** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

###### **WASHINGTON, DC 20549**

###### ** **

###### **FORM 10-QSB**

###### ** **

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 OF THE SECURITIES EXCHANGE ACT OF 1934**          |
|------------|---------------------------------------------------------------------------------------------------------|
|       |                                                                                                    |
|       | **For the quarterly period ended June 30,  2005**                                                  |
|       |                                                                                                    |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

# **Commission FileNumber: 333-112325**

# ** **

**Treaty Oak Bancorp, Inc.**

(Exact name of registrant as specified in its charter)

 

**Texas**

(State or other jurisdiction of

corporation or organization)

 

**20-0413144**

(I.R.S. Employer Identification Number)

 

**101 Westlake Drive, Austin, Texas**

(Address of Principal Executive Offices)

 

**78746**

(Zip Code)

 

**(512) 617-3600**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the issuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file****such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

**Yes ****ý****   No****o**

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

**Yes****o****    No ****ý**

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the close of business on August 10, 2005.

 

$0.01Par Value Common Stock                                                                                                     2,627,787shares

 

Transitional SmallBusiness Disclosure Format (Check one):                    **Yes****o****    No ****ý**

 

 

----

 

**QUARTERLY REPORT ON FORM 10-QSB**

**FOR THE PERIOD ENDED June 30, 2005**

 

**TABLE OF CONTENTS**

 
| **Part I.**  | **Financial Information**                                                                                                         |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                              |   |
| **Item 1.**       | *Financial Statements*                                                                                                            |   |
|              |                                                                                                                              |   |
|              | Consolidated Balance Sheets  at June 30, 2005, and September 30, 2004 (unaudited)                                       |   |
|              |                                                                                                                              |   |
|              | Consolidated Statements of  Operations for the Three-Month and Nine-Month Periods ended June 30,  2004, and 2005 (unaudited) |   |
|              |                                                                                                                              |   |
|              | Consolidated Statements of  Changes in Shareholders’ Equity for the Nine-Month Period ended June 30,  2005 (unaudited)  |   |
|              |                                                                                                                              |   |
|              | Consolidated Statements of  Cash Flows for the Nine-Month Periods ended June 30, 2004, and 2005  (unaudited)                 |   |
|              |                                                                                                                              |   |
|              | Notes to Consolidated Financial  Statements (unaudited)                                                                           |   |
|              |                                                                                                                              |   |
| **Item 2.**       | *Management’s Discussion and  Analysis of Financial Condition and Results of Operations*                                     |   |
|              |                                                                                                                              |   |
| **Item 3.**       | *Controls and Procedures*                                                                                                         |   |
|              |                                                                                                                              |   |
| **Part II.** | **Other  Information**                                                                                                            |   |
|              |                                                                                                                              |   |
| **Item  1.**      | *Legal Proceedings*                                                                                                               |   |
|              |                                                                                                                              |   |
| **Item 2.**       | *Changes in Securities and Use  of Proceeds*                                                                                      |   |
|              |                                                                                                                              |   |
| **Item  3.**      | *Defaults Upon Senior  Securities*                                                                                                |   |
|              |                                                                                                                              |   |
| **Item 4.**       | *Submission of Matters to a  Vote of Security Holders*                                                                            |   |
|              |                                                                                                                              |   |
| **Item  5.**      | *Other Information*                                                                                                               |   |
|              |                                                                                                                              |   |
| **Item  6.**      | *Exhibits and Reports on Form 8-K*                                                                                           |   |
|              |                                                                                                                              |   |
|              | Signatures                                                                                                                        |   |

 

This Form 10-QSBcontains forward-looking statements consisting of estimates with respect to thefinancial condition, results of operations, and other business of Treaty OakBancorp, Inc., that are subject to various factors which could causeactual results to differ materially from those estimates.  Factors that could influence the estimatesinclude changes in the national, regional, and local market conditions,legislative and regulatory conditions, and an adverse interest rateenvironment.

 

i

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**TreatyOak Bancorp, Inc.**

**ConsolidatedBalance Sheets (Unaudited)**

** (Dollars In Thousands, Except Par ValueAmounts)**

 
| ** **                                                                                                   | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**          | ** ** | **2004 (1)**           | ** ** |
| ASSETS                                                                                                       |       |              |       |                   |       |
|                                                                                                         |       |              |       |                   |       |
| Cash and cash items                                                                                          |       | $                 | 273        |                   | $          | 3,562 |   |
| Due from banks                                                                                               |       | 6,505             |       | 1,272                  |       |
| Federal funds sold                                                                                           |       | 4,519             |       | 4,450                  |       |
|                                                                                                         |       |              |       |                   |       |
| Total cash and cash equivalents                                                                              |       | 11,297            |       | 9,284                  |       |
|                                                                                                         |       |              |       |                   |       |
| Stock subscriptions receivable                                                                               |       | —            |       | 3,379                  |       |
| Securities available for sale                                                                                |       | 438               |       | 464                    |       |
| Securities held to maturity, fair value of $3,970  and $6, respectively                                      |       | 4,000             |       | 7                      |       |
| Investment in Federal Home Loan Bank, at cost                                                                |       | 215               |       | 211                    |       |
| Investment in Independent Bankers Bank, at cost                                                              |       | 100               |       | —                 |       |
| Loans, net                                                                                                   |       | 30,334            |       | 9,953                  |       |
| Premises and equipment, net                                                                                  |       | 5,897             |       | 1,227                  |       |
| Accrued interest receivable                                                                                  |       | 263               |       | 144                    |       |
| Due from affiliates                                                                                          |       | 16                |       | 69                     |       |
| Goodwill                                                                                                     |       | 1,161             |       | 1,161                  |       |
| Core deposit intangibles, net                                                                                |       | 57                |       | 64                     |       |
| Other                                                                                                        |       | 319               |       | 205                    |       |
|                                                                                                         |       |              |       |                   |       |
| Total assets                                                                                                 |       | $                 | 54,097     |                   | $          | 26,168 |   |
|                                                                                                         |       |              |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                    |       |              |       |                   |       |
|                                                                                                         |       |              |       |                   |       |
| Deposits:                                                                                                    |       |              |       |                   |       |
| Noninterest-bearing demand                                                                                   |       | $                 | 9,037      |                   | $          | 2,579 |   |
| NOW, money market and savings                                                                                |       | 15,478            |       | 2,391                  |       |
| Time deposits                                                                                                |       | 14,280            |       | 8,223                  |       |
|                                                                                                         |       |              |       |                   |       |
| Total deposits                                                                                               |       | 38,795            |       | 13,193                 |       |
|                                                                                                         |       |              |       |                   |       |
| Accounts payable and accrued expenses                                                                        |       | 78                |       | —                 |       |
| Accrued interest payable                                                                                     |       | 68                |       | 15                     |       |
| Liability under capital lease                                                                                |       | —            |       | 509                    |       |
| Notes payable                                                                                                |       | 2,831             |       | —                 |       |
| Minority interest - PGI Equity Partners, LP                                                                  |       | 1,108             |       | —                 |       |
| Other liabilities                                                                                            |       | 95                |       | 132                    |       |
|                                                                                                         |       |              |       |                   |       |
| Total liabilities                                                                                            |       | 42,975            |       | 13,849                 |       |
|                                                                                                         |       |              |       |                   |       |
| Shareholders’ equity:                                                                                   |       |              |       |                   |       |
| Common stock, $0.01 par value; 20,000,000 shares  authorized; 2,634,186 and 2,169,814, respectively, issued. |       | 26                |       | 22                     |       |
| Paid-in capital                                                                                              |       | 14,933            |       | 11,067                 |       |
| Accumulated deficit                                                                                          |       | (3,783            | )          | (2,151                 | )          |
| Common shares subscribed but not paid for and not  issued - 405,663 shares.                                  |       | —            |       | 3,379                  |       |
| Accumulated other comprehensive income (loss)                                                                |       | (4                | )          | 2                      |       |
| Less shares held in treasury, at cost (6,003 shares)                                                         |       | (50               | )          | —                 |       |
| Total shareholders’ equity                                                                              |       | 11,122            |       | 12,319                 |       |
|                                                                                                         |       |              |       |                   |       |
| Total liabilities and shareholders’ equity                                                              |       | $                 | 54,097     |                   | $          | 26,168 |   |

 

----

| (1) Derived from audited financial statements. |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|

 
| See accompanying notes to unaudited consolidated  financial statements. |   |   |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

1

----

 

**TreatyOak Bancorp, Inc.**

**ConsolidatedStatements of Operations (Unaudited)**

**(DollarsIn Thousands, except per share amounts)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **June 30,**      | ** ** | **June 30,**     | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Interest income:                                         |       |                   |       |                  |       |   |   |   |   |
| Loans, including fees                                    |       | $                      | 507        |                  | $          | 203 |   | $ | 1,073 |   | $ | 251 |   |
| Taxable securities                                       |       | 35                     |       | 2                     |       | 92 |   | 3 |   |
| Interest on deposits with other banks                    |       | 19                     |       | 2                     |       | 34 |   | 2 |   |
| Federal funds sold                                       |       | 38                     |       | 2                     |       | 124 |   | 2 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Total interest income                                    |       | 599                    |       | 209                   |       | 1,323 |   | 258 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Interest expense:                                        |       |                   |       |                  |       |   |   |   |   |
| Deposits                                                 |       | 144                    |       | 30                    |       | 297 |   | 40 |   |
| Interest on other borrowings                             |       | 42                     |       | 18                    |       | 101 |   | 20 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Total interest expense                                   |       | 186                    |       | 48                    |       | 398 |   | 60 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Net interest income                                      |       | 413                    |       | 161                   |       | 925 |   | 198 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Provision for loan losses                                |       | 30                     |       | —                |       | 60 |   | — |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Net interest income after provision for loan losses      |       | 383                    |       | 161                   |       | 865 |   | 198 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Noninterest income:                                      |       |                   |       |                  |       |   |   |   |   |
| Service charges on deposit accounts                      |       | 23                     |       | 14                    |       | 56 |   | 19 |   |
| Other noninterest income                                 |       | 84                     |       | —                |       | 162 |   | — |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Total noninterest income                                 |       | 107                    |       | 14                    |       | 218 |   | 19 |   |
| Noninterest expense:                                     |       |                   |       |                  |       |   |   |   |   |
| Salaries and employee benefits                           |       | 409                    |       | 302                   |       | 1,501 |   | 745 |   |
| Occupancy and equipment expenses                         |       | 59                     |       | 38                    |       | 228 |   | 41 |   |
| Acquisition related costs                                |       | —                 |       | —                |       | — |   | 156 |   |
| Other noninterest expense                                |       | 304                    |       | 336                   |       | 1,015 |   | 535 |   |
| Minority interests in partnership income (loss)          |       | 1                      |       | —                |       | (29 | ) | — |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Total noninterest expense                                |       | 773                    |       | 676                   |       | 2,715 |   | 1,477 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Net loss                                                 |       | $                      | (283       | )                     | $          | (501 | ) | $ | (1,632 | ) | $ | (1,260 | ) |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Loss per common share - basic and diluted                |       | $                      | (0.11      | )                     | $          | (0.48 | ) | $ | (0.63 | ) | $ | (1.22 | ) |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Weighted average shares outstanding - basic and  diluted |       | 2,633,951              |       | 1,040,000             |       | 2,609,344 |   | 1,029,927 |   |

 
| See accompanying notes to unaudited consolidated  financial statements. |   |   |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

2

----

 

**Treaty Oak Bancorp, Inc.**

**ConsolidatedStatement of Changes in Shareholders’ Equity (unaudited)**

**(Dollars In Thousands, except share amounts)**

 
| ** **                                                                      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **           | ** ** | ** **         | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                                      | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**       | ** ** | **Subscribed for** | ** ** | ** **        | ** ** | **other**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **but not paid for** | ** ** | **Accumulated**    | ** ** | **comprehensive** | ** ** | **Treasury**      | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**          | ** ** | **and not issued** | ** ** | **Deficit**       | ** ** | **income (loss)** | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| ** **                                                                      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **           | ** ** | ** **         | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balances at October 1,  2004                                               |       | 2,169,814        |       | $           | 22         |                 | $          | 11,067             |       | $                 | 3,379      |              | $          | (2,151     | )          | $          | 2          |   | $ | — |   | 12,319 |   |
|                                                                            |       |             |       |        |       |                 |       |               |       |              |       |              |       |       |       |       |       |
| Issuances of common stock  subscribed as of September 30, 2004 - unaudited |       | 405,663          |       | 4           |       | 3,375                |       | (3,379             | )          |              |       | —            |       | —     |       | —     |       |
| Sale of common stock, net  of costs of issuance - unaudited                     |       | 47,510           |       | —      |       | 393                  |       |               |       |              |       |              |       | —     |       | 393        |       |
| Shares repurchased and held  in treasury- unaudited                             |       |             |       |        |       |                 |       |               |       |              |       |              |       | (50        | )          | (50        | )          |
| Issuance of 11,199 shares  of common stock for services - unaudited             |       | 11,199           |       |        |       | 98                   |       |               |       |              |       |              |       |       |       | 98         |       |
| Comprehensive loss:                                                             |       |             |       |        |       |                 |       |               |       |              |       |              |       |       |       |       |       |
| Net loss - unaudited                                                            |       |             |       |        |       |                 |       |               |       | (1,632            | )          | —            |       | —     |       | (1,632     | )          |
| change in unrealized loss  on securities available for sale - unaudited         |       |             |       |        |       |                 |       |               |       | —            |       | (6                | )          | —     |       | (6         | )          |
| Total comprehensive loss -  unaudited                                           |       |             |       |        |       |                 |       |               |       | —            |       | —            |       | —     |       | (1,638     | )          |
|                                                                            |       |             |       |        |       |                 |       |               |       |              |       |              |       |       |       |       |       |
| Balances at June 30,  2005 - unaudited                                     |       | 2,634,186        |       | $           | 26         |                 | $          | 14,933             |       | $                 | —     |              | $          | (3,783     | )          | $          | (4         | ) | $ | (50 | ) | $ | 11,122 |   |
|                                                                                 |            |                  |            |             |            |                      |            |                    |            |                   |            |                   |            |            |            |            |            |  |  |  |  |  |  |  |

 
| See accompanying notes to unaudited consolidated  financial statements. |   |   |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

3

----

 

**TreatyOak Bancorp, Inc.**

**ConsolidatedStatements of Cash Flows (Unaudited)**

** (Dollars In Thousands)**

 
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **June 30,**     | ** ** | **June 30,**     | ** ** |
| ** **                                                                               | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Cash flows from operating activities:                                                    |       |                  |       |                  |       |
| Net loss                                                                                 |       | $                     | (1,632     | )                     | $          | (1,260 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:             |       |                  |       |                  |       |
|                                                                                     |       |                  |       |                  |       |
| Minority interests in partnership loss                                                   |       | (29                   | )          | —                |       |
| Provision for loan losses                                                                |       | 60                    |       | —                |       |
| Non-cash stock based compensation                                                        |       | 98                    |       | 333                   |       |
| Non-cash pre-opening expenses incurred by majority  shareholder on behalf of the Company |       | —                |       | 520                   |       |
| Write off of loan acquisition costs                                                      |       | 100                   |       | —                |       |
| Depreciation and amortization                                                            |       | 231                   |       | 21                    |       |
| Changes in other operating assets and liabilities,  net of acquisitions:                 |       |                  |       |                  |       |
|                                                                                     |       |                  |       |                  |       |
| Accrued interest receivable                                                              |       | (119                  | )          | 5                     |       |
| Other assets                                                                             |       | (47                   | )          | (309                  | )          |
| Accrued interest payable                                                                 |       | 53                    |       | 12                    |       |
| Other liabilities                                                                        |       | (36                   | )          | 64                    |       |
| **Net cash used in operating activities**                                                |       | (1,321                | )          | (614                  | )          |
|                                                                                     |       |                  |       |                  |       |
| Cash flows from investing activities:                                                    |       |                  |       |                  |       |
| Acquisition of Texline State Bank, net of cash  received                                 |       | —                |       | (324                  | )          |
| Proceeds from the sale of other real estate                                              |       | —                |       | 10                    |       |
| Proceeds from maturities and principal repayments on  securities - available for sale    |       | 26                    |       | 17                    |       |
| Proceeds from maturities and principal repayments on  securities - held to maturity      |       | 1,501                 |       | —                |       |
| Purchase of securities - held to maturity                                                |       | (5,494                | )          | —                |       |
| Acquisition of interest in PGI Equity Partners, LP,  net of cash received of $24         |       | (926                  | )          | —                |       |
| Purchase of Independent Bankers Bank stock                                               |       | (100                  | )          | —                |       |
| Purchase of Federal Home Loan Bank stock                                                 |       | (4                    | )          | (1                    | )          |
| Net increase (decrease) in loans                                                         |       | (20,441               | )          | 537                   |       |
| Purchases of premises and equipment                                                      |       | (617                  | )          | (260                  | )          |
| Advances to affiliates                                                                   |       | (81                   | )          | —                |       |
| **Net cash used in investing activities**                                                |       | (26,136               | )          | (21                   | )          |
|                                                                                     |       |                  |       |                  |       |
| Cash flows from financing activities:                                                    |       |                  |       |                  |       |
| Initial capital contribution of majority shareholder                                     |       | —                |       | 1,200                 |       |
| Net increase (decrease) in deposits                                                      |       | 25,602                |       | (74                   | )          |
| Proceeds from the sale of common stock, net of  issuance costs                           |       | 3,772                 |       | 1                     |       |
| Repayments of advances to affiliates                                                     |       | 134                   |       | —                |       |
| Payments of principal on mortgage                                                        |       | (9                    | )          | —                |       |
| Repayments of notes payable                                                              |       | (228                  | )          | —                |       |
| Proceeds from note payable - PGI Equity Partners, LP                                     |       | 149                   |       | 500                   |       |
| Repurchase of common stock                                                               |       | (50                   | )          | —                |       |
| Increase in minority interest - PGI Equity Partners,  LP                                 |       |                  |       |                  |       |
|                                                                                     |       | 100                   |       | —                |       |
| **Net cash provided by financing activities**                                            |       | 29,470                |       | 1,627                 |       |
| ** **                                                                               |       |                  |       |                  |       |
| Net increase in cash and cash equivalents                                                |       | 2,013                 |       | 992                   |       |
|                                                                                     |       |                  |       |                  |       |
| Cash and cash equivalents at beginning of period                                         |       | 9,284                 |       | —                |       |
| Cash and cash equivalents at end of period                                               |       | $                     | 11,297     |                  | $          | 992 |   |
|                                                                                     |       |                  |       |                  |       |   |   |
| Supplemental disclosures of cash flow information:                                       |       |                  |       |                  |       |
| Non-cash investing and financing information:                                            |       |                  |       |                  |       |
| Contribution of deferred stock issuance costs                                            |       | $                     | —     |                  | $          | 905 |   |
| Contribution of direct acquisition costs - Texline  State Bank                           |       | $                     | —     |                  | $          | 217 |   |
| Contribution of deposit on Texline State Bank                                            |       | $                     | —     |                  | $          | 50 |   |
| Cash interest paid                                                                       |       | $                     | 352        |                  | $          | 74 |   |
|                                                                                     |       |                  |       |                  |       |
| Acquisition of Texline State Bank                                                        |       |                  |       |                  |       |
| Assets acquired                                                                          |       | $                     | —     |                  | $          | 10,940 |   |
| Liabilities assumed                                                                      |       | $                     | —     |                  | $          | (9,597 | ) |
| Notes payable on acquisition                                                             |       | $                     | —     |                  | $          | (1,019 | ) |
| Cash paid, net of cash received                                                          |       | $                     | —     |                  | $          | 324 |   |
|                                                                                     |       |                  |       |                  |       |
| Acquisition of PGI Equity Partners, LP                                                   |       |                  |       |                  |       |
| Assets acquired                                                                          |       | $                     | 4,943      |                  | $          | — |   |
| Liabilities assumed                                                                      |       | $                     | (3,015     | )                     | $          | — |   |
| Minority interests                                                                       |       | $                     | (1,002     | )                     | $          | — |   |
| Cash paid, net of cash acquired                                                          |       | $                     | 926        |                  | $          | — |   |

 
| See accompanying notes to unaudited consolidated  financial statements. |   |   |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

4

----

** **

**TreatyOak Bancorp, Inc.**

**Notes to Consolidated FinancialStatements - unaudited**

 

**Note 1.  Basis of Presentation**

 

Treaty Oak Bancorp, Inc. (the “Company”) is a bank holding companyincorporated on November 18, 2003, and organized December 8, 2003 forthe purpose of holding the common stock of Treaty Oak Bank (formerly TexlineState Bank, the “Bank”).  The Companyacquired the Bank on March 9, 2004, and began conducting bankingoperations in Texline, Texas.  On September 10,2004, the Company received final approval to relocate the main office of theBank to Austin, Texas, and to rename the Bank “Treaty Oak Bank.”  The Bank commenced operations in Austin,Texas, on September 10, 2004, and prior to the commencement of operationsin Austin, the Company was considered to be in the development stage.

 

The Company, throughTreaty Oak Bank, provides a full range of commercial and consumer bankingservices to individuals and businesses in the commercial sector in Austin,Texas, and in the agriculture, cattle and commercial sectors in the communityof Texline, Texas.

 

The Company acquired a47.5% interest in PGI Equity Partners, LP (the “Partnership”) on December 30,2004.  The Partnership owns and operatesthe building in which the Company offices.

 

The Company (through itsBank subsidiary) acquired a 50% interest in Treaty Oak Mortgage, LLC on June 27,2005 for a purchase price of $1,000 which is accounted for on the equity methodof accounting.

 

The consolidated financialstatements include the accounts of Treaty Oak Bancorp, Inc., its whollyowned subsidiary Treaty Oak Bank, and the accounts of PGI Equity Partners, LP.

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-QSB and, therefore, do not include all ofthe disclosures and notes required by generally accepted accountingprinciples.  In the opinion ofmanagement, all material adjustments (which are of a normal recurring nature)considered necessary for a fair presentation have been made.

 

The results for theinterim period are not necessarily indicative of the results to be expected forthe entire year or any other interim period. The information included in this Form 10-QSB should be read inconjunction with Management’s Discussion and Analysis and financial statementsand notes thereto included in the Treaty Oak Bancorp, Inc., 2004 Form 10-KSB.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation to employees using theintrinsic value method.  Accordingly,compensation costs for employee stock options is measured as the excess, ifany, of the fair market value of the Company’s common stock at date of grantover the exercise price.

 

The Company accounts forstock-based compensation to non-employees at fair value.

 

As of June 30, 2005,there were outstanding options to purchase an aggregate of 202,500 shares ofthe Company’s common stock.  Each optionhas an exercise price of between $8.33 and $8.83 per share and may be exercisedin three equal annual installments for each year of service measured from thegrant date.  During the nine months endedJune 30, 2005, the Company granted stock options to purchase an aggregateof 37,000 shares of its common stock with an exercise price of $8.83 per share.

 

Accordingly, the expenserelated to stock option compensation included in the determination of netincome for the nine months ended June 30, 2005, is less than that whichwould have been recognized if the fair value method had been applied.  The Company’s net income and earnings pershare would have been adjusted to the pro-forma amounts indicated below:

 

5

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For all periods reported,the weighted average fair value of the options granted has been estimated usingthe Black-Scholes option pricing model with the following assumptions:
| ** **              | ** ** | **All Periods Reported** | ** ** |
|-------------------------|------------|--------------------------|------------|
|                    |       |                     |       |
| Dividend yield          |       | 0%                       |       |
| Risk-free interest rate |       | 4.00% - 4.75%            |       |
| Expected volatility     |       | 22%                      |       |
| Expected life in years  |       | 10 Years                 |       |

 

 

Thetable below presents the pro forma effect on the Company’s net loss assumingthe Company had expensed the fair value of the options (in thousands, exceptper share amounts):

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **June 30,**      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                   | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                         |       |                   |       |                  |       |   |   |   |   |
| Net loss - as reported       |       | $                      | (283       | )                     | $          | (501 | ) | $ | (1,632 | ) | $ | (1,260 | ) |
| Net loss - pro forma         |       | $                      | (347       | )                     | $          | (519 | ) | $ | (1,818 | ) | $ | (1,278 | ) |
|                         |       |                   |       |                  |       |   |   |   |   |
| Loss per share - as reported |       |                   |       |                  |       |   |   |   |   |
| basic                        |       | $                      | (0.11      | )                     | $          | (0.48 | ) | $ | (0.63 | ) | $ | (1.22 | ) |
| diluted                      |       | $                      | (0.11      | )                     | $          | (0.48 | ) | $ | (0.63 | ) | $ | (1.22 | ) |
|                         |       |                   |       |                  |       |   |   |   |   |
| Loss per share - pro forma   |       |                   |       |                  |       |   |   |   |   |
| basic                        |       | $                      | (0.13      | )                     | $          | (0.50 | ) | $ | (0.69 | ) | $ | (1.24 | ) |
| diluted                      |       | $                      | (0.13      | )                     | $          | (0.50 | ) | $ | (0.69 | ) | $ | (1.24 | ) |

 

**Note 2.  Common Stock Offering**

 

The Company issued1,593,790 shares of its common stock at $8.33 per share, resulting in grossproceeds of approximately $13,276,271 and incurred offering costs of $910,000in an offering that closed on September 30, 2004. The stock subscriptionreceivable at September 30, 2004 (the date the offering closed), representedstock subscription agreements that were received on or before September 30,2004, and collected during the period from October 1, 2004 to December 3,2004.  The final stock subscription was paid in full on March 11,2005; accordingly, there was no stock subscription receivable balance as of June 30,2005.  All of the stock subscriptionshave now been accounted for and that activity has been closed. The Company usedthe proceeds to pay the costs of the offering, pay the balance of theacquisition indebtedness for the purchase of Texline State Bank, and pay offcertain other short-term borrowings, including advances and a note payable tothe organizing shareholder.  The balance of the proceeds of the offering arebeing held and invested and used to support holding company operations.

 

**Note 3. Adoption of FIN 46(R): Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51 (FIN 46(R))**

 

On November 30,2004, the Company approved the acquisition of a 47.5% Class D limitedpartnership interest in the Partnership for a cash investment of $950,000.  The Company paid $150,000 as an investmentdeposit on November 18, 2004, and the remaining $800,000 on December 30,2004, in conjunction with the closing of the purchase.

 

6

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The Partnership owns andoperates the premises located at 101 Westlake Drive where the Company leasesits Austin, Texas, bank location and Company offices.  The Partnership has no other significantactivities.

 

The Company has analyzedits relationship with the Partnership in accordance with FIN 46(R) and hasdetermined that the Company is the consolidating parent of the Partnership forfinancial reporting purposes based upon its investment in the Partnershipcombined with its lessee relationship with the Partnership.

 

The assets andliabilities of the Partnership have been included in the consolidated balancesheet of the Company at June 30, 2005. The balance sheet of the Partnership as of June 30, 2005, was asfollows (in thousands):

 

| Cash                                         |   | $      | 15     |   |
|----------------------------------------------|--------|--------|--------|--------|
| Premises and equipment, net                  |   | 4,689  |   |
| Other assets                                 |   | 156    |   |
|                                         |   |   |   |
| Total Assets                                 |   | $      | 4,860  |   |
|                                         |   |   |   |
| Mortgage payable                             |   | $      | 2,741  |   |
| Other liabilities                            |   | 157    |   |
| Partners’ capital                       |   | 1,962  |   |
|                                         |   |   |   |
| Total Liabilities and Partners’ Capital |   | $      | 4,860  |   |

 

The operations of thePartnership were included in the Company’s statement of operations commencingon January 1, 2005.

 

Because of the Company’s status as a limited partner of the Partnership,the creditors of the Partnership do not have recourse against the Company withrespect to the obligations of the Partnership in excess of the Company’sinvestment in the Partnership.

 

On March 14, 2005, the partnership closed its refinancing of thedebt for the real property and building located at 101 Westlake Drive. Inconjunction with the refinancing, the Company pledged a $200,000 certificate ofdeposit as security for the loan borrowed by PGI Capital, Inc. (an affiliate and sole general partner of thepartnership).

 

**Note4.  Earnings Per Share**

 

Basic earnings (loss) pershare is computed by dividing net earnings (loss) by the weighted averagenumber of common shares outstanding for the period.  Diluted earnings pershare is computed using the weighted-average number of common sharesoutstanding plus the number of additional common shares that would have beenoutstanding if dilutive common shares had been issued.  For all periodspresented, all potentially dilutive securities outstanding were anti-dilutive.

 

For purposes ofcalculating weighted-average shares outstanding, the 1,000,000 common sharesissued to Treaty Oak Holdings, Inc., in the Company’s initialcapitalization are assumed to be outstanding for all periods presented.

 

7

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**Note 5. Securities**

 

  Securities consisted of the following (inthousands):

 
| ** **                                                                               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| **September 30, 2004:**                                                             |       |                |       |                         |       |                          |       |                       |       |
| Agency notes and bonds – held to maturity                                           | ** ** | **$**               | **7**      | ** **                   | **$**      | **—**                    | ** ** | **$**                      | **(1**     | **)** | **$** | **6** | ** ** |
| **Total held to maturity**                                                               | ** ** | **7**               | ** ** | **—**                   | ** ** | **(1**                        | **)**      | **6**                      | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| Agency notes and bonds - available for sale                                              | ** ** | **404**             | ** ** | **—**                   | ** ** | **—**                    | ** ** | **404**                    | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - available for sale | ** ** | **58**              | ** ** | **2**                        | ** ** | **—**                    | ** ** | **60**                     | ** ** |
| **Total available for sale**                                                             | ** ** | **462**             | ** ** | **2**                        | ** ** | **—**                    | ** ** | **464**                    | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| **Total**                                                                                | ** ** | **$**               | **469**    | ** **                   | **$**      | **2**                         | ** ** | **$**                      | **(1**     | **)** | **$** | **470** | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| **June 30, 2005:**                                                                  |       |                |       |                         |       |                          |       |                       |       |
| Agency notes and bonds - held to maturity                                                | ** ** | **$**               | **3,994**  | ** **                   | **$**      | **—**                    | ** ** | **$**                      | **(29**    | **)** | **$** | **3,965** | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - held to maturity   | ** ** | **6**               | ** ** | **—**                   | ** ** | **(1**                        | **)**      | **5**                      | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| **Total held to maturity**                                                               | ** ** | **4,000**           | ** ** | **—**                   | ** ** | **(30**                       | **)**      | **3,970**                  | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| Agency notes and bonds - available for sale                                              | ** ** | **401**             | ** ** | **—**                   | ** ** | **(5**                        | **)**      | **396**                    | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - available for sale | ** ** | **41**              | ** ** | **1**                        | ** ** | **—**                    | ** ** | **42**                     | ** ** |
| **Total available for sale**                                                             | ** ** | **442**             | ** ** | **1**                        | ** ** | **(5**                        | **)**      | **438**                    | ** ** |
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| **Total**                                                                                | ** ** | **$**               | **4,442**  | ** **                   | **$**      | **1**                         | ** ** | **$**                      | **(35**    | **)** | **$** | **4,408** | ** ** |

 

Mortgage-backedsecurities are backed by pools of mortgages, most of which are insured orguaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the FederalNational Mortgage Association (FNMA) or the Government National MortgageAssociation (GNMA).

 

Agency notes and bonds -available for sale mature within one year. Expected maturities ofmortgage-backed securities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations.  Therefore, maturities of mortgage-backedsecurities are not presented.  Agencynotes and bonds - held to maturity mature within two years.

 

At June 30, 2005, $1,230,000of the Company’s securities were pledged to secure the deposits of the TexlineIndependent School District ($1,028,000) and the City of Texline ($202,000).

 

8

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**Note 6. Loans and Allowance for Loan Losses**

 

The Company grantsagribusiness, real estate, and commercial loans to customers primarily in theAustin and Northwest Texas markets. Loans at June 30, 2005, and September 30, 2004, were asfollows (in thousands):

 

| ** **                      | ** ** | **As of**         | ** ** | **As of**              | ** ** |
|---------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                      | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                      | ** ** | **2005**          | ** ** | **2004**               | ** ** |
|                            |       |              |       |                   |       |
| Agriculture                     |       | $                 | 2,708      |                   | $          | 3,444 |   |
| Commercial                      |       | 11,824            |       | 2,316                  |       |
| Commercial real estate          |       | 7,770             |       | 1,030                  |       |
| Residential real estate         |       | 4,188             |       | 2,627                  |       |
| Construction real estate        |       | 2,581             |       | 33                     |       |
| Consumer                        |       | 1,596             |       | 720                    |       |
|                            |       |              |       |                   |       |
| **Gross Loans**                 |       | 30,667            |       | 10,170                 |       |
| Unearned fee income             |       | (44               | )          | —                 |       |
| Less: allowance for loan losses |       | (289              | )          | (217                   | )          |
| **Net Loans**                   |       | $                 | 30,334     |                   | $          | 9,953 |   |

 

Activity in the allowancefor loan losses for the nine (9) months ended June 30, 2005 and the yearended September 30, 2004 was as follows (in thousands):

 
| ** **                                 | ** ** | **For the  Nine Months Ended  June 30, 2005** | ** ** | **For the  Year Ended  September 30, 2004** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| Balance on date of acquisition             | ** ** | **$**                                              | **—** |                                             | **$**      | **166** |   |
| Balance at beginning of the period         | ** ** | **217**                                            | ** ** | **—**                                       | ** ** |
| Provision for loan losses                  | ** ** | **60**                                             | ** ** | **95**                                           | ** ** |
| Loans charged off                          | ** ** | **(1**                                             | **)**      | **(65**                                          | **)**      |
| Recoveries on loans previously charged-off | ** ** | **13**                                             | ** ** | **21**                                           | ** ** |
|                                       |       |                                               |       |                                             |       |
| Balance at the end of the period           | ** ** | **$**                                              | **289**    | ** **                                       | **$**      | **217** | ** ** |

 

The Company had noimpaired loans at June 30, 2005 or September 30, 2004.  At June 30, 2005, and September 30,2004, the Bank had approximately $129,500 and $153,000, respectively, innonperforming loans including nonaccrual loans and loans past due over 90 daysand still accruing interest.

 

**Note 7. Premises and Equipment**

 

Premises and equipment atJune 30, 2005, and September 30, 2004, were as follows (inthousands):

 
| ** **                                     | ** ** | **As of  June 30, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
|                                           |       |                          |       |                               |       |
| Land                                           | ** ** | **$**                         | **949**    | ** **                         | **$**      | **4** | ** ** |
| Building and leasehold improvements            | ** ** | **4,520**                     | ** ** | **615**                            | ** ** |
| Furniture, fixtures and equipment              | ** ** | **712**                       | ** ** | **635**                            | ** ** |
|                                           |       |                          |       |                               |       |
| ** **                                     | ** ** | **6,181**                     | ** ** | **1,254**                          |       |
|                                           |       |                          |       |                               |       |
| Less accumulated depreciation and amortization | ** ** | **(284**                      | **)**      | **(27**                            | **)**      |
|                                           |       |                          |       |                               |       |
| ** **                                     | ** ** | **$**                         | **5,897**  | ** **                         | **$**      | **1,227** |   |

 

9

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Depreciation andamortization expense related to fixed assets for the nine months ended June 30,2005 and 2004 was $207,000 and 15,000, respectively.

 

**Note 8. Leases**

 

Effective September 28,2004, the Company entered into a three year lease for certain furniture,fixtures and equipment.  The firstpayment under this lease was due on January 1, 2005, though the Companyhad already accepted delivery of the equipment on September 30, 2004.  The lease had a renewal option for twoadditional years.  Due to certainfinancing provided by the Bank to the lessor, the lease was treated as acapital lease, and the lease would have been amortized over the maximum 60month term.  The lease was paid-in-fulland the equipment purchased in January 2005.

 

**Note 9. Deposits**

 

Time deposits of $100,000or more totaled $5,990,000 and $1,597,000 at June 30, 2005, and September 30,2004, respectively. At June 30, 2005, and September 30, 2004, thescheduled maturities of all time deposits were as follows (in thousands):

 

Time deposits maturing inthe fiscal year ending:

 
| ** ** | ** ** | **As of  June 30, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|------------|------------|-------------------------------|------------|------------------------------------|------------|
|       |       |                          |       |                               |       |
| 2005       |       | $                             | 8,591      |                               | $          | 7,860 |   |
| 2006       |       | 3,300                         |       | 363                                |       |
| 2007       |       | 2,389                         |       | 0                                  |       |
|       |       | $                             | 14,280     |                               | $          | 8,223 |   |

 

**Note 10. Goodwill and Other Intangibles**

 

In conjunction with theacquisition of Texline State Bank, the Company recorded Goodwill of $1,161,000and core deposit intangibles of $70,000. Goodwill is periodically reviewed, at least annually, to determinewhether a decline in value exists which requires a charge to earnings and areduction to goodwill reflected on the statement of financial condition of theCompany.

 

Core deposit intangiblesare amortized on a straight-line basis over seven years.  The following table reflects the net carryingamount of core deposit intangibles at June 30, 2005, and September 30,2004 (in thousands):

 

| ** **                     | ** ** | **As of  June 30, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|--------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| Gross core deposit intangibles |       | $                             | 70         |                               | $          | 70 |   |
| Less accumulated amortization  |       | (13                           | )          | (6                                 | )          |
| Net core deposit intangibles   |       | $                             | 57         |                               | $          | 64 |   |

 

10

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**Note 11.  Stock Based Compensation and 2004 StockIncentive Plan**

 

On December 8, 2003, in conjunction with the issuance of 40,000shares of the Company’s common stock to four individual organizers, the Companyrecognized compensation expense of $332,400.

 

On January 19, 2004,the Company and its shareholders approved the Company’s 2004 Stock IncentivePlan (the “Plan”).  The Plan authorizes incentive stock option grants,non-statutory stock option grants and  direct stock issuances.  Eligibleparticipants are employees, non-employee board members, and independentconsultants or advisors.  The Company has reserved 500,000 shares ofcommon stock under the Plan, and the share reserve increases on the 1stbusiness day in January each year (beginning in 2005) by an amount equalto 2% of the number of outstanding shares of the Company on the last businessday in December of the preceding year, subject to a maximum annualincrease of 100,000 shares.  Accordingly, on January 3, 2005, 52,177shares were added to the Plan under the automatic increase provisions.  No person may receive stock option grants,stock issuances, or stock appreciation rights for more than 100,000 shares inthe aggregate in any calendar year under the Plan.  No person may receive stock option grants orstock issuances, for more than 100,000 shares in the aggregate in any calendaryear under the Plan.

 

The table below presentsthe weighted average number of options issued and outstanding during the ninemonths ended June 30, 2005, and the fiscal year ended September 30,2004.

 
| ** **                                                        | ** ** | **For the  Nine Months Ended  June 30, 2005** | ** ** | **For the  Year Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **Shares**                                         | ** ** | **Weighted  Average  Exercise Price**            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                                                              |       |                                               |       |                                             |       |   |   |   |   |
| Outstanding, beginning of the period                              |       | 165,500                                            |       | $                                                | 8.33       |   | — |   | $ | — |   |
| Granted                                                           |       | 37,000                                             |       | 8.83                                             |       | 175,500 |   | 8.33 |   |
| Exercised                                                         |       | —                                             |       | —                                           |       | — |   | — |   |
| Forfeited/expired                                                 |       | —                                             |       | —                                           |       | (10,000 | ) | 8.33 |   |
| Outstanding, end of the period                                    |       | 202,500                                            |       | $                                                | 8.42       |   | 165,500 |   | $ | 8.33 |   |
|                                                              |       |                                               |       |                                             |       |   |   |   |   |
| Exercisable at the end of the period                              |       | —                                             |       | —                                           |       |   |   |   |   |
| Weighted-average fair value of options granted  during the period |       |                                               |       | $                                                | 3.61       |   |   |   | $ | 3.80 |   |
| Weighted-average remaining contractual life (months)              |       | 109                                                |       |                                             |       | 118 |   |   |   |

 

In February 2005,the Company awarded share issuances for an aggregate of 10,803 shares of commonstock under its 2004 incentive plan in connection with services that wererendered to the Company. These shares are fully vested. The Company recordedcompensation expense in February of $95,000 related to this transaction.On February 8, 2005, the Company granted stock options to purchase anaggregate of 27,000 shares with an exercise price of $8.83 per share tonon-employee Board members of the Company and its banking subsidiary under theAutomatic Option Grant Program of the Plan. In the three months ended June 30, 2005, the Company grantedoptions for the purchase of 10,000 shares of common stock to a board member atan exercise price of $8.83 per share. The Company also issued 396 shares ofcommon stock to a consultant at $8.83 per share. The Company recognizedcompensation expense in the amount of $3,500 related to the transaction.

 

11

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**Note 12.  Other Related Party Transactions**

 

**Accountingand Tax Services**

 

The Company receives taxplanning advice and general tax and accounting services from Hamann, Ernstmeyer &Williamson, P.C. (formerly Hamann & Associates”, P.C.  “HEW”), a professional corporation ofcertified public accountants in which Mr. Hamann (the Chief ExecutiveOfficer of the Company) had previously owned an 80% interest.  For the nine months ended June 30, 2005and June 30, 2004, the Company paid approximately $104,000 and $100,000.respectively, for these services primarily with respect to assistance in thepreparation of the Company’s monthly and periodic reporting, tax planning andreporting, and other advisory services including public reportingmatters.  As of June 30, 2005, Mr. Hamann has owned a 5%interest in HEW, is no longer an officer or a director, and has a limitedparticipation in the ongoing delivery of services to its clients in an advisorycapacity.  None of the fees paid for services during the three and ninemonths ended June 30, 2005 were related to the efforts of Mr. Hamann,and Mr. Hamann is not currently compensated by the firm.  HEW is afirm focused on tax planning and advisory work and does not provide auditingservices to clients.

 

**OtherTransactions**

 

The Company has a $16,000Due from Affiliate balance as of June 30, 2005. Approximately $5,200relates to marketing costs initially incurred by Treaty Oak Bank (TOB) in thedevelopment of the Treaty Oak brochure. Treaty Oak Financial Services, Inc.(TOFS, which through May 31, 2005 was an “affiliate” of the Company)agreed to absorb half of these costs as they are able to share the samebrochure. The agreement calls for TOFS to pay the balance $1,311.11 per monthto the Company until the balance is paid off in full. $10,000 relates to anagreement between a third party vendor and TOFS totaling $24,000 for a bankingindustry customer relationship management system (CRM). On March 30, 2005,TOB advanced TOFS $10,000 on this contract providing TOB the option to acquirethe software license with no additional costs. This option is valid as long asthe balance on the contract is paid in full by October 1, 2005.  The remaining balance relates tomiscellaneous operating costs which arise between TOFS and the Company in theordinary course of business.

 

**Note13.  Financial Instruments with Off-BalanceSheet Risk**

 

In the normal course ofbusiness, the Company is a party to financial instruments with off-balancesheet risk to meet the financing needs of its customers, through the use ofcommitments to extend credit and standby letters of credit.  Those instruments involve, to varyingdegrees, elements of credit and interest-rate risk in excess of the amountrecognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extentof the Company’s involvement in particular classes of financial instruments.

 

The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualamount of those instruments.  The Companyuses the same credit policies in making commitments and conditional obligationsas it does for on-balance sheet instruments.

 

The following tablesummarizes the Company’s off-balance sheet financial instruments as of June 30,2005, and September 30, 2004 (in thousands):

 
| ** **                   | ** ** | **As of  June 30,  2005** | ** ** | **As of  September 30,  2004** | ** ** |
|------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|
|                         |       |                           |       |                                |       |
| Commitments to extend credit | ** ** | **$**                          | **11,706** | ** **                          | **$**      | **1,264** | ** ** |
| Standby letters of credit    | ** ** | **$**                          | **122**    | ** **                          | **$**      | **97** | ** ** |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may

 

12

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require payment of afee.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Companyupon extension of credit is based on management’s credit evaluation of thecounterparty.  Collateral held varies butmay include accounts receivable, inventory, property, plant and equipment andincome-producing commercial properties.

 

Standby letters of creditare written conditional commitments used by the Company to guarantee theperformance of a customer to a third party. The Company’s policies generally require that letter of creditarrangements contain security and debt covenants similar to those contained inloan arrangements.  In the event thecustomer does not perform in accordance with the terms of the agreement withthe third party, the Company would be required to fund the commitment.  The maximum potential amount of futurepayments the Company could be required to make is represented by thecontractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seekrecovery from the customer.  As of June 30,2005, no amounts have been recorded as liabilities for the Company’s potentialobligations under these guarantees.

 

**Note 14. Dividend Restrictions and Regulatory Matters**

 

Banks and bank holdingcompanies are subject to regulatory capital requirements administered by stateand federal banking regulatory agencies. Capital adequacy guidelines and, additionally for banks, promptcorrective action regulations involve quantitative measures of assets,liabilities, and certain off-balance sheet items calculated under regulatoryaccounting practices.  Capital amountsand classifications are also subject to qualitative judgments by regulatorsabout components, risk weightings and other factors.  Failure to meet capital requirements caninitiate regulatory action.  As of June 30,2005, management believes the Bank is in compliance with all regulatory capitalrequirements to which it is subject.

 

The following table setsforth the bank only actual capital levels in addition to the requirements underprompt corrective action regulations (in thousands):

 
| ** **                             | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                              | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| June 30, 2005                     |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| Tier I capital to average assets       | ** ** | **$**      | **7,636**  | ** **                         | **19.01**  | **%**                                                                   | **1,606**  | ** ** | **4.0** | **%** | **$** | **2,008** | ** ** | **5.0** | **%** |
| Tier I capital to risk weighted assets | ** ** | **7,636**  | ** ** | **21.12**                          | **%**      | **1,446**                                                               | ** ** | **4.0** | **%** | **2,169** | ** ** | **6.0** | **%** |
| Total capital to risk weighted assets  | ** ** | **7,925**  | ** ** | **21.92**                          | **%**      | **2,892**                                                               | ** ** | **8.0** | **%** | **3,615** | ** ** | **10.0** | **%** |
|                                   |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| September 30, 2004                |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| Tier I capital to average assets       | ** ** | **$**      | **6,439**  | ** **                         | **42.68**  | **%**                                                                   | **$**      | **603** | ** ** | **4.0** | **%** | **$** | **754** | ** ** | **5.0** | **%** |
| Tier I capital to risk weighted assets | ** ** | **6,439**  | ** ** | **56.51**                          | **%**      | **456**                                                                 | ** ** | **4.0** | **%** | **684** | ** ** | **6.0** | **%** |
| Total capital to risk weighted assets  | ** ** | **6,582**  | ** ** | **57.77**                          | **%**      | **911**                                                                 | ** ** | **8.0** | **%** | **1,139** | ** ** | **10.0** | **%** |
|                                        |            |            |            |                                    |            |                                                                         |            |  |  |  |  |  |  |  |  |  |

 

13

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As of June 30, 2005, theBank met the level of capital required to be categorized as “well capitalized”under prompt corrective action regulations. Management is not aware of any conditions subsequent to June 30,2005, that would change the Bank’s capital category.

 

The Bank is a statechartered banking association and is subject to regulation, supervision andexamination by the Texas Department of Banking and the Federal DepositInsurance Corporation (FDIC).  Inaddition, upon making certain determinations with respect to the condition ofany insured bank, the FDIC may begin proceedings to terminate a bank’s federaldeposit insurance.

 

From its initialacquisition of Texline State Bank, the Company’s banking operations had beensubject to a Memorandum of Understanding (MOU) with the FDIC.  The MOU had been entered into for the purposeof ensuring that bank management appropriately and adequately addressed certaindeficiencies identified by the FDIC and Texas Department of Banking (TDB)during previous regulatory examinations prior to the Company’sacquisition.  Following the FDICexamination of Treaty Oak Bank in November, 2004, the FDIC terminated the MOUand proposed a new MOU that was more limited in scope.  In February 2005, Treaty Oak Bank agreedto become subject to the new MOU, which was subsequently executed effective March 3,2005 by the FDIC.  Prior to March 31,2005, the Bank had addressed all of the issues identified in the new MOU.  At a subsequent follow-up review of the Bankconducted jointly by the FDIC and TDB, the on-site examiners deemed the Bank’sactions to date with regard to the new MOU to be “satisfactory.”  The Bank was later advised to discontinue thesubmission of quarterly responses to the MOU in a letter dated April 25,2005 from the FDIC. Management believes the Company is in compliance with theMOU.

 

Certain restrictionsexist regarding the ability of the Bank to pay cash dividends.  Regulatory approval is required in order topay dividends until such time as the accumulated deficit is eliminated andcertain other conditions are met.  Further, the Company has been notified by its banking regulators that noapproval will be received in the first three years of operations.

 

14

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**Item 2.****                                                           *Management’s Discussion and Analysis of FinancialCondition and Results Of Operations***

 

**Introduction**

 

We are a bank holding company headquartered in Austin,Texas with a branch in Texline, Dalham County, Texas.  We opened ourAustin office on September 10, 2004, though our branch in Texline has beena bank in operation since 1977.  As aresult, our operating history, as it relates to the banking industry, islimited.   In the course of preparing ourconsolidated financial statements, we use certain estimates with respect toloans, intangibles, the allowance for loan losses and other estimates necessaryfor financial reporting.  We have made nosignificant changes to the types of estimates and the manner in which they aredetermined since the filing of our annual report on Form 10-KSB, except asotherwise noted within this discussion and analysis.

 

**Plan of Operation**

 

***General***

 

We have focused our efforts on establishing a community-orientedbank out of our headquarters in the leased facility that we occupy at 101Westlake Drive (at Bee Cave Road), Austin, Texas, 78746. The Bank occupiesapproximately 7,000 square feet in a building and has executed, effective June 1,2004, and revised as of March 1, 2005, a 15-year lease with options torenew for up to an additional 10 years.  Further, we have subleased anadditional 850 square feet in the same building, effective October 1,2004, and revised as of March 1, 2005, under the same terms, for theoffices of the Company.  We have a total of 20 employees, 20 of whom arefull-time employees and 19 of whom are employees of the Bank.  Of those,14 are employed at the Austin headquarters, and 5 are employed in Texline.

 

On December 30, 2004, the Company closed on thepurchase of a 47.5% Class D limited partnership interest in PGI EquityPartners, L.P., a Texas limited partnership, which owns and operates thebuilding and premises in which the Company has its Austin, Texas,headquarters.  As a result of thisinvestment, the Company has included PGI Equity Partners, L.P., in itsconsolidated financial statements, in accordance with FIN 46(R), AnInterpretation of ARB No. 51.

 

***Holding CompanyLiquidity***

 

We closed our stock offering on September 30,2004, which resulted in 1,593,790 shares subscribed representing $13,276,271 ingross total capital raised.  The final stock subscription was paid in fullon March 11, 2005.  All of the stocksubscriptions have now been accounted for and that activity has beenclosed.  Of the total capital raised, $7,500,000, in addition to the$500,000 injected on the date of acquisition, was injected into the Bank. After payment of offering and start-up costs under the Expense ReimbursementAgreement to Treaty Oak Holdings, Inc., (“TOHI”) of $775,000, repayment ofother start-up costs accumulated prior to the closing of the offering ofapproximately $303,000, repayment of the $500,000 note plus accumulatedinterest to TOHI, which was used to make the $500,000 capital injection to theBank upon acquisition, payment of the outstanding notes, of $1,019,000 plusaccumulated interest, arising from the acquisition of Texline State Bank, theinvestment of $950,000 in PGI Equity Partners, L.P.,  and the payment of other operating expenses,the Company had approximately $1,467,000 in remaining cash proceeds. Thesefunds are being used for Company operations, investment and for later infusioninto the Bank and other corporate activities.  The primary source of liquidityfor the Company will be dividends paid by the Bank.  The Bank is currentlyrestricted from paying dividends without regulatory approval which will not begranted until the accumulated deficit has been eliminated.  As of June 30, 2005, 1,594,186 shares ofcommon stock, in addition to the initial issuances of 1,040,000 shares, weredeemed issued and a total of 2,628,183 were outstanding.

 

15

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***Bank Liquidity***

 

The Bank’s liquidity is monitored by its staff, theAsset/Liability Management Committee, and the Board of Directors, who willreview historical funding requirements, current liquidity position, sources andstability of funding, marketability of assets, options for attractingadditional funds, and anticipated future funding needs, including the level ofunfunded commitments.

 

The Bank’s primary sources of funds are retail andcommercial deposits, loan and securities repayments, other short-termborrowings, and other funds provided by operations. While scheduled loanrepayments and maturing investments are relatively predictable, deposit flowsand early loan prepayments are more influenced by interest rates, generaleconomic conditions, and competition. The Bank maintains investments in liquidassets based upon management’s assessment of (1) the need for funds, (2) expecteddeposit flows, (3) yields available on short-term liquid assets, and (4) objectivesof the asset/liability management program. While we intend to limit the use ofborrowed funds to meet cash flow needs, we may continue to make use ofavailable borrowing lines to meet short term cash demands since the rates onthese lines are more attractive and more stable than rates on premium CDs.

 

We have retained the facility in Texline, Texas, as abranch of Treaty Oak Bank.  Because this facility has both a concentrationand an expertise in agricultural lending, we continue to service the existingloans and make new agricultural loans when possible in the Texline market. Themajority of new loan growth, particularly commercial and executive andprofessional loan demand, has come from the Austin market. Growth in industriesoutside agriculture allows us to dilute the existing concentration inagricultural loans.

 

Greater loan demand results in greater pressure on theBank’s liquidity; however, our goal is to maintain a conservative loan todeposit ratio in the range of 80% - 90%. Consequently, we do not aggressivelypursue lending opportunities when sufficient funding sources (i.e. deposits,Fed Funds, etc.) are not available. We also limit the percentage of transient,volatile non-local deposits with above-market interest rates. As of June 30,2005, the Bank’s loan-to-deposit ratio was 79.05%, compared to 92.81% at June 30,2004.

 

 The FDICexamined the Bank in November 2004 and issued its final report for suchexamination on January 31, 2005.  Asa result of the examination, the FDIC proposed a new abbreviated MOU to replacethe previous seventeen point MOU, which had been in place at Texline sinceApril, 2002.  As part of the most recentMOU, the Bank agreed to take certain corrective actions with respect tointernal compliance procedures and training, and to provide quarterly reportson its progress. The Bank promptly met all of the conditions listed in the MOU andsubsequently was relieved of its quarterly reporting requirements by the FDICin a letter dated April 25, 2005. Management believes the Bank is incompliance with its current Memorandum of Understanding (MOU).

 

In the event that additional short-term liquidity isneeded, the Bank established new correspondent relationships through the mainoffice in Austin. Texline had utilized such relationships as a source ofliquidity in the past, and the Bank will continue to utilize such sources goingforward if needed.  Texline State Bankhad been a frequent user of Federal Home Loan Bank borrowings in the past. Inthe current rate environment, where rates on various federal sources continueto be relatively low by historical comparisons, Treaty Oak Bank may utilize thissource as an alternative to soliciting deposits that would carry a slightlyhigher interest cost to attract and retain. While the Bank does not intend torely as heavily on Federal Home Loan Bank borrowings as had Texline State Bank,the source will remain available going forward.  As of June 30, 2005,the Bank had no Federal Home Loan Bank borrowings or Federal Fund purchases.

 

The Bank had cash and cash equivalents of $9,815,000or 20.55% of the Bank’s total assets, at June 30, 2005 compared to $7,991,000or 37.33% of the Bank’s total assets at September 30, 2004. The Bank has$34.8 million of rate-sensitive assets that will mature or re-price within oneyear or less, as of June 30, 2005.

 

The Bank is subject to various regulatory capitalrequirements administered by federal and state banking agencies, which couldaffect its ability to pay dividends to the Company. Failure to meet minimumcapital requirements can initiate certain mandatory and discretionary actionsby regulators that, if undertaken, could have a direct material adverse effecton our financial statements. The minimum ratios required for the Bank to beconsidered “well capitalized” for regulatory purposes, and therefore eligibleto consider the payment of dividends to the

 

16

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Company,will be 10% total capital to risk weighted assets, 6% tier 1 capital torisk weighted assets and 5% tier 1 capital to average assets. At June 30,2005, the Bank was considered “well capitalized” by regulatory standards.Nonetheless, the Bank will not pay dividends for at least two more years (threeyears from the date of acquisition of Texline State Bank), regardless of itstotal capitalization as part of its agreement with banking regulators forapproval of the relocation of the Bank’s main office to Austin.

 

***Capital Resources***

 

As of June 30, 2005, the Company’s shareholder’sequity was $11,122,000 ($11,172,000 net of $50,000 in treasury stock), or20.55% of total assets. The decrease in shareholders’ equity results fromcapital raised in our offering, net of costs, reduced by the operating lossesof approximately $2,854,000 arising during the start-up phase of operations inAustin, including charges of $427,400 for non-cash, stock-based compensationexpense from the initial issuances of the Company’s common stock to certainaffiliated parties and from a subsequent issuance of common stock in exchangefor services received from an affiliated person.

 

The equity capital base of the Bank increased from$7,647,000 to $8,858,000 between September 30, 2004 and June 30,2005, due primarily to the capital injections of $2,000,000 net of operatinglosses of $789,000 attributable to the start-up activities in Austin,Texas.  Total assets of the Bank increased from $21,403,000 to $47,767,000for the same period.

 

The Bank is subject to the risk-based capitalregulations administered by the banking regulatory agencies. The risk-basedcapital guidelines are designed to make regulatory capital requirements moresensitive to differences in risk profiles among banks to account foroff-balance sheet exposure and to minimize disincentives for holding liquidassets. Under the regulations, assets and off-balance sheet items are assignedto broad risk categories, each with appropriate weights. The resulting capitalratios represent capital as a percentage of total risk weighted assets andoff-balance sheet items. Under the prompt corrective action regulations, to beadequately capitalized a bank must maintain minimum ratios of total capital torisk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,and Tier 1 capital to total assets of 4.00%. Failure to meet these capitalrequirements may initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that if undertaken could have a materialadverse effect on the Bank’s financial statements. At June 30, 2005,management reported that the Bank was in full compliance with all capitaladequacy requirements.

 

**Results of Operations**

 

***General***

 

The following discussion analyzes the results of theCompany for the three months and nine months ended June 30, 2005, and June 30,2004. References to the “Bank” in this review concern the operating performanceof Treaty Oak Bank (formerly Texline State Bank) since its acquisition on March 9,2004.

 

***Net Income—General***

 

The Company’s fiscal year ends on September 30.The net loss for the quarter ended June 30, 2005, was $283,000, comparedto a net loss of $501,000 for the quarter ended June 30, 2004. Costs associatedwith the new operations in Austin, Texas accounted for substantially all of thelosses for the quarter ended June 30, 2005, while start-up activitiesaccounted for substantially all of the loss for the three months ended June 30,2004.   The net loss for the nine monthperiod ended June 30, 2005 was $1,632,000, compared to a net loss of$759,000 for the nine month period ended June 30, 2004.  The nine month period ended June 30,2004 included the operations of the Bank for the period beginning March 9,2004, and ending June 30, 2004, which accounts for a majority of thesubstantial increase in the net loss.

 

The profitability of the Company’s consolidatedoperations depends primarily on net interest income, which is defined as thedifference between total interest earned on interest earning assets(investments and loans) and total interest paid on interest bearing liabilities(deposits, borrowed funds). The Company’s net income is affected by itsprovision for loan losses, as well as other income and other expenses. Theprovision for loan losses reflects the

 

17

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amountconsidered to be adequate to cover probable credit losses in the loanportfolio. Non-interest income or other income consists of service charges ondeposits, loan fees, gain on sale of loans, and other operating income. Otherexpenses include salaries and employee benefits, occupancy expenses, dataprocessing expenses, marketing, supplies, and other operating expenses.

 

Net interest income is affected by changes in thevolume and mix of interest earning assets, the level of interest rates earnedon those assets, the volume and mix of interest bearing liabilities, and thelevel of interest rates paid on those interest bearing liabilities. The provisionfor loan losses is dependent upon changes in the loan portfolio and management’sassessment of the collectibility of the loan portfolio, as well as economic andmarket conditions. Other income and other expenses are impacted by growth ofoperations and growth in the number of accounts through both acquisitions andcore banking business growth. Growth in operations affects other expenses as aresult of additional employees, branch facilities, and promotional marketingexpense. Growth in the number of accounts affects other income includingservice fees, as well as other expenses such as computer services, supplies,postage, telecommunications, and other miscellaneous expenses.

 

***Provision for LoanLosses***

 

The provision for loan losses represents an expensedetermined by management as the amount necessary to increase the allowance forloan losses after net charge-offs have been deducted to a level that, inmanagement’s best estimate, is necessary to absorb possible losses in the loanportfolio. The amount of the provision is based upon management’s review of theloan portfolio and consideration of such factors as historical loss experience,general prevailing economic conditions, changes in the size and composition ofthe loan portfolio and specific borrower considerations, including the abilityof the borrower to repay the loan and the estimated value of the underlyingcollateral. The provision is calculated monthly and a charge to expense ismade, as required, to increase the allowance to the calculated level. For anyparticular month, in the event the required allowance is less than or equal tothe current allowance, no expense is charged or reversed.

 

For the quarter ended June 30, 2005, the Bankmade $30,000 in provisions for loan losses compared to zero for the quarterended June 30, 2004. The Bank charged-off $0 in commercial and consumerloans and had recoveries of loans previously charged-off of $1,000 for netrecoveries of $1,000. These factors accounted for the increase in the Allowancefor Loan Losses to $289,000 or 0.94% of the portfolio. This amount representsmanagement’s estimate of potential losses inherent in the portfolio. For thenine month’s ended June 30, 2005, the bank made provisions to the reservefor loan losses in the amount of $60,000. The Bank charged off $2,000 in commercial and consumer loans and hadrecoveries of loans previously charged off of $13,000, for a net recovery of$10,000.

 

***Income Taxes***

 

No federal tax benefit has been recorded for the threeand nine months ended June 30, 2005, based upon net operating lossesincurred and carried forward in previous years. Based upon the Company’slimited operating history, the federal tax benefit of these losses has beenfully reserved against.  No federal taxbenefit was recorded for the nine months ended June 30, 2005 or June 30,2004.

 

**Financial Condition**

 

***Loan Portfolio***

 

Net loans increased $20,381,000 (204.77%) to$30,334,000 from $9,953,000 between September 30, 2004 and June 30,2005, while the three month period ended June 30, 2005 saw an increase innet loans of  $8,593,000; an increase of39.53%.  These increases were dueprimarily to the opening of the Austin office and subsequent funding of new loanrequests. The concentration within the portfolio has shifted over time from aconcentration of agricultural loans to concentrations in real estate andcommercial loans as expected.

 

18

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***Loan Portfolio Mix***

 

The following tables set forth the composition of theloan portfolio:

 

 
| ** **                | ** ** | **At June 30,  2005** | ** ** | **At September 30,  2004** | ** ** |
|---------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Amount**                 | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                      |       |                       |       |                            |       |   |   |   |   |
| Agriculture               |       | $                          | 2,708,000  |                            | 8.8        | % | $ | 3,444,000 |   | 33.9 | % |
| Commercial                |       | 11,824,000                 |       | 38.6                            | %          | 2,316,000 |   | 22.8 | % |
| Commercial real estate    |       | 7,770,000                  |       | 25.3                            | %          | 1,030,000 |   | 10.1 | % |
| Residential real estate   |       | 4,188,000                  |       | 13.7                            | %          | 2,627,000 |   | 25.8 | % |
| Construction real estate  |       | 2,581,000                  |       | 8.4                             | %          | 33,000 |   | 0.3 | % |
| Installment and other     |       | 1,596,000                  |       | 5.2                             | %          | 720,000 |   | 7.1 | % |
|                      |       |                       |       |                            |       |   |   |   |   |
| Total Loans               |       | 30,667,000                 |       | 100                             | %          | 10,170,000 |   | 100 | % |
| Unearned Origination Fees |       | (44,000                    | )          |                            |       |   |   |   |   |
| Gross Loans               |       | 30,623,000                 |       |                            |       | 10,170,000 |   |   |   |
| Allowance for Loan Losses |       | (289,000                   | )          |                            |       | (217,000 | ) |   |   |
|                      |       |                       |       |                            |       |   |   |   |   |
| Net Loans                 |       | $                          | 30,334,000 |                            |       |   | $ | 9,953,000 |   |   |   |

 

Loan concentrations are considered to exist when thereare amounts loaned to a multiple number of borrowers engaged in similaractivities that would cause them to be similarly impacted by economic or otherconditions.

 

Prior to its acquisition by us, the Texline State Bankoperated a branch office in Houston, Texas (which was closed in 2002), and asecond portfolio concentration developed with loans of one-to-four familyresidential real estate in that market. Approximately $1,310,000 of the Bank’sresidential real estate portfolio is comprised of single family residences inHouston. The majority of these loans originated between 1996 and 1998 for 15-yearterms with fixed rates of 8.75% or greater. These loans additionally havefive-year call provisions exercisable at the Bank’s discretion.

 

These residential real estate loans are expected todecrease as the individual loans continue to pay down. The majority of new loangrowth is expected to originate from the Austin market.  As had been anticipated by management, loansoriginated from the Austin market reflect a broader, more diverse mix ofindustries and borrowers than had been the case previously. As new loanscontinue to originate for non-agricultural and non residential real estatepurposes, the percentage of the total loan portfolio creating the concentrationsdescribed above will continue to decline thereby diminishing undue riskassociated with industry concentration.

 

Management may renew loans at maturity when requestedby a customer whose financial strength appears to support such a renewal or whensuch a renewal appears to be in the best interest of the Bank. The Bankrequires payment of accrued interest in such instances and may adjust the rateof interest, require a principal reduction, or modify other terms of the loanat the time of renewal.

 

***Loan Maturities***

 

As of June 30, 2005, 39.9% of the loan portfolioconsisting of agricultural, commercial, and real estate loans, or $11,600,000,will mature or re-price within one year or less. $22,708,000 of the representedloan portfolio,

 

19

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or78.11%, are variable rate loans.  At September 30,2004, 55.56% of the loan portfolio consisting of agricultural, commercial, andreal estate loans, or $5,250,000, matured or re-priced within one year or less.$5,082,000 of the represented loan portfolio, or 53.78%, were variable rateloans.  The following table presents thecontractual maturity ranges for agricultural, commercial, and real estate loansoutstanding at June 30, 2005 and September 30, 2004, and also presentsfor each maturity range the portion of loans that have fixed interest rates orinterest rates that fluctuate over the life of the loan in accordance withchanges in the interest rate environment as represented by the base rate:

 
| ** **             | ** ** | **Due in One Year  or Less** | ** ** | **Due after One Year  Through  Five Years** | ** ** | **Due after  Five Years** | ** ** | ** **         | ** ** |
|------------------------|------------|------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|--------------------|------------|
| **June 30, 2005** | ** ** | **Fixed  Rate**              | ** ** | **Floating  Rate**                          | ** ** | **Fixed  Rate**           | ** ** | **Floating  Rate** | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** | **Total** | ** ** |
| Agricultural           |       | $                            | 90,000     |                                        | 1,279,000  |                      | 11,000     |               | 723,000    |   | — |   | 605,000 |   | $ | 2,708,000 |   |
| Commercial             |       | 327,000                      |       | 6,870,000                                   |       | 2,366,000                 |       | 2,134,000          |       | — |   | 127,000 |   | 11,824,000 |   |
| Real Estate            |       | 511,000                      |       | 2,523,000                                   |       | 1,727,000                 |       | 6,496,000          |       | 1,331,000 |   | 1,951,000 |   | 14,539,000 |   |
|                        |            |                              |            |                                             |            |                           |            |                    |            |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **Due in One Year  or Less** | ** ** | **Due after One Year  Through  Five Years** | ** ** | **Due after  Five Years** | ** ** | ** **         | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|--------------------|------------|
| **September 30, 2004** | ** ** | **Fixed  Rate**              | ** ** | **Floating  Rate**                          | ** ** | **Fixed  Rate**           | ** ** | **Floating  Rate** | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** | **Total** | ** ** |
| Agricultural                |       | $                            | 64,000     |                                        | 2,127,000  |                      | 6,000      |               | 608,000    |   | — |   | 639,000 |   | $ | 3,444,000 |   |
| Commercial                  |       | 1,066,000                    |       | 1,085,000                                   |       | 11,000                    |       | 154,000            |       | — |   | — |   | 2,316,000 |   |
| Real Estate                 |       | 728,000                      |       | 180,000                                     |       | 705,000                   |       | 125,000            |       | 1,788,000 |   | 164,000 |   | 3,690,000 |   |
|                             |            |                              |            |                                             |            |                           |            |                    |            |  |  |  |  |  |  |  |  |

 

***InvestmentSecurities***

 

The primary purposes of the investment portfolio areto provide a source of earnings for liquidity management purposes, to providecollateral to pledge against public deposits, and to control interest raterisk. In managing the portfolio, the Bank seeks to attain the objectives ofsafety of principal, liquidity, diversification, and maximized return on investment.

 

The following tables set forth the amortized cost andfair value of the Bank’s securities portfolio by accounting classificationcategory and by type of security as indicated:

 
| ** **                          | ** ** | **As of**              | ** ** | **As of**                   | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **June 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                          | ** ** | **Amortized**          | ** ** | **Fair**                    | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                          | ** ** | **Cost**               | ** ** | **Value**                   | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities Held to Maturity:        |       |                   |       |                        |       |   |   |   |   |
|                                |       |                   |       |                        |       |   |   |   |   |
| U.S. Government Agencies            |       | $                      | 3,994      |                        | $          | 3,965 |   | $ | — |   | $ | — |   |
| Mortgage backed securities          |       | 6                      |       | 5                           |       | 7 |   | 6 |   |
|                                |       |                   |       |                        |       |   |   |   |   |
| Total Securities Held to Maturity   |       | $                      | 4,000      |                        | $          | 3,970 |   | $ | 7 |   | $ | 6 |   |
|                                |       |                   |       |                        |       |   |   |   |   |
| Securities Available for Sale       |       |                   |       |                        |       |   |   |   |   |
|                                |       |                   |       |                        |       |   |   |   |   |
| U.S. Government Agencies            |       | 401                    |       | 396                         |       | 404 |   | 404 |   |
| Mortgage backed securities          |       | 41                     |       | 42                          |       | 58 |   | 60 |   |
|                                |       |                   |       |                        |       |   |   |   |   |
| Total Securities Available for Sale |       | $                      | 442        |                        | $          | 438 |   | $ | 462 |   | $ | 464 |   |

 

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U.S. Treasury securities and securities of U.S.Government agencies generally consist of fixed rate securities with maturitiesof three months to five years. Other mortgage backed securities consists offixed rate mortgage pass-through securities with a maturity of five to fifteenyears.

 

***Asset Quality***

 

The following table sets forth the amount ofnon-performing loans and non-performing assets as of June 30, 2005 and September 30,2004:

 

| ** **                                               | ** ** | **6/30/2005** | ** ** | **9/30/2004** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|---------------|------------|
|                                                     |       |          |       |          |       |
| Non-accruing loans                                       |       | $             | 129,500    |          | $          | 97,000 |   |
| Loans 90 days or more past due, still accruing  interest |       | —        |       | 56,000        |       |
| Total non-performing loans                               |       | 129,500       |       | 153,000       |       |
| Other real estate owned                                  |       | —        |       | —        |       |
| Other repossessed assets                                 |       | 17,000        |       | 7,000         |       |
| Total non-performing assets                              |       | 146,500       |       | 160,000       |       |
|                                                     |       |          |       |          |       |
| Total non-performing loans to total loans                |       | 0.42          | %          | 1.51          | %          |
| Allowance for loan losses to non-performing loans        |       | 224.03        | %          | 136           | %          |
| Total non-performing assets to total assets              |       | 0.31          | %          | 0.63          | %          |
|                                                          |            |               |            |               |            |  |  |

 

***Non-performingLoans***

 

Non-performing loans include (1) loans accountedfor on a non-accrual basis, (2) accruing loans contractually past due90 days or more as to interest and principal, and (3) troubled debtrestructurings. Management reviews the loan portfolio for problem loans on anongoing basis.

 

If interest on non-accrual loans had been accrued,such income would have amounted to approximately $500 for the quarter ended June 30,2005, and $1,800 for the quarter ended June 30, 2004. These amounts werenot included in interest income during these periods.

 

Under Federal and Texas law, any loan 90 or more dayspast due is required to be placed on non-accrual basis unless specificallyidentified mitigating circumstances exist. The Bank’s policy is to place loans90 days past due on a non-accrual status. An exception is made whenmanagement believes the loan is fully secured and in the process of collection.Non-accrual loans are further classified as impaired when underlying collateralis not sufficient to cover the loan balance and it is probable that the Bankwill not fully collect all principal and interest. As of June 30, 2005,the Bank had $129,500 in non-accrual loans, compared to $97,000 in non-accrualloans at September 30, 2004. There were no loans contractually past dueover 90 days and continuing to accrue interest on June 30, 2005, ascompared to $56,000 at September 30, 2004. In compliance with thesestatutes we have developed pro

 

21

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forma financialstatements assuming that no loans will continue to accrue interest if the loanbecomes 90 days past due, and instead transfer all such loans to anon-accruing status.

 

A “troubled debt restructuring” is a restructured loanupon which interest accrues at a below market rate or upon which certainprincipal has been forgiven so as to aid the borrower in the final repayment ofthe loan, with any interest previously accrued, but not yet collected, beingreversed against current income. Interest is accrued based upon the new loanterms. There were no troubled debt restructurings outstanding as of June 30,2005 or as of September 30, 2004*.*

 

Non-performing assets also consist of otherrepossessed assets and other real estate owned (“OREO”). OREO representsproperties acquired through foreclosure or other proceedings and is recorded atthe lower of cost or fair market value less the estimated cost of disposal.OREO is evaluated regularly to ensure that the recorded amount is supported byits current fair market value. Valuation allowances to reduce the carryingamount to fair market value less estimated costs of disposal are recorded asnecessary. Revenues and expenses from the operations of OREO and changes in thevaluation are included in other income and other expenses on the incomestatement. As of June 30, 2005 and September 30, 2004, the Bank hadno other real estate owned. Repossessed assets totaled $17,000 at June 30,2005, and $7,000 at September 30, 2004.

 

***Sources of Funds***

 

***General***

 

Deposits, short-term and long-term borrowings, loanand investment security repayments and prepayments, proceeds from the sale ofsecurities, and cash flows generated from operations are the primary sources ofour funds for lending, investing, and other general purposes. Loan repaymentsare a relatively predictable source of funds except during periods ofsignificant interest rate declines, while deposit flows tend to fluctuate withprevailing interests rates, money markets conditions, general economicconditions, and competition.

 

***Deposits***

 

The Bank offers a variety of deposit accounts with arange of interest rates and terms. Core deposits consist of checking accounts(non-interest bearing), “NOW” accounts, savings accounts, and non-publiccertificates of deposit. These deposits, along with public fund deposits andshort-term borrowings, are used to support the Bank’s asset base. Deposits areobtained predominantly from the geographic trade areas surrounding the Bank’soffice locations. The Bank relies primarily on customer service, currenttechnology and long-standing relationships with customers to attract and retaindeposits; however, market interest rates and rates offered by competingfinancial institutions significantly affect the Bank’s ability to attract andretain deposits.  Total depositsincreased from $13,193,000 at September 30, 2004 to $38,795,000 at June 30,2005, the increase resulting primarily from non-interest bearing deposits($6,459,000) and a campaign to attract longer term certificates of deposit toensure adequate funding sources to accommodate the increase in net loans.

 

The following table sets forth the maturities of timedeposits $100,000 and over as of June 30, 2005 and September 30,2004:

 
| ** **                             | ** ** | **As of June 30,** | ** ** | **As of September 30,** | ** ** |
|----------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **2005**                | ** ** | **2004**                     | ** ** |
| Time deposits $100,000 and over:       |       |                    |       |                         |       |
| Maturing within three months           |       | $                       | 1,009,000  |                         | $          | 557,000 |   |
| After three months but within 12months |       | 4,572,000               |       | 940,000                      |       |
|                                   |       |                    |       |                         |       |
| After 12 months but within 3 years     |       | 409,000                 |       | 100,000                      |       |
| After 3 years                          |       | 0                       |       | 0                            |       |
|                                   |       |                    |       |                         |       |
| Total time deposits $100,000 and over: |       | $                       | 5,990,000  |                         | $          | 1,597,000 |   |

 

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***Return on Equity and Assets***

 

The following table sets forth certain informationregarding the Company’s return on equity and assets for the periods indicated:

 
| ** **             | ** ** | **For the  Three Months  Ended  June 30,  2005** | ** ** | **For the  Nine months  Ended  June 30,  2005** | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| Return on assets       |       | -0.52                                                 | %          | -3.02                                                | %          |
| Return on equity       |       | -2.54                                                 | %          | -14.67                                               | %          |
| Dividend payout ratio  |       | 0                                                     | %          | 0                                                    | %          |
| Equity to assets ratio |       | 20.56                                                 | %          | 20.56                                                | %          |

 

**Capital Resources**

 

The risk-based capital regulations established andadministered by the banking regulatory agencies discussed previously areapplicable to the Bank. Risk-based capital guidelines are designed to makeregulatory capital requirements more sensitive to differences in risk profilesamong banks, to account for off-balance sheet exposure, and to minimizedisincentives for holding liquid assets. Under the regulations, assets andoff-balance sheet items are assigned to broad risk categories, each withappropriate weights. The resulting capital ratios represent capital as apercentage of total risk weighted assets and off-balance sheet items. Under theprompt corrective action regulations, to be adequately capitalized a bank mustmaintain minimum ratios of total capital to risk-weighted assets of 8.00%, Tier1 capital to risk-weighted assets of 4.00%, and Tier 1 capital to total assetsof 4.00%. Failure to meet these capital requirements can initiate certainmandatory, and possibly additional discretionary, actions by regulators that,if undertaken, could have a material adverse effect on the Bank’s financialstatements.

 

As of June 30, 2005, the most recent notificationfrom the federal banking regulators categorized the Bank as well-capitalized. Awell-capitalized institution must maintain a minimum ratio of total capital torisk-weighted assets of at least 10.00%, a minimum ratio of Tier 1 capital torisk weighted assets of at least 6.00%, and a minimum ratio of Tier 1 capitalto total assets of at least 5.00% and must not be subject to any written order,agreement, or directive requiring it to meet or maintain a specific capitallevel. We believe that there are no conditions or events since thatnotification that have changed the capital classification.

 

The Bank was in full compliance with all applicablecapital adequacy requirements as of June 30, 2005. The required and actualamounts and ratios for the Bank as of June 30, 2005 and September 30,2004, are presented below:

 
| ** **                               | ** ** | **Actual** | ** ** | **For Capital Adequacy  Purposes** | ** ** | **To Be Well Capitalized  Under  Prompt Corrective  Action  Provisions** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of June 30, 2005                 |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 capital (to average assets)       |       | $          | 7,636,000  |                               | 19.01      | %                                                                        | $          | 1,606,000 |   | 4 | % | $ | 2,008,000 |   | 5 | % |
| Tier 1 capital (to risk-weighted assets) |       | 7,636,000  |       | 21.12                              | %          | 1,446,000                                                                |       | 4 | % | 2,169,000 |   | 6 | % |
| Total capital (to risk-weighted assets)  |       | 7,925,000  |       | 21.92                              | %          | 2,892,000                                                                |       | 8 | % | 3,615,000 |   | 10 | % |
|                                     |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| As of September 30, 2004            |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 capital (to average assets)       |       | $          | 6,439,000  |                               | 42.68      | %                                                                        | $          | 603,000 |   | 4 | % | $ | 754,000 |   | 5 | % |
| Tier 1 capital (to risk-weighted assets) |       | 6,439,000  |       | 56.51                              | %          | 456,000                                                                  |       | 4 | % | 684,000 |   | 6 | % |
| Total capital (to risk-weighted assets)  |       | 6,582,000  |       | 57.77                              | %          | 911,000                                                                  |       | 8 | % | 1,139,000 |   | 10 | % |

 

23

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**Item 3.****                                                           *Controls and Procedures***

 

With the participation of management, the Company’schief executive officer and chief financial officer reviewed and evaluated theCompany’s disclosure controls and procedures as defined in Rules 13a-14(c) and15d-14(c) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the period covered by this report.  Based on this evaluation, the chief executiveofficer and chief financial officer concluded that the disclosure controls andprocedures are effective to ensure that the information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported to the Company’s managementwithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

There have been no significant changes in theCompany’s internal controls for financial reporting or in other factors thatcould significantly affect these controls, including any significantdeficiencies or material weaknesses of internal controls that would requirecorrective action.  In connection withthe new rules, the Company is currently in the process of further reviewing anddocumenting its disclosure controls and procedures, including its internalaccounting controls, and may from time to time make changes aimed at enhancingtheir effectiveness and ensuring that the Company’s systems evolve with itsbusiness.

 

**PART II.****                                             OtherInformation**

 

**Item 1.****                                                        *Legal Proceedings***

 

The Company is involvedin various legal proceedings arising in the ordinary course of business.  These actions are not believed to be materialeither individually or collectively to the consolidated financial condition,results of operations or cash flows. At June 30, 2005, there was nopending legal proceeding involving the Company.

 

**Item 2.****                                                        *Changes in Securities and Use of Proceeds***

 

On May 7,2004, the Securities and Exchange Commission declared our RegistrationStatement on Form SB-2 (File No. 333-112325) related to our initialpublic offering effective.  In addition,on October 22, 2004, we filed a Form SB-2MEF under Rule 462registering additional shares of common stock and warrants to purchase ourcommon stock under our public offering. We registered a total of 1,944,000 shares of our common stock, of which324,000 shares are issuable under registered common stock warrants.  We accepted subscriptions for 1,589,602 sharesof our common stock under the offering and have received net offering proceeds(after deducting offering expenses) of approximately $11.9 million.

 

24

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As of June 30,2005, we had paid our organizing shareholder and affiliate, Treaty OakHoldings, for reimbursement of expenses and advances on our behalf inconnection with our offering and repayment of the amount due under aconvertible promissory note.  Treaty OakHoldings owns approximately 39% of our common stock.  We contributed to the capital of the Bank andpaid operating expenses including repayment of certain costs previously paid byTreaty Oak Holdings.  We also repaid principaland interest under unsecured promissory notes issued in connection with thepurchase price of the Bank.  The tablebelow summarizes the use of net offering proceeds through June 30, 2005:

 
| ** **                                                                                                                                                                                    | ** ** | **As of**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **6/30/05** | ** ** |
| Gross proceeds from sale of shares                                                                                                                                                            |       | 13,276,271  |       |
| Amounts receivable as of December 31, 2004                                                                                                                                               |       | —      |       |
|                                                                                                                                                                                          |       |        |       |
| Repayment of offering and start-up costs under  Expense Reimbursement Agreement to Treaty Oak Holdings, Inc., including  offering costs of $500,000 and pre-opening expenses of $275,000 |       | (775,000    | )          |
| Repayment of note payable to Treaty Oak Holdings, Inc.,  including accrued interest of approximately $7,000                                                                              |       | (507,302    | )          |
|                                                                                                                                                                                          |       |        |       |
| Repayment of notes payable for the acquisition of  Texline State Bank including accrued interest of approximately $29,000                                                                     |       | (1,015,332  | )          |
| Contribution to the capital of the Bank                                                                                                                                                       |       | (7,500,000  | )          |
|                                                                                                                                                                                          |       |        |       |
| Payments to directors and officers (bonuses and  directors’ fees)                                                                                                                        |       | (151,187    | )          |
| Payments to officers (salary and benefits)                                                                                                                                                    |       | (179,003    | )          |
| Other payments to affiliates for services                                                                                                                                                     |       | (82,136     | )          |
|                                                                                                                                                                                          |       |        |       |
| Limited partnership investment in affiliated limited  partnership                                                                                                                             |       | (950,000    | )          |
| Repurchase of shares issued                                                                                                                                                                   |       | (50,005     | )          |
| Payment of additional operating expenses (estimated)                                                                                                                                          |       | (631,267    | )          |
| Remaining net proceeds                                                                                                                                                                        |       | 1,435,039   |       |

 

$679,691of the amount referenced as “Repayment of notes payable for the acquisition ofTexline State Bank was paid to Charles T. Meeks, a member of our Board ofDirectors and Chairman of the Board of the Bank.   An additional amount due to Mr. Meeksfrom the acquisition of the Bank in the amount of $18,783 previously held inescrow is also included in this amount. On November 18, 2004, we approved the purchase of a 47.5%preferential limited partnership interest in PGI Equity Partners, L.P., whichowns and operates the building premises we lease, for $950,000.  A deposit of $150,000 was paid on November 18,2004, and the balance of the purchase price of $800,000 was paid on December 30,2004, at closing.  We had originallyanticipated these funds would be used for capital of the Bank, but we believethe investment in premises will allow us the opportunity to realize more valuefrom appreciation in the real property rather than over-capitalizing theBank.  The remaining net proceeds havebeen invested in short-term interest bearing, money market accounts.

 

**Item 3.****                                                        *Defaults Upon Senior Securities***

## ** **

## **None.**

## ** **

**Item 4.****                                                        *Submission of Matters to a Vote of Security Holders***

## ** **

2.               None

 

25

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**Item 5.****                                                        *Other Information***

 

On June 28, 2005, the Company’s Bank subsidiary completed the purchase for $1,000 of a 50% investment interest in Treaty Oak Mortgage, LLC, a residential mortgage brokerage business, from an affiliate.  It is not anticipated that the Company, nor its subsidiary, will invest additional capital in this entity.

 

The Company is reviewing the feasibility of two possible branch locations in the Greater Austin area, both of which would open in 2006.

 

**Item 6.****                                                        *Exhibits and Reports on Form 8-K***

 

a.               Exhibits

 
| 3.1    |   | Amended and  Restated Articles of Incorporation (filed as Exhibit 4.1 to Registration  Statement on Form S-8 filed with the Commission on October 22, 2004  (File No. 333-119914, which exhibit is incorporated herein by reference) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                     |
| 3.2*   |   | By-laws                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| 4.1*   |   | Specimen Common  Stock Certificate, $.01 par value per share                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                     |
| 4.2*   |   | See Exhibits 3.1  and 3.2 for provisions of the Articles of Incorporation and By-laws defining  rights of holders of Common Stock                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                     |
| 31.1   |   | Certification of  Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under  the Exchange Act                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                     |
| 31.2   |   | Certification of  Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under  the Exchange Act                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                     |
| 32.1   |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                |
|   |   |                                                                                                                                                                                                                                                     |
| 32.2   |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                |

 

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*                                         Incorporatedby reference to the same numbered exhibit filed with the Company’s RegistrationStatement on Form SB-2 (File No. 333-112325).

 

b.              CurrentReports on Form 8-K

 

None.

 

26

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                         | **TREATY  OAK BANCORP, INC.** |
|------------------------------|-------------------------------|
|                         |                          |
| Dated: August 15,  2005 | By:                           | /s/ Terry W.  Hamann |   |
|                         |                          | Terry W. Hamann,  President and Chief Executive Officer |
|                         |                          |   |
|                         |                          |   |
|                         | By:                           | /s/ Jeffrey L.  Nash |   |
|                         |                          | Jeffrey L. Nash,  Chief Financial Officer |

 

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