** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

###### **FORM10-QSB/A**

**x****                   ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2006**

**o****                        ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

# **Commission File Number: 333-112325**

**Treaty Oak Bancorp, Inc.**

(Exact name of registrant as specified in its charter)

**Texas**

(State or otherjurisdiction of

corporation or organization)

**20-0413144**

(I.R.S. Employer Identification Number)

**101Westlake 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 12 months(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 ****x            No****o**

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

**Yes****o   No  ****x**

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock asof the close of business on August 15, 2006.
| $0.01 Par Value Common Stock |   | 2,636,926 shares |
|------------------------------|--------|------------------|

 

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

 

----

**ExplanatoryNote**

The Company is filingthis Quarterly Report on Form 10-QSB/A as Amendment No. 1 to the Company’s Form10-QSB for the quarter ended June 30, 2006, originally filed on August 16, 2006(the “Original Form 10-QSB), for the purpose of correcting its pro formaearnings per share as presented in Note 1 of the Company’s consolidated,unaudited financial statements.  Although this filing presents the Company’sOriginal Form 10-QSB in its entirety, the only substantive correction is tothat Note 1.

----

**QUARTERLYREPORT ON FORM 10-QSB**

**FOR THEPERIOD ENDED JUNE 30, 2006**

**TABLE OFCONTENTS**
| **Part I.**  | **Financial Information** | ** **                                                                                                                   |
|--------------|---------------------------|------------------------------------------------------------------------------------------------------------------------------|
|         |                      |                                                                                                                         |
| ** **   | **Item 1.**               | *Financial Statements*                                                                                                       | * * |
|         |                      |                                                                                                                         |
|         |                      | Consolidated  Balance Sheets at June 30, 2006 (unaudited) and September 30, 2005 (audited)                                   |   |
|         |                      |                                                                                                                         |
|         |                      | Consolidated Statements  of Operations for the Three-Month and Nine-Month Periods ended June 30, 2005,  and 2006 (unaudited) |   |
|         |                      |                                                                                                                         |
|         |                      | Consolidated  Statements of Cash Flows for the Nine-Month Periods ended June 30, 2005, and  2006 (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.**               | *Unregistered  Sales of Equity 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*                                                                                                         | * * |
|         |                      |                                                                                                                         |
|         | 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 cause actualresults 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

----

**TreatyOak Bancorp, Inc.**

**ConsolidatedBalance Sheets (Unaudited)**

**June 30,2006, and September 30, 2005**

**(DollarsIn Thousands, Except Par Value Amounts)**
| ** **                                                                                                   | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**          | ** ** | **2005 (1)**      | ** ** |
|                                                                                                         |       |              |       |                   |       |
| ASSETS                                                                                                       |       |              |       |                   |       |
|                                                                                                         |       |              |       |                   |       |
| Cash and cash items                                                                                          |       | $                 | 279        |                   | $          | 230 |   |
| Due from banks                                                                                               |       | 2,930             |       | 9,271                  |       |
| Federal funds sold                                                                                           |       | 7,104             |       | 3,606                  |       |
|                                                                                                         |       |              |       |                   |       |
| Total cash and  cash equivalents                                                                             |       | 10,313            |       | 13,107                 |       |
|                                                                                                         |       |              |       |                   |       |
| Securities available  for sale                                                                               |       | 418               |       | 427                    |       |
| Securities held to  maturity, fair value of $1,989 and $3,472, respectively                                  |       | 2,005             |       | 3,501                  |       |
| Investment in Federal  Home Loan Bank, at cost                                                               |       | 224               |       | 217                    |       |
| Investment in  Independent Banker’s Financial Corporation stock, at cost                                |       | 102               |       | 100                    |       |
| Loans, net                                                                                                   |       | 52,843            |       | 35,683                 |       |
| Premises and equipment,  net                                                                                 |       | 5,670             |       | 5,819                  |       |
| Note receivable from  affiliate                                                                              |       | 371               |       | —                 |       |
| Accrued interest  receivable                                                                                 |       | 353               |       | 348                    |       |
| Due from affiliates                                                                                          |       | 131               |       | 34                     |       |
| Goodwill and other  intangibles, net                                                                         |       | 1,161             |       | 1,161                  |       |
| Other                                                                                                        |       | 520               |       | 352                    |       |
|                                                                                                         |       |              |       |                   |       |
| Total assets                                                                                                 |       | $                 | 74,111     |                   | $          | 60,749 |   |
|                                                                                                         |       |              |       |                   |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                   |       |              |       |                   |       |
|                                                                                                         |       |              |       |                   |       |
| Deposits:                                                                                                    |       |              |       |                   |       |
| Noninterest-bearing  demand                                                                                  |       | $                 | 27,302     |                   | $          | 17,057 |   |
| NOW, money  market and savings                                                                               |       | 16,103            |       | 13,413                 |       |
| Time deposits                                                                                                |       | 15,316            |       | 15,076                 |       |
|                                                                                                         |       |              |       |                   |       |
| Total deposits                                                                                               |       | 58,721            |       | 45,546                 |       |
|                                                                                                         |       |              |       |                   |       |
| Accounts payable and  accrued expenses                                                                       |       | 262               |       | 109                    |       |
| Accrued interest payable                                                                                     |       | 121               |       | 116                    |       |
| Property mortgage                                                                                            |       | 2,682             |       | 2,727                  |       |
| Note payable                                                                                                 |       | 62                |       | 74                     |       |
| Minority interest - PGI  Equity Partners, LP                                                                 |       | 1,094             |       | 1,109                  |       |
| Other liabilities                                                                                            |       | 38                |       | 35                     |       |
|                                                                                                         |       |              |       |                   |       |
| Total  liabilities                                                                                           |       | 62,980            |       | 49,716                 |       |
|                                                                                                         |       |              |       |                   |       |
| Shareholders’ equity:                                                                                   |       |              |       |                   |       |
| Common stock, $0.01 par  value; 20,000,000 shares authorized; 2,636,926 and 2,635,746 issued,  respectively. |       | 26                |       | 26                     |       |
| Paid-in capital                                                                                              |       | 14,960            |       | 14,949                 |       |
| Accumulated  deficit                                                                                         |       | (3,804            | )          | (3,888                 | )          |
| Accumulated  other comprehensive loss                                                                        |       | (1                | )          | (4                     | )          |
| Less shares held  in treasury, at cost (6,003 shares)                                                        |       | (50               | )          | (50                    | )          |
| Total  shareholders’ equity                                                                             |       | 11,131            |       | 11,033                 |       |
|                                                                                                         |       |              |       |                   |       |
| Total liabilities and  shareholders’ equity                                                             |       | $                 | 74,111     |                   | $          | 60,749 |   |

 

----

(1) Derived fromaudited financial statements.

 

See accompanying notes to the unaudited consolidatedfinancial statements.

3

----

**TreatyOak Bancorp, Inc.**

**ConsolidatedStatements of Operations (Unaudited)**

**(DollarsIn Thousands, except per share amounts)**
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **June 30,**                | ** ** | **June 30,**               | ** ** |
| ** **                                           | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Interest income:                                     |       |                             |       |                            |       |   |   |   |   |
| Loans, including fees                                |       | $                                | 1,104      |                            | $          | 507 |   | $ | 2,887 |   | $ | 1,073 |   |
| Taxable securities                                   |       | 22                               |       | 35                              |       | 76 |   | 92 |   |
| Interest on deposits with other banks                |       | 34                               |       | 19                              |       | 91 |   | 34 |   |
| Federal funds sold                                   |       | 73                               |       | 38                              |       | 181 |   | 124 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Total interest income                                |       | 1,233                            |       | 599                             |       | 3,235 |   | 1,323 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Interest  expense:                                   |       |                             |       |                            |       |   |   |   |   |
| Deposits                                             |       | 252                              |       | 144                             |       | 643 |   | 297 |   |
| Interest on other borrowings                         |       | 41                               |       | 42                              |       | 124 |   | 101 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Total interest expense                               |       | 293                              |       | 186                             |       | 767 |   | 398 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net interest  income                                 |       | 940                              |       | 413                             |       | 2,468 |   | 925 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Provision for  loan losses                           |       | 90                               |       | 30                              |       | 180 |   | 60 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 850                              |       | 383                             |       | 2,288 |   | 865 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Noninterest  income:                                 |       |                             |       |                            |       |   |   |   |   |
| Service charges on deposit accounts                  |       | 31                               |       | 23                              |       | 69 |   | 56 |   |
| Other noninterest income                             |       | 113                              |       | 84                              |       | 316 |   | 162 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Total noninterest income                             |       | 144                              |       | 107                             |       | 385 |   | 218 |   |
| Noninterest  expense:                                |       |                             |       |                            |       |   |   |   |   |
| Salaries and employee benefits                       |       | 420                              |       | 409                             |       | 1,253 |   | 1,501 |   |
| Occupancy and equipment expenses                     |       | 109                              |       | 59                              |       | 331 |   | 228 |   |
| Other noninterest expense                            |       | 326                              |       | 304                             |       | 990 |   | 1,015 |   |
| Minority interests in partnership income (loss)      |       | 5                                |       | 1                               |       | 15 |   | (29 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Total noninterest expense                            |       | 860                              |       | 773                             |       | 2,589 |   | 2,715 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                   |       | $                                | 134        |                            | $          | (283 | ) | $ | 84 |   | $ | (1,632 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per common share - basic            |       | $                                | 0.05       |                            | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.63 | ) |
| Earnings (loss)  per common share - diluted          |       | $                                | 0.05       |                            | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.63 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding - basic         |       | 2,630,018                        |       | 2,627,948                       |       | 2,629,548 |   | 2,609,344 |   |
| Weighted average shares  outstanding - diluted       |       | 2,631,074                        |       | 2,627,948                       |       | 2,631,702 |   | 2,609,344 |   |

 

See accompanying notes to unaudited consolidated financial statements.

4

----

**TreatyOak Bancorp, Inc.**

**Consolidated Statements of Cash Flows (Unaudited)**

**Nine Months Ended June 30, 2006, and 2005**

**(Dollars In Thousands)**
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,**               | ** ** | **June 30,**               | ** ** |
| ** **                                                                                          | ** ** | **2006**                        | ** ** | **2005**                        | ** ** |
| Cash flows from  operating activities:                                                              |       |                            |       |                            |       |
| Net income (loss)                                                                                   |       | $                               | 84         |                            | $          | (1,632 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                            |       |                            |       |
| Minority interests in partnership income (loss)                                                     |       | 15                              |       | (29                             | )          |
| Provision for loan losses                                                                           |       | 180                             |       | 60                              |       |
| Non-cash stock based compensation                                                                   |       | —                          |       | 98                              |       |
| Loan acquisition costs                                                                              |       | —                          |       | 100                             |       |
| Depreciation and amortization                                                                       |       | 264                             |       | 231                             |       |
| Changes in other operating assets and liabilities:                                                  |       |                            |       |                            |       |
| Accrued interest receivable                                                                         |       | (5                              | )          | (119                            | )          |
| Other assets                                                                                        |       | (177                            | )          | (47                             | )          |
| Accrued interest payable                                                                            |       | 5                               |       | 53                              |       |
| Other liabilities                                                                                   |       | 156                             |       | (36                             | )          |
| **Net cash provided by (used in) operating  activities**                                            |       | 522                             |       | (1,321                          | )          |
|                                                                                                |       |                            |       |                            |       |
| Cash flows from  investing activities:                                                              |       |                            |       |                            |       |
| Proceeds from maturities and principal repayments on  securities - available for sale               |       | 12                              |       | 26                              |       |
| Proceeds from maturities and principal repayments on  securities - held to maturity                 |       | 1,496                           |       | 1,501                           |       |
| Purchase of securities - held to maturity                                                           |       | —                          |       | (5,494                          | )          |
| Acquisition of interest in PGI Equity Partners, LP,  net of cash received of $24                    |       | (80                             | )          | (926                            | )          |
| Purchase of correspondent bank stock                                                                |       | (7                              | )          | (104                            | )          |
| Purchase of equipment                                                                               |       | (58                             | )          | (617                            | )          |
| Net increase in loans                                                                               |       | (17,340                         | )          | (20,441                         | )          |
| **Net cash used in investing activities**                                                           |       | (15,977                         | )          | (26,055                         | )          |
|                                                                                                |       |                            |       |                            |       |
| Cash flows from  financing activities:                                                              |       |                            |       |                            |       |
| Net increase in deposits                                                                            |       | 13,175                          |       | 25,602                          |       |
| Proceeds from the sale of common stock, net of  issuance costs                                      |       | —                          |       | 3,772                           |       |
| Advances to affiliates                                                                              |       | (468                            | )          | (81                             | )          |
| Repayments of advances to affiliates                                                                |       | —                          |       | 134                             |       |
| Payments of principal on mortgage                                                                   |       | (45                             | )          | (9                              | )          |
| Repayments of notes payable                                                                         |       | (12                             | )          | (228                            | )          |
| Proceeds from exercise of warrants                                                                  |       | 11                              |       | —                          |       |
| Proceeds from note payable - PGI Equity Partners, LP                                                |       | —                          |       | 149                             |       |
| Repurchase of common stock                                                                          |       | —                          |       | (50                             | )          |
| Increase in minority interest - PGI Equity Partners,  LP                                            |       | —                          |       | 100                             |       |
| **Net cash provided by financing activities**                                                       |       | 12,661                          |       | 29,389                          |       |
|                                                                                                |       |                            |       |                            |       |
| Net increase  (decrease) in cash and cash equivalents                                               |       | (2,794                          | )          | 2,013                           |       |
|                                                                                                |       |                            |       |                            |       |
| Cash and cash  equivalents at beginning of period                                                   |       | 13,107                          |       | 9,284                           |       |
|                                                                                                |       |                            |       |                            |       |
| Cash and cash  equivalents at end of period                                                         |       | $                               | 10,313     |                            | $          | 11,297 |   |
|                                                                                                |       |                            |       |                            |       |
| Supplemental disclosures of cash flow information:                                                  |       |                            |       |                            |       |
| Non-cash investing and  financing information:                                                      |       |                            |       |                            |       |
| Cash interest received                                                                              |       | $                               | 3,230      |                            | $          | 482 |   |
| Cash interest paid                                                                                  |       | $                               | 762        |                            | $          | 155 |   |
|                                                                                                |       |                            |       |                            |       |
| 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.

5

----

**Treaty Oak Bancorp, Inc.**

**Notes toConsolidated Financial Statements - unaudited**

**Note1.  Interim Financial**

Treaty Oak Bancorp, Inc.(the “Company”) is a bank holding company incorporated on November 18, 2003,and organized December 8, 2003 for the purpose of holding the common stock ofTreaty Oak Bank (formerly Texline State Bank, the “Bank”).  The Company acquired the Bank on March 9,2004, and began conducting banking operations in Texline, Texas.  The Bank commenced operations in Austin,Texas on September 10, 2004.

The Company, through Treaty Oak Bank, provides a full range ofcommercial and consumer banking services to individuals and businesses in thecommercial sector in Austin, Texas, and in the agriculture, cattle andcommercial sectors in the community of Texline, Texas.

The Company acquired a47.5% interest in PGI Equity Partners, LP (the “Partnership”) on December 31,2004. The Partnership owns and operates the building in which the Companyoffices.  On February 23, 2006, theCompany acquired additional 2.5% Class A and 1.25% Class B interests in thePartnership from the sole remaining minority shareholder for $80,000 cash,bringing the Company’s total ownership interest in the Partnership to 51.25% atJune 30, 2006.

The Company (through itsBank subsidiary) acquired a 50% interest in Treaty Oak Mortgage, LLC on June27, 2005 for a purchase price of $1,000, which is accounted for on the equitymethod of accounting.  The Company(through its Bank subsidiary) acquired a 50% interest in Treaty Oak CommercialGroup, LLC (“TOCG”) on June 29, 2006 for a purchase price of $100,000, which isaccounted for on the equity method of accounting.   TOCG is a commercial real estate brokeragefirm providing medium and long term mortgages on commercial real estate.  TOCGworks with life insurance and pension companies to fund these mortgages. Aside from its initial investment, the Company has no risk associated withoperating expenditures or other liabilities of TOCG.  The transaction wasapproved by the Texas Department of Banking on June 19, 2006.

The consolidatedfinancial statements include the accounts of Treaty Oak Bancorp, Inc., itswholly owned subsidiary Treaty Oak Bank, and the accounts of PGI EquityPartners, LP.

The accompanying condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-QSB and, therefore, donot include all of the disclosures and notes required by accounting principlesgenerally accepted in the United States of America. In the opinion of management,all material adjustments (which are of a normal recurring nature) considerednecessary for a fair presentation have been made.  The results for the interim period are notnecessarily indicative of the results to be expected for the entire year or anyother interim period.

Stock-Based Compensation

The Company accounts forstock-based compensation to employees using the intrinsic value method.  Compensation costs for employee stock optionsis measured as the excess, if any, of the fair value of the Company’s commonstock at date of grant over the exercise price.

The Companyaccounts for stock-based compensation to non-employees at fair value.

The Company will berequired to adopt FASB Statement No. 123R, “Share-Based Payments” (Statement123R), beginning on October 1, 2006. Statement 123R requires public entities tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions). That cost will be recognized over the period during whichan employee is required to provide service in exchange for the award – therequisite service period (usually the vesting period).

Statement 123Rapplies to all awards granted after the required effective date and to awardsmodified, repurchased, or cancelled after that date.  Additionally, compensation cost for theportion of awards for which the requisite service has not been rendered thatare outstanding as of the required effective date shall be recognized as the requisiteservice is rendered on or after the effective date.  The impactthat this statement will have on our consolidated financial statements isdependent upon the levels of share based payments granted in the future.

6

----

The weightedaverage fair value of the options granted during the three months ended June30, 2006 and June 30, 2005 has been estimated using the Black-Scholes optionpricing model with the following assumptions:

|                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005**      | ** ** |
|                     |       |                             |       |                             |       |
| Dividend yield           |       | 0                                | %          | 0                                | %          |
| Risk-free  interest rate |       | 4.73                             | %          | 4.00% - 4.75                     | %          |
| Expected  volatility     |       | 22                               | %          | 22                               | %          |
| Expected life in years   |       | 6.85 Years                       |       | 10 Years                         |       |

 

The table below presents the pro forma effect on the Company’s operationsassuming the Company had accounted for its stock options issued to employees atfair value (in thousands, except per share amounts):
|                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**               | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) - as reported         |       | $                                | 134        |                            | $          | (283 | ) | $ | 84 |   | $ | (1,632 | ) |
| Net income  (loss) - pro forma           |       | $                                | 95         |                            | $          | (354 | ) | $ | (28 | ) | $ | (1,818 | ) |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per share - as reported |       |                             |       |                            |       |   |   |   |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| basic                                    |       | $                                | 0.05       |                            | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.63 | ) |
| diluted                                  |       | $                                | 0.05       |                            | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.63 | ) |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per share - pro forma   |       |                             |       |                            |       |   |   |   |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| basic                                    |       | $                                | 0.04       |                            | $          | (0.13 | ) | $ | 0.01 |   | $ | (0.70 | ) |
| diluted                                  |       | $                                | 0.04       |                            | $          | (0.13 | ) | $ | 0.01 |   | $ | (0.70 | ) |

 

NewAccounting Pronouncement

InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxesrecognized in accordance with SFAS No. 109, “Accounting for Income Taxes.”  This Interpretation prescribes acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken in income tax returns.  The Companyis currently evaluating the impact of FIN 48. The Company will adopt this Interpretation in the first quarter offiscal 2008.

**Note2.  Earnings Per Share**

Basic earnings(loss) per share is computed by dividing net earnings (loss) by the weightedaverage number of common shares outstanding for the period.  Dilutedearnings per share is computed using the weighted-average number of commonshares outstanding plus the number of additional common shares that would havebeen outstanding if dilutive common shares had been issued.  For the threeand nine months ended June 30, 2005, all potentially dilutive securitiesoutstanding were anti-dilutive.  For thethree and nine months ended June 30, 2006, all potentially dilutive securities,except for stock options to purchase 179,500 and 145,500 shares, respectively,of the Company’s common stock at $8.33 per share, were anti-dilutive.

7

----

**Note 3.  Other Comprehensive Income (Loss)**
|                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                | ** ** | **June 30,**               | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**          | ** ** |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                 |       | $                                | 134        |                            | $          | (283 | ) | $ | 84 |   | $ | (1,632 | ) |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Change in  unrealized gain (loss) on securities available for sale |       | —                           |       | (4                              | )          | 3 |   | (6 | ) |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Other comprehensive  income (loss)                                 |       | $                                | 134        |                            | $          | (287 | ) | $ | 87 |   | $ | (1,638 | ) |

 

**Note 4.  Securities**

Securitiesconsisted of the following (in thousands):
|                                      | ** ** | **As of**              | ** ** | **As of**                    | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **June 30, 2006** | ** ** | **September 30, 2005:** | ** ** |
| ** **                           | ** ** | **Amortized**               | ** ** | **Fair**                          | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                           | ** ** | **Cost**                    | ** ** | **Value**                         | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities Held  to Maturity:        |       |                        |       |                              |       |   |   |   |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| U.S. Government Agencies             |       | $                           | 1,999      |                              | $          | 1,984 |   | $ | 3,495 |   | $ | 3,467 |   |
| Mortgage-backed securities           |       | 6                           |       | 5                                 |       | 6 |   | 5 |   |
| Total Securities  Held to Maturity   |       | 2,005                       |       | 1,989                             |       | 3,501 |   | 3,472 |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| Securities  Available for Sale:      |       |                        |       |                              |       |   |   |   |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| U.S. Government Agencies             |       | 400                         |       | 399                               |       | 401 |   | 396 |   |
| Mortgage-backed securities           |       | 19                          |       | 19                                |       | 30 |   | 31 |   |
| Total Securities  Available for Sale |       | 419                         |       | 418                               |       | 431 |   | 427 |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| Total                                |       | $                           | 2,424      |                              | $          | 2,407 |   | $ | 3,932 |   | $ | 3,899 |   |

 

Mortgage-backed securities are backed by pools of mortgages and aretypically insured or guaranteed by the Federal Home Loan Mortgage Corporation(FHLMC), the Federal National Mortgage Association (FNMA) or the GovernmentNational Mortgage Association (GNMA).

AtJune 30, 2006, $2,207,000 of the Company’s securities at fair value were pledgedto Texline Independent School District ($1,012,000) and to the City of Texline($1,195,000).

**Note 5.  Loans and Allowance for Loan Losses**

The Company grants agribusiness, real estate, and commercial loans tocustomers primarily in the Austin area and the Texas Panhandle.  Loans at June 30, 2006, and September 30,2005, were as follows (in thousands):

8

----

 
|                                  | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | ** **                  | ** ** | ** **                       | ** ** |
| Agricultural                     |       | $                           | 2,522      |                             | $          | 3,261 |   |
| Commercial                       |       | 15,388                      |       | 12,887                           |       |
| Real Estate -  commercial        |       | 18,311                      |       | 8,619                            |       |
| Real Estate -  residential       |       | 7,461                       |       | 4,524                            |       |
| Real Estate -  construction      |       | 4,554                       |       | 4,152                            |       |
| Consumer and  other              |       | 5,044                       |       | 2,517                            |       |
| **Gross  Loans**                 |       | 53,280                      |       | 35,960                           |       |
| Less: allowance  for loan losses |       | (437                        | )          | (277                             | )          |
|                             |       |                        |       |                             |       |
| **Net  Loans**                   |       | $                           | 52,843     |                             | $          | 35,683 |   |

 

Activity in the allowance for loan losses for the three months and ninemonths ended June 30, 2006 and June 30, 2005 was as follows (in thousands): 
|                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **June 30,**               | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Balance at  beginning of period             |       | $                                | 358        |                            | $          | 258 |   | $ | 277 |   | $ | 217 |   |
| Provision for  loan losses                  |       | 90                               |       | 30                              |       | 180 |   | 60 |   |
| Loans charged  off                          |       | (12                              | )          | —                          |       | (22 | ) | (1 | ) |
| Recoveries on  loans previously charged-off |       | 1                                |       | 1                               |       | 2 |   | 13 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Balance at the end of  the period           |       | $                                | 437        |                            | $          | 289 |   | $ | 437 |   | $ | 289 |   |

 

The Company had no impaired loans at June 30, 2006 or September 30,2005.  At June 30, 2006 and September 30,2005, the Bank had approximately $162,000 and $91,000, respectively, innonperforming loans including non-accrual loans and loans past due over 90 daysand still accruing interest.

**Note 6.  Premises and Equipment**

Premises and equipment at June 30, 2006, and September 30, 2005, wereas follows (in thousands):
|                                                 | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| Land                                            |       | $                           | 959        |                             | $          | 949 |   |
| Building and  leasehold improvements            |       | 4,566                       |       | 4,520                            |       |
| Furniture,  fixtures and equipment              |       | 770                         |       | 718                              |       |
| Subtotal                                        |       | 6,295                       |       | 6,187                            |       |
| Less accumulated  depreciation and amoritzation |       | (625                        | )          | (368                             | )          |
| Total                                           |       | $                           | 5,670      |                             | $          | 5,819 |   |

 

Depreciation andamortization expense for the nine months ended June 30, 2006 and 2005 was $257,000and $207,000, respectively.

**Note 7.  Deposits**

Time deposits of $100,000 or more totaled $5,514,000 and $7,797,000 atJune 30, 2006 and September 30, 2005, respectively. At June 30, 2006 andSeptember 30, 2005, the scheduled maturities of time deposits were as follows(in thousands):

9

----

 
|                                                    | ** ** | **As of**              | ** ** | **As of**                   | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|                                               |       |                        |       |                             |       |
| Time deposits  maturing in the fiscal year ending: |       |                        |       |                             |       |
|                                               |       |                        |       |                             |       |
| 2006                                               |       | $                           | 8,157      |                             | $          | 12,685 |   |
| 2007                                               |       | 6,830                       |       | 2,391                            |       |
| 2008                                               |       | 329                         |       | —                           |       |
|                                               |       | $                           | 15,316     |                             | $          | 15,076 |   |

 

**Note 8.  Goodwill and Other Intangibles**

In conjunctionwith the acquisition of Texline State Bank, the Company recorded Goodwill of$1,161,000 and core deposit intangibles of $70,000.  Goodwill is periodically reviewed, at leastannually, to determine whether a decline invalue exists which requires a charge to earnings and a reduction to goodwillreflected on the statement of financial condition of the Company.

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, 2006 and September 30, 2005 (inthousands):
|                                 | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
|                            |       |                        |       |                             |       |
| Gross core  deposit intangibles |       | $                           | 70         |                             | $          | 70 |   |
| Less accumulated  amortization  |       | (23                         | )          | (16                              | )          |
|                            |       |                        |       |                             |       |
| Net core deposit  intangibles   |       | $                           | 47         |                             | $          | 54 |   |

 

**Note9.  Stock Based Compensation and 2004Stock Incentive Plan**

On January 19,2004, the Company and its shareholders approved the Company’s 2004 StockIncentive Plan (the “Plan”).  The Plan authorizes incentive stock optiongrants, non-statutory stock option grants, direct stock issuances, stockappreciation rights, salary investment option grants, and director fee optiongrants.  Eligible participants are employees, non-employee board members,and independent consultants or advisors.  The Company has reserved 500,000shares of common stock under the Plan, and the share reserve increases on the 1st business day in January each year(beginning in 2005) by an amount equal to 2% of the number of outstandingshares of the Company on the last business day in December of thepreceding year, subject to a maximum annual increase of 100,000 shares. No person may receive stock option grants, stock issuances, or stockappreciation rights for more than 100,000 shares in the aggregate in anycalendar year under the Plan.

On October 25, 2005, theCompany granted 82,750 options to purchase shares of stock at an exercise priceof $8.50 per share to fifteen (15) officers and directors.  The options become exercisable for the optionshares in three equal annual installments upon completion of each year of serviceover the three-year period of service measured from October 25, 2005.  On January 24, 2006, the Company granted 750options to purchase shares of stock at an exercise price of $8.50 per share totwo (2) employees.  The options becomeexercisable for the option shares in three equal annual installments uponcompletion of each year of service over the three-year period of servicemeasured from January 24, 2006.  On April24, 2006, the Company granted 1,500 options at an exercise price of $8.35 pershare to an employee associated with an employment offer.  The options become exercisable for the optionshares in three equal annual installments upon completion of each year ofservice over the three-year period of service measured from April 24, 2006.  On May 3, 2006, the Company granted 1,700 optionsat an exercise price of $8.35 per share to various employees as performancebased incentive.  The options becomeexercisable for the option shares in three equal annual installments uponcompletion of each year of service over the three-year period of servicemeasured from May 3, 2006.  On June 26,2006, the Company granted 200 options at an exercise price of $8.50 per shareto an employee as performance based incentive. The options become exercisable for the option shares in three equal

10

----

annual installments uponcompletion of each year of service over the three-year period of servicemeasured from June 26, 2006.

The table below presentsthe weighted average number of options issued and outstanding during the ninemonths ended June 30, 2006, and 2005.
| ** **                                                        | ** ** | **For the**                | ** ** | **For the**                 | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **Nine Months Ended** | ** ** | **Year Ended**              | ** ** |
| ** **                                                        | ** ** | **June 30, 2006**     | ** ** | **September 30, 2005** | ** ** |
| ** **                                                        | ** ** | ** **                      | ** ** | **Weighted**                     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                        | ** ** | ** **                      | ** ** | **Average**                      | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **Shares**                      | ** ** | **Exercise Price**          | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
|                                                              |       |                            |       |                             |       |   |   |   |   |
| Outstanding,  beginning of the period                             |       | 213,800                         |       | $                                | 8.42       |   | 175,500 |   | $ | 8.33 |   |
| Granted                                                           |       | 86,900                          |       | 8.49                             |       | 38,300 |   | 8.82 |   |
| Forfeited/expired                                                 |       | (33,250                         | )          | 8.38                             |       | — |   | — |   |
| Outstanding, end  of the period                                   |       | 267,450                         |       | $                                | 8.45       |   | 213,800 |   | $ | 8.42 |   |
|                                                              |       |                            |       |                             |       |   |   |   |   |
| Exercisable at  the end of the period                             |       | 137,216                         |       | $                                | 8.41       |   | 48,500 |   | $ | 8.33 |   |
| Weighted-average  fair value of options granted during the period |       |                            |       | $                                | 1.86       |   |   |   | $ | 1.77 |   |
| Weighted-average  remaining contractural life (months)            |       | 102                             |       |                             |       | 103 |   |   |   |

 

**Note10.  Other Related Party Transactions**

**Treaty OakHoldings, Inc.**

On October 11,2005, Treaty Oak Bancorp, Inc. made a $355,000 loan to Treaty Oak Holdings,Inc. (“TOHI”), a significant shareholder of Treaty Oak Bancorp, Inc., withinterest at 6.75% (WSJ Prime, floating) per annum, payable on the first of eachmonth beginning November 1, 2005.  The purposeof the loan was to enable TOHI to pay off certain obligations and provideworking capital.  On April 26, 2006, theobligation was renewed and increased to $373,000 at the then current WSJ primerate of 7.75%.  The principal balance,along with any accrued interest, is due and payable in full on September 1,2006.  On June 30, 2006, the outstandingprincipal balance of the loan was $371,000.

**Accounting andTax Services**

The Companyreceives tax planning advice and general tax and accounting services fromHamann, Ernstmeyer & Williamson, P.C. (formerly Hamann & Associates,P.C. “HEW”), a professional corporation of certified public accountants inwhich Mr. Hamann (the former Chief Executive Officer of the Company) owned an80% interest.  As of June 30, 2005, Mr.Hamann’s ownership was reduced to a 5% interest in HEW, and as of November,2005, he had no remaining ownership interest.  HEW is a firm focused on tax planning and advisory work and does notprovide auditing services to clients. For the nine months ended June 30, 2006, and June 30, 2005, the Companypaid approximately $35,000 and $104,000, respectively, for these servicesprimarily with respect to assistance in the preparation of the Company’s annualand periodic reporting, tax planning and reporting, and other advisoryservices.

**OtherTransactions**

The Company has a$131,000 and $34,000 Due from Affiliate balance as of June 30, 2006 andSeptember 30, 2005, respectively, which represents amounts due from Treaty OakHoldings, Inc. to PGI Equity Partners, LP for occupancy costs.

**Note 11.  Financial Instruments with Off-Balance SheetRisk**

In the normal course of business, the Company is a party to financialinstruments with off-balance sheet risk to meet the financing needs of itscustomers, through the use of commitments to extend credit.  Those instruments involve, to

11

----

varying degrees, elements of credit and interest-rate risk in excess ofthe amount recognized in the consolidated balance sheet.  The contract or notional amounts of thoseinstruments reflect the extent of the Company’s involvement in particularclasses of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for commitments to extend creditand standby letters of credit is represented by the contractual amount of thoseinstruments.  The Company uses the samecredit policies in making commitments and conditional obligations as they dofor on-balance sheet instruments.

The following table summarizes the Company’s off-balance sheetfinancial instruments as of June 30, 2006 and September 30, 2005 (inthousands):
|                               | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                    | ** ** | **2006**          | ** ** | **2005**               | ** ** |
|                          |       |              |       |                   |       |
| Commitments to  extend credit |       | $                 | 11,044     |                   | $          | 14,043 |   |
| Standby letters of credit     |       | $                 | 1,962      |                   | $          | 269 |   |

 

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 require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The Company evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained if deemednecessary by the Company upon extension of credit is based on management’scredit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory,property, plant and equipment and income-producing commercial properties.

Standby letters of credit are written conditionalcommitments used by the Company to guarantee the performance of a customer to athird party.  The Company’s policiesgenerally require that letter of credit arrangements contain security and debtcovenants similar to those contained in loan arrangements.  In the event the customer does not perform inaccordance with the terms of the agreement with the third party, the Companywould be required to fund the commitment. The maximum potential amount of future payments the Company could berequired to make is represented by the contractual amount shown in the tableabove.  If the commitment is funded, theCompany would be entitled to seek recovery from the customer.  As of June 30, 2006, no amounts have beenrecorded as liabilities for the Company’s potential obligations under theseguarantees.

**Note 12.  Dividend Restrictions and Regulatory Matters**

Banks and bankholding companies are subject to regulatory capital requirements administeredby state and federal banking regulatory agencies.  Capital adequacy guidelines and, additionallyfor banks, prompt corrective action regulations involve quantitative measures ofassets, liabilities, and certain off-balance sheet items calculated underregulatory accounting practices.  Capitalamounts and classifications are also subject to qualitative judgments byregulators about components, risk weightings and other factors.  Failure to meet capital requirements caninitiate regulatory action.  As of June30, 2006, management believes the Bank is in compliance with all regulatorycapital requirements to which it is subject.

The followingtable sets forth the actual capital levels for the Bank in addition to therequirements under prompt corrective action regulations (in thousands):

12

----

 
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                             | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| (Bank Only)                            |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| June 30, 2006:                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Tier I capital to average assets       |       | $          | 8,006      |                       | 12.14      | %                          | $          | 2,637                      |       | 4.0                        | %          | $ | 3,297 |   | 5.0 | % |
| Tier I capital to risk weighted assets |       | 8,006      |       | 13.48                      | %          | 2,375                      |       | 4.0                        | %          | 3,563                      |       | 6.0 | % |
| Total capital to risk weighted assets  |       | $          | 8,443      |                       | 14.22      | %                          | $          | 4,750                      |       | 8.0                        | %          | $ | 5,938 |   | 10.0 | % |
| September 30,  2005:                   |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Tier I capital to average assets       |       | $          | 7,617      |                       | 14.71      | %                          | $          | 2,071                      |       | 4.0                        | %          | $ | 2,589 |   | 5.0 | % |
| Tier I capital to risk weighted assets |       | 7,617      |       | 18.12                      | %          | 1,654                      |       | 4.0                        | %          | 2,481                      |       | 6.0 | % |
| Total capital to  risk weighted assets |       | $          | 7,894      |                       | 19.09      | %                          | $          | 3,307                      |       | 8.0                        | %          | $ | 4,134 |   | 10.0 | % |

 

As of June 30,2006, the Bank met the level of capital required to be categorized as “wellcapitalized” under prompt corrective action regulations.  Management is not aware of any conditionssubsequent to June 30, 2006, 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).

Fromits initial acquisition of Texline State Bank, the Company’s banking operationshad been subject 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’s acquisition ofTexline State Bank on March 9, 2004.  Followingthe FDIC examination of Treaty Oak Bank in November, 2004, the FDIC terminatedthe MOU and proposed a new MOU that was more limited in scope.  In February 2005, Treaty Oak Bank agreed tobecome subject to the new MOU, which was subsequently executed effective March3, 2005 by the FDIC.  The Bank hadaddressed all of the issues identified in the new MOU by March 31, 2005.  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 based upon the Bank’s affirmativeactions in a letter dated April 25, 2005 from the FDIC.

TheTDB and the FDIC conducted a joint safety and soundness examination of the bankand holding companies during December, 2005 and reported their findings to theboard of directors on January 10, 2006. The final written report was received by management in March, 2006, atwhich time the bank was advised of the official termination of the MOU.

Certainrestrictions exist regarding the ability of the Bank to pay cashdividends.  Regulatory approval isrequired in order to pay dividends until such time as the accumulated deficitis eliminated and certain other conditions are met.   Further, the Company has been notified byits banking regulators that no approval will be received in the first threeyears of operations.

13

----

** **

**Item 2.                    *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

**Introduction**

We are a bank holding company headquartered in Austin,Texas.  We operate a state charteredbank, Treaty Oak Bank (the “Bank”) in Austin, Texas with a branch in Texline,Texas.  We began operations in Austin,Texas on September 10, 2004, and as a result, our operating history, as itrelates to the banking industry, is limited.  In the course of preparing our consolidated financial statements, we usecertain estimates with respect to loans, intangibles, the allowance for loanlosses and other estimates necessary for financial reporting.  We have made no significant changes to thetypes of estimates and the manner in which they are determined since the filingof our annual report on Form 10-KSB, except as otherwise noted within thisdiscussion and analysis.

**Results of Operations**

*General*

The following discussion analyzes the results of theCompany for the three months and nine months ended June 30, 2006, and June 30,2005.

***Net Income—General***

For the three months ended June 30, 2006, the Companyhad net income of $134,000, compared to a net loss of $283,000 for the threemonths ended June 30, 2005.  Theimprovement is attributable to the increase in net interest income, as theCompany grew its earning assets 73.3% from June 30, 2005 and increased theyield on those assets 124 basis points from 6.63% to 7.87%.  For the same comparative period, interestbearing liabilities grew 61.5%, and the rates paid on those deposits decreased8 basis points, resulting in a substantial increase in net interest income.

For the nine months ended June 30, 2006, the Companyhad net income of $84,000 compared to a net loss of $1,632,000 for the ninemonths ended June 30, 2005, which losses included costs associated with thestart up of operations in Austin. The improvement in operations is alsoattributable to the increase in net interest income, as the Company grew itsearning assets at a faster pace and at a greater yield than its interestbearing liabilities.

Our profitability depends primarily on net interestincome, which is defined as the difference between total interest earned oninterest earning assets (investments and loans) and total interest paid oninterest bearing liabilities (deposits, borrowed funds). The Company’s netincome is affected by its provision for loan losses, as well as other incomeand other expenses. The provision for loan losses reflects the amountconsidered to be adequate to cover probable credit losses in the loanportfolio. Non-interest income or other income consists of service charges ondeposits, gain on sale of loans, and other operating income. Other expensesinclude salaries and employee benefits, occupancy expenses, data processingexpenses, marketing, supplies, and other operating expenses.

Net interest income isaffected by changes in the volume and mix of interest earning assets, the levelof interest rates earned on those assets, the volume and mix of interestbearing liabilities, and the level of interest rates paid on those interestbearing liabilities. The provision for loan losses is dependent upon changes inthe loan portfolio and management’s assessment of the collectibility of theloan portfolio, as well as economic and market conditions. Other income andother expenses are impacted by growth of operations and growth in the number ofaccounts through both acquisitions and core banking business growth. Growth inoperations affects other expenses as a result of additional employees, branchfacilities, and promotional marketing expense. Growth in the number of accountsaffects other income including service fees, as well as other expenses such ascomputer services, supplies, postage, telecommunications, and othermiscellaneous expenses.

14

----

***Net Interest Income***

For the three months ended June30, 2006, our net interest income was $940,000 compared to $413,000 for thethree months ended June 30, 2005.  Forthe nine months ended June 30, 2006, our net interest income was $2,468,000compared to $925,000 for the nine months ended June 30, 2005.

For the comparative three monthperiods of June 30, 2006, and June 30, 2005, the average rate on interest-bearingliabilities decreased 8 basis points, from 3.38% to 3.30%, while the averagerate on interest bearing assets improved 124 basis points from 6.63% to 7.87%during the same period.   For thecomparative nine month periods ended June 30, 2006 and June 30, 2005, theaverage rate on interest-bearing liabilities increased 61 basis points,from 2.56% to 3.17%, while the average rate on interest bearing assets improved204 basis points from 5.67% to 7.71% during the same period.

The following tables present, forthe periods indicated, the total dollar amount of interest income from averageinterest earning assets, and the resultant yields, as well as the interestexpense on average interest bearing liabilities, and the resultant costs,expressed both in dollars and rates. The averages are computed using the dailyaverages for each item noted. Yields are reflected on an annualized basis.

15

----

 
|                                                  | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                | ** ** | **June 30,**                | ** ** |
| ** **                                       | ** ** | **2006**                         | ** ** | **2005**                         | ** ** |
| ** **                                       | ** ** | **Average**                      | ** ** | ** **                       | ** ** | **Yield /** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield /** | ** ** |
| ** **                                       | ** ** | **Balance**                      | ** ** | **Interest (2)**            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest (2)** | ** ** | **Rate** | ** ** |
| Interest Earning  Assets:                        |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Loans (1)                                        |       | $                                | 50,780     |                             | $          | 1,104 |   | 8.70 | % | $ | 25,985 |   | $ | 507 |   | 7.80 | % |
| Taxable investment securities                    |       | 2,856                            |       | 22                               |       | 3.08 | % | 4,852 |   | 35 |   | 2.89 | % |
| Federal funds sold                               |       | 6,030                            |       | 73                               |       | 4.84 | % | 5,063 |   | 38 |   | 3.00 | % |
| Interest bearing deposits with other banks       |       | 2,681                            |       | 31                               |       | 4.63 | % | — |   | 19 |   | 0.00 | % |
| FHLB and TIB stock                               |       | 324                              |       | 3                                |       | 3.70 | % | 254 |   | — |   | 0.00 | % |
| Total interest  earning assets                   |       | 62,671                           |       | 1,233                            |       | 7.87 | % | 36,154 |   | 599 |   | 6.63 | % |
| Non-interesting earning assets                   |       | 9,633                            |       |                             |       |   |   | 11,633 |   |   |   |   |   |
| Total Assets                                     |       | $                                | 72,304     |                             |       |   |   |   | $ | 47,787 |   |   |   |   |   |
|                                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                   |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Deposits:                                        |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| NOW and money market deposits                    |       | $                                | 18,118     |                             | 105        |   | 2.32 | % | $ | 10,756 |   | 53 |   | 1.97 | % |
| Savings deposits                                 |       | 424                              |       | 1                                |       | 0.94 | % | 477 |   | 1 |   | 0.84 | % |
| Time Deposits                                    |       | 14,296                           |       | 146                              |       | 4.09 | % | 6,311 |   | 90 |   | 5.70 | % |
| Short-term borrowings                            |       | 4                                |       | —                           |       | 0.00 | % | 1,608 |   | — |   | 0.00 | % |
| Property mortgage  and long-term borrowings      |       | 2,687                            |       | 41                               |       | 6.10 | % | 2,852 |   | 42 |   | 5.89 | % |
| Total interest  bearing liabilities              |       | 35,529                           |       | 293                              |       | 3.30 | % | 22,004 |   | 186 |   | 3.38 | % |
| Demand deposits - non-interest bearing           |       | 24,937                           |       |                             |       |   |   | 4,825 |   |   |   |   |   |
| Other non-interest bearing liabilities           |       | 707                              |       |                             |       |   |   | 8,393 |   |   |   |   |   |
| Shareholders’  equity                       |       | 11,131                           |       |                             |       |   |   | 12,565 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                                | 72,304     |                             |       |   |   |   | $ | 47,787 |   |   |   |   |   |
|                                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Net interest  income                             |       |                             |       | $                                | 940        |   |   |   |   |   | $ | 413 |   |   |   |
|                                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest rate spread (3)                         |       |                             |       |                             |       | 4.57 | % |   |   |   |   | 3.25 | % |
| Net interest  margin (4)                         |       |                             |       |                             |       | 6.00 | % |   |   |   |   | 4.57 | % |

 
|                                                  | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **June 30,**               | ** ** | **June 30,**               | ** ** |
| ** **                                       | ** ** | **2006**                        | ** ** | **2005**                        | ** ** |
| ** **                                       | ** ** | **Average**                     | ** ** | ** **                      | ** ** | **Yield /** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield /** | ** ** |
| ** **                                       | ** ** | **Balance**                     | ** ** | **Interest (2)**           | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest (2)** | ** ** | **Rate** | ** ** |
| Interest Earning  Assets:                        |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Loans (1)                                        |       | $                               | 44,334     |                            | $          | 2,887 |   | 8.68 | % | $ | 18,646 |   | $ | 1,073 |   | 7.67 | % |
| Taxable investment securities                    |       | 3,463                           |       | 76                              |       | 2.93 | % | 3,816 |   | 92 |   | 3.21 | % |
| Federal funds sold                               |       | 5,006                           |       | 181                             |       | 4.82 | % | 8,413 |   | 124 |   | 1.97 | % |
| Interest bearing deposits with other banks       |       | 2,815                           |       | 83                              |       | 3.93 | % | — |   | 34 |   | 0.00 | % |
| FHLB and TIB stock                               |       | 320                             |       | 8                               |       | 3.34 | % | 233 |   | — |   | 0.00 | % |
| Total interest  earning assets                   |       | 55,938                          |       | 3,235                           |       | 7.71 | % | 31,108 |   | 1,323 |   | 5.67 | % |
| Non-interesting earning assets                   |       | 18,173                          |       |                            |       |   |   | 9,946 |   |   |   |   |   |
| Total Assets                                     |       | $                               | 74,111     |                            |       |   |   |   | $ | 41,054 |   |   |   |   |   |
|                                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                   |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Deposits:                                        |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| NOW and money market deposits                    |       | $                               | 15,557     |                            | 289        |   | 2.48 | % | $ | 10,635 |   | 135 |   | 1.69 | % |
| Savings deposits                                 |       | 448                             |       | 2                               |       | 0.60 | % | 458 |   | 2 |   | 0.58 | % |
| Time Deposits                                    |       | 13,503                          |       | 372                             |       | 3.67 | % | 5,936 |   | 160 |   | 3.59 | % |
| Short-term borrowings                            |       | 46                              |       | —                          |       | 0.00 | % | 804 |   | — |   | 0.00 | % |
| Property mortgage  and long-term borrowings      |       | 2,702                           |       | 104                             |       | 5.13 | % | 2,886 |   | 101 |   | 4.67 | % |
| Total interest bearing  liabilities              |       | 32,256                          |       | 767                             |       | 3.17 | % | 20,719 |   | 398 |   | 2.56 | % |
| Demand deposits - non-interest bearing           |       | 21,055                          |       |                            |       |   |   | 5,076 |   |   |   |   |   |
| Other non-interest bearing liabilities           |       | 10,628                          |       |                            |       |   |   | 3,219 |   |   |   |   |   |
| Shareholders’  equity                       |       | 10,173                          |       |                            |       |   |   | 12,040 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                               | 74,111     |                            |       |   |   |   | $ | 41,054 |   |   |   |   |   |
|                                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Net interest  income                             |       |                            |       | $                               | 2,468      |   |   |   |   |   | $ | 925 |   |   |   |
|                                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Interest rate spread (3)                         |       |                            |       |                            |       | 4.54 | % |   |   |   |   | 3.11 | % |
| Net interest  margin (4)                         |       |                            |       |                            |       | 8.82 | % |   |   |   |   | 5.95 | % |

 

----

(1)                                  Non-accrual loans are includedin average loans.

(2)                                  Interest income includesloan fees of $38,000 and $94,000, respectively, for the three months and ninemonths ended June 30, 2006 and $31,000 and $61,000, respectively, for the threemonths and nine months ended June 30, 2005.

(3)                                  Interest rate spreadrepresents the difference between the average yield on interest earning assetsand the average cost of interest bearing liabilities.

(4)                                  Net interest marginrepresents annualized net interest income as a percentage of average interestearning assets.

16

----

***Volume, Mix and Rate Analysis of NetInterest Income***

The following table presents theextent to which changes in volume, changes in interest rates, and changes inthe interest rates times the changes in volume of interest earning assets andinterest bearing liabilities affected the Bank’s interest income and interestexpense during the periods indicated. Information is provided on changes ineach category due to (1) changes attributable to changes in volume (changein volume times the prior period interest rate), (2) changes attributableto changes in interest rate (changes in rate times the prior period volume),and (3) changes attributable to changes in rate/volume (changes ininterest rate times changes in volume). Changes attributable to the combinedimpact of volume and rate have been allocated proportionally to the changes dueto volume and the changes due to rate:
|                                             | ** ** | **Three Months Ended June 30, 2006** | ** ** | **Nine Months Ended June 30, 2006**  | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Compared to**                                          | ** ** | **Compared to**                                          | ** ** |
| ** **                                  | ** ** | **Three Months Ended June 30, 2005** | ** ** | **Nine Months Ended March 30, 2005** | ** ** |
| ** **                                  | ** ** | **Change Due**                                           | ** ** | **Change Due**                                           | ** ** | **Total** | ** ** | **Change Due** | ** ** | **Change Due** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **to Volume**                                            | ** ** | **to Rate**                                              | ** ** | **Change** | ** ** | **to Volume** | ** ** | **to Rate** | ** ** | **Change** | ** ** |
| **Interest  Earning Assets:**               | ** ** | ** **                                                    | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                       |       | 2,078                                                         |       | (1,481                                                        | )          | 597 |   | 3,385 |   | (1,571 | ) | 1,814 |   |
| Taxable investment securities               |       | (61                                                           | )          | 48                                                            |       | (13 | ) | 26 |   | (42 | ) | (16 | ) |
| Federal funds sold                          |       | 21                                                            |       | 14                                                            |       | 35 |   | (132 | ) | 189 |   | 57 |   |
| Interest bearing deposits in banks          |       | 6                                                             |       | 6                                                             |       | 12 |   | 24 |   | 25 |   | 49 |   |
| Federal Home Loan Bank stock and other      |       | —                                                        |       | 3                                                             |       | 3 |   | — |   | 8 |   | 8 |   |
|                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Increase  (decrease) in interest income     |       | 2,044                                                         |       | (1,410                                                        | )          | 634 |   | 3,303 |   | (1,391 | ) | 1,912 |   |
|                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Interest  Bearing Liabilities:**          | ** ** | ** **                                                    | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| NOW and money market deposit accounts       |       | 193                                                           |       | (141                                                          | )          | 52 |   | (15,187 | ) | 15,341 |   | 154 |   |
| Savings deposits                            |       | —                                                        |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Time deposits                               |       | 541                                                           |       | (485                                                          | )          | 56 |   | 417 |   | (205 | ) | 212 |   |
| Short term borrowings                       |       | —                                                        |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Long term borrowings                        |       | (10                                                           | )          | 9                                                             |       | (1 | ) | — |   | 3 |   | 3 |   |
|                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Increase  (decrease) in interest expense    |       | 724                                                           |       | (617                                                          | )          | 107 |   | (14,770 | ) | 15,139 |   | 369 |   |
|                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Increase (decrease) in  net interest income |       | 1,320                                                         |       | (793                                                          | )          | 527 |   | 18,073 |   | (16,530 | ) | 1,543 |   |

***Provision for LoanLosses***

The provision for loan losses is a charge (credit)determined by management as the amount necessary to increase (decrease) theallowance for loan losses after net charge-offs have been deducted to a levelthat, in management’s best estimate, is necessary to absorb probable losses inthe loan portfolio. The amount of the provision is based on management’s reviewof the loan portfolio and consideration of such factors as historical lossexperience, general prevailing economic conditions, changes in the size andcomposition of the loan portfolio and specific borrower considerations,including the ability of the borrower to repay the loan and the estimated valueof the underlying collateral. The provision is calculated monthly and a charge(credit) to operations is made, as required, to increase (decrease) theallowance to the calculated level.

For the three months ended June 30, 2006, theprovision for loan losses was $90,000 compared to $30,000 for the three monthsended June 30, 2005. For the three months ended June 30, 2005, the Bank chargedoff $0 in commercial and consumer loans and had recoveries of loans previouslycharged off of $1,000 for net recoveries of $1,000. For the three months endedJune 30, 2006, the Bank charged off $12,000 in commercial and consumer loansand had recoveries of loans previously charged off of 1,000 for net charge offsof $11,000.  The growth of the loanportfolio for the three months ended June 30, 2006 of $4,374,000, combined withreserves established for each loan based on perceived risk of loss, resulted inan increase of the Allowance for Loan Losses to $437,000 or 0.83% of theportfolio.  For the nine month’s endedJune 30, 2006 and June 30, 2005, the provision for loan losses was $180,000 and$60,000 respectively.  For the ninemonths ended June 30, 2006, the Bank charged off $22,000 in commercial andconsumer loans and had recoveries of loans previously charged off of $1,000 fora net charge off of $20,000.  For thenine months ended June 30, 2005, the Bank charged off $1,000 in commercial andconsumer loans and had recoveries of loans previously charged off of $13,000,for a net recovery of $12,000.

17

----

***Income Taxes***

No federal tax benefit has been recorded for the threeand nine months ended June 30, 2006, and 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, as management believes their realization is not likelyto occur.

**Financial Condition**

***Loan Portfolio***

Net loans increased $17,160,000 (48%) to $52,843,000from $35,683,000 between June 30, 2006 and September 30, 2005. Theconcentration within the portfolio has shifted over time from the previousconcentration of agricultural loans to real estate and commercial loans.

***Loan Portfolio Mix***

The following tables set forth the composition of theloan portfolio:

|                                  | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
|                             |       |                        |       |                             |       |
| Agricultural                     |       | $                           | 2,522      |                             | $          | 3,261 |   |
| Commercial                       |       | 15,388                      |       | 12,887                           |       |
| Real Estate -  commercial        |       | 18,311                      |       | 8,619                            |       |
| Real Estate -  residential       |       | 7,461                       |       | 4,524                            |       |
| Real Estate -  construction      |       | 4,554                       |       | 4,152                            |       |
| Consumer and  other              |       | 5,044                       |       | 2,517                            |       |
| **Gross  Loans**                 |       | 53,280                      |       | 35,960                           |       |
| Less: allowance  for loan losses |       | (437                        | )          | (277                             | )          |
|                             |       |                        |       |                             |       |
| **Net Loans**                    |       | $                           | 52,843     |                             | $          | 35,683 |   |

Loan concentrations are considered to exist when thereare amounts loaned to multiple borrowers engaged in similar activities thatwould cause them to be similarly impacted by economic or other conditions.

Approximately $1,066,000 of the Bank’s residentialreal estate portfolio is comprised of single family residences in Houston. Themajority of these loans originated between 1996 and 1998 for 15-year terms withfixed rates of 8.75% or greater. These loans additionally have five-year callprovisions 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, loansoriginating 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 theconcentrations described above will continue to decline thereby diminishingundue risk associated with industry concentration.

Management may renew loans at maturity when requestedby a customer whose financial strength appears to support such a renewal orwhen such 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.

18

----

*LoanMaturities*

As of June 30, 2006, 47.77% of the loan portfolioconsisting of agricultural, commercial, real estate and consumer loans, or$23,456,000, mature or re-price within one year or less. $45,589,000 of theloan portfolio, or 85.56%, are variable rate loans.   At September 30, 2005, 36.52% of the loanportfolio consisting of agricultural, commercial, real estate and consumerloans, or $13,132,000, matured or re-priced within one year or less.$28,108,000 of the loan portfolio, or 78.16%, were variable rate loans. Thefollowing table presents the contractual maturity ranges for agricultural,commercial, real estate and consumer loans outstanding at June 30, 2006, and atSeptember 30, 2005, and also presents for each maturity range the portion ofloans that have fixed interest rates or interest rates that fluctuate over thelife of the loan in accordance with changes in the interest rate environment asrepresented by the base rate:
| ** **                  | ** ** | ** **                         | ** ** | ** **          | ** ** | **Due after One Year** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** |
|-----------------------------|------------|------------------------------------|------------|---------------------|------------|---------------------------------------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **                  | ** ** | **Due in One Year** | ** ** | **Through**         | ** ** | **Due after**                    | ** ** | ** **   | ** ** |
| ** **                  | ** ** | **or Less**                   | ** ** | **Five Years** | ** ** | **Five Years**                   | ** ** | ** **   | ** ** |
| ** **                  | ** ** | **Fixed**                          | ** ** | **Floating**        | ** ** | **Fixed**                             | ** ** | **Floating** | ** ** | **Fixed**  | ** ** | **Floating** | ** ** | ** ** | ** ** |
| **June 30, 2006** | ** ** | **Rate**                           | ** ** | **Rate**            | ** ** | **Rate**                              | ** ** | **Rate**     | ** ** | **Rate**   | ** ** | **Rate**     | ** ** | **Total** | ** ** |
| Agricultural                |       | $                                  | 2,000      |                | $          | 1,420,000                             |       | $            | —     |       | $          | 592,000      |       | $ | — |   | $ | 508,000 |   | $ | 2,522,000 |   |
| Real  Estate-residential    |       | 890,000                            |       | 1,755,000           |       | 1,179,000                             |       | 2,177,000    |       | 1,460,000  |       | —       |       | 7,461,000 |   |
| Real Estate-  commercial    |       | 210,000                            |       | 4,927,000           |       | 224,000                               |       | 8,303,000    |       | —     |       | 4,647,000    |       | 18,311,000 |   |
| Real Estate -  construction |       | 899,000                            |       | 2,682,000           |       | —                                |       | 973,000      |       | —     |       | —       |       | 4,554,000 |   |
| Commercial                  |       | 192,000                            |       | 10,658,000          |       | 1,815,000                             |       | 2,609,000    |       | —     |       | 114,000      |       | 15,388,000 |   |
| Consumer and  Other         |       | 112,000                            |       | 1,709,000           |       | 677,000                               |       | 2,515,000    |       | 31,000     |       | —       |       | 5,044,000 |   |
| **Total**                   |       | $                                  | 2,305,000  |                | $          | 23,151,000                            |       | $            | 3,895,000  |       | $          | 17,169,000   |       | $ | 1,491,000 |   | $ | 5,269,000 |   | $ | 53,280,000 |   |

 
| ** **                       | ** ** | ** **                         | ** ** | ** **          | ** ** | **Due after One Year** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------|------------|------------------------------------|------------|---------------------|------------|---------------------------------------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **                       | ** ** | **Due in One Year** | ** ** | **Through**         | ** ** | **Due after**                    | ** ** | ** **   | ** ** |
| ** **                       | ** ** | **or Less**                   | ** ** | **Five Years** | ** ** | **Five Years**                   | ** ** | ** **   | ** ** |
| ** **                       | ** ** | **Fixed**                          | ** ** | **Floating**        | ** ** | **Fixed**                             | ** ** | **Floating** | ** ** | **Fixed**  | ** ** | **Floating** | ** ** | ** ** | ** ** |
| **September 30, 2005** | ** ** | **Rate**                           | ** ** | **Rate**            | ** ** | **Rate**                              | ** ** | **Rate**     | ** ** | **Rate**   | ** ** | **Rate**     | ** ** | **Total** | ** ** |
|                             |       |                               |       |                |       |                                  |       |         |       |       |       |         |       |   |   |
| Agricultural                     |       | $                                  | 16,000     |                | $          | 1,873,000                             |       | $            | 2,000      |       | $          | 766,000      |       | $ | — |   | $ | 604,000 |   | $ | 3,261,000 |   |
| Real  Estate-residential         |       | 706,000                            |       | —              |       | 1,063,000                             |       | 1,612,000    |       | 1,077,000  |       | 66,000       |       | 4,524,000 |   |
| Real Estate-  commercial         |       | 233,000                            |       | 1,059,000           |       | 339,000                               |       | 4,975,000    |       | —     |       | 2,013,000    |       | 8,619,000 |   |
| Real Estate -  construction      |       | —                             |       | 936,000             |       | —                                |       | 2,988,000    |       | 228,000    |       | —       |       | 4,152,000 |   |
| Commercial                       |       | 328,000                            |       | 6,352,000           |       | 2,149,000                             |       | 3,935,000    |       | —     |       | 123,000      |       | 12,887,000 |   |
| Consumer and  Other              |       | 1,156,000                          |       | 473,000             |       | 539,000                               |       | 333,000      |       | 16,000     |       | —       |       | 2,517,000 |   |
| **Total**                        |       | $                                  | 2,439,000  |                | $          | 10,693,000                            |       | $            | 4,092,000  |       | $          | 14,609,000   |       | $ | 1,321,000 |   | $ | 2,806,000 |   | $ | 35,960,000 |   |

***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 oninvestment.

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:

19

----

 
|                                      | ** ** | **As of**              | ** ** | **As of**                    | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **June 30, 2006** | ** ** | **September 30, 2005:** | ** ** |
| ** **                           | ** ** | **Amortized**               | ** ** | **Fair**                          | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                           | ** ** | **Cost**                    | ** ** | **Value**                         | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities Held  to Maturity:        |       |                        |       |                              |       |   |   |   |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| U.S. Government Agencies             |       | $                           | 1,999      |                              | $          | 1,984 |   | $ | 3,495 |   | $ | 3,467 |   |
| Mortgage-backed securities           |       | 6                           |       | 5                                 |       | 6 |   | 5 |   |
| Total Securities  Held to Maturity   |       | 2,005                       |       | 1,989                             |       | 3,501 |   | 3,472 |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| Securities  Available for Sale:      |       |                        |       |                              |       |   |   |   |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| U.S. Government Agencies             |       | 400                         |       | 399                               |       | 401 |   | 396 |   |
| Mortgage-backed securities           |       | 19                          |       | 19                                |       | 30 |   | 31 |   |
| Total Securities  Available for Sale |       | 419                         |       | 418                               |       | 431 |   | 427 |   |
|                                 |       |                        |       |                              |       |   |   |   |   |
| Total                                |       | $                           | 2,424      |                              | $          | 2,407 |   | $ | 3,932 |   | $ | 3,899 |   |

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***

Thefollowing table sets forth the amount of non-performing loans andnon-performing assets as of June 30, 2006, and September 30, 2005:
|                                                          | ** ** | **At June 30,** | ** ** | **At September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **2006**                  | ** ** | **2005**                       | ** ** |
|                                                     |       |                      |       |                           |       |
| Non-accruing loans                                       |       | $                         | 162,000    |                           | $          | 85,000 |   |
| Loans 90 days or  more past due, still accruing interest |       | —                    |       | 6,000                          |       |
|                                                     |       |                      |       |                           |       |
| Total  non-performing loans                              |       | 162,000                   |       | 91,000                         |       |
| Other real  estate owned                                 |       | 36,000                    |       | —                         |       |
| Other  repossessed assets                                |       | 15,000                    |       | 15,000                         |       |
|                                                     |       |                      |       |                           |       |
| Total  non-performing assets                             |       | $                         | 213,000    |                           | $          | 106,000 |   |
|                                                     |       |                      |       |                           |       |
| Total  non-performing loans to total loans               |       | 0.30                      | %          | 0.25                           | %          |
| Allowance for  loan losses to non-performing loans       |       | 270                       | %          | 304                            | %          |
| Total non-performing  loans to total assets              |       | 0.31                      | %          | 0.17                           | %          |

***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.

During the ordinary course ofbusiness, management becomes aware of borrowers that may not be able to meetthe contractual requirements of loan agreements. Such loans are placed underclose supervision with consideration given to placing the loan on a non-accrualstatus, increasing the allowance for loan losses, and (if appropriate) partialor full charge-off. After a loan is placed on non-accrual status, any currentyear interest previously accrued but not yet collected is reversed againstcurrent income. When payments are received on non-accrual loans, such paymentsare applied to principal and not taken into income. Loans are not placed backon accrual status unless all back interest and principal payments are made. Ifinterest on non-accrual loans had been accrued, such income would have amountedto 

20

----

approximately $3,000 and $500 for the three months endedJune 30, 2006 and June 30, 2005, respectively. For the nine months ended June 30, 2006 and June 30, 2005 such incomewould have amounted to approximately $9,000 and $1,500 respectively.  These amounts were not included in interestincome during these periods.

Under Federal and Texas law, anyloan 90 or more days past due is required to be placed on non-accrual basisunless specifically identified mitigating circumstances exist. Our policy is toplace loans 90 days past due on non-accrual status. An exception is madewhen management believes the loan is fully secured and in process ofcollection. Non-accrual loans are further classified as impaired whenunderlying collateral is not sufficient to cover the loan balance and it isprobable that we will not fully collect all principal and interest. As of June30, 2006 and September 30, 2005, we had $162,000 and $85,000 in non-accrualloans, respectively. Loans contractually past due over 90 days whichcontinued to accrue interest totaled $0 on June 30, 2006 and $6,000 onSeptember 30, 2005, based upon specific information available at that timeto management.  In compliance with thesestatutes we have developed pro forma financial statements assuming that noloans will continue to accrue interest if they become 90 days past due,and instead transfer all such loans to non-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 30,2006 or September 30, 2005*.*

Non-performing assets alsoconsist of other repossessed assets and other real estate owned (“OREO”). OREOrepresents properties acquired through foreclosure or other proceedings and isrecorded at the lower of cost or fair market value less the estimated cost ofdisposal. OREO is evaluated regularly to ensure that the recorded amount issupported by its current fair market value. Valuation allowances to reduce thecarrying amount to fair market value less estimated costs of disposal arerecorded as necessary. Revenues and expenses from the operations of OREO andchanges in the valuation are included in other income and other expenses on theincome statement. As of June 30, 2006, we had $36,000 in other real estateowned.  The properties consist of twosingle family dwellings located in Dalhart, Texas, and one single family dwellinglocated in Texline, Texas. At September 30, 2005, we had no other real estateowned, and no acquisitions or dispositions of OREO during the fiscal year.Repossessed assets totaled $15,000 at June 30, 2006 and September 30,2005.

***Sources of Funds***

*General*

Deposits, short-term andlong-term borrowings, loan and investment security repayments and prepayments,proceeds from the sale of securities, and cash flows generated from operationsare the primary sources of our funds for lending, investing, and other generalpurposes. Loan repayments are a relatively predictable source of funds exceptduring periods of significant interest rate declines, while deposit flows tendto fluctuate with prevailing interests rates, money markets conditions, generaleconomic conditions, and competition.

*Deposits*

We offer a variety of depositaccounts with a range of interest rates and terms. Core deposits consist ofchecking accounts (non-interest bearing), “NOW” accounts, savings accounts, andnon-public certificates of deposit. These deposits, along with public funddeposits and short-term borrowings, are used to support our asset base.Deposits are obtained predominantly from the geographic trade areas surroundingour office locations. We rely primarily on customer service and long-standingrelationships with customers to attract and retain deposits; however, marketinterest rates and rates offered by competing financial institutionssignificantly affect our ability to attract and retain deposits.

The following table sets forth the maturities of timedeposits $100,000 and over as of June 30, 2006 and September 30, 2005:

21

----

 
|                                          | ** ** | **At June 30, 2006** | ** ** | **At September 30, 2005** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|
| Time deposits  $100,000 and over:        |       |                                |       |                                     |       |
| Matuiring within three months            |       | $                                   | 2,341,000  |                                     | $          | 4,760,000 |   |
| After three months but within six months |       | 2,055,000                           |       | 1,205,000                                |       |
| After six months but within 12 months    |       | 1,118,000                           |       | 1,523,000                                |       |
| After 12 months                          |       | —                              |       | 309,000                                  |       |
|                                     |       |                                |       |                                     |       |
| Total time deposits  $100,000 and over:  |       | $                                   | 5,514,000  |                                     | $          | 7,797,000 |   |

*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**      | ** ** | **For the**     | ** ** |
|------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **             | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
| ** **             | ** ** | **Ended**             | ** ** | **Ended**            | ** ** |
| ** **             | ** ** | **June 30,**     | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **             | ** ** | **2006**              | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Return on assets       |       | 0.18                  | %          | -0.52                | %          | 0.11 | % | -3.02 | % |
| Return on equity       |       | 1.20                  | %          | -2.54                | %          | 0.75 | % | -14.67 | % |
| Dividend payout  ratio |       | 0                     | %          | 0                    | %          | 0 | % | 0 | % |
| Equity to assets ratio |       | 15.02                 | %          | 20.56                | %          | 15.02 | % | 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, ifundertaken, could have a material adverse effect on the Bank’s financialstatements.

As of June 30, 2006 and as ofSeptember 30, 2005, the most recent notifications from the federal bankingregulators categorized the Bank as well-capitalized. A well-capitalizedinstitution must maintain a minimum ratio of total capital to risk-weightedassets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weightedassets of at least 6.00%, and a minimum ratio of Tier 1 capital to total assetsof at least 5.00% and must not be subject to any written order, agreement, ordirective requiring it to meet or maintain a specific capital level. There areno conditions or events since that notification that the Bank’s managementbelieves have changed the capital classification.

The Bank was in full compliancewith all applicable capital adequacy requirements as of June 30, 2006 andSeptember 30, 2005. The required and actual amounts and ratios for the Bank asof June 30, 2006 and September 30, 2005, are presented below:

22

----

 
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                             | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| (Bank Only)                            |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| June 30, 2006:                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Tier I capital to average assets       |       | $          | 8,006      |                       | 12.14      | %                          | $          | 2,637                      |       | 4.0                        | %          | $ | 3,297 |   | 5.0 | % |
| Tier I capital to risk weighted assets |       | 8,006      |       | 13.48                      | %          | 2,375                      |       | 4.0                        | %          | 3,563                      |       | 6.0 | % |
| Total capital to risk weighted assets  |       | $          | 8,443      |                       | 14.22      | %                          | $          | 4,750                      |       | 8.0                        | %          | $ | 5,938 |   | 10.0 | % |
| September 30,  2005:                   |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Tier I capital to average assets       |       | $          | 7,617      |                       | 14.71      | %                          | $          | 2,071                      |       | 4.0                        | %          | $ | 2,589 |   | 5.0 | % |
| Tier I capital to risk weighted assets |       | 7,617      |       | 18.12                      | %          | 1,654                      |       | 4.0                        | %          | 2,481                      |       | 6.0 | % |
| Total capital to  risk weighted assets |       | $          | 7,894      |                       | 19.09      | %                          | $          | 3,307                      |       | 8.0                        | %          | $ | 4,134 |   | 10.0 | % |

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

Withthe participation of management, the Company’s chief executive officer andchief financial officer reviewed and evaluated the Company’s disclosurecontrols and procedures as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the period covered by this report. Based on this evaluation, the chief executive officer and chieffinancial officer concluded that the disclosure controls and procedures areeffective to ensure that the information required to be disclosed by theCompany in reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported to the Company’s management within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

Therehave been no significant changes in the Company’s internal controls forfinancial reporting or in other factors that could significantly affect thesecontrols, including any significant deficiencies or material weaknesses ofinternal controls that would require corrective action.  In connection with the new rules, the Companyis currently in the process of further reviewing and documenting its disclosurecontrols and procedures, including its internal accounting controls, and mayfrom time to time make changes aimed at enhancing their effectiveness andensuring that the Company’s systems evolve with its business.

**PART II.                OtherInformation**

**Item 1.                    *Legal Proceedings***

                               None.

**Item 2.                    *Changes in Securities andUse of Proceeds***

On May 7, 2004, theSecurities and Exchange Commission declared our Registration Statement on FormSB-2 (File No. 333-112325) related to our initial public offeringeffective.  In addition, on October 22,2004, we filed a Form SB-2MEF under Rule 462 registering additional shares ofcommon stock and warrants to purchase our common stock under our publicoffering.  We registered a total of1,944,000 shares of our common stock, of which 324,000 shares are issuableunder registered common stock warrants. We accepted subscriptions for 1,589,602 shares of our common stock underthe offering and have received gross offering proceeds of approximately $13.3million.

23

----

As of June 30,2006, we had paid our organizing shareholder and affiliate, Treaty OakHoldings, Inc. 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 repaidprincipal and interest under unsecured promissory notes issued in connectionwith the purchase price of the Bank.  Thetable below summarizes the use of net offering proceeds through June 30, 2006:

|                                                                                                                                                                                           | ** ** | **As of  06/30/06** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| Gross proceeds from  sale of shares                                                                                                                                                       |       | $                        | 13,276,271 |   |
|                                                                                                                                                                                      |       |                     |       |
| 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)                                                                                                                    |       | (185,187                 | )          |
| Payments to officers  (salary and benefits)                                                                                                                                               |       | (320,320                 | )          |
| Other payments to  affiliates for services                                                                                                                                                |       | (149,057                 | )          |
|                                                                                                                                                                                      |       |                     |       |
| Limited partnership  investment in affiliated limited partnership                                                                                                                         |       | (1,030,000               | )          |
| Loan to affiliated  company                                                                                                                                                               |       | (370,947                 | )          |
| Repurchase of shares  issued                                                                                                                                                              |       | (50,005                  | )          |
| Payment of additional  operating expenses (estimated)                                                                                                                                     |       | (823,248                 | )          |
| Remaining net proceeds                                                                                                                                                                    |       | $                        | 549,873    |   |

 

Of the amountreferenced as “Repayment of notes payable for the acquisition of Texline StateBank,” $679,691 was paid to Charles T. Meeks, a member of our Board ofDirectors and Chairman of the Board of the Bank.   An additional amount of $18,783 due to Mr.Meeks from the acquisition of the Bank previously held in escrow is alsoincluded in this amount.  On November 18,2004, we approved the purchase of a 47.5% preferential limited partnershipinterest in PGI Equity Partners, L.P., which owns and operates the buildingpremises we lease, for $950,000.  Adeposit of $150,000 was paid on November 18, 2004 and the balance of thepurchase price of $800,000 was paid on December 30, 2004, at closing.  On February 23, 2006, we purchased theremaining 3.75% minority interests in PGI Equity Partners, LP for $80,000bringing the Company’s percentage ownership to 51.25%. We had originallyanticipated these funds would be used to capitalize 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 the Bank.On October 11, 2005, Treaty Oak Bancorp, Inc. made a $355,000 loan to TreatyOak Holdings, Inc. (“TOHI”) with an interest rate equal to the Wall StreetJournal prime rate and monthly interest payments due on the first of each monthbeginning November 1, 2005. On April 10, 2006, the loan was renewed andincreased to $373,000. The total principal advanced under this loan throughJune 30, 2006, was $373,000 at the then current WSJ prime interest rate of7.75%.  The purpose of the loan was toenable TOHI to pay off certain obligations and to provide sufficient workingcapital liquidity to TOHI until the proposed merger with the Company has beencompleted.  The principal balance, alongwith any accrued interest, is due and payable in full on September 1, 2006. Theremaining net proceeds have been invested in short-term interest bearing, moneymarket accounts.

24

----

## **Item 3.    *                Defaultsupon Senior Securities***

None.

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

None.

**Item 5.                    *Other Information***

On July 25, 2006 the election of Sandra Ellsworth asChief Financial Officer was ratified by the board of directors.

**Item 6.                    *Exhibits***

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                                                                                      |

 

----

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

25

----

**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,thereunto duly authorized.

 
|                        | **TREATY OAK BANCORP, INC.** |
|------------------------|------------------------------|
| ** **             |                         |
| ** **             |                         |
| Dated: August 17, 2006 | By:                          | /s/ Jeffrey L. Nash |   |
|                   |                         | Jeffrey L. Nash, President and Chief Executive  Officer |
|                   |                         |   |
|                   |                         |   |
|                   | By:                          | /s/ Sandra L. Ellsworth |   |
|                   |                         | Sandra L. Ellsworth, Chief Financial Officer |
|                        |                              |  |  |  |

 

26

----