** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON,DC 20549

###### ** **

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

###### ** **

| **ý**                                              | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF  1934**          |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                     |
| **For the quarterly period ended March 31,  2005** |
|                                                    |       |                                                                                                     |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

# **Commission FileNumber: 333-112325**

# ** **

**Treaty Oak Bancorp, Inc.**(Exact name of registrant as specified in its charter)

 

**Texas**(State or other jurisdiction ofcorporation or organization)

 

**20-0413144**(I.R.S. Employer Identification Number)

 

**101 Westlake Drive, Austin, Texas**(Address of Principal Executive Offices)

 

**78746**(Zip Code)

 

**(512) 617-3600**(Registrant’s telephone number, including area code)

 

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

 
| **Yes****ý** | ** ** | **No****o** |
|-------------------|------------|-------------|

 

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

 
| **Yes****o** | ** ** | **No****ý** |
|--------------|------------|------------------|

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock as of the close of business on May 11, 2005.

 
| $0.01  Par Value Common Stock |   | **2,627,787 shares** |
|-------------------------------|--------|----------------------|

 
| Transitional  Small Business Disclosure Format (Check one): | ** ** | **Yes****o    No****ý** |
|-------------------------------------------------------------|------------|--------------------------------------------------|

 

 

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**QUARTERLY REPORT ON FORM 10-QSBFOR THE PERIOD ENDED MARCH 31, 2005**

 

**TABLE OF CONTENTS**

 
| **Part I.**  | **Financial Information**                                                                                                         | ** ** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                              |       |
| **Item 1.**       | *Financial Statements*                                                                                                            | * *   |
|              |                                                                                                                              |       |
|              | Consolidated  Balance Sheets at March 31, 2005, and September 30, 2004  (unaudited)                                     |       |
|              |                                                                                                                              |       |
|              | Consolidated  Statements of Operations for the Three-Month and Six-Month Periods ended March 31,  2004, and 2005 (unaudited) |       |
|              |                                                                                                                              |       |
|              | Consolidated Statements  of Changes in Shareholders’ Equity for the Six-Month Period ended March 31,  2005 (unaudited)  |       |
|              |                                                                                                                              |       |
|              | Consolidated Statements of  Cash Flows for the Six-Month Periods ended March 31, 2004, and 2005  (unaudited)                 |       |
|              |                                                                                                                              |       |
|              | Notes  to Consolidated Financial Statements (unaudited)                                                                           |       |
|              |                                                                                                                              |       |
| **Item 2.**       | *Management’s Discussion  and Analysis of Financial Condition and Results of Operations*                                     | * *   |
|              |                                                                                                                              |       |
| **Item 3.**       | *Controls and Procedures*                                                                                                         | * *   |
|              |                                                                                                                              |       |
| **Part II.** | **Other Information**                                                                                                             | ** ** |
|              |                                                                                                                              |       |
| **Item 1.**       | *Legal  Proceedings*                                                                                                              | * *   |
|              |                                                                                                                              |       |
| **Item 2.**       | *Changes  in Securities and Use of Proceeds*                                                                                      | * *   |
|              |                                                                                                                              |       |
| **Item 3.**       | *Defaults  Upon Senior Securities*                                                                                                | * *   |
|              |                                                                                                                              |       |
| **Item 4.**       | *Submission  of Matters to a Vote of Security Holders*                                                                            | * *   |
|              |                                                                                                                              |       |
| **Item 5.**       | *Other  Information*                                                                                                              | * *   |
|              |                                                                                                                              |       |
| **Item 6.**       | *Exhibits  and Reports on Form 8-K*                                                                                          | * *   |
|              |                                                                                                                              |       |
|              | Signatures                                                                                                                        |       |

 

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

 

i

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**TreatyOak Bancorp, Inc.Consolidated Balance Sheets(Unaudited)March 31, 2005, and September 30, 2004(Dollars In Thousands, Except Par Value Amounts)**

 
| ** **                                                                                                   | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**           | ** ** | **2004****(1)**        | ** ** |
| ASSETS                                                                                                       |       |               |       |                   |       |
|                                                                                                         |       |               |       |                   |       |
| Cash and cash items                                                                                          |       | $                  | 285        |                   | $          | 3,562 |   |
| Due from banks                                                                                               |       | 2,457              |       | 1,272                  |       |
| Federal funds sold                                                                                           |       | 119                |       | 4,450                  |       |
|                                                                                                         |       |               |       |                   |       |
| Total cash and cash equivalents                                                                              |       | 2,861              |       | 9,284                  |       |
|                                                                                                         |       |               |       |                   |       |
| Stock subscriptions receivable                                                                               |       | —             |       | 3,379                  |       |
| Securities available for sale                                                                                |       | 441                |       | 464                    |       |
| Securities held to maturity, fair value of $4,463  and $6, respectively                                      |       | 4,501              |       | 7                      |       |
| Investment in Federal Home Loan Bank stock, at cost                                                          |       | 213                |       | 211                    |       |
| Loans, net                                                                                                   |       | 21,740             |       | 9,953                  |       |
| Premises and equipment, net                                                                                  |       | 5,927              |       | 1,227                  |       |
| Accrued interest receivable                                                                                  |       | 223                |       | 144                    |       |
| Due from affiliates                                                                                          |       | 18                 |       | 69                     |       |
| Goodwill                                                                                                     |       | 1,161              |       | 1,161                  |       |
| Core deposit intangibles, net                                                                                |       | 59                 |       | 64                     |       |
| Other                                                                                                        |       | 328                |       | 205                    |       |
|                                                                                                         |       |               |       |                   |       |
| Total assets                                                                                                 |       | $                  | 37,472     |                   | $          | 26,168 |   |
|                                                                                                         |       |               |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                    |       |               |       |                   |       |
|                                                                                                         |       |               |       |                   |       |
| Deposits:                                                                                                    |       |               |       |                   |       |
| Noninterest-bearing demand                                                                                   |       | $                  | 5,829      |                   | $          | 2,579 |   |
| NOW, money market and savings                                                                                |       | 10,833             |       | 2,391                  |       |
| Time deposits                                                                                                |       | 4,999              |       | 8,223                  |       |
|                                                                                                         |       |               |       |                   |       |
| Total deposits                                                                                               |       | 21,661             |       | 13,193                 |       |
|                                                                                                         |       |               |       |                   |       |
| Accrued interest payable                                                                                     |       | 13                 |       | 15                     |       |
| Fed Funds borrowed                                                                                           |       | 250                |       | —                 |       |
| Liability under capital lease                                                                                |       | —             |       | 509                    |       |
| Property mortgage                                                                                            |       | 2,731              |       | —                 |       |
| Note payable                                                                                                 |       | 150                |       | —                 |       |
| Deposit on investment                                                                                        |       | 100                |       | —                 |       |
| Minority interest - PGI Equity Partners, LP                                                                  |       | 1,007              |       | —                 |       |
| Other liabilities                                                                                            |       | 159                |       | 132                    |       |
|                                                                                                         |       |               |       |                   |       |
| Total liabilities                                                                                            |       | 26,071             |       | 13,849                 |       |
|                                                                                                         |       |               |       |                   |       |
| Shareholders’ equity:                                                                                   |       |               |       |                   |       |
| Common stock, $0.01 par value; 20,000,000 shares  authorized; 2,633,790 and 2,169,814, respectively, issued. |       | 26                 |       | 22                     |       |
| Paid-in capital                                                                                              |       | 14,930             |       | 11,067                 |       |
| Accumulated deficit                                                                                          |       | (3,500             | )          | (2,151                 | )          |
| Common shares subscribed but not paid for and not  issued - none and 405,663 shares, respectively            |       | —             |       | 3,379                  |       |
| Accumulated other comprehensive income (loss)                                                                |       | (5                 | )          | 2                      |       |
| Less shares held in treasury, at cost (6,003 shares)                                                         |       | (50                | )          | —                 |       |
| Total shareholders’ equity                                                                              |       | 11,401             |       | 12,319                 |       |
|                                                                                                         |       |               |       |                   |       |
| Total liabilities and shareholders’ equity                                                              |       | $                  | 37,472     |                   | $          | 26,168 |   |

 

----

(1) Derived from audited financial statements.

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**TreatyOak Bancorp, Inc.Consolidated Statements of Operations(Unaudited)(Dollars In Thousands, except per share amounts)**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **March 31,**     | ** ** | **March 31,**   | ** ** |
| ** **                                          | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Interest income:                                    |       |                   |       |                 |       |   |   |   |   |
| Loans, including fees                               |       | $                      | 333        |                 | $          | 46 |   | $ | 566 |   | $ | 46 |   |
| Taxable securities                                  |       | 37                     |       | 1                    |       | 57 |   | 1 |   |
| Interest on deposits with other banks               |       | 9                      |       | 2                    |       | 15 |   | 2 |   |
| Federal funds sold                                  |       | 20                     |       | —               |       | 86 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total interest income                               |       | 399                    |       | 49                   |       | 724 |   | 49 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Interest expense:                                   |       |                   |       |                 |       |   |   |   |   |
| Deposits                                            |       | 67                     |       | 7                    |       | 153 |   | 7 |   |
| Interest on other borrowings                        |       | 59                     |       | 5                    |       | 59 |   | 5 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total interest expense                              |       | 126                    |       | 12                   |       | 212 |   | 12 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Net interest income                                 |       | 273                    |       | 37                   |       | 512 |   | 37 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Provision for loan losses                           |       | 30                     |       | —               |       | 30 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Net interest income after provision for loan losses |       | 243                    |       | 37                   |       | 482 |   | 37 |   |
| Noninterest income:                                 |       |                   |       |                 |       |   |   |   |   |
| Service charges on deposit accounts                 |       | 17                     |       | 5                    |       | 33 |   | 5 |   |
| Other noninterest income                            |       | 78                     |       | —               |       | 78 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total noninterest income                            |       | 95                     |       | 5                    |       | 111 |   | 5 |   |
| Noninterest expense:                                |       |                   |       |                 |       |   |   |   |   |
| Salaries and employee benefits                      |       | 509                    |       | 110                  |       | 1,092 |   | 443 |   |
| Occupancy and equipment expenses                    |       | 58                     |       | 3                    |       | 169 |   | 3 |   |
| Acquisition related costs                           |       | —                 |       | 84                   |       | — |   | 156 |   |
| Other noninterest expense                           |       | 450                    |       | 91                   |       | 711 |   | 199 |   |
| Minority interests in partnership loss              |       | (30                    | )          | —               |       | (30 | ) | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total noninterest expense                           |       | 987                    |       | 288                  |       | 1,942 |   | 801 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Loss before income taxes                            |       | (649                   | )          | (246                 | )          | (1,349 | ) | (759 | ) |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Income tax expense (benefit)                        |       | —                 |       | —               |       | — |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Net loss                                            |       | $                      | (649       | )                    | $          | (246 | ) | $ | (1,349 | ) | $ | (759 | ) |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Loss per common share - basic                       |       | $                      | (0.25      | )                    | $          | (0.24 | ) | $ | (0.52 | ) | $ | (0.74 | ) |
| Loss per common share - diluted                     |       | $                      | (0.25      | )                    | $          | (0.24 | ) | $ | (0.52 | ) | $ | (0.74 | ) |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares outstanding - basic         |       | 2,617,684              |       | 1,040,000            |       | 2,602,365 |   | 1,020,290 |   |
| Weighted average shares outstanding - diluted       |       | 2,617,684              |       | 1,040,000            |       | 2,602,365 |   | 1,020,290 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

4

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**TreatyOak Bancorp, Inc.Consolidated Statement of Changesin Shareholders’ Equity (unaudited)(Dollars In Thousands, except per share amounts)**

 
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **       | ** ** | **Subscribed for** | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**   | ** ** | **but not**        | ** ** | ** **        | ** ** | **other**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **paid for and** | ** ** | **Accumulated**    | ** ** | **comprehensive** | ** ** | **Treasury**      | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**      | ** ** | **not issued**     | ** ** | **Deficit**       | ** ** | **income (loss)** | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **         | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balances at October 1, 2004                                                 |       | 2,169,814        |       | $           | 22         |             | $          | 11,067             |       | $                 | 3,379      |              | $          | (2,151     | )          | $          | 2          |   | $ | — |   | 12,319 |   |
| Sale on common stock subscribed as of September 30,  2004 - unaudited       |       | 405,663          |       | 4           |       | 3,375            |       | (3,379             | )          | —            |       | —            |       | —     |       | —     |       |
| Sale of common stock, net of costs of issuance -  unaudited                      |       | 47,510           |       | —      |       | 393              |       | —             |       | —            |       | —            |       | —     |       | 393        |       |
| Shares repurchased and held in treasury-unaudited                                |       | —           |       | —      |       | —           |       | —             |       | —            |       | —            |       | (50        | )          | (50        | )          |
| Issuance of 10,803 shares of common stock - unaudited                            |       | 10,803           |       | —      |       | 95               |       | —             |       | —            |       | —            |       | —     |       | 95         |       |
| Comprehensive loss:                                                              |       | —           |       |        |       |             |       |               |       |              |       |              |       |       |       |       |       |
|                                                                             |       |             |       |        |       |             |       |               |       |              |       |              |       |       |       |       |       |
| Net loss - unaudited                                                             |       | —           |       | —      |       | —           |       | —             |       | (1,349            | )          | —            |       | —     |       | (1,349     | )          |
| Change in unrealized income (loss) on securities  available for sale - unaudited |       | —           |       | —      |       | —           |       | —             |       | —            |       | (7                | )          | —     |       | (7         | )          |
| Total comprehensive loss - unaudited                                             |       | —           |       | —      |       | —           |       | —             |       | —            |       | —            |       | —     |       | (1,356     | )          |
|                                                                             |       |             |       |        |       |             |       |               |       |              |       |              |       |       |       |       |       |
| Balances at March 31, 2005                                                  |       | 2,633,790        |       | $           | 26         |             | $          | 14,930             |       | $                 | —     |              | $          | (3,500     | )          | $          | (5         | ) | $ | (50 | ) | $ | 11,401 |   |
|                                                                                  |            |                  |            |             |            |                  |            |                    |            |                   |            |                   |            |            |            |            |            |  |  |  |  |  |  |  |

 

See accompanying notes to unaudited consolidated financial statements.

 

5

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**TreatyOak Bancorp, Inc.Consolidated Statements of CashFlows (Unaudited)Six Months Ended March 31, 2005, and 2004(Dollars In Thousands)**

 
| ** **                                                                               | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **March 31,**   | ** ** | **March 31,**   | ** ** |
| ** **                                                                               | ** ** | **2005**             | ** ** | **2004**             | ** ** |
| Cash flows from operating activities:                                                    |       |                 |       |                 |       |
| Net loss                                                                                 |       | $                    | (1,349     | )                    | $          | (759 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:             |       |                 |       |                 |       |
|                                                                                     |       |                 |       |                 |       |
| Minority interests in partnership loss                                                   |       | (30                  | )          | —               |       |
| Provision for loan losses                                                                |       | 30                   |       | —               |       |
| Non-cash stock based compensation                                                        |       | 95                   |       | 332                  |       |
| Non-cash pre-opening expenses incurred by majority  shareholder on behalf of the Company |       |                 |       | 320                  |       |
| Loan acquisition costs                                                                   |       | 100                  |       | —               |       |
| Net amortization on securities                                                           |       |                 |       | 3                    |       |
| Depreciation and amortization                                                            |       | 143                  |       | 3                    |       |
| Changes in other operating assets and liabilities,  net of acquisitions:                 |       |                 |       |                 |       |
|                                                                                     |       |                 |       |                 |       |
| Accrued interest receivable                                                              |       | (79                  | )          | (1                   | )          |
| Other assets                                                                             |       | (96                  | )          | (83                  | )          |
| Accrued interest payable                                                                 |       | (2                   | )          | 1                    |       |
| Other liabilities                                                                        |       | 27                   |       | 184                  |       |
| **Net cash used in operating activities**                                                |       | (1,161               | )          | —               |       |
|                                                                                     |       |                 |       |                 |       |
| Cash flows from investing activities:                                                    |       |                 |       |                 |       |
| Initial capital contribution of majority shareholder                                     |       | —               |       | 1,200                |       |
| Proceeds from the sale of common stock                                                   |       | —               |       | 1                    |       |
| Cash paid for the acquisition of Texline State Bank,  net of cash received               |       | —               |       | (324                 | )          |
| Proceeds from the sale of other real estate                                              |       | —               |       | 10                   |       |
| Proceeds from maturities and principal repayments on  securities - available for sale    |       | 16                   |       | —               |       |
| Proceeds from maturities and principal repayments on  securities - held to maturity      |       | 1,000                |       | —               |       |
| Purchase of securities - held to maturity                                                |       | (5,494               | )          | —               |       |
| Acquisition of interest in PGI Equity Partners, LP,  net of cash received of $24         |       | (926                 | )          | —               |       |
| Deposit on investment from PGI Capital, Inc.                                        |       | 100                  |       | —               |       |
| Purchase of FHLB stock                                                                   |       | (2                   | )          | —               |       |
| Net (increase) decrease in loans                                                         |       | (11,817              | )          | 131                  |       |
| Purchase of Federal Home Loan Bank stock                                                 |       | —               |       | (1                   | )          |
| Purchases of premises and equipment                                                      |       | (565                 | )          | —               |       |
| **Net cash provided by (used in) investing  activities**                                 |       | (17,688              | )          | 1,017                |       |
|                                                                                     |       |                 |       |                 |       |
| Cash flows from financing activities:                                                    |       |                 |       |                 |       |
| Net increase in deposits                                                                 |       | 8,468                |       | 235                  |       |
| Increase in borrowed funds                                                               |       | 250                  |       | —               |       |
| Deposits in escrow                                                                       |       | (28                  | )          | —               |       |
| Proceeds from the sale of common stock, net of  issuance costs                           |       | 3,772                |       | —               |       |
| Advances to affiliates                                                                   |       | (75                  | )          | —               |       |
| Repayments of advances to affiliates                                                     |       | 126                  |       | —               |       |
| Payments of principal on mortgage                                                        |       | (5                   | )          | —               |       |
| Net repayment of mortgage through refinance, net of  costs                               |       | (181                 | )          | —               |       |
| Proceeds from note payable - PGI Equity Partners, LP                                     |       | 149                  |       | 500                  |       |
| Repurchase of common stock                                                               |       | (50                  | )          | —               |       |
| **Net cash provided by financing activities**                                            |       | 12,426               |       | 735                  |       |
|                                                                                     |       |                 |       |                 |       |
| Net increase (decrease) in cash and cash equivalents                                     |       | (6,423               | )          | 1,752                |       |
|                                                                                     |       |                 |       |                 |       |
| Cash and cash equivalents at beginning of period                                         |       | 9,284                |       | —               |       |
|                                                                                     |       |                 |       |                 |       |
| Cash and cash equivalents at end of period                                               |       | 2,861                |       | 1,752                |       |
|                                                                                          |            |                      |            |                      |            |  |  |

 

See accompanying notes to unaudited consolidated financial statements.

 

6

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| Supplemental  disclosures of cash flow information:            |   |   |   |   |   |
|----------------------------------------------------------------|--------|--------|--------|--------|--------|
| Non-cash investing and financing information:                  |   |   |   |   |   |
| Contribution of deferred stock issuance costs                  |   | $      | — |   | $      | 690 |   |
| Contribution of direct acquisition costs - Texline  State Bank |   | $      | — |   | $      | 217 |   |
| Contribution of deposit on Texline State Bank                  |   | $      | — |   | $      | 50 |   |
| Cash interest received                                         |   | $      | 482    |   | $      | — |   |
| Cash interest paid                                             |   | $      | 155    |   | $      | 6 |   |
|                                                           |   |   |   |   |   |
| Acquisition of Texline State Bank                              |   |   |   |   |   |
| Assets acquired                                                |   | $      | — |   | $      | 10,940 |   |
| Liabilities assumed                                            |   | — |   | (9,597 | )      |
| Notes payable on acquisition                                   |   | — |   | (1,019 | )      |
| Cash paid, net of cash received                                |   | $      | — |   | $      | 324 |   |
|                                                           |   |   |   |   |   |
| Acquisition of PGI Equity Partners, LP                         |   |   |   |   |   |
| Assets acquired                                                |   | $      | 4,943  |   | $      | — |   |
| Liabilities assumed                                            |   | (3,015 | )      | — |   |
| Minority interests                                             |   | (1,002 | )      | — |   |
| Cash paid, net of cash acquired                                |   | $      | 926    |   | $      | — |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

7

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**TreatyOak Bancorp, Inc.Notes to Consolidated FinancialStatements - unaudited**

 

**Note 1.  Basis of Presentation**

 

Treaty Oak Bancorp, Inc. (the “Company”) is a bank holding companyincorporated on November 18, 2003, and organized December 8, 2003 forthe purpose of holding the common stock of Treaty Oak Bank (formerly TexlineState Bank, the “Bank”).  The financialstatements of the Company include the operations of its predecessor for theperiod from October 1, 2003 to December 7, 2003.  The Company acquired the Bank on March 9,2004, and began conducting banking operations in Texline, Texas.  On September 10, 2004, the Companyreceived final approval to relocate the main office of the Bank to Austin,Texas, and to rename the Bank “Treaty Oak Bank.”  The Bank commenced operations in Austin,Texas, on September 10, 2004, and prior to the commencement of operationsin Austin, the Company was considered to be in the development stage.

 

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

 

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

 

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

 

Stock-Based Compensation

 

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

 

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

 

As of March 31, 2005,there were outstanding options to purchase an aggregate of 192,500 shares ofthe Company’s common stock.  Each optionhas an exercise price of between $8.33 and $8.83 per share and may be exercisedin three equal annual installments for each year of service measured from thegrant date.  During the six months ended March 31,2005, the Company granted stock options to purchase an aggregate of 27,000shares of its common stock with an exercise price of $8.83 per share.

 

Accordingly, the expenserelated to stock option compensation included in the determination of netincome for the six months ended March 31, 2005, is less than that whichwould have been recognized if the fair value method had been applied.  The Company’s net income and earnings pershare would have been adjusted to the pro-forma amounts indicated below:

 

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

 

8

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

 

| ** **                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **March 31,**     | ** ** | **March 31,**   | ** ** |
| ** **                   | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                         |       |                   |       |                 |       |   |   |   |   |
| Net loss - as reported       |       | $                      | (649       | )                    | $          | (246 | ) | $ | (1,349 | ) | $ | (759 | ) |
| Net loss - pro forma         |       | $                      | (700       | )                    | $          | (246 | ) | $ | (1,458 | ) | $ | (759 | ) |
|                         |       |                   |       |                 |       |   |   |   |   |
| Loss per share - as reported |       |                   |       |                 |       |   |   |   |   |
| basic                        |       | $                      | (0.25      | )                    | $          | (0.24 | ) | $ | (0.52 | ) | $ | (0.74 | ) |
| diluted                      |       | $                      | (0.25      | )                    | $          | (0.24 | ) | $ | (0.52 | ) | $ | (0.74 | ) |
|                         |       |                   |       |                 |       |   |   |   |   |
| Loss per share pro forma     |       |                   |       |                 |       |   |   |   |   |
| basic                        |       | $                      | (0.27      | )                    | $          | (0.24 | ) | $ | (0.56 | ) | $ | (0.74 | ) |
| diluted                      |       | $                      | (0.27      | )                    | $          | (0.24 | ) | $ | (0.56 | ) | $ | (0.74 | ) |

 

**Note 2.  Common Stock Offering**

 

The Company issued1,593,790 shares of its common stock at $8.33 per share, resulting in grossproceeds of approximately $13,276,270 and incurred offering costs of $910,000in an offering that closed on September 30, 2004. The stocksubscription receivable at September 30, 2004 (the date the offering closed),represented stock subscription agreements that were received on or before September 30,2004, and collected during the period from October 1, 2004 to December 3,2004.  The final stock subscription was paid in full on March 11,2005; accordingly, there was no stock subscription receivable balance as of March 31,2005.  All of the stock subscriptionshave now been accounted for and that activity has been closed. The Company usedthe proceeds to pay the costs of the offering, pay the balance of the acquisitionindebtedness for the purchase of Texline State Bank, and pay off certain othershort-term borrowings, including advances and a note payable to the organizingshareholder.  The balance of the proceeds of the offering will be held andinvested and used to support holding company operations.

 

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

 

On November 30,2004, the Company approved the acquisition of a 47.5% Class D limitedpartnership interest in PGI Equity Partners, L.P, (the “Partnership”) for acash investment of $950,000.  The Companypaid $150,000 as an investment deposit on November 18, 2004, and theremaining $800,000 on December 30, 2004, in conjunction with the closingof the purchase.

 

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

 

9

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

 

The assets andliabilities of the Partnership have been included in the consolidated balancesheet of the Company at March 31, 2005. The balance sheet of the Partnership as of March 31, 2005, was asfollows (in thousands):

 

| Cash                                         |   | $      | 16     |   |
|----------------------------------------------|--------|--------|--------|--------|
| Premises and equipment, net                  |   | 4,728  |   |
| Other assets                                 |   | 143    |   |
|                                         |   |   |   |
| Total Assets                                 |   | $      | 4,887  |   |
|                                         |   |   |   |
| Mortgage payable                             |   | $      | 2,731  |   |
| Other liabilities                            |   | 297    |   |
| Partners’ capital                       |   | 1,859  |   |
|                                         |   |   |   |
| Total Liabilities and Partners’ Capital |   | $      | 4,887  |   |

 

Because of the timing ofthe closing date, any results of operations to be included in the consolidatedstatements of operations are for three months ended March 31, 2005.

 

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

 

On March 14, 2005, the partnership closed its refinancing of thedebt for the real property and building located at 101 Westlake Drive. The$2,750,000 principal note accrues interest at 5.92% and requires monthlypayments of principal and interest in the amount of $18,453.40 with all unpaidprincipal and interest becoming due and payable on April 1, 2015. Inconjunction with the refinancing, the Company pledged a $200,000 certificate ofdeposit against a loan borrowed by PGI Capital, Inc. (an affiliate andsole general partner of the partnership). $150,000 of this amount was loaned toPGI Equity Partners, LP to facilitate the closing, funding additional reserves,expenses, and working capital requirements. An additional $100,000 was advancedto the partnership in conjunction with the closing and will be contributed asadditional capital.

 

**Note4.  Earnings Per Share**

 

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

 

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

 

10

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**Note 5. Securities**

 

Securitiesconsisted of the following (in thousands):

 
| ** **                                                                               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                                                                                     |       |                |       |                         |       |                          |       |                       |       |
| September 30, 2004:                                                                 | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - held to maturity   | ** ** | **$**               | **7**      | ** **                   | **$**      | **—**                    | ** ** | **$**                      | **(1**     | **)** | **$** | **6** | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| **Total held to maturity**                                                               | ** ** | **7**               | ** ** | **—**                   | ** ** | **(1**                        | **)**      | **6**                      | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Agency notes and bonds - available for sale                                              | ** ** | **404**             | ** ** | **—**                   | ** ** | **—**                    | ** ** | **404**                    | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - available for sale | ** ** | **58**              | ** ** | **2**                        | ** ** | **—**                    | ** ** | **60**                     | ** ** |
| **Total available for sale**                                                             | ** ** | **462**             | ** ** | **2**                        | ** ** | **—**                    | ** ** | **464**                    | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| **Total**                                                                                | ** ** | **$**               | **469**    | ** **                   | **$**      | **2**                         | ** ** | **$**                      | **(1**     | **)** | **$** | **470** | ** ** |
|                                                                                     |       | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| March 31, 2005:                                                                     | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Agency notes and bonds - held to maturity                                                | ** ** | **$**               | **4,494**  | ** **                   | **$**      | **—**                    | ** ** | **$**                      | **(37**    | **)** | **$** | **4,457** | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - held to maturity   | ** ** | **7**               | ** ** | **—**                   | ** ** | **(1**                        | **)**      | **6**                      | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| **Total held to maturity**                                                               | ** ** | **4,501**           | ** ** | **—**                   | ** ** | **(38**                       | **)**      | **4,463**                  | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Agency notes and bonds - available for sale                                              | ** ** | **402**             | ** ** | **—**                   | ** ** | **(6**                        | **)**      | **396**                    | ** ** |
| Mortgage-backed securities and collateralized  mortgage obligations - available for sale | ** ** | **44**              | ** ** | **1**                        | ** ** | **—**                    | ** ** | **45**                     | ** ** |
| **Total available for sale**                                                             | ** ** | **446**             | ** ** | **1**                        | ** ** | **(6**                        | **)**      | **441**                    | ** ** |
| ** **                                                                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| **Total**                                                                                | ** ** | **$**               | **4,947**  | ** **                   | **$**      | **1**                         | ** ** | **$**                      | **(44**    | **)** | **$** | **4,904** | ** ** |

 

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

 

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

 

At March 31, 2005, $1,232,000of the Company’s securities were pledged to Texline Independent School District($1,030,000) and to the City of Texline ($202,000).

 

11

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

 

The Company grantsagribusiness, real estate, and commercial loans to customers primarily in theAustin and Northwest Texas markets. Loans at March 31, 2005, and September 30, 2004, were asfollows (in thousands):

 
| ** **                      | ** ** | **As of**          | ** ** | **As of**              | ** ** |
|---------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
| ** **                      | ** ** | **2005**           | ** ** | **2004**               | ** ** |
|                            |       |               |       |                   |       |
| Agriculture                     |       | $                  | 2,671      |                   | $          | 3,444 |   |
| Commercial                      |       | 8,890              |       | 2,316                  |       |
| Commercial real estate          |       | 4,927              |       | 1,030                  |       |
| Residential real estate         |       | 3,812              |       | 2,627                  |       |
| Construction real estate        |       | 495                |       | 33                     |       |
| Consumer                        |       | 1,248              |       | 720                    |       |
| Unearned fee income             |       | (45                | )          | —                 |       |
|                            |       | 21,998             |       | 10,170                 |       |
|                            |       |               |       |                   |       |
| Less: allowance for loan losses |       | (258               | )          | (217                   | )          |
|                            |       | $                  | 21,740     |                   | $          | 9,953 |   |

 

Activity in the allowancefor loan losses for the six months ended March 31, 2005 and year ended September 30,2004 was as follows (in thousands):

 
| ** **                                 | ** ** | **For the   Six Months Ended  March 31, 2005** | ** ** | **For the   Six Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Balance on date of  acquisition            | ** ** | ** **                                          | ** ** | **166**                                             | ** ** |
| Balance at beginning of the period         | ** ** | **217**                                             | ** ** | **—**                                          | ** ** |
| Provision for loan losses                  | ** ** | **30**                                              | ** ** | —                                              | ** ** |
| Loans charged off                          | ** ** | **(1**                                              | **)**      | —                                              |       |
| Recoveries on loans previously charged-off | ** ** | **12**                                              | ** ** | —                                              | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | ** **                                          | ** ** |
| Balance at the end of the period           | ** ** | **$**                                               | **258**    | ** **                                          | **$**      | **166** | ** ** |
|                                            |            |                                                     |            |                                                     |            |  |  |

 

The Company had noimpaired loans at March 31, 2005 or September 30, 2004.  At March 31, 2005 and September 30,2004, the Bank had approximately $56,000 and $152,000, respectively, innonperforming loans including nonaccrual loans and loans past due over 90 daysand still accruing interest.

 

**Note 7. Premises and Equipment**

 

Premises and equipment atMarch 31, 2005, and September 30, 2004, were as follows (inthousands):

 
| ** **                                     | ** ** | **As of  March 31, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| ** **                                     | ** ** | ** **                     | ** ** | ** **                         | ** ** |
| Land                                           | ** ** | **$**                          | **949**    | ** **                         | **$**      | **4** | ** ** |
| Building and leasehold improvements            | ** ** | **4,489**                      | ** ** | **615**                            | ** ** |
| Furniture, fixtures and equipment              | ** ** | **691**                        | ** ** | **635**                            | ** ** |
| ** **                                     | ** ** | ** **                     | ** ** | ** **                         | ** ** |
| ** **                                     | ** ** | **6,129**                      | ** ** | **1,254**                          | ** ** |
| ** **                                     | ** ** | ** **                     | ** ** | ** **                         | ** ** |
| Less accumulated depreciation and amortization | ** ** | **(202**                       | **)**      | **(27**                            | **)**      |
| ** **                                     | ** ** | ** **                     | ** ** | ** **                         | ** ** |
| ** **                                     | ** ** | **$**                          | **5,927**  | ** **                         | **$**      | **1,227** | ** ** |

 

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Depreciation andamortization expense related to fixed assets for the six months ended March 31,2005 was $138,000.  The net change inaccumulated depreciation and amortization of $175,000 includes $138,000 infiscal year to date depreciation and amortization (relating to fixed assets) aswell as accumulated depreciation acquired in the acquisition of PGI EquityPartners, LP of $41,000.  Otheramortization expenses for the month and six months ended March 31, 2005,was $1,000 and $5,000, respectively.

 

**Note 8. Leases**

 

The Company’s offices arelocated in a renovated building at 101 Westlake Drive, Austin, Texas. The Bankleases approximately 7,000 square feet for its offices effective June 1,2004 (and an additional 650 square feet for the Company’s offices is leased througha sub-lease, effective October 1, 2004) from PGI Equity Partners, L.P., aTexas limited partnership, a related party. The Company engaged the services of a third party consultant indetermining the fair market rental value of this office space to be leased tothe Company and the Bank.  In conjunctionwith the refinance (Note 3), the lease was updated and re-executed dated March 1,2005.  The schedule of lease paymentshas been revised and updated as follows:

 
| ** **                                | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|-------------------------------------------|------------|---------------|------------|-------------|------------|
| **Fiscal Year Ending September 30,** | ** ** | **Leases**    | ** ** | **Leases**  | ** ** |
| 2005                                      |       | $             | 175        |        | $          | — |   |
| 2006                                      |       | 175           |       | —      |       |
| 2007                                      |       | 178           |       | —      |       |
| 2008                                      |       | 180           |       | —      |       |
| 2009                                      |       | 182           |       | —      |       |
| Thereafter                                |       | 1,892         |       | —      |       |
| Total                                     |       | $             | 2,782      |        | $          | — |   |
|                                      |       |          |       |        |       |
| Assets under capital  lease               |       |          |       | $           | —     |   |
| Accumulated  depreciation                 |       |          |       | —      |       |
|                                      |       |          |       | $           | —     |   |

 

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

 

**Note 9. Deposits**

 

Time deposits of $100,000or more totaled $1,748,667 and $1,597,064 at March 31, 2005, and September 30,2004, respectively. At March 31, 2005, and September 30, 2004, thescheduled maturities of time deposits were as follows (in thousands):

 

Timedeposits maturing in the fiscal year ending:

 
| ** ** | ** ** | **As of  March 31, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|------------|------------|--------------------------------|------------|------------------------------------|------------|
|       |       |                           |       |                               |       |
| 2005       |       | $                              | 3,580      |                               | $          | 7,860 |   |
| 2006       |       | 1,314                          |       | 363                                |       |
| 2007       |       | 105                            |       | —                             |       |
|       |       |                           |       |                               |       |
|       |       | $                              | 4,999      |                               | $          | 8,223 |   |

 

13

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**Note 10. Goodwill and Other Intangibles**

 

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

 

Core deposit intangiblesare amortized on a straight-line basis over seven years.  The following table reflects the net carryingamount of core deposit intangibles at March 31, 2005, and September 30,2004 (in thousands):

 

| ** **                     | ** ** | **As of  March 31, 2005** | ** ** | **As of  September 30, 2004** | ** ** |
|--------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| Gross core deposit intangibles |       | $                              | 70         |                               | $          | 70 |   |
| Less accumulated amortization  |       | (11                            | )          | (6                                 | )          |
| Net core deposit intangibles   |       | $                              | 59         |                               | $          | 64 |   |

 

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

 

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

 

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

 

The table below presentsthe weighted average number of options issued and outstanding during the sixmonths ended March 31, 2005, and the fiscal year ended September 30,2004.

 
| ** **                                                        | ** ** | **For the  Six Months Ended  March 31, 2005** | ** ** | **For the  Year Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **Shares**                                         | ** ** | **Weighted  Average  Exercise Price**            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                                                              |       |                                               |       |                                             |       |   |   |   |   |
| Outstanding, beginning of the period                              |       | 165,500                                            |       | $                                                | 8.33       |   | — |   | $ | — |   |
| Granted                                                           |       | 27,000                                             |       | 8.83                                             |       | 175,500 |   | 8.33 |   |
| Exercised                                                         |       | —                                             |       | —                                           |       | — |   | — |   |
| Forfeited/expired                                                 |       | —                                             |       | —                                           |       | (10,000 | ) | 8.33 |   |
| Outstanding, end of the period                                    |       | 192,500                                            |       | $                                                | 8.40       |   | 165,500 |   | $ | 8.33 |   |
|                                                              |       |                                               |       |                                             |       |   |   |   |   |
| Exercisable at the end of the period                              |       | —                                             |       |                                             |       | — |   |   |   |
| Weighted-average fair value of options granted  during the period |       |                                               |       | $                                                | 3.78       |   |   |   | $ | 3.80 |   |
| Weighted-average remaining contractual life (months)              |       | 111                                                |       |                                             |       | 118 |   |   |   |

 

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In February 2005, the Company awarded share issuances for anaggregate of 10,803 shares of common stock under its 2004 incentive plan inconnection with services that were rendered to the Company. These shares arefully vested. The Company recorded compensation expense in February of$95,000 related to this transaction. In addition, on February 8, 2005, theCompany granted stock options to purchase an aggregate of 27,000 shares with anexercise price of $8.83 per share to non-employee Board members of the Companyand its banking subsidiary under the Automatic Option Grant Program of thePlan.

 

**Note 12.  Other Related Party Transactions**

 

**Accountingand Tax Services**

 

The Company receives taxplanning advice and general tax and accounting services from Hamann, Ernstmeyer &Williamson, P.C. (formerly Hamann & Associates”, P.C.  “HEW”), a professional corporation ofcertified public accountants in which Mr. Hamann (the Chief ExecutiveOfficer of the Company) owned an 80% interest.  For the one month and six months ended March 31,2005, the Company paid approximately $10,000 and $67,136, respectively, forthese services primarily with respect to assistance in the preparation of theCompany’s monthly and periodic reporting, tax planning and reporting, and otheradvisory services including public reporting matters.  As of March 31,2005, Mr. Hamann owns a 5% interest in HEW and serves as the chairmanemeritus but has a limited participation in the ongoing delivery of services toits clients in an advisory capacity.  None of the fees paid for servicesduring the one and six months ended March 31, 2005 were related to theefforts of Mr. Hamann, and Mr. Hamann is not currently compensated bythe firm.  HEW is a firm focused on tax planning and advisory work anddoes not provide auditing services to clients.

 

**OtherTransactions**

 

The Company has an$18,000 Due from Affiliate balance as of March 31, 2005. Approximately$7,900 relates to marketing costs initially incurred by Treaty Oak Bank (TOB)in the development of the Treaty Oak brochure. Treaty Oak Financial Services, Inc.(TOFS, an affiliate under common control with the Company’s organizingshareholder) agreed to absorb half of these costs as they are able to share thesame brochure. The agreement calls for TOFS to pay $1,311.11 per month to theCompany until the balance is paid off in full. $10,000 relates to an agreementbetween CoreTrac and TOFS totaling $24,000 for a banking industry customerrelationship management system (CRM). On March 30, 2005, TOB advanced TOFS$10,000 on this contract providing TOB the option to acquire the softwarelicense with no additional costs. This option is valid as long as the balanceon the contract is paid in full by October 1, 2005.

 

On February 23,2005, Treaty Oak Holdings, Inc. advanced PGI Equity Partners, LP $6,500 inconnection with the refinancing of its mortgage on the building at 101 WestlakeDrive in Austin, Texas. This short term advance was repaid in March 2005.

 

On March 8, 2005,Treaty Oak Bank loaned $200,000 to PGI Capital, Inc. (an affiliate) for aperiod of 6 months at an interest rate of 5.05%. $150,000 of this amount wasloaned to PGI Equity Partners, LP to cover the closing costs and other feesrelated to the refinancing of the building at 101 Westlake Drive in Austin,Texas. On March 14, 2005, an additional $100,000 was advanced to thepartnership by PGI Capital, Inc. in conjunction with the closing.  This amount is being held as a capitalcontribution subject to a capital call by the general partner. The refinancingclosed on March 14, 2005. PGI Capital, Inc. is the general partner ofPGI Equity Partners, LP, which owns the building.  In conjunction with this loan, the Company,which owns 47.5% of PGI Equity Partners, LP, purchased a $200,000 certificateof deposit and pledged such certificate against the loan.

 

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**Note 13.  Financial Instruments with Off-Balance SheetRisk**

 

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

 

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

 

The following tablesummarizes the Company’s off-balance sheet financial instruments as of March 31,2005, and September 30, 2004 (in thousands):

 
| ** **                   | ** ** | **As of  March 31,  2005** | ** ** | **As of  September 30,  2004** | ** ** |
|------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
|                         |       |                            |       |                                |       |
| Commitments to extend credit | ** ** | **$**                           | **8,817**  | ** **                          | **$**      | **1,264** | ** ** |
| Standby letters of credit    | ** ** | **$**                           | **97**     | ** **                          | **$**      | **97** | ** ** |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may 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 creditare written conditional commitments used by the Company to guarantee theperformance of a customer to a third party. The Company’s policies generally require that letter of creditarrangements contain security and debt covenants similar to those contained inloan arrangements.  In the event thecustomer does not perform in accordance with the terms of the agreement withthe third party, the Company would be required to fund the commitment.  The maximum potential amount of futurepayments the Company could be required to make is represented by thecontractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seekrecovery from the customer.  As of March 31,2005, no amounts have been recorded as liabilities for the Company’s potentialobligations under these guarantees.

 

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

 

Banks and bank holdingcompanies are subject to regulatory capital requirements administered by stateand federal banking regulatory agencies. Capital adequacy guidelines and, additionally for banks, promptcorrective action regulations involve quantitative measures of assets,liabilities, and certain off-balance sheet items calculated under regulatoryaccounting practices.  Capital amountsand classifications are also subject to qualitative judgments by regulatorsabout components, risk weightings and other factors.  Failure to meet capital requirements caninitiate regulatory action.  As of March 31,2005, management believes the Bank is in compliance with all regulatory capitalrequirements to which it is subject.

 

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

 
| ** **                             | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                              | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| March 31, 2005                    |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| Total capital to risk weighted assets  | ** ** | **$**      | **8,052**  | ** **                         | **31.25**  | **%**                                                                   | **$**      | **2,061** | ** ** | **8.0** | **%** | **$** | **2,576** | ** ** | **10.0** | **%** |
| Tier I capital to risk weighted assets | ** ** | **7,794**  | ** ** | **30.25**                          | **%**      | **1,030**                                                               | ** ** | **4.0** | **%** | **1,546** | ** ** | **6.0** | **%** |
| Tier I capital to average assets       | ** ** | **7,794**  | ** ** | **26.47**                          | **%**      | **1,178**                                                               | ** ** | **4.0** | **%** | **1,472** | ** ** | **5.0** | **%** |
|                                   |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| September 30, 2004                |       |       |       |                               |       |                                                                    |       |   |   |   |   |   |   |
| Total capital to risk weighted assets  | ** ** | **$**      | **6,582**  | ** **                         | **57.77**  | **%**                                                                   | **$**      | **736** | ** ** | **8.0** | **%** | **$** | **921** | ** ** | **10.0** | **%** |
| Tier I capital to risk weighted assets | ** ** | **6,439**  | ** ** | **56.51**                          | **%**      | **368**                                                                 | ** ** | **4.0** | **%** | **553** | ** ** | **6.0** | **%** |
| Tier I capital to average assets       | ** ** | **6,439**  | ** ** | **42.68**                          | **%**      | **463**                                                                 | ** ** | **4.0** | **%** | **580** | ** ** | **5.0** | **%** |

 

As of March 31, 2005, theBank met the level of capital required to be categorized as “well capitalized”under prompt corrective action regulations. Management is not aware of any conditions subsequent to March 31,2005, that would change the Bank’s capital category.

 

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

 

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

 

Certain restrictionsexist regarding the ability of the Bank to pay cash dividends.  Regulatory approval is required in order topay dividends until such time as the accumulated deficit is eliminated andcertain other conditions are met.   Further, the Company has been notified by its bankingregulators that no approval will be received in the first three years ofoperations.

 

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**Item 2.****                                  *****Management’s Discussion andAnalysis of Financial Condition and Results Of Operations***

 

**Introduction**

 

We are a bank holding company headquartered in Austin,Texas.  We acquired 99.92% of TexlineState Bank (the “Bank”), a state chartered bank with a single business locationin Texline, Dalham County, Texas, on March 9, 2004.  Following thepurchase of additional shares from shareholders of the Bank and the completionof a reverse stock split, we acquired all of the outstanding stock of theBank.  On September 10, 2004, the name of the Bank was changed to “TreatyOak Bank,” and we began banking operations in Austin, Texas, retaining a branchin Texline, Texas.  As a result, our operating history, as it relates tothe banking industry, is limited.   Inthe course of preparing our consolidated financial statements, we use certainestimates with respect to loans, intangibles, the allowance for loan losses andother 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.

 

**Plan of Operation**

 

***General***

 

Financial performance in our Texline branch hascontinued to improve over the prior year.  Additionally, given the greater growthpotential in Austin, we have focused our efforts on establishing acommunity-oriented bank out of our headquarters in the leased facility that weoccupy at 101 Westlake Drive (at Bee Cave Road), Austin, Texas, 78746. The Bankoccupies approximately 7,000 square feet in a building and has executed,effective June 1, 2004, and revised as of March 1, 2005, a 15-yearlease with options to renew for up to an additional 10 years.  Further, wehave subleased an additional 650 square feet in the same building, effective October 1,2004, and revised as of March 1, 2005, under the same terms, for theoffices of the Company.  We have a total of 24 employees, 19 of whom arefull-time employees and 21 of whom are employees of the Bank.  Of those,14 are employed at the Austin headquarters, and 7 are employed in Texline.

 

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

 

***Holding CompanyLiquidity***

 

We closed our stock offering on September 30,2004, which resulted in 1,593,790 shares subscribed representing $13,276,271 ingross total capital raised.  As of March 31, 2005, 1,593,790 ($13,276,271)shares of common stock, in addition to the initial issuances of 1,040,000shares, were issued. The final stock subscription was paid in full on March 11,2005; accordingly, the stock subscription receivable balance as of March 31,2005 was zero.  All of the stocksubscriptions have now been accounted for and that activity has been closed. Of the total capital raised, $7,500,000, in addition to the $500,000 injectedon the date of acquisition, was injected into the Bank.  After payment ofoffering and start-up costs under the Expense Reimbursement Agreement to TreatyOak Holdings, Inc., (“TOHI”) of $775,000, repayment of other start-up costsaccumulated prior to the closing of the offering of approximately $303,000,repayment of the $500,000 note plus accumulated interest to TOHI, which wasused to make the $500,000 capital injection to the Bank upon acquisition,payment of the outstanding notes, of $1,019,000 plus accumulated interest,arising from the acquisition of Texline State Bank, the investment of $950,000in PGI Equity Partners, L.P., and the payment of other operating expenses, theCompany (excluding the Bank) had approximately $1,580,000 in remaining cashproceeds. These funds are being used for Company operations, investmentand for later infusion into the Bank and other corporate activities.  Theprimary source of liquidity for the Company will be dividends paid by the Bank. The Bank is currently restricted from paying dividends without regulatoryapproval which will not be granted until the accumulated deficit has beeneliminated.

 

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***Bank Liquidity***

 

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

 

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

 

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

 

Greater loan demand will result in greater pressure onthe Bank’s liquidity; however, it is our intention to maintain a conservativeloan to deposit ratio in the range of 80% over time. Consequently, we will notaggressively pursue lending opportunities if sufficient funding sources (i.e.deposits, Fed Funds, etc.) are not available, nor will we seek to attracttransient, volatile non-local deposits with above market interest rates. As of March 31,2005, the loan-to-deposit ratio was 101.77%. This ratio resulted from two unanticipated transactions at the end ofthe month.

 

Managementbelieves the Bank is in compliance with its current Memorandum ofUnderstanding.   We believe we havemet the liquidity requirements by injecting $8,000,000 of capital into theBank, which increased total capitalization of the Bank to $9,305,000 as of March 31,2005.  In addition, the FDIC examined theBank in November 2004 and issued its final report for such examination on January 31,2005.  The FDIC has proposed a newMemorandum of Understanding to replace the current Memorandum of Understanding,which proposed terms require the Bank to take certain corrective actions withrespect to internal compliance procedures and training.

 

In the event that additional short-term liquidity isneeded, the Bank will retain established relationships created by Texline StateBank with several large regional banks in addition to establishing newcorrespondent relationships through the main office in Austin. Texline hasutilized such relationships as a source of liquidity in the past, and we expectto continue to utilize these going forward if needed. Also, Texline State Bankhas been a frequent borrower of Federal Funds in the past. In the current rateenvironment, where rates on Federal Funds are at historical lows, Texline StateBank has relied upon this source as an alternative to attracting more expensivedeposit funds that would carry a slightly higher interest cost. While we do notintend to rely as heavily on Federal Funds as has Texline State Bank, thesource will remain available to the Bank going forward.  As of March 31,2005, the Bank had borrowed $250,000 in Federal Funds.

 

The Bank had cash and cash equivalents of $1,267,000or 4.00% of the Bank’s total assets, at March 31, 2005 compared to $1,669,000as of March 31, 2004, and had available $16.2 million of rate-sensitiveassets which mature or reprice within one year or less

 

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

 

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Company,will be 10% total capital to risk weighted assets, 6% tier 1 capital torisk weighted assets and 5% tier 1 capital to average assets. At March 31,2005, the Bank was considered “well capitalized” by regulatory standards.Nonetheless, the Bank will not pay dividends for at least three years,regardless of its total capitalization as part of its agreement with bankingregulators for approval of the relocation of the Bank’s main office to Austin.

 

***Capital Resources***

 

As of March 31, 2005, the Company’s shareholder’sequity was $11,401,000 ($11,466,000 net of $50,000 in treasury stock), or 30.43%of total assets. The decrease in shareholders’ equity results from capital raisedin our offering, net of costs, reduced by the operating losses of approximately$2,854,000 arising during the start-up phase of operations in Austin, includingcharges of $427,400 for non-cash, stock-based compensation expense from theinitial issuances of the Company’s common stock to certain affiliated partiesand from a subsequent issuance of common stock in exchange for servicesreceived from an affiliated person.

 

The equity capital base of the Bank increased from$1,066,000 to $9,014,000 between March 9, 2004 (the date of acquisition) andMarch 31, 2005, due primarily to the capital injections of $8,000,000 netof operating losses of $1,407,000 attributable to the start-up activities inAustin, Texas.  Total assets of the Bank increased from $10,663,000 to $31,002,000for the same period.

 

The Bank will be subject to the risk-based capitalregulations administered by the banking regulatory agencies. The risk-basedcapital guidelines are designed to make regulatory capital requirements moresensitive to differences in risk profiles among banks to account foroff-balance sheet exposure and to minimize disincentives for holding liquidassets. Under the regulations, assets and off-balance sheet items are assignedto broad risk categories, each with appropriate weights. The resulting capitalratios represent capital as a percentage of total risk weighted assets andoff-balance sheet items. Under the prompt corrective action regulations, to beadequately capitalized a bank must maintain minimum ratios of total capital torisk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,and Tier 1 capital to total assets of 4.00%. Further, the Bank is currentlyrequired to maintain an 8% Tier 1 leverage ratio, under the Memorandum ofUnderstanding. Failure to meet these capital requirements may initiate certainmandatory, and possibly additional discretionary actions by regulators that ifundertaken could have a material adverse effect on the Bank’s financialstatements. At March 31, 2005, management believed that the Bank was infull compliance with all capital adequacy requirements.

 

Results of Operations

 

*General*

 

The following discussion analyzes the results of theCompany for the three months and six months ended March 31, 2004, and March 31,2005. References to the “Bank” in this review concern the operating performanceof Treaty Oak Bank (formerly Texline State Bank) since its acquisition on March 9,2004.

 

***Net Income—General***

 

The Company’s fiscal year ends on September 30.The net loss for the quarter ended March 31, 2005, was $649,000, comparedto a net loss of $246,000 for the quarter ended March 31, 2004. A $95,000charge to earnings from the issuance of stock in exchange for services and the expensesassociated with the new operations in Austin, Texas accounted for substantiallyall of the losses for the quarter ended March 31, 2005, while start-upactivities accounted for substantially all of the loss for the three monthsended March 31, 2004.   The net lossfor the sixth month period ended March 31, 2005 was $1,349,000, comparedto a net loss of $759,000 for the six month period ended March 31,2004.  The six month period ended March 31,2004 included the operations of the Bank for the period beginning March 9,2004, and ending March 31, 2004.

 

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

 

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amount considered to beadequate to cover probable credit losses in the loan portfolio. Non-interestincome or other income consists of service charges on deposits, gain on sale ofloans, and other operating income. Other expenses include salaries and employeebenefits, occupancy expenses, data processing expenses, marketing, supplies,and other operating expenses.

 

Netinterest income is affected by changes in the volume and mix of interestearning assets, the level of interest rates earned on those assets, the volumeand mix of interest bearing liabilities, and the level of interest rates paidon those interest bearing liabilities. The provision for loan losses isdependent upon changes in the loan portfolio and management’s assessment of thecollectibility of the loan portfolio, as well as economic and marketconditions. Other income and other expenses are impacted by growth ofoperations and growth in the number of accounts through both acquisitions andcore banking business growth. Growth in operations affects other expenses as aresult of additional employees, branch facilities, and promotional marketingexpense. Growth in the number of accounts affects other income includingservice fees, as well as other expenses such as computer services, supplies, postage,telecommunications, and other miscellaneous expenses.

 

***Provision for Loan Losses***

 

Theprovision for loan losses is an expense determined by management as the amountnecessary to increase the allowance for loan losses after net charge-offs havebeen deducted to a level that, in management’s best estimate, is necessary toabsorb probable losses in the loan portfolio. The amount of the provision isbased on management’s review of the loan portfolio and consideration of suchfactors as historical loss experience, general prevailing economic conditions,changes in the size and composition of the loan portfolio and specific borrowerconsiderations, including the ability of the borrower to repay the loan and theestimated value of the underlying collateral. The provision is calculatedmonthly and a charge to expense is made, as required, to increase the allowanceto the calculated level. For any particular month, in the event the requiredallowance is less than or equal to the current allowance, no expense is chargedor reversed.

 

Forthe quarter ended March 31, 2005, the Bank made $30,000 in provisions forloan losses compared to zero for the quarter ended March 31, 2004. TheBank charged off $1,000 in commercial and consumer loans and had recoveries ofloans previously charged-off of $1,000 for net charge-offs of $0. The factorscombined increased the Allowance for Loan Losses to $258,000 or 1.17% of theportfolio. This amount represents management’s estimate of potential lossesinherent in the portfolio.  For the sixmonth’s ended March 31, 2005, the bank made provisions to the reserve forloan losses in the amount of $30,000. The Bank charged off $1,000 in commercial and consumer loans and hadrecoveries of loans previously charged off of $12,000, for a net recovery of$11,000.

 

***Income Taxes***

 

Nofederal tax benefit has been recorded for the quarter ended March 31, 2005,based upon net operating losses incurred and carried forward in previous years.Based upon the Company’s limited operating history, the federal tax benefit ofthese losses has been fully reserved against. No federal tax benefit was recorded for the six months ended March 31,2005 or March 31, 2004.

 

**FinancialCondition**

 

***Loan Portfolio***

 

Netloans increased $11,787,000 (118.43%) to $21,740,000 from $9,953,000 between September 30,2004 and March 31, 2005. The increase was due primarily to the opening ofthe Austin office and subsequent funding of new loan requests. Theconcentration within the portfolio has shifted over time from the previous concentrationof agricultural loans to real estate and commercial loans.

 

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***Loan Portfolio Mix***

 

Thefollowing tables set forth the composition of the loan portfolio:

 
| ** **                 | ** ** | **At March 31,  2005** | ** ** | **At September 30,  2004** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Amount**                  | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                       |       |                        |       |                            |       |   |   |   |   |
| Agriculture                |       | $                           | 2,671,000  |                            | 12.1       | % | $ | 3,444,000 |   | 33.9 | % |
| Commercial                 |       | 8,890,000                   |       | 40.3                            | %          | 2,316,000 |   | 22.8 | % |
| Commercial real  estate    |       | 4,927,000                   |       | 22.3                            | %          | 1,030,000 |   | 10.1 | % |
| Residential real  estate   |       | 3,812,000                   |       | 17.3                            | %          | 2,627,000 |   | 25.8 | % |
| Construction  real estate  |       | 495,000                     |       | 2.3                             | %          | 33,000 |   | 0.3 | % |
| Installment and  other     |       | 1,248,000                   |       | 5.7                             | %          | 720,000 |   | 7.1 | % |
|                       |       |                        |       |                            |       |   |   |   |   |
| Total Loans                |       | 22,043,000                  |       | 100                             | %          | 10,170,000 |   | 100 | % |
| Deferred  Origination Fees |       | (45,000                     | )          |                            |       |   |   |   |   |
| Gross Loans                |       | 21,998,000                  |       |                            |       | 10,170,000 |   |   |   |
| Allowance for  Loan Losses |       | (258,000                    | )          |                            |       | (217,000 | ) |   |   |
|                       |       |                        |       |                            |       |   |   |   |   |
| Net Loans                  |       | $                           | 21,740,000 |                            |       |   | $ | 9,953,000 |   |   |   |

 

Loanconcentrations are considered to exist when there are amounts loaned to a multiplenumber of borrowers engaged in similar activities that would cause them to besimilarly impacted by economic or other conditions.

 

Priorto its acquisition by us, the Bank operated a branch office in Houston, Texas(which was closed in 2002), and a second portfolio concentration developed withloans of one-to-four family residential real estate. Approximately $1,500,000of the Bank’s residential real estate portfolio is comprised of single familyresidences in Houston. The majority of these loans originated between 1996 and1998 for 15-year terms with fixed rates of 8.75% or greater. These loansadditionally have five-year call provisions exercisable at the Bank’sdiscretion.

 

Theseresidential real estate loans are expected to remain flat or possibly trenddown slightly. The majority of new loan growth is expected to originate fromthe Austin market.  Management believesthat loans originated from the Austin market will reflect a broader, morediverse mix of industries and borrowers. As new loans are generated fornon-agricultural and non residential real estate purposes, the percentage ofthe total loan portfolio creating the concentrations described above will bereduced thereby diminishing undue risk associated with industry concentration.

 

Managementmay renew loans at maturity when requested by a customer whose financialstrength appears to support such a renewal or when such a renewal appears to bein the best interest of the Bank. The Bank requires payment of accrued interestin such instances and may adjust the rate of interest, require a principalreduction, or modify other terms of the loan at the time of renewal.

 

 

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*Loan Maturities*

 

As of March 31,2005, 33.67% of the loan portfolio consisting of agricultural, commercial, andreal estate loans, or $7,001,000, matures or reprices within one year or less.$5,688,000 of these loans, or 81.25%, are variable rate loans. The followingtable presents the contractual maturity ranges for agricultural, commercial,and real estate loans outstanding at March 31, 2005, and also presents foreach maturity range the portion of loans that have fixed interest rates orinterest rates that fluctuate over the life of the loan in accordance withchanges in the interest rate environment as represented by the base rate:

 
| ** **              | ** ** | **Due in One Year  or Less** | ** ** | **Due after One Year  Through  Five Years** | ** ** | **Due after  Five Years** | ** ** | ** **         | ** ** |
|-------------------------|------------|------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|--------------------|------------|
| **March 31, 2005** | ** ** | **Fixed  Rate**              | ** ** | **Floating  Rate**                          | ** ** | **Fixed  Rate**           | ** ** | **Floating  Rate** | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** | **Total** | ** ** |
| Agricultural            |       | $                            | 150,000    |                                        | 1,234,000  |                      | 8,000      |               | 606,000    |   | — |   | 673,000 |   | $ | 2,671,000 |   |
| Commercial              |       | 494,000                      |       | 3,636,000                                   |       | 2,682,000                 |       | 1,948,000          |       | — |   | 130,000 |   | 8,890,000 |   |
| Real Estate             |       | 669,000                      |       | 818,000                                     |       | 1,019,000                 |       | 3,675,000          |       | 1,585,000 |   | 1,468,000 |   | 9,234,000 |   |
|                         |            |                              |            |                                             |            |                           |            |                    |            |  |  |  |  |  |  |  |  |

 

***Investment Securities***

 

Theprimary purposes of the investment portfolio are to provide a source ofearnings for liquidity management purposes, to provide collateral to pledgeagainst public deposits, and to control interest rate risk. In managing the portfolio,the Bank seeks to attain the objectives of safety of principal, liquidity,diversification, and maximized return on investment.

 

Thefollowing tables set forth the amortized cost and fair value of the Bank’ssecurities portfolio by accounting classification category and by type ofsecurity as indicated:

 

| ** **                           | ** ** | **As of  March 31, 2005** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**            | ** ** | **Fair  Value** | ** ** |
| Securities Held  to Maturity:        |       |                           |       |   |   |
| U.S. Government  Agencies            |       | $                              | 4,494,000  |   | $ | 4,457,000 |   |
| Mortgage backed  securities          |       | 7,000                          |       | 6,000 |   |
|                                 |       |                           |       |   |   |
| Total Securities  Held to Maturity   |       | $                              | 4,501,000  |   | $ | 4,463,000 |   |
|                                 |       |                           |       |   |   |
| Securities  Available for Sale       |       |                           |       |   |   |
| U.S. Government  agencies            |       | $                              | 402,000    |   | $ | 396,000 |   |
| Mortgage backed  securities          |       | 44,000                         |       | 45,000 |   |
|                                 |       |                           |       |   |   |
| Total Securities  Available for Sale |       | $                              | 446,000    |   | $ | 441,000 |   |

 

U.S.Treasury securities and securities of U.S. Government agencies generallyconsist of fixed rate securities with maturities of three months to five years.Other mortgage backed securities consists of fixed rate mortgage pass-throughsecurities with a maturity of five to fifteen years.

 

23

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***Asset Quality***

 

Thefollowing table sets forth the amount of non-performing loans andnon-performing assets as of March 31, 2005 and September 30, 2004:

 

| ** **                                               | ** ** | **As of**          | ** ** | **As of**         | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2005**           | ** ** | **2004**          | ** ** |
|                                                     |       |               |       |              |       |
| Non-accruing  loans                                      |       | $                  | 31,000     |              | $          | 93,000 |   |
|                                                     |       |               |       |              |       |
| Loans 90 days or  more past due, still accruing interest |       | —             |       | 51,000            |       |
| Total  non-performing loans                              |       | 31,000             |       | 144,000           |       |
|                                                     |       |               |       |              |       |
| Other real  estate owned                                 |       | —             |       | —            |       |
|                                                     |       |               |       |              |       |
| Other reposessed  assets                                 |       | 17,000             |       | 7,000             |       |
|                                                     |       |               |       |              |       |
| Total  non-performing assets                             |       | $                  | 48,000     |              | $          | 151,000 |   |
|                                                     |       |               |       |              |       |
| Total  non-performing loans to total loans               |       | 0.14               | %          | 1.42              | %          |
| Allowance for  loan losses to non-performing loans       |       | 832.26             | %          | 150.69            | %          |
|                                                     |       |               |       |              |       |
| Total  non-performing assets to total assets             |       | 0.13               | %          | 0.58              | %          |

 

***Non-performing Loans***

 

Non-performingloans include (1) loans accounted for on a non-accrual basis, (2) accruingloans contractually past due 90 days or more as to interest and principal,and (3) troubled debt restructurings. Management reviews the loanportfolio for problem loans on an ongoing basis.

 

Ifinterest on non-accrual loans had been accrued, such income would have amountedto approximately $800 for the quarter ended March 31, 2005, and $1,800 forthe quarter ended March 31, 2004. These amounts were not included ininterest income during these periods.

 

UnderFederal and Texas law, any loan 90 or more days past due is required to beplaced on non-accrual basis unless specifically identified mitigatingcircumstances exist. The Bank’s policy is to place loans 90 days past dueon non-accrual status. An exception is made when management believes the loanis fully secured and in process of collection. Non-accrual loans are furtherclassified as impaired when underlying collateral is not sufficient to coverthe loan balance and it is probable that the Bank will not fully collect allprincipal and interest. As of March 31, 2005, the Bank had $31,000 in non-accrualloans. There were no loans contractually past due over 90 days and continuingto accrue interest on March 31, 2005, based upon specific informationavailable at that time to management. In compliance with these statutes we havedeveloped pro forma financial statements assuming that no loans will continueto accrue interest if the loan become 90 days past due, and insteadtransfer all such loans to non-accruing status.

 

A “troubleddebt restructuring” is a restructured loan upon which interest accrues at abelow market rate or upon which certain principal has been forgiven so as toaid the borrower in the final repayment of the loan, with any interestpreviously accrued, but not yet collected, being reversed against currentincome. Interest is accrued based upon the new loan terms. There were notroubled debt restructurings outstanding as of March 31, 2005*.*

 

24

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Non-performingassets also consist of other repossessed assets and other real estate owned (“OREO”).OREO represents properties acquired through foreclosure or other proceedingsand is recorded at the lower of cost or fair market value less the estimatedcost of disposal. OREO is evaluated regularly to ensure that the recordedamount is supported by its current fair market value. Valuation allowances toreduce the carrying amount to fair market value less estimated costs ofdisposal are recorded as necessary. Revenues and expenses from the operationsof OREO and changes in the valuation are included in other income and otherexpenses on the income statement. As of March 31, 2005, the Bank had noother real estate owned. Repossessed assets totaled $17,000 at March 31,2005.

 

***Sources of Funds***

 

*General*

 

Deposits,short-term and long-term borrowings, loan and investment security repaymentsand prepayments, proceeds from the sale of securities, and cash flows generatedfrom operations are the primary sources of our funds for lending, investing,and other general purposes. Loan repayments are a relatively predictable sourceof funds except during periods of significant interest rate declines, whiledeposit flows tend to fluctuate with prevailing interests rates, money marketsconditions, general economic conditions, and competition.

 

*Deposits*

 

TheBank offers a variety of deposit accounts with a range of interest rates andterms. Core deposits consist of checking accounts (non-interest bearing), “NOW”accounts, savings accounts, and non-public certificates of deposit. Thesedeposits, along with public fund deposits and short-term borrowings, are usedto support the Bank’s asset base. Deposits are obtained predominantly from thegeographic trade areas surrounding the Bank’s office location. The Bank reliesprimarily on customer service and long-standing relationships with customers toattract and retain deposits; however, market interest rates and rates offeredby competing financial institutions significantly affect the Bank’s ability toattract and retain deposits.

 

Thefollowing table sets forth the maturities of time deposits $100,000 and over asof March 31, 2005 and September 30, 2004:

 

| ** **                                | ** ** | **As of**          | ** ** | **As of**         | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2005**           | ** ** | **2004**          | ** ** |
| Time deposits  $100,000 and over:         |       |               |       |              |       |
| Maturing within  three months             |       | $                  | 515,000    |              | $          | 557,000 |   |
| After three months  but within six months |       | 907,000            |       | 325,000           |       |
| After six months  but within 12 months    |       | 227,000            |       | 615,000           |       |
| After 12 months                           |       | 100,000            |       | 100,000           |       |
|                                      |       |               |       |              |       |
| Total time  deposits $100,000 and over:   |       | $                  | 1,749,000  |              | $          | 1,597,000 |   |

 

25

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*Return on Equity and Assets*

 

Thefollowing table sets forth certain information regarding the Company’s returnon equity and assets for the periods indicated:

 
| ** **              | ** ** | **For the  Three Months  Ended  March 31,  2005** | ** ** | **For the  Six Months  Ended  March 31  2005** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Return on assets        |       | -1.73                                                  | %          | -3.60                                               | %          |
| Return on equity        |       | -5.69                                                  | %          | -11.83                                              | %          |
| Dividend payout  ratio  |       | 0                                                      | %          | 0                                                   | %          |
| Equity to assets  ratio |       | 30.43                                                  | %          | 30.43                                               | %          |

 

**CapitalResources**

 

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

 

As of March 31,2005, the most recent notification from the federal banking regulatorscategorized the Bank as well-capitalized. A well-capitalized institution mustmaintain a minimum ratio of total capital to risk-weighted assets of at least10.00%, a minimum ratio of Tier 1 capital to risk weighted assets of at least6.00%, and a minimum ratio of Tier 1 capital to total assets of at least 5.00%and must not be subject to any written order, agreement, or directive requiringit to meet or maintain a specific capital level. We believe that there are noconditions or events since that notification that have changed the capitalclassification.

 

TheBank was in full compliance with all applicable capital adequacy requirementsas of March 31, 2005. The required and actual amounts and ratios for theBank as of March 31, 2005, are presented below:

 
| ** **                                | ** ** | **Actual** | ** ** | **For Capital Adequacy  Purposes** | ** ** | **To Be Well Capitalized  Under  Prompt Corrective  Action  Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of  March 31, 2005                |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 capital  (to average assets)       |       | $          | 7,794,000  |                               | 26.47      | %                                                                        | $          | 1,178,000 |   | 4 | % | $ | 1,472,000 |   | 5 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 7,794,000  |       | 30.25                              | %          | 1,030,000                                                                |       | 4 | % | 1,546,000 |   | 6 | % |
| Total capital  (to risk-weighted assets)  |       | 8,052,000  |       | 31.25                              | %          | 2,061,000                                                                |       | 8 | % | 2,576,000 |   | 10 | % |
| As of  March 31, 2004                |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 capital  (to average assets)       |       | $          | 1,800,000  |                               | 16.65      | %                                                                        | $          | 432,000 |   | 4 | % | $ | 541,000 |   | 5 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 1,800,000  |       | 22.89                              | %          | 314,000                                                                  |       | 4 | % | 472,000 |   | 6 | % |
| Total capital  (to risk-weighted assets)  |       | 1,899,000  |       | 24.15                              | %          | 629,000                                                                  |       | 8 | % | 786,000 |   | 10 | % |

 

26

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**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) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of theend of 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 andforms.

 

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 and ensuringthat the Company’s systems evolve with its business.

 

**PART II.****                Other Information**

 

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

 

The Company has no pending legal proceedings as of March 31,2005.  From time to time, the Company’ssubsidiary is involved in various legal proceedings arising in the ordinarycourse of business.  These actions arenot believed to be material either individually or collectively to theconsolidated financial condition of the Company or its subsidiary.

 

**Item 2.****                                                           *Cha******nges in Securities and Useof Proceeds***

 

On May 7, 2004, theSecurities and Exchange Commission declared our Registration Statement on Form SB-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 additionalshares of common stock and warrants to purchase our common stock under ourpublic offering.  We registered a totalof 1,944,000 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 net offering proceeds (after deducting offeringexpenses) of approximately $11.9 million.

 

27

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As of March 31, 2005,we had paid our organizing shareholder and affiliate, Treaty Oak Holdings, forreimbursement of expenses and advances on our behalf in connection with ouroffering and repayment of the amount due under a convertible promissorynote.  Treaty Oak Holdings ownsapproximately 39% of our common stock. We contributed to the capital of the Bank and paid operating expensesincluding repayment of certain costs previously paid by Treaty OakHoldings.  We also repaid principal andinterest under unsecured promissory notes issued in connection with thepurchase price of the Bank.  The tablebelow summarizes the use of net offering proceeds through March 31, 2005:

 

| 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  expeneses 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.                                                                      |   | (1,034,115 | )          |
| Contribution to  the capital of the Bank                                                                                                                                                         |   | (7,500,000 | )          |
| Payments to  directors and officers (bonuses and directors’ fees)                                                                                                                           |   | (259,871   | )          |
| Payments to  officers (salary and benefits)                                                                                                                                                      |   | (209,000   | )          |
| Other payments  to affiliates for services                                                                                                                                                       |   | (19,000    | )          |
| Limited  partnership investment in affiliated limited partnership                                                                                                                                |   | (950,000   | )          |
| Repurchase of  shares issued                                                                                                                                                                     |   | (50,005    | )          |
| Payment of  additional operating expenses (estimated)                                                                                                                                            |   | (424,000   | )          |
| Remaining net  proceeds                                                                                                                                                                          |   | $          | 1,547,978  |   |

 

$679,691 of the amountreferenced as “Repayment of notes payable for the acquisition of Texline StateBank was paid to Charles T. Meeks, a member of our Board of Directors andChairman of the Board of the Bank.   Anadditional amount due to Mr. Meeks from the acquisition of the Bank in theamount of $18,783 previously held in escrow is also included in thisamount.  On November 18, 2004, weapproved the purchase of a 47.5% preferential limited partnership interest inPGI Equity Partners, L.P., which owns and operates the building premises welease, for $950,000.  A deposit of$150,000 was paid on November 18, 2004, and the balance of the purchaseprice of $800,000 was paid on December 30, 2004, at closing.  We had originally anticipated these fundswould be used for capital of the Bank, but we believe the investment inpremises will allow us the opportunity to realize more value from appreciationin the real property rather than over-capitalizing the Bank.  The remaining net proceeds have been investedin short-term interest bearing, money market accounts.

 

## **Item3.**                                                           *Defaults Upon Senior Securities*

 

## **None.**

 

28

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## **Item4.**                                                           *Su**bmission of Matters to a Vote of Security Holders*

## ** **

On February 8, 2005,we held our annual meeting of shareholders. Holders of 1,483,460 of the 2,602,882outstanding shares of our common stock were present at the meeting in person orby proxy.  The following matters wereapproved at the meeting as indicated below.

 

1.   Election of Class I Directors (to serve terms until 2008 annual meeting):

 
| **Nominee**         | ** ** | **Votes** | ** ** | **Votes Withheld** | ** ** |
|---------------------|------------|-----------|------------|--------------------|------------|
| Charles T. Meeks    |       | 1,482,660 |       | 800                |       |
| Marvin L.  Schrager |       | 1,483,460 |       | —             |       |
| Arthur H.  Coleman  |       | 1,482,660 |       | 800                |       |

 

2.               Ratificationof McGladrey & Pullen, LLP as auditors.  1,479,860 shares voted in favor, 3,000 sharesvoted against, and 600 shares abstained.

 

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

 

We approved director and retainer fees for certain members of our board of directors and those of our banking subsidiary. Effective as of January 1, 2005, members of our board of directors and of our banking subsidiary who are not our employees or officers or those of our affiliates receive $175 fee for each board or Treaty Oak Bancorp, Inc. committee meeting attended in person or via teleconference.  In addition, the chair of our audit committee receives a $3,600 annual retainer fee, and the chair of our compensation committee receives a $2,000 annual retainer fee.

 

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

 

a.               Exhibits

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

 

----

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

 

b.              Current Reports on Form 8-K

 

None.

 

29

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**SIGNAT****URES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                      | **TREATY OAK BANCORP, INC.** |
|---------------------------|------------------------------|
|                      |                         |
|                      |                         |
| Dated: May 13,  2005 | By:                          | /s/ Terry W. Hamann |   |
|                      |                         | Terry W. Hamann,  President and Chief Executive Officer |
|                      |                         |
|                      |                         |
|                      | By:                          | /s/ Jeffrey L. Nash |   |
|                      |                         | Jeffrey L. Nash, Chief  Financial Officer |

 

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