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 December 31, 1998

                                       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 December 31, 1998, was 1,464,056.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1998



                                      INDEX

                                                           

Part I - Financial Information

     Item 1.  Financial Statements

         Consolidated  Statements  of  Financial  Condition,  December  31, 1998
         (Unaudited) and September 30, 1998

         Consolidated  Statements  of Income,  (Unaudited)  three  months  ended
         December 31, 1998, and December 31, 1997

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         three months ended December 31, 1998

         Consolidated Statements of Cash Flows, (Unaudited) three months ended
         December 31, 1998, and December 31, 1997 
               

         Notes to (Unaudited)  Consolidated  Financial Statements,  December 31,
         1998..............
                   

         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

                                DECEMBER 31, 1998



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  acquire  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,  1998,  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


                  ASSETS                                           December 31, 1998          September 30, 1998           
                                                                   -----------------          ------------------           
                                                                       (Unaudited)                                             
<S>                                                                  <C>                        <C>                        
Cash and due from banks ........................................     $     493,628              $     592,363              
Interest-bearing deposits with banks ...........................         8,688,440                  1,104,695              
Interest-earning time deposits with financial institutions .....         1,959,617                  1,959,617              
Federal funds sold .............................................                 0                    129,187              
Mortgage-backed securities available-for-sale ..................        19,380,931                 12,810,165              
Investment securities held-to-maturity (estimated market                                                                   
     value of $24,770,764 at December 31, 1998, and                                                                        
     $30,115,954 at September 30, 1998) ........................        24,528,748                 29,766,844              
Mortgage-backed securities held-to-maturity (estimated                                                                     
     market value of $9,844,468 at December 31, 1998                                                                       
     and $11,088,555 at September 30, 1998) ....................         9,472,284                 10,940,500              
Loans receivable, net of allowance for credit losses of                                                                    
     $233,180 at December 31, 1998 and at September 30, 1998 ...        60,706,438                 61,119,047              
Accrued interest receivable ....................................           939,058                    978,378              
Federal Home Loan Bank stock, at cost ..........................         1,144,200                    789,100              
Premises and equipment .........................................         2,425,879                  2,273,067              
Foreclosed real estate, net of allowance of $-0- ...............             2,068                     34,500              
Mortgage servicing rights ......................................           249,731                    216,879              
Other assets ...................................................           574,897                  1,303,120              
                                                                     -------------              -------------              
                                                                                                                           
     Total Assets ..............................................     $ 130,565,919              $ 124,017,462              
                                                                     =============              =============              
                                                                                                                           
                                                                                                                           
     LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                  
                                                                                                                           
Liabilities:                                                                                                               
     Demand deposits ...........................................     $   3,210,827              $   1,528,374              
     Savings and NOW deposits ..................................        10,909,801                 10,504,973              
     Other time deposits .......................................        73,638,912                 74,610,310              
                                                                     -------------              -------------              
           Total deposits ......................................        87,759,540                 86,643,657              
                                                                                                                           
     FHLB advances .............................................        21,799,354                 14,945,852              
     Advances from borrowers for taxes and insurance ...........            59,757                    844,188              
     Federal income taxes                                                                                                  
           Current .............................................            84,550                        -0-              
           Deferred ............................................            49,056                     31,618              
     Accrued expenses and other liabilities ....................           297,980                  1,168,453              
                                                                     -------------              -------------              
           Total liabilities ...................................       110,050,237                103,633,768              
                                                                     -------------              -------------              
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                       EAST TEXAS FINANCIAL SERVICES, INC.
                                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                   (continued)


                                                                   December 31, 1998          September 30, 1998           
                                                                   -----------------          ------------------           
                                                                       (Unaudited)                                             
<S>                                                                  <C>                        <C>           
Stockholders' equity:                                                                                         
     Preferred stock, $0.01 par value, 500,000                                                                
        shares authorized, none outstanding                                                                   
     Common stock, $0.01 par value, 5,500,000 shares authorized,                                              
        1,884,492 shares issued and 1,464,056 outstanding ......            18,845                     18,845 
     Additional paid-in-capital ................................        12,319,624                 12,319,624 
     Deferred compensation - RRP shares ........................          (184,271)                  (213,366)
     Unearned employee stock ownership plan shares .............          (543,564)                  (543,564)
     Unrealized gain/(loss) available-for-sale securities (net)            (64,648)                   (64,974)
     Retained earnings (substantially restricted) ..............        13,763,959                 13,661,392 
     Treasury stock, 420,436 shares at cost ....................        (4,794,263)                (4,794,263)
                                                                     -------------              ------------- 
                                                                                                              
           Total stockholder's equity ..........................        20,515,682                 20,383,694 
                                                                     -------------              ------------- 
                                                                                                              
           Total liabilities and stockholders' equity ..........     $ 130,565,919              $ 124,017,462 
                                                                     =============              ============= 
                                                                                              
</TABLE>



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


                                                                        Three Months Ended December 31,
                                                                            (unaudited)
                                                                                1998           1997
                                                                            -----------    ---------- 
<S>                                                                         <C>            <C>         
INTEREST INCOME
     Loans receivable:
         First mortgage loans .........................................     $1,122,187     $1,134,833
         Consumer and other loans .....................................         76,009         29,305
     Securities available-for-sale:
         Investment securities ........................................         14,535         15,209
         Mortgage-backed securities ...................................        264,320         64,390
     Securities held to maturity
         Investment securities ........................................        467,306        393,909
         Mortgage-backed securities ...................................        178,700        314,702
         Deposits with banks ..........................................         33,083         76,962
                                                                            ----------     ----------

         Total interest income ........................................      2,156,140      2,029,310
                                                                            ----------     ----------

INTEREST EXPENSE
     Deposits .........................................................      1,083,531      1,123,670
     FHLB advances ....................................................        251,218         62,173
                                                                            ----------     ----------

         Total interest expense .......................................      1,334,749      1,185,843
                                                                            ----------     ----------

         Net interest income before provision
            for loan losses ...........................................        821,391        843,467

     Provision for loan losses ........................................              0              0
                                                                            ----------     ----------

         Net interest income after provision
            for loan losses ...........................................        821,391        843,467
                                                                            ----------     ----------

NONINTEREST INCOME
     Gain (loss) on sales of interest-earnings assets .................         76,476         21,437
     Loan origination and commitment fees .............................         23,608         22,963
     Loan servicing fees ..............................................         10,783         22,303
     Gain on foreclosed real estate ...................................          2,370              0
     Other ............................................................         54,462         10,712
                                                                            ----------     ----------

         Total noninterest income .....................................        167,699         77,415
                                                                            ----------     ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                  EAST TEXAS FINANCIAL SERVICES, INC.
                                    CONSOLIDATED STATEMENTS OF INCOME
                                              (continued)




<S>                                                                         <C>            <C>       
NONINTEREST EXPENSE
     Compensation and benefits ........................................        510,075        492,110
     Occupancy and equipment ..........................................         72,605         48,246
     SAIF deposit insurance premium ...................................         12,984         14,147
     Loss on foreclosed real estate ...................................          2,069              0
     Other ............................................................        116,536        139,666
                                                                            ----------     ----------

         Total noninterest expense ....................................        714,269        694,169
                                                                            ----------     ----------

Income (loss) before provision for income taxes .......................        274,821        226,713

Income tax expense (benefit) ..........................................         99,050         82,409
                                                                            ----------     ----------

NET INCOME (LOSS) .....................................................     $  175,771     $  144,304
                                                                            ==========     ==========


Earnings per common share and earnings per
     common share - assuming dilution .................................     $      .13     $      .10
</TABLE>

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


THREE MONTHS ENDED
    December 31, 1998

                                       Common Stock          Unearned     Unallocated      Unrealized
                                      and Additional           RRP           ESOP         Gain(loss) on     Retained     Treasury   
                                      Paid in Capital        Shares         Shares       AFS Securities     Earnings      Stock 
                                       -------------     ------------    ----------        -----------    -----------  -----------  

<S>                                    <C>               <C>             <C>               <C>            <C>          <C>          
Balance September 30, 1998             $  12,338,469     $   (213,366)   $ (543,564)       $   (64,974)   $13,661,392  $(4,794,263) 
                                                                                                                                    
Comprehensive income:                                                                                                               
     Net income                                                                                               175,771               
     Unrealized holding gains                                                                      326                              
                                                                                                                                    
Comprehensive income                                                                                                                
                                                                                                                                    
                                                                                                                                    
Deferred compensation                                                                                                               
   amortization                                                29,095                                                               
                                                                                                                                    
Purchase of treasury stock                                                                                                          
   at cost                                                                                                                          
                                                                                                                                    
Payment of cash dividends                                                                                     (71,968)              
Accrued dividends - RRP stock                                                                                  (1,236)              
(1,236)                                                                                                                             
                                                                                                                                    
Balance December 31, 1998              $  12,338,469      $  (184,271)   $ (543,564)       $   (64,648)   $13,763,959  $(4,794,263) 
                                       =============      ============   ===========       ============   ===========  ============ 
                                                                                             
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                              EAST TEXAS FINANCIAL SERVICES, INC.
                                                   CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                          (UNAUDITED)


THREE MONTHS ENDED
    December 31, 1998
    (continued)


                                                                     Total             
                                        Comprehensive            Stockholders'         
                                            Income                   Equity            
                                        -------------           ----------------       
<S>                                     <C>                     <C>                      
Balance September 30, 1998              $                       $     20,383,694       
                                                                                       
Comprehensive income:                                                                  
     Net income                               175,771                    175,771       
     Unrealized holding gains                    326                         326       
                                        -------------                                  
Comprehensive income                    $     176,097                                  
                                        =============                                  
                                                                                       
Deferred compensation                                                                  
   amortization                                                           29,095       
                                                                                       
Purchase of treasury stock                                                             
   at cost                                                                             
                                                                                       
Payment of cash dividends                                                (71,968)      
Accrued dividends - RRP stock                                             (1,236) 
                                                                                       
Balance December 31, 1998                                       $     20,515,682       
                                                                ================       
                                                               

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


                                                                    For the Three Months Ended
                                                                            December 31,
                                                                       1998             1997 
                                                                   -----------      -----------
<S>                                                                <C>              <C>        
Cash flows from operating activities:
     Net income ..............................................     $   175,771      $   144,304
     Adjustments to reconcile net income to net cash
        provided by operating activities:
         Amortization of deferred loan origination fees ......          (1,830)          (1,483)
         Amortization of premiums and discounts on investment
            securities, mortgage-backed securities, and loans           39,270           29,964
         Amortization of deferred compensation ...............          29,095           29,096
         Compensation charge related to release of ESOP shares          14,590           31,216
         Depreciation ........................................          23,095           25,413
         Deferred income taxes ...............................          16,946            3,956
         Stock dividends on FHLB stock .......................         (14,500)         (15,200)
         Origination of mortgage servicing rights ............         (57,636)         (16,967)
         Amortization of mortgage servicing rights ...........          24,784            8,686
         Net (gain) loss on sale of:
              Securities held to maturity ....................               0                0
              Foreclosed real estate .........................           2,069                0
              Fixed assets ...................................               0                0
              Net loss on disposal of fixed assets ...........               0            3,889
              Other assets ...................................               0                0
              Loans ..........................................         (18,841)         (21,438)
              Loans held for sale ............................               0                0
         Proceeds from loan sales ............................       4,443,332        1,596,651
         Originations of loans held for sale .................               0                0
         Proceeds from sale of fixed assets ..................               0                0
         (Increase) decrease in:
              Accrued interest receivable ....................          39,320          (37,115)
              Other assets ...................................         728,223         (109,418)
              Accrued loan loss ..............................               0                0
         Increase (decrease) in:
              Federal income tax payable .....................          84,550                0
              Accrued expenses and other liabilities .........        (885,063)      (1,056,249)
         Capitalized interest on time deposits ...............               0                0
                                                                   -----------      -----------

Net cash provided (used) by operating activities .............       4,643,175          615,305
                                                                   -----------      -----------

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

                                                                               For the Three Months Ended
                                                                                        December 31,
                                                                                  1998               1997
                                                                             ------------      ------------
<S>                                                                          <C>               <C>         
Cash flows from investing activities
     Purchases of interest earning time deposits .......................     $          0      $          0
     Net decrease (increase) in fed funds sold .........................          129,187        (1,917,569)
     Purchases of obligations - U.S. Govt. and agencies
        held to maturity ...............................................                0        (6,533,031)
     Proceeds from maturity of time deposits ...........................                0            98,000
     Proceeds from sale of securities held to maturity .................                0                 0
     Proceeds from maturities of obligations - U.S. Govt ...............
        and agencies held to maturity ..................................        5,225,000         3,500,000
     Proceeds from sale of obligations of U.S. Govt ....................
        and agencies held to maturity ..................................                0                 0
     Purchases of FHLB stock ...........................................         (340,600)                0
     Purchases of mortgage-backed securities available-for-sale ........       (8,005,395)       (2,029,452)
     Purchases of mortgage-backed securities held to maturity ..........                0                 0
     Principal payments on mortgage-backed securities available for sale        1,414,236           312,146
     Principal payments on mortgage-backed securities held to maturity .        1,463,129         1,847,047
     Net originations and principal collections on loans ...............       (4,013,234)       (4,762,692)
     Capitalized acquisition cost related to foreclosed real estate ....                0                 0
     Proceeds from sale of foreclosed real estate ......................           32,432                 0
     Proceeds from sale of fixed assets ................................                0                 0
     Expenditures for premises and equipment ...........................         (175,906)             (352)
                                                                             ------------      ------------

Net cash provided (used) by investing activities .......................       (4,271,151)       (9,485,903)
                                                                             ------------      ------------


Cash flows from financing activities: Net increase (decrease) in:
         Non-interest bearing deposits, savings, NOW accounts ..........        2,087,281         2,306,510
         Time deposits .................................................         (971,398)          198,937
         FHLB Advances .................................................       53,762,000        15,738,500
         Repayment of FHLB Advances ....................................      (46,908,498)      (12,411,500)
         Advances from borrowers for taxes and insurance ...............         (784,431)         (709,807)
     Dividends paid to stockholders ....................................          (71,968)          (51,318)
     Purchase of treasury stock ........................................                0                 0
     Proceeds from sale of common stock ................................                0                 0
                                                                             ------------      ------------

Net cash provided (used) by financing activities .......................        7,112,986         5,071,322
                                                                             ------------      ------------

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                        EAST TEXAS FINANCIAL SERVICES, INC.
                                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                                    (UNAUDITED)
                                                    (continued)

                                                                               For the Three Months Ended
                                                                                        December 31,
                                                                                  1998               1997
                                                                             ------------      ------------
<S>                                                                           <C>              <C>        
Net increase (decrease) in cash and cash equivalents ...................        7,485,010        (3,799,276)

Cash and cash equivalents at beginning of the period ...................        1,697,058         6,931,133
                                                                             ------------      ------------

Cash and cash equivalents at end of the period .........................     $  9,182,068      $  3,131,857
                                                                             ============      ============

Supplemental disclosure:
     Cash paid for:
         Interest on deposits ..........................................     $    555,881      $    561,505
         Income taxes ..................................................     $     60,707      $          0

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

     Loans charged off to loan loss reserves ...........................     $          0      $          0

     Recoveries credited to loan loss reserves .........................     $          0      $          0


</TABLE>

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

             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


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  statements and notes thereto included in the
Company's  Annual  Report on Form 10-KSB for the year ended  September 30, 1998.
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

Earnings per common share for the three months ended December 31, 1998 and 1997,
has been computed based on net income divided by the weighted  average number of
common shares outstanding during the period. For the three months ended December
31, 1998 and 1997,  the weighted  average number of shares  outstanding  totaled
1,382,520  and  1,441,956  (as  adjusted  for the March 1998 three for two stock
split in the form of a 50% stock dividend), shares respectively

Earnings  per  common  share - assuming  dilution,  for the three  months  ended
December 31, 1998 and 1997, has been computed based on net income divided by the
weighted average number of common shares outstanding.  In addition,  it includes
the effects of all dilutive potential common shares that were outstanding during
the period.  For the three months ended December 31, 1998 and 1997, the weighted
average number of shares  outstanding for earnings per share - assuming dilution
totaled  1,394,533  and 1,490,741  (as adjusted for the above  referenced  stock
split), shares respectively.

For both  earnings per share and  earnings per common share - assuming  dilution
and as  prescribed  by the American  Institute of Certified  Public  Accountants
Statement of Position  93-6 ("SOP 93-6")  Employer's  Accounting  for  Employees
Stock Ownership Plans,  the weighted  average number of shares  outstanding does
not include unallocated Employee Stock Ownership Plan ("ESOP") shares.

See Part II, Item 6 - Exhibits for a detailed  presentation  of the earnings per
share calculation for the three-month periods ended December 31, 1998 and 1997.
<PAGE>
NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
                                                      Gross         Gross        Estimated
                                    Amortized      Unrealized     Unrealized       Market
                                        Cost          Gains         Losses          Value
                                    -----------     --------     -----------     ------------ 
Debt securities:
<S>                                 <C>             <C>          <C>             <C>        
      U. S. Treasury ..........     $ 2,503,043     $ 19,947     $         0     $ 2,522,990


      U. S. government agency
                                     22,025,705      222,069               0      22,247,774
                                    -----------     --------     -----------     -----------

           Total debtsecurities     $24,528,748     $242,016     $         0     $24,770,764
                                    -----------     --------     -----------     -----------
</TABLE>

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity  as of December 31,  1998,  by  contractual  maturity are shown
below:
<TABLE>
<CAPTION>
                                                                      Estimated
                                                      Amortized        Market
                                                        Cost             Value
                                                    -----------      ----------- 
<S>                                                 <C>              <C>        
Due in one year or less ......................      $ 8,029,826      $ 8,083,132


Due after one year through two years..........       3,993,250         4,072,488
       
Due after two years through three years ......                0                0

Due after three years through five years
                                                     12,505,672       12,615,144
                                                    -----------      -----------

        Total debt securities ................      $24,528,748      $24,770,764
                                                    -----------      -----------
</TABLE>

As of December 31, 1998, each of the securities due after three and through five
years had call options  exercisable at the  discretion of the issuer.  Such call
dates varied between February 1999 and June 2001.

As of December 31, 1998, the weighted average yield on the Company's  investment
security held-to-maturity  portfolio was approximately 6.01% 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 5.68%.
<PAGE>
The carrying values and estimated market values of  mortgage-backed  and related
securities available-for-sale as of December 31, 1998 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 ....        $ 1,478,332        $      0        $ 14,189         $    (20,293)        $ 1,443,850

Adjustable Rate         17,753,716         261,024               0              (77,659)         17,937,081
                       -----------        --------        --------         ------------         -----------

                       $19,232,048        $261,024        $ 14,189         $    (97,952)        $19,380,931
                       -----------        --------        --------         ------------         -----------

</TABLE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity  as of December 31, 1998 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 ....        $1,414,338        $     0        $      946        $1,413,392        $1,584,802

Adjustable Rate         8,000,142         67,944             9,194         8,058,892         8,259,666
                       ----------        -------        ----------        ----------        ----------

                       $9,414,480        $67,944        $   10,140        $9,472,284        $9,844,468
                       ----------        -------        ----------        ----------        ----------
</TABLE>

The overall yield on the Company's  mortgage-backed  securities  portfolio as of
December 31, 1998 was approximately 6.36%.

NOTE 4 - CURRENT ACCOUNTING ISSUES

SFAS No. 130 In June of 1997, the Financial  Accounting  Standards  Board issued
Statement  of  Financial   Accounting  Standards  (SFAS  )  No.  130,  Reporting
Comprehensive  Income.  SFAS No. 130  establishes  standards  for  reporting and
displaying  comprehensive income and its components in general purpose financial
statements.  Comprehensive  income  includes net income and several  other items
that  current  accounting  standards  require  to be  recognized  outside of net
income.

SFAS No. 130 requires companies to display comprehensive income in its financial
statements,  to classify items of comprehensive  income by their nature in their
financial statements and to display accumulated balances of comprehensive income
in stockholders'  equity  separately from retained earnings and addition paid-in
capital.

The Statement is effective for fiscal years  beginning  after December 31, 1997.
The Company adopted the Statement as required.
<PAGE>
SFAS No. 131 In June of 1997, the Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards  (SFAS) No. 131,  Disclosure About
Segments of and  Enterprise  and Related  Information.  The  Statement  requires
entities  to report  certain  information  about their  operating  segments in a
complete  set of  financial  statements.  It  requires  them to  report  certain
enterprise-wide  information  about their  products and services,  activities in
different  geographic  regions  and their  reliance on major  customers,  and to
disclose certain segment information in their interim financial statements.

The Statement is effective for fiscal years  beginning  after December 15, 1997.
The Company  has  determined  that it has no  reporting  obligations  under this
statement. The Company adopted the Statement as required.

SFAS No. 132 In February  of 1998,  the  Financial  Accounting  Standards  Board
issued  Statement of Financial  Accounting  Standard (SFAS) No. 132,  Employers'
Disclosures  about  Pensions  and Other  Postretirement  Benefits.  SFAS No. 132
revises current  disclosures  for employers'  disclosures for pensions and other
postretirement  benefit plans. It standardizes  the disclosure  requirements for
these plans to the extent possible, and it requires additional information about
changes in the  benefit  obligations  and the fair value of plan assets that are
expected  to  enhance  financial  analysis.  It does not change  measurement  or
recognition standards for these plans.

SFAS No. 132 is effective for fiscal years  beginning  after  December 15, 1997.
The Company  anticipates  changing the  disclosure  requirements  of its defined
benefit  pension  plan as a result of the  statement.  The  Company has no other
postretirement benefit plans.

SFAS No. 133 In June of 1998, the Financial  Accounting  Standards  Board issued
Statement of  Financial  Accounting  Standards  (SFAS) No. 133,  Accounting  for
Derivative  Instruments  and  Hedging  Activities.   SFAS  No.  133  establishes
accounting  and reporting  standards  for  derivative  instruments  and requires
recognition of all  derivatives  in the statement of financial  position at fair
value.  The Company  currently does not invest in any derivative  instruments or
hedging activities as defined in this Statement.

The Statement is effective for fiscal years  beginning  after June 15, 1999. The
Company adopted the Statement as required.

NOTE 5 - STOCK OPTION AND INCENTIVE PLAN

The 1995 Stock Option and Incentive Plan (the "Stock Option Plan")  provides for
awards in the form of stock options,  stock appreciation  rights,  limited stock
appreciation rights, and restricted stock.

Options to  purchase  shares of common  stock of the  Company  may be granted to
selected directors,  officers and key employees.  The number of shares of common
stock  reserved for issuance under the stock option plan was equal to 121,519 or
10% of the total number of common shares issued pursuant to the conversion.  The
option  exercise  price  cannot  be less  than  the  fair  market  value  of the
underlying  common  stock as of the date of the option  grant,  and the  maximum
option  term  cannot  exceed  ten years.  Awards  vest at a rate of 20% per year
beginning at the date of the grant.  The Company plans to use treasury stock for
the  exercise  of  options.  The  following  is a summary  of changes in options
outstanding:
<PAGE>
Options outstanding
     Balance, September 30, 1995                                103,411
           Granted                                                  -0-
           Exercised at $14.125 per share                       (2,090)
           Forfeited and expired                                    -0-
     Balance, September 30, 1996                                101,321
           Granted                                                  -0-
           Exercised at $14.125 per share                       (1,056)
           Forfeited and expired                                    -0-
      Balance, September 30, 1997                               100,276
                                                                =======

On March 25, 1998, the Company  completed a 3 for 2 stock split in the form of a
50%  dividend.  As a result of the  split,  the number of  outstanding  options,
option price,  options  exercisable at year end, and shares available for future
grants were adjusted as follows:

Options outstanding
     Balance, September 30, 1997                                        150,411
         Granted                                                            -0-
         Exercised at $9.42 per share                                   (1,568)
         Forfeited and expired                                              -0-
     Balance, September 30, 1998                                        148,843
                                                                        =======

Options exercisable at December 31, 1998 under stock option plan         86,807
                                                                       ========

Shares available for future grants                                       27,162
                                                                       ========

During the three  months ended  December 31, 1998,  there were no changes to the
options outstanding.

NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK

The  outstanding  advances from the FHLB  consisted of the following at December
31, 1998:

                  Maturity                          1998                  Rate
                  --------                          ----                  ----

                  01/04/1999                $    20,025,000               4.85%
                  12/31/2004                $       258,643               6.09%
                  01/03/2005                $       124,842               6.03%
                  01/01/2013                $       480,749               6.09%
                  01/01/2013                $       456,771               6.13%
                  02/01/2013                $       453,349               5.91%

Pursuant  to  collateral  agreements  with the  Federal  Home Loan Bank  (FHLB),
advances  are  secured by all stock and deposit  accounts in the FHLB,  mortgage
collateral, securities collateral, and other collateral.

NOTE 7 - COMMON STOCK SPLIT

On March 25, 1998, the Company  completed a 3 for 2 stock split in the form of a
50% stock dividend.  The effect of the split is presented  retroactively  within
stockholder's equity by transferring the par value of the additional shares from
retained  earnings  to  additional  paid in  capital.  All share per share data,
including  stock option plan  information,  has been  retroactively  restated to
reflect the stock split.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1998


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 Company also  borrows  funds from the Federal Home Loan Bank of
Dallas to fund loans and to purchase  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.

To better serve its existing customers and to attract new customers, the Company
will be  adding  additional  lines  of  business  in 1999.  The need for  higher
yielding assets with less likelihood to refinance, less reliance on certificates
of deposits as the Company's  primary source of funds, and a greater reliance on
income from sources other than net interest income are the principal  objectives
of the  decision  to add new lines of  business.  While  existing  products  and
services  such as  single-family  mortgage  loans  and home  equity  loans  will
continue  to be  offered,  additional  products  and  services  will  be  added.
Additional  products and services to be offered include  commercial and consumer
loans,  debit and credit cards,  an ATM machine and cards,  safe deposit  boxes,
investment brokerage services and a full range of checking and deposit accounts.

In  conjunction  with  the  added  business  lines,  the  Company  has  received
regulatory  approval  to open a full  service  branch  office  in  South  Tyler.
Staffing  has  been  completed,  and the  premises  and  equipment  is  close to
completion.  The Company  anticipates  the full service branch office to be open
for  business in the early part of 1999,  and the Company  will offer a complete
line of  banking  services  at the new  location  as well as its two other  full
service offices.
<PAGE>
The start-up costs  associated  with the expansion  will be significant  and the
Company does not anticipate the new branch office to be profitable  immediately.
However,  management  believes  that the  long-term  future  of the  Company  is
dependent upon the success of this change.

FINANCIAL CONDITION

Total assets were $130.6  million at December 31, 1998, a $6.6 million  increase
from the $124.0  million  reported at September  30, 1998,  the  Company's  most
recent fiscal year end. The increase in total assets was primarily the result of
a $6.6 million increase in mortgage-backed  securities  available-for-sale and a
$7.6 million  increase in  interest-bearing  deposits with banks.  The increases
were partially offset by a $5.2 million  decrease in investment  securities held
to maturity and a $1.4 million  decrease in  mortgage-backed  securities held to
maturity.  The  increase in  interest-bearing  deposits was a result of proceeds
from maturing investment securities being temporarily placed in interest-bearing
deposits.  Subsequent  to December  31,  1998,  the Company  invested all of its
excess overnight deposits into longer term and higher yielding securities.

At December 31, 1998, loans receivable totaled $60.7 million,  compared to $61.1
million at September 30, 1998.  The decrease in loans  receivable was the result
of the  Company's  election  to sell 15 year  fixed  rate  mortgage  loans  with
interest  rates below 7.00% in the secondary  market  rather than  portfolio the
loans.  Although  the  Company has  continued  its policy of placing all one- to
four-family loans with original terms of less than or equal to 15 years and with
interest rates of greater than or equal to 7.00% into portfolio,  fewer mortgage
loans have been placed into  portfolio as mortgage loan rates have  consistently
been below  7.00%  during the  quarter  ended  December  31,  1998.  The Company
continued  its policy of  selling  all one- to  four-family  loans with terms of
greater than 15 years into the secondary market.

At December 31, 1998,  the Company  reported  $19.4  million in  mortgage-backed
securities available-for-sale,  compared to $12.8 million at September 30, 1998.
The  increase  was the result of the  Company's  continued  program of borrowing
funds from the FHLB and investing the proceeds into  mortgage-backed and similar
securities in an effort to achieve a positive margin on the transaction.

Subject to favorable interest rate spreads,  the Company intends to continue its
program of investing in mortgage-backed  and other similar securities held in an
available-for-sale  accounting  classification.  The  Company  will  continue to
utilize  its  ability  to  borrow  short  term  funds  from the FHLB to fund the
program.  The Company  anticipates  investing up to an additional $20 million in
mortgage-backed  and similar securities  available-for-sale.  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 FHLB advances. The advance reprices approximately every 30 days, and
the securities have rate adjustment frequencies between 30 days and one year.

At  December  31,  1998,  the  yield  on  the  securities  in  the  program  was
approximately 5.94% while the cost of the FHLB advance was approximately 4.85%.

The Company's mortgage-backed securities held-to-maturity portfolio totaled $9.5
million at December 31, 1998  compared to $10.9  million at September  30, 1998.
The decrease was primarily due to principal  payments  received on the portfolio
during  the  quarter.  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 6.36% at December 31, 1998.
<PAGE>
At December 31,  1998,  the  investment  securities  held-to-maturity  portfolio
totaled $24.5  million,  compared to $29.8  million at September  30, 1998.  The
decrease  was a result of  securities  that matured or were called by the issuer
during the quarter. At December 31, 1998, the overall yield on the portfolio was
approximately  6.01%.  At December 31, 1998, the investment  securities  held to
maturity  portfolio  contained $8.0 million in securities  with remaining  terms
until maturity of less than one year, $4.0 million with remaining  maturities of
one through two years,  no securities  with remaining  maturities of two through
three years,  and $12.5 million with remaining  maturities of three through five
years.  All of the  securities  with  maturities of three through five years had
call options  associated  with them. The call dates,  exercisable by the issuer,
varied between February 1999 and June 2001.

Total deposits were $87.8 million at December 31, 1998, a $1.2 million  increase
from the $86.6 million  reported at September 30, 1998. The increase in deposits
was  primarily the result of the Company  transferring  funds from advances from
borrowers for taxes and insurance and custodial  accounts for escrow balances on
loans sold into a temporary  account  designated to pay year end property  taxes
for its loan customers. The balance in the account,  approximately $2.1 million,
was,  subsequent to December 31, 1998,  withdrawn as payments to various  taxing
entities were made on behalf of loan customers.

The Company's average deposit cost was approximately 4.78% at December 31, 1998.

The Company  reported  $21.8 million in borrowed  funds at December 31, 1998, an
increase of $6.9 million from the $14.9 million  reported at September 30, 1998.
Approximately  $20.0  million  of the  borrowed  funds are  associated  with the
Company's  investment  in  mortgage-backed  securities  available-for-sale.  The
advance  has a remaining  term of less than 30 days and has an interest  rate of
4.85%.  The  remaining  $1.8 million in advances are  associated  with funding a
portion  of the  Company's  commercial  real  estate  loan  portfolio  and has a
weighted average cost of approximately 6.05%.

Stockholders'  equity totaled $20.5 million at December 31, 1998, an increase of
$132,000 from the $20.4 million reported at September 30, 1998. The increase was
primarily  attributable  to the net income of $176,000  reported for the quarter
and a $29,000  increase in deferred  compensation  RRP shares.  The increase was
offset by $73,000 in cash dividends paid during the quarter.

At December  31,  1998,  the  Company  reported a book value per share of $14.01
based on  1,464,056  outstanding  shares.  The  Company did not  repurchase  any
treasury stock during the quarter ended  December 31, 1998 and reported  420,436
shares of treasury stock at an average cost of $11.40 per share at quarter end.


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  and  advances,  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.
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

General. Net income for the three months ended December 31, 1998 was $176,000 or
$.13 per share,  an  increase  of $32,000  from the  $144,000  or $.10 per share
reported  for the three months  ended  December  31,  1997.  The increase in net
income was attributable to a $91,000 increase in noninterest  income,  which was
offset by a $22,000  decrease  in net  interest  income,  a $20,000  increase in
noninterest expense and a $17,000 increase in income tax expenses.

Net Interest  Income.  For the quarter  ended  December  31, 1998,  net interest
income after provision for loan losses totaled  $821,000,  a decrease of $22,000
from the $843,000  reported  for the quarter  ended  December  31,  1997.  On an
annualized  basis,  the $821,000 in net interest  income for the current quarter
was approximately  2.66% of average interest earning assets and 2.56% of average
total assets.  For the quarter ended December 31, 1997, the $843,000 in reported
net interest income was  approximately  2.95% of average interest earning assets
and  2.86% of  average  total  assets.  Average  interest  earning  assets  were
approximately  $123.4 million for the quarter ended December 31, 1998,  compared
to $114.4 million for the quarter ended December 31, 1997.

The  decline in net  interest  income,  despite the fact that  average  interest
earning assets increased, was primarily attributable to the continued decline in
the general level of interest rates and the narrowing of the difference in short
term and long term rates.  Cash flow from the Company's  interest earning assets
has increased over the past several quarters as mortgage  borrowers,  both local
and those associated with the Company's  mortgage-backed  securities portfolios,
have elected to refinance their mortgages. In addition,  scheduled maturities of
the  investment  securities   held-to-maturity   portfolio  have  also  provided
additional  challenges  for  reinvesting  cash flow in a falling  interest  rate
environment.  The result has been,  despite growth in interest earning assets, a
yield on the Company's  average interest earning assets at 6.99% for the quarter
ended December 31, 1998,  down from the 7.09% for the quarter ended December 31,
1997.

Contrarily,   interest   rates  on  the  Company's   primary  source  of  funds,
certificates  of deposit,  have not decreased as rapidly as interest  rates have
fallen. Continued competition for deposits in the Company's market has compelled
the  Company to  continue  to pay  higher  interest  rates in order to  maintain
current  deposit  levels.  On an  annualized  basis,  the $1.3  million in total
interest  expense,  reported  for the  quarter  ended  December  31,  1998,  was
approximately 5.00% of average interest costing liabilities  outstanding for the
quarter.  For the quarter  ended  December 31,  1997,  the $1.2 million in total
interest   expense  was   approximately   4.95%  of  average   interest  costing
liabilities.

Total interest  income was $2.2 million for the quarter ended December 31, 1998,
up  slightly  from the $2.0  million  reported  for the  same  quarter  in 1997.
Interest  income on loans  receivable  totaled  $1.2 million or 7.82% of average
loans  receivable  balances  outstanding  for the quarter,  compared to 7.94% of
average  loans  receivable  balances for the $1.2 million in interest  income on
loans  receivable  reported for the quarter ended December 31, 1997.  During the
quarter ended  December 31, 1998,  the Company  continued its plan to place into
portfolio  mortgage  loans with original  maturities of less than or equal to 15
years and with interest rates of greater than or equal to 7.00%. Because 15 year
mortgage  loan rates  remained  below 7.00%  during  most of the  quarter  ended
December 31, 1998, the Company has not been able to increase its loan receivable
portfolio.  However, interest income from loans receivable,  despite the decline
in the average  yield on the  portfolio,  has increased due to home equity loans
and other consumer  loans.  For the quarter ended December 31, 1998, the Company
originated $6.9 million in loans.  Approximately $4.4 million were sold into the
secondary market while the remainder weas placed into portfolio.
<PAGE>
Interest income from investment  securities  available-for sale totaled $279,000
for the three months ended December 31, 1998,  compared to $80,000 for the three
months ended December 31, 1997.  Interest  income from this portfolio is part of
the Company's plan to borrow funds from the FHLB and invest in  mortgage-related
securities in an effort to achieve a margin on the  difference in the investment
yield and the cost of the  borrowings  from the FHLB. The yield on the portfolio
was approximately 5.94% at December 31, 1998.

Interest income from the investment  securities  held-to-maturity  and overnight
funds portfolios  totaled $500,000 for the three months ended December 31, 1998,
compared to $471,000  for the same quarter in 1997.  The increase was  primarily
the result of a $1.3 million  increase in average  balances  outstanding  in the
portfolios  from $32.3  million for the three months ended  December 31, 1997 to
$33.6 million for the three months ended December 31, 1998. The average yield on
the portfolio was  approximately  5.90% for the quarter ended December 31, 1998,
compared to 6.02% for the three months ended December 31, 1997.

Interest income from the mortgage-backed  securities  held-to-maturity portfolio
totaled  $179,000  for the three months  ended  December  31, 1998,  compared to
$315,000  for the same  period in 1997.  The  decrease  is  attributable  to the
decline  in the  average  balance  of the  portfolio.  Maturing  securities  and
continued  prepayments on the adjustable rate securities in the portfolio caused
the balance to decline to $9.5 million at December  31, 1998 from $16.3  million
at December 31, 1997.

Interest  paid to  depositors  totaled  $1.1  million for the three months ended
December  31, 1998,  unchanged  from the $1.1 million for the three months ended
December 31, 1997.  Average  deposit  balances  declined $2.6 million from $89.8
million at December 31, 1997 to $87.2 million at December 31, 1998.  Interest on
FHLB  advances  was  $251,000  for the three  months  ended  December  31, 1998,
compared  to $62,000 for the same period in 1997.  Total  interest  expense as a
percentage of average  interest-costing  liabilities was approximately 5.12% for
the three months ended December 31, 1998, compared to 4.95% for the three months
ended December 31, 1997.

Provision For Loan Losses. The Company made no provision for loan losses for the
quarters ended December 31, 1998 and December 31, 1997. (See - "Asset Quality")

Non-Interest  Income.  Non-interest income totaled $168,000 for the three months
ended December 31, 1998, compared to the $77,000 reported for the same period in
1997.

Gains  on sales of  interest-earning  assets  equaled  $76,000  for the  current
quarter,  a $55,000  increase from the $21,000  reported for the same quarter in
1997. The increase was  attributable to additional gains on the sale of mortgage
loans into the secondary  market during the quarter ended  December 31, 1998. In
addition,  other operating  income  increased from $11,000 for the quarter ended
December  31, 1997 to $54,000 for the  quarter  ended  December  31,  1998.  The
$33,000  increase  was the result of the  receipt  of a payment of a  deficiency
judgment lien originating in a previous accounting period.

Offsetting  the  increases  in gains on sales of loans and loan fee income was a
$11,000 decline in loan servicing fee income to $11,000 for the current quarter,
compared to $22,000 for the quarter ended December 31, 1997. The decline was the
result,  as borrowers  paid of or  refinanced  their  mortgages,  of a continued
decrease  of older  loans  in the  Company's  servicing  portfolio  with  higher
servicing  margins.  In addition,  the Company's  decision to retain its fifteen
year loans and a borrower  preference for such loans, has resulted in fewer sold
loans and therefore fewer additions to the loan servicing portfolio.
<PAGE>
Non-Interest  Expenses.  Non-interest  expenses  totaled  $714,000 for the three
months ended December 31, 1998,  compared to $694,000 for the three months ended
December 31, 1997.

The  increase in  non-interest  expense was  primarily  the result of an $18,000
increase in compensation and benefits expense from $492,000 for the three months
ended  December 31, 1997 to $510,000  for the three  months  ended  December 31,
1998. The increase in compensation and benefits expense was mostly the result of
additional expenses associated with the funding of the Company's defined benefit
pension plan and the Company's Employee Stock Ownership Plan. Also, a portion of
the increase was the result of additional  expenses for new  employees  added in
December 1998 in conjunction with the anticipated  opening of a new full-service
office by the Company.

Occupancy and  equipment  expense  increased  $24,000 from $49,000 for the three
months ended  December  31, 1997 to $73,000 for the three months ended  December
31, 1998. The increase was also attributable to additional  expenses  associated
with the opening of a new  full-service  office,  scheduled to open in the early
part of 1999.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$99,000 or 36.0% or pre-tax income for the three months ended December 31, 1998,
compared  to  $82,000  or 36.3% of pre-tax  income  for the three  months  ended
December 31, 1997.

ASSET QUALITY

At December 31, 1998, the Company's  non-performing  assets totaled  $331,000 or
 .25% of total assets,  compared to $228,000 or .18% of total assets at September
30,  1998.  The  increase  was the result of several  loans that  became 91 days
delinquent  at December 31, 1998.  At December 31, 1998,  non-performing  assets
were  comprised  of  twenty-four  (24) loans,  the largest of which was $47,000,
secured by a single-family dwelling.

Non-performing  loans at December  31, 1998,  equaled  $331,000 or .54% of loans
receivable,  compared to $228,000 or .37% of loans  receivable  at September 30,
1998.

Classified assets totaled $506,000 or .39% of total assets at December 31, 1998,
compared to $570,000 or .46% of total assets at September 30, 1998.

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 December 31, 1998, were deemed
to be "substandard".  No assets were classified  "doubtful" or "loss" as of such
date.

The Company's  allowance for loan losses totaled $233,0000 at December 31, 1998,
unchanged from September 30, 1998. The allowance for loan losses as a percentage
of loans receivable equaled .38% at December 31, 1998,  unchanged from September
30, 1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

The Company's  principal sources of funds are deposits from customers,  advances
from  the  FHLB,  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, at a minimum, cash and eligible investments,  in an amount of not less
than 4.0% of net withdrawable  savings accounts and borrowings payable on demand
or in one year or less.  Liquid assets  include cash on hand,  unpledged  demand
deposits,  certain time deposits,  and, U. S Government and agency  obligations.
The Association  maintains a liquid asset ratio above the minimum required level
of the Office of Thrift  Supervision.  At December 31, 1998,  the  Association's
liquid asset ratio equaled 40.09%.

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 December 31,
1998,  the  Association  had  outstanding  commitments  to extend credit on $3.7
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 December 31,  1998,  an
increase of $132,000 from the $20.4 million  reported at September 30, 1998. The
increase was  primarily  the result of the $176,000 net income  reported for the
quarter ended December 31, 1998 and $29,000  decrease in deferred  compensation,
less a $73,000 cash dividend paid during the quarter.

As of December 31, 1998,  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  1,464,056  outstanding  shares of common  stock (the total
issued shares including  unallocated ESOP and RRP shares, less treasury shares),
equaled $14.01 per share.

Subsequent to the quarter  ended  December 31, 1998,  the Company  announced its
intention  to pay a cash  dividend of $.05 per share on February  24,  1998,  to
stockholders of record at February 10, 1998.

Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA"),  Congress  imposed  a three  part  capital  requirement  for  thrift
institutions.  At December  31,  1998,  the  Association's  actual and  required
capital amounts under each of the three requirements were as follows:

     - Tangible  Capital  (stockholders'  equity) was $18.2 million or 13.97% of
     total assets, exceeding the minimum requirement of 1.5% by $16.3 million.

     - Core Capital (Tangible capital plus certain  intangible assets) was $18.2
     million or 13.97% of total  assets,  exceeding the minimum  requirement  of
     4.0% by $13.0 million.

     -  Risk-based  Capital  (Core  capital  plus  general  loan  and  valuation
     allowances less an adjustment for capitalized  mortgage  servicing  rights)
     equaled  $18.5  million of 36.98% of risk  weighted  assets,  exceeding the
     minimum requirement of 8.0% of risk weighted assets by $14.5 million.

At December 31,  1998,  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>
YEAR 2000 ISSUE

The Year 2000 or Century  Date  Change  issue is a result of  computer  programs
being written using two digits rather than four digits to define the  applicable
year. A computer system's  inability to recognize the date "00" as the year 2000
of if the system  recognized  the date "00" as the year 1900,  could result in a
system failure or miscalculations causing disruptions of operations. The Company
outsources its primary computer processing functions.

The  Company has  established  a  management  committee  to identify  all of its
systems  potentially  affected by the year 2000 and to ensure that reprogramming
of affected  systems is completed.  The committee is responsible for testing all
company  computer  systems and  ensuring  that all third party  computer  system
vendors complete Year 2000 remediation.

The  Company  believes  that the risk that the  major  data  processing  service
provider  will not be Year 2000  compliant is low. The Company has also received
correspondence  from all other third party software providers that indicate that
all of such software will be Year 2000 compliant.

The Company has budgeted  approximately $25,000 for its Year 2000 program. As of
December 31, 1998,  the Company has expensed or is aware of future  expenditures
totaling approximately $10,000.

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

                                DECEMBER 31, 1998



                           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

     On January 20, 1999, the Company's Annual Stockholders' Meeting was held to
     elect directors and ratify the appointment of independent  auditors for the
     current  fiscal year. The following are the voting results of each of these
     matters submitted to stockholders:

     The election of M. Earl Davis,               For                 1,227,781
     James W. Fair, and L. Lee Kidd               Against                     0
     As directors for a three year term ending    Abstain                22,000
     January 2002.                                Broker Non-Votes            0

     Ratification of the appointment of Bryant    For                 1,249,631
     And Welborn, LLP, as independent             Against                   150
     Auditors for the fiscal year ending          Abstain                     0
     September 30, 1999.

     The text of the  matters  referred  to in this  Item 4 is set  forth in the
     Proxy  Statement  dated  December  23,  1998,  previously  filed  with  the
     Securities and Exchange Commission.

Item 5.  Other Information.

     None
<PAGE>
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  December 31, 1998, the Company filed a report
         on Form 8-K on October  21,  1998,  to report the  issuance  of a press
         release dated October 21, 1998,  announcing the Company's  intention to
         pay, on November 25,  1998,  a cash  dividend of $.05 per share for the
         quarter ended September 30, 1998, to stockholders of record on November
         11, 1998.

         During the quarter ended  December 31, 1998, the Company filed a report
         on Form 8-K on December  10,  1998,  to report the  issuance of a press
         release dated December 10, 1998,  announcing the Company's earnings for
         the year ended September 30, 1998.
<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:  February 9, 1999            /s/ Gerald W. Free
                                   ------------------
                                   Gerald W. Free

                                   Vice Chairman, President and CEO
                                   (Principal Executive Officer)


Date:  February 9, 1999            /s/  Derrell W. Chapman
                                   -----------------------
                                   Derrell W. Chapman
                                   Vice President/COO/CFO
                                   (Principal Financial and Accounting Officer)