TREATY OAK BANCORP, INC.

101 Westlake Drive

Austin, Texas 78746

(512) 617-3600

NOTICE OF 2008 ANNUAL MEETING OF SHAREHOLDERS

To Be Held on February       , 2008

To our shareholders:

You are cordially invited to attend our 2008 Annual Meeting of Shareholders to be held on February       , 2008, at 5:30 p.m., Austin, Texas time, at our headquarters, 101 Westlake Drive, Austin, Texas 78746.

The meeting is for the purpose of considering and voting upon the following matters:

1.     To approve an amendment to our Articles of Incorporation (which we will refer to as the “Amendment”) to effect a reclassification of all shares of our common stock held by record shareholders owning less than 2,500 shares of our common stock into shares of a new series of our preferred stock titled Series A preferred stock on a one share of common stock for one share of Series A preferred stock basis (which we will refer to as the “Reclassification”);

2.     To elect three directors to serve as Class I directors on our Board of Directors for a three year term until our 2011 annual meeting of shareholders; and

3.     To transact such other business as may properly come before the meeting or any adjournments thereof. We are not aware of any other business to be considered at the meeting.

Our Board of Directors has established January       , 2008 as the record date for the determination of our shareholders entitled to notice of and to vote at the meeting and any adjournments thereof.

Our Board of Directors has carefully considered the terms of the Reclassification and believes that the proposal is fair to, and in the best interests of, us and our shareholders.  Our Board of Directors has unanimously approved the Reclassification and recommends that you vote FOR the approval of the Amendment authorizing the Reclassification and FOR the election of the persons nominated to serve as Class I directors.

Those shareholders holding shares of our Series A preferred stock immediately following the Reclassification will have the option to sell those shares to us at any time during the thirty (30) day period following the Reclassification at a cash price equal to $11.00 per share.

A form of proxy is enclosed to enable you to vote your shares at the meeting.  Your vote is very important. You are urged, regardless of the number of shares you hold, to complete, sign, date and return the proxy promptly.  A self-addressed return envelope, which requires no postage if mailed in the United States, is enclosed for your convenience.  If you attend the meeting, you may vote in person, if you wish, whether or not you have returned your proxy.  In any event, you may revoke your proxy at any time before it is exercised.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE AMENDMENT, PASSED UPON THE MERITS OR FAIRNESS OF THE AMENDMENT OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND THE ACCOMPANYING PROXY STATEMENT, AND ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

TREATY OAK BANCORP, INC.

PRELIMINARY PROXY STATEMENT
2008 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY       , 2008

GENERAL INFORMATION

Our Board of Directors hereby solicits your proxy for use at our 2008 annual meeting of shareholders to be held at our headquarters, 101 Westlake Drive, Austin, Texas 78746 at 5:30 p.m., Austin, Texas time, on February       , 2008 (the “Meeting”), and any adjournments thereof.  This solicitation may be made in person or by mail, telephone, or telecopy by our directors, officers, and regular employees, who will receive no extra compensation for participating in this solicitation.  We will also reimburse banks, brokerage firms, and other fiduciaries for forwarding solicitation materials to the beneficial owners of our common stock held of record by such persons.  We will pay the entire cost of this solicitation.  We expect to mail this proxy statement and the enclosed form of proxy to our shareholders on or about January       , 2008.

Unless the context indicates otherwise, “Treaty Oak,” “we,” “us,” “our” or the “Company” means Treaty Oak Bancorp, Inc. and all of our subsidiaries on a consolidated basis.

Our Board of Directors is soliciting your vote on two matters:  (1) an amendment to our Articles of Incorporation (which we will refer to as the “Amendment”) to reclassify all shares of our common stock held by record shareholders owning less than 2,500 shares of our common stock into shares of our Series A preferred stock on a one share of common stock for one share of Series A preferred stock basis (which we will refer to as the “Reclassification”) and (2) the election of three persons to serve as Class I directors on our Board of Directors for a three year term until our 2011 annual meeting of shareholders.  As set forth in the Amendment, those shareholders owning shares of our Series A preferred stock immediately following the Reclassification shall have the option to sell any or all of the Series A preferred stock to us at a cash price equal to $11.00 per share (which we will refer to as the “Put Price”) during the thirty (30) days following the Reclassification.  Under the terms of the proposed Amendment, the number of authorized shares of our preferred stock (excluding Series A preferred stock) will be reduced from 10,000,000 to 7,500,000, and the number of authorized shares of our common stock will remain 20,000,000.

Our Series A preferred stock will not have the same rights as our common stock.  There will be no voting rights associated with our Series A preferred stock except (i) as required by law or (ii) upon the merger, acquisition or sale of our stock or assets that would require approval of the holders of our common stock.  Each share of our Series A preferred stock will have a preference prior to any payment to holders of our common stock at the time of our liquidation, dissolution or winding up in an amount equal to the greater of book value per share and the amount per share to be paid to the holders of common stock.  In addition, we will not be able to award any dividend to holders of our common stock without also paying a dividend of no less than equal value to the holders of our Series A preferred stock.  Upon a change of control of us, all shares of our Series A preferred stock shall automatically convert into shares of our common stock.  A “Change of Control” is any merger, acquisition of all of the capital stock of, or other business combination involving us (other than with an entity 50% or more of which is controlled by, or is under common control with, us), (i)  which involves any sale of all or substantially all of our assets, (ii) in which our shareholders immediately prior to the transaction will hold less than 50% of the equity ownership or voting power of the surviving entity after the transaction or (iii) the result of which transaction is that a person or entity beneficially owns, directly or indirectly, more than 50% of the equity ownership or voting power of the surviving entity.

Shareholders whose shares of our common stock will be reclassified into Series A preferred stock are not entitled to appraisal rights under Texas law.

In connection with the Reclassification, each record shareholder:

•                                          Holding 2,500 or more shares of our common stock at the effective time of the Reclassification, as determined by our Board of Directors, will retain the same number of shares of common stock

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as owned prior to the Reclassification and receive no consideration with respect to the Reclassification; or

•                                          Holding fewer than 2,500 shares of our common stock at the effective time of the Reclassification, as determined by our Board of Directors, will be issued new shares of our Series A preferred stock in exchange for all shares of our common stock owned by such record shareholder on a one share of Series A preferred stock for one share of common stock basis, and all shares of common stock owned by such shareholder prior to the effective time of the Reclassification will be cancelled.  Each record shareholder who receives our Series A preferred stock in connection with the Reclassification will be able to sell our Series A preferred stock received as a result of the Reclassification to us at the Put Price at any time during the thirty (30) day period following the Reclassification.

Our Board of Directors’ basis in determining the number of shares held of record by all of the shareholders will be consistent with our stock records maintained in the ordinary course of business.

After the Reclassification transaction, we anticipate that we will have approximately 244 record shareholders owning our common stock and approximately 349 record shareholders owning our Series A preferred stock.  Once we have fewer than 300 common shareholders of record, we intend to deregister our common stock with the Securities and Exchange Commission (the “SEC”) so that we will no longer be subject to the periodic reporting and related requirements mandated by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are applicable to public companies.  Because fewer than 500 record shareholders will be holding shares of our Series A preferred stock after the Reclassification, we do not intend to register that class of stock with the SEC under the Exchange Act.

Also after the Reclassification and deregistration, holders of our common stock and Series A preferred stock will lose any benefit associated with having registered shares.  Once we deregister as a SEC reporting company, we will no longer file current and periodic reports with the SEC, including annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and current reports on Form 8-K, and we will also no longer be subject to the proxy requirements of the Exchange Act.  In addition, following deregistration, our directors, executive officers and persons owning more than 10% of our outstanding shares of common stock will no longer be subject to the reporting and short-swing trading requirements of Section 16 of the Exchange Act.  No shareholder will receive any consideration in exchange for approving the Reclassification and the subsequent deregistration from SEC reporting requirements; however, we anticipate that the cost savings of no longer being a SEC reporting company will ultimately benefit us, and as a result, our shareholders.  We anticipate that our common stock, which is currently traded on the Over-the-Counter Bulletin Board, and our Series A preferred stock will be traded on the Pink Sheets after the Reclassification.  However, we cannot predict whether this will occur or whether there will be an active trading market for our common stock and Series A preferred stock after the Reclassification.

Following shareholder approval of the Amendment and the consummation of the Reclassification, we anticipate that any trading in our common or preferred stock will be on the Pink Sheets.

The Reclassification cannot occur unless the holders of more than two-thirds (66 2/3rds) of the issued and outstanding shares of our common stock approve the proposed Amendment.

This document provides you with detailed information about the proposed Reclassification.  Please see “Additional Information” on page    for additional information about us on file with the Securities and Exchange Commission.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE PROPOSED AMENDMENT, PASSED UPON THE MERITS OR FAIRNESS OF THE AMENDMENT OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION DISCLOSED IN THIS PROXY STATEMENT. ANY REFERENCE TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Proxy Statement is January       , 2008.  This Proxy Statement is being mailed to our shareholders on or about January       , 2008.

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TABLE OF CONTENTS

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SUMMARY TERM SHEET

This summary of terms, as well as the questions and answers that follow, highlights selected information about the proposed Reclassification and Amendment included elsewhere in this Proxy Statement.  This summary is qualified in its entirety by reference to the more detailed information appearing or incorporated by reference elsewhere in this Proxy Statement.  We encourage you to read the entire Proxy Statement, as well as any information that has been incorporated by reference, before you vote at the Meeting.  Unless the context indicates otherwise, all references to “Treaty Oak,” “we,” “us,” “our” or the “Company” shall mean Treaty Oak Bancorp, Inc. and all of its subsidiaries on a consolidated basis.  The term “Bank” shall refer to Treaty Oak Bank, a Texas state-chartered banking association, a wholly-owned subsidiary of Treaty Oak Bancorp, Inc.  The term “Reclassification” shall refer to the reclassification of shares of our common stock to shares of our Series A preferred stock as to those record shareholders owning less than 2,500 shares of our common stock.

Structure of the Reclassification

If adopted by our shareholders, the Amendment will authorize the issuance of up to 2,500,000 shares of our Series A preferred stock.

•                                          Each holder of record of 2,500 or more shares of our common stock immediately prior to the Reclassification will retain the same number of shares of our common stock, and such record holder will not receive any consideration as a result of this transaction or have his or her stock holdings affected as a result of the Reclassification.  (See pages        .)

•                                          Each holder of record of fewer than 2,500 shares of our common stock immediately prior to the Reclassification will have their shares of our common stock cancelled, and in exchange will receive one (1) share of our Series A preferred stock for each share of common stock owned of record by such shareholder immediately prior to the Reclassification.  As a result, those holders of record owning fewer than 2,500 shares immediately prior to the Reclassification will no longer be common shareholders of record after the Reclassification and will receive no additional consideration other than the receipt of our Series A preferred stock. (See pages        .)

•                                          Based on the number of our shareholders of record as of September 30, 2007, an aggregate of approximately 297,791 shares, or 10.07% of our outstanding common stock, will be reclassified to Series A preferred stock and approximately 2,660,811 shares, or 89.93% of our outstanding common stock, will not be reclassified.  As a result, the percentage ownership of each remaining holder of our common stock will increase after the Reclassification.  See pages         for additional information.

•                                          All stock certificates for our common stock held by those holders of record owning fewer than 2,500 shares of our common stock immediately prior to the Reclassification will be cancelled and must be returned to us.  After the Amendment has been filed with the Texas Secretary of State, we will send those shareholders whose shares of common stock are being converted to Series A preferred stock transmittal materials that will inform those shareholders how to receive new stock certificates for their Series A preferred stock.  Shareholders owning Series A preferred stock after the Reclassification will accrue dividends on their new shares when declared by our Board of Directors, but they will not be entitled to receive the dividends until their old stock certificates representing their cancelled common stock are properly surrendered.  Likewise, these preferred shareholders will not be able to transfer their shares on our books until their old stock certificates are properly surrendered. (See pages        .)

Terms of Series A Preferred Stock

The Series A preferred stock will have different rights and limitations from our common stock with respect to voting, dividends, liquidation and redemption.  The terms of the Series A preferred stock provide as follows:

•                                          Voting Rights.  Unlike our common stock, our Series A preferred stock will not have voting rights except as provided by law or upon a merger, acquisition or sale of our stock or assets that would

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require approval of holders of our common stock.  For those matters on which holders of Series A preferred stock are entitled to vote, such holders have the right to one vote for each share of common stock into which the Series A preferred stock would convert if a Series A preferred stock conversion event had occurred.

•                                          Dividend Rights.  No dividend will be paid to holders of our common stock unless a dividend of no less than equal value is also paid to holders of our Series A preferred stock.  We are not required to pay dividends on our Series A preferred stock. 

•                                          Conversion Right.  All shares of our Series A preferred stock will automatically convert to shares of common stock upon a change of control of us.

•                                          Liquidation Rights.  Holders of our Series A preferred stock would receive a preferential payment upon our liquidation or dissolution.

•                                          Put Right.  Those holders of record owning fewer than 2,500 shares of our common stock immediately prior to the Reclassification and who therefore receive our Series A preferred stock as a result of the Reclassification will be entitled to sell those shares of Series A preferred stock to us at any time within thirty (30) days following the Reclassification at a price equal to $11.00 per share of Series A preferred stock (the “Put Price”). (See pages        .)

•                                          Anti-dilution Adjustments. If the number of outstanding shares of our common stock is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of ours or any other company, by reason of any merger, consolidation, liquidation, reclassification, recapitalization, stock split, reverse stock split, combination of shares or stock dividend, an appropriate adjustment shall be made by our Board of Directors in the number and relative term of the Series A preferred stock.

Determination of Shares “Held of Record”

Because SEC rules require that we count “record holders” for purposes of determining our reporting obligations, the Reclassification is based on shares held of record without regard to the ultimate control of the shares.  A shareholder “of record” is the shareholder whose name is listed on the front of the stock certificate, regardless of who ultimately has the power to vote or sell the shares.  For example, if a shareholder holds separate certificates individually, as a joint tenant with someone else, as trustee, and in an IRA, those four certificates represent shares held by four different record holders, even if a single shareholder controls the voting or disposition of those shares.  Similarly, shares held by a broker in “street name” on a shareholder’s behalf are held of record by the broker.

As a result, a single shareholder with 2,500 or more shares held in various accounts could receive Series A preferred stock in the Reclassification for all of his or her shares if those accounts individually hold fewer than 2,500 shares.  To avoid this, the shareholder may either consolidate his or her ownership into a single form of ownership representing 2,500 or more shares, or acquire additional shares in the market prior to the effective date of the Reclassification.  Additionally, a shareholder who holds fewer than 2,500 shares of common stock through a broker may be unaffected by the Reclassification if the broker holds an aggregate of 2,500 or more shares.

Purpose of the Reclassification

The purpose of the Reclassification is to reduce the number of record holders of our common stock so that we may deregister our common stock under the Securities Exchange Act of 1934 (the “Exchange Act”).  Our Board’s primary reason for deregistration is the estimated annual costs savings to us.  If we deregister, we will not be governed by the Sarbanes-Oxley Act of 2002 as applicable to public companies.  We also will no longer file periodic reports with the SEC, including annual and quarterly reports on Form 10-KSB and Form 10-QSB and current reports on Form 8-K, nor will we be subject to the SEC’s proxy rules.  However, we currently intend to provide our shareholders with annual audited financial statements and quarterly unaudited financial statements.  These financial statements, including our balance sheet and profit and loss statement, sent as part of quarterly investor reports from our CEO, will be provided to all shareholders of record soon after the end of each fiscal quarter and year end, and may not contain information in the same format nor to the same depth as that contained in

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the Forms 10-KSB and 10-QSB that we report today.  Other reasons for, and anticipated consequences of, the Reclassification are discussed in this Proxy Statement (See pages        .)

Effects of the Reclassification

•                                          Our common stock is currently traded on the Over-the-Counter Bulletin Board.  After the Reclassification, we anticipate that our common stock and our Series A preferred stock will be traded on the Pink Sheets.  However, we cannot predict whether this will occur or that an active trading market will exist for our common stock and Series A preferred stock after the Reclassification.  It is unlikely that there will be an active trading market for our Series A preferred stock after the Reclassification due to the limited number of shares which will be outstanding.  As a result, it may be more difficult for our shareholders to sell their shares after the Reclassification.  (See page   .)

•                                          Outstanding stock options to acquire our common stock will not be affected by the Reclassification.  Awards of restricted stock under our 2004 stock incentive plan are deemed to be outstanding shares of common stock under the terms of the plan and therefore will be treated as outstanding shares for purposes of the Reclassification.

•                                          Under the terms of the outstanding warrants to acquire our common stock, as a result of the Reclassification, the holders of the warrants will have the right to purchase such shares that the holder would have received in the Reclassification had the holder exercised the warrant immediately prior to the Reclassification.  Thus, a warrant to acquire 2,500 or more shares of our common stock would not be affected by the Reclassification.  A warrant to acquire less than 2,500 shares of our common stock would be converted into a warrant to acquire a number of shares of Series A preferred stock equal to the number of shares of common stock underlying such warrants, unless the holder already holds of record shares of our common stock in the same capacity such that, in total, the holder would hold of record 2,500 or more shares.  For example, if a shareholder holds of record 1,000 shares of our common stock in his individual capacity and holds a warrant to acquire 2,000 shares of our common stock in his individual capacity, the warrant would not be affected by the Reclassification.  The exercise price and other terms of the warrants will not be affected by the Reclassification.

•                                          The Reclassification will not be effective unless and until our shareholders approve the proposed Amendment.  We anticipate that the Amendment will be filed with the Texas Secretary of State, and the Reclassification will take place, shortly after the Meeting. (See page   .)

•                                          Upon the approval of the Reclassification, we estimate that approximately 297,791 shares of our common stock will be converted to Series A preferred stock, which will directly affect the stock holdings of approximately 349 shareholders of record.  If all of the holders of Series A preferred stock elect to sell their shares to us at the Put Price within the thirty (30) days following the Reclassification, we will be required to pay approximately $3,275,700 for the purchased preferred shares.  In addition, we estimate that we will incur approximately $161,700 in transaction expenses related to the Reclassification.  We intend to pay for any shares of Series A preferred stock to be sold to us at the Put Price, as well as the expenses of the Reclassification, from our cash reserves and anticipate remaining well-capitalized after the transaction.  However, we do anticipate obtaining a back-up credit facility to ensure that our liquidity position remains healthy.  On September 30, 2007, we had approximately $2.6 million in cash and cash equivalents and $15.3 million in the form of shareholders’ equity.  (See pages    and        .)

•                                          Subject in all respects to the discussion cited below, our shareholders generally should not recognize gain or loss for federal income tax purposes as a result of the Reclassification.  However, those shareholders who receive Series A preferred stock and elect to sell any or all of those shares to us at the Put Price typically will recognize gain or loss for federal, and possibly state and local, income tax purposes when they receive cash for their shares.  They will generally recognize gain or loss equal to the difference between the amount of cash received and their tax basis in their shares of common stock which are cashed out. These shareholders should consult their personal tax advisors for a full understanding of their tax consequences resulting from the Reclassification and sale of stock. (See pages        .)

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Fairness of the Reclassification

•                                          Our Board of Directors has determined the Reclassification, as well as the Put Price to be paid to those Series A preferred shareholders selling their stock to us following the Reclassification, to be fair to our unaffiliated shareholders.  Our directors separately considered the fairness of the Reclassification as to those shareholders who will receive Series A preferred stock as well as those shareholders who will retain their shares of common stock after the Reclassification. (See pages        .)

•                                          Financial Valuation Services, LC (d/b/a Fowler Valuation Services) (“FVS”), an independent financial advisor to our Board of Directors, has delivered to our Board a fairness opinion dated November 13, 2007 (the “Written Opinion”).  The fairness opinion states that, as of its date, the cash Put Price to be paid to those Series A preferred shareholders selling their Series A preferred shares to us following the Reclassification was fair, from a financial point of view, to all of our shareholders.  This fairness opinion was one of the factors considered by our Board in determining the Put Price.  A copy of the fairness opinion is attached as Appendix B to this Proxy Statement.  The fairness opinion is based upon and subject to the various assumptions and limitations described therein.  Please read the fairness opinion in its entirety. (See pages        .)

•                                          FVS has also delivered to our Board a valuation analysis, dated November 12, 2007, of our common stock.  This valuation analysis was one of the factors considered by our Board in adopting the Amendment.  The valuation analysis is based upon and subject to the various assumptions and limitations described therein.  (See pages        .)

You may either vote in person at the Meeting or by using the enclosed proxy card.  If voting by proxy, you should specify your choice with regard to the Amendment and the election of Class I directors on the enclosed proxy card.  All properly executed proxies delivered to us in time will be voted at the Meeting.  You may revoke your proxy at any time before it is voted at the Meeting by giving written notice to our Secretary, executing and delivering to our Secretary a proxy card bearing a later date, or voting in person at the Meeting.  Any executed, but unmarked, proxies will be voted in favor of the Amendment and the election of the nominated Class I directors.  (See page   .)

Our Board of Directors believes that the Reclassification is in the best interests of us and our shareholders and has unanimously adopted and approved the Amendment.  Our Board recommends that shareholders vote “FOR” the approval of the Amendment and, as a result, the Reclassification. (See pages        .)

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QUESTIONS AND ANSWERS

The questions and answers below are a summary of items described in this Proxy Statement.  To fully understand the Amendment and Reclassification, you are encouraged to read carefully the entire Proxy Statement.

When is the Meeting?

The Meeting will be held on February       , 2008 at 5:30 p.m., Austin, Texas time, at our headquarters, 101 Westlake Drive, Austin, Texas 78746.

What am I being asked to vote on at the Meeting?

You are being asked to approve two matters:  (1) an amendment to our Articles of Incorporation to reclassify shares of our common stock held by shareholders of record owning less than 2,500 shares of our common stock to shares of our Series A preferred stock on a one share of common stock for one share of preferred stock basis and (2) the election of three directors to serve as Class I directors on our Board of Directors for a three year term until our 2011 annual meeting of shareholders.  Those shareholders whose shares are being converted to Series A preferred stock as a result of the Reclassification will be entitled to sell their shares of Series A preferred stock to us at a Put Price equal to $11.00 per share during the thirty (30) day period following the Reclassification.

Do I need to be present at the Meeting?

No.  You do not have to attend the Meeting to vote your shares of common stock.  You may sign and return the enclosed proxy card to vote your shares.

What vote is required to approve the Amendment?

The proposal to approve the Amendment must receive the affirmative vote of the holders of at least two-thirds of the shares of our common stock issued and outstanding as of January       , 2008, the record date for the Meeting.  If you do not vote your shares, either in person or by proxy, or if you abstain from voting, it has the same effect as a vote against the transaction.  In addition, if you do not instruct your broker on how to vote your shares on the proposed Amendment, your broker will not be able to vote for you.  This will have the same effect as a vote against the proposed Amendment.

What vote is required to elect Class I directors?

The election of the nominees for Class I directors requires the affirmative vote of a plurality of the votes cast at the Meeting by holders of our common stock. 

Can I change my vote after I have mailed the proxy card?

Yes.  You can change your vote at any time before your proxy is voted at the Meeting so long as you follow the procedures outlined in this Proxy Statement.

What is the recommendation of the Board of Directors regarding the proposals?

Our Board of Directors believes that the Reclassification is fair to unaffiliated shareholders and recommends that you vote FOR the Reclassification.  Our Board of Directors also recommends that you vote in favor of the nominees for Class I directors.

What do I need to do now?

Please sign, date and complete your proxy card and promptly return it in the enclosed, self-addressed, prepaid envelope so that your shares can be represented and voted at the Meeting.

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Why has the Board of Directors chosen this course of action?

Our Board of Directors has approved the Amendment and Reclassification in order to reduce the number of record shareholders owning our common stock.  After the Reclassification, we anticipate that the number of record shareholders owning common stock will be less than 300.  Having fewer than 300 common shareholders will permit us to deregister our common stock under the Exchange Act.  Our Series A preferred stock will not be registered under the Exchange Act.  After our deregistration, we will no longer be subject to the SEC’s periodic reporting requirements (e.g., annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and disclosures on Forms 8-K) or its proxy rules and regulations.  Officers, directors and large shareholders will no longer have to file Section 16 reports when they buy or sell stock or enter into other applicable transactions.  In addition, we will not be subject to additional reporting and audit requirements adopted under the Sarbanes-Oxley Act with respect to public companies, as we deem these additional reporting requirements overly burdensome for an already heavily regulated banking organization of our size.  We estimate that this will result in estimated costs savings of approximately $300,000 annually for the 2008 and 2009 fiscal years and approximately $272,000 annually thereafter and will allow our management to better focus on other business opportunities.

Further, we have not realized some of the anticipated benefits of being a public company.  For example, because many of our shareholders have seemingly elected to retain their investment in us few trade transactions have occurred and as a result, an active, liquid market for our shares has not developed. 

Will the Company remain a public company after the completion of the Reclassification?

No.  We estimate that the Reclassification will result in the number of our record shareholders of our common stock falling below 300, and we intend to terminate the registration of our common stock under the Exchange Act, thus we will become a “privately” held company.  However, although we will be “private” it is our intention that both our common and preferred shares will be traded on the Pink Sheets, an electronic trading vehicle available to small companies such as Treaty Oak.

What is “going private?”

The term “going private” is used within this Proxy Statement to mean the Reclassification and our subsequent transformation from a public reporting company filing detailed, periodic reports under the Exchange Act to an entity with less than 300 record holders of common stock and less than 500 of the newly issued Series A preferred stock, such that we are no longer subject to those Exchange Act reporting requirements.  Following deregistration, we anticipate continuing to report quarterly and annual financial information, including detailed financial statements for us and our primary subsidiary Treaty Oak Bank, to both common and preferred shareholders on a timely basis, and that a market will be made for both our common and preferred shares to ensure some degree of liquidity for our shares.

Why did the Board elect to convert some shares of common stock to preferred stock?

After our Board determined it was in our best interests to “go private”, it attempted to select a transaction format most beneficial to all our shareholders.  The proposed Reclassification allows record shareholders owning less than 2,500 shares of common stock to remain equity owners in us if they so choose or, alternatively, cash out at a fair price.  With this structure no investor in Treaty Oak is forced from ownership in the Company.

When will the Reclassification be completed?

If our shareholders approve the Amendment, the Reclassification will take place shortly following the adjournment of the Meeting.  If the Meeting is not postponed or adjourned, we estimate that the Reclassification will be effective on February       , 2008.

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If I own less than 2,500 shares of common stock prior to the Reclassification, how will I receive my new shares of Series A preferred stock following the Reclassification?

After the Amendment is filed, we will send transmittal documents to those record holders owning less than 2,500 shares of our common stock immediately prior to the Reclassification that will explain how they should turn in their old share certificates in exchange for new shares.  We will issue new shares of our Series A preferred stock to those entitled to receive such preferred shares following the Reclassification.

How can holders of our Series A preferred stock receive cash for their shares after the Reclassification?

The transmittal documents that we will send to those shareholders receiving our Series A preferred stock will include a form that can be completed and returned if a shareholder wants to sell any Series A preferred stock received pursuant to the Reclassification to us at the Put Price.  A shareholder who wishes to sell his or her Series A preferred stock to us at the Put Price must deliver the notice of election in writing prior to the expiration of the thirty (30) day period following the Reclassification.

Will the common shareholders owning 2,500 or more shares prior to the Reclassification receive any transmittal materials after the Reclassification?

No.  Shareholders owning 2,500 or more shares immediately prior to the Reclassification will not be converting or changing their record stockholdings in us solely as a result of the Reclassification and will not be receiving any consideration as a result of the transaction.

How will the Company pay for the Series A preferred stock purchased after the Reclassification?

We will pay for any Series A preferred stock sold to us at the Put Price out of our cash and liquid assets.  We do not anticipate borrowing any funds to pay for the Put Price of our Series A preferred stock, although we do anticipate obtaining a back-up credit facility to ensure that our liquidity position remains healthy.  We are currently in negotiations with a lender to enter into a promissory note to borrow up to $1.5 million for purposes of having a back-up credit facility.  If we have to pay more than $1.8 million to Series A preferred shareholders who have exercised their put right, we intend to borrow funds under this facility to pay such excess amount.  We expect this promissory note to contain covenants and default provisions customary for similar credit facilities.  We anticipate repaying any amounts borrowed under this promissory note from cash generated by our operations. 

How will the Reclassification affect common stock owned in “street name”?

Shares of our common stock held with brokerage accounts and registered in the name of a depositary institution such as Cede & Co. (a/k/a Depository Trust Company and commonly referred to as “street name”) will be treated as being owned by one record shareholder.  If 2,500 or more shares of our common stock are held through a broker or depositary institution in street name at the time of the Reclassification, these shares will not be converted into our Series A preferred stock.  If a record shareholder also owns common stock in street name, those shares held in street name will not be aggregated with the shareholder’s record holdings to determine if the shareholder exceeds the 2,500 share threshold.

May I buy additional shares of common stock in order to remain a common shareholder of the Company and avoid having my shares converted to Series A preferred stock?

Yes.  You may buy additional shares of our common stock in the open market at any time prior to us filing the Amendment if shares are then available.

If I cannot buy additional shares of common stock but I want to remain a common shareholder of the Company, is there anything I can do to avoid having my shares converted into Series A preferred stock?

Yes.  If you own unrestricted shares of our common stock and your stock certificate contains no restrictive legends, you may be able to hold your shares in street name.  To do so, you should contact your broker as soon as possible to initiate the process to convert your holdings of our common stock into street name.  Your broker’s total record

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holdings of our common stock must exceed the 2,500 share threshold for your broker’s shares not to be converted into our Series A preferred stock as a result of the Reclassification.

If any record holdings of Company common stock exceed the 2,500 share threshold but I wish for my shares to be converted into Series A preferred stock, how can I accomplish this?

You may accomplish this by holding your shares of our common stock in different capacities with each capacity as a separate record holder.  If in each separate capacity you hold less than 2,500 shares of our common stock, then the shares will be converted into our Series A preferred stock.  To do so, you must transfer your shares into the different capacity(ies) and then work with our transfer agent, Continental Stock Transfer & Trust Company, to record the shares and issue a new stock certificate(s) in the different capacities.  You should consult with your attorney and tax advisor before making any such transfers.

How will the Reclassification affect stock options to acquire Company common stock?

Stock options to acquire our common stock will not be affected by the Reclassification.  If we complete the Reclassification and are no longer a public reporting company, then option holders who exercise options after the Reclassification will receive restricted shares of common stock upon exercising options (rather than unrestricted shares, which would be received upon the exercise of stock options while we are a public reporting company and while we have an effective Registration Statement on Form S-8 on file with the SEC).

How will the Reclassification affect restricted stock granted under the Company’s 2004 Stock Incentive Plan?

The shares of restricted stock granted under our 2004 stock incentive plan are deemed to be issued and outstanding shares and are treated as such under the plan.  Accordingly, the restricted stock will be treated as issued and outstanding shares for purposes of the Reclassification.

How will the Reclassification affect warrants to acquire Company common stock?

Warrants to acquire 2,500 or more shares of our common stock will not be affected by the Reclassification.  A warrant to acquire less than 2,500 shares of our common stock would be converted into a warrant to acquire a number of shares of Series A preferred stock equal to the number of shares of common stock underlying such warrant, unless the holder already holds of record shares of our common stock in the same capacity such that, in total, the holder would hold of record 2,500 or more shares of our common stock in such capacity.  For example, if a shareholder holds of record 1,000 shares of our common stock in his individual capacity and holds a warrant to acquire 2,000 shares of our common stock in his individual capacity, the warrant would not be affected by the Reclassification.

Should I send in my share certificates now?

No.  After the Reclassification is effected, we will send those record shareholders who receive Series A preferred stock in the Reclassification written transmittal materials for surrendering their stock certificates.  Shareholders owning 2,500 or more shares of record at the time of the Reclassification will not need to send in their stock certificates.

How will the Company operate after the Reclassification?

After the Reclassification, we expect our business and operations to continue as they are currently being conducted and, except as disclosed in this Proxy Statement, the Reclassification is not anticipated to have any effect upon the conduct of our business.  However, we will deregister our common stock under the Exchange Act and, as a result, will no longer be subject to the reporting and related requirements under the Exchange Act that are applicable to public reporting companies.

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What are the federal income tax consequences of the Reclassification?

Generally, those shareholders who receive our Series A preferred stock in exchange for their shares of common stock should not be subject to federal income taxation solely as a result of the Reclassification.  However, those holders of Series A preferred stock who elect to sell their preferred shares to us at the Put Price will generally be subject to United States federal income taxation.  These selling shareholders may be subject to taxation for state and local tax purposes as well.  Please consult with your personal tax advisor to determine the federal, state and local tax consequences of the Reclassification to your own particular circumstances.  See “Special Factors – Material United States Federal Income Tax Consequences.”

What will be the effect of the Reclassification on affiliated shareholders?

Officers, directors and other affiliated shareholders will be treated in the same manner as non-affiliated shareholders under the terms of the Reclassification.  To the extent that affiliated shareholders own less than 2,500 shares of our common stock at the time of the Reclassification, they will receive Series A preferred stock in exchange for their common stock.  We estimate that total beneficial ownership of our common stock by affiliated shareholders as compared to unaffiliated shareholders will increase very slightly after the Reclassification is completed.  In addition, affiliated shareholders will not be subject to the same reporting requirements after we deregister as a reporting company under the Exchange Act.

Will the Company’s common stock be traded on an exchange after the Reclassification?  Will the Company’s Series A preferred stock be traded on an exchange?

We anticipate that our common stock and Series A preferred stock will be traded on the Pink Sheets following the Reclassification.  However, we can give you no assurances that our common stock or Series A preferred stock will be traded on the Pink Sheets following the Reclassification or, if so traded, whether an active trading market will develop.

Who should I contact if I have additional questions?

If you have additional questions about the proxy, this Proxy Statement, the Reclassification, or related matters, you should contact: Jeffrey L. Nash (President and CEO) or Coralie S. Pledger (CFO), 101 Westlake Drive, Austin, Texas 78746; (512) 617-3600.

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SPECIAL FACTORS

Background of the Transaction

Introduction.  In 2004 we raised approximately $13 million through an initial public offering of our common stock (“IPO”) following our acquisition of Texline State Bank (“TSB”), Texline, Texas, for the purpose of transferring the TSB charter to Austin, Texas, and establishing our headquarters in its present location at 101 Westlake Drive, Austin, Texas.  At the time of the charter transfer Texline State Bank’s name was changed to Treaty Oak Bank.   Since the close of our IPO we have been subject to the applicable reporting requirements of the Securities Exchange Act of 1934 (which we will refer to as the “Exchange Act”), the Federal Reserve Act (Treaty Oak Bancorp only) and the Texas Securities Act.  The bank has continued to be subject to regulatory oversight of both the FDIC and the Texas Department of Banking.

Since our founding in 2003, our Board of Directors has generally discussed the advantages and disadvantages of being a SEC reporting company, including the anticipated costs of compliance with the Sarbanes-Oxley Act of 2002.  In February 2007 our Board began internal discussions regarding the desirability of remaining a SEC reporting company.  The Board considered many factors which are discussed throughout this Proxy Statement.  The Board delayed making any proposal to our shareholders in hopes that the SEC and the U.S. Congress would provide some relief for smaller public companies and not apply the requirements of Sarbanes-Oxley uniformly between large and relatively smaller public companies with varying resources.  On May 8, 2006, the U.S. Government Accountability Office published a report concerning the implementation of Sarbanes-Oxley on small public companies and concluded, in part, that the cost of compliance has been disproportionately higher for smaller public companies (defined in the report as having $700 million or less in market capitalization), particularly with respect to the Section 404 internal reporting provisions and related audit fees.  At the time our Board elected to engage in the “going private” transaction, it was our Board’s assessment that the SEC and the U.S. Congress did not intend to address the disproportionate impact on smaller public companies in any material fashion.  As a result, our Board concluded that the advantages of our being a SEC reporting company no longer outweigh the costs we incur as a public company, particularly in light of the requirements the Sarbanes-Oxley Act imposes upon public companies.  Recent pronouncements from the SEC seem clear that at this time the intent is that all publicly reporting companies regardless of size must comply with Section 404.  Because of our September 30 fiscal year end we would be required to meet the initial requirements of Section 404 as of the fiscal year ending September 30, 2008.  For this reason our Board decided this to be an appropriate time to recommend “going private” thereby saving the expense associated with Section 404 internal controls requirements and other public reporting company requirements.

Based on the foregoing, our Board of Directors approved the Amendment and the Reclassification and is recommending that the shareholders approve the Amendment at the Meeting.  As a result of the Reclassification, the Board estimates that the number of record shareholders owning common stock will be reduced to below 300, which will allow us to deregister our common stock for reporting purposes under the Exchange Act.  Because the number of persons owning Series A preferred stock following the Reclassification will not exceed 500 shareholders, we will not register the Series A preferred stock under the Exchange Act.

Costs Associated with SEC Regulations.  Because we are a SEC reporting company, we are obligated to prepare and file with the SEC certain reports and information, including the following:

•                                          Annual Reports on Form 10-KSB;

•                                          Quarterly Reports on Form 10-QSB;

•                                          Current Reports on Form 8-K; and

•                                          Proxy Statements and related materials as required by Regulation 14A of the Exchange Act.

In addition, beginning in fiscal year 2008, were we to remain a public reporting entity we would assist officers and directors in complying with reports required under the Exchange Act’s transaction and short swing profit reporting requirements for our affiliates.

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The costs associated with these reports and other filing obligations comprise a significant corporate overhead expense.  Expenses associated with being a SEC reporting company include securities counsel fees, auditor fees, costs of printing and mailing SEC documents, and costs associated with converting SEC filings into Edgar format.  We realize that the costs associated with SEC reporting have been increasing over the last few years, and we believe that the costs will continue to increase significantly in preparation for our becoming and after we become obligated to comply with the internal controls provisions of Section 404 of the Sarbanes-Oxley Act.  In addition, we determined that as of September 30, 2007 we had more than 500 record holders of our common stock.  As a result, we are, during the fiscal year ending September 30, 2008, experiencing increased costs associated with complying with the SEC’s proxy rules under Regulation 14A of the Exchange Act and assisting our officers and directors in complying with Section 16 of the Exchange Act and the related SEC rules (i.e., short-swing profit rules).

In addition to compliance costs and out of pocket expenses, compliance with existing and new SEC reporting and audit requirements and other regulatory restrictions diverts the time of senior management and financial staff from other Company and Bank business.

We estimate that in fiscal year 2007, we paid approximately $122,700 in on-going out-of-pocket costs as a public reporting company which we would not incur as a private company.  These costs include filing Forms 10-KSB, 10-QSB and 8-K and filing and printing costs.  These costs also include $34,200 representing the time and resources of our senior management and other employees in preparation of these reports and compliance with reporting obligations.

Further, we anticipate that the out-of-pocket costs for future years will increase due to the additional SEC reporting requirements caused by exceeding the 500 common stock record shareholder threshold and for the completion of the documentation and testing of internal controls required by Section 404 of the Sarbanes-Oxley Act.  We estimate that we will incur in 2008 out-of-pocket costs and management time and resources of $306,600.  For the fiscal year 2009, our auditors will be required to test our internal controls and attest to their adequacy.  We estimate that we will incur in 2009 out-of-pocket costs and management time and resources of $306,300.  Annually thereafter, we estimate our recurring out-of-pocket costs of SEC reporting and Section 404 compliance to equal $272,000.  The time demanded of our senior management with respect to these SEC compliance requirements takes away time which could be focused on business matters that bear a more direct relationship to our operations and profitability.  We estimate the cost associated with senior management’s time for SEC compliance requirements included in the above cost estimates total approximately $95,100 for the fiscal year ending September 30, 2008, $63,700 for fiscal 2009 and $66,300 for fiscal 2010 and annually thereafter.

Advantages of a Public Corporation.  While considering the increasing SEC compliance costs that we have and will incur, our Board of Directors analyzed if the advantages of our remaining a SEC reporting company outweighed the costs.  One advantage to being a public company is that it may facilitate a more active trading market.

As of September 30, 2007, there were approximately 593 record shareholders who owned 2,958,602 shares of our common stock.  However, over the past 24 months there have been only 46 days in which trading activity has occurred for our stock suggesting that the vast majority of our shareholders have adopted a hold strategy with regard to our shares.  The relatively few willing sellers have limited the development of an active trading market.  If the Reclassification is completed, our Board anticipates that our shareholders will have the opportunity to trade shares on the Pink Sheets.

Although our common stock is not traded on a daily basis, we anticipate trading of both classes of securities will be possible on the Pink Sheets.  Nonetheless, it is difficult to determine what impact the Reclassification may have on the existing liquidity of our common stock, or the anticipated trading market of the newly created Series A preferred stock.

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Another potential advantage of being a publicly traded institution is the ability to access public capital markets to meet additional capital needs. As of September 30, 2007, we had approximately $2.6 million in cash, which is available to meet our near term capital requirements and to pay Series A preferred stockholders who elect to exercise their put right. Also, we intend to arrange a standby credit facility to pay Series A preferred shareholders who elect to exercise their put right if the total payout amount exceeds $1.8 million or we otherwise determine such borrowing is in our best interest. We are currently in negotiations with a lender to enter into a promissory note to borrow up to $1.5 million for purposes of having a back-up credit facility. We expect this promissory note to contain covenants and default provisions customary for similar credit facilities. We anticipate repaying any amounts borrowed under this promissory note from cash generated by our operations. There remain other alternatives to the equity capital markets to generate capital and liquidity should the need arise.

Since becoming a public company in September 2004, we have not made any additional public offerings of common stock or any other equity or debt securities. We have attempted to forecast our future capital needs. Based on our analyses of the banking industry in our immediate and surrounding geographic areas, we do not anticipate the need for a large amount of capital for acquisitions or expansions. We estimate that any anticipated expansion can be accomplished at the same method of controlled growth with available capital or via private offering opportunities (e.g. trust preferred securities). At this time, we do not currently anticipate issuing additional shares of common stock in either public or private transactions.

Shareholders of public companies are also entitled to another benefit in that they typically have greater access to information about the entity. As discussed above, the SEC requires that reporting companies comply with increasingly stringent reporting and auditing requirements. There are several benefits to this type of SEC oversight and mandated disclosure; however, there are also large costs that accompany this compliance. Not only does compliance with SEC regulations divert the time and resources of senior management and financial staff from our other business, it also results in increased legal, auditing and accounting costs which we anticipate will continue to rise in the future.

Smaller publicly traded institutions, such as Treaty Oak, have more difficulty absorbing these costs and resource allocations than larger publicly traded institutions since they represent a larger portion of our revenues. These costs seem further unjustified when considering that we are a bank holding company which owns a Texas state chartered bank. As a result of our business, we will continue to be extensively regulated under other federal and state laws. The Bank will also be subject to periodic reporting requirements and inspections from certain regulatory agencies including the Federal Deposit Insurance Commission (“FDIC”), the Board of Governors of the Federal Reserve (the “Federal Reserve Board”) and the Texas Department of Banking (the “Texas Department”).

Background of Board’s Recommendation

The concept to have us reduce the number of record holders of our common stock and de-register as an Exchange Act reporting company began as the deadline for compliance with Section 404 became imminent and our management became aware of other banks deregistering their securities to avoid increased legal and accounting compliance costs of the Sarbanes-Oxley Act and other SEC rules and regulations. Our management first consulted an outside legal advisor regarding the option of deregistering as a reporting company and the implications of the same in April 2007. On April 12, 2007, management met with representatives of the firm of Selman, Monson & Lerner P.C. regarding various issues. At this meeting, management obtained some general background information regarding going private transactions and some of the going private transactions occurring throughout the country.

On May 7 and May 8, 2007, at a Board of Directors strategic planning retreat, management presented, among other cost saving topics as a result of anticipated additional cost of the Sarbanes-Oxley Act, a general overview of alternative strategies for “going private” including stock repurchase programs and the reclassification of all shares of our common stock held by record shareholders owning less than a certain number of shares to shares of preferred stock on a one share of common stock for one share of preferred stock basis. Our management next outlined possible transactions which might be employed in order to reduce the number of record shareholders such that we could deregister as a reporting entity, most of which are discussed in this Proxy Statement under “—Alternatives Considered.”  The Board heard information as to how each alternative may be accomplished and some advantages and disadvantages to each. Our Board requested that management continue to evaluate the basic

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requirements for having us de-register as an Exchange Act reporting company and potential transactions which could reduce the number of record common shareholders to allow us to be eligible to de-register.

On July 24, 2007, at a Board meeting, our Board of Directors further discussed the desirability of our going private. At this meeting, our Board appointed a special committee (the “Special Committee”) to focus consideration on the Reclassification and to further advise the Board regarding the advantages and disadvantages of going private and alternative going private transaction structures.Specifically, the Special Committee was charged with reviewing alternative strategies for going private transactions including assessment of the advantages and disadvantages of each, and following that evaluation making a recommendation to our Board of Directors regarding whether or not to go private and the strategy most advantageous to us and our shareholders.  In addition, the Special Committee was charged with the selection and retention of a financial advisor to advise the Company in connection with a going private transaction.  Finally, the Special Committee analyzed and recommended the threshold below which record holders of common stock would have their shares reclassified to Series A preferred stock.  The Special Committee would also work closely with our counsel in advising on and structuring a going private transaction.  The Special Committee served until its final recommendation was presented to our Board of Directors on November 13, 2007.

Our Board appointed Jeffrey L. Nash, our President and Chief Executive Officer, Coralie S. Pledger, our Chief Financial Officer, Company Board members Charles T. Meeks (Board Chair) and Hayden D. Watson (Audit Committee Chair) and Treaty Oak Bank Board Member Arthur H. Coleman as members of the Special Committee. Mr. Nash, Mr. Meeks and Mr. Watson will remain common shareholders following the Reclassification; however, Mr. Coleman was selected for the committee because his holdings of Treaty Oak are such that he will be converted from common shareholder to Series A preferred shareholder following the Reclassification, thus his interests align with those of our shareholders who hold fewer than 2,500 common shares. Further, Mr. Nash holds some of his common shares in capacities that hold less than 2,500 shares, therefore, those shares will be converted to Series A preferred shares following the Reclassification.  All of the members of the Special Committee hold shares of our common stock as described above and therefore might be considered “interested” persons in the proposed going-private transaction.  Mr. Watson is currently an independent Board member and Mr. Coleman, who was a Board member until February 13, 2007, was an independent Board member, as independence is determined under the NASDAQ independence rules (see further discussion of director independence on page         ).  Neither Mr. Nash nor Mr. Meeks is independent as determined under the NASDAQ independence rules, and Ms. Pledger is not a member of the Board.  Except as described above, the membership of the Special Committee did not affect our Board of Directors’ assessment of the Special Committee’s work or recommendations.

On August 21, 2007, the Special Committee met to review reasons for “going private” including preliminary estimates of costs savings that might result from such a transaction. The Special Committee also determined it appropriate to contact service professionals who might assist in a going private transaction. Having considered three different legal representatives the committee chose to select the firm of Jackson Walker L.L.P. to represent us in considering a going private transaction, so long as the estimated legal fees were reasonable. The committee additionally selected Financial Valuation Services, LC (d/b/a Fowler Valuation Services) (“FVS”) to perform the independent valuation of the Company, in part because FVS had previously performed a valuation of Treaty Oak and therefore had significant familiarity with the business, and American Realty Corporation (“ARC”) to perform an updated appraisal of the Company’s real estate at 101 Westlake Drive, Austin, Texas for inclusion as a component of the overall business valuation.

On August 28, 2007 our Board of Directors again met to hear a status report from the Special Committee. At this meeting management gave an update regarding the service professionals selected. Management additionally offered an estimate that costs associated with reporting as a public company, including the first time costs associated with Sarbanes-Oxley Section 404 compliance could range between $250,000 and $400,000. One member of our Board expressed concern that the greater burden to the Company could distract the CEO and CFO from the routine management of the Company. Ensuing discussion included requests for greater specificity regarding total cost savings that would result from the Reclassification.

On August 30, 2007, management had a preliminary meeting with a representative of our legal advisor, Jackson Walker L.L.P., and then on October 3, 2007, a follow up meeting was held with two lawyers from Jackson Walker. These meetings included reviews of alternative going private transaction structures, including two structures of substantially the same structure as that being discussed by the Special Committee. The discussion included alternative methods of “going private” and the positives and negatives associated with each alternative, potential features of preferred stock to be exchanged for common shares, alternatives for shareholders who wish not to have their common shares converted, and potential tax implications of such a transaction. The discussion also included permissible communication with shareholders following the filing of the proxy statement with the SEC and a proposed timeline for meeting the various milestones necessary to accomplish the Reclassification.

On September 26, 2007, management met with FVS to engage their services for an independent valuation of Treaty Oak for the purpose of establishing the value of the business enterprise, determining an equitable exchange ratio for preferred shares from common shares and to offer an opinion as to the fairness of the proposed transaction for both common and preferred shareholders on a post-transaction basis. Management reviewed with FVS the rationale for considering “going private” and preliminary considerations regarding the terms and conditions of the Reclassification.

On October 3, 2007, management met with a representative of ARC to consider engaging ARC to perform an updated appraisal of the Company’s real estate located at 101 Westlake Drive, Austin, Texas. The discussion included the alternative methods ARC would likely employ in determining the market value of the property for

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inclusion in the FVS enterprise valuation. ARC was formally engaged for the real estate appraisal on October 9, 2007.

On October 18, 2007, management had a teleconference with FVS to learn of the preliminary assessment of the Company’s per share value and the methodology being employed to determine that value. FVS explained that several alternative approaches are being considered in assessing the value of Treaty Oak including consideration of our operating history, the nature of our holdings and our business, our book value and financial condition, our earnings and dividend paying capacity, the economy, and, to the extent available and relevant, information about the prices at which transactions in similar businesses have occurred. FVS explained that they would perform a valuation and provide a restricted use appraisal report which would include an opinion as to the fair value of the shares as of the valuation date. The report would contain certifications and a statement of limiting conditions, however, with such modifications and/or additions thereto as may be deemed appropriate due to factors which might become apparent during performance of the Assignment.

On October 23, 2007, a joint meeting of our Board of Directors and the Special Committee convened with representatives from Jackson Walker and FVS to discuss engaging in a transaction to allow us to de-register as an Exchange Act reporting company. This was the first time the entire Board had met with Jackson Walker and FVS. At the meeting, management again addressed alternative transaction structures for going private, including a reclassification, a reverse stock split, a stock repurchase program, and a cash-out merger. Management emphasized the reclassification as the optimal transaction structure because it enables shareholders to continue holding an equity interest in us. Management presented a more detailed discussion of cost savings that would result from us going private. Management also proposed terms of Series A preferred stock for our Board’s consideration and discussion. Management also addressed proposing terms for our common stock or Series A preferred stock to enable us to take certain actions if after the transaction the number of record holders for our common stock began to approach 300 or the number of record holders of our Series A preferred stock began to approach 500. Representatives of Jackson Walker addressed fiduciary duties of our Board members in considering and approving a going private transaction and other legal matters related to a reclassification such as the tax consequence of going private by reclassification, the impact of the reclassification on our existing stock options and common stock purchase warrants, and post-reclassification reporting requirements. A representative of FVS addressed the valuation of Treaty Oak excluding the real estate, which is being separately appraised by ARC. FVS also addressed the methodology of its valuation analysis and fairness opinion analysis, including a discussion on the possibility of a premium on the price at which our Series A preferred stock could be sold back to us. Consistently, during the management, Jackson Walker and FVS presentations, our Board members engaged in discussions with the presenters and themselves over various aspects of going private generally, the specifics of a reclassification, legal aspects of a reclassification, fairness of the transaction to all holders of our common stock, including those who would receive Series A preferred stock as a result of a reclassification and those who would retain common stock, and the amount of premium, if any, on the Put Price. Our Board agreed with management that a reclassification is the preferred transaction structure for going private, especially because our shareholders would continue to hold an equity interest in us. Our Board also discussed the idea of voluntarily providing our shareholders dissenters’ rights in the transaction. Our Board decided not to voluntarily provide our shareholders dissenters’ rights because shareholders who receive Series A preferred stock would have the right to sell the stock back to us at a fair price by virtue of the put option. Our Board engaged in a lengthy discussion regarding including terms in the transaction that would enable us to address the possibility of the number of record holders of our common stock or Series A preferred stock reaching a number that could cause us to again become a public reporting company. The Board members discussed the possibility of a call right, right of first refusal, or other right of limited transfer. The Board requested that the Special Committee consider terms and other contingency plans to address this risk.

On October 30, 2007, the Special Committee met for further discussion regarding the threshold of shares held at which an investor would be converted from common shares to Series A preferred shares. The discussion revolved around the best balance of shareholders converted compared with those not converted such that we reduce the total number of common shareholders sufficiently below 300 so as to reduce the likelihood that we would again approach 300 or more shareholders as a result of market activity, thereby pushing Treaty Oak again to the point of SEC reporting. The goal was compared against the maximum potential repurchase obligation should 100 percent of the shareholders converted to Series A preferred shares choose to exercise their put right. As part of the consideration the Special Committee reviewed the average stock price, trading volume and trading days of our shares over the past 24 months. Also, contingency alternatives were considered should common shareholders again approach the 300 threshold post-Reclassification through share sales and other forms of distribution. After much

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discussion the Special Committee determined fewer than 2,500 common shares to be the appropriate cutoff to recommend to the Board of Directors for reclassification to Series A preferred shares. The Special Committee also engaged in preliminary discussion of likely put prices based upon input received to date from FVS.

On November 7, 2007, management had a teleconference with FVS to again discuss their assessment of the valuation of Treaty Oak, the fairness of the proposed transaction to both common shareholders and those being converted to Series A preferred shares, and FVS’ recommendation regarding the appropriate liquidation preference to be paid to Series A preferred shareholders. The discussion included various factors under consideration by FVS in determining our current per share value including the updated appraisal of our real estate that was received on November 6, 2007.

On November 9, 2007, the Special Committee again met with FVS to review their analysis of the per share value of Treaty Oak and their recommendation regarding the appropriate liquidation preference to accompany Series A preferred shares. FVS reviewed the analysis methodology and ultimate value assigned to the various assets owned by the Company. For the Company’s primary asset, Treaty Oak Bank, FVS discussed with the Special Committee the specifics of the three methodologies used to establish and validate its value, including a discounted dividends methodology, comparison to stock valuation and share prices of other Texas publicly traded banks and extensive analysis and review of more than 150 bank merger and acquisitions transactions that have occurred in the southwestern U.S. since 2004. Based upon the various value analyses employed FVS concluded the current per share fair value of Treaty Oak common stock to be $11.00.

Next FVS presented a summary of approximately 40 “going private” transactions that have occurred since 2002. The purpose of this analysis was to determine whether a premium might be warranted in setting the put price to be paid those shareholders being converted to Series A preferred shares. The majority of such transactions included a premium above the per share market price of the institution immediately prior to the going private announcement. The transaction most similar in structure to that being considered by Treaty Oak carried a premium of 10.99 percent.

Throughout the FVS presentation the members of the Special Committee discussed various aspects of the analysis, asking many questions. The Special Committee concluded that the FVS valuation of Treaty Oak common shares is reasonable. Further, given a recent trading range for the stock of $10.00-$10.50 the Special Committee determined that it would recommend to the Treaty Oak Board of Directors that the put price be set at the $11.00 FVS value, concluding that a premium of 10 percent relative to the most recent transaction price of $10.00 is fair to the shareholders being converted from common shares to Series A preferred shares, and likewise, that setting the put price at the independent value set for the shares by FVS is fair to those who will continue to hold common shares following the Reclassification.

The Special Committee also discussed the liquidation preference to accompany the Series A preferred shares. Alternatives considered included per share book value of the Company at the time of a liquidation or dissolution event and the initial public offering price per share. After discussing advantages and disadvantages of the various considerations the Special Committee concluded that a fair preference was the greater of per share book value at the time of liquidation or the amount to be distributed to common shareholder at such time, again in the interest of fairness to both those common shareholders being converted to Series A preferred stock and those who will continue as common shareholders following the Reclassification.

FVS determined that the intended recommendations of the Special Committee are fair to both those shareholders who will be converted to Series A preferred shares and those shareholders who will continue to hold common shares following the Reclassification, and stated an intention to issue a written opinion to that end.

On November 13, 2007, the Board of Directors held its regularly scheduled meeting, at which all Board members were present, along with representatives of Jackson Walker and FVS. The Board heard the final recommendations of the Special Committee regarding the terms and conditions of the Reclassification, including the recommendation of $11.00 as the Put Price and a liquidation preference for the Series A preferred shares equal to the greater of book value at the time of liquidation or dissolution or the price per share paid to common shareholders. The Put Price and liquidation preference were based in part on the FVS analysis. At this meeting, the Board heard a

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presentation by FVS of its valuation of Treaty Oak and received FVS’ written opinion dated November 13, 2007 as to the fairness of the Put Price to be paid to those Series A preferred shareholders selling their Series A preferred shares to us, from a financial point of view, in connection with the Reclassification. The Board approved the form of the Amendment and agreed to submit it to our shareholders for approval at the meeting. The Board revisited its considerations for the Reclassification and agreed that the Reclassification, including the Put Price offered to preferred shareholders, is a fair transaction to affiliated and unaffiliated shareholders. A separate discussion was conducted with respect to those shareholders who will receive preferred stock, and if applicable, cash for the preferred shares, and those shareholders that would continue to own common stock. The Board considered whether other procedures should be employed to further consider the fairness of the transaction to unaffiliated shareholders, and it determined that none were necessary because it believes that the Reclassification is both substantively and procedurally fair.

The matters considered at the October 23, 2007 and November 13, 2007 Board meetings and the November 9, 2007 Special Committee meeting, as well as FVS’ written opinion, are more fully discussed in this proxy statement at “Recommendation of Board; Fairness of Reclassification” and “Opinion of Financial Advisor.”  ARC’s appraisal of our real estate is more fully described in this proxy statement at “Opinion of Real Estate Appraiser”.

Purposes of the Reclassification

Our Board of Directors is recommending the Amendment to our shareholders for the purpose of reducing the number of record holders of our common stock and terminating our status as a reporting company with the Securities and Exchange Commission. We anticipate that upon the completion of the Reclassification, the number of record holders of our common stock will be less than 300. Having less than 300 shareholders will qualify us to apply to terminate the registration of our common stock under Section 12(g)(4) of the Exchange Act and suspend our obligations to file reports under Section 15(d) of the Exchange Act.

The primary reason the Board recommends that we deregister as an Exchange Act reporting company is that it will significantly reduce our on-going and anticipated costs related to SEC reporting requirements and compliance with the Sarbanes-Oxley Act. We realize that not all annual reporting costs will be eliminated. We anticipate that we will continue to provide shareholders with audited financial statements on an annual basis, unaudited financial and other pertinent Company data on a quarterly basis, and we will continue to comply with all state and federal reporting requirements applicable to the Bank and us as a Texas state chartered bank and bank holding company, respectively. However, we also estimate that we could save approximately $884,400 over the next three fiscal years in connection with (i) annual professional fees, printing costs, mailing costs and Edgar expenses if we no longer have to comply with Exchange Act reporting requirements and (ii) direct and indirect expenses associated with compliance with Section 404 of the Sarbanes-Oxley Act. The following is a breakdown of our estimated cost savings:

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In addition to reducing expenses, terminating our registration as a SEC reporting company under the Exchange Act would relieve our officers, directors and other personnel of many of the administrative burdens associated with SEC compliance. As a SEC reporting company, we are required to commit personnel and other internal resources to insure our compliance with the rules and regulations under the Exchange Act. Our Board now estimates that the Sarbanes-Oxley Act has subjected, and will subject, us and our directors and officers to additional burdens that are relatively substantial in scope. The additional corporate governance, accounting, auditing and internal control provisions employed by Sarbanes-Oxley place, in our Board’s opinion, a disproportionate burden on public companies that are relatively smaller than others subject to the same rule. By removing us from these requirements, our Board and management will be able to better focus on our business activities, including any long term business strategies, as well as the needs of our customers and remaining shareholders.

Our Board believes that the direct and indirect cost savings which will result from having us go private now outweigh the advantages which would remain available to our shareholders if we elected to remain a SEC reporting company. The de-registration could reduce the liquidity of our common stock due to the reduction in publicly available information or other reasons. Also, those shareholders receiving Series A preferred stock will have a reduced liquidity in their holdings as a result of the fewer number of shares of Series A preferred stock outstanding. However, we anticipate that our common stock and Series A preferred stock will be traded on the Pink Sheets. After the Reclassification, we will no longer be subject to many of the reporting and disclosure rules implemented by the SEC, but we will continue to be subject to federal and state regulation as a holding company of a Texas state chartered bank. We intend to continue to provide annual audited financial information and quarterly unaudited financial reports to our shareholders. These financial statements, including our balance sheet and profit and loss statement, sent as part of quarterly investor reports from our CEO, will be provided to all shareholders of record soon after the end of each fiscal quarter and year end, and may not contain information in the same format nor to the same depth as that contained in the Forms 10-KSB and 10-QSB that we report today. We may have more limited access to capital markets as a non-reporting company than we would as an Exchange Act reporting company. However, because we have no anticipated need for additional capital at this time, this concern does not outweigh the anticipated costs savings associated with terminating our SEC reporting status.

The effects of the Reclassification, including effects specific as to affiliated shareholders and non-affiliated shareholders, are later discussed in this Proxy Statement under “– General Effects of the Reclassification” , “–Additional Effects of Reclassification of Affiliated Shareholders,” and “–Additional Effects

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of Reclassification on Non-Affiliated Shareholders,” and we urge you to read those sections to further understand the benefits and detriments of the Reclassification, as well as the impact of deregistering as an Exchange Act reporting company.

Our Board of Directors determined that the best method for reducing the number of record holders of common stock was the Reclassification. The Amendment will provide an effective time for when the Reclassification will be effective. At that effective time, all shares of our common stock held by holders of record owning less than 2,500 common shares will be automatically converted to shares of Series A preferred stock on a 1-for-1 basis. At the effective time, shareholders owning 2,500 or more shares of our common stock will not have their stock holdings affected as a result of the Reclassification. Shareholders who receive shares of the Series A preferred stock will have the option of selling the preferred stock received as a result of the Reclassification to us during the thirty (30) day period following the Reclassification at the $11.00 per share Put Price.

Our Board of Directors preferred the proposed Reclassification over other available alternatives to reduce the number of common shareholders. Primarily, it offers certainty that we will have the number of record holders of common stock to allow us to deregister as an Exchange Act reporting entity. By reviewing the list of record shareholders, our Board is able to predict with some certainty (i) the number of record shareholders who will receive Series A preferred stock as a result of the Reclassification and (ii) the number of record holders of our common stock who will remain following the Reclassification. The Board estimates that the total number of record common shareholders following the Reclassification will be less than 300, and as a result, we will be able to apply to deregister our common stock from further SEC reporting requirements. Also, the Board estimates that the total number of holders of the newly-issued Series A preferred stock will be less than 500, and as a result, we will not be required to register our Series A preferred stock under the Exchange Act.

The structure of the Reclassification also appealed to our Board of Directors because it gave those common shareholders who were no longer going to own our common stock the option to (i) own Series A preferred stock and continue as an equity holder of us or (ii) receive cash at a fair value for their stock holdings. The Board is able to gauge with reasonable certainty the total number of preferred shares (297,791) which will be eligible to be sold to us at the $11.00 Put Price. However, we can not estimate how many holders of Series A preferred stock will elect to sell those shares to us during the thirty (30) day period following the Reclassification. As a result, we can only estimate the maximum amount of money necessary to buy out those shares (approximately $3,275,700). Assuming that all shares of Series A preferred stock are purchased at the Put Price, the Board felt that the Reclassification was a prudent transaction to reduce the number of record holders of our common stock to below 300.

Alternatives Considered

Staying Public. Prior to recommending the Reclassification to our shareholders, our Board of Directors first considered other alternatives, including remaining an Exchange Act reporting company. For the reasons discussed above, our Board felt that the costs of remaining an Exchange Act reporting company no longer justified the benefits to us and our shareholders. The Board could not determine an alternative for significantly reducing our on-going and anticipated costs resulting from qualifying as an Exchange Act reporting company other than terminating our Exchange Act registration.

Once our Board determined that we should reduce the number of our shareholders below 300 so that we could qualify to deregister our common stock with the SEC, it considered several alternatives to achieve that objective including (i) a reverse stock split, (ii) a cash out merger, and (iii) a stock repurchase plan. The Board rejected these alternatives because we believe that the Reclassification would be the most shareholder-friendly (particularly to those shareholders who would no longer hold our common stock after the Reclassification), while, at the same time, being equally or more effective as the other alternatives and a cost efficient manner to reduce the number of our common shareholders comfortably below the 300 shareholder threshold.

Reclassification by Merger. Our Board of Directors considered the possibility of effecting the Reclassification by a merger. Under this alternative, we would form a new wholly-owned subsidiary and merge the subsidiary into us, with us as the surviving corporation. As a result of the merger, all record holders who hold 2,500 or more shares of our common stock would receive such number of shares of common stock upon completion

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of the merger, and those record holders who hold less than 2,500 shares of our common stock would receive an equal number of shares of our Series A preferred stock upon completion of the merger. Our Board of Directors determined to pursue a going private transaction by virtue of an amendment to our Article of Incorporation because (1) it is a simple transaction structure that is easier to explain to our shareholders and (2) it allows us to avoid regulatory approvals associated with the merger of a bank holding company. Our Board also considered that a merger would afford our shareholders appraisal rights under the Texas Business Corporation Act, a favorable aspect to our shareholders. However, because those shareholders who receive Series A preferred stock would have the right to sell the preferred shares back to us at the Put Price, which our Board determined is fair to our shareholders, our Board decided appraisal rights were not as important a factor in determining the transaction structure.

Reverse Stock Split. Our Board of Directors also considered the possibility of a reverse stock split. Under this alternative, we would file (subject to shareholder approval) an amendment to our Articles of Incorporation which would authorize a reverse stock split and the cash out of any fractional shares created as a result. For example, if we were to use the same threshold number of shares in the reverse stock split (2,500), at the effective time of the reverse stock split, for every 2,500 shares owned by a shareholder, that shareholder would receive one (1) share of common stock. All fractional shares created as a result would be cashed out, even if such fractional shares were owed by a shareholder owning more than 2,500 shares prior to the reverse stock split. Unless a shareholder owned stock in an amount evenly divisible by 2,500 share lots, that shareholder would have some portion of his stock cashed out at the designated cash price. Shareholders who owned less than 2,500 common shares prior to the reverse stock split would no longer own any of our common stock. Following the reverse stock split, we would likely engage in a forward stock split so that there would not be too few shares outstanding after the going private transaction.

This alternative also provides certainty in that the Board would be able to estimate the number of record shareholders that would be completely cashed out, thus reducing the number of record shareholders. However, this option would be more costly than the Reclassification (even if all preferred shareholders elect to sell their shares following the Reclassification) because all fractional shares would be cashed out, even if they are owned by persons who would remain shareholders after the forward stock split. Also, this alternative did not provide the holders owning less than 2,500 shares of record the alternative to remain as our equity owners. Rather, they would be forced to cash out at the price determined by our Board of Directors. For this reason our Board of Directors rejected this alternative.

Cash Out Merger. An alternative similar to the reverse stock split is coordinating a merger with a shell corporation and reissuing common stock and/or cash to the shareholders of the newly merged entity. Under this alternative, the share exchange could be structured such that shareholders owning less than 2,500 shares of our common stock prior to the merger would be cashed out, and shareholders not owning stock evenly divisible by 2,500 would receive cash for the fractional share they would otherwise receive as a result of the terms of the merger. This merger structure is substantially the same as the reverse stock split, and as a result was not preferred for the reasons discussed above in the discussion regarding reverse stock splits. Also, the Reclassification allows us to avoid regulatory approvals associated with the merger of a bank holding company.

Stock Repurchase Plan. The Board also considered going into the open market and repurchasing stock from shareholders willing to sell their shares. This repurchase plan would be crafted so that it complied with the safe harbor set forth in Rule 10b-18 of the Exchange Act. In order to avoid manipulation of stock prices, Rule 10b-18 restricts when an issuer can repurchase its shares, the manner in which the repurchase is effected, the volume of shares purchased and the price paid. As a result of these restrictions, and also because of the limited number of shares of our stock that come available on the market for sale, there is no guaranty and it is seemingly unlikely that a stock repurchase plan would result in any appreciable reduction of the number of record shareholders within the time period required to accomplish our objectives.

Sale of the Company. If we were sold to a larger publicly traded institution, the costs of complying with SEC reporting rules and the Sarbanes-Oxley Act’s auditing and internal controls requirements would no longer be as disproportionate to the size of the new entity, or alternatively, were we sold to a non-public company and thereby be taken “private”, compliance with the Sarbanes-Oxley Act would no longer be applicable. However, we believe at this time that the sale of Treaty Oak would not be in the best interests of our shareholders, customers, employees and community. Treaty Oak has successfully served its target market by diligently pursuing its community bank

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business model. Our locally based management has been able to serve our customer base successfully and profitably, and we have managed to steadily increase our assets through controlled growth. In fact, in the most recent FDIC data available (June 30, 2007) our deposit market share in our primary 78746 zip code has increased to better than 8.3 percent from approximately 5.9 percent for the prior year, ranking us third among all banks with a physical presence in our primary market. Further, we have recently opened a branch in Marble Falls, Texas and are scheduled to open a branch in Barton Creek in Southwest Austin in January 2008. At this time, we do not feel it is in the best interests of our shareholders to abandon this model. As a result, we have not solicited, nor have we received any unsolicited, third party bids or firm offers, and we have not engaged in any specific discussions with potential purchasers.

Recommendation of the Board of Directors; Fairness of the Reclassification

Our Board of Directors unanimously (except for Mr. Bendele, who abstained from voting on the matter because he was appointed to the Board on the same day the Board approved the transaction) approved the Amendment and the Reclassification and determined that the Reclassification (including the Put Price) is fair to, and in the best interests of, us and our unaffiliated shareholders, including shareholders who will receive Series A preferred stock as well as those who will retain their shares of common stock after the Reclassification. Our Board of Directors unanimously (except for Mr. Bendele, who abstained from voting on the matter because he was appointed to the Board on the same day the Board approved the transaction) recommends that the shareholders vote for approval of the Amendment. Each member of our Board of Directors and senior staff has advised us that he or she intends to vote his or her shares in favor of the Amendment.

Our Board has the authority to reject (and not implement) the Reclassification (even after approval thereof by our shareholders) if it determines subsequently that the Reclassification is not then in the best interests of us and our shareholders. At this point, the Board does not anticipate any circumstances in which it would elect to reject (and not implement) the Reclassification, because it currently believes that the Reclassification is in the best interests of our shareholders.

Our Board considered numerous factors, discussed below, in reaching its conclusion as to the substantive and procedural fairness of the Reclassification to unaffiliated shareholders. Our Board believes that the terms of the Series A preferred stock, including the $11.00 per share Put Price, as well as the Reclassification, are fair to our unaffiliated shareholders. Our Board did not assign any specific weights to the factors listed below. Moreover, in their considerations, individual directors may have given differing weights to different factors. However, none of the factors that our Board of Directors considered led the Board to believe that the transaction is unfair to unaffiliated shareholders.

Our Board intends to have us issue shares of a new series of preferred stock to those shareholders of record owning less than 2,500 common shares which (i) is distinguishable from the existing class of common stock and (ii) has rights and preferences equitable to the non-affiliated shareholders receiving and not receiving the preferred stock.

Specifically, the holders of our Series A preferred stock will no longer have voting rights except as required by law or upon the sale of our stock or assets, or the merger of us, which requires the approval of the common shareholders. However, only shareholders of record owning less than 2,500 common shares will receive Series A preferred stock, and as a result, no shareholder receiving preferred stock in the Reclassification currently has significant voting power. We anticipate that 297,791 shares of our common stock will be converted to Series A preferred stock as a result of the Reclassification, which as of September 30, 2007 represents only 10.07% of all eligible votes to be cast on matters submitted to a shareholder vote.

Our Series A preferred stock will also receive a preference upon the distribution of assets pursuant to our liquidation, dissolution or winding up. Holders of Series A preferred stock will receive the greater of book value per share and the amount per share to be paid to common shareholders. The Board of Directors wants to provide some reasonable assurance that the Series A preferred stock will maintain some value as compared to our common stock despite the fact that (i) Series A preferred shareholders will have limited voting rights and (ii) there will be fewer shares outstanding, which may adversely affect the liquidity of the Series A preferred stock. This liquidation preference preserves some base-line value of the stock, but not so much as to be unfair to the remaining common shareholders.

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Our Series A preferred stock will have a dividend preference such that no dividend will be awarded to the common shareholders which is not also received by the Series A preferred shareholders. There is no requirement that the Board of Directors award any dividend, and the holders of Series A preferred stock have no rights to a cumulative dividend. If the Board desires to do so, it could elect to award holders of Series A preferred stock a dividend which is not paid to common shareholders. At this time, the Board does not anticipate awarding any cash dividends to Series A preferred shareholders which is not also received by common shareholders.

In order to cause all classes of stock to be treated similarly in the event of a merger, sale or other change of control, all shares of Series A preferred stock will automatically convert to shares of common stock on a one-to-one ratio at the time of such events (subject to anti-dilution protections). This will assure that all shareholders will receive the same consideration at the time of this significant event. Presumably, this could cause us to be subject to the Exchange Act reporting requirements after the change of control event since we may have more than 300 common shareholders at that time.

Finally, the Board of Directors acknowledged that the Reclassification would cause smaller shareholders of record to lose their shares of common stock involuntarily. As a result, in an effort to be fair, the Board of Directors is recommending that these holders be able to sell their newly issued shares of Series A preferred stock to us at the $11.00 Put Price. The Board considered numerous factors discussed below in reaching its conclusion as to the fairness of the Put Price and did not assign any specific weights to the factors listed below. The Board also adopted the analysis of FVS in reaching its fairness determination as to the Put Price and adopts the discussion set forth under “Opinion of Financial Advisor” later in this proxy statement. Moreover, in their considerations, individual directors may have given differing weights to different factors. However, none of the factors that our Board of Directors considered led the Board to believe that the Put Price is unfair to unaffiliated shareholders.

•                                          Voluntary Transaction. Holders of our Series A preferred stock are not required to sell shares to us at the Put Price. The Series A preferred shareholders have the option of holding their Series A preferred shares and remaining shareholders. However, these shareholders are not given the opportunity to convert their holdings to common shares other than in a change of control event. The Board considered the opportunity the holders of the Series A preferred stock have to cash in their shares of common stock at a Put Price representing a 7.42%, 3.72% and 11.27% premium over the weighted average trading price for the 90 day, 6 month and one year periods ending September 30, 2007, respectively, without incurring brokerage charges.

•                                          Current and Historical Market Prices. Although our common stock is not traded daily, it was traded 31 of the 251 trading days during the 12 month period ending September 30, 2007 and 20 of the 129 trading days for the six month period ending September 30, 2007. The average trading volume for those 12 and six month periods was 3,374 and 3,373 shares, respectively.

During this 12 month period, the high trading price was $12.00 (which last occurred on March 21, 2007), and the low trading price was $8.00 (occurring on December 18, 2006). The Board calculated that the weighted average trading price for the 90 day, 6 month and 12 month periods ending September 30, 2007 was $10.24, $10.61 and $9.89, respectively. The last sale price for our common stock reported on the Over-the-Counter Bulletin Board was $10.00, which sale occurred on October 31, 2007. The Put Price represents a premium over these historical averages. Our Board believes this amount of the premium to be fair due to the fact the Series A preferred shareholders will automatically be receiving the Series A preferred stock as a result of the Reclassification and should be offered some premium due to the involuntary nature of the Reclassification. However, the premium should not be excessive due to the fact the Series A preferred shareholders are not being forced to cease being our shareholders altogether, and as a result, the sale at the Put Price is voluntary.

•                                          Going Concern Value. Our Board generally approached the valuation of our common stock as a going concern operating entity. This analysis is described later in this Proxy Statement under the heading “Opinion of Financial Advisor-Comparable Company Analysis,” which should be read in its entirety. Our Board reviewed and adopted FVS’ analysis, which reflected that, based on the information studied, the fair value per share of our common stock is $11.00. Based on that

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conclusion, the Board’s knowledge and judgment with regard to the banking industry, and our anticipated on-going operations and business plans, the Board determined that such valuation generally reflected the value of our common stock on a going concern basis.

•                                          Net Book Value. As of June 30, 2007, the book value per share of our common stock was $5.21. The Board considered net book value and tangible net book value in determining fair market value ranges using market price/book value ratios established from analyses of certain peers located in Texas and surrounding states as well as selected guideline companies. This analysis is described further in “Opinion of Financial Advisor.”  The Board also considered net book value per share in determining the Put Price, but the Board generally did not consider it to be as relevant as other factors in considering the fairness of the Put Price to all shareholders. However, to the extent the Board deemed it relevant, the Board adopted FVS’ analysis. The Board noted that the Put Price reflected a 111.5% premium above our June 30, 2007 book value per share.

•                                          Liquidation Value. In determining the Put Price, the Board did not view our liquidation value as a representative value to determine the fairness of the Reclassification to the unaffiliated shareholders. The vast majority of our (and our underlying subsidiary Bank’s) assets are financial assets, and their book values roughly approximate their liquidation value. In the event our assets were to be sold in an orderly liquidation, some portion of our loans and deposits may be sold at a slight premium above or discount from book value depending on applicable interest rates. However, any premium which might be paid over book value is not material, particularly when considering the discount for which certain other assets may be sold and the expense of the liquidation process. In addition, interest gaps on mismatched assets and liabilities re-price quickly. As a result, we estimate that our liquidation value would not be materially different than our book value.

•                                          Earnings. The Board reviewed our earnings for the previous two fiscal years. For the fiscal years ended September 30, 2006 and 2005, we reported net income of $195,000 and a net loss of $1,737,000, respectively. The basic earnings per share for each of the 2006 and 2005 fiscal years was $0.07 and $(.66), respectively. For the nine months ended June 30, 2007, net income was $181,000 and basic earnings per share was $.07. The proposed Put Price represents a multiple of 157.14 times the earnings per share for the nine months ended June 30, 2007. These pricing multiples were within the range of price to earnings ratios for a selected peer group of companies identified by FVS and discussed later under the heading “Opinion of Financial Advisor; Comparable Company Analysis,” and FVS’ analysis with respect to these ratios was adopted by our Board of Directors.

•                                          Opinion and Valuation Analysis of the Financial Advisor. Our Board received a written opinion dated November 13, 2007, of FVS, a financial advisor to the Board, and a valuation analysis from FVS of our common stock. The opinion stated that, as of the its date and based upon and subject to the various assumptions and limitations described in the opinion, the Put Price to be paid to Series A preferred shareholders selling their chares to us was fair, from a financial point of view, to our shareholders, including those who will receive Series A preferred stock (with the thirty day put option), as well as those who will retain their common shares after the Reclassification. By stating that the Put Price was fair, from a financial point of view, to our shareholders, this opinion incorporates both affiliated and unaffiliated shareholders. In addressing how the Put Price should be determined, our Board believes the impact on affiliated and unaffiliated shareholders is the same because the Put Price does not change based on the status of the particular shareholder.  Rather, it applies equally to all holders of our Series A preferred stock after the Reclassification, whether or not the particular holder is affiliated. As a result, with respect to determining the fairness of the Put Price, our Board determined that FVS’ opinion was sufficient to support the fairness of the Put Price to unaffiliated shareholders. Our shareholders may inspect a copy of the valuation analysis at our principal executive offices during regular business hours. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, including Treaty Oak, who file electronically with the SEC. The address of that site is http://www.sec.gov. We have filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 in connection with the Reclassification. As permitted by the SEC, this proxy statement omits certain information contained in the Schedule 13E-3. A copy of the valuation analysis is attached as an exhibit to our Schedule 13E-3 and is available for inspection electronically at the SEC’s website.

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A copy of FVS’ written opinion, which addresses only the financial fairness of the cash Put Price, is attached as Appendix B to this Proxy Statement and incorporated herein by reference. You should read the entire opinion carefully. The opinion does not constitute a recommendation by FVS to any shareholder as to how the shareholder should vote on the Amendment at the Meeting or any other matter.

FVS’ opinion relies in part on an appraisal of our real estate performed by ARC.  A copy of this appraisal is attached as an exhibit to our Schedule 13E-3 and is available for inspection electronically at the SEC’s website.  Our shareholders may also inspect a copy of the appraisal at our principal executive offices during regular business hours.

•                                          Other Going Private Transactions. The Board also considered premiums paid to shareholders in other going private transactions over the last five years. FVS discussed with the Board 38 transactions primarily involving reverse stock splits or cash out mergers for banks and thrift institutions. The Board considered the $10.00 closing price on October 31, 2007, which is consistent with the historical weighted average price for the twelve month period ended September 30, 2007 of $9.89. The weighted average price for the six months ended September 30, 2007 was $10.61 per share. The Put Price represents a 10.0% premium over that October 31, 2007 trading price and a 3.72% premium over the six month weighted purchase price. Premiums paid with respect to our selected peer group for other going private transactions ranged from –6.9% to 65.9%, with the median premium paid being 13.2%, and the first and third quartile averages being 19.5% and 6.2%, respectively. However, the selected peer group transactions primarily involved circumstances in which the shareholders receiving cash were given no option to retain any class of stock. Considering this, the Board believes the price to be paid to our Series A preferred shareholders who elect to exercise the put option to be fair for all shareholders.

Although it is difficult to determine what our Board as a whole or any individual Board member concluded from any one particular analysis, certain facts were compelling and discussed at great length. After consideration of all this information, our Board determined that the $11.00 per share Put Price is a fair price to be offered to unaffiliated shareholders receiving shares of Series A preferred stock at the effective time of the Reclassification. As a result of the fairness of this Put Price and the other characteristics of our Series A preferred stock, the Reclassification is fair in the opinion of our Board to those unaffiliated shareholders.

After determining the characteristics of our Series A preferred stock, comparing the relative rights and preferences of our Series A preferred stock with our common stock and receiving FVS’ valuation analysis, our Board concluded that a one Series A preferred share for one common share exchange was a fair exchange ratio for all of our unaffiliated shareholders. Although the characteristics of our Series A preferred stock are distinguishable from those of our common stock, the practical effect of many of the differences is not significant to those unaffiliated shareholders receiving Series A preferred stock in the Reclassification, as well as those unaffiliated shareholders who do not. Series A preferred shareholders who lose their voting rights had relatively little voting power as common shareholders, and the non-converting commons shareholders retain their voting power. Although there could be a more limited market for the Series A preferred stock, these Series A preferred shareholders will have 30 days to sell their stock to us with no broker fees at the Put Price. Series A preferred shareholders will have a liquidation preference. Series A preferred shareholders will also receive at least the same dividends as the common shareholders, and our Board does not anticipate awarding dividends solely to Series A preferred shareholders at this time. Also, both classes will be treated the same in the event of a merger, sale or other change of control of us. Due to the foregoing, in the opinion of our Board, our common stock and Series A preferred stock are distinct, but neither reflects a material advantage over the other when considering all of the characteristics of both classes of stock and the number of shares owned by such shareholders. As a result, the one share of common stock for one share of Series A preferred stock exchange ratio, as well as the Reclassification generally, is fair in the opinion of our Board to our unaffiliated shareholders.

Our Board of Directors also believes that the Reclassification is fair to shareholders who will continue to own shares of our common stock after the Reclassification. This belief is based on the Board’s consideration of the following material factors:

•                                          If we are able to terminate the registration of our common stock under the Exchange Act, we believe that the cost savings will benefit continuing shareholders. These cost savings include known and unknown legal, auditing, accounting and other expenses which will be incurred by public companies under the Sarbanes-Oxley Act. Also, our officers, directors and other management will be able to better focus its resources on our business opportunities. Our Board

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believes these cost savings and increase in focus should enhance our ability to increase our profitability.

•                                          If we succeed in deregistering our common stock with the SEC, we will no longer be subject to the SEC reporting or proxy disclosure requirements. However, we intend to continue to provide annual audited financial information and quarterly unaudited financial reports to our shareholders. These financial statements, including our balance sheet and profit and loss statement, sent as part of quarterly investor reports from our CEO, will be provided to all shareholders of record soon after the end of each fiscal quarter and year end, and may not contain information in the same format nor to the same depth as that contained in the Forms 10-KSB and 10-QSB that we report today. We will also be subject to the regulatory and supervisory authority of other governmental agencies applicable to bank holding companies and state chartered banks, including the Federal Reserve Board, the FDIC, and the Texas Department of Banking.

•                                          Our Board anticipates that our common stock will be traded on the Pink Sheets following the Reclassification, but since we will no longer be subject to the Exchange Act reporting requirements, this could adversely affect the liquidity, trading volume and marketability of our common stock, although as noted previously, trading volume of our common stock has been limited. However, we believe any loss in liquidity resulting from not reporting publicly to the SEC is outweighed by the other advantages of this going private transaction.

The transaction is not structured so that approval of at least a majority of unaffiliated shareholders is required. Our Board determined that any such voting requirement would usurp the power of the holders of a large portion of our outstanding shares to consider and approve the proposed Amendment as provided under Texas law and our charter documents.

No independent committee of the Board has reviewed the fairness of the Reclassification proposal. However, the Special Committee comprised of members who will both continue as common shareholders and who will receive Series A preferred shares following the Reclassification, did review the proposal and recommended its approval to the Board. Further, no unaffiliated representative acting solely on behalf of the unaffiliated shareholders for the purpose of negotiating the terms of the Reclassification or preparing a report covering the fairness of the Reclassification and the Put Price was retained by us or by a majority of directors who are not employees of ours. Again, however, the Board committee tasked with review and recommendation of the Reclassification proposal did include a representative of the Treaty Oak Bank Board who will receive Series A preferred shares (and will retain no common stock) as a result of the Reclassification. The Board did elect to engage an independent financial advisor to ensure the fairness of the Put Price. The Board’s vote in recommending the Reclassification was unanimous (except for Mr. Bendele, who abstained from voting on the matter because he was appointed to the Board on the same day the Board approved the transaction).

We acknowledge that as of January       , 2008, which is the record date for determining those shareholders entitled to vote on the Amendment, three of our directors will beneficially own and control less than 2,500 shares of our common stock in at least one record holder capacity and will receive Series A preferred shares in the Reclassification and one member of the Treaty Oak Bank Board of Directors who served on the Special Committee that recommended the Reclassification will also receive Series A preferred shares.

With respect to unaffiliated shareholders’ access to our corporate files, the Board determined that this Proxy Statement, together with our other filings with the SEC, provide adequate information for unaffiliated shareholders to make an informed decision with respect to the Reclassification. The Board also considered the fact that under Texas corporate law, and subject to certain conditions set forth under Texas law, shareholders have the right to review our relevant books and records of account. Our Board did not consider these steps necessary to ensure the procedural fairness of the Reclassification. Our Board determined that such steps would be costly and would not provide any meaningful additional benefits. Thus, we have not made any provision in connection with the Reclassification to grant unaffiliated shareholders access to our corporate files or to obtain counsel or appraisal services at our expense.

After considering the factors described above, our Board believes that the Reclassification is fair, notwithstanding the absence of such an unaffiliated shareholder approval requirement, independent committee or

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unaffiliated representative. Our Board believes that the Reclassification is procedurally fair because after consideration of all aspects of the proposed transaction as described above, all of the directors approved the proposed Amendment. In addition, the Board recognizes that all shareholders owning less than 2,500 shares of common stock have (or have had) the opportunity to (i) buy more shares of common stock prior to the Record Date to exceed the 2,500 share threshold or (ii) put those shares in “street name” with a broker that holds of record 2,500 or more shares of our common stock prior to the record date. Either of these alternatives will allow the shareholders to retain their common stock following the Reclassification. The Board recognizes that purchasing shares of our common stock prior to the record date may be difficult due to the relative lack of a trading market for our common stock; however, the Board has intentionally attempted to devise a transaction which will give all unaffiliated shareholders the most alternatives which could reasonably be available while accomplishing its “going private” objectives.

Our Board also believes that the Reclassification is procedurally fair, as compared to other going private transactions considered by the Board, because it is the only alternative that allowed smaller shareholders the opportunity to decide whether or not to remain an equity investor of Treaty Oak. After the Reclassification, Series A preferred shareholders will have the opportunity to remain equity owners of Treaty Oak or cash out at the Put Price. Other possible going private transactions which would insure success in deregistering us as an Exchange Act reporting company, such as a reverse stock split, would not give small shareholders this choice. The shareholders primarily affected by the transaction (i.e. those owning less than 2,500 shares) have some ability to determine their ownership status with us.

For the reasons discussed above, our Board of Directors believes that the Reclassification is substantively and procedurally fair to our shareholders, including unaffiliated shareholders, and in the best interests of us and our shareholders.

Opinion of Financial Advisor

Overview. The Board of Directors of the Company retained Financial Valuation Services, LC (d/b/a Fowler Valuation Services) (“FVS”) to act as its financial advisor in connection with the Reclassification. As part of its engagement, FVS performed a valuation of the Company’s common stock as of October 18, 2007 and rendered an opinion in regard to the fairness of the Put Price, from a financial point of view, to the Company’s shareholders. In connection with providing its valuation and fairness opinion, FVS received no specific instructions from the Company’s Board of Directors other than to provide its opinion in regard to the fair value of the Company’s common stock and its opinion in regard to whether the Put Price was fair to the Company’s shareholders from a financial point of view.

A copy of FVS’ fairness opinion is attached hereto as Appendix B. You should read FVS’ fairness opinion carefully and in its entirety. The following summary of FVS’ opinion is qualified in its entirety by reference to the full text of the opinion. FVS’ opinion is addressed to the Company’s Board of Directors and is not a recommendation to any shareholder as to how the shareholder should vote in regard to the Reclassification or whether the shareholders should elect to receive the Put Price.

Background of FVS. Founded in 1996, FVS is a business valuation and financial consulting firm which specializes in valuing businesses and business interests. In its ordinary course of business, FVS provides valuation opinions in many different types of businesses, including financial institutions and interests therein. The Company has agreed to pay FVS a fee of $41,000 for performing the valuation and providing the fairness opinion, and has agreed to indemnify FVS for certain liabilities arising out of the engagements. FVS provided valuation and financial consulting services to the Company in connection with its 2006 acquisition of Treaty Oak Holdings, Inc. and received a fee of $17,500 for providing such services. FVS may provide services to the Company in the future.

Factors Considered. In connection with providing its valuation, FVS considered: the history and nature of the Company, the economy, the Company’s book value and financial condition, its earning capacity, its dividend paying capacity, the value of intangible assets such as goodwill, prior sales of the Company’s stock, the market value of other firms which are traded actively in a free and open market, and information in regard to sales of bank companies located in Texas and surrounding states. Information reviewed in performing the engagements included, but was not limited to: documents relating to the Reclassification, including a draft Proxy Statement provided; the

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Company’s audited financial statements for the fiscal years ended September 30, 2004 and September 30, 2005; the Company’s SEC Form 10Q for the period ended June 30, 2007; the Company’s audited balance sheet as of September 30, 2006; the Company’s unaudited income statement for the year ended September 30, 2006; the Company’s unaudited financial statements for the year ended September 30, 2007; the Company’s capitalization table dated September 30, 2007; an appraisal of PGI Equity Partners, LP’s (“PGIEP”) real property holdings located at 101 Westlake Drive prepared by American Realty Corporation; Highline Financial, LLC’s The Bank Report in regard to Treaty Oak Bank (the “Bank”), dated June 30, 2007; certain forecasts regarding Treaty Oak Bank and the Company; the Company’s and Treaty Oak Bank’s Board of Directors meeting minutes for 2007; information in regard to transactions whereby banking companies completed similar transactions; information made available in regard to the cost savings anticipated to be realized as a result of the proposed Reclassification; and information in regard to the Company’s historical stock price and trading volume.

In performing the valuation and providing the fairness opinion, FVS has assumed and relied on, without independent verification, the accuracy and completeness of the financial, accounting, business, legal, tax, and other information discussed with or furnished to FVS by Treaty Oak, published sources, and materials otherwise made available. FVS expresses no opinion in regard to legal, regulatory, tax, or accounting issues related to the Reclassification. FVS has assumed there have been no material changes in the Company’s financial condition or earning capacity since the date of the most recently financial information provided. FVS’ opinion is necessarily based on upon market, economic, and other conditions as of the date hereof. With regard to financial forecasts prepared and made available by the Company’s management, including forecasts of cost savings to be realized from the Reclassification, FVS has assumed that this information reflects the best available estimates and judgments of the Company’s management in regard to future performance and that the projections provide a reasonable basis upon which FVS could provide its advisory services. The projections were based upon a number of variables and assumptions, and actual results could vary significantly from those set forth in the projections.

Summary of Financial Analysis. As part of providing its advisory services to the Company’s Board of Directors, FVS performed a variety of financial and comparative methodologies, which are summarized below. FVS believes these analyses must be considered as a whole. Selecting certain portions of them, without considering all of the analysis and factors considered, could create an incomplete understanding of the process underlying the analyses and a misleading and/or incomplete understanding of FVS’ written opinion as to the fairness of the Reclassification from a financial point of view. The preparation of a financial advisor’s opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analyses or a summary description of those analyses. In addition, for purposes of providing its opinion, FVS has assumed that the Reclassification will be completed in accordance with the terms set forth in the Proxy Statement, without any material changes in its terms or conditions. FVS does not express any opinion in regard to whether any alternative transaction may produce consideration for the holders of the Company’s common stock in excess of that contemplated in the Transaction. The opinion provided to the Company’s Board of Directors was necessarily based upon relevant conditions as of the date of the letter opinion. Subsequent events may affect the opinion. FVS does not have any obligation or commitment to update, revise, or reaffirm its valuation or opinion in regard to the fairness, from a financial point of value, of the Put Price.

Fair Value of the Company’s Common Stock. In performing the valuation of the Company’s common stock, FVS relied on all three principal valuation approaches. In particular, FVS relied on the earnings and market approaches to arrive at an indication of the value of the Bank. We relied on the asset approach to arrive at an indication of the value of Company’s interests in PGIEP/PGI Capital and Treaty Oak Financial Holdings, Inc. (“TOFHI”). We also relied on the asset approach to arrive at an indication of the value of the Company. Finally, we also considered information in regard to the prices at which the Company’s stock has traded as well as its trading activity.

The Bank

Discounted Dividend Analysis. To arrive at an indication of the value of the Bank using the earnings approach, FVS utilized a discounted dividend paying capacity methodology. This discounted dividend method calculated the present value of the future cash flows that the Bank could pay to its investors in the form of dividends based on asset growth, return on average assets, equity retention, and required rate of return assumptions. As shown below, the Bank’s assets are projected to grow 23.6% in 2008, 17.6% in 2009, 18.7% in 2010, 10% in 2011 and 2012, and 6% per year thereafter. The Bank’s return on average assets is projected to equal 0.55% in 2008, 1.09% in 2009, and 1.45% per year thereafter.

TREATY OAK BANK

EARNINGS & DIVIDEND PAYING CAPACITY MODEL

($s in Thousands)

(1) 2007 = Latest Twelve Months Figures.

* Numbers may not foot due to rounding.

Assuming the Bank is required to maintain an equity balance equal to 7% of tangible equity, it is projected to be able to pay dividends to its shareholders of $146,000 in 2009, $458,000 in 2010, $1,582 in 2011, $1,741 in 2012, and $2,481 in the Residual period. The Residual period represents all years after 2012. Further, the Bank’s dividend paying capacity is projected to grow at a long term average annual rate of 6% per year.

TREATY OAK BANK

EARNINGS & DIVIDEND PAYING CAPACITY MODEL

($s in Thousands)

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As shown below and in the financial exhibits to the valuation report, discounting the Bank’s projected 2008 — 2012 dividend paying capacity utilizing a 12% discount rate, capitalizing the Residual dividend stream by dividing it by this 12% discount rate less the 6% long term average growth rate, and summing the results resulted in an indication of the present value of the Bank’s future dividends, on an as if control, non-marketable basis, was found to be $25,900,632.

TREATY OAK BANK

PRESENT VALUE OF FUTURE DIVIDEND PAYING CAPACITY

($s in Thousands)

Comparable Company Analysis. In using the market approach to value the Bank, FVS relied on data in regard to sales of privately held banks made available by SNL Securities, as well as information in regard to the prices at which the shares of actively traded Texas based banks traded as of the valuation date. In regard to sales of privately held banks, FVS analyzed operational and pricing multiple data in regard to sales of 165 banks in Texas and surrounding states which sold between January 1, 2004 and September 20, 2007. In particular, we analyzed the location of the banks which sold, the amount of their assets and equity, their return on average assets, their return on average equity, their non-performing assets, their efficiency ratio, and the operating expenses to average assets.  For a list of such banks, see the exhibits to the valuation report, which is filed as an exhibit to the Company’s Schedule 13E-3 filed with the Securities and Exchange Commission.  Based on FVS’ analysis of the banks relative to the Bank and the transaction data, FVS selected a price to earnings, a price to equity, a price to tangible equity, a price to asset, and a price to deposits multiple. FVS applied the selected pricing multiples to the Bank’s fiscal year end September 30, 2007 financial results, and arrived at preliminary indications of value. FVS then weighted the preliminary indications of value and summed the results to arrive at an indication of the value of 100% of the Bank on a control, non-marketable basis of $25,976,066.

To arrive at an indication of the value of the Bank using the public guideline company method FVS analyzed operational and financial information in regard to nine actively traded Texas based banking companies: Cullen/Frost, First Financial Bankshares, Franklin Bank Corp, International BancShares Corp, Metrocorp Bancshares, Prosperity Bancshares, Southside Bancshares, Sterling Bancshares, and Texas Capital Bancshares. In particular, we considered the size of the public guideline banking companies, their equity to assets ratio, their return on assets, and their return on equity relative to the Bank. Based on FVS’ analysis, FVS selected a price to assets, a price to equity, and a price to earnings multiple. FVS applied the selected pricing multiples to the Bank’s fiscal year end September 30, 2007 financial results to arrive at preliminary indications of value. FVS then weighted these preliminary indications of value and arrived at an indication of the value of the Bank on a minority, marketable basis of $26,110,650.

The shares of the public guideline banking companies are actively traded. Although the shares of the Bank are not traded on an exchange, the Company owns 100% of its outstanding shares. With a 100% ownership position, the Company has absolute control over its day to day operations, including the right to sell it. Should the Company desire to sell the Bank FVS believes that it could do so in a relatively short timeframe and at a price in line with that found based on our analysis. Thus, to reflect the illiquidity of the Bank relative to the liquidity of the actively traded public banks’ shares, FVS applied a 9.1% discount for lack of marketability and arrived at an indication of the value of the Bank on a minority, non-marketable basis of $23,734,581.

The Company owns 100% of the Bank.  However, shares of publicly traded banks trade in minority, or non-controlling, blocks. Thus, the indication of value found utilizing the multiples at which the public guideline companies’ shares trade reflects a minority, or non-controlling, ownership position. When publicly traded companies are acquired, the acquirer typically pays a premium over the price at which the acquired company’s minority shares trade. Thus, to adjust the indication of value found using the public guideline company data to be consistent with the Company’s 100% ownership position FVS applied an adjustment to reflect the Company’s controlling position. To arrive at an appropriate premium for control FVS analyzed data made available in the MergerStat/Shannon Pratt’s Control Premium Study database (“MergerStat”), which reported the average and median control premiums paid in acquisitions of 69 state commercial banks between January 1, 2006 and October 18, 2007 were 26.4% and 20.3%, respectively. Based on FVS’ understanding of the Bank and the empirical data in regard to control premiums made available by MergerStat, FVS applied a 25% control premium to the minority, non-marketable value found above to arrive at an indication of the value of the Bank on a control, non-marketable basis of $29,668,226.

The next step in FVS’ analysis was to reconcile the indications of value found using the earnings approach – discounted dividend method, the private company merger & acquisition method, and the public company guideline method. The private company merger & acquisition method involved the study of a large number of actual sales of banks in Texas and surrounding states. Thus, FVS believes that a knowledgeable investor considering the Bank would apply a weighting of 50% to the indication of value found using the private company merger & acquisition method. In FVS’ opinion, the indications of value found using the discounted dividend method and the public guideline company method would be considered equally relevant and would each be weighted by 25%. Applying these weights and summing the results produced an indication of the value of 100% of the Bank on a control, non-marketable basis of $26,880,248, rounded to $26,880,000.

For purposes of its analysis, FVS utilized the following financial projections provided by Treaty Oak:

Treaty Oak Bank 3 Year Forecast

Financial Summary

(Dollars in 000s)

As of 04/23/07