
Total	$	1,967,124							$	2,123,774
Net interest revenue					2.80	%	$	13,246					3.16	%	$	15,807
Net yield on interest-earning assets					2.91	%							3.28	%
Tax equivalent adjustment					0.00								0.00
Net yield on interest-earning assets (tax equivalent)					2.91	%							3.28	%

(1) Loans classified as non-accrual are included in the average volume classification. Net loan (costs) fees are included in the interest amounts for loans.

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Provision for Loan and Lease Losses

The provision for loan and lease losses is the charge to earnings that is added to the allowance for loan and lease losses in order to maintain the allowance at a level that Management deems adequate to absorb inherent losses in our loan and lease portfolio. See "Risk Management in the Loan and Lease Portfolio and the Allowance for Loan and Lease Losses " above.  Net charge-offs in the third quarter of 2012 were $4.618 million compared to $3.162 million in the same period in 2011. The provision for loan and lease losses was $9.500 million in the third quarter of 2012, compared to $6.000 million for the comparable period in 2011.  A remediation plan implemented by BancTrust during the second quarter of 2012 to address impaired loans requires additional external appraisals and independent appraisal reviews for all impaired loans over $1 million.  The implementation of this action plan is targeted to be complete by the end of 2012.  Increases in specific allowances for impaired loans, especially land and land development loans, were made as we continue to experience economic deterioration in our markets as well as increases in non-performing loans.  As a result, the allowance for loan and lease losses as a percentage of loans, net of unearned income, increased from 3.30 percent at December 31, 2011, to 4.85 percent at September 30, 2012.

Non-Interest Revenue and Expense

Non-interest revenue was $5.079 million for the third quarter of 2012, a decrease of $194 thousand from the third quarter of 2011. Net securities gains increased $81 thousand in the third quarter of 2012 compared to the same period in 2011. Service charges on deposit accounts decreased $132 thousand, or 8.3 percent, from $1.581 million for the third quarter of 2011 to $1.449 million for the same period in 2012. Trust revenue in the third quarter of 2012 was $873 thousand compared to $945 thousand for the same period in 2011. Trust assets were $870.324 million at September 30, 2012 compared to $816.178 million at September 30, 2011.

Salary and employee benefit expense in the third quarter of 2012 was $6.631 million, a decrease of $175 thousand from the same period in 2011. Full time equivalent employees decreased from 547 at September 30, 2011 to 486 at September 30, 2012.

Net occupancy expense was $1.754 million in the third quarter of 2012, an increase of $187 thousand, or 11.9 percent from the same period in 2011. The increase is due primarily to rent expense of our new corporate headquarters. In 2011, we combined our corporate headquarters and our Mobile, Alabama operations department into our new corporate headquarters. We expect our net occupancy expense to decrease from its current level once we have sold our operations building. Furniture and equipment expense decreased by $52 thousand, or 6.0 percent. At September 30, 2012, the Company was operating in 49 branches compared to 50 at September 30, 2011.
 

Intangible amortization decreased to $226 thousand for the quarter ended September 30, 2012 from $292 thousand for the same period last year through amortization of our core deposit intangible on an accelerated basis.

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Losses on other real estate owned reflect both net losses on the sale of other real estate owned and the write-down of other real estate owned to its estimated fair value.  We recorded $3.464 million in losses on other real estate owned in the third quarter of 2012, compared to $1.461 million in the third quarter of 2011. The losses in the third quarter of 2012 were primarily due to write-downs resulting from updated appraisals. Other real estate owned carrying cost increased $98 thousand from $438 thousand in the third quarter of 2011 to $536 thousand in the third quarter of 2012. Other real estate owned carrying costs consist primarily of property taxes, insurance and maintenance.

FDIC assessments were $675 thousand for the quarter ended September 30, 2012, compared to $356 thousand for the same period in 2011. The third quarter 2011 number reflects the reversal of accrued FDIC assessments due to the change by the FDIC in the assessment base for FDIC insurance premiums from domestic deposits to average assets minus average tangible equity.

Other expense was $2.301 million for the quarter ended September 30, 2012, a decrease of $141 thousand from the third quarter of 2011. Other expense includes items such as advertising, audit fees, director fees, insurance costs and stationery and supplies.

Income tax expense was $0 for the third quarter of 2012, compared to income tax benefit of $117 thousand for the same period in 2011. In 2011, the Company established a valuation allowance for the full amount of its deferred tax asset.

Nine Months Ended September 30, 2012 and 2011

Net Income

The Company recorded a net loss to common shareholders of $23.186 million, or $1.29 per basic and diluted common share, during the first nine months of 2012, compared to a net loss to common shareholders in the first nine months of 2011 of $457 thousand, or $0.03 per basic and diluted common share. The net loss before the preferred stock dividend was $20.835 million in the first nine months of 2012 compared to net income before the preferred dividend of $1.857 million in the first nine months of 2011. The loss in the first nine months of 2012 was caused primarily by the $26.800 million provision for loan and lease losses.

Net Interest Revenue

Net interest revenue, the difference between amounts earned on interest-earning assets and the amounts paid on interest-bearing liabilities, is the most significant component of earnings for a financial institution. Major factors influencing net interest revenue are changes in interest rates, changes in the volume of assets and liabilities and changes in the asset/liability mix.

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Average interest-earning assets decreased to $1.830 billion for the first nine months of 2012 from $1.944 billion in the same period in 2011, a decrease of $114.548 million, or 5.9 percent. This decrease was primarily a result of the decreases in time deposits and FHLB advances. The decrease in average interest-earning assets resulted in a decrease in net interest revenue of $4.068 million, or 8.7 percent, from the first nine months of 2011 to the first nine months of 2012. Our net interest margin for the first nine months of 2012 was 3.12 percent compared to 3.22 percent for the same period in 2011. The decrease in net interest margin was due primarily to the decrease in average loans and leases from the first nine months of 2011 to the same period in 2012 of $104.469 million. We estimate that non-performing assets resulted in our net interest margin being approximately 50 basis points lower than it would have been if these assets had been earning interest. Interest rate cuts, response to future competitive deposit pricing pressures, or increases in our non-performing assets could have the effect of decreasing our margins.

The following table presents an analysis of net interest revenue, weighted-average yields on interest-earnings assets and weighted-average yields on interest-bearing liabilities for the nine months ended September 30, 2012 and 2011.

(Dollars in Thousands)	Nine Months Ended September 30, 2012								Nine Months Ended September 30, 2011
	Average Amount Outstanding			Average Rate			Interest Earned/ Paid		Average Amount Outstanding			Average Rate			Interest Earned/ Paid
Interest-earning assets:
Taxable securities	$	498,299			2.12	%	$	7,890	$	512,082			2.66	%	$	10,202
Non-taxable securities		1,219			4.46			41		2,072			4.69			73
Total securities		499,518			2.12			7,931		514,154			2.67			10,275
Loans and leases(1)		1,239,977			4.78			44,335		1,344,446			5.05			50,780
Interest-bearing deposits		90,167			0.22			151		85,610			0.25			160
Total interest-earning assets		1,829,662			3.83			52,417		1,944,210			4.21			61,215
Non-interest-earning assets
Cash and due from banks		34,627								34,631
Premises and equipment, net		70,387								74,327
Other real estate owned, net		58,395								86,649
Other assets		45,809								57,124
Intangible assets, net		3,213								4,230
Allowance for loan and leases losses		(48,134	)							(46,765	)
Total assets	$	1,993,959							$	2,154,406
Interest-bearing liabilities:
Interest-bearing demand deposits	$	556,570			0.37	%	$	1,532	$	529,373			0.43	%	$	1,722
Savings deposits		143,846			0.34			363		139,092			0.40			418
Time deposits		811,655			0.92			5,598		951,883			1.43			10,167
Short-term borrowings		20,000			7.28			1,090		20,000			5.29			791
FHLB advances and long-term debt		60,678			2.56			1,163		84,648			2.18			1,378
Total interest-bearing liabilities		1,592,749			0.82			9,746		1,724,996			1.12			14,476
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		276,303								246,490
Other liabilities		15,091								16,193
Total non-interest bearing liabilities		291,394								262,683
Common shareholders’ equity		60,877								118,390
Preferred stock		48,939								48,337
Shareholders’ equity		109,816								166,727
Total	$	1,993,959							$	2,154,406
Net interest revenue					3.01	%	$	42,671					3.09	%	$	46,739
Net yield on interest-earning assets					3.12	%							3.22	%
Tax equivalent adjustment					0.00								0.00
Net yield on interest-earning assets (tax equivalent)					3.12	%							3.22	%

(1) Loans classified as non-accrual are included in the average volume classification. Net loan (costs) fees are included in the interest amounts for loans.

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Provision for Loan and Lease Losses

The provision for loan and lease losses is the charge to earnings that is added to the allowance for loan and lease losses in order to maintain the allowance at a level that Management deems adequate to absorb inherent losses in our loan and lease portfolio. See "Asset Quality" above.  Net charge-offs in the first nine months of 2012 were $11.521 million compared to $19.314 million in the same period in 2011.The provision for loan and lease losses was $26.800 million in the first nine months of 2012, compared to $14.500 million for the comparable period in 2011. A remediation plan implemented by BancTrust during the second quarter of 2012 to address deficiencies identified in internal controls surrounding impaired loans requires additional external appraisals and independent appraisal reviews for all impaired loans over $1 million.  The implementation of this action plan is targeted to be complete by the end of 2012.  Increases in specific allowances for impaired loans, especially land and land development loans, were made as we continue to experience economic deterioration in our markets as well as increases in non-performing loans.  The allowance for loan and lease losses as a percentage of loans, net of unearned income, increased from 3.30 percent at December 31, 2011, to 4.85 percent at September 30, 2012.

Non-Interest Revenue and Expense

Non-interest revenue was $15.238 million for the first nine months of 2012, an increase of $39 thousand from the first nine months of 2011. Net securities gains increased $684 thousand in the first nine months of 2012 compared to the same period in 2011. Service charges on deposit accounts decreased $246 thousand, or 5.3 percent, from $4.606 million for the first nine months of 2011 to $4.360 million for the same period in 2012.  Monthly maintenance fees on checking accounts decreased $94 thousand, and the fees we charge our customers for using ATMs not owned by us decreased $55 thousand. We have been experiencing a decline in insufficient funds (“NSF”) fees for several years, but this trend has moderated in recent quarters, and we experienced only a small decrease for the nine months ended September 30, 2012 as compared to the same period last year. Trust revenue in the first nine months of 2012 was $2.742 million compared to $3.035 million for the same period in 2011. Trust assets were $870.324 million at September 30, 2012 compared to $816.178 million at September 30, 2011.

Salary and employee benefit expense for the first nine months of 2012 was $20.118 million, a decrease of $790 thousand from the first nine months of 2011. Full time equivalent employees decreased from 547 at September 30, 2011 to 486 at September 30, 2012.

Net occupancy expense was $5.011 million in the first nine months of 2012, an increase of $489 thousand from the same period in 2011. The increase was primarily due to costs of our new main office. In 2011, we combined our corporate headquarters and our Mobile, Alabama operations department into our new corporate headquarters. We expect our net occupancy expense to decrease from its current level once we have sold our operations building. Furniture and equipment expense decreased by $123 thousand, or 4.7 percent, primarily as a result of decreased depreciation expense as some older assets were fully depreciated between the two periods and of decreased maintenance cost. At September 30, 2012, the Company was operating in 49 branches compared to 50 at September 30, 2011.

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Intangible amortization decreased to $677 thousand for the nine months ended September 30, 2012 from $876 thousand for the same period last year through amortization of our core deposit intangible on an accelerated basis.

Losses on other real estate owned reflect both net losses on the sale of other real estate owned and the write-down of other real estate owned to its estimated fair value.  We recorded losses on other real estate owned of $3.464 million in the first nine months of 2012, compared to $2.187 million in the same period in 2011. The write-downs of other real estate owned in the fourth quarter of 2011established lower carrying values reflective of market conditions. If real estate values decline, additional losses on other real estate may occur in future periods. Other real estate owned carrying cost increased $190 thousand from $1.399 million in the first nine months of 2011 to $1.589 million in the first nine months of 2012. Other real estate owned carrying costs consist primarily of property taxes, insurance and maintenance.

FDIC assessments were $2.019 million for the nine months ended September 30, 2012, compared to $2.528 million for the same period in 2011, reflecting the change by the FDIC in the assessment base for FDIC insurance premiums from domestic deposits to average assets minus average tangible equity.

Early in 2012, we ended our efforts to recapitalize the Company as an independent entity and began working towards a strategic merger. Expenses related to the abandoned recapitalization and to our proposed merger with Trustmark were $2.384 million for the first nine months of 2012. There were no such expenses during the first nine months of 2011. These costs consist primarily of attorney and investment advisor fees.

On July 2, 2012, BankTrust entered into a Final Settlement Agreement (the “Agreement”) with Countrywide Home Loans, Inc. (“Countrywide”). Pursuant to the Agreement, BankTrust paid Countrywide $3.520 million as full and final settlement of any and all claims and disputes related to mortgage loans sold by BankTrust or its predecessors in interest to Countrywide prior to July 2, 2012 pursuant to loan purchase agreements between BankTrust, or its predecessors in interest, and Countrywide. The Agreement contains a mutual release whereby BankTrust and Countrywide fully, finally and completely release each other and their respective related parties from any claims and disputes related to the mortgage loans transferred by BankTrust or its predecessors in interest to Countrywide. The Agreement was made to compromise and settle the claims and disputes at issue and is not an admission of liability or any other matter by either BankTrust or Countrywide. This settlement resulted in our recognizing an expense of $3.520 million in the first nine months of 2012. We are not aware of any other material potential repurchase commitments.

Other expense was $7.027 million for the nine months ended September 30, 2012, a decrease of $257 thousand from the first nine months of 2011. Other expense includes items such as advertising, audit fees, director fees, insurance costs and stationery and supplies.

Income tax benefit was $672 thousand for the first nine months of 2012, compared to income tax expense of $263 thousand for the same period in 2011. The benefit in 2012 was due to the reversal of reserves previously established for our uncertain tax positions. These positions have been resolved. In 2011, the Company established a valuation allowance for the full amount of its deferred tax asset.

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Contractual Obligations

In the normal course of business, the Company enters into various contractual obligations. For a discussion of contractual obligations see "Contractual Obligations and Off-Balance Sheet Arrangements" in BancTrust's 2011 Annual Report on Form 10-K. Items disclosed in the Annual Report on Form 10-K have not changed materially since the report was filed.

Off-Balance Sheet Arrangements

The Company, as part of its ongoing business operations, issues financial guaranties in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. A financial standby letter of credit is a commitment by the Company to guarantee a customer's repayment of an outstanding loan or financial obligation. In a performance standby letter of credit, the Company guarantees a customer's performance under a contractual non-financial obligation for which it receives a fee. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the life of the standby letter of credit. At September 30, 2012, the Company had standby letters of credit outstanding with maturities ranging from less than one year to three years. The maximum potential amount of future payments the Company could be required to make under its standby letters of credit at September 30, 2012 was $19.217 million, and that sum represents the Company's maximum credit risk under these arrangements. At September 30, 2012, the Company had $192 thousand of liabilities associated with standby letter of credit agreements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

The Company minimizes risk by managing four key risk factors: (1) liquidity; (2) interest rate sensitivity; (3) capital adequacy; and (4) asset quality. Our primary market risk is our exposure to interest rate changes. Interest rate risk management strategies are designed to optimize net interest income while minimizing the effects of changes in market rates of interest on operating results and asset and liability fair values. A key component of our interest rate risk management strategy is to manage and match the maturity and repricing characteristics of our assets and liabilities. The Company's market risk and strategies for market risk management are more fully described in its 2011 Annual Report on Form 10-K. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2012. Through September 30, 2012, Management has not utilized derivatives as a part of this process, but it may do so in the future.

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ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In conducting its assessment of the Company’s internal control over financial reporting as of December 31, 2011, Management identified deficiencies in internal controls that, when evaluated in combination, gave rise to a material weakness. As a result of this material weakness, the Company’s disclosure controls and procedures were not effective as of December 31, 2011 to ensure that information required to be disclosed in the reports that the Company files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized, and reported on a timely basis.  These deficiencies and the material weakness are described under the caption entitled “Management’s Report on Internal Control Over Financial Reporting” in Item 8 of the Company’s Annual Report on 10-K for the year ended December 31, 2011. 

Upon making this determination, the Company implemented remedial measures in the second quarter of 2012 to cure this material weakness; however, as of September 30, 2012, the elapsed time has been insufficient to conclude that the material weakness has been remediated. Initial testing of the remediation plan indicated that Management has made significant progress through September 30, 2012. The remediation will continue to be tested during the fourth quarter of 2012 in conjunction with the implementation of the plan. Management has targeted the implementation of these remedial measures to be complete by December 31, 2012.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q.  Based upon that evaluation and as of the end of the period covered by this Report, and considering the material weakness as discussed above, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective but are being remediated to ensure that information required to be disclosed in its reports that the Company files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized, and reported on a timely basis.

Changes in Internal Controls

Management’s assessment of the Company’s internal control over financial reporting identified a material weakness in the Company’s internal control over financial reporting related to the valuation, documentation, and review of impaired loans and other real estate owned as of December 31, 2011.

Other than the remediation plan for the material weakness discussed below, there were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

Immediately following Management’s identification of the above-referenced material weakness, Management took steps to remediate the material weakness.  These ongoing efforts include the following:

●      External appraisals are now required on all impaired loans and other real estate owned equal to or exceeding $1 million on an annual basis; external appraisals are now required on all impaired loans and other real estate owned below $1 million on a biennial basis;

●      All external appraisals required on an annual basis (but not those required on a biennial basis) are submitted for independent third party review to ensure reasonableness of the underlying appraisal assumptions;

●      When external appraisals are not required for impaired loans and other real estate owned because they are below the dollar threshold, internal evaluations are conducted and periodically reviewed to ensure external market data and proprietary data, if available, are adequately documented; and

●      Management has implemented a quarterly valuation meeting between the Special Assets Group, Loan Review and Risk Management to discuss current developments and market conditions that might indicate a potential impairment has occurred and to ensure that there is adequate documentation of the consideration for recording a potential impairment if it is probable that a loss has been incurred.

Management anticipates that these remedial actions will strengthen the Company’s internal control over financial reporting and will, over time, address the material weakness that was identified as of December 31, 2011 and again as of March 31, 2012, June 30, 2012 and September 30, 2012.  Because some of these remedial actions will take place on a quarterly basis, their successful implementation may need to be evaluated over several quarters before Management is able to conclude that the material weakness has been remediated.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

An investment in our common stock involves risk. Shareholders should carefully consider the risks described below in conjunction with the other information in this Form 10-Q and information incorporated by reference in this Form 10-Q, including our consolidated financial statements and related notes. If any of the following risks or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. This could cause the price of our stock to decline and shareholders could lose part or all of their investment. This Form 10-Q contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in our forward-looking statements.

The pending Trustmark merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may negatively impact BancTrust.

The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals. If any condition to the merger is not satisfied or, where permitted, waived, the merger will not be completed. In addition, Trustmark and/or BancTrust may terminate the merger agreement under certain circumstances even though the merger has been approved by BancTrust’s shareholders.

If the merger agreement is terminated, there may be various negative consequences. For example, BancTrust’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of Management on the merger and the restrictions on BancTrust’s ability to do so under the merger agreement, without realizing any of the anticipated benefits of completing the merger, or the market price of BancTrust common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed. In addition, termination of the merger agreement would increase the possibility of adverse regulatory actions which could adversely affect BancTrust’s business. If the merger agreement is terminated and BancTrust’s board of directors seeks another merger or business combination, BancTrust shareholders cannot be certain that BancTrust will be able to find a party willing to pay the equivalent or greater consideration than that which Trustmark has agreed to pay in the merger. In addition, if the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by BancTrust’s board of directors, BancTrust may be required to pay Trustmark a termination fee of $5 million.

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Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by or on behalf of BancTrust or any affiliated purchaser (as defined in SEC Rule 10b-18(a)(3)) of BancTrust during the quarter ended September 30, 2012 of equity securities that are registered by BancTrust pursuant to Section 12 of the Exchange Act.

Period	Total Number Of Shares Purchased(1)		Average Price Paid Per Share		Total Number of  Shares Purchased As Part Of Publicly Announced Plans Or Programs		Maximum Number of Shares That May Yet Be Purchased Under The Plans Or Programs(2)
07/01/12-07/31/12		2,573	$	3.10		0		229,951
08/01/12-08/31/12		2,120	$	3.10		0		229,951
09/01/12-09/30/12		0	$	0.00		0		229,951
Total		4,693	$	3.10		0		229,951

__________________

(1)   4,693 shares of common stock were purchased on the open market to provide shares of common stock to participants in BancTrust's grantor trust related to its deferred compensation plan for directors.

(2)   Under a share repurchase program announced on September 28, 2001, BancTrust may buy up to 425,000 shares of its common stock. The repurchase program does not have an expiration date. Shares of common stock purchased in BancTrust's grantor trust do not decrease the number of shares of common stock that may be purchased under the share repurchase program.

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Item 6. Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1	The following financial information from BancTrust Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i)  Unaudited Condensed Consolidated Statements of Condition at September 30, 2012, and December 31, 2011 (ii) Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2012, and September 30, 2011, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2012 and 2011, (iv) Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2012, and September 30, 2011, (v) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2012 and 2011, (vi) Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011, (vii) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012, and September 30, 2011, and (viii) the Notes to Unaudited Condensed Consolidated Financial Statements.1
	1As provided in Rule 406T of Regulation S-T, this information shall be not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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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.

	BancTrust Financial Group, Inc.
November 13, 2012	By: /s/W. Bibb Lamar, Jr.
Date	W. Bibb Lamar, Jr.
	President and Chief Executive Officer
November 13, 2012	By: /s/F. Michael Johnson
Date	F. Michael Johnson
	Chief Financial Officer and Secretary

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	EXHIBIT INDEX
SEC Assigned Exhibit No.	Description of Exhibit
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1	The following financial information from BancTrust Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i)  Unaudited Condensed Consolidated Statements of Condition at September 30, 2012, and December 31, 2011 (ii) Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2012, and September 30, 2011, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2012 and 2011, (iv) Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2012, and September 30, 2011, (v) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2012 and 2011, (vi) Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011, (vii) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012, and September 30, 2011, and (viii) the Notes to Unaudited Condensed Consolidated Financial Statements.1
	1As provided in Rule 406T of Regulation S-T, this information shall be not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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