UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-15423

BANCTRUST FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Alabama	63-0909434
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)
107 Saint Francis Street	36602
Mobile, Alabama	(Zip Code)
(Address of principal executive offices)

251-431-7800

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK $.01 PAR

(Title of class)

Name of exchange on which registered:  NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

NONE

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.  Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 32.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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. (Check one):

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

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

Aggregate market value of the Common Stock ($.01 Par) held by non-affiliates of the registrant as of June 30, 2011 (assuming that all executive officers, directors and 5% shareholders are affiliates): $41,850,460

Shares of Common Stock ($.01 Par) outstanding at April 10, 2012: 17,967,788

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 annual meeting of shareholders are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I
Item 1:	Business	4
Item 1A:	Risk Factors	17
Item 1B:	Unresolved Staff Comments	26
Item 2:	Properties	26
Item 3:	Legal Proceedings	27
PART II
Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6:	Selected Financial Data	29
Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operation	31
Item 7A:	Quantitative and Qualitative Disclosures about Market Risk	67
Item 8:	Financial Statements and Supplementary Data	67
Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	122
Item 9A:	Controls and Procedures	122
Item 9B:	Other Information	123
PART III
Item 10:	Directors and Executive Officers of the Registrant	123
Item 11:	Executive Compensation	123
Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	123
Item 13:	Certain Relationships and Related Transactions	123
Item 14:	Principal Accountant Fees and Services	124
PART IV
Item 15:	Exhibits, Financial Statement Schedules	124

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PART I

Cautionary Note Concerning Forward-Looking Statements

This Annual Report on Form 10-K, other periodic reports filed by us under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any other written or oral statements made by or on behalf of BancTrust Financial Group, Inc. may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events and financial performance. These statements can be identified by our use of words like “expect,” “may,” “could,” “intend,” “project,” “estimate,” “anticipate,” “should,” “will,” “plan,” “believe,” “continue,” “predict,” “contemplate” and similar expressions. These forward-looking statements reflect our current views, but they are based on assumptions and are subject to risks, uncertainties and other variables that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements, including, in addition to the items discussed under the caption “Risk Factors” and elsewhere in this Report on Form 10-K, the following:

●              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;

●              we may be compelled to seek additional capital in the future to augment capital levels or ratios or improve liquidity, but capital or liquidity may not be available when needed or on acceptable terms;

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

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

●              changes in monetary and fiscal policies of the US government may adversely affect the business in which we are engaged;

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

●              the assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates may be inaccurate;

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

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

●              we may be unable to obtain required shareholder or regulatory approval for any proposed mergers or acquisitions or financings or capital-raising transactions;

●              we may be unable to achieve anticipated results from mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions and, integrating operations as part of these transactions; possible failures to achieve expected gain, revenue growth and/or expense savings from such transaction; and greater than expected deposit attrition, customer loss or revenue loss;

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

●              adverse changes may occur in the equity markets; and

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

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We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this Report on Form 10-K in the case of forward-looking statements contained herein.

We expressly qualify in their entirety all written or oral forward-looking statements attributable to us or any person acting on our behalf by the cautionary statements contained or referred to in this section. We do not intend to update or revise, and we assume no responsibility for updating or revising, any forward-looking statement contained in this Report on Form 10-K, whether as a result of new information, future events or otherwise.

Item 1.   Business

Organization

BancTrust Financial Group, Inc. (the “Company” or “BancTrust”) is an Alabama corporation headquartered in Mobile, Alabama and was incorporated in 1986.  The Company is registered under the Bank Holding Company Act of 1956, as amended, and its principal subsidiary is BankTrust (“BankTrust” or the “Bank”).  The Company and the Bank shall from time to time be collectively referred to as “we”, “us” and “our.”

At December 31, 2011, the Company had total consolidated assets of approximately $2.032 billion, total consolidated deposits of approximately $1.812 billion and total consolidated shareholders’ equity of approximately $114.3 million and ranked third in terms of total assets among Alabama-based bank holding companies.

Nature of Business and Markets

Introduction

Through its system of 49 offices located in south Alabama (referred to as our Southern Division), central Alabama (referred to as our Central Division), and northwest Florida (referred to as our Florida Division), the Bank provides a broad range of community banking services to commercial, small business and retail customers, offering a variety of transaction and savings deposit products, treasury management services, investment brokerage and insurance services, secured and unsecured loan products, including revolving credit facilities, and letters of credit and similar financial guarantees.  The Bank also provides trust and investment management services to retirement plans, corporations and individuals.

	Population 2010	Labor Force 2010	Per Capita Personal Income 2011	Median Family Income 2011
Alabama	4,802,700	2,127,200	$33,149	$54,600
Mobile MSA	591,599	267,800	32,670	55,800
Montgomery MSA	374,536	189,800	32,667	59,300
Florida	19,057,500	9,223,800	$39,032	$56,200
Bay County	168,852	90,200	36,316	57,500
Okaloosa County	180,822	96,300	42,007	67,500
Walton County	55,043	39,081	30,018	58,500

Southern Division

Our Southern Division is anchored by Mobile, Alabama and includes all of Mobile, Baldwin, Escambia, Marengo and Monroe Counties.  With an estimated population of 591,599 in 2010, the Mobile Metropolitan Statistical Area, or MSA, is the second largest metro area in the state of Alabama. Mobile County is the second largest county in the state and Baldwin County was the second fastest-growing county in Alabama between the years 2000 and 2010.

The area’s economy is home to a broad range of industries including aerospace, maritime, education, oil and gas exploration, steel manufacturing, and transportation.  Recent highlights include:

Austal USA: In late 2010, the U.S. Navy awarded Austal USA, headquartered in Mobile,a contract worth an estimated $3.5 billion to build up to 10 littoral combat ships. The project will add 2,100 jobs to Austal’s workforce. Earlier in 2010, the Navy awarded Austal USA a $1.6 billion contract to build four joint high speed vessels, resulting in the hiring of 800 employees.

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ThyssenKrupp: The $5.2 billion ThyssenKrupp complex located in north Mobile County opened in late 2010 and is now producing carbon and stainless steel. Named one of the nation’s largest private economic development projects, the facility will ultimately generate 2,700 permanent jobs.

Port of Mobile: The Alabama State Port Authority continues to add infrastructure to make the Port of Mobile more competitive, announcing in late 2010 it would invest an additional $360 million in infrastructure improvements with a new interchange, intermodal rail yard, cargo yard and warehouse and other cargo terminal improvements. The Port of Mobile is one of the nation’s largest, full-service seaports handling in excess of 54 million tons annually.

Airbus:Having reached its target employment of 150, Airbus Americas Engineering recently announced it would add 90 new positions, and invest another $1.7 million at its engineering center located at Brookley Aeroplex adjacent to downtown Mobile.

Central Division

Our Central Division is anchored by the Montgomery MSA.  With an estimated population of 374,536, the Montgomery MSA includes Autauga, Elmore, Lowndes and Montgomery Counties, which are four of the thirteen counties included in our Central Division.  Montgomery is the capitol of Alabama and the area economy is supported by state and local government, the Maxwell/Gunter Air Force Base, and the automotive industry.  Recent highlights include:

Hyundai Motor Company:  Completed in 2005, Hyundai Motor Manufacturing Alabama, LLC’s $1.4 billion plant south of Montgomery is the company’s first U.S. manufacturing facility and employs about 2,500 people. In late 2011, Hyundai announced plans to invest $173 million and create an additional 200 jobs to expand and modify the existing facility.

Maxwell/Gunter:  The Maxwell/Gunter Air Force Base is home to 2,300 active duty military personnel, 1,200 reserve personnel, 3,700 government civilians and 2,100 civilian contractors and has an aggregate economic impact on the area of $1.4 billion.

Other key locations in our Central Division include Shelby County, the fastest growing county in Alabama over the ten-year period between 2000 and 2010, and the Auburn/Opelika market, where SiO2 Medical Products recently announced plans to invest $90 million in a new facility that is expected to add up to 300 new jobs in Lee County.

Florida Division

Our Florida Division includes offices in Bay, Okaloosa and Walton Counties, which as of 2010 had a combined population of approximately 404,717.  Commonly referred to as the Panhandle of Florida, this area attracts millions of visitors annually, due in large part to the extensive coastline along the Gulf of Mexico, where the beautiful white sand beaches are consistently rated among the best in the world. In addition to tourism, the area’s economy is driven by aviation, aerospace and defense, healthcare, and transportation, distribution and logistics.  Recent highlights include:

Tourism:   Assisted by a major marketing effort funded by a $30 million grant from BP, the Panhandle experienced record bed-tax revenues in 2011, with increases of 85% over 2010.

New Airport:  The Northwest Florida Beaches International Airport, the first international airport to be built in the U.S. in the past ten years, opened in 2010 and is serviced by Delta and Southwest airlines.

Competition

There is significant competition within the financial services industry in general as well as with respect to the particular financial services provided by the Bank. Within its markets, the Bank competes directly with major banking institutions of comparable or larger size and resources and with various other smaller banking organizations. The Bank also has numerous local and national nonbank competitors, including savings and loan associations, credit unions, mortgage companies, personal and commercial finance companies, investment brokerage and financial advisory firms, and mutual fund companies. Entities that deliver financial services and access to financial products and transactions exclusively through the Internet are another source of competition.

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At June 30, 2011, the Bank had a top five deposit market share in 11 of the 18 counties served and a first or second position in 9 of the 18 counties served.

Alabama Counties	Our Number of Offices	Our Market Deposits		Total Market Deposits		Our Ranking	Market Share Percentage
	(Dollars in thousands)
Autauga	2	$	97,136	$	477,751	1	20.33	%
Baldwin	4		81,515		3,233,012	10	2.52
Barbour	2		80,781		447,141	2	18.07
Bibb	1		27,854		174,260	3	15.98
Butler	4		94,887		283,832	1	33.43
Dallas	3		142,521		493,717	1	28.87
Elmore	4		100,654		737,137	2	13.65
Escambia	3		138,368		604,450	1	22.89
Jefferson	1		984		23,950,341	34	0.00
Lee	2		49,369		2,000,387	10	2.47
Marengo	2		84,877		418,137	2	20.30
Mobile	7		513,156		6,035,488	5	8.50
Monroe	2		114,655		329,192	1	34.83
Montgomery	2		98,785		5,915,831	10	1.67
Shelby	2		76,749		2,516,973	10	3.05
Florida Counties
Bay	2	$	45,434	$	2,559,859	13	1.77	%
Okaloosa	3		38,565		3,525,011	19	1.09
Walton	4		96,151		752,223	2	12.78

The foregoing information for market deposits, ranking and market share percentage was obtained from the Federal Deposit Insurance Corporation.

The Bank’s ability to compete effectively is a result of providing customers with desired products and services in a convenient and cost effective manner.  Our customers are influenced by convenience, quality of service, personal contacts, availability of products and services and competitive pricing.  We strive to present a focused message to our customers, emphasizing our commitment to their interest and our markets. Our employees are expected to be actively involved in all aspects of the community in which they operate. We also maintain a network of local advisory boards to further enhance our connection to, and knowledge of, these markets. We are able to compete with larger financial institutions by providing superior customer service with localized decision-making capabilities.

Recent Developments

Economic Environment

Since late 2007, the U.S. capital and credit markets have experienced volatility and disruption. Dramatic declines in the housing market, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. This market turmoil and the resulting tightening of credit have led to increased commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally.

Notwithstanding the positive economic developments in our markets described above, the recent macro-economic downturn and the Company’s elevated levels of collateral dependent acquisition and development loans have had, and continue to have, a negative impact on the Company and its customers in all of the markets that it serves. This impact has been reflected in a decline in credit quality, increases in the Company’s nonperforming loans and leases and net charge-offs over the past several years, and significant net losses in 2009 and 2011.

Efforts to Raise Private Capital and Current Strategic Focus

In 2010, the Company embarked on an effort to raise private capital in an amount necessary to (a) repay and redeem, as appropriate, its $20 million Silverton Note secured by the capital stock of the Bank and its $50 million in preferred stock held by the US Treasury; (b) address the Company’s elevated level of non-performing assets; (c) provide a measure of liquidity at the holding company level; and (d) generate significant shareholder value as a recapitalized, independent entity.

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Our 2010 efforts to raise capital proved unsuccessful, primarily, we believe, because of the uncertainty surrounding the Gulf of Mexico oil spill and its possible adverse impact on our entire footprint.   In 2011, with the oil spill behind us, we renewed our efforts to raise capital, and it appeared that we were making significant progress on an equity offering.  Ultimately, however, we were unable, for a combination of reasons, including current market conditions, certain structural constraints and weaker than expected asset valuations, to attract a sufficient number of investors at a price sufficient to generate value for existing shareholders.  As a result, the Company’s Board of Directors has authorized management to seek a recapitalization of the Company through a strategic merger, and we are in the process of pursuing that strategy.

2011 Results of Operations

In early 2012, the Company completed an in-depth review of asset quality, other real estate owned carrying values, and the adequacy of its allowance for credit losses.  Management had the benefit of recently developed information generated in conjunction with the Company’s efforts to raise capital.  After discussion with its independent registered public accounting firm and the Audit Committee of its Board of Directors, the Company concluded that certain asset quality indicators and the current expected liquidation horizon of nonperforming assets warranted an increase in its provision for loan losses and a decrease in the carrying value of certain other real estate owned, and that these matters should be included in the results of operations for the fourth quarter of 2011.  These valuation-related adjustments, combined with the expensing of certain previously deferred costs associated with capital raise efforts and a valuation allowance for the Company’s net deferred tax asset, resulted in a net loss to common shareholders for the fourth quarter of 2011, of approximately $50.48 million and for the fiscal year ended December 31, 2011, of approximately $50.94 million.

Holding Company Liquidity

One of the most difficult issues we face is liquidity at the holding company level.  We have debt and other obligations at the holding company level that can only be funded through dividends from the Bank.  However, because of our current level of nonperforming assets and losses, the Bank is essentially unable to pay dividends to the holding company.  Most of our holding company obligations, specifically preferred stock dividends and interest payments on our two series of trust preferred securities, can be deferred for the foreseeable future, albeit with some potentially adverse consequences; and, we have recently elected to defer those obligations.  We do not, however, have the right to defer repayment of the Silverton Note; but, we have recently successfully negotiated a modification of that loan to defer our principal repayment obligations.  The recent modification provides a mechanism for us to make required quarterly interest payments for the next year and defers principal repayment until April of 2013 or such earlier time as we complete a merger, consolidation, sale of substantially all of the Company’s assets or a similar transaction.  The modification results in higher interest costs and fees, and it is discussed in greater detail in “Management’s Discussion and Analysis of Financial Condition” under the heading “Recent Developments – Holding Company Liquidity.”

Employees

As of December 31, 2011, we had 540 full-time equivalent employees. We are not a party to any collective bargaining agreement, and, in the opinion of the Company’s management team (“Management”), we enjoy satisfactory relations with our employees.

Supervision and Regulation

BancTrust and its subsidiary Bank are subject to extensive state and federal banking regulations that impose restrictions on, and provide for general regulatory oversight of, their operations. These laws generally are intended to protect depositors and the Deposit Insurance Fund (the “DIF”) and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us. This discussion is a general summary of the laws and regulations applicable to BancTrust and the Bank and is qualified in its entirety by reference to the statutory or regulatory provisions being described.

BancTrust

Since we own all of the capital stock of the Bank, we are a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the Federal Reserve Board, including compliance with the Federal Reserve Board’s rules and regulations.

Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

● banking or managing or controlling banks; and

● any activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.

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Activities that the Federal Reserve Board has found to be so closely related to banking as to be a proper incident to the business of banking include:

● factoring accounts receivable;

● making, acquiring, brokering or servicing loans and usual related activities;

● leasing personal or real property on certain terms and conditions;

● operating a non-bank depository institution, such as a savings association;

● trust company functions;

● financial and investment advisory activities;

● conducting securities brokerage activities as agent for the account of customers;

● underwriting and dealing in government obligations and money market instruments;

● providing specified management consulting and counseling activities;

● performing selected data processing services and support services;

● acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

● performing selected insurance underwriting activities.

Despite prior approval, the Federal Reserve Board may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

In addition to the permissible bank holding company activities listed above, a bank holding company meeting certain requirements may qualify and elect to become a financial holding company, permitting the bank holding company to engage in additional activities that are financial in nature or incidental or complementary to financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:

● lending, trust and other banking activities;

● insuring, guaranteeing or indemnifying against loss or harm, or providing and issuing annuities and acting as principal, agent or broker for these purposes, in any state;

● providing financial, investment or advisory services;

● issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

● underwriting, dealing in or making a market in securities;

● other activities that the Federal Reserve Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;

● foreign activities permitted outside of the United States if the Federal Reserve Board has determined them to be usual in connection with banking operations abroad;

● merchant banking through securities or insurance affiliates; and

● insurance company portfolio investments.

To qualify to become a financial holding company, our depository institution subsidiary must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, we must file an election with the Federal Reserve Board to become a financial holding company and must provide the Federal Reserve Board with 30 days’ written notice prior to engaging in a permitted financial activity. We are not a financial holding company at this time.

Support of Subsidiary Institution. Under Federal Reserve Board policy, we are expected to act as a source of financial strength for the Bank and to commit resources to support it. This support may be required at times when, without this Federal Reserve Board policy, we might not be inclined to provide it.

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Acquisitions of Banks.  The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before taking certain actions, including:

● acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

● acquiring all or substantially all of the assets of any bank; or

● merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve Board’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, adequately capitalized and adequately managed bank holding companies may purchase banks located either inside or outside of our markets in Alabama and Florida. Certain state laws, however, place restrictions on the acquisition by an out-of-state bank holding company of a bank that has only been in existence for a limited amount of time or results in specified concentrations of deposits. For example, Florida law prohibits an out-of-state bank holding company from acquiring control of a depository institution if, as a result of the merger or acquisition, the resulting bank holding company’s affiliates would control 30% or more of the total deposits in Florida, unless the bank holding company has been in existence and continually operating as a bank for more than three years.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve Board approval prior to any person or company acquiring “control” of a bank or bank holding company. Under the Change in Bank Control Act, control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank or bank holding company. Control is presumed to exist, subject to rebuttal, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

● the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

● no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is registered under Section 12 of the Securities Exchange Act of 1934. The Federal Reserve Board’s regulations provide a procedure for rebutting a presumption of control.

The Bank

Our subsidiary Bank is a member of the Federal Deposit Insurance Corporation (the “FDIC”), and, as such, its deposits are insured by the FDIC to the extent provided by law. Our subsidiary Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations. It is a state-chartered bank subject to supervision and examination by the state banking authorities of the state of Alabama. The primary state regulator in Alabama is the Superintendent of the State Banking Department of Alabama (the “Alabama Department”). The FDIC and Alabama Department regularly examine the Bank’s operations and have authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. The federal and state banking regulators also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective actions to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category. BancTrust and its subsidiary bank were categorized as “Well Capitalized” at December 31, 2011. 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 of 6 percent and 10 percent, respectively. At December 31, 2011, the Bank’s capital ratios exceeded all three of these target ratios with a Tier 1 leverage capital ratio of 8.19%, a Tier 1 Capital to risk-weighted assets ratio of 11.98% and a total capital to risk-weighted assets ratio of 13.25%.

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An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from accepting and renewing brokered deposits, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

FDIC Insurance Assessments. The Bank is a member of the FDIC, and its deposits are insured by the DIF up to the amount permitted by law. The Bank is thus subject to FDIC deposit insurance premium assessments. The FDIC uses a risk-based assessment system that assigns insured depository institutions to one of four risk categories, as well as a separate category for large and highly complex institutions. On February 7, 2009, the FDIC issued new rules for calculating the Bank’s deposit insurance assessment base and assessment rates that took effect April 1, 2011. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Bank’s deposit insurance assessment base is defined as its average consolidated total assets less average tangible equity capital. The final rules also revised the assessment rates for insured depository institutions in various risk categories, adopts a new large-bank pricing assessment scheme and sets a target size for the Deposit Insurance Fund. The rule shifts the burden of paying assessments and protecting customers against bank failures toward larger and riskier financial institutions. The changes went into effect in the second quarter of 2011, and the first premium payment under the new DIF assessment scheme was payable on September 30, 2011.  The rule, as mandated by the Dodd-Frank Act, finalized a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. The rule lowers overall assessment rates while generating the same approximate amount of revenue under the new larger base as was raised under the old base.

For institutions in the lowest risk category, the initial base assessment rate ranges from 5 to 9 basis points which, following adjustments based on the institutions unsecured debt and brokered deposits, would range from 2.5 to 9 basis points.. For institutions assigned to higher risk categories, the new total base assessment rates range from 9 to 45 basis points. These ranges reflect a possible downward adjustment for unsecured debt outstanding and possible upward adjustments for secured liabilities and, in the case of institutions outside the lowest risk category, brokered deposits.

The FDIC also collects an assessment from insured financial institutions on behalf of The Financing Corporation (FICO). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and equaled 0.680 basis points for the fourth quarter of 2011.

Effective November 21, 2008 and terminating on December 31, 2010, the FDIC temporarily expanded deposit insurance limits for certain accounts under the FDIC’s Temporary Liquidity Guarantee Program (TLG Program). Provided an institution did not opt out of the TLG Program, the FDIC fully guaranteed funds deposited in noninterest-bearing transaction accounts, including (i) interest on Lawyer Trust Accounts or IOLTA accounts, and (ii) negotiable order of withdrawal or NOW accounts with rates no higher than .50 percent if the institution has committed to maintain the interest rate at or below that rate. A separate assessment was imposed for this expanded coverage. The Bank did not opt out of the TLG Program.  Under the Dodd Frank Act, these expanded deposit insurance limits were further extended through December 31, 2012, with some modifications.  While the expanded limit for IOLTA accounts was extended, the expanded limit for NOW accounts was not.  In addition, the expanded limits now apply to accounts held at all FDIC insured institutions – there is no opportunity for institutions to opt out.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on our Bank. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and the Federal Reserve Board’s regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these arrangements on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof; or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

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Other Regulations. Interest and other charges collected or contracted for by our Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Servicemembers Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United States military.

Our Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

● Fair Credit Reporting Act of 1978, governing the use of information from, and provision of information to, credit reporting agencies;

● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by a debt collector;

● Servicemembers Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

● the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

The deposit operations of our Bank are subject to, among other laws and regulations:

● the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

● the Electronic Funds Transfer Act, Regulation E and Regulation II issued by the Federal Reserve Board and the Bureau of Consumer Financial Protection regarding, among other things, automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services and debit interchange fees and network routing requirements for debit cards associated with deposit accounts.

Capital Adequacy

We are required to comply with the capital adequacy standards established by the Federal Reserve Board. The Federal Reserve Board has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock and a limited amount of loan loss reserves. The total amount of Tier 2 Capital included as part of the bank holding company’s total capital for purposes of the total risk-based capital ratio is limited to 100% of Tier 1 Capital. At December 31, 2011, our ratio of total capital to risk-weighted assets was 11.75% and our ratio of Tier 1 Capital to risk-weighted assets was 10.48%. Both ratios were significantly above the minimum regulatory guidelines.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve Board’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2011, our leverage ratio was 7.13%, significantly above the minimum leverage ratio guidelines. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve Board considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

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Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.  To ensure our capital is maintained at acceptable levels, we are currently required to obtain approval from the Federal Reserve Bank of Atlanta prior to declaring dividends on our common or preferred stock, incurring additional debt or modifying or refinancing existing debt, or reducing our capital position by purchasing or redeeming our outstanding securities.

We regularly monitor current and projected capital ratios at both the Company and Bank levels.

Payment of Dividends

BancTrust is a legal entity separate and distinct from our subsidiary Bank. Our principal source of cash flow, including cash flow to pay dividends to our common stockholders and to holders of the preferred stock we issued to the United States Treasury, is dividends from our Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank, and there are statutory and regulatory limitations on our ability to pay dividends to our shareholders. We are currently required to obtain approval from the Federal Reserve Bank of Atlanta prior to declaring dividends on our common or preferred stock.

As to the payment of dividends, our Bank is subject to the laws and regulations of the state of Alabama and to the regulations of the FDIC. Various federal and state statutory provisions limit the amount of dividends our subsidiary Bank can pay to us without regulatory approval.

Under Alabama law, a bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital. An Alabama state bank is also required by Alabama law to obtain the prior approval of the Superintendent of the State Banking Department of Alabama for the payment of dividends if the total of all dividends declared by it in any calendar year will exceed the total of (a) its net earnings (as defined by statute) for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends may be paid from an Alabama state bank’s surplus without the prior written approval of the Superintendent.

Under Alabama law, no corporation may pay a cash dividend or other distribution to its shareholders if, after giving effect to such distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of business or (ii) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

If, in the opinion of a federal bank regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such agency may require, after notice and hearing, that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under current federal law, an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve Board and the FDIC have issued policy statements which provide that bank holding companies and insured banks should generally pay dividends only out of current operating earnings.

In addition to the limitations on our ability to pay dividends under Alabama law, FDIC and Federal Reserve Board regulations, our ability to pay dividends on our common stock is also limited by our participation in the U.S. Treasury’s Capital Purchase Program. Prior to December 19, 2011, unless we have redeemed the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, liquidation preference $1,000 per share issued to the U.S. Treasury, or the U.S. Treasury has transferred the preferred stock to a third party, the consent of the U.S. Treasury must be received before we can pay a regular quarterly common stock dividend in excess of $0.13 per share. Furthermore, if we are not current in the payment of quarterly dividends on the preferred stock, we cannot pay dividends on our common stock.  We did not pay a dividend on our common stock in 2011 or 2010.

At December 31, 2011, our subsidiary Bank was unable to pay dividends without regulatory approval.  We requested and received approval for the Bank to pay $2.1 million in dividends to BancTrust in 2011.

Restrictions on Transactions with Affiliates

We are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

● a bank’s loans or extensions of credit to affiliates;

● a bank’s investment in affiliates;

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● assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

● loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and

● a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

We are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the depository institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.  The Dodd-Frank Act, discussed below, also placed additional restrictions on transactions with certain affiliates.

Privacy

Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

Consumer Credit Reporting

In 2004, the Fair and Accurate Credit Transactions Act (the “FCRA Amendments”) amended the federal Fair Credit Reporting Act.  The FCRA Amendments include, among other things:

● requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

● consumer notice requirements for lenders that use consumer report information in connection with risk-based credit pricing programs;

● requirements for entities that furnish information to consumer reporting agencies (which would include the Bank), to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and

● a requirement for mortgage lenders to disclose credit scores to consumers.

The FCRA Amendments also prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the opt-out), subject to certain exceptions. We do not share consumer information among our affiliated companies for marketing purposes, except as allowed under exceptions to the notice and opt-out requirements. Because no affiliate of BancTrust is currently sharing consumer information with any other affiliate of BancTrust for marketing purposes, the limitations on sharing of information for marketing purposes do not have a significant impact on us.

Anti-Terrorism and Money Laundering Legislation

The Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), the Bank Secrecy Act and rules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes and related rules and regulations impose requirements and limitations on specific financial transactions and account relationships and are intended to guard against money laundering and terrorism financing. The Bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise has implemented policies and procedures to comply with the foregoing rules.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks. The Federal Reserve Board has the power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

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Recent Laws and Regulatory Activities

Dodd-Frank Act.  On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act fundamentally restructures federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act also creates a new independent federal regulator to administer federal consumer protection laws. Many of the provisions of the Dodd-Frank Act have delayed effective dates and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations will increase our operating and compliance costs. The following discussion summarizes certain significant aspects of the Dodd-Frank Act:

The Dodd-Frank Act requires the Federal Reserve Board to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. Because our trust preferred securities meet these requirements, they will continue to be included in our Tier 1 capital, but any future issuances of trust preferred securities would not be included in our Tier 1 capital. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

The Dodd-Frank Act permanently increases the maximum deposit insurance amount for financial institutions to $250,000 per depositor, and extends unlimited deposit insurance to noninterest bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective as of July 21, 2011, the Dodd-Frank Act eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. Because we participated in the U.S. Treasury’s Capital Purchase Program, we are required to give stockholders a non-binding vote on executive compensation at every annual meeting, until the preferred stock issued to the U.S. Treasury is redeemed.  The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company's proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the institution is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Effective as of July 21, 2011, the Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating hereto.

The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.

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Effective as of July 21, 2011, the Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.  Finally, the Dodd-Frank Act prohibits, with certain limited exceptions, banks and bank holding companies from engaging in proprietary trading or from making or holding investments in private equity or hedge funds. Neither we nor our affiliates advise mutual funds, engage in significant proprietary trading or invest or sponsor private equity or hedge funds, and we do not expect these provisions to have a material effect on our business or finances.

The Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Effective on October 1, 2011, the Federal Reserve Board set new caps on interchange fees at $0.21 per transaction, plus an additional five basis-point charge per transaction to help cover fraud losses. An additional $0.01 per transaction is allowed if certain fraud-monitoring controls are in place. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, such as the company, the new restrictions could negatively impact bank card services income for smaller banks if the reductions that are required of larger banks cause industry-wide reduction of interchange fees. This provision of the Dodd-Frank Act and its implementing Regulation II also require that all debit cards be enabled with two or more unaffiliated networks for processing electronic debit transactions initiated by the debit card. No exemption is available from the network routing requirements and, accordingly, the Bank has implemented the necessary requirement to ensure that its debit cards are enabled with the appropriate number of networks.

The Dodd-Frank Act creates a new, independent federal agency called the Bureau of Consumer Financial Protection ("CFPB"), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Depository institutions with less than $10 billion in assets, such as our bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive acts and practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Basel III.  The Basel Committee released in December 2010 revised final frameworks for the regulation of capital and liquidity of internationally active banking organizations. These new frameworks are generally referred to as "Basel III". Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by U.S. banking regulators in developing new regulations applicable to other banks in the United States, including those developed pursuant to directives in the Dodd-Frank Act. Although the U.S. banking agencies have not yet published a notice of proposed rulemaking to implement Basel III in the United States, they are likely to do so (at least with respect to certain elements of the Basel III capital framework) during 2012.

FOMC.  On September 21, 2011, the Federal Open Market Committee ("FOMC") announced that, to support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with its statutory mandate, it had decided to extend the average maturity of its holdings of securities. In addition, the FOMC announced that it intended to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of three years or less in order to put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. Further, to help support conditions in mortgage markets, the FOMC intends to now reinvest in agency mortgage-backed securities the principal payments from its holdings of agency debt and agency mortgage-backed securities.

Final Guidance on Incentive Compensation Policies for Banking Organizations.  In June 2010, the federal banking agencies jointly issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." These reviews will be tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

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U.S. Treasury Capital Purchase Program. Pursuant to the U.S. Treasury’s Capital Purchase Program (the “CPP”), on December 19, 2008, BancTrust issued to the U.S. Treasury 50,000 shares of BancTrust’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value and liquidation preference of $1,000 per share, and a warrant to purchase up to 731,000 shares of BancTrust’s common stock at an exercise price of $10.26 per share for an aggregate purchase price of $7.5 million in cash. The securities purchase agreement pursuant to which the securities issued to the U.S. Treasury under the CPP were sold limits the payment of dividends on BancTrust’s common stock on or before December 19, 2011 to the then current quarterly dividend of $0.13 per share without prior approval of the U.S. Treasury, limits BancTrust’s ability to repurchase shares of its common stock, grants the holders of the preferred stock, the warrant and the common stock of BancTrust to be issued under the warrants certain registration rights, and subjects BancTrust to certain executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 and the American Relief and Recovery Act of 2009.

Proposed Legislation and Regulatory Action.

The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry as a whole. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation's financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments of those reports filed with or furnished to the SEC are available on our website at www.banktrustonline.com by following the “Investor Relations” tab and then clicking on the link to “Financial Information.” These documents are made available free of charge on BancTrust’s website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. You may also request a copy of these filings, at no cost, by writing or telephoning BancTrust at the following address:

BancTrust Financial Group, Inc.

Attn: F. Michael Johnson

107 St. Francis Street

Suite 3100

Mobile, Alabama 36602

(251) 431-7800

You may also read and copy any document we file with the SEC at the SEC’s public reference room at 100 F. Street NE, Washington D.C. 20549.  You can also obtain copies of the documents upon payment of a duplicating fee to the SEC.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC as we do.  Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.

Executive Officers of the Registrant

The following table reflects certain information concerning the executive officers of BancTrust. Each such officer holds his office(s) until the first meeting of the Board of Directors following the annual meeting of shareholders each year, or until a successor is chosen, subject to removal at any time by the Board of Directors. Except as otherwise indicated, no family relationships exist among the executive officers and directors of BancTrust, and no such officer holds his office(s) by virtue of any arrangement or understanding between him and any other person except the Board of Directors.

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Name, Age and Office(s) with BancTrust	Other Positions with BancTrust
W. Bibb Lamar, Jr. — age 68(1)
President and CEO (since 1989)	Director (since 1989)
Michael D. Fitzhugh — age 63(2)
Executive Vice President (since 2004)	None
F. Michael Johnson — age 66(3)
Chief Financial Officer, Executive
Vice President & Secretary (since 1993)	None
Bruce C. Finley, Jr. — age 63(4)
Executive Vice President and
Senior Lending Officer (since 2004)	None
Edward T. Livingston — age 65(5)
Executive Vice President (since 2007)	None
Henry F. O’Connor, III – age  43(6)
Executive Vice President and Corporate Strategy Director (since 2011)	None

(1) Chief Executive Officer and Director, since 1989, and Chairman, since 1998, of the Bank. Previously: President (1989-1998), of the Bank; Director (1998-2007), of BancTrust Company, Inc.

(2) Market President, Southern Division, Alabama, of the Bank, since 2009. Previously: Market President, Florida, of the Bank (2008 - 2009). Chief Executive Officer and Director of BankTrust-Florida (2005-2008); President, Chief Operating Officer and Director (1998 - 2005) of the Bank.

(3) Executive Vice President and Cashier, since 1986, of the Bank.

(4) Executive Vice President of the Bank, since 1998. Previously: Senior Loan Officer (1998-2004), of the Bank.

(5) Central Division President, of the Bank, since 2007. Previously: Market President, Brewton, of the Bank, (2002-2007).

(6) Previously: Managing Director of IPC Capital Partners, LLC, a private investment firm (2009-2010); Managing Partner of O’Connor & O’Connor, LLC, a law firm (1999-2008).  Mr. O’Connor’s wife is Director Clifton C. Inge, Jr.’s sister and Director Harris V. Morrissette’s first cousin.

Item 1A.   Risk Factors

Making or continuing an investment in securities issued by the Company, including its common stock, involves certain risks that you should carefully consider. The Company must recognize and attempt to manage these risks as it implements its strategies to successfully compete with other companies in the financial services industry. Some of the more important risks common to the industry and the Company are:

• liquidity risk, which is the risk that funds will not be available at a reasonable cost to meet operating and strategic needs;

• operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events, such as natural disasters.

• compliance risk, which is the risk of failure to comply with requirements imposed by regulators;

• market risk, which is the risk that changes in market rates and prices will adversely affect the results of operations or financial condition;

• reputation risk, which is the risk that negative perceptions of a business will adversely affect operations and financial performance;

• credit risk, which is the risk that borrowers will be unable to meet their contractual obligations, leading to loan losses and reduced interest income; and

• industry risk, which is the risks related to our industry and the soundness of other financial institutions.

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Although the Company generally is not significantly more susceptible to adverse effects from these or other common risk factors than other industry participants, there are certain aspects of the Company’s business model that may expose it to somewhat higher levels of risk. In addition to the other information contained in or incorporated by reference into this annual report on Form 10-K, these risk factors should be considered carefully in evaluating the Company’s overall risk profile. Additional risks not presently known, or that the Company currently deems immaterial, may also adversely affect Company’s business, financial condition or results of operations.

Liquidity Risks

We may not be able to successfully complete a strategic merger or recapitalization transaction.

A combination of asset quality problems and a lack of liquidity at the holding company level has lead Management to conclude that within the next year we either need to raise capital through an equity offering or effect a strategic merger.  We recently attempted to structure a private offering of our equity securities to private equity firms and institutional investors, but we were unable to agree with our potential investors upon mutually acceptable terms for this transaction.  As a result, we view a strategic merger as our best alternative to recapitalize the Company.  However, we may not be able to find a strategic merger partner, or we may not be able to command a price that we deem to be in the best interest of our shareholders.  In addition, we may not be able to obtain necessary regulatory or shareholder approvals for a strategic merger or other recapitalization transaction.  If we fail to raise capital or effect a strategic merger it could have a material and adverse effect on our liquidity, results of operations and financial condition.

We have a $20 million note payable maturing in April 2013 or at such earlier time as we complete a merger, consolidation, sale of substantially all of our assets or similar transaction; and, absent an infusion of capital at the holding company level, we will not be able to repay the note at maturity.

BancTrust has outstanding a $20 million note which is secured by all of the stock of the Bank. The FDIC, as Receiver for Silverton Bank, N.A. is the holder of this note, which we refer to as the Silverton Note. We have available and will escrow funds sufficient to make the four remaining required interest payments on the note, but absent an infusion of cash at the holding company level through a strategic merger or other source, we do not have the ability to repay the Silverton Note.  Therefore, BancTrust must complete a strategic merger, raise additional capital or issue debt in a sufficient amount to enable repayment, or renew or extend the Silverton Note prior to its maturity.  Any renewal or extension of the note would require FDIC approval, and we can give no assurance that such approval will be granted.  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. Management is currently seeking a strategic merger partner to enable repayment of the Silverton Note.  Failure to timely repay, modify or replace this note would have a material adverse effect on BancTrust.

We need to obtain funds from the Bank necessary to meet our obligations and to declare dividends on our preferred stock and common stock; however, the Bank is required to obtain regulatory approval prior to paying any dividends to us.

BancTrust’s ability to pay its commitments as they come due is completely dependent upon dividends from the Bank. BancTrust’s most significant recurring commitments consist of interest and upcoming principal payments on debt obligations, dividends on the preferred stock held by the U.S. Treasury and operating costs. The Bank is currently unable to pay dividends or interest payments without regulatory approval.  The Bank requested and received permission to pay dividends of $2.1 million to BancTrust in 2011. The Bank requested and received permission to pay dividends to BancTrust in the first quarter of 2012 sufficient to make our next four quarterly interest payments on the $20 million Silverton Note and to pay the first 2012 quarterly interest payment on our 2003 series of trust preferred securities.  The Bank does not intend to seek permission to pay any additional dividends in the near future.  If the Bank requests permission to pay additional dividends, we can offer no assurance that the applicable regulatory agencies would grant such requests in full or in part.  BancTrust’s inability to meet its commitments, particularly payment upon maturity of the Silverton Note, would have a material adverse effect on the Company.

The preferred stock issued to the Treasury impacts net income available to the Company’s common shareholders and its earnings per share.

As long as shares of our preferred stock issued under the Capital Purchase Program are outstanding, no dividends may be paid on our common stock unless all dividends on the preferred stock have been paid in full. The dividends declared and accrued on shares of our preferred stock reduce the net income available to common shareholders and our earnings per common share. Additionally, the Warrant issued to the Treasury may be dilutive to our earnings per share.

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Holders of the Series A Preferred Stock have rights that are senior to those of our common shareholders.

The Series A Preferred Stock held by the Treasury is senior to our shares of common stock, and holders of the Series A Preferred Stock have certain rights and preferences that are senior to holders of our common stock. The restrictions on our ability to declare and pay dividends to our common shareholders are discussed above. In addition, the Company and its subsidiaries may not purchase, redeem or otherwise acquire for consideration any shares of our common stock unless we have paid in full all accrued dividends on the preferred stock for all prior dividend periods, except in certain limited circumstances. Furthermore, the preferred stock is entitled to a liquidation preference over shares of our common stock in the event of liquidation, dissolution or winding up of the Company.

We may not declare a dividend on your common stock.

Historically, BancTrust paid a cash dividend on your common stock; however, we have not paid a cash dividend on our common shares since the second quarter of 2009.  Holders of shares of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. In addition, the payment of dividends may be affected by Alabama law, FDIC and Federal Reserve Board regulations.  Not declaring dividends could adversely affect the market price of our common stock. Also, deferring interest on our trust preferred securities and not paying dividends on our preferred stock prevents us from paying a dividend on, or repurchasing, our common stock, as discussed in greater detail above.  At January 1, 2012, the Bank, which is generally the source of payment of the Company’s dividends, could not declare a dividend without the approval of regulators, and the Bank’s recent earnings and high levels of nonperforming assets have severely limited its ability to obtain such approval.

We have elected to defer the payment of dividends on our outstanding preferred stock and expect to continue to defer the payment of such dividends for the foreseeable future. We are required to obtain the approval of the Federal Reserve Bank of Atlanta before we may declare dividends on our preferred stock held by the U.S. Treasury.

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.  We do not intend to seek Federal Reserve approval for the declaration of a dividend on our preferred stock, all of which is held by the U.S. Treasury, for the second quarter of 2012 and for the foreseeable future.  If we request such approval, we can provide no assurance that the Federal Reserve will grant such request in full or in part, and we do not currently have the liquidity at the holding company level to make any dividend payments.  BancTrust’s inability to pay dividends on its preferred stock could have a material adverse effect on the Company.  Until the preferred stock dividends are brought current, we may not pay dividends on our common stock.

We have elected to defer the payment of interest on our outstanding trust preferred securities and expect to continue to defer the payment of interest for the foreseeable future.

Commencing with the April 30, 2012 payment of interest on our 2006 series of trust preferred securities, we have elected to defer the payment of interest on both of our outstanding series of trust preferred securities, and we expect to continue to defer the payment of interest on these securities for the foreseeable future.  Our deferral of interest payments for up to 20 consecutive quarters (through the first quarter of 2016) is expressly permitted under the applicable indentures for both series of trust preferred securities.

Although we will defer the payment of interest, we will continue to accrue interest expense related to the trust preferred securities. The Company recognized interest expense of $909,000, $919,000 and $1.1 million on the trust preferred securities during the years ended December 31, 2011, 2010, and 2009, respectively. To the extent applicable law permits interest on interest, the deferred interest payments also accrue interest at the rates specified in the corresponding indentures, compounded quarterly. All of the deferred interest and the compounded interest are due in full at the end of the applicable deferral period. If we fail to pay the deferred and compounded interest at the end of the deferral period, the trustee under the applicable indenture, or the holders of 25% of the outstanding principal amount of any issue of trust preferred securities, would have the right, after any applicable grace period, to declare an event of default. The occurrence of an event of default on these securities would entitle the trustees and holders of the trust preferred securities to exercise various remedies, including demanding immediate payment in full of the entire outstanding principal amount of the subordinated debentures.

While we defer interest payments on our trust preferred securities, we are, subject to limited exceptions, prohibited from declaring dividends or distributions on, redeeming, purchasing, acquiring or making a liquidation payment with respect to any of our capital stock.

Currently we have no cash available at the holding company level to resume the payment of interest on the subordinated debentures. Accordingly, our ability to resume the payment of interest on the subordinated debentures will depend on the Bank's ability to generate earnings and pay dividends to the Company. The Bank currently cannot pay dividends without regulatory approval and, if the Bank requests permission to pay additional dividends, we can offer no assurance that the applicable regulatory agencies would grant such requests in full or part.  As a result, if we do not achieve sufficient profitability for the Bank so that our regulators would grant approval for the Bank to pay dividends, we will be unable to resume the payment of interest on the subordinated debentures. Even if the Bank is able to resume paying dividends, we can offer no assurance that the amount of dividends would be sufficient to pay the entire amount of interest due under the subordinated debentures at the end of the deferral period.

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If the trading price of our common stock fails to comply with the continued listing requirements of the NASDAQ Global Select Market, we could face possible delisting. NASDAQ delisting could make the market for our stock more illiquid.

Since October 2011, our common stock has traded on The NASDAQ Global Select Market at less than $2.00 per share.  If at any time our common stock does not maintain a minimum bid price of $1.00 per share for 30 consecutive days, as required by NASDAQ Listing Rule 5450(a)(1), then NASDAQ may provide written notification regarding the delisting of our securities. At that time, we would have the right to request a hearing to appeal the NASDAQ determination.

We cannot be sure that our price will comply with the requirements for continued listing of our common shares on The NASDAQ Global Select Market, or that any appeal of a decision to delist our common shares will be successful. If our common shares lose their listed status on The NASDAQ Global Select Market and we are not successful in obtaining a listing on another exchange, our common shares would likely trade in the over-the-counter market.

If our shares were to trade on the over-the-counter market, selling our common shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common shares are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common shares, further limiting the liquidity thereof. These factors could result in lower prices and larger spreads in the bid and ask prices for common shares.

Our businesses have been and will likely continue to be adversely affected by recent and current conditions in the financial markets and economic conditions generally.

Recessionary conditions and a subsequent period of slow recovery in the broader economy could continue to adversely affect the financial capacity of businesses and individuals in the Company’s market area. These conditions could, among other consequences, increase the credit risk inherent in the current loan portfolio, restrain new loan demand from creditworthy borrowers, prompt the Company to tighten its underwriting criteria, and reduce the liquidity in the Company’s customer base and the level of deposits that they maintain. These economic conditions could also delay the correction of the imbalance of supply and demand in certain real estate markets as discussed below. Legislative and regulatory actions taken in response to these conditions could impose additional restrictions and requirements on the Company and others in the financial industry.

The impact on the Company’s financial results could include continued high levels of problem credits, increased provisions for credit losses and expenses associated with loan collection efforts, the possible further impairment of certain intangible or deferred tax assets, the need for the Company to replace core deposits with higher-cost sources of funds, and an inability to produce loan growth or overall growth in earning assets. Non-interest income from sources that are dependent on financial transactions and market valuations could also be reduced.

Operational Risk

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results, and investor confidence and the market price of our shares may be adversely affected.

We and our independent registered public accounting firm, in connection with the audit of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act for the fiscal year ended December 31, 2011, have identified deficiencies, that, when evaluated in combination, result in a material weakness in our internal control over financial reporting.  This material weakness relates to controls surrounding the valuation, documentation and review of impaired loans and other real estate owned at December 31, 2011.

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have taken measures and plan to continue to take measures to remedy these deficiencies. However, 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.  In addition, the implementation of these measures may not fully address the control deficiencies in our internal control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be materially and adversely affected.

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We may not be able to effectively manage risk.

Our risk management framework seeks to mitigate risk and appropriately balance risk and return. Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, these policies and procedures may not be fully effective. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.  Management of our risks in some cases depends upon the use of analytical and/or forecasting models.  If the models we use to mitigate these risks are inadequate, we may incur increased losses.  In addition, there may be risks that exist, or that arise in the future, that we have not appropriately anticipated, identified or mitigated.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which could have an adverse effect on our business or results of operations.  The likelihood and severity of such events may be increased by climate change.

Our market areas in Alabama and Florida are susceptible to hurricanes. This coastal region experienced major hurricanes in 2004 and 2005. Some experts predict that the likelihood and severity of severe storms may increase as a result of climate change.  The psychological impact of these storms, the high cost of and, in some cases, lack of property insurance, an over-supply of housing and investment properties along with changing property values and higher taxes over recent years slowed the economic growth in these areas. Such weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. We cannot predict whether or to what extent damage caused by these hurricanes or damage that may be caused by future hurricanes will affect our operations or the economies in our market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in the risk of delinquencies, foreclosures or loan losses. Our business and results of operations may be adversely affected by these and other negative effects of future hurricanes or other adverse weather events.

We may experience interruptions or breaches in our information system security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We may be adversely affected by the failure of certain third party vendors to perform.

We rely upon certain third party vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks. While we believe these policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to our operations, which could have a material adverse effect on our financial condition and results of operations.

Compliance Risk

Failure to pay dividends on our preferred stock for six quarters could result in a change to our Board of Directors.

If dividends are not paid on our preferred stock for an aggregate of 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, as the sole preferred stock shareholder, may elect two new directors to the Board of Directors.  The holders of our common stock will continue to elect the remaining members of our Board of Directors.   The interests of the Treasury, as holder of the preferred stock may differ and at times even be adverse to the interests of the holders of our common stock.  We cannot predict what actions any directors appointed by the Treasury may take or propose once they are seated on the Company’s Board of Directors.

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The impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their implementing regulations, and actions by the FDIC, cannot be predicted at this time.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, as amended (“EESA”). Under EESA, the U.S. Treasury has the authority to purchase up to $700 billion of mortgages and other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. One of the programs created by EESA is the Troubled Asset Relief Program (“TARP”). EESA was supplemented and amended by the Financial Stability Plan announced by Treasury Secretary Timothy Geithner on February 10, 2009 (the “FSP”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”). The U.S. Treasury and federal banking regulators have implemented a number of programs under this legislation and otherwise to address capital and liquidity issues in the banking system, including the Capital Purchase Program available through the TARP, in which BancTrust participated. In addition, other regulators have taken steps to attempt to stabilize and add liquidity to the financial markets.

In addition, on July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act will have a significant impact on the regulatory structure of the financial markets and will impose additional costs on us.  The Dodd-Frank Act, among other things, establishes a new Financial Stability Oversight Council to monitor systemic risk posed by financial institutions, alters the regulatory capital treatment of trust preferred securities and other hybrid capital securities and revises the FDIC’s assessment base for deposit insurance.  Provisions in the Dodd-Frank Act may also restrict the flexibility of financial institutions to compensate their employees.  In addition, provisions in the Dodd-Frank Act may require changes to the existing capital rules or the interpretation of such rules by institutions or regulators, which could have an adverse effect on our ability to comply with capital requirements, capital ratios or other laws or regulations.  For institutions such as BancTrust with assets less than $15 billion, currently outstanding trust preferred securities will continue to be included in Tier 1 capital indefinitely under the Dodd-Frank Act, but newly issued trust preferred securities would be excluded from Tier 1 capital.  However, provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Company and the Bank could require us to seek other sources of capital in the future.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry as a whole. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate.

There can be no assurance, however, as to the actual impact that the EESA, as supplemented by the FSP, the ARRA, the Dodd-Frank Act and other programs will have on the financial markets. The failure of the EESA, the ARRA, the FSP, the Dodd-Frank Act and other programs to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our businesses, financial condition, results of operations, access to credit or the trading price of our common stock.

The EESA, ARRA, the FSP and the Dodd-Frank Act are relatively new initiatives and, as such, are subject to change and evolving interpretation. We are unable to predict the effects that any further changes will have on the effectiveness of the government’s efforts to stabilize the credit markets or on our businesses, financial condition or results of operations.

The programs established or to be established under the EESA, TARP and the Dodd-Frank Act may have adverse effects upon us. We may face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific programs may subject us to additional restrictions. For example, participation in the TARP Capital Purchase Program subjects us to additional executive compensation restrictions. Similarly, programs established by the FDIC under the systemic risk exception of the FDIA, whether we participate or not, may have an adverse effect on us.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. In addition, our participation in the TARP Capital Purchase Program subjects us to additional legislation and rulemaking beyond the regime governing financial institutions generally.  Our compliance with applicable laws and regulations is costly and restricts certain of our activities, including payment of dividends, investments, loans, executive compensation, interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators that require us to maintain adequate capital to support our assets.

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The laws and regulations applicable to the banking industry and to TARP Capital Purchase Program participants could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably and limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. We cannot predict the extent to which the government and governmental organizations may change any of these laws or controls. We also cannot predict how such changes would adversely affect our business and prospects.

Market Risk

If the value of real estate in our markets remains materially depressed, a significant portion of our loan portfolio could become or remain under-collateralized, which could have a material adverse effect on us. Additionally, if real estate values remain depressed or decline further, we could be required to further write down the values of our other real estate owned.

The decline in local economic conditions has adversely affected the values of our real estate collateral. A continued or further decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Any decline in deposits or loan originations, any increase in borrower delinquencies or any decline in the value or condition of mortgaged properties could have a material adverse effect on our business.  We have continued to increase our provision for loan and lease losses, and we have written down the value of our other real estate owned to reflect current market conditions.  However, we continuously monitor borrower delinquencies, value and condition of mortgaged properties and real estate values in our markets; and, if local economic conditions continue to decline, additional significant provisions and write downs may be necessary.

In addition to considering the financial strength and cash flow characteristics of our borrowers, the Bank often secures loans with real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. If real estate values in our markets continue to remain depressed, or if we are required to liquidate collateral to collect on loans during this period of reduced real estate values, our earnings and capital could be adversely affected. Additionally, a decline in real estate prices negatively affects the carrying value of our other real estate owned, which has increased significantly in recent years.  Such decreases in real estate values have and could continue to adversely affect our earnings and capital.

We are subject to a risk of rapid and significant changes in market interest rates.

The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments. Changes in interest rates, inflation or the financial markets may affect the demand for our products or our ability to deliver products efficiently.

Most of our assets and liabilities are monetary in nature and are subject to significant risks tied to changes in interest rates. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, the rate of inflation, consumer preferences for specific loan and deposit products, monetary policies of various governmental and regulatory agencies, including the Federal Reserve, and the stability of domestic and foreign markets.  Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure. In a period of rising or declining interest rates, our interest expense could increase or decrease in different amounts and at different rates than the interest that we earn on our assets. Accordingly, changes in interest rates could reduce our net interest income. Our profitability depends to a large extent on our net interest income. Unexpected or significant movements in interest rates could cause our net interest income to decrease and could impact the valuation of our assets and liabilities. Changes in the level of interest rates may negatively affect our ability to attract deposits, originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, to maintain our liquidity. If those sales were made at prices lower than the amortized costs of the investments, we would incur losses.

Our investments may suffer further other than temporary impairment.

Other than temporary impairment can occur when we determine that we do not have the intent and ability to hold a security with an amortized cost greater than its estimated fair market value until recovery. One of the securities we hold has suffered other than temporary impairment.  If the credit ratings of the issuers of the securities we hold deteriorate further, we may not be able to recover our investment in these securities, which could have a material adverse effect on our financial condition and future results of operations.

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Reputational Risk

If our reputation as a fiduciary and financial services provider is negatively affected, our business will suffer.

Our relationship with many of our clients is predicated upon our reputation as a fiduciary and a financial services provider that adheres to the highest standards of ethics and provides superior customer services in a responsive and personalized manner.  Adverse publicity, regulatory actions, litigation, operational failures, the failure to meet client expectations and other issues with respect to our business could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding.  In addition, adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.  Preserving and enhancing our reputation also depends on maintaining systems and procedures that address known risks and regulatory requirements, as well as our ability to identify and mitigate additional risks that arise as a result of changes in our businesses and the markets in which we operate.  If any of these developments has a material adverse effect on our reputation, our business will suffer.

We may be subject to negative publicity that may adversely affect our business, financial condition, liquidity and ability to attract financing.

We have recently announced the end of our efforts to raise capital as an independent institution and the intent of the Company to seek a recapitalization through a strategic merger, adjustments to preliminary unaudited financial results previously released for the quarter and year ended December 31, 2011 and our intention to suspend payments of dividends on our preferred stock and interest on our trust preferred securities.  As we previously announced, we had an in-depth review of asset quality, other real estate owned carrying values, and the adequacy of our allowance for credit losses conducted and, after management’s careful analysis of this review, we decided to increase our provision for loan losses by an additional $13.25 million, and write down the net carrying value of other real estate owned by an additional $27.00 million, over our previously announced results.  In addition, we have recently been the subject of news reports discussing our current financial situation, and we may continue to be subject to negative publicity as the press and others speculate about our ability to raise capital through a strategic merger or other means.  For example, shareholders may elect to sell their stock in large volumes, further reducing our stock price.  In addition, long-term service providers may be reluctant to commit to long-term projects with us.  Even if we are able to improve our current financial situation, we may continue to be the object of negative publicity and speculation about our future.

We are dependent upon the services of our management team, and the limitations on incentive compensation contained in the ARRA and the Dodd-Frank Act may adversely affect BancTrust’s ability to attract key employees or retain its highest performing employees.

Our future success and profitability are substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management, sales and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in retaining such personnel. We also cannot guarantee that members of our executive management team will remain with us. In addition, our announced intention to seek a strategic merger may cause key personnel to depart from the Company.   Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

In the case of a company such as BancTrust that sold preferred stock to the U.S. Treasury pursuant to the Capital Purchase Program, the ARRA contains restrictions on bonus and other incentive compensation payable to the five executives named in a company’s proxy statement and the next twenty highest paid employees. The Dodd-Frank Act expanded some of those restrictions to apply to all public companies, regardless of whether they participated in the Capital Purchase Program.  These restrictions may prevent BancTrust from being able to create a compensation structure that is attractive to key employees and its highest performing employees. If this were to occur, the Company’s business and results of operations could be adversely affected, perhaps materially.

Credit Risk

Losses from loan defaults may exceed the allowance the Company establishes for that purpose, which could have an adverse effect on the Company's business.

There are inherent risks associated with the Company's lending activities. Losses from loan defaults may exceed the allowance the Company establishes for that purpose. Like all financial institutions, the Company maintains an allowance for loan and lease losses to provide for losses inherent in its loan and lease portfolio. The allowance reflects management's best estimate of losses in the loan and lease portfolio at the relevant statement of condition date. The level of the allowance reflects management's continuing evaluation of the specific credit risks, the Company's historical loan and lease loss experience, current loan and lease portfolio quality, composition and growth of the loan and lease portfolio, and economic, political and regulatory conditions and unidentified losses inherent in the current loan and lease portfolio. The determination of an appropriate level of loan and lease loss allowance is an inherently difficult process and is based on numerous factors and assumptions. In addition, bank regulatory agencies periodically review the Company's allowance for loan and lease losses and may require an increase in the provision for losses or the recognition of further charge-offs, based on judgments different than those of management. As a result, the Company's allowance for loan and lease losses may not be adequate to cover actual losses, and there is always a chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we do identify.  We might underestimate the loan and lease losses inherent in our loan and lease portfolio and have loan and lease losses in excess of the amount reserved.  We might increase the allowance because of changing economic conditions. Future provisions for loan and lease losses may adversely affect the Company's earnings. The Company believes its allowance for loan and lease losses is adequate at December 31, 2011.

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We make and hold in our portfolio a significant number of commercial construction, land and land development loans, which may pose more credit risk than other types of loans typically made by financial institutions.

At December 31, 2011, we had a balance of $250.859 million in commercial construction, land and land development loans, representing 19.64% of our total loan portfolio. These commercial construction, land and land development loans have certain risks that are not present in other types of loans.

Commercial construction, land and land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.  If our appraisal of the value of the collateral proves to be overstated or market values decline, we may have inadequate security for the repayment of the loan.  If we are forced to foreclose on the collateral due to a default, we face even more uncertainty than we would in foreclosing on an occupied, vertical project as to whether or not we will be able to recover all of the unpaid balance and accrued interest on the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.  The adverse effects of the foregoing matters upon our commercial construction, land and land development portfolio could necessitate a further increase in non-performing loans related to this portfolio and these non-performing loans may result in a material level of charge-offs, which may have a material adverse effect on our financial condition and results of operations. During the year ended December 31, 2011, our net charge-offs of commercial real estate loans aggregated $33.5 million. At December 31, 2011, non-accrual commercial construction, land and land development loans totaled $59.382 million.

In addition, we reported a material weakness in internal control over financial reporting related to proper valuation, documentation and review of impaired loans and other real estate owned.  If we cannot properly remediate this material weakness it may have an adverse impact on the accuracy of our reported financial results.

Because of the geographic concentration of our assets, our business is highly susceptible to local economic conditions.

Our business is primarily concentrated in selected markets in Alabama and Florida. As a result of this geographic concentration, our financial condition and results of operations depend largely upon economic conditions in these market areas. Deterioration in economic conditions in the markets we serve could result in one or more of the following: an increase in loan delinquencies; an increase in problem assets and foreclosures; a decrease in the demand for our products and services; and a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

Industry Risk

The soundness of other financial institutions could adversely affect us.

Since mid-2007, the financial services industry as a whole, as well as the securities markets generally, have been materially and adversely affected by very significant declines in the values of nearly all asset classes. Financial institutions in particular have been subject to increased volatility and an overall loss in investor confidence.  The commercial soundness of many financial institutions is closely tied to the commercial soundness of other financial institutions as a result of credit, trading, clearing or other relationships between the institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan. Any such losses could materially and adversely affect our businesses, financial condition or results of operations.

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The downgrade of the U.S. government’s sovereign credit rating, any related rating agency action in the future, the ongoing debt crisis in Europe and the downgrade of the sovereign credit ratings for several European nations could negatively impact our business, financial condition and results of operations.

On November 21, 2011, a Congressional committee that was formed to achieve $1.2 trillion in deficit reduction measures announced that it had failed to achieve its stated purpose by the deadline imposed by Congress’ August 2011 agreement to raise the U.S. government’s debt ceiling. Standard & Poor’s Rating Services, which had downgraded the U.S. government’s AAA sovereign credit rating to AA+ with a negative outlook in August 2011, affirmed its AA+ rating following the announcement. Moody’s Investors Services, which changed its U.S. government rating outlook to negative on August 2, 2011, also reaffirmed its rating following the Congressional committee’s announcement. On November 22, 2011, Fitch Ratings stated that the failure of the committee to reach an agreement would likely cause it to change its outlook on U.S. government debt to negative. Further, on November 28, 2011, Fitch stated that a downgrade of the U.S. sovereign credit rating would occur without a credible plan in place by 2013 to reduce the U.S. government deficit. The impact of any additional downgrades to the U.S. government’s sovereign credit rating by any of these rating agencies, as well as the perceived creditworthiness of U.S. government-related obligations, is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions and have a material adverse effect on our business, financial condition and results of operation.

In addition, certain European nations continue to experience varying degrees of financial stress. Despite various assistance packages, worries about European financial institutions and sovereign finances persist. On January 13, 2012, Standard & Poor’s downgraded the credit ratings of France, Italy and seven other European nations in part as a result of the failure of leaders to address systemic stresses in the Eurozone.  In addition, Greece has sought a bailout twice from the European Union and has restructured its sovereign debt and has been forced to undertake significant austerity measures as part of its bailout and debt restructuring packages.  Market concerns over the direct and indirect exposure of European banks and insurers to Greece and these other European Union nations and each other have resulted in a widening of credit spreads and increased costs of funding for some European financial institutions. Risks related to the European economic crisis have had, and are likely to continue to have, a negative impact on global economic activity and the financial markets. As these conditions persist, our financial condition and results of operations could be materially adversely affected.

We operate in a highly competitive market which may have an impact upon our success.

The banking business is highly competitive, and we experience competition in each of our markets from many other financial institutions. Recent mergers, divestitures, and de-novo branching in our markets, particularly in our Mobile market, have affected competition. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other financial institutions and from new residents to our markets. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. Many of our competitors are well-established larger financial institutions that have greater resources and lending limits than we do. Our success in maintaining or increasing market share depends in part on our ability to adapt our products and services to evolving industry standards. There is increasing pressure to utilize new technologies and other means to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. Our competitors may introduce new products or services embodying new technologies which may cause our current technology or systems to be considered obsolete. Our future success in gaining market share may depend, in part, on our ability to use technology competitively and to provide products and services that provide convenience to our customers and create additional efficiencies in our operations.

Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will continue to be successful.

Item 1B.   Unresolved Staff Comments

 None

Item 2.   Properties

The Company’s corporate headquarters occupies all or part of nine floors of a thirty-four story building located at 107 St. Francis Street, in downtown Mobile, Alabama 36602 (the “Home Office”). The Bank, which is headquartered in the Home Office, leases this location.  The building is known as the RSA – BankTrust Tower. In addition to the Home Office, the Bank currently operates 48 offices or branch locations in southern and central Alabama and the western panhandle of Florida, of which 41 are owned and 7 are subject to either building or ground leases. On February 29, 2012, we closed one branch office located in Gulf Shores, Alabama.  The Bank also owns a building in Selma, Alabama that it uses as an operations center. Additionally, the Bank owns a building in downtown Mobile, Alabama that it used as an operation center. The Bank consolidated its operations department into the Home Office and plans to sell its operations center in downtown Mobile. The Bank paid annual rents in 2011 of approximately $622 thousand. At December 31, 2011, there were no significant encumbrances on the Bank’s offices, equipment or other operational facilities.

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Item 3.   Legal Proceedings

In the ordinary course of operating our business, we may be a party to various legal proceedings from time to time. We do not believe that there are any pending or threatened proceedings against us, which, if determined adversely, would have a material effect on our business, results of operations or financial condition.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Prices and Cash Dividends Per Share

BancTrust’s common stock trades on The NASDAQ Global Select Market under the symbol BTFG.

At December 31, 2011, the Company had approximately 4,599 common shareholders, including 1,666 of record and 2,933 shareholders in nominee accounts, and 1 holder of record of its preferred stock.

The following chart provides the high and low sales price and the cash dividends declared on the Company’s common stock for each quarter in 2011 and 2010.

	High		Low		Cash Dividends Declared Per Share
2011
Fourth quarter	$	2.35	$	1.20	$	0.00
Third quarter		2.60		2.15		0.00
Second quarter		2.75		2.25		0.00
First quarter		2.94		2.25		0.00
2010
Fourth quarter	$	3.30	$	2.36	$	0.00
Third quarter		4.15		2.82		0.00
Second quarter		6.47		3.65		0.00
First quarter		5.09		2.74		0.00

The Company did not declare a dividend on its common stock during 2011 or 2010.  The Company believes it is important for it to preserve its capital during this turbulent economic period and that its recent results of operations did not justify the payment of a dividend on its common stock.  Throughout 2011 and 2010, the Company paid dividends on its preferred stock.  However, for the first time since issuing its preferred stock, in the first quarter of 2012 the Company decided to cease paying dividends on its preferred stock, and the Company does not intend to resume paying such dividends in the foreseeable future.  The Company is currently required to obtain approval from the Federal Reserve Bank of Atlanta prior to declaring dividends on its common or preferred stock.

The Company’s ability to pay dividends is largely dependent upon dividends from its subsidiary Bank.  The Bank is currently unable to pay dividends without regulatory approval.  We do not expect to request regulatory approval for the Bank to pay a dividend in the immediate future and, if requested, we can make no assurances that the applicable regulatory agencies will grant, in full or in part, any request to pay a dividend of the Bank to fund a dividend on the Company’s common stock.

While any preferred stock is outstanding, the Company may pay dividends on its common stock and redeem or repurchase its common stock, provided that all accrued and unpaid dividends for all past dividend periods on the preferred stock are fully paid (See “Sales of Unregistered Securities,” below).  The Board of Directors has recently determined that it will not declare or pay dividends on the preferred stock for the foreseeable future, which will effectively prevent us from paying dividends on our common stock until the preferred stock dividends are brought current.

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Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information at December 31, 2011 with respect to BancTrust’s equity compensation plans that provide for the issuance of options, warrants or rights to purchase BancTrust’s securities.

Stock Options Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
Equity compensation plans approved by security holders	69,507	(1)	$16.67	500,000	(2)
Equity compensation plans not approved by security holders	N/A		N/A	N/A

	Weighted-Average
Restricted Stock Plan Category	Number of Securities Issued	Market Value of Shares Issued
Equity compensation plans approved by security holders	44,005	$8.14	(3)
Equity compensation plans not approved by security holders	N/A	N/A

(1) Includes shares issuable pursuant to outstanding options under the Company’s 1993 Incentive Compensation Plan and its 2001 Incentive Compensation Plan.

(2) Represents shares of BancTrust Common Stock which may be issued pursuant to future awards under the 2011 Incentive Compensation Plan.

(3) Represents the average of the closing bid and ask price on the date of issue.

Sales of Unregistered Securities

None.

Share Repurchases

On September 28, 2001, the Company announced that it intended to repurchase up to 425 thousand shares of its common stock. Approximately one year before implementation of the stock repurchase plan, the Company purchased 61 thousand of its shares. As of December 31, 2011, the Company had purchased 195 thousand shares under the stock repurchase plan. These purchases were accomplished primarily through private transactions and were accounted for under the cost method. The Company share purchases, including those that predate the repurchase plan, ranged in price from $8.00 per share to $15.33 per share, and the weighted-average price per share paid by the Company was $9.42. The Company has not repurchased any of its shares under this repurchase plan since December 23, 2002.

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The Company makes repurchases from time to time to fund its deferred compensation plan for directors. The following table provides information about purchases by BancTrust during the quarter ended December 31, 2011 of equity securities that are registered by BancTrust pursuant to Section 12 of the Exchange Act.

Period	Number of Shares Purchased(1)		Average Price Paid per Share		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)
10/01/11-10/31/11		4,502	$	1.64	0	229,951
11/01/11-11/30/11		10,086	$	2.03	0	229,951
12/01/11-12/31/11		3,575	$	1.55	0	229,951
Total		18,163	$	1.84	0	229,951

(1) 18,163 shares of common stock were purchased on the open market to provide shares for 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.

Item 6.   Selected Financial Data

	At and for the Year Ended December 31,
	2011			2010		2009			2008			2007(1)
RESULTS OF OPERATIONS:	Dollars and shares in thousands, except per share amounts.
Interest revenue	$	80,520		$	84,076	$	85,938		$	108,092		$	104,025
Interest expense		18,311			23,671		32,075			47,188			50,245
Net interest revenue		62,209			60,405		53,863			60,904			53,780
Provision for loan losses		32,100			12,300		37,375			15,260			12,435
Non-interest revenue		20,424			20,404		23,302			22,737			15,156
Non-interest expense		91,013			63,705		176,114			67,420			48,308
Income (loss) from before income taxes		(40,480	)		4,804		(136,324	)		961			8,193
Income tax expense (benefit)		7,366			929		(15,029	)		(295	)		2,007
Net income (loss)		(47,846	)		3,875		(121,295	)		1,256			6,186
Effective preferred stock dividend		3,090			3,033		3,026			111			0
Net income (loss) available to common shareholders	$	(50,936	)	$	842	$	(124,321	)	$	1,145		$	6,186
PER SHARE DATA:
Basic earnings (loss) per common share	$	(2.85	)	$	0.05	$	(7.06	)	$	0.07		$	0.49
Diluted earnings (loss) per common share	$	(2.85	)	$	0.05	$	(7.06	)	$	0.06		$	0.49
Cash dividends declared per common share	$	0.00		$	0.00	$	0.035		$	0.52		$	0.52
Book value per common share	$	3.65		$	6.56	$	6.59		$	13.80		$	14.26
Common shares outstanding		17,954			17,639		17,634			17,555			17,497
Basic average common shares outstanding		17,903			17,639		17,617			17,540			12,521
Diluted average common shares outstanding		17,903			17,717		17,617			17,695			12,704

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	At and for the Year Ended December 31,
	2011			2010			2009			2008			2007(1)
	Dollars and shares in thousands, except per share amounts.
SUMMARY BALANCE SHEET DATA:
Total assets	$	2,031,877		$	2,158,148		$	1,946,719		$	2,088,177		$	2,240,094
Federal funds sold		0			0			0			0			59,400
Investments		517,213			425,560			261,834			221,879			245,877
Loans, net of unearned income		1,277,049			1,383,285			1,468,588			1,533,806			1,632,676
Deposits		1,811,673			1,864,805			1,653,435			1,662,477			1,827,927
FHLB advances and long-term debt		70,539			92,804			93,037			113,398			137,341
Short-term borrowings		20,000			20,000			20,000			0			4,198
Preferred stock		48,730			48,140			47,587			47,085			0
Common shareholders’ equity		65,552			115,790			116,211			242,303			249,520
Intangible assets		3,519			4,632			6,827			106,844			108,621
Tangible shareholders’ equity		110,763			159,298			156,971			182,544			140,899
AVERAGE BALANCES:
Total assets	$	2,139,696		$	2,069,086		$	2,083,618		$	2,116,424		$	1,558,040
Earning assets		1,930,803			1,865,197			1,852,989			1,812,114			1,381,358
Loans		1,333,074			1,423,131			1,507,864			1,560,017			1,147,714
Deposits		1,855,648			1,772,594			1,725,750			1,705,628			1,277,597
Common shareholders’ equity		118,748			118,982			176,450			248,051			163,121
Shareholders’ equity		167,159			166,824			223,758			249,725			163,121
PERFORMANCE RATIOS:
Return on average assets		-2.24	%		0.19	%		-5.82	%		0.06	%		0.40	%
Return on average equity		-42.89	%		0.71	%		-70.46	%		0.46	%		3.79	%
Net interest margin (tax equivalent)(2)		3.22	%		3.24	%		2.93	%		3.40	%		3.95	%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets		7.59	%		8.60	%		8.58	%		5.91	%		2.26	%
Allowance for loan losses to total loans, net of unearned income		3.30	%		3.47	%		3.13	%		2.00	%		1.46	%
Net loans charged-off to average loans		2.84	%		0.72	%		1.47	%		0.51	%		1.02	%
Allowance for loan losses to non-performing loans		43.53	%		46.50	%		39.97	%		42.32	%		65.99	%
CAPITAL RATIOS:
Tier 1 leverage ratio(3)		7.13	%		9.11	%		9.73	%		11.09	%		8.86	%
Tier 1 risk-based capital		10.48	%		12.71	%		11.81	%		12.80	%		9.60	%
Total risk-based capital		11.75	%		13.98	%		13.08	%		14.05	%		10.84	%
Average common shareholders’ equity to average total assets		5.55	%		5.75	%		8.47	%		11.72	%		10.47	%
Dividend payout ratio		N/A			N/A			N/A			742.86	%		106.12	%
OTHER DATA:
Banking locations		50			50			50			51			54
Full-time equivalent employees		540			549			565			621			686

(1) In October of 2007, we acquired The Peoples BancTrust Company, Inc., and we have accounted for this acquisition under the purchase accounting method. Under the purchase accounting method, the financial statements do not reflect results of operations of the financial condition of Peoples prior to October 15, 2007.

(2) Net interest margin is the net yield on interest-earning assets. Net yield on interest-earning assets is net interest revenue, on a tax equivalent basis, divided by total interest-earning assets.

(3) Tier 1 leverage ratio is defined as Tier 1 capital (pursuant to risk-based capital guidelines) as a percentage of adjusted average assets.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

Introduction

The following discussion and analysis reviews our results of operations and assesses our financial condition. The purpose of this discussion is to focus on information about us that is not otherwise apparent from the consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Reference should be made to those financial statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K for an understanding of the following discussion and analysis. Historical results of operations and any trends which may appear are not necessarily indicative of the results to be expected in future periods.

The following discussion and analysis also identifies significant factors that have affected our financial condition and results of operations during the periods included in the financial statements contained in this Annual Report on Form 10-K. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this Annual Report on Form 10-K.

Executive Summary

We reported a net loss to common shareholders in 2011 of $50.9 million, or $2.85 per diluted common share, compared with net income available to common shareholders of $842 thousand, or $0.05 per diluted common share, for 2010.  The loss to our common shareholders was increased by an effective preferred stock dividend of $3.090 million, or $0.17 per common share, in 2011, and net income to common shareholders was reduced by an effective preferred stock dividend of $3.033 million, or $0.17 per common share, in 2010.

In connection with the due diligence process associated with the Company’s capital raise efforts described below, the Company completed an in-depth review of asset quality, other real estate owned carrying values, and the adequacy of its allowance for credit losses.  Upon termination of the capital raise process in early 2012, management undertook a careful analysis of whether, given the recently received information generated by this review, additional provisions and write-downs should be made in the fourth quarter of 2011. The Company, after discussion with its independent registered public accounting firm and the Audit Committee of its Board of Directors, concluded that certain asset quality indicators and the expected liquidation horizon of nonperforming assets warranted an increase in its provision for loan losses and a decrease in the carrying value of certain other real estate owned, and that these matters should be included in the results of operations for the fourth quarter of 2011.  This analysis and the resulting provision for credit losses and write-downs are largely responsible for the significant net loss reported for the fourth quarter of 2011.  These items, together with substantial credit costs during the first three quarters of 2011, comprising approximately 26% of our total credit costs in 2011, were primary contributors to the net loss for the year ended December 31, 2011.

Despite the magnitude of the net loss, both the Company and the Bank remain “well capitalized” entities.  At December 31, 2011, the Company had Tier 1 leverage capital of 7.13%, Tier 1 capital to risk-weighted assets of 10.48%, and total capital to risk-weighted assets of 11.75%.

Economic Overview

Historical Perspective.  In late 2007, the rate of residential mortgage foreclosures began to escalate and real estate values began to decline. These factors worsened as the U.S. economy reached a confirmed recessionary trend in 2008 and significantly impacted the performance of BancTrust’s residential construction and real estate and land acquisition loan portfolios. Other segments of BancTrust’s commercial loan portfolio were impacted as well, particularly in industries that were adversely affected by the changes in commercial real estate and residential development. As a result, BancTrust experienced significant increases in its credit costs, elevated levels of loan charge-offs and non-performing assets, and further valuation adjustments on existing non-performing assets. BancTrust’s loan portfolio contracted during this period due to loan charge-offs, foreclosures and weak demand for new loans.

Current Economic Environment.  The U.S. economy appears to have gained moderate momentum during the fourth quarter of 2011, building on modest improvement in the third quarter of 2011. The initial stages of economic recovery emerged during the latter half of 2010, but softened during the first and second quarters of 2011 in response to a series of global events, including the earthquake and tsunami in Japan, geo-political unrest in the Middle East, elevated energy costs, and continued concerns over the debt of certain European nations.

The improvement in economic indicators during 2011 has been positive in the aggregate, but progress during the year was uneven at times with mixed messages in many economic measures. Inflation remained subdued; however, energy prices continued to show volatility, which could trigger inflation and impede the recovery. The Federal Reserve's commitment to hold interest rates stable for the next two years appears to indicate that it is more concerned with sustaining recovery than the risk of inflation. Long-term interest rates have fallen significantly in response to the Federal Reserve Bank's aggressive easing of monetary policy, with 10-year Treasury yields near 2% and fixed mortgage interest rates falling to record lows below 4%. Residential mortgage foreclosure and delinquency rates have declined over the past year, but remain at elevated levels compared to historical periods. On a local level, particularly in the Company's coastal market areas, property values have remained depressed, having a negative impact on the Company's collateral dependent acquisition and development loan portfolio and resulting in a significant net loss in 2011.

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To navigate the unsettled economic environment, the Company has continued its practice of maintaining excess funding capacity to provide the Bank with adequate liquidity for its ongoing operations.  In this regard, the Bank benefits from its strong core deposit base and its highly liquid investment portfolio.  Additionally, in an attempt to adhere to interagency guidelines regarding concentration limits of commercial real estate loans, the Company has reduced its exposure to certain loan classifications, including construction, land development and other land loans.

Recent Developments

Efforts to Raise Private Capital and Current Strategic Focus.

In 2010, the Company embarked on an effort to raise private capital in an amount necessary to: (a) repay or redeem, as appropriate, its $20 million Silverton Loan secured by the capital stock of the Bank and its $50 million in preferred stock held by the US Treasury; (b) address the Company’s elevated level of non-performing assets; (c) provide a measure of liquidity at the holding company level; and (d) generate significant shareholder value as a recapitalized, independent entity.  Our 2010 efforts to raise capital proved unsuccessful, primarily, we believe, because of the uncertainty surrounding the Gulf of Mexico oil spill and its possible adverse impact on our entire footprint.

In January 2011, after resolution of the Gulf of Mexico oil spill, we engaged Keefe, Bruyette & Woods, Inc. (“KBW”) to assist us in a renewed effort to attract private capital.  We believed the Company could generate significant shareholder value as a recapitalized, independent bank holding company. Throughout 2011, it appeared that we were making significant progress on an equity offering, and, in December 2011, we entered into an exclusive dealing arrangement with two potential significant investors, whereby we agreed to work exclusively on a plan for these and other potential investors to recapitalize the Company.   Ultimately, however, we were unable to attract a sufficient number of investors at a price sufficient to generate value for existing shareholders for a combination of reasons, including current market conditions, certain structural constraints and weaker than expected asset valuations.  As a result, the Company’s board of directors authorized management to seek a recapitalization of the Company through a strategic merger, and we are currently pursuing that strategy.

Holding Company Liquidity.

One of the most difficult issues we face is liquidity at the holding company level.  The Company is obligated to make interest payments on two issues of trust preferred securities totaling approximately $34 million in principal indebtedness, to declare and pay 5% (increasing to 9% at the end of 2013) dividends on $50 million of preferred stock, and to service a $20 million loan, which we refer to as the Silverton Note, secured by all of the outstanding capital stock of the Bank.  Absent an infusion of capital, these obligations can only be funded through upstream dividends from the Bank.  However, because of the Bank’s current level of nonperforming assets and losses, the Bank is essentially unable to pay dividends to the Company.

Most of our holding company obligations, specifically preferred stock dividends and interest payments on our two series of trust preferred securities, can, pursuant to their terms, be deferred, though such deferrals could lead to potentially adverse consequences.  We have determined that it is in the best interests of the Company and its shareholders to defer future dividends on our preferred stock and interest payments on our two series of trust preferred securities for the foreseeable future.  The deferral on the trust preferred securities is permitted under the applicable indentures for up to five years without penalty or default, and these deferrals will commence with upcoming interest payments in April and June; however, we are not permitted to declare any dividend on our preferred and common stock while we defer these interest payments.  After the next preferred stock dividend date in May and until the preferred stock dividends are thereafter brought current, we will be prohibited from paying dividends on our common stock.  Additionally, if we do not pay dividends on our preferred stock for an aggregate of six fiscal quarters, whether or not consecutive, the number of directors on the Company’s Board of Directors will automatically increase by two, and the U.S. Treasury, as the holder of all of our outstanding preferred stock, will have the right to elect two new members of the Board of Directors.

We do not have the right to defer repayment of interest or principal of the $20 million Silverton Note, and that loan is secured by all of the issued and outstanding stock of the Bank.  However, to facilitate the Company’s new strategic direction, we negotiated a modification of this loan with the lender, the FDIC, as Receiver for Silverton Bank, N.A.  The modification relieves the Company from making any principal payments under the Silverton 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 Silverton Note.  The modification also requires 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 Loan Documents. We have recently received the necessary regulatory approvals for the Bank to pay a dividend $1,080,000 to the Company for this purpose, and we are in the process of establishing this escrow account.

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Critical Accounting Policies and Estimates

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. Our significant accounting policies are described in the notes to our audited consolidated financial statements as of December 31, 2011 included in this Report on Form 10-K. 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 sufficient to absorb inherent or potential losses 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 is based on periodic reviews of the portfolio, past loan and lease loss experience, estimated collateral values, availability of guarantor support for payment of the loans and leases, 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, the fair value of the collateral, or the loan’s or lease’s observable market price. Recovery of the carrying value of loans and leases is dependent to a great extent on economic, operating and other conditions that may be beyond the Company’s control.

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

Other Real Estate Owned Valuation

Other real estate owned (“OREO”) is carried at the lower of the recorded investment in the loan or fair value, as determined by Management, less costs to dispose. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan losses at the time of foreclosure. A provision is charged to earnings and the carrying value of other real estate owned 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.

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

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

●       the anticipated future economic prospects of our market areas;

●       investor interest in our assets; and

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

Throughout each year, Management conducts evaluations of our allowance for loan and lease losses and carrying value of OREO.  In conducting our most recent evaluations, 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 which 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 optimal 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 the year.  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 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 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 to include obtaining external appraisals and independent external appraisal reviews on all impaired loans and other real estate owned exceeding a certain dollar threshold 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 gets 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. Judgments are 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, 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

2007 Acquisition

In October of 2007, the Company completed the acquisition of The Peoples BancTrust Company, Inc. (“Peoples”). On the acquisition date the assets of Peoples were approximately $999 million. The acquisition of Peoples was accounted for under the purchase accounting method as required by United States generally accepted accounting principles. Under this method of accounting, the financial statements and tables shown in this section do not reflect results of operations or the financial condition of Peoples prior to October 15, 2007.

Average Assets and Liabilities

Average assets in 2011 were $2.140 billion, an increase of $70.610 million, or 3.4 percent, from 2010 attributable to an increase in our investment securities and offset by a decrease in our loans. Average loans in 2011 were $1.333 billion compared to $1.423 billion in 2010.

Average loans net of the loan loss reserve were $1.287 billion in 2011 compared to $1.374 billion in 2010. The decrease was a result of the weak economy’s effect on loan demand, loan charge-offs and the transfer of some loans to OREO through the foreclosure process. During 2010 and 2011, we concentrated our efforts on improving loan quality rather than on growing loans. Compared to 2010, average investment securities in 2011 increased $181.279 million. This increase was funded by the decrease in average interest-bearing deposits held at other banks of $25.616 million, the increase in average deposits and the decrease in our average loans.  We increased the size of the investment portfolio to increase our yield on earning assets.  To maintain a high level of liquidity, we invested in securities that had low price volatility and could be sold with little or no gain or loss.

Average deposits in 2011 were $1.856 billion compared to $1.773 billion in 2010. Short-term and long-term borrowings consist of federal funds purchased, Federal Home Loan Bank (“FHLB”) borrowings, notes payable to our subsidiary statutory trusts issued in connection with trust preferred securities offerings and the Silverton Note.

Our average equity as a percent of average total assets in 2011 was 7.81 percent, compared to 8.06 percent in 2010. Average equity in 2011 and 2010 included approximately $4.088 million and $5.724 million, respectively, recorded as intangible assets related to acquisitions accounted for as purchases.

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Table 1

DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

	2011		2010		2009		2008		2007
	(Dollars in thousands)
Average Assets
Cash and due from banks	$	34,326	$	34,879	$	36,370	$	54,268	$	46,926
Federal funds sold		0		0		0		18,883		67,947
Interest-bearing deposits		83,606		109,222		92,563		9,262		23,248
Securities available for sale		514,123		332,844		252,562		223,952		142,449
Loans, net		1,286,589		1,374,375		1,466,033		1,534,931		1,127,813
Premises and equipment, net		73,937		77,465		81,514		87,285		56,480
Accrued income receivable		6,246		6,521		6,918		9,550		8,938
Other real estate owned, net		87,120		70,771		51,997		39,126		4,288
Intangible assets, net		4,088		5,724		56,163		108,285		57,293
Cash surrender value of life insurance		17,367		16,744		16,100		15,464		7,217
Other assets		32,294		40,541		23,398		15,418		15,441
Average Total Assets	$	2,139,696	$	2,069,086	$	2,083,618	$	2,116,424	$	1,558,040
Average Liabilities and Shareholders’ Equity
Non-interest-bearing demand deposits	$	249,858	$	224,411	$	212,729	$	221,781	$	174,867
Interest-bearing demand deposits		531,703		494,183		496,429		554,562		369,475
Savings deposits		138,489		132,521		119,823		109,834		84,102
Time deposits		935,598		921,479		896,769		819,451		649,153
Total deposits		1,855,648		1,772,594		1,725,750		1,705,628		1,277,597
Short-term borrowings		20,000		20,000		20,032		3,306		3,321
FHLB advances and long-term debt		81,107		92,938		93,164		135,823		99,687
Other liabilities		15,782		16,730		20,914		21,942		14,314
Shareholders’ equity		167,159		166,824		223,758		249,725		163,121
Average Total Liabilities and Shareholders’ Equity	$	2,139,696	$	2,069,086	$	2,083,618	$	2,116,424	$	1,558,040

Loans

Our ability to grow our loan portfolio has been impacted by downward pressure placed on the real estate market, especially in our coastal markets, as reduced demand has driven the steep decline in real estate prices. The volume of loans declined by $107 million from December 31, 2010 to December 31, 2011.  Approximately half of the decline was the result of foreclosures and charge-offs relating to further declines in collateral values of impaired loans.  The remainder of the decline was the result of loan demand being depressed further due to the general nature of regulatory pressures on all banks to curtail lending in the commercial and real estate market.  As a result, loan demand was not sufficient to offset repayments of existing loans.

Our lending strategy concentrates on originating loans with relatively short maturities or, in the case of loans with longer maturities, with floating rate arrangements when possible. Because current loans rates are very low, customers have occasionally negotiated originated loans with fixed interest rates for longer terms, typically up to five years. However, we have been able to maintain a high level of interest rate flexibility as, of our outstanding loans at December 31, 2011, $692.2 million, or 54 percent, mature within one year or otherwise reprice within one year.  Interest revenue and net interest margin decreased in 2011 compared to 2010, as both measures are being affected by higher levels of non-performing loans and OREO. Net interest revenue and the net interest margin are discussed more fully under “Results of Operations.”

We offer, through third party arrangements, certain mortgage loan products that we sell to these third parties shortly after origination and that are therefore not retained in our loan portfolio. These products expand our mortgage loan product offerings and have the capacity to generate significant fee income, especially during periods of relatively low mortgage rates. These fees have come from first and second home purchases as well as from home refinancing volume.

Table 2 shows the distribution of our loan portfolio by major category at December 31, 2011, and at year-end for each of the previous four years. Included in commercial, financial and agricultural loans in 2011 are $12.8 million in commercial leases acquired in the Peoples merger. Table 3 depicts maturities of selected loan categories and the interest rate structure for such loans maturing after one year.

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Table 2

DISTRIBUTION OF LOANS AND LEASES BY CATEGORY

	December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Commercial, financial and agricultural	$	291,874		$	302,279		$	318,829		$	349,897		$	381,366
Real estate — construction		264,368			335,824			384,008			439,425			476,330
Real estate — mortgage		669,870			681,172			688,859			663,423			681,027
Consumer, installment and single pay		50,978			64,783			78,799			84,787			101,366
Total		1,277,090			1,384,058			1,470,495			1,537,532			1,640,089
Less: Unearned discount leases		(1,173	)		(2,032	)		(3,229	)		(5,204	)		(7,815	)
Less: Deferred loan cost (unearned loan income), net		1,132			1,259			1,322			1,478			402
Total loans and leases	$	1,277,049		$	1,383,285		$	1,468,588		$	1,533,806		$	1,632,676

Table 3

SELECTED LOANS AND LEASES BY CATEGORY AND MATURITY

	December 31, 2011 Maturing
	Within One Year		After One But Within Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial, financial and agricultural	$	168,732	$	113,022	$	10,120	$	291,874
Real estate — construction		200,778		54,447		9,143		264,368
Real estate — mortgage		173,877		404,860		91,133		669,870
	$	543,387	$	572,329	$	110,396	$	1,226,112
Loans maturing after one year with:
Fixed interest rates			$	427,644	$	35,851
Floating interest rates				144,685		74,545
			$	572,329	$	110,396

Loan Portfolio Development

Total loans at December 31, 2011 were down $107.0 million from December 31, 2010.  Real estate-construction decreased $71.5 million with smaller decreases in all other categories.  Economic conditions continued to restrain loan demand in 2011, while approximately half of the decline was the result of foreclosures and charge-offs.  BankTrust continues to seek new credit relationships and renew existing ones, but the overall demand level has been insufficient to overcome the effect of repayments, maturities, and problem loan resolution.  We expect this situation to continue through 2012.

Table 4 shows loan balances by loan type at December 31, 2011 and at the end of the four prior quarters.  Table 5 distributes the loans by the geographic regions from which the loans are serviced.  The following discussion provides an overview of the composition of the portfolio.

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Table 4

DISTRIBUTION OF LOANS AND LEASES BY TYPE

	2011								2010
	December 31		September 30		June 30		March 31		December 31
	(Dollars in thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	278,032	$	274,764	$	272,134	$	281,327	$	279,422
Agricultural		1,028		2,897		3,304		3,151		3,450
Equipment leases		12,814		14,720		15,991		17,768		19,407
Total commercial, financial and agricultural		291,874		292,381		291,429		302,246		302,279
Commercial real estate:
Commercial construction,  land and land development(1)		250,859		265,215		270,703		314,519		315,079
Other commercial real estate(2)		424,690		430,585		434,835		406,437		417,700
Total commercial real estate		675,549		695,800		705,538		720,956		732,779
Residential real estate:
Residential construction(1)		13,509		15,328		17,968		18,471		20,745
Residential mortgage(2)		245,180		250,477		251,043		254,434		263,472
Total residential real estate:		258,689		265,805		269,011		272,905		284,217
Consumer, installment and single pay:
Consumer		44,713		47,158		49,117		52,059		54,934
Other		6,265		6,442		8,446		8,676		9,849
Total consumer, installment and single pay		50,978		53,600		57,563		60,735		64,783
Total	$	1,277,090	$	1,307,586	$	1,323,541	$	1,356,842	$	1,384,058

(1) Included in the category “Real estate  - construction”

(2) Included in the category “Real estate  - mortgage”

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Table 5

GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO

	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(1)		90,207			50,832			109,820			250,859
Other commercial real estate(2)		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(1)		8,110			5,271			128			13,509
Residential mortgage(2)		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	%

(1) Included in the category “Real estate  - construction”

(2) Included in the category “Real estate  - mortgage”

December 31, 2010
Southern Alabama	Central Alabama	Northwest Florida	Total
(Dollars in thousands)