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, 1996

                                       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, 1996, was 1,079,285.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1996



                                      INDEX

                                                         

Part I - Financial Information

     Item  1.  Financial Statements

         Consolidated  Statements  of  Financial  Condition,  December  31, 1996
         (Unaudited) and September 30, 1996

         Consolidated Statements of Income, (Unaudited) three months
         ended December 31, 1996, and December 31, 1995

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         three months ended December 31, 1996

         Consolidated  Statements of Cash Flows,  (Unaudited) three months ended
         December 31, 1996, and December 31, 1995

         Notes to (Unaudited)  Consolidated  Financial Statements,  December 31,
         1996

     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, 1996



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 CONDIITON

                                                           December 31,      September 30,
                                                              1996               1996
                                                        -------------      -------------
                                                          (Unaudited)
<S>                                                     <C>                <C>
    ASSETS
Cash and due from banks ...........................     $     511,931      $     704,615
Interest-bearing deposits with banks ..............         3,540,032          4,995,032
Interest earning time deposits with financial
institutions ......................................         1,565,573          1,663,573
Federal funds sold ................................         2,554,364            480,285
Investment securities held-to-maturity
     (estimated market value of $28,147,500 at
     December 31, 1996, and
     $30,114,685 at September 30, 1996) ...........        28,111,400         30,138,744
Mortgage-backed securities held-to-maturity
     (estimated market value of $23,789,397
     at December 31, 1996, and
      $25,383,579 at September 30, 1996) ..........        23,310,954         24,948,793
Loans receivable, net of allowance for credit
     losses of $267,256 at December 31, 1996, and
      $289,120 at September 30, 1996 ..............        50,289,866         47,925,067
Accrued interest receivable .......................           989,982            930,657
Federal Home Loan Bank stock, at cost .............           962,400            948,500
Premises and equipment ............................           953,309            970,184
Foreclosed real estate, net of allowances of $-0- .           118,868                  0
Deferred income taxes .............................           126,258            130,825
Mortgage servicing rights .........................           127,999            119,845
Other assets ......................................           272,091            416,816
                                                        -------------      -------------

         Total Assets .............................     $ 113,435,027      $ 114,372,936
                                                        =============      =============

    LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Demand deposits ..............................     $   3,381,715      $   2,889,861
     Savings and NOW deposits .....................        10,960,580         11,099,604
     Other time deposits ..........................        77,516,758         77,671,666
                                                        -------------      -------------
         Total deposits ...........................        91,859,053         91,661,131

     Advances from borrowers for taxes and
     insurance ....................................           148,434            917,222
     Federal income taxes
           Current ................................           105,898              5,044
           Deferred ...............................                 0                  0
     Accrued expenses and other liabilities .......           232,668            858,926
                                                        -------------      -------------

         Total Liabilities ........................        92,346,053         93,442,323
                                                        -------------      -------------
<PAGE>
<CAPTION>


                            EAST TEXAS FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF FINANCIAL CONDIITON
                                      (continued)

                                                           December 31,      September 30,
                                                              1996               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 isued............            12,564             12,564
     Additional paid-in capital ...................        12,112,516         12,112,516
     Deferred compensation - RRP shares ...........          (417,034)          (446,129)
     Unearned employee stock ownership plan shares           (763,205)          (763,206)
     Retained earnings (substantially restricted)..        12,941,146         12,811,881
     Treasury stock, 177,102 shares at cost .......        (2,797,013)        (2,797,013)
                                                        -------------      -------------

         Total stockholders' equity ...............        21,088,974         20,930,613
                                                        -------------      -------------
         Total liabilities and stockholders'
         equity ...................................     $ 113,435,027      $ 114,372,936
                                                        =============      =============


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

                                                               Three Months
                                                            Ended December 31,
                                                              (Unaudited)
                                                          1996           1995
                                                       ----------     ----------
<S>                                                    <C>            <C>
INTEREST INCOME Loans receivable:
        First mortgage loans .....................     $  967,638     $  865,408
        Consumer and other loans .................         20,527         19,159
   Investment securities .........................        570,919        628,274
   Mortgage-backed securities ....................        421,434        561,846
                                                       ----------     ----------

          Total interest income ..................      1,980,518      2,074,687
                                                       ----------     ----------

INTEREST EXPENSE
   Deposits ......................................      1,109,672      1,142,864
                                                       ----------     ----------

          Total interest expense .................      1,109,672      1,142,864
                                                       ----------     ----------

          Net interest income before provision
            for loan losses ......................        870,846        931,823

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

          Net interest income after provision
            for loan losses ......................        865,846        931,823
                                                       ----------     ----------

NONINTEREST INCOME
   Gain (loss) on sales of interest-earning assets         13,079         27,750
   Loan origination and commitment fees ..........         17,219          9,431
   Loan servicing fees ...........................         31,686         30,611
   Other .........................................         15,430         21,714
                                                       ----------     ----------

          Total noninterest income ...............         77,414         89,506
                                                       ----------     ----------
NONINTEREST EXPENSE
   Compensation and benefits .....................        427,655        401,983
   Occupancy and equipment .......................         33,864         39,063
   SAIF deposit insurance premium ................         48,051         57,039
   (Gain) loss on foreclosed real estate .........             58          3,084
   Other .........................................        139,937        139,643
                                                       ----------     ----------

          Total noninterest expense ..............        649,565        640,812
                                                       ----------     ----------
<PAGE>
<CAPTION>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                  (continued)

                                                               Three Months
                                                            Ended December 31,
                                                              (Unaudited)
                                                          1996           1995
                                                       ----------     ----------
<S>                                                    <C>            <C>
Income (loss) before provision for income taxes ..        293,695        380,517

Income tax expense (benefit) .....................        110,465        138,190
                                                       ----------     ----------

NET INCOME (LOSS) ................................     $  183,230     $  242,327
                                                       ==========     ==========

Earnings per common share ........................     $     0.18     $     0.21





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





THREE MONTHS ENDED
December 31, 1996
                                   Common
                                 Stock and        Unearned       Unallocated                                      Total
                                  Paid in          RRP             ESOP          Retained       Treasury      Stockholders'
                                  Capital         Shares          Shares         Earnings        Stock           Equity
                                  -------         ------          ------         --------        -----           ------
<S>                             <C>            <C>             <C>             <C>             <C>             <C>
Balance October 1, 1996 .....   $ 12,125,080   $   (446,129)   $   (763,206)   $ 12,811,881    $ (2,797,013)   $ 20,930,613

Deferred compensation
     amortization ...........           --           29,095            --              --              --            29,095

Payment of cash dividends ...           --             --              --           (52,317)           --           (52,317)

Accrued dividends - RRP stock           --             --              --            (1,647)           --            (1,647)

Net income for the three
     months ended
     December 31, 1996 ......           --             --              --           183,230            --           183,230

Balance December 31, 1996 ...   $ 12,125,080   $   (417,034)   $   (763,206)   $ 12,941,147    $ (2,797,013)   $ 21,088,974
                                ============   ============    ============    ============    ============    ============

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                             EAST TEXAS FINANCIAL SERVICES, INC.
                             CONSOLIDATED STATEMENT OF CASH FLOWS
                                         (Unaudited)


                                                                  For The Three Months Ended
                                                                          December 31,
                                                                     1996             1995
                                                                -----------      -----------
<S>                                                             <C>              <C>
Cash flows from operating activities:
  Net income ..............................................     $   183,230      $   242,327
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Amortization of deferred loan origination fees ......             (69)          (2,295)
      Amortization of premiums and discounts on investment
        securities, mortgage-backed securities, and loans .          34,002           52,209
      Amortization of deferred compensation ...............          29,095           29,096
      Compensation charge related to release of ESOP shares          28,994           22,834
      Depreciation ........................................          16,875           18,396
      Deferred income taxes ...............................           4,567          (21,463)
      Stock dividends on FHLB stock .......................         (13,900)         (14,500)
      Net (gain) loss on sale of:
        Securities held to maturity .......................               0                0
        Foreclosed real estate ............................               0                0
        Net loss on disposal of fixed assets ..............               0                0
        Other Assets ......................................               0                0
        Loans .............................................          (4,925)          (7,593)
        Loans held for sale ...............................               0                0
      Proceeds from loan sales ............................       1,184,950        1,798,118
      Originations of loans held for sale .................               0                0
      (Increase) decrease in:
        Accrued interest receivable .......................         (59,325)        (143,324)
        Other assets ......................................         136,571           94,953
        Accrued loan loss reserve .........................           5,000                0
      Increase (decrease) in:
        Federal income tax payable ........................         100,854          144,233
        Accrued expenses and other liabilities ............        (655,252)          (5,885)
      Capitalized interest on time deposits ...............               0           (1,573)
                                                                -----------      -----------

Net cash provided (used) by operating activities ..........         990,667        2,205,533
                                                                -----------      -----------

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


                                                                       For the Three Months Ended
                                                                               December 31,
                                                                          1996             1995
                                                                      -----------      -----------
<S>                                                                   <C>              <C>
Cash flows from investing activities:
  Purchases of interest earning time deposits ...................     $         0      $  (681,000)
  Net decrease (increase) in fed funds sold .....................      (2,074,079)      (2,208,263)
  Purchases of obligations - U.S. Govt. and agencies
      held-to-maturity ..........................................        (997,578)      (6,629,673)
  Proceeds from maturity of time deposits .......................          98,000                0
  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 .................................       3,000,000        5,000,000
  Purchases of mortgage-backed securities           
      held-to-maturity...........................................               0                0
  Principal payments on mortgage-backed securities
      held-to-maturity ..........................................       1,628,759        2,478,833
  Net originations and principal collections on loans ...........      (3,721,670)      (2,112,698)
  Acquisition cost related to foreclosed real estate ............          (5,252)               0
  Proceeds from sale of foreclosed real estate ..................          58,300                0
  Expenditures for premises and equipment .......................               0                0
                                                                      -----------      -----------

Net cash provided (used) by investing activities ................      (2,013,520)      (4,152,801)
                                                                      -----------      -----------

Cash flows from financing activities:
   Net increase (decrease) in:
   Non-interest bearing deposits, savings, and NOW accounts .....         352,830        1,422,904
   Time deposits ................................................        (154,908)        (111,361)
   Advances from borrowers for taxes and insurance ..............        (768,788)        (761,070)
Dividends paid to stockholders ..................................         (53,965)               0
Purchase of treasury stock ......................................               0       (1,030,774)
                                                                      -----------      -----------

Net cash provided (used) by financing activities ................        (624,831)        (480,301)
                                                                      -----------      -----------

Net increase (decrease) in cash and cash equivalents ............      (1,647,684)      (2,427,569)

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

Cash and cash equivalents at end of the period ..................     $ 4,051,963      $ 3,812,267
                                                                      ===========      ===========

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


                                                                       For the Three Months Ended
                                                                               December 31,
                                                                          1996             1995
                                                                      -----------      -----------
<S>                                                                   <C>              <C>
Supplemental disclosure:
Cash paid for:
  Interest on deposits ..........................................     $   559,672      $   654,929
  Income taxes ..................................................     $     5,157      $    38,692

Transfers from loans to real estate
  acquired through foreclosures .................................     $   197,595      $         0

Loan losses charged to valuation allowance ......................     $     1,185      $         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

                                DECEMBER 31, 1996




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 ended
December  31,  1996,  the  weighted  average  number of shares  outstanding  for
earnings per share  calculation  purposes was 1,002,964.  (See Part II, Item 6 -
Exhibits for a detailed  presentation of the earnings per share  calculation for
the three month period ended December 31, 1996.)

NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of December 31, 1996, 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 ...........     $ 1,998,813     $     6,657     $         0     $ 2,005,470

      U. S. government agency ..      26,112,587         104,259          74,816      26,142,030
                                     -----------     -----------     -----------     -----------

           Total debt securities     $28,111,400     $   110,916     $    74,816     $28,147,500
                                     -----------     -----------     -----------     -----------
</TABLE>
<PAGE>
NOTE 3 - Continued

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity  as of December 31,  1996,  by  contractual  maturity are shown
below:
<TABLE>
<CAPTION>
                                                                       Estimated
                                                      Amortized         Market
                                                        Cost             Value
                                                    -----------      -----------
<S>                                                 <C>              <C>
Due in one year or less ......................      $14,019,385      $14,068,925

Due after one year through two  years ........        8,520,430        8,542,085

Due after two years through three years ......        4,567,321        4,543,830


Due after three years through five years .....        1,004,264          992,660
                                                    -----------      -----------

        Total debt securities ................      $28,111,400      $28,147,500
                                                    -----------      -----------
</TABLE>

As of December 31, 1996, the weighted average yield on the Company's  investment
security   portfolio  was  approximately   6.24%  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 6.08%.

The carrying values and estimated market values of  mortgage-backed  and related
securities held-to-maturity as of December 31, 1996, by issuer are as follows:
<TABLE>
<CAPTION>
                                                                            Estimated
           Principal     Unamortized       Unearned         Carrying          Market
            Balance        Premiums        Discounts          Value           Value
          -----------     -----------     -----------     -----------     -----------
<S>       <C>             <C>             <C>             <C>             <C>
FHLMC     $19,073,587     $   102,597     $    49,899     $19,126,285     $19,474,191

FNMA        4,155,573          29,096               0       4,184,669       4,315,206
          -----------     -----------     -----------     -----------     -----------

          $23,229,160     $   131,693     $    49,899     $23,310,954     $23,789,397
          -----------     -----------     -----------     -----------     -----------
</TABLE>
<PAGE>
NOTE 3 - Continued

The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity as of December 31, 1996, 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 ....     $ 5,509,757     $         0     $    34,575     $ 5,475,182     $ 5,440,030

Adjustable Rate      17,719,403         131,693          15,324      17,835,772      18,349,367
                    -----------     -----------     -----------     -----------     -----------     

                    $23,229,160     $   131,693     $    49,899     $23,310,954     $23,789,397
                    -----------     -----------     -----------     -----------     -----------
</TABLE>

Unrealized  gains  and  losses  on   mortgage-backed   and  related   securities
held-to-maturity as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>

                 Fixed Rate             Adjustable Rate               Total
                Unrealized                 Unrealized               Unrealized
            Gains       Losses        Gains       Losses       Gains         Losses
          --------     --------     --------     --------     --------     --------
<S>       <C>          <C>          <C>          <C>          <C>          <C>
FHLMC     $ 13,565     $ 48,717     $383,058     $      0     $396,623     $ 48,717

FNMA             0            0      130,537            0      130,537            0
          --------     --------     --------     --------     --------     --------

          $ 13,565     $ 48,717     $513,595     $      0     $527,160     $ 48,717
          --------     --------     --------     --------     --------     --------
</TABLE>

The overall yield on the Company's  mortgage-backed  securities  portfolio as of
December 31, 1996, was approximately 7.25%.


NOTE 4 - CURRENT ACCOUNTING ISSUES

SFAS NO. 123 In October 1995 the  Financial  Accounting  Standards  Board issued
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 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.
<PAGE>
Beginning  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 for any future stock-based compensation plans.

SFAS NO. 125 Statement of Financial Accounting Standards 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  occuring  after December 31, 1996, and shall be
applied prospectively. The Company adopted the Statement as required.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1996





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

The Company's total assets were $113.4 million at December 31, 1996, compared to
$114.4  million at  September  30,  1996,  a $938,000 or .82%  decrease.  A $3.7
million decrease in held-to-maturity  investment and mortgage-backed  securities
accounted for most of the decrease in total  assets.  Partially  offsetting  the
decrease was a $328,000  increase in cash due from banks and federal funds sold,
as well as a $2.4 million increase in loans receivable as the Company  continued
to originate loans to be placed into the loan portfolio.

Total  liabilities  decreased by $1.1  million to $92.3  million at December 31,
1996,  compared  to $93.4  million at  September  30,  1996.  The  decrease  was
attributable  to a $769,000  decrease in advances  from  mortgage  borrowers for
taxes and  insurance  as year end taxes were paid on behalf of  borrowers  and a
$626,000 decrease in accrued expenses as the Association paid its portion of the
one-time "SAIF" special assessment that was accrued at September 30, 1996.
<PAGE>
Stockholders'  equity  increased  by $158,000 to $21.1  million at December  31,
1996, compared to $20.9 million at September 30, 1996,  primarily as a result of
the net income for the quarter.

Cash and due from banks  totaled  $512,000 at  December  31,  1996,  compared to
$705,000 at September  30,  1996.  Vault cash,  teller cash funds,  and clearing
accounts with correspondent  banks comprised the balances in this item. Balances
in this item fluctuate as loan payments and deposits are received from customers
as well as with  maturities of investment  securities and  disbursement  of loan
proceeds, deposits withdrawals, and payment of operating expenses.

Interest-earning  deposits with banks totaled $3.5 million at December 31, 1996,
compared to $5.0 million at September 30, 1996. The balance  consists  primarily
of overnight  deposits with the Federal Home Loan Bank of Dallas and the balance
varies daily with the Association's  cash flow needs.  Federal funds sold, which
is a sweep account  arrangement with the Association's  correspondent  bank, was
$2.6  million at quarter end compared to $480,000 at  September  30,  1996.  The
increase was a result of the  Association  placing funds with its  correspondent
bank to cover checks written to pay year end property taxes on its mortgage loan
servicing portfolio.

Investment  securities  held-to-maturity  totaled  $28.1 million at December 31,
1996,  compared  to $30.1  million at  September  30,  1996.  The  portfolio  is
comprised of 25 fixed rate and term U. S.  Treasury and agency  securities  with
staggered  maturities over the next four years.  Approximately  $14.0 million or
twelve  securities  will  mature over the next  twelve  months.  Balances in the
portfolio are determined by the Association's cash flow needs and will vary over
time.  Subsequent to December 31, 1996, the Association purchased two additional
securities  totaling  approximately  $2.5  million.  At December 31,  1996,  the
portfolio  contained  $14.0 million in securities  with final  maturities of one
year or less, $ 8.5 million with final maturities of one through two years, $4.6
million with final  maturities  of two through three years and $1.0 million with
final maturities of three through five years. At December 31, 1996, the yield on
the portfolio was approximately 6.24%.

The  Company's  mortgage-backed  securities  portfolio  totaled $23.3 million at
December 31, 1996,  down $1.6 million from $24.9  million at September 30, 1996.
The decrease resulted from principal  payments  received on the  mortgage-backed
securities portfolio during the quarter. At December 31, 1996, the portfolio was
comprised  of $5.5  million  of  fixed  rate  and  term  securities  with  final
maturities of five years or less. The balance of $17.8 million was in adjustable
rate securities  with interest rate adjustment  frequencies of either six months
or one year. The weighted average yield on the portfolion was 7.25 % at December
31, 1996.

Loans  receivable   increased  $2.4  million,   an  annualized  growth  rate  of
approximately  20%, to $50.3 million at December 31, 1996, from $47.9 million at
September  30, 1996.  The growth in the loan  portfolio is  attributable  to the
Company's  pricing of its fifteen  year fixed rate loan  product.  Over the past
several  quarters,  the Company has priced its fifteen  year fixed term and rate
mortgage  loans  at  competitive  levels  in  Tyler  in an  effort  to  generate
additional  lending activity.  At December 31, 1996, the fifteen year fixed rate
and term portfolio equaled $20.0 million, compared to $18.1 million at September
30, 1996,  an increase of $1.9  million or  approximately  42% on an  annualized
basis.  For the quarter ended December 31, 1996, the Company reported total loan
originations  of $ 5.4 million,  compared to $4.5 million for the quarter  ended
December 31, 1995.
<PAGE>
The Company  reported  foreclosed  real estate of $119,000 at December 31, 1996,
compared to none at September 30, 1996. The increase was due to the  foreclosure
during the  quarter of a loan  securing  four  single-family  homes.  Two of the
houses  were  sold to a bidder  at the  foreclosure  sale and the two  remaining
houses  were  purchased  by the Company  and  recorded at their book value.  The
properties,  located in Houston,  Texas,  will be listed for sale. (See - "Asset
Quality".)

Subsequent  to December  31,  1996,  the Company  foreclosed  on two  additional
single-family  homes located in Tyler,  Texas. The properties were recorded at a
combined amount of $212,000, their book value. The properties will be made ready
and listed for sale.

Total  deposits  were $91.9  million at  December  31,  1996,  compared to $91.7
million at September 30, 1996. The Association's average funds cost was 4.87% at
December 31, 1996, up 8 basis point from the 4.79 % at September 30, 1996.

Advances from borrowers for taxes and insurance  decreased  $769,000 to $148,000
at December 31, 1996,  compared to $917,000 at September 30, 1996.  The decrease
was a  result  of year  end tax  payments  on the  Association's  mortgage  loan
servicing portfolio.

Stockholders'  equity  totaled  $21.1  million at December 31, 1996, up $158,000
from the $20.9  million  reported  at  September  30,  1996.  The  increase  was
attributable to the $183,000 net income for the quarter plus a $29,000  increase
in  deferred   compensation   -  RRP  shares,   resulting  from  the  continuing
amortization  of the cost of the shares,  less a $54,000 cash dividend  declared
and paid during the quarter.

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 DECEMBER 31, 1996
         AND DECEMBER 31, 1995

General.  Net income for the three months ended  December 31, 1996, was $183,000
or $.18 per share,  compared to $242,000 or $.21 per share for the quarter ended
December 31, 1995, a $59,000 or 24.4%  decrease.  The decrease in net income was
attributable  to a $66,000  decline in net interest  income after  provision for
loan losses,  a $12,000 decline in non-interest  income and a $9,000 increase in
non-interest  expense,  all of which were partially offset by a $28,000 decrease
in income tax expense.

Net Interest Income.  For the three months ended December 31, 1996, net interest
income after  provision for loan losses totaled  $866,000,  down $66,000 or 7.1%
from the $932,000  reported for the quarter  ended  December 31, 1995. A $94,000
decline in total  interest  income and a $5,000  increase in provision  for loan
losses,  which were partially offset by a $33,000 decrease in interest  expense,
accounted for the decrease in net interest income.
<PAGE>
Interest on loans receivable totaled $988,000 for the quarter ended December 31,
1996,  compared to  $885,000  for the  quarter  ended  December  31,  1995.  The
Company's  continued emphasis on portfolio lending accounted for the increase in
interest income on loans  receivable.  For the quarter,  the Company  originated
$5.4 million in mortgage  loans.  Only $1.2 million were sold into the secondary
market,  while the remainder were placed into the loan  portfolio.  As a result,
and net of principle  payments,  loans receivable  increased to $50.3 million at
December 31, 1996,  compared to $47.9 million at September  30, 1996,  and $42.1
million at December 31, 1995.

Interest income from the Company's mortgage backed securities portfolio declined
to $421,000 for the quarter  ended  December 31, 1996,  compared to $562,000 for
the  same  period  in  1995,  a  $140,000  or 25.0%  decline.  Borrowers  of the
predominately  adjustable  rate loans  underlying  the  securities  continued to
refinance  their  mortgages  to fixed rate and term loans  during the year.  The
Company  redirected the resulting cash flow into its portfolio lending operation
and the result was a decrease in the mortgage-backed  securities  portfolio from
$31.2 million at December 31, 1995,  to $23.3 million at December 31, 1996.  The
decline in balances outstanding, despite an increase in the overall yield of the
portfolio  from 7.03% at  December  31,  1995,  to 7.25% at December  31,  1996,
accounted for the significant decline in interest income on the portfolio.

Interest  income from the investment  securities and overnight  funds  portfolio
totaled  $571,000  for the three months  ended  December  31, 1996,  compared to
$628,000 for the same period in 1995, a $57,000 or 9.1%  decrease.  The decrease
resulted from a $1.9 million decline in the average  balance  outstanding in the
portfolio for the quarter ended December 31, 1996,  compared to the same quarter
in 1995. In addition,  the average  yield on the portfolio  declined to 6.08% at
December 31,  1996,  from 6.23% at December  31,  1995,  as maturing  investment
securities were reinvested in lower interest rates.

Interest paid to depositors  totaled $1.1 million for the quarter ended December
31, 1996, a $33,000 decrease from the $1.1 million for the same quarter in 1995.
Despite the fact that average deposit balances outstanding for the quarter ended
December  31,  1996,  decreased  $1.4  million to $91.8  million  from the $93.1
million for the quarter  ended  December 31, 1995,  an increase in the Company's
average  funds cost to 4.87% at December  31,  1996,  from 4.70% at December 31,
1995,  accounted for the minimal change in interest expense. The increase in the
average funds cost resulted as the Company continued to pay competitive  deposit
rates on renewing certificate of deposit accounts throughout 1996.

Provision  for Loan Losses.  The Company  recorded  $5,000 in provision for loan
losses  during the quarter  ended  December  31,  1996,  compared to none in the
quarter ended  December 31, 1995.  Management,  in  recognition of the continued
increase in loans  receivable  outstanding,  made the  decision to increase  the
balance in the  allowance  for loss  account.  It is  management's  intention to
periodically  add to the allowance  for loan loss account as the loan  portfolio
increases and is not indicative of management's assessment of the quality of the
loan portfolio, which is still considered as strong. (see "Asset Quality".)
<PAGE>
Non-Interest  Income.  Non-interest  income decreased to $77,000 for the quarter
ended December 31, 1996, from $90,000 for the quarter ended December 31, 1995, a
$12,000 or 13.5% decrease.  The decrease was primarily attributable to a $15,000
decrease in gains on sales of interest-earning assets. As more loans were placed
into portfolio than sold, the Company  recorded fewer gains on the sale of loans
under  the  accounting   requirements  of  Statements  of  Financial  Accounting
Standards  ("SFAS")  No. 122,  Accounting  For  Mortgage  Servicing  Rights - An
Amendment  of FASB  Statement  No. 65.  Loan  origination  and  commitment  fees
increased to $17,000 for the quarter, compared to $9,000 for the same quarter in
1995, as the Company continued to emphasize its portfolio lending.

Non-Interest  Expense.  Total non-interest expense increased to $650,000 for the
three  months  ended  December 31,  1996,  from  $641,000 for the quarter  ended
December 31, 1995.  The increase was primarily the result of a $26,000  increase
in  compensation  and benefits  expense as a result of a year-end  bonus paid to
employees   during  the  quarter  ended  December  31,  1996.  The  increase  in
compensation  and benefits was  partially  offset by a $9,000  reduction in SAIF
deposit  insurance  premiums.  The Company had accrued,  at September  30, 1996,
$645,000 in  anticipation  of the  special  assessment  levied  against all SAIF
insured  thrifts and designed to  recapitalize  the SAIF.  The company's  actual
assessment was $639,000 and was paid in the quarter ended December 31, 1996. The
difference  in the amount  accrued and actually  paid  accounted for most of the
change in SAIF insurance premiums.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$110,000 or 37.6% of pre-tax  income for the three  months  ended  December  31,
1996,  compared to  $138,000  or 36.3% of pre-tax  income for the same period in
1995. The decrease was attributable to a decline in pre-tax income from $381,000
for the quarter  ended  December  31, 1995,  to $294,000  for the quarter  ended
December 31, 1996.

ASSET QUALITY

At December 31, 1996, the Company's  non-performing  assets totaled  $499,000 or
 .44% of total assets,  compared to $450,000 or .39% of total assets at September
30, 1996. The increase was  attributable  to one additional  single-family  home
loan with a balance of $153,000 that reached ninety days  delinquent at December
31, 1996. The loan, plus an additional  single-family home loan in the amount of
$54,000 were  foreclosed on subsequent  to December 31, 1996.  (see  "Foreclosed
Real Estate".)

At December 31, 1996,  non-performing  assets was comprised entirely of loans on
single-family residences.  Non-performing loans equaled .76% of loans receivable
at December 31, 1996, compared to .94% at September 30, 1996.

Classified  assets  totaled $1.0 million or .92% of total assets at December 31,
1996,  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 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, 1996, were deemed
to be  "substandard".  No assets were  classified  as "doubtful" or "loss" as of
such date.
<PAGE>
The Company's  allowance for loan losses totaled  $267,000 at December 31, 1996,
compared to $289,000 at September  30, 1996,  a $22,000  decrease.  The decrease
resulted from the Company's  December 3, 1996,  foreclosure  of a single loan on
four single-family  residences  located in the Houston,  Texas, area. Two of the
properties were  successfully  acquired at the foreclosure sale and are recorded
as foreclosed  real estate.  (see  "Foreclosed  Real Estate".) The remaining two
properties were sold at the foreclosure sale in partial satisfaction of the debt
on the properties. The attorney retained by the Association to act as substitute
trustee at the foreclosure sale failed to follow the Company's instructions with
regards to the two  properties.  The attorney sold the  properties for less than
the  instructed  amount  resulting  in a loss to the  Company  at the sale.  The
attorney  acknowledged  the  error  and  agreed  to  file a  claim  against  his
professional  liability insurance carrier.  The loss on the sale,  approximately
$26,000,  was charged against the Company's allowance for loan loss account. Any
payment  received on the  insurance  claim will be recorded as a recovery of the
loss on the sale and will be credited to the allowance account.

The allowance for loan losses as a percentage of loans  receivable  equaled .53%
at December 31, 1996, compared to .60% at September 30, 1996.

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
December 31, 1996, the Association's liquid asset ratio equaled 43.4%.

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,
1996,  the  Association  had  outstanding  commitments  to extend credit on $2.8
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  $21.1  million at December 31,  1996,  an
increase of $158,000 from the $20.9 million  reported at September 30, 1996. The
increase  was  primarily  a result of the  $183,000  net income for the  quarter
partially offset by a cash dividend of $54,000 paid during the quarter.

As of December 31, 1996,  the  Company's  reported  book value per share,  using
total stockholders' equity of $21.1 million (net of the cost of unallocated ESOP
shares)  and  1,079,285  outstanding  shares of common  stock (the total  issued
shares including  unallocated ESOP shares less treasury shares),  equaled $19.54
per share.

Subsequent to the quarter  ended  December 31, 1996,  the Company  announced its
intention  to pay a cash  dividend of $.05 per share on February  26,  1997,  to
stockholders of record at February 12, 1997.
<PAGE>
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,  1996,  the  Association's  actual and  required
capital amounts under each of the three requirements were as follows:

- Tangible  Capital  (stockholders'  equity) was $17.7 million or 15.6% of total
assets, exceeding the minimum requirement of 1.5% by $16.0 million.

- Core  Capital  (Tangible  capital plus  certain  intangible  assets) was $17.7
million or 15.6% of total assets,  exceeding the minimum  requirement of 3.0% by
$14.3 million.

- Risk-based  Capital (Core  capital plus general loan and valuation  allowances
less an adjustment for  capitalized  mortgage  servicing  rights)  equaled $18.0
million or 44.2% of risk weighted assets,  exceeding the minimum  requirement of
8.0% of risk weighted assets by $14.7 million.

At December 31,  1996,  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

                                DECEMBER 31, 1996



                           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 22, 1997, 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 Jack W. Flock and                 For             1,009,548
     Charles R. Halstead as directors for a three      Against                 0
     year term ending January 2000.                    Abstain                 0
                                                       Broker Non-Votes        0

     Ratification of the appointment of Bryant         For             1,009,548
     and Welborn, LLP, as independent                  Against                 0
     auditors for the fiscal year ending               Abstain                 0
     September 30, 1997.

     The text of the  matters  referred  to in this  Item 4 is set  forth in the
     Proxy  Statement  dated  December  23,  1996,  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 3.0 - By-Laws

         Exhibit 10.1 - 1995 Stock Option and Incentive Plan

         Exhibit 10.2 - Recognition and Retention Plan

         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, 1996, the Company filed a report
         on Form 8-K on October  17,  1996,  to report the  issuance  of a press
         release dated October 17, 1996,  announcing the Company's  intention to
         pay, on November 27,  1996,  a cash  dividend of $.05 per share for the
         quarter ended September 30, 1996, to stockholders of record on November
         13, 1996.

         During the quarter ended  December 31, 1996, the Company filed a report
         on Form 8-K on November  22,  1996,  to report the  issuance of a press
         release dated November 22, 1996,  announcing the Company's earnings for
         the year ended September 30, 1996.
<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 13, 1997            /s/ Gerald W. Free
                                    ------------------
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


Date:  February 13, 1997            /s/  Derrell W. Chapman
                                    -----------------------
                                    Vice President/COO/CFO
                                    (Principal Financial and Accounting Officer)