UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-QSB

(Mark One)
|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the quarterly period ended June 30, 1999


|_|   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 0-23971

                          GASTON FEDERAL BANCORP, INC.
                          ----------------------------
             (Exact name of registrant as specified in its charter)

         United States                                          56-2063438
-------------------------------                           ----------------------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                           Identification Number)

            245 West Main Avenue, Gastonia, North Carolina 28052-4140
            ---------------------------------------------------------
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (704)-868-5200
                                                           --------------


--------------------------------------------------------------------------------
ormer name, former address and former fiscal year, if changed since last report

      Indicate by check |X| whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. Yes |X| No |_|

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 4,374,634 shares
of the Registrant's common stock outstanding as of August 10, 1999.

<PAGE>

GASTON FEDERAL BANCORP, INC.

                                      INDEX

                                                                            Page
                                                                            ----

PART I.  FINANCIAL INFORMATION

  Item 1. Consolidated Financial Statements..............................      2

    Consolidated Statements of Financial Condition as of June 30, 1999
      and September 30, 1998 ............................................      2

    Consolidated Statements of Operations for the three and nine months
      ended June 30, 1999 and 1998.......................................      3

    Consolidated Statements of Comprehensive Income for the nine months
      ended June 30, 1999 and 1998.......................................      4

    Consolidated  Statements  of Cash  Flows  for the  nine  months
      ended June 30, 1999 and 1998.......................................      5

    Notes to Consolidated Financial Statements...........................      6

  Item 2. Management's Discussion and Analysis of Financial Condition
          and Results of Operations......................................      8

PART II. OTHER INFORMATION...............................................     11


                                       1
<PAGE>

PART I. FINANCIAL INFORMATION

      ITEM 1. Consolidated Financial Statements

Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition (unaudited)
(in thousands)

                                                       June 30,    September 30,
                                                         1999          1998
                                                       --------    -------------

Assets
Cash and cash equivalents ..........................      3,341        13,798
Investment securities available-for-sale,
  at fair value ....................................     22,483        20,919
Investment securities held-to-maturity,
  at amortized cost ................................     13,365        15,588
Mortgage-backed securities available-for-sale,
  at fair value ....................................     11,363         8,350
Mortgage-backed securities held-to-maturity,
  at amortized cost ................................      4,109         6,357
Loans, net .........................................    168,234       136,501
Premises and equipment, net ........................      2,374         2,247
Accrued interest receivable ........................      1,043         1,238
Federal Home Loan Bank stock .......................      1,650         1,300
Other assets .......................................      2,094         1,705
                                                       --------      --------
  Total assets .....................................   $230,056      $208,003
                                                       ========      ========

Liabilities and Equity
Deposits ...........................................   $154,427      $143,901
Advances from borrowers for taxes and insurance ....      1,062           728
Advances from Federal Home Loan Bank ...............     33,000        19,500
Other liabilities ..................................      1,347         2,304
                                                       --------      --------
  Total liabilities ................................    189,836       166,433

Retained earnings, substantially restricted ........     22,412        21,430
Common stock and additional paid in capital,
  net of ESOP loan .................................     17,294        18,602
Unrealized gain on securities available-for-sale,
  net of tax .......................................        514         1,538
                                                       --------      --------

  Total equity .....................................     40,220        41,570
                                                       --------      --------

Total liabilities and equity .......................   $230,056      $208,003
                                                       ========      ========

See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                Three Months              Nine Months
                                               Ended June 30,            Ended June 30,
                                               --------------            --------------
                                              1999         1998         1999         1998
                                              ----         ----         ----         ----
<S>                                        <C>          <C>          <C>          <C>
Interest income
Loans ................................     $    3,088   $    2,774   $    8,902   $    8,248
Investment securities ................            562          741        1,856        1,645
Mortgage-backed and related securities            236          140          606          449
                                           ----------   ----------   ----------   ----------
  Total interest income ..............          3,886        3,655       11,364       10,342

Interest Expense
Deposits .............................          1,602        1,421        4,738        4,889
Borrowed funds .......................            398          297        1,060          404
                                           ----------   ----------   ----------   ----------
  Total interest expense .............          2,000        1,718        5,798        5,293
                                           ----------   ----------   ----------   ----------

Net interest income ..................          1,886        1,937        5,566        5,049

Provision for loan losses ............             25           90           90          240
                                           ----------   ----------   ----------   ----------

  Net interest income after provision
    for loan losses ..................          1,861        1,847        5,476        4,809

Noninterest Income
Service charges on deposit accounts ..            102           67          262          203
Gain on sale of securities ...........          1,171            0        1,177          185
Gain on sale of other assets .........             27            0          165            0
Other income .........................            165          142          459          256
                                           ----------   ----------   ----------   ----------
  Total noninterest income ...........          1,465          209        2,063          644

Noninterest Expense
Compensation and benefits ............          1,807          614        3,168        1,839
Occupancy and equipment expense ......            103          145          313          358
Other expenses .......................            462          375        1,440        1,078
                                           ----------   ----------   ----------   ----------
  Total noninterest expense ..........          2,372        1,134        4,921        3,275

Income before income taxes ...........            954          922        2,618        2,178

Provision for income taxes ...........            338          312          939          763
                                           ----------   ----------   ----------   ----------

Net income ...........................     $      616   $      610   $    1,679   $    1,415
                                           ==========   ==========   ==========   ==========


Basic earnings per share .............     $     0.14   $     0.14   $     0.38           NA

Diluted earnings per share ...........     $     0.14   $     0.14   $     0.38           NA

Basic weighted average outstanding
  shares .............................      4,461,911    4,496,500    4,464,578           NA

Diluted weighted average outstanding
  shares .............................      4,473,623    4,496,500    4,468,482           NA

Dividends paid per share .............     $    0.055   $    0.000   $    0.155   $    0.000
</TABLE>


                                       3
<PAGE>

Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (unaudited)

                                                             Nine Months Ended
                                                                  June 30,
                                                            -------------------
                                                              1999        1998
                                                            -------     -------
                                                              (in thousands)

Net income .............................................    $ 1,679     $ 1,415
Other comprehensive income, net of tax:
  Unrealized gains on securities:
    Unrealized holding gains/(losses) arising
      during  period ...................................       (271)        352
    Reclassification adjustment for (gains)/losses
      included in net income ...........................       (753)       (118)
                                                            -------     -------
  Other comprehensive income ...........................     (1,024)        234
                                                            -------     -------

 Comprehensive income ..................................    $   655     $ 1,649
                                                            -------     -------


                                       4
<PAGE>

Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)

                                                             Nine Months Ended
                                                                  June 30,
                                                           --------------------
                                                              1999        1998
                                                           --------    --------
                                                              (in thousands)

Cash flows from operating activities:
  Net income ...........................................   $  1,679    $  1,415
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Provision for loan losses ..........................         90         240
    Depreciation .......................................        245         238
    (Gain) loss on sale of investment securities .......     (1,177)       (185)
    (Gain) loss on sale of other assets ................       (138)          0
    (Increase) decrease in other assets ................       (170)       (200)
    Increase (decrease) in other liabilities ...........       (957)       (245)
                                                           --------    --------

      Net cash provided by (used for) operating
        activities .....................................       (428)      1,263
                                                           --------    --------

Cash flows from investing activities:
  Net (increase) in loans receivable ...................    (30,566)     (4,806)
  Sale of investment securities ........................      5,727       2,713
  Maturities and prepayments of investment securities ..      7,734       6,431
  Maturities and prepayments of mortgage-backed
    securities .........................................      3,705       2,532
  Purchases of investments .............................    (10,639)    (25,989)
  Purchases of mortgage-backed securities ..............     (6,480)     (4,430)
  Net cash flows from other investing activities .......       (746)       (293)
                                                           --------    --------

      Net cash provided by (used for) investment
        activities .....................................    (31,265)    (23,842)
                                                           --------    --------

Cash flows from financing activities:
  Dividends to stockholders ............................       (697)          0
  Repurchase of common stock ...........................     (2,427)          0
  Net increase (decrease) in deposits ..................     10,526      (5,655)
  Net increase (decrease) in borrowed money ............     13,500      15,000
  Increase (decrease) in advances from borrowers for
    insurance and taxes ................................        334        (194)
  Net proceeds from sale of common stock ...............          0      18,590
                                                           --------    --------

      Net cash provided by (used for) financing
        activities .....................................     21,236      27,741
                                                           --------    --------


Net increase (decrease) in cash and cash equivalents ...    (10,457)      5,162

Cash and cash equivalents at beginning of period .......     13,798       4,625
                                                           --------    --------

Cash and cash equivalents at end of period .............   $  3,341    $  9,787
                                                           ========    ========


                                       5
<PAGE>

                   GASTON FEDERAL BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A - Basis of Presentation

      In management's opinion, the financial information, which is unaudited,
reflects all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial information as of and for the
three and nine month periods ended June 30, 1999 and 1998, in conformity with
generally accepted accounting principles. The financial statements include the
accounts of Gaston Federal Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Gaston Federal Bank (the "Bank"). Operating results for the three
and nine month periods ended June 30, 1999, are not necessarily indicative of
the results that may be expected for future periods.

      The organization and business of the Company, accounting policies
followed, and other information are contained in the notes to the consolidated
financial statements of the Company as of and for the years ended September 30,
1998 and 1997, filed as part of the Company's annual report on Form 10-KSB.
These consolidated financial statements should be read in conjunction with the
annual consolidated financial statements.

Note B - Plan of Reorganization and Stock Offering

      On April 9, 1998, the Bank converted from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank and
became the wholly-owned subsidiary of Gaston Federal Bancorp, Inc., a Federal
corporation (the "Reorganization"). The Company was incorporated on March 18,
1998, to serve as the Bank's holding company, and prior to April 9, 1998, had no
operations and insignificant assets and liabilities. In addition, the Company
sold 2,113,355 shares of its common stock to the Bank's customers for $10.00 per
share (the "Offering"), and issued 2,383,145 shares of its common stock to
Gaston Federal Holdings, MHC (the "Mutual Holding Company"), a federal mutual
holding company formed as part of the Reorganization. At the conclusion of the
Offering, the Mutual Holding Company owned 53.0% of the Company's outstanding
shares of common stock and purchasers in the Offering owned 47.0%. Gross
proceeds of the Offering totaled $21,133,550, expenses totaled approximately
$853,000, and purchases by the Bank's employee stock ownership plan formed in
connection with the Offering totaled $1,690,680 for net proceeds of
approximately $18,590,000.

Note C - Earnings per Share

      Earnings per share has been determined under the provisions of the
Statement of Financial Accounting Standards No. 128, Earnings Per Share. For the
quarters ended June 30, 1999 and 1998, basic earnings per share has been
computed based upon the weighted average common shares outstanding of 4,461,911
and 4,496,500, respectively. For the nine months ended June 30, 1999, basic
earnings per share has been computed based on the weighted average common shares
outstanding of 4,464,578. Earnings per share for the nine months ended June 30,
1998, is not presented since the common stock was not outstanding during the
entire period.


                                       6
<PAGE>

      The only potential stock of the Company as defined in the Statement of
Financial Accounting Standards No. 128, Earnings Per Share, is stock options
granted to various directors and officers of the Bank. The following is a
summary of the diluted earnings per share calculation for the three and nine
months ended June 30, 1999, and 1998: (in thousands, except per share data)

                                         Three Months            Nine Months
                                        Ended June 30,          Ended June 30,
                                        --------------          --------------
                                      1999         1998         1999       1998
                                      ----         ----         ----       ----

Net income .....................   $      616   $      610   $    1,679   $1,415

Weighted average outstanding
  shares .......................    4,461,911    4,496,500    4,464,578       NA
Dilutive effect of stock
  options ......................       11,712            0        3,904       NA
                                   ----------   ----------   ----------   ------

Weighted average diluted
  shares .......................    4,473,623    4,496,500    4,468,482       NA

Diluted  earnings per share ....   $     0.14   $     0.14   $     0.38       NA

      Options for 10,000 shares granted with an exercise price of $13.00 per
share were excluded from the calculation of diluted earnings per share because
the exercise price exceeded the average market price of $12.79.

Note D - Stock Compensation Plans

      On April 12, 1999, the Company's shareholders, among other actions,
approved the Gaston Federal Bank 1999 Recognition and Retention Plan.
Subsequently, 84,534 shares of common stock were awarded under the plan to
directors and management. All such awards vested during the quarter ended June
30, 1999. In addition, the Company's shareholders approved the Gaston Federal
Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options
for directors and officers to purchase the Company's common stock. As of June
30, 1999, 200,069 options had been awarded under the plan at a weighted average
exercise price of $12.05 and a weighted average contractual life of 118 months.
There were 82,819 options fully vested as of June 30, 1999.

      During the quarter ended June 30, 1999, compensation expense of $1.0
million was recognized in connection with the stock awards described above. The
Company applies the provisions of Accounting Principles Board Opinion No. 25 in
accounting for the Stock Option Plan described above and, accordingly, no
compensation expense has been recognized in connection with the granting of the
stock options.


                                       7
<PAGE>

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

      From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements provided that the Company notes that a variety of
factors could cause the Company's actual results to differ materially from the
anticipated results expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, and results
of the Company's business include, but are not limited to, changes in economic
conditions, changes in interest rates, and changes in laws and regulations.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends. Statements included in this report should
be read in conjunction with the Company's Annual Report on Form 10-KSB and are
incorporated into this discussion by this reference.

Comparison of Financial Condition

      Assets. Total assets of the Company increased by $22.1 million, or 10.6%,
from $208.0 million as of September 30, 1998, to $230.1 million as of June 30,
1999. The primary reason for the increase was a $31.7 million, or 23.2%,
increase in total loans from $136.5 million to $168.2 million. Mortgage loans
increased by $24.3 million, or 20.1%, to $145.2 million, and nonmortgage loans
increased by $7.4 million, or 47.4%, to $23.0 million. These loans were funded
from existing interest-earning bank balances, additional deposit accounts, and
additional advances from the Federal Home Loan Bank of Atlanta. Management plans
to continue to grow the loan portfolio in a safe and sound manner with an
emphasis on short-term, high-yielding nonmortgage loans. Due to the strong
growth in the loan portfolio, cash and cash equivalents decreased by $10.5
million, or 75.8%. Investment securities decreased by 1.8% to $35.8 million,
while mortgage-backed securities increased by 5.2% to $15.5 million.

      Liabilities. Total liabilities increased by $23.4 million, or 14.1%, from
$166.4 million as of September 30, 1998, to $189.8 million as of June 30, 1999.
The primary reasons for the change was a $10.5 million, or 7.3%, increase in
total deposits from $143.9 million to $154.4 million and a $13.5 million, or
69.2%, increase in borrowed money from $19.5 million to $33.0 million. The
increase in deposits was primarily the result of the introduction of a new menu
of personal and business demand accounts, which have been marketed aggressively
in order to gain market share in the local community. Management plans to
continue in its efforts to gain deposit market share through new product
development and aggressive marketing. The additional borrowed money was a part
of various leverage strategies in which the funds were used to purchase or fund
investment securities, mortgage-backed securities, and loans. The borrowed money
is comprised of various callable and fixed-term Federal Home Loan Bank advances
at fixed interest rates ranging from 4.69% to 5.75%, with a weighted average
interest rate of 5.15%.

      Equity. Total equity decreased by $1.4 million, or 3.5%, from $41.6
million as of September 30, 1998, to $40.2 million as of June 30, 1999. This
decrease was primarily due to the payment of $698,000 in dividends ($0.155 per
share) and the repurchase of 178,400 shares of common stock for $2.4 million, or
a weighted average price of $13.61 per share. The Company has been authorized to
repurchase a total of 401,437 shares of common stock, or 223,137 additional
shares. This decrease in equity was partly offset by $1.7 million in earnings.


                                       8
<PAGE>

Comparison of Results of Operations for the Three Months Ended June 30, 1999 and
1998

      General. Net income for the Company for the three months ended June 30,
1999, amounted to $616,000, as compared to $610,000 for the three months ended
June 30, 1998. This represents an increase of $6,000, or 1.0%.

      Net interest income. Net interest income amounted to $1.89 million for the
three months ended June 30, 1999, as compared to $1.94 million for the three
months ended June 30, 1998. This decrease of $51,000, or 2.6%, was due to a
$231,000 increase in interest income and a $282,000 increase in interest
expense. Interest income improved primarily as a result of a $29.2 million
increase in total loans and a $4.0 million increase in mortgage-backed
securities. This improvement was tempered by the receipt of an additional
$187,000 in interest income due to the favorable effects of the temporary
investment of approximately $100 million of oversubscriptions of the Company's
initial public offering during the June 30, 1998 quarter. Interest expense
increased primarily as a result of a $14.6 million increase in deposits and a
$14.5 million increase in borrowed money.

      Provision for loan losses. The provision for loan losses amounted to
$25,000 for the three months ended June 30, 1999, as compared to $90,000 for the
three months ended June 30, 1998. This represents a decrease of $65,000. The
amount of the provision for loan losses was reduced due to an overall reduction
in the percentage of nonperforming assets from 0.74% of total assets as of June
30, 1998, to 0.24% of total assets as of June 30, 1999. The ratio of loan loss
reserves to gross loans was 0.88% as of June 30, 1999, and 0.96% as of June 30,
1998.

      Noninterest income. Total noninterest income amounted to $1.5 million for
the three months ended June 30, 1999, as compared to $209,000 for the three
months ended June 30, 1998. This increase of $1.3 million was primarily due to
$1.2 million in gains on sale of assets during the quarter ended June 30, 1999.
Without these nonrecurring items, noninterest income would have increased by
$58,000, or 21.7%, due to additional fee income derived from loan and deposit
products and commissions on the sale of financial products through the Bank's
wholly-owned subsidiary.

      Noninterest expense. Total noninterest expense amounted to $2.4 million
for the three months ended June 30, 1999, as compared to $1.1 million for the
three months ended June 30, 1998. This increase of $1.2 million was primarily
due to a nonrecurring $1.0 million increase in compensation as the result of the
implementation of the 1999 Gaston Federal Bank Recognition and Retention Plan
that was adopted by the Company's shareholders in April 1999. The remaining
increase in noninterest expense was primarily due to an increase in the cost of
professional services as a result of being a public company and additional
expenses associated with implementing new products and services.

      Income taxes. Income taxes amounted to $338,000, or 35.4% of taxable
income, for the three month period ended June 30, 1999, as compared to $312,000,
or 33.8% of taxable income, for the three month period ended June 30, 1998. This
represents an increase of $26,000, or 8.3%. This difference was primarily due to
a $32,000 increase in net income before taxes for the three months ended June
30, 1999.


                                       9
<PAGE>

Comparison of Results of Operations for the Nine Months Ended June 30, 1999 and
1998

      General. Net income for the Company for the nine months ended June 30,
1999, amounted to $1,679,000, as compared to $1,415,000 for the nine months
ended June 30, 1998. This represents an increase of $264,000, or 18.7%.

      Net interest income. Net interest income amounted to $5.6 million for the
nine months ended June 30, 1999, as compared to $5.0 million for the nine months
ended June 30, 1998. This represents an increase of $517,000, or 10.4%. This
increase was due to a $1.0 million increase in total interest income that was
offset by a $505,000 increase in interest expense. Interest income improved
primarily as a result of a $29.2 million increase in total loans and a $4.0
million increase in mortgage-backed securities. This improvement was tempered by
the receipt of additional interest income derived from the temporary investment
of approximately $100 million of oversubscriptions of the Company's initial
public offering in April 1998. Interest expense increased primarily as a result
of a $14.6 million increase in deposits and a $14.5 million increase in borrowed
money.

      Provision for loan losses. The provision for loan losses amounted to
$90,000 for the nine months ended June 30, 1999, as compared to $240,000 for the
nine months ended June 30, 1998. This represents a decrease of $150,000. The
amount of the provision for loan losses was reduced due to an overall reduction
in the percentage of nonperforming assets from 0.74% of total assets as of June
30, 1998, to 0.24% of total assets as of June 30, 1999. The ratio of loan loss
reserves to gross loans was 0.88% as of June 30, 1999, and 0.96% as of June 30,
1998.

      Noninterest income. Total noninterest income amounted to $2.1 million for
the nine months ended June 30, 1999, as compared to $644,000 for the nine months
ended June 30, 1998. This represents an increase of $1.4 million, or 220.3%.
Gains on sale of assets amounted to $1.3 million in 1999 and $185,000 in 1998.
Without these nonrecurring items, noninterest income would have increased by
$262,000, or 57.1%. This increase was primarily due to additional fee income
derived from loan and deposit products and commissions on the sale of financial
products through the Bank's wholly-owned subsidiary.

      Noninterest expense. Total noninterest expense amounted to $4.9 million
for the nine months ended June 30, 1999, as compared to $3.3 million for the
nine months ended June 30, 1998. This represents an increase of $1.6 million or
48.5%. This increase was primarily due to a nonrecurring $1.0 million increase
in compensation as the result of the implementation of the 1999 Gaston Federal
Bank Recognition and Retention Plan that was adopted by the Company's
shareholders in April 1999. The remaining increase in noninterest expense was
primarily due to an increase in the cost of professional services as a result of
being a public company and additional expenses associated with implementing new
products and services.

      Income taxes. Income taxes amounted to $939,000, or 35.9% of taxable
income, for the nine month period ended June 30, 1999, as compared to $763,000,
or 35.0% of taxable income, for the nine month period ended June 30, 1998. This
represents an increase of $176,000, or 23.1%. This difference was primarily due
to a $440,000, or 20.2%, increase in net income before taxes for the nine months
ended June 30, 1999.


                                       10
<PAGE>

Liquidity and Capital Resources

      The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.

      The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable and cash flows generated from operations.
External sources of funds include increases in deposits and advances from the
Federal Home Loan Bank of Atlanta.

      The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in qualifying types of investments having
maturities of five years or less. Current OTS regulations require that a savings
bank maintain liquid assets of not less that 4% of its average daily balance of
net withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At June 30, 1999, the Bank's liquidity, as measured for regulatory
purposes, was 14.4%, or $17.0 million in excess of the minimum OTS requirement.

      The Bank is subject to various regulatory capital requirements
administered by the banking regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly discretionary actions
by the regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are subject
to qualitative judgments by the regulators about components, risk-weightings,
and other factors. As of June 30, 1999, Gaston Federal Bank's level of capital
substantially exceeded all applicable regulatory requirements.

The Year 2000

      Like all financial institutions, the Bank relies upon computers for
conducting its daily operations. There is concern among industry experts that on
January 1, 2000, computers will be unable to "read" the new year and, as a
consequence, there may be widespread computer malfunctions. Since the Bank
processes all of its loan, deposit, and accounting operations on an internal
data processing system, the Year 2000 issue could have a material adverse effect
on the operations of the Bank if proper modifications and conversions are not
made in a timely manner. As a result, Management has conducted a comprehensive
review of its computer systems to identify systems that could be affected by the
Year 2000, and has developed a Year 2000 Plan to modify or replace the affected
systems and test them for Year 2000 readiness. To date, the Company has taken
the following actions to mitigate the potential effects of the Year 2000 issue:

o     The Bank has upgraded its mainframe computer system (including hardware
      and software) to be Year 2000 ready. Management has successfully tested
      the new computer system to ensure that there are no material Year 2000
      problems. These tests have been validated by a qualified third party;

o     The Board of Directors has adopted a Year 2000 Plan that has been
      implemented by Management. The Plan addresses the overall status of the
      Year 2000 project, details the Bank's contingency plan, describes mission
      critical systems and non-mission critical systems, and identifies test
      dates. The Company also has a written Year 2000 Business Resumption
      Contingency Plan which contains all mission critical systems and services
      and details policy, public relations statements, and workaround procedures
      for each system. A general contingency plan has been developed for
      non-mission critical systems;


                                       11
<PAGE>

o     The Board of Directors has engaged an outside technology consultant to
      assist Management in identifying any and all exposures that the Bank may
      have and help make all appropriate changes necessary to allow a smooth
      transition to the new millennium;

o     The Bank's Year 2000 Business Resumption Contingency Plan has been
      completed and validated;

o     The Company has established a Year 2000 Committee consisting of members of
      senior management that currently meets regularly to discuss progress on
      the Year 2000 Plan; and

o     A Year 2000 budget has been developed which estimates the cost associated
      with Year 2000 readiness to be less than $250,000. To date, the Company
      has expensed approximately $200,000 on Year 2000 readiness, including
      $125,000 for a new mainframe computer system (hardware and software) which
      is being depreciated over a three-year period.

      While the Bank has completed its Year 2000 plan, there can be no assurance
that the mission critical systems of the other companies and vendors on which
the Bank's systems may rely will be completed in a timely fashion. The failure
of such outside entities to address the Year 2000 issue adequately could have an
adverse effect on the Bank's ability to conduct its business. Workaround
procedures for these possible scenarios are detailed in the Company's Year 2000
Business Resumption Contingency Plan.

PART II. OTHER INFORMATION

Legal Proceedings

      There are various claims and lawsuits in which the Bank is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.

Changes in Securities

      Not applicable.

Defaults Upon Senior Securities

      Not applicable.

Submission of Matters to a Vote of Security Holders

      On April 12, 1999, the Company's shareholders, among other actions,
approved the Gaston Federal Bank 1999 Recognition and Retention Plan.
Subsequently, 84,534 shares of common stock were awarded under the plan to
directors and management. All such awards vested during the quarter ended June
30, 1999. In addition, the Company's shareholders approved the Gaston Federal
Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options
for directors and officers to purchase the Company's common stock. As of June
30, 1999, 200,069 options had been awarded under the plan and 82,819 options had
fully vested.

Exhibits and Report on Form 8-K.

      No Form 8-K reports were filed during the quarter.


                                       12
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.

                                       GASTON FEDERAL BANCORP, INC.


Date: August 13, 1999                  By: /s/ Kim S. Price
                                           -------------------------------------
                                           Kim S. Price
                                           President and Chief Executive Officer


Date: August 13, 1999                  By: /s/ Gary F. Hoskins
                                           -------------------------------------
                                           Gary F. Hoskins
                                           Senior Vice President, Chief
                                           Financial Officer and Treasurer


                                       13