FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



     [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                       For the period ended June 30, 1997

                                       OR

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

              For the transition period from _______ to _______.


                         Commission file number 0-24848


                       East Texas Financial Services, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                         75-2559089
(State or other jurisdiction of                        (I.R.S. employer
incorporation or organization                        identification number)

                     1200 South Beckham, Tyler, Texas 75701
               (Address of principal executive offices) (Zip code)

                                 (903) 593-1767
              (Registrant's telephone number, including area code)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 of 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.       [x] Yes [ ] No

         The number of shares of the registrant's  common stock ($.01 par value)
outstanding as of June 30, 1997, was 1,025,321.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1997



                                      INDEX



Part I - Financial Information

     Item 1.  Financial Statements

         Consolidated   Statements  of  Financial   Condition,   June  30,  1997
         (Unaudited) and September 30, 1996

         Consolidated  Statements of Income,  (Unaudited)  three months and nine
         months ended June 30, 1997, and June 30, 1996

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         nine months ended June 30, 1997

         Consolidated  Statements of Cash Flows,  (Unaudited)  nine months ended
         June 30, 1997, and June 30, 1996

         Notes to (Unaudited) Consolidated Financial Statements, June 30, 1997 
                      

     Item 2.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations 

Part II - Other Information

     Item 1.  Legal Proceedings 

     Item 2.  Changes In Securities 

     Item 3.  Defaults Upon Senior Securities 

     Item 4.  Submission of Matters To a Vote of Security Holders  

     Item 5.  Other Information 

     Item 6.  Exhibits and Reports on Form 8-K   

Signature Page  
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1997



PART I - FINANCIAL INFORMATION

     Item 1 - Financial Statements

East Texas Financial  Services,  Inc. (the "Company") was formed in September of
1994 for the  purpose  of  acquiring  all of the common  stock of First  Federal
Savings and Loan Association of Tyler (the  "Association"),  concurrent with its
conversion from the mutual to stock form of ownership. The Company completed its
initial public stock offering of 1,215,190 shares of $.01 par value common stock
on January 10,  1995.  The Company  utilized  approximately  one half of the net
stock  sale  proceeds  to  acquired  all  of  the  common  stock  issued  by the
Association.  For additional  discussion of the Company's formation and intended
operations,  see the Form S-1 Registration  Statement (No.  33-83758) filed with
the Securities and Exchange  Commission and the Company's  annual report on Form
10-KSB  for the  fiscal  year  ended  September  30,  1996,  also filed with the
Commission.

The financial  statements presented in this Form 10-QSB reflect the consolidated
financial  condition  and  results of  operations  of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.
<PAGE>
<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                                           June 30, 1997    September 30, 1996
                                                                           -------------    ------------------
                                                                           (Unaudited)

<S>                                                                       <C>                 <C>
    ASSETS

Cash and due from banks ............................................      $     524,238       $     704,615
Interest-bearing deposits with banks ...............................          3,661,117           4,995,032
Interest earning time deposits with financial institutions..........          1,565,573           1,663,573
Federal funds sold .................................................                191             480,285
Mortgage-backed securities available-for-sale ......................          2,039,439                   0
Investment securities held-to-maturity (estimated market
     value of $27,077,180 at June 30, 1997, and $30,114,685
     at September 30, 1996) ........................................         27,074,037          30,138,744
Mortgage-backed securities held-to-maturity (estimated market
     value of $20,314,274 at June 30, 1997, and
      $25,383,579 at September 30, 1996) ...........................         19,914,227          24,948,793
Loans receivable, net of allowance for credit losses
     of $273,659 at June 30, 1997, and $289,120
     at September 30, 1996 .........................................         54,582,647          47,925,067
Accrued interest receivable ........................................            924,798             930,657
Federal Home Loan Bank stock, at cost ..............................            990,700             948,500
Premises and equipment .............................................            952,471             970,184
Foreclosed real estate, net of allowances of $-0- ..................             31,202                   0
Deferred income taxes ..............................................            107,310             130,825
Mortgage servicing rights ..........................................            137,604             119,845
Other assets .......................................................            191,295             416,816
                                                                          -------------       -------------

         Total Assets ..............................................      $ 112,696,849       $ 114,372,936
                                                                          =============       =============

    LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Demand deposits ...............................................      $   2,340,942       $   2,889,861
     Savings and NOW deposits ......................................         10,336,441          11,099,604
     Other time deposits ...........................................         76,623,581          77,671,666
                                                                          -------------       -------------
         Total deposits ............................................         89,300,964          91,661,131

     FHLB advances .................................................          1,963,420                   0
     Advances from borrowers for taxes and insurance ...............            632,275             917,222
     Federal income taxes
           Current .................................................              2,462               5,044
           Deferred ................................................                  0                   0
     Accrued expenses and other liabilities ........................            326,582             858,926
                                                                          -------------       -------------

         Total Liabilities .........................................         92,225,703          93,442,323
                                                                          -------------       -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                  (continued)

                                                                           June 30, 1997    September 30, 1996
                                                                           -------------    ------------------
                                                                           (Unaudited)

<S>                                                                       <C>                 <C>
Stockholders' equity:
     Preferred stock, $0.01 par value, 500,000
     shares authorized, none outstanding
     Common stock, $.01 par value, 5,500,000 shares authorized,
     1,256,387 shares issued .......................................             12,564              12,564
     Additional paid-in capital ....................................         12,112,516          12,112,516
     Deferred compensation - RRP shares ............................           (358,843)           (446,129)
     Unearned employee stock ownership plan shares .................           (763,206)           (763,206)
     Net unrealized gain on securities available-for-sale ..........              3,623                   0
     Retained earnings (substantially restricted) ..................         13,212,621          12,811,881
     Treasury stock, 231,066 and 177,102 shares at cost ............         (3,748,129)         (2,797,013)
                                                                          -------------       -------------


         Total stockholders' equity ................................         20,471,146          20,930,613
                                                                          -------------       -------------

         Total liabilities and stockholders' equity ................      $ 112,696,849       $ 114,372,936
                                                                          =============       =============


                   The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         EAST TEXAS FINANCIAL SERVICES, INC.
                                          CONSOLIDATED STATEMENTS OF INCOME



                                                                 Three Months                    Nine Months
                                                                Ended June 30,                  Ended June 30,
                                                                 (Unaudited)                      (Unaudited)
                                                           1997             1996             1997            1996
                                                       -----------      -----------      -----------     -----------
<S>                                                    <C>              <C>              <C>             <C>
INTEREST INCOME
   Loans receivable:
        First mortgage loans .....................     $ 1,050,080      $   905,480      $ 3,023,247     $ 2,631,571
        Consumer and other loans .................          20,378           19,588           61,306          57,698
   Securities available for sale:
        Mortgage-backed securities ...............           9,530                0            9,530               0
   Securities held to maturity:
        Investment securities ....................         519,860          603,635        1,630,019       1,835,456
        Mortgage-backed securities ...............         354,023          470,306        1,164,609       1,555,358
                                                       -----------      -----------      -----------     -----------


          Total interest income ..................       1,953,871        1,999,009        5,888,711       6,080,083
                                                       -----------      -----------      -----------     -----------

INTEREST EXPENSE
   Deposits ......................................       1,105,921        1,117,339        3,310,523       3,391,531
   FHLB advances .................................           4,728                0            4,728               0
                                                       -----------      -----------      -----------     -----------

          Total interest expense .................       1,110,649        1,117,339        3,315,251       3,391,531
                                                       -----------      -----------      -----------     -----------

          Net interest income before provision
            for loan losses ......................         843,222          881,670        2,573,460       2,688,552

   Provision for loan losses .....................               0                0            5,000               0
                                                       -----------      -----------      -----------     -----------

          Net interest income after provision
            for loan losses ......................         843,222          881,670        2,568,460       2,688,552
                                                       -----------      -----------      -----------     -----------

NONINTEREST INCOME
   Gain (loss) on sales of interest-earning assets          13,050           16,588           44,372          74,548
   Loan origination and commitment fees ..........          18,809           22,474           46,102          60,016
   Loan servicing fees ...........................          26,860           32,007           73,797          91,995
   Other .........................................          18,967           18,118           51,382          48,668
                                                       -----------      -----------      -----------     -----------

          Total noninterest income ...............          77,686           89,187          215,653         275,227
                                                       -----------      -----------      -----------     -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         EAST TEXAS FINANCIAL SERVICES, INC.
                                          CONSOLIDATED STATEMENTS OF INCOME
                                                     (continued)



                                                                 Three Months                    Nine Months
                                                                Ended June 30,                  Ended June 30,
                                                                 (Unaudited)                      (Unaudited)
                                                           1997             1996             1997            1996
                                                       -----------      -----------      -----------     -----------
<S>                                                    <C>              <C>              <C>             <C>
NONINTEREST EXPENSE
   Compensation and benefits .....................         425,534          405,463        1,271,288       1,193,286
   Occupancy and equipment .......................          40,769           40,133          112,829         115,051
   SAIF deposit insurance premium ................          15,011           55,139           66,186         167,522
   (Gain) loss on foreclosed real estate .........              (8)             (26)           5,683           4,826
   Other .........................................         136,337          135,526          438,547         431,882
                                                       -----------      -----------      -----------     -----------

          Total noninterest expense ..............         617,643          636,235        1,894,533       1,912,567
                                                       -----------      -----------      -----------     -----------

Income (loss) before provision for income taxes ..         303,265          334,622          889,580       1,051,212

Income tax expense (benefit) .....................         112,354          122,262          329,646         383,063
                                                       -----------      -----------      -----------     -----------

NET INCOME (LOSS) ................................     $   190,911      $   212,360      $   559,934     $   668,149
                                                       ===========      ===========      ===========     ===========

Earnings per common share                              $      0.20      $      0.20      $      0.57     $      0.60




                      The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             EAST TEXAS FINANCIAL SERVICES, INC.
                                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                         (UNAUDITED)


                                                     NINE MONTHS ENDED
                                                        June 30, 1997



                                       Common             Unearned          Unallocated     Net Unrealized              
                                     Stock and              RRP                ESOP         Gain on Avail.      Retained    
                                  Paid in Capital          Shares             Shares      For Sale Security     Earnings    
                                  ---------------          ------             ------      -----------------     --------    
<S>                                  <C>               <C>                <C>               <C>               <C>
Balance October 1, 1996 .......      $ 12,125,080      $   (446,129)      $   (763,206)     $       --        $ 12,811,881

Deferred compensation
     amortization .............              --              87,286               --                --                --   

Purchase of treasury
     stock at cost ............              --                --                 --                --                --

Payment of cash dividends .....              --                --                 --                --            (154,252)

Accrued dividends - RRP stock .              --                --                 --                --              (4,942)

Net change in unrealized
     gain on securities
     available for sale, net of
     deferred taxes of $1,866 .              --                --                 --               3,623              --   

Net income for the nine
     months ended
     June 30, 1997 ............              --                --                 --                --             559,934

Balance June 30, 1997 .........      $ 12,125,080      $   (358,843)      $   (763,206)     $      3,623      $ 13,212,621
                                     ============      ============       ============      ============      ============


</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                       EAST TEXAS FINANCIAL SERVICES, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (UNAUDITED)


                                NINE MONTHS ENDED
                                  June 30, 1997
                                  (continued)


                                                                       Total    
                                                Treasury           Stockholders'
                                                 Stock                Equity    
                                                 -----                ------    
<S>                                           <C>                  <C>
Balance October 1, 1996 ..............        $ (2,797,013)        $ 20,930,613

Deferred compensation
     amortization ....................                --                 87,286

Purchase of treasury
     stock at cost ...................            (951,116)            (951,116)

Payment of cash dividends ............                --               (154,252)

Accrued dividends - RRP stock ........                --                 (4,942)

Net change in unrealized
     gain on securities
     available for sale, net of
     deferred taxes of $1,866 ........                --                  3,623

Net income for the nine
     months ended
     June 30, 1997 ...................                --                559,934

Balance June 30, 1997 ................        $ (3,748,129)        $ 20,471,146
                                              ============         ============



  The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              EAST TEXAS FINANCIAL SERVICES, INC.
                              CONSOLIDATED STATEMENT OF CASH FLOWS
                                          (Unaudited)


                                                                   For The Nine Months Ended
                                                                            June 30,
                                                                      1997             1996
                                                                  -----------      -----------
<S>                                                               <C>              <C>
Cash flows from operating activities:
  Net income ...................................................  $   559,934      $   668,149
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Amortization of deferred loan origination fees ...........       (1,947)          (1,692)
      Amortization of premiums and discounts on investment
            securities, mortgage-backed securities, and loans...       77,941          155,372
      Amortization of deferred compensation ....................       87,286           87,286
      Compensation charge related to release of ESOP shares ....       70,977           64,064
      Depreciation .............................................       50,890           55,481
      Deferred income taxes ....................................       21,649           47,973
      Stock dividends on FHLB stock ............................      (42,200)         (41,300)
      Amortization of mortgage servicing rights ................       18,819                0
      Net (gain) loss on sale or disposal of:
        Securities held to maturity ............................       (1,381)               0
        Foreclosed real estate .................................            0                0
        Fixed assets ...........................................       (9,562)               0
        Other Assets ...........................................            0                0
        Loans ..................................................      (42,991)         (14,811)
        Loans held for sale ....................................            0                0
      Proceeds from loan sales .................................    2,989,034        6,127,911
      Originations of loans held for sale ......................            0                0
      (Increase) decrease in:
        Accrued interest receivable ............................        5,859          (58,817)
        Other assets ...........................................      243,280          (21,147)
        Accrued loan loss reserve ..............................        5,000                0
      Increase (decrease) in:
        Federal income tax payable .............................       (2,582)         (53,573)
        Accrued expenses and other liabilities .................     (603,321)        (116,735)
      Capitalized interest on time deposits ....................            0           (1,573)
                                                                  -----------      -----------

Net cash provided (used) by operating activities ...............    3,426,685        6,896,588
                                                                  -----------      -----------


           The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                     EAST TEXAS FINANCIAL SERVICES, INC.
                                    CONSOLIDATED STATEMENT OF CASH FLOWS
                                                 (Unaudited)

                                                                               For the Nine Months Ended
                                                                                         June 30,
                                                                                 1997              1996
                                                                             ------------      ------------
<S>                                                                          <C>               <C>
Cash flows from investing activities:
  Purchases of interest earning time deposits ..........................     $    (98,000)     $   (877,000)
  Net decrease (increase) in fed funds sold ............................          480,094           294,857
  Purchases of obligations - U.S. Govt. and agencies
      held-to-maturity .................................................       (6,495,391)       (9,641,946)
  Proceeds from maturity of time deposits ..............................          196,000            98,000
  Proceeds from sale of securities held-to-maturity ...................                 0                 0
  Proceeds from maturity of securities held-to-maturity ................                0                 0
  Proceeds from maturities of obligations - U.S. Govt. and
      agencies held-to-maturity ........................................        8,500,000         9,500,000
  Proceeds from sale of obligations - U.S. Govt. and
      agencies held-to-maturity ........................................        1,000,938                 0
  Purchases of mortgage-backed securities available-for-sale............       (2,035,446)                0
  Purchases of mortgage-backed securities held-to-maturity .............         (512,122)         (913,080)
  Principal pmts on mortgage-backed securities available-for-sa1e.......            1,130                 0
  Principal payments on mortgage-backed securities
      held-to-maturity .................................................        5,529,654         7,851,932
  Net originations and principal collections on loans ..................      (10,121,466)      (10,688,421)
  Acquisition cost related to foreclosed real estate ...................           (9,489)                0
  Proceeds from sale of foreclosed real estate .........................          437,094            83,320
  Expenditures for premises and equipment ..............................          (41,115)          (22,418)
  Proceeds from sale of fixed assets ...................................           17,500                 0
                                                                             ------------      ------------

Net cash provided (used) by investing activities .......................       (3,150,619)       (4,314,756)
                                                                             ------------      ------------

Cash flows from financing activities:
   Net increase (decrease) in:
    Non-interest bearing deposits, savings, and NOW accounts............       (1,312,081)          417,356
   Time deposits .......................................................       (1,048,085)         (434,203)
   Proceeds from FHLB advances .........................................        2,481,420                 0
   Repayment of FHLB advances ..........................................         (518,000)                0
   Advances from borrowers for taxes and insurance .....................         (284,947)         (335,525)
Dividends paid to stockholders .........................................         (157,549)         (112,212)
Purchase of treasury stock .............................................         (951,116)       (1,970,702)
                                                                             ------------      ------------

Net cash provided (used) by financing activities .......................       (1,790,358)       (2,435,286)
                                                                             ------------      ------------

Net increase (decrease) in cash and cash equivalents ...................       (1,514,292)          146,546

Cash and cash equivalents at beginning of the period ...................        5,699,647         6,239,836
                                                                             ------------      ------------

Cash and cash equivalents at end of the period .........................     $  4,185,355      $  6,386,382
                                                                             ============      ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                     EAST TEXAS FINANCIAL SERVICES, INC.
                                    CONSOLIDATED STATEMENT OF CASH FLOWS
                                                 (Unaudited)
                                                 (continued)

                                                                               For the Nine Months Ended
                                                                                         June 30,
                                                                                 1997              1996
                                                                             ------------      ------------
<S>                                                                          <C>               <C>
Supplemental disclosure:
Cash paid for:
  Interest on deposits .................................................     $  1,666,746      $  1,794,387
  Income taxes .........................................................     $    310,692      $    349,973

Transfers from loans to real estate
  acquired through foreclosures ........................................     $    467,991      $          0

Loan losses charged to valuation allowance .............................     $     71,345      $          0

Recoveries credited to loan loss reserves ..............................     $     51,159      $          0




                  The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


NOTE 1 - BASIS OF PRESENTATION

The  financial  statements  presented  in this report have been  prepared by the
Company  pursuant to the rules and  regulations  of the  Securities and Exchange
Commission for interim  reporting and include all adjustments  which are, in the
opinion  of  management,   necessary  for  fair  presentation.  These  financial
statements  have  not  been  audited  by  an  independent  accountant.   Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance with generally accepted  accounting  principles have been
condensed  or  omitted  pursuant  to such  rules  and  regulations  for  interim
reporting.  The Company  believes that the  disclosures are adequate to make the
information not misleading.  However,  these financial statements should be read
in conjunction  with the financial  statement and notes thereto  included in the
Company's  Annual  Report on Form 10-KSB for the year ended  September 30, 1996.
The financial data and results of operations for interim  periods  presented may
not necessarily reflect the results to be anticipated for the complete year.

NOTE 2 - EARNINGS PER SHARE

For purposes of  calculating  earnings per common share and as prescribed by the
American  Instituted of Certified Public Accountants  Statement of Position 93-6
("SOP 93-6")  Employers'  Accounting For Employees  Stock Ownership  Plans,  the
weighted average number of shares outstanding,  excluding  unallocated  Employee
Stock  Ownership Plan ("ESOP")  shares,  was used. For the three months and nine
months ended June 30, 1997, the weighted  average  number of shares  outstanding
for earnings per share  calculation  purposes  were 965,982 and 988,171  shares,
respectively. (See Part II, Item 6 - Exhibits for a detailed presentation of the
earnings per share  calculation for the three month and nine month periods ended
June 30, 1997.) (See Part I, Item 4 - Notes for a discussion of proposed changes
to earnings per share reporting.)

NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of June 30, 1997, are as follows:
<TABLE>
<CAPTION>
                                                      Gross          Gross         Estimated
                                  Amortized        Unrealized      Unrealized         Market
                                      Cost            Gains          Losses           Value
                                  -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>
Debt securities:
      U. S. Treasury ........     $ 2,512,491     $         0     $     3,565     $ 2,508,926

      U. S. government agency
                                   24,561,546          58,971          52,263      24,568,254
                                  -----------     -----------     -----------     -----------

           Total debt .......     $27,074,037     $    58,971     $    55,828     $27,077,180
                                  -----------     -----------     -----------     -----------
</TABLE>
<PAGE>
NOTE 3 - Continued

The amortized  cost and estimated  market values of investment  securities as of
June 30, 1997, by contractual maturity are shown below:
<TABLE>
<CAPTION>
                                                                      Estimated
                                                     Amortized         Market
                                                       Cost             Value
                                                    -----------      -----------
<S>                                                 <C>              <C>
Due in one year or less ......................      $12,015,717      $12,043,471

Due after one year through two
years ........................................        7,512,042        7,511,609

Due after two years through three years
                                                      5,559,754        5,542,923

Due after three years through five years
                                                      1,986,524        1,979,177
                                                    -----------      -----------

        Total debt securities ................      $27,074,037      $27,077,180
                                                    -----------      -----------
</TABLE>

As of June 30, 1997,  the weighted  average  yield on the  Company's  investment
security   portfolio  was  approximately   6.18%  while  the  Company's  overall
investment portfolio, including securities held-to-maturity,  overnight deposits
and  interest  earning  time  deposits  with other  financial  institutions  was
approximately 6.18%.

The carrying values and estimated market values of  mortgage-backed  and related
securities  available-for-sale  as of June 30, 1997,  by type of security are as
follows:
<TABLE>
<CAPTION>
                     Principal     Unamortized     Unearned      Unrealized      Carrying
                      Balance        Premiums      Discounts     Gain/(Loss)       Value
                    ----------     ----------     ----------     ----------     ----------
<S>                 <C>            <C>            <C>            <C>            <C>
Fixed Rate ....     $        0     $        0     $        0     $        0     $        0

Adjustable Rate      1,962,290         71,660              0          5,489      2,039,439
                    ----------     ----------     ----------     ----------     ----------

                    $1,962,290     $   71,660     $        0     $    5,489     $2,039,439
                    ----------     ----------     ----------     ----------     ----------
</TABLE>
<PAGE>
NOTE 3 - Continued

The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity  as of June 30,  1997,  by type of security  are as
follows:
<TABLE>
<CAPTION>
                                                                                     Estimated
                     Principal      Unamortized       Unearned        Carrying        Market
                      Balance         Premiums        Discounts        Value           Value
                    -----------     -----------     -----------     -----------     -----------
<S>                 <C>             <C>             <C>             <C>             <C>
Fixed Rate ........ $ 4,611,008     $         0     $    16,511     $ 4,594,497     $ 4,539,937


Adjustable Rate ...  15,229,540         106,818          16,628      15,319,730      15,774,337
                    -----------     -----------     -----------     -----------     -----------

                    $19,840,548     $   106,818     $    33,139     $19,914,227     $20,314,274
                    -----------     -----------     -----------     -----------     -----------
</TABLE>
The overall yield on the Company's  mortgage-backed  securities  portfolio as of
June 30, 1997, was approximately 7.19%.

NOTE 4 - CURRENT ACCOUNTING ISSUES

SFAS NO. 123 In October 1995 the  Financial  Accounting  Standards  Board issued
Statement of  Financial  Accounting  Standards  (SFAS) No. 123,  Accounting  for
Stock-Based  Compensation  which  established  a  fair  value  based  method  of
accounting for stock-based  compensation  plans. It encourages entities to adopt
that method in place of the  provisions  of  Accounting  Principles  Board (APB)
Opinion No. 25,  Accounting for Stock Issued to Employees,  for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of its stock.  It permits  entities to continue to use the intrinsic value
method  included in APB No. 25, but regardless of the method used to account for
the  compensation  cost  associated  with stock  option and  similar  plans,  it
requires employers to show significant expanded  disclosures,  including the pro
forma amount of net income (and  earnings per share) as if the fair  value-based
method were used to account for stock-based compensation.

As of October 1, 1996, the effective date for the Statement, the Company elected
to continue using the accounting and disclosure methods prescribed by APB No. 25
for its current plan and to continue using the accounting  methods prescribed by
APB No. 25 but disclose in the footnotes  information on a fair value basis,  as
prescribed by SFAS No. 123, for any future stock-based compensation plans.

SFAS NO. 125  Statement  of  Financial  Accounting  Standards  (SFAS)  No.  125,
Accounting For Transfers and Servicing of Financial  Assets and  Extinguishments
of Liabilities,  provides consistent  standards for distinguishing  transfers of
financial  assets that are sales from transfers that are secured  borrowings and
for the extinguishment of financial  liabilities.  It is based on the consistent
application of the  financial-components  approach.  The Statement  requires the
recognition of financial  assets and servicing  assets that are controlled by an
entity, the derecognition of financial assets and servicing assets where control
is surrendered, and the derecognition of liabilities when they are extinguished.
The Statement is effective  for transfers and servicing of financial  assets and
extinguishment  of liabilities  occurring  after December 31, 1996, and shall be
applied prospectively. The Company adopted the Statement as required.
<PAGE>
NOTE 4 - Continued

SFAS NO. 128 In February 1997, the Financial  Accounting  Standards Board issued
Statement of Financial  Accounting Standards (SFAS) No. 128, Earnings Per Share.
SFAS No. 128  establishes  standards for computing and  presenting  earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. The Statement simplifies the standards for computing EPS and makes
them comparable with international EPS standards.

SFAS No. 128 replaces the  presentation of primary EPS previously  prescribed in
Accounting  Principles  Board Opinion (APB) No. 15,  Earnings Per Share,  with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital   structures  and  requires  a  reconciliation   of  the  numerator  and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.

Basic EPS does not include dilution and is computed by dividing income available
to  common  stockholders  by  the  weighted  average  number  of  common  shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then shared in the  earnings  of the entity.  Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.

The Statement is effective for financial  statements  issued for periods  ending
after December 15, 1997.

NOTE 5 - FORWARD-LOOKING STATEMENTS

When  used in this  Form  10-QSB  or  future  filings  by the  Company  with the
Securities and Exchange Commission, the Company's press releases or other public
or shareholder  communications,  or in oral statements made with the approval of
an authorized executive officer, the words or phrases "will likely result", "are
expected  to",  "will  continue",  "is  anticipated",   "estimate",   "project",
"believe"  or similar  expressions  are  intended to  identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  The Company  wishes to caution  readers not to place undue reliance on
any such forward-looking  statements,  which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions,  changes in levels of market interest rates, credit risks of lending
activities,  and competitive and regulatory factors,  could affect the Company's
financial  performance  and could cause the Company's  actual results for future
periods to differ materially from those anticipated or projected.

The Company does not undertake,  and specifically  disclaims any obligation,  to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1997


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
         of Operations

GENERAL

The principle business of the Company is that of a community-oriented  financial
institution  attracting deposits from the general public and using such deposits
to originate  one- to  four-family  residential  loans and, to a lesser  extent,
commercial  real estate,  one- to  four-family  construction,  multi-family  and
consumer  loans.  These  funds have also been used to  purchase  mortgage-backed
securities,  U. S.  government  and  agency  obligations  and other  permissible
securities.  The ability of the Company to attract  deposits is  influenced by a
number of  factors,  including  interest  rates paid on  competing  investments,
account maturities and levels of personal income and savings. The Company's cost
of funds is influenced by interest  rates on competing  investments  and general
market rates of interest.  Lending  activities  are influenced by the demand for
real  estate  loans and other types of loans,  which is in turn  affected by the
interest  rates at which  such  loans  are  made,  general  economic  conditions
affecting  loan  demand,  the  availability  of funds  for  lending  activities,
economic conditions and changes in real estate values.

The  Company's  results of operations  are  dependent  primarily on net interest
income,  which is the  difference  between  the  income  earned  on its loan and
investment portfolios and the interest paid on deposits and borrowings.  Results
of operations  are also affected by the Company's  provision for loan losses and
the net  gain(loss)  on sales of  interest  earning  assets and loan  fees.  The
Company's  results of  operations  are also  significantly  affected  by general
economic and  competitive  conditions,  particularly  changes in interest rates,
government policies and actions of regulatory authorities.

FINANCIAL CONDITION

Total  assets  were  $112.7  million at June 30,  1997,  a $1.7  million or 1.5%
decrease from the $114.4  million  reported at the  Company's  fiscal year ended
September 30, 1996.  The decrease in total assets was primarily the result of an
$8.1   million   decline   in   mortgage-backed   and   investment    securities
held-to-maturity  and a $2.0  million  decrease  in  cash  and  cash  equivalent
accounts with financial  institutions.  The decreases were partially offset by a
$6.7  million  increase  in loans  receivable  balances  outstanding  and a $2.0
million increase in mortgage-backed securities available-for-sale.

Total  liabilities  declined by $1.2 million to $92.2  million at June 30, 1997,
compared to $93.4 million at September 30, 1996.  The decrease was primarily the
result of a $2.4 million  decline in total deposits to $89.3 million at June 30,
1997, from $91.7 million at September 30, 1996,  which was partially offset by a
$2.0 million increase in Federal Home Loan Bank advances.
<PAGE>
Stockholders'  equity  declined by $459,000 to $20.5  million at June 30,  1997,
from $20.9  million at September  30,  1996.  The decrease was due to a $951,000
increase in treasury  stock as the Company  re-purchased  an  additional  53,964
shares of stock during the year.  The increase in treasury  stock was  partially
offset by a $401,000  increase in retained  earnings,  which  resulted  from the
$560,000 in net income for the nine months ended June 30, 1997, less $159,000 of
cash dividends paid during the year.

Cash,  interest-earning  deposits with banks and federal funds sold totaled $5.8
million at June 30,  1997,  a decrease  of $2.0  million  from the $7.8  million
reported at September  30, 1996.  Balances in these  accounts  fluctuate as loan
payments and deposits are received from  customers as well as with purchases and
maturities of securities, disbursement of loan proceeds, deposit withdrawals and
payments of operating expenses.

At  June  30,  1997,  the  Company  reported  $2.0  million  in  mortgage-backed
securities  available-for-sale,  compared to none at September 30, 1996.  During
the nine months  ended June 30, 1997,  the Company  began a program of utilizing
its borrowing privileges as a member of the Federal Home Loan Bank of Dallas. At
June 30, 1997,  the Company had  outstanding  $2.0 million in advances  from the
Federal Home Loan Bank of Dallas and had  invested  the advance  proceeds in the
$2.0 million of mortgage-backed securities available-for-sale.

Subject to the level of  interest  rates,  the  Company  intends,  over the next
several  quarters,  to systematically  borrow up to approximately  $20.0 million
from the Federal Home Loan Bank of Dallas and invest the proceeds in  adjustable
rate mortgage-backed  securities to be held in an "available-for-sale"  account.
The  purpose of the  program is to  leverage a portion of the  Company's  excess
capital and to achieve a rate of return on the  difference in the rate earned on
the securities  and the cost of the advance.  The success of the program will be
dependent  upon several  factors,  including the  Company's  ability to purchase
adjustable  rate  securities  that will maintain a positive  "spread"  above the
Federal Home Loan Bank advance rates.  The Company  intends to borrow funds from
the Federal  Home Loan Bank of Dallas with a term of  approximately  thirty days
and  invest  in   mortgage-backed   securities  with  interest  rate  adjustment
frequencies that vary between six months and one year. As a result,  the success
of the program will be  dependent  upon the  difference  between very short term
federal funds type interest rates and interest rates comparable to six month and
one year U. S. Treasury rates.  In general,  the program will be more successful
as the difference  widens and less successful as the difference  narrows.  Also,
the general level of interest rates,  which in turn affect mortgage rates,  will
have an effect on the success of the program.  A period of lower  interest rates
could have the effect of increasing prepayments of the principal balances on the
securities  which  would  in  turn  affect  the  yield  on the  adjustable  rate
securities purchased in the program.

At June 30, 1997, the  approximate  yield on the portfolio was 6.63%,  while the
cost of the advance was 5.53%.

Investment securities  held-to-maturity  totaled $27.1 million at June 30, 1997,
compared to $30.1 million at September  30, 1996.  Balances in the portfolio are
determined by the Company's cash flow needs and will vary over time.
<PAGE>
During  the nine  months  ended  June 30,  1997,  cash  proceeds  from  maturing
investment  securities  were  redirected to fund loan  originations  and to fund
deposit withdrawals.  At June 30, 1997, the portfolio contained $12.0 million in
securities  with  remaining  terms until  maturity  of less than one year,  $7.5
million with  remaining  maturities of one through two years,  $5.6 million with
remaining  maturities of two through three years and $2.0 million with remaining
maturities  of three  through  four years.  At June 30,  1997,  the yield on the
portfolio was approximately 6.18%.

The Company's  mortgage-backed  securities  held-to-maturity  portfolio  totaled
$19.9 million at June 30, 1997, compared to $24.9 million at September 30, 1996.
The decrease was primarily due to principal  payments  received on the portfolio
during the year. The Company's decision to invest in mortgage-backed  securities
held-to-maturity,  as it is  with  investment  securities  held-to-maturity,  is
primarily  dependent  upon and is counter to the Company's  ability to originate
portfolio loans.  The weighted average yield on the portfolio was  approximately
7.25% at June 30, 1997.

Loans  receivable  totaled  $54.6  million at June 30, 1997, an increase of $6.7
million over the $47.9 million  reported at September  30, 1996.  The demand for
home loan financing in the Company's market area remained strong  throughout the
nine  months  ended  June 30,  1997.  For the  period,  the  Company  originated
approximately  $18.0 million in mortgage  loans and  estimates  that it captures
approximately 10% of the market in the Tyler area.

In an effort to increase  its lending  volume,  the Company  opened an addtional
loan  production  office in  Lindale,  Texas,  a rapidly  growing  area  located
approximately ten miles north of Tyler.  Lindale, a town of approximately  3,500
people, has experienced  significant growth over the past several years.  During
1995,  the latest data  available,  Home Mortgage  Disclosure Act filings showed
that there were approximately 470 loans totaling $22.9 million originated in the
census tracts  encompassing  the Lindale area. In addition,  the Target  Company
recently  made the  decision to locate a major  distribution  hub in Lindale and
anticipates employing approximately 800 to 1,000 persons when fully operational.
Management  believes that a loan  production  office located in the Lindale area
will enable the Company to gain a larger  percentage  of the market in that area
than it is currently capturing.

In addition,  the Company employed a full time loan officer in its existing full
service branch office in Whitehouse,  a community of approximately 4,000 located
seven  miles  south of Tyler.  Management  believes  that the growth of new home
construction south of Tyler warrants a full time loan officer in that area.

Foreclosed  real-estate owned totaled $31,000 at June 30, 1997, compared to none
a September 30, 1996. The balance was comprised of one  single-family  residence
located in San Antonio, Texas. The balance represents the Company's 95% interest
in the  property.  The  balance has been  adjusted to "fair  value" and is being
marketed for sale by the servicer of the loan.

Total  deposits were down $2.4 million to $89.3  million at June 30, 1997,  from
$91.7 million at September  30, 1996.  The decline was partially due to year end
tax payments made by the  Association on custodial  escrow  accounts held at the
Association  by FNMA.  The remainder of the decrease in deposits was a result of
deposit  customers   withdrawing  funds  to  seek  higher  yielding   investment
alternatives.  The Association's  average funds cost was 4.96% at June 30, 1997,
up  seventeen  basis  points from the 4.79%  reported  at  September  30,  1996.
<PAGE>
Advances from borrowers for taxes and insurance  decreased  $285,000 to $632,000
at June 30, 1997, compared to $917,000 at September 30, 1996. The decrease was a
result  of  year  end  tax  payments  made on the  Association's  mortgage  loan
servicing portfolio less additional customer escrow deposits received during the
year.

The Company  reported $2.0 million in borrowed  money from the Federal Home Loan
Bank of Dallas at June 30,  1997,  compared to none at September  30, 1996.  The
entire $2.0 million balance had a maturity date of less than thirty days and had
a cost of 5.53% at quarter end.

Stockholders'  equity totaled $20.5 million at June 30, 1997, down $459,000 from
the $20.9  million  reported at September  30, 1996.  The decrease was primarily
attributable  to a $951,000  increase in treasury stock during the year.  During
the nine months ended June 30, 1997, the Company  re-purchased  53,964 shares of
stock at an average  price of $17.63 per share.  At June 30,  1997,  the Company
owned  231,066  shares of  treasury  stock at an average  cost of  approximately
$16.22 per share.

Partially  offsetting the increase in treasury stock was a $401,000  increase in
retained  earnings  to $13.2  million at June 30,  1997,  from $12.8  million at
September  30,  1996.  The  increase in retained  earnings was the result of the
$560,000 in net income  reported for the nine months  ended June 30, 1997,  less
the $159,000 in cash dividends paid during that same period.

RESULTS OF OPERATIONS

The Company's net income is dependent  primarily upon net interest  income,  the
difference or spread  between the average yield earned on loans and  investments
and the average rate paid on deposits,  as well as the relative  amounts of such
assets and liabilities.  The Company,  like other financial  intermediaries,  is
subject  to  interest  rate  risk  to  the  degree  that  its   interest-bearing
liabilities  mature or reprice at different times, or on a different basis, than
its interest earning assets.


COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997
         AND JUNE 30, 1996

General.  Net income for the three months  ended June 30, 1997,  was $191,000 or
$.20 per share,  compared  to  $212,000  or $.20 per share for the three  months
ended June 30, 1996.  The $21,000  decline in net income was  attributable  to a
$38,000  decline in net interest  income after  provision  for loan losses and a
$12,000 decline in total  noninterest  income,  which were partially offset by a
$19,000 decrease in total  noninterest  expense and a $10,000 decrease in income
tax expense.

Net Interest  Income.  For the quarter ended June 30, 1997, net interest  income
before  provision  for loan  losses  totaled  $843,000,  down  $38,000  from the
$881,000  reported for the quarter ended June 30, 1996. On an annualized  basis,
the $843,000 in net interest income for the current year is approximately  3.09%
of average  interest  earning assets and 3.01% of average total assets.  For the
quarter  ended  June  30,  1996,  the  $882,000  in  net  interest   income  was
approximately  3.15% of average interest earning assets and approximately  3.06%
of average total assets.
<PAGE>
Total  interest  income was $2.0  million for the quarter  ended June 30,  1997,
unchanged  from the $2.0 million  reported for the same quarter in 1996. For the
three months ended June 30, 1997, total interest income was approximately  7.15%
of average  interest  earning  assets,  compared to 7.13% for the same period in
1996.  Interest  income on loans  receivable  totaled $1.1 million for the three
months ended June 30,  1997,  an increase of $145,000 or 15.7% over the $925,000
reported  for the quarter  ended June 30,  1996.  As a  percentage  of the $53.2
million  in  average  loans  receivable  balances  outstanding  for the  current
quarter, interest income from loans receivable totaled approximately 8.05% on an
annualized  basis,  compared  to 8.20% for the prior  year.  During the  current
quarter, the Company continued its fifteen year term, fixed rate lending program
at interest rates below the market but above comparable investment alternatives.
As a  result,  the  Company  has been  able to  increase  its  loans  receivable
portfolio  and  increase  the level of interest  income  from loans  receivable,
despite the decline in the overall yield of the portfolio. For the quarter ended
June 30, 1997, the Company originated $4.8 million in loans.  Approximately $1.1
million were sold into the secondary  market,  while the  remainder  were placed
into the portfolio.

Interest income from the investment  securities  held-to-maturity  and overnight
funds  portfolio  totaled  $520,000  for the three  months  ended June 30, 1997,
compared to $604,000 for the same quarter in 1996. The decrease  resulted from a
$4.5 million  decline in the average  balance  outstanding  in the  portfolio to
$34.7  million for the current  quarter from $39.2 million from the same quarter
in 1996. During the year,  maturing  securities were redirected to the Company's
lending operations or were used to fund deposit  withdrawals.  In addition,  the
average yield on the portfolio  declined to 6.08% for the quarter ended June 30,
1997,  from 6.16% for the same  quarter  in 1996,  as higher  yielding  maturing
investment  securities were reinvested at lower current rates or were redirected
to fund loans.

Interest income from the Company's mortgage-backed  securities  held-to-maturity
portfolio totaled $354,000 for the three months ended June 30, 1997, compared to
$470,000 for the three months ended June 30, 1996. Continued  prepayments on the
adjustable rate securities in the portfolio  caused the balance in the portfolio
to decline  to $19.9  million at June  30,1997,  from $26.8  million at June 30,
1996.  The  Company  redirected  the  cash  flows  from the  portfolio  into its
portfolio  lending  operations.  Despite an increase in the average yield on the
portfolio  to 6.95% for the  quarter  ended  June 30,  1997,  from 6.79% for the
quarter  ended June 30, 1996,  the  significant  decline in the average  balance
outstanding in the portfolio accounted for the decline in interest income on the
portfolio.

Interest income on mortgage-backed securities  available-for-sale totaled $9,500
for the quarter ended June 30, 1997,  as the Company  purchased  securities  for
this portfolio for the first time. The yield on the portfolio was  approximately
6.63% at June 30, 1997.  The Company  intends to make  additional  purchases for
this portfolio over the next several  quarters and anticipates  that the balance
in the portfolio will reach  approximately $20.0 million.  Securities  purchased
for the portfolio will be predominately  adjustable rate in nature and will have
both annual and semi-annual interest rate adjustment frequencies on a stratified
basis  throughout  the year.  In addition,  the Company  anticipates  purchasing
securities  for this  portfolio  that have  various  interest  rate  indices and
various  periodic  and  lifetime  caps  on  the  movement  of the  rates  on the
securities.  All of these features are an effort to obtain some measure of price
stability  within the  portfolio  and to avoid  dramatic  changes in the overall
yield on the portfolio.  The Company anticipates,  to the extent it is unable to
do so through local retail deposit  growth,  funding the security  purchases for
this portfolio  through  wholesale  methods,  primarily by borrowing through the
advance window at the Federal Home Loan Bank of Dallas.
<PAGE>
Interest paid to depositors  totaled $1.1 million for the quarter ended June 30,
1997,  unchanged  from the $1.1  million  reported for the same quarter in 1996.
Average deposit balances  outstanding declined $2.5 million to $89.5 million for
the quarter  ended June 30, 1997,  from $92.1 million for the quarter ended June
30, 1996.  Interest on deposits as a percentage of average deposit  balances was
approximately  4.94% for the quarter ended June 30, 1997,  compared to 4.85% for
the same quarter in 1996.

Provision for Loan Losses. The Company made no provision for loan losses for the
quarter  ended June 30, 1997,  or for the quarter  ended June 30,  1996.  (See -
"Asset Quality".)

Non-Interest  Income.  Non-interest income totaled $78,000 for the quarter ended
June 30, 1997, compared to $89,000 for the same quarter in 1996. The decrease in
total interest  income was due to a $4,000 decline in gains on sales of interest
earning assets,  a $4,000 decline in loan  origination and commitment fees and a
$5,000 decline in loan servicing fees.

Over the last  several  quarters,  the  Company  has  placed  more of its  loans
originated into portfolio than were sold. The result was that fewer gains on the
sale of loans were reported  under the accounting  requirements  of statement of
Financial  Accounting  Standards  ("SFAS")  No.  122,  Accounting  for  Mortgage
Servicing  Rights - An Amendment of SFAS No. 65. Also, the market for fixed rate
and term loans of the type the Company is originating and placing into portfolio
has been less receptive to origination and commitment fees.

Non-Interest Expense. Non-interest expense totaled $618,000 for the three months
ended June 30,  1997,  compared  to $636,000  for the same  period in 1996.  The
decrease was primarily due to a $40,000 decline in deposit insurance premiums as
a  result  of  the  reduction  in  SAIF  premiums  after  the  special  one-time
contribution  made by the  Company in 1996 to help  recapitalize  the SAIF.  The
reduction  in SAIF  premiums  was  partially  offset  by a $20,000  increase  in
compensation  and benefits  expense.  The  increased  compensation  and benefits
expense was directly  related to  additional  expenses  related to the Company's
Employee Stock Ownership Plan as the value of the stock scheduled to be released
to  participants  in the current  fiscal year  increased  and was  recognized as
additional  expense.   In  addition,   the  Company  increased  its  accrual  in
anticipation  of increased  funding on its defined  benefit pension plan for the
fiscal  year.   Increases  in  employee  salaries  for  the  current  year  also
contributed to the increase.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$112,000 or 37.0% of pre-tax  income for the three  months  ended June 30, 1997,
compared to $122,000 or 36.5% of pre-tax income for the same quarter in 1996.

COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1997
         AND JUNE 30, 1996

General.  For the nine months  ended June 30,  1997,  the Company  reported  net
income of $560,000 or $.57 per share, compared to $668,000 or $.60 per share for
the nine months  ended June 30, 1996.  The decrease in net income was  primarily
the result of $120,000  decrease in net interest income after provision for loan
losses and a $60,000 decrease in total noninterest  income. The decreases in net
interest income and total noninterest expense were partially offset by a $53,000
decrease  in income tax expense  and an $18,000  decrease  in total  noninterest
expense.
<PAGE>
Net  Interest  Income.  For the nine months  ended June 30,  1997,  net interest
income after  provision for loan losses  totaled $2.6 million,  compared to $2.7
million for the nine months ended June 30,  1996.  Net  interest  income,  on an
annualized basis, was approximately 3.12% of average interest earning assets and
3.02% of average total assets for the nine months ended June 30, 1997,  comapred
to 3.17% and 3.08%  respectively  for the nine months ended June 30, 1996. Total
interest  income,  on an annualized  basis, was  approximately  7.16% of average
interest  earning  assets for the nine months ended June 30,  1997,  compared to
7.17% for the same period in 1996.

Interest income on loans receivable  increased $395,000 or 14.7% to $3.1 million
for the nine months ended June 30,  1997,  from $2.7 million for the nine months
ended June 30, 1996. The increase was primarily  attributable  to a $7.2 million
increase in avereage  balances  outstanding for the nine month period ended June
30,  1997,  compared  to the same  period  in  1996.  Interest  income  on loans
receivable,  on an annualized  basis, was  approximately  8.02% of average loans
receivable  balances for the nine months ended June 30, 1997,  compared to 8.14%
for the same period in 1996.

The  decrease  in the  overall  yield  on the  loans  receivable  portfolio  was
expected.  The Company  continued its emphasis on originating  fifteen year term
fixed interest rate loans at rates approximately .125% to .25% below competition
but at levels higher than comparable investment alternatives.

Interest  income on the Company's  investment  securities  held-to-maturity  and
overnight  funds  portfolios was $1.6 million for the nine months ended June 30,
1997,  compared to $1.8  million for the same  period in 1996.  The  decrease in
income was the result of a $3.0 million decrease in average balances outstanding
from $38.7 million for the nine months ended June 30, 1996, to $35.8 million for
the same period in 1997.  Also,  the overall yield on the portfolio  declined to
approximately  6.08%  for the  current  year from  6.32%  for the prior  year as
maturing  investment  securities were reinvested at lower interest rates or were
redirected to the Company's lending operations.

Interest  income on  mortgage-backed  securities  held-to-maturity  totaled $1.2
million for the nine months  ended June 30,  1997,  compared to $1.6 million for
the nine months ended June 30, 1996.  The decrease in earnings was primarily the
result of a decline in the average  balances  outstanding  in the  portfolio  as
prepayments continued on the underlying adjustable rate loans in the securities.
A period of lower long term  interest  rates could have the effect of continuing
or increasing the prepayments on the portfolio.  The result would be a continued
decline in the  income  from the  portfolio  and  possibly  a decrease  in total
interest  income as the cash flow is reinvested at lower interest  rates.  On an
annualized basis,  interest income on the portfolio was  approximately  6.92% of
average balances  outstanding for the nine months enede June 30, 1997,  compared
to 6.86% for the prior year.

Interest income on the mortgage-backed securities  available-for-sale  portfolio
totaled $9,500 for the nine months ended June 30, 1997, compared to none for the
same period in 1996.  (See - Comparison  of The Three Months Ended June 1997 and
1996.)

Interest  expense was $3.3  million for the nine months  ended June 30,  1997, a
decrease of $76,000  from the $3.4  million  reported  for the nine months ended
June 30, 1996. A $1.6 million decline in average balances outstanding  accounted
for the decline in interest  expense.  For the nine months  ended June 30, 1997,
average  deposit and borrowed  funds  balances were $90.9  million,  compared to
$92.5  million for the nine  months  ended June 30,  1996.  As a  percentage  of
average balances  outstanding,  interest expense was approximately 4.87% for the
nine months ended June 30, 1997, compared to 4.89% for the same period in 1996.
<PAGE>
Non-Interest Income.  Non-interest income was $216,000 for the nine months ended
June 30, 1997, compared to $275,000 for the nine months ended June 30, 1996. The
decrease in noninterest  income, as was the case for the three months ended June
30,  1997,  was  directly  attributable  to the  Company's  program  designed to
originate  fifteen year fixed term and rate portfolio  loans.  Gains on sales of
interest earning assets were down $30,000,  loan origination and commitment fees
were down $14,000 and loan servicing fees were down $18,000.

Non-Interest  Expense.  Non-interest  expense  totaled $1.9 million for the nine
months ended June 30,  1997,  unchanged  from the $1.9 million  reported for the
nine months ended June 30, 1996.  Noninterest  expense was approximately,  on an
annualized  basis,  2.22% and 2.19% of average  total assets for the nine months
ended June 30, 1997, and June 30, 1996, respectively.

Provision For Income Taxes.  The Company reported federal income tax expenses of
$330,000 or 37.1% and  $383,000  or 36.4% of pre-tax  income for the nine months
ended June 30, 1997, and June 30, 1996, respectively.

ASSET QUALITY

At June 30, 1997, the Company's  non-performing  assets totaled $193,000 or .17%
of total  assets,  compared to $450,000 or .39% of total assets at September 30,
1996.  The decrease was primarily the result of the  foreclosure  and subsequent
sale of four single family  residences,  all of which secured one loan. The loan
was  considered  non-performing  at  September  30,  1996,  and had a balance of
approximately $197,000 at that time. All four of the properties were sold during
the nine month period ended June 30, 1997, and a loss of  approximately  $19,000
was charged to the Company's  general loss reserve.  In addition,  a loan with a
balance of $54,000 and secured by one single family  residence,  was  foreclosed
and sold during the period.

At June 30,  1997,  non-performing  assets was  comprised of fifteen (15) loans,
totaling approximately $162,000 and the largest of which was $48,000, secured by
single  family  dwellings  and  $31,000  of  foreclosed  real  estate  which was
comprised of one single family dwelling  located in Tyler,  Texas.  The property
was being marketed for sale.

The $162,000 in  non-performing  loans at June 30,  1997,  equaled .30% of loans
receivable,  compared to $450,000 or .94% of loans  receivable  at September 30,
1996.

Classified  assets  totaled  $715,000 or .63% of total  assets at June 30, 1997,
compared to $999,000 or .87% of total assets at September 30, 1996.

Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent.  Also, assets guaranteed by
government agencies such as the Veterans  Administration and the Federal Housing
Administration  are not  included  in  classified  assets  but are  included  in
non-performing assets. All classified assets at June 30, 1997, were deemed to be
"substandard". No assets were classified "doubtful" or "loss" as of such date.

The  Company's  allowance  for loan losses  totaled  $274,0000 at June 30, 1997,
compared to $289,000 at September  30, 1996.  The decrease in the  allowance was
attributable  to the  approximate  $19,000  charged  against  the reserve on the
aforementioned  foreclosed  real  estate less the $5,000  addition  added to the
reserve and charged  against  provision for loan losses.  The allowance for loan
losses  as a  percentage  of loans  receivable  equaled  .50% at June 30,  1997,
compared to .60% at September 30, 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

The  Company's   principal   sources  of  funds  are  deposits  from  customers,
amortization  and  prepayment  of  loan  principal  (including   mortgage-backed
securities), maturities of securities, sales of loans and operations.

Current  Office of Thrift  Supervision  regulations  require the  Association to
maintain cash and eligible  investments  (liquid assets),  in an amount equal to
5.0% of net withdrawable  savings  deposits and borrowings  payable on demand or
within five years or less during the  preceding  month.  Liquid  assets  include
cash,  certain time  deposits,  U. S  Government  and agency  securities  having
maturities  of less than five years.  The  Association  maintains a liquid asset
ratio above the minimum required level of the Office of Thrift  Supervision.  At
June 30, 1997, the Association's liquid asset ratio equaled 43.0%.

The  Association  uses its liquidity and capital  resources  principally to meet
ongoing   commitments  to  fund  maturing   certificates  of  deposit  and  loan
commitments,  maintain liquidity and pay operating  expenses.  At June 30, 1997,
the Association had outstanding  commitments to extend credit on $4.8 million of
real estate loans.

Management  believes that present levels of liquid assets are sufficient to meet
anticipated future loan commitments as well as deposit withdrawal demands.

Total stockholders' equity equaled $20.5 million at June 30, 1997, a decrease of
$459,000 from the $20.9 million reported at September 30, 1996. The decrease was
primarily the result of a $951,000 increase in treasury stock to $3.7 million at
June 30, 1997, from $2.8 million at September 30, 1996. The increase in treasury
stock resulted from the Company's  decision to repurchase 53,964 shares of stock
at an average price of $17.63 per share.  The decrease in  stockholders'  equity
resulting from the treasury  stock  purchase was partially  offset by a $401,000
increase in retained  earnings.  Retained earnings increased due to the $560,000
net income  reported for the nine months ended June 30, 1997,  less  $159,000 in
cash dividends paid during the year.

As of June 30, 1997,  the Company's  reported book value per share,  using total
stockholders'  equity of $20.5 million (net of the cost of unallocated  ESOP and
RRP shares) and 1,025,321  outstanding  shares of common stock (the total issued
shares including unallocated ESOP and RRP shares, less treasury shares), equaled
$19.97 per share.

Subsequent  to the  quarter  ended June 30,  1997,  the  Company  announced  its
intention  to pay a cash  dividend  of $.05 per share on  August  27,  1997,  to
stockholders of record at August 13, 1997.

Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA"),  Congress  imposed  a three  part  capital  requirement  for  thrift
institutions.  At June 30, 1997, the  Association's  actual and required capital
amounts under each of the three requirements were as follows:

- Tangible  Capital  (stockholders'  equity) was $18.4 million or 16.3% of total
assets, exceeding the minimum requirement of 1.5% by $16.7 million.

- Core  Capital  (Tangible  capital plus  certain  intangible  assets) was $18.4
million or 16.3% of total assets,  exceeding the minimum  requirement of 3.0% by
$15.0 million.
<PAGE>
- Risk-based  Capital (Core  capital plus general loan and valuation  allowances
less an adjustment for  capitalized  mortgage  servicing  rights)  equaled $18.6
million of 41.0% of risk weighted assets,  exceeding the minimum  requirement of
8.0% of risk weighted assets by $15.0 million.

At  June  30,  1997,  the  Association  was  considered  a  "well   capitalized"
institution  under the prompt  corrective  action  requirements  of the  Federal
Deposit Insurance Corporation Improvement Act of 1991.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1997



                           PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

     There  are no  material  legal  proceedings  to which  the  Company  or the
     Association is a party or of which any of their  property is subject.  From
     time-to-time,  the  Association  is a party to  various  legal  proceedings
     incident to the conduct of its business.

Item 2.  Changes In Securities

     None

Item 3.  Defaults Upon Senior Securities

     None

Item 4.  Submissions Of Matters To A Vote Of Security Holders

     None.

Item 5.  Other Information.

     None

Item 6.  Exhibits and Reports on Form 8-K

     (a)  The following exhibits are filed herewith:

         Exhibit 11.0 - Computation of Earnings Per Share

         Exhibit 27.0 - Financial Data Schedule

     (b)  Reports on Form 8-K

         During the quarter  ended June 30, 1997,  the Company filed a report on
         Form 8-K on April 23, 1997,  to report the issuance of a press  release
         dated April 17, 1997,  reporting  earnings for the quarter  ended March
         31, 1997,  announcing a stock  repurchase  program,  and announcing the
         declaration of a cash dividend for the quarter ended March 31, 1997.

         During the quarter  ended June 30, 1997,  the Company filed a report on
         Form 8-K on May 15,  1997,  to report the  issuance of a press  release
         dated May 14, 1997,  announcing the  completion of the Company's  stock
         repurchase program.
<PAGE>
                                   SIGNATURES

Pursuant to the  requirement  of the  Securities  and Exchange Act of 1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                    East Texas Financial Services, Inc.


Date:  August 4, 1997               /s/ Gerald W. Free
                                    ------------------
                                    Vice Chairman, President and CEO
                                    (Principal Executive Officer)


Date:  August 4, 1997               /s/  Derrell W. Chapman
                                    -----------------------
                                    Vice President/COO/CFO
                                    (Principal Financial and Accounting Officer)