U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

    X           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 ------              OF THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 2008

                                       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 No.
                                     0-25933

                        SOUTHCOAST FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

               South Carolina                          57-1079460
        (State or other jurisdiction                (I.R.S. Employer
     of incorporation or organization)            Identification No.)

                           530 Johnnie Dodds Boulevard
                       Mt. Pleasant, South Carolina 29464
                    (Address of principal executive offices)

                                  843-884-0504
              (Registrant's telephone number, including area code)
                ------------------------------------------------

Indicate by check mark 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 [ ]


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
the definitions of "large accelerated filer,"  "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [ ]                    Accelerated filer          [X]
Non-accelerated filer    [ ]                    Smaller reporting company  [ ]
(Do not check if a smaller reporting company)

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 YES [ ] NO [X]

 State the  number of shares  outstanding  of each of the  issuer's  classes  of
common stock as of the latest practicable date.

     4,534,089 shares of common stock, no par value, as of October 31, 2008





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

<TABLE>
<CAPTION>
                                      INDEX

PART I - FINANCIAL INFORMATION                                                                                     Page No.
------------------------------                                                                                     --------

Item 1.  Financial Statements (Unaudited)

<S>      <C>                                                                                                        <C>
         Condensed Consolidated Balance Sheets - September 30, 2008 and December 31, 2007...............................2

         Condensed Consolidated Statements of Income - Nine months ended September 30, 2008 and 2007....................3

         Condensed Consolidated Statements of Income - Three months ended September 30, 2008 and 2007...................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Nine months ended September 30, 2008 and 2007................................................................5

         Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2008 and 2007................6

Notes to Condensed Consolidated Financial Statements.................................................................7-11

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................12-23

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................23

Item 4.  Controls and Procedures.......................................................................................23

PART II - OTHER INFORMATION

Item 1A.  Risk Factors   ............................................................................................. 24

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.................................................. 25

Item 6.  Exhibits......................................................................................................25

Signatures ............................................................................................................26

Exhibit Index..........................................................................................................27
</TABLE>





<PAGE>


                                         SOUTHCOAST FINANCIAL CORPORATION
                                       Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                  September 30,         December 31,
                                                                                                       2008                2007
                                                                                                       ----                ----
                                                                                                   (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $  16,007,237        $   7,033,156
     Federal funds sold ..................................................................             584,648            3,774,000
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................          16,591,885           10,807,156
   Investment securities
     Available for sale ..................................................................          63,655,054           58,467,574
     Federal Home Loan Bank Stock, at cost ...............................................           4,149,500            4,141,700
                                                                                                 -------------        -------------
       Total investment securities .......................................................          67,804,554           62,609,274
   Loans held for sale ...................................................................             150,000              384,000
   Loans, net of allowance of $5,845,319 and $4,297,337 ..................................         402,738,219          374,116,734
   Property and equipment, net ...........................................................          23,813,535           26,735,228
   Company Owned Life Insurance ..........................................................          21,107,232           20,467,919
   Other assets ..........................................................................           9,384,131            5,731,776
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 541,589,556        $ 500,852,087
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  29,224,099        $  32,607,181
     Interest bearing ....................................................................         357,110,804          310,147,640
                                                                                                 -------------        -------------
       Total deposits ....................................................................         386,334,903          342,754,821
   Federal funds purchased ...............................................................             789,100                    -
   Securities sold under agreements to repurchase ........................................          11,697,086            7,730,401
   Other borrowings ......................................................................          73,000,000           73,500,000
   Junior subordinated debentures ........................................................          10,310,000           10,310,000
   Other liabilities .....................................................................           4,394,170            3,815,558
                                                                                                 -------------        -------------
       Total liabilities .................................................................         486,525,259          438,110,780
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  4,534,089 shares
     outstanding at September 30, 2008 and
     5,009,903 at December 31, 2007) .....................................................          53,537,239           60,157,384
   Retained earnings .....................................................................           3,223,188            2,597,714
   Accumulated other comprehensive loss ..................................................          (1,696,130)             (13,791)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          55,064,297           62,741,307
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 541,589,556        $ 500,852,087
                                                                                                 =============        =============
</TABLE>




                                       2
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the Nine Months Ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                    2008                    2007
                                                                                                    ----                    ----
Interest income
<S>                                                                                             <C>                     <C>
   Loans, including fees ............................................................           $ 20,596,901            $ 21,470,899
   Investment securities ............................................................              2,651,345               1,969,230
   Federal funds sold ...............................................................                 35,194                 358,259
                                                                                                ------------            ------------
       Total interest income ........................................................             23,283,440              23,798,388
                                                                                                ------------            ------------
Interest expense
   Deposits and borrowings ..........................................................             11,985,003              12,960,254
                                                                                                ------------            ------------
Net interest income .................................................................             11,298,437              10,838,134
Provision for loan losses ...........................................................              2,594,297                       -
                                                                                                ------------            ------------
Net interest income after provision for loan losses .................................              8,704,140              10,838,134
                                                                                                ------------            ------------
Noninterest income
    Service fees on deposit accounts ................................................                856,365                 780,816
    Fees on loans sold ..............................................................                186,549                 263,243
    Gain on sale of available for sale securities ...................................                300,115                 255,954
    Other than temporary impairment charge on GSE preferred stock ...................             (2,878,096)                      -
    Gain on sale of premises and equipment ..........................................              2,330,246                  25,016
    Company Owned Life Insurance earnings ...........................................                639,313                 355,085
    Other ...........................................................................                211,752                 240,710
                                                                                                ------------            ------------
       Total noninterest income .....................................................              1,646,244               1,920,824
                                                                                                ------------            ------------
Noninterest expenses
   Salaries and employment benefits .................................................              5,826,220               4,935,028
   Occupancy ........................................................................                894,417                 834,648
   Furniture and equipment ..........................................................                887,476                 869,362
   Advertising and public relations .................................................                 39,874                 121,432
   Professional fees ................................................................                468,692                 414,051
   Travel and entertainment .........................................................                190,522                 219,832
   Telephone, postage and supplies ..................................................                306,334                 331,846
   Other operating expenses .........................................................              1,330,188               1,022,457
                                                                                                ------------            ------------
       Total noninterest expenses ...................................................              9,943,723               8,748,656
                                                                                                ------------            ------------
Income before income taxes ..........................................................                406,661               4,010,302
Income tax (benefit) expense ........................................................               (218,813)              1,304,660
                                                                                                ------------            ------------
Net income ..........................................................................           $    625,474            $  2,705,642
                                                                                                ============            ============
Basic net income per common share ...................................................           $        .13            $        .49
Diluted net income per common share .................................................           $        .13            $        .49
Weighted average shares outstanding
   Basic ............................................................................              4,641,649               5,554,195
   Diluted ..........................................................................              4,641,649               5,559,507
</TABLE>


                                       3
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       For the Three Months Ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                      2008                  2007
                                                                                                      ----                  ----
 Interest income
<S>                                                                                               <C>                    <C>
   Loans, including fees ..............................................................           $ 6,794,215            $ 7,248,499
   Investment securities ..............................................................               917,090                762,912
   Federal funds sold .................................................................                16,390                 61,358
                                                                                                  -----------            -----------
       Total interest income ..........................................................             7,727,695              8,072,769
                                                                                                  -----------            -----------
Interest expense
   Deposits and borrowings ............................................................             3,972,153              4,599,063
                                                                                                  -----------            -----------
Net interest income ...................................................................             3,755,542              3,473,706
Provision for loan losses .............................................................             1,484,250                     -.
                                                                                                  -----------            -----------
Net interest income after provision for loan losses ...................................             2,271,292              3,473,706
                                                                                                  -----------            -----------
Noninterest income(loss)
   Service fees on deposit accounts ...................................................               308,068                291,432
   Fees on loans sold .................................................................                49,706                 60,493
   Gain on sale of available for sale securities ......................................                75,697                164,003
   Other than temporary impairment charge on GSE preferred stock ......................            (2,878,096)                     -
   Gain on sale of property and equipment .............................................             2,330,246                      -
   Company Owned Life Insurance Earnings ..............................................               211,663                196,553
   Other ..............................................................................                40,639                 44,223
                                                                                                  -----------            -----------
       Total noninterest income .......................................................               137,923                756,704
                                                                                                  -----------            -----------
Noninterest expenses
   Salaries and employment benefits ...................................................             2,390,269              1,511,610
   Occupancy ..........................................................................               320,687                297,021
   Furniture and equipment ............................................................               295,164                302,112
   Advertising and public relations ...................................................                19,815                 28,508
   Professional fees ..................................................................               150,796                 92,354
   Travel and entertainment ...........................................................                85,480                 76,275
   Telephone, postage, and supplies ...................................................               104,726                108,473
   Other operating expenses ...........................................................               554,284                368,724
                                                                                                  -----------            -----------
       Total noninterest expenses .....................................................             3,921,221              2,785,077
                                                                                                  -----------            -----------
Income (loss) before income taxes .....................................................            (1,512,006)             1,445,333
Income tax(benefit)expense ............................................................              (623,033)               434,635
                                                                                                  -----------            -----------
Net income (loss) .....................................................................           $  (888,973)           $ 1,010,698
                                                                                                  ===========            ===========
Basic net income (loss) per common share ..............................................           $      (.20)           $       .19
Diluted net income (loss) per common share ............................................           $      (.20)           $       .19
Weighted average shares outstanding
   Basic ..............................................................................             4,542,304              5,217,249
   Diluted ............................................................................             4,542,304              5,221,717
</TABLE>


                                       4
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
       Condensed Consolidated Statement of Changes in Shareholders' Equity
                            and Comprehensive Income
              For the nine months ended September 30, 2008 and 2007
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                                           other
                                                                Common Stock                           comprehensive
                                                                ------------               Retained        income
                                                             Shares        Amount          earnings         (loss)           Total
                                                             ------        ------          --------         ------           -----
<S>                                                        <C>          <C>             <C>             <C>            <C>
Balance, December 31, 2006 ..........................      5,470,316    $ 75,315,774    $  3,503,162    $    (16,324)  $ 78,802,612

   Net income for the period ........................                                      2,705,642                      2,705,642

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ...............                                                      (158,740)       (158,740)
                                                                                                                       ------------

   Comprehensive income .............................                                                                     2,546,902

   Stock dividend ...................................        502,609       4,334,074      (4,334,074)                             -

   Shares repurchased and retired ...................       (957,497)    (19,443,547)                                   (19,443,547)

   Employee stock purchase plan .....................          5,077         102,834                                        102,834
                                                           ---------    ------------    ------------    ------------   ------------

Balance, September 30, 2007 .........................      5,020,505    $ 60,309,135    $  1,874,730    $   (175,064)  $ 62,008,801
                                                           =========    ============    ============    ============   ============

Balance, December 31, 2007 ..........................      5,009,903    $ 60,157,384    $  2,597,714    $    (13,791)  $ 62,741,307

   Net income for the period ........................                                        625,474                        625,474

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ...............                                                     (3,332,247)    (3,332,247)

   Less reclassification adjustment for
     losses included in net income, net of
     taxes of $ 928,073 .............................                                                      1,649,908      1,649,908
                                                                                                                        ------------

   Comprehensive loss ...............................                                                                    (1,056,865)

   Shares repurchased and retired ...................       (483,593)     (6,730,886)                                    (6,730,886)

   Employee stock purchase plan .....................          7,779         110,741                                        110,741
                                                           ---------    ------------    ------------    ------------    ------------

Balance, September 30, 2008 .........................      4,534,089    $ 53,537,239    $  3,223,188    $ (1,696,130)   $ 55,064,297
                                                           =========    ============    ============    ============    ============
</TABLE>


                                       5
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                     For the nine months ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                      2008                  2007
                                                                                                      ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $    625,474         $  2,705,642
   Adjustments to reconcile net income to net
    cash provided (used) by operating activities
     (Increase)decrease in deferred income taxes .........................................          (1,426,766)             371,008
     Provision for loan losses ...........................................................           2,594,297                    -
     Depreciation and amortization .......................................................             858,931            1,014,086
     Discount accretion and premium amortization .........................................             (50,921)              (9,654)
     Other than temporary impairment charge on GSE preferred stock .......................           2,878,096                    -
     Gain on sale of securities ..........................................................            (300,115)            (255,954)
     Gain on sale of premises and equipment ..............................................          (2,330,246)             (25,016)
     Loss on disposal of premises and equipment ..........................................              14,955                    -
     Loss on sale of other real estate owned .............................................               1,739                    -
     Originations of loans held for sale .................................................         (36,162,715)         (40,816,193)
     Proceeds from sales of loans held for sale ..........................................          36,396,715           40,713,123
     Increase in value of Company owned life insurance ...................................            (639,313)            (355,085)
     Increase in other assets ............................................................            (839,425)            (592,225)
     Increase(decrease) in other liabilities .............................................             578,612             (233,140)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           2,199,318            2,516,592
                                                                                                  ------------         ------------

Investing activities
   Purchases sales of Federal Home Loan Bank stock .......................................              (7,800)            (483,900)
   Purchases of investment securities available-for-sale .................................         (33,580,470)         (26,551,342)
   Sales, calls, and maturities of investment securities available-for-sale ..............          23,284,118           18,522,130
   Purchases of Company Owned Life Insurance .............................................                   -          (14,716,988)
Proceeds from sales of premises and equipment ............................................           5,795,459               34,000
   Purchases of premises and equipment ...................................................          (1,417,406)          (1,677,080)
   Net increase in loans .................................................................         (31,704,212)          (2,456,687)
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (37,630,311)         (27,329,867)
                                                                                                  ------------         ------------

Financing activities
   Increase in borrowings ................................................................           4,255,785           24,969,418
   Decrease in junior subordinated debentures ............................................                   -           (4,125,000)
   Proceeds from issuances of stock ......................................................             110,741              102,834
   Funds used to repurchase stock ........................................................          (6,730,886)         (19,443,547)
   Net increase(decrease) in deposits ....................................................          43,580,082           (7,867,640)
                                                                                                  ------------         ------------

         Net cash provided (used) by financing activities ................................          41,215,722           (6,363,935)
                                                                                                  ------------         ------------

         Increase (decrease) in cash and cash equivalents ................................           5,784,729          (31,177,210)

Cash and cash equivalents, beginning of period ...........................................          10,807,156           38,212,202
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 16,591,885         $  7,034,992
                                                                                                  ============         ============

Cash paid during the year for:
   Income taxes ..........................................................................        $  1,219,345         $  1,314,715
   Interest ..............................................................................        $ 11,778,576         $ 12,721,667
</TABLE>


                                       6
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
for interim  financial  information  and with the  instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange  Commission.  Accordingly  they do
not include all information and notes required by generally accepted  accounting
principles for complete financial statements.  However, in management's opinion,
all  adjustments   (consisting  of  normal  recurring  adjustments)   considered
necessary for a fair presentation have been included.

Note 2 - Organization

Southcoast Financial Corporation (the "Company") is a South Carolina corporation
organized  in 1999 for the  purpose of being a holding  company  for  Southcoast
Community Bank (the "Bank").  On April 29, 1999,  pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding shares of capital stock of
the Bank were  exchanged for shares of common stock of the Company.  The Company
presently  engages in no business other than that of owning the Bank and another
subsidiary and has no employees.

Note 3 - Net Income Per Share

Net income per share is computed on the basis of the weighted  average number of
common shares  outstanding in accordance with Statement of Financial  Accounting
Standards No. 128,  "Earnings  per Share." The treasury  stock method is used to
compute the effect of stock  options on the  weighted  average  number of shares
outstanding for diluted earnings per share.

Note 4 - Stock Repurchase

On January 18, 2008,  the Company  announced  plans to  repurchase up to 484,527
shares of its  outstanding  common  stock.  Repurchased  shares are retired into
authorized  unissued  shares.  The Company had previously in July 2007 announced
plans to repurchase up to 547,556 shares of its outstanding common stock. During
the first nine months of 2008, the Company  repurchased 483,593 shares, of which
314,929 were  repurchased  pursuant to the 2008 repurchase plan and 168,664 were
repurchased  pursuant to the 2007 repurchase plan.  During the first nine months
of 2007, the Company  repurchased 957,497 shares of common stock pursuant to the
2007 repurchase plan.

Note 5 - Recently Issued Accounting Standards

The  following  is a summary  of recent  authoritative  pronouncements  that may
affect  accounting,  reporting,  and disclosure of financial  information by the
Company:

In December  2007,  the FASB issued SFAS No.  141(R),  "Business  Combinations,"
("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes  principles and
requirements  for how an  acquirer  in a  business  combination  recognizes  and
measures in its financial  statements  the  identifiable  assets  acquired,  the
liabilities  assumed,  and any  controlling  interest;  recognizes  and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and  determines  what  information  to disclose to enable users of the financial
statements  to  evaluate  the  nature  and  financial  effects  of the  business
combinations.  FAS 141(R) is effective for  acquisitions  by the Company  taking
place on or after January 1, 2009. Early adoption is prohibited.  Accordingly, a
calendar   year-end  company  is  required  to  record  and  disclose   business
combinations  following existing  accounting guidance until January 1, 2009. The
Company  will assess the impact of SFAS 141(R) if and when a future  acquisition
occurs.

In December  2007,  the FASB issued SFAS No. 160,  "Noncontrolling  Interests in
Consolidated  Financial  Statements - an amendment of ARB No. 51" ("SFAS  160").
SFAS  160   establishes   new  accounting   and  reporting   standards  for  the
noncontrolling  interest  in a  subsidiary  and  for  the  deconsolidation  of a
subsidiary.  Before this  statement,  limited  guidance  existed  for  reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is  reported  in  the  mezzanine  section  between  liabilities  and  equity.
Specifically,  SFAS 160 requires the  recognition of a  noncontrolling  interest
(minority  interest) as equity in the  consolidated  financials  statements  and
separate from the parent's equity. The amount of net income  attributable to the
noncontrolling  interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a


                                       7
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Recently Issued Accounting Standards- (continued)

parent's   ownership   interest   in  a   subsidiary   that  do  not  result  in
deconsolidation  are equity  transactions  if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
gain or loss in net income when a  subsidiary  is  deconsolidated.  Such gain or
loss  will be  measured  using  the  fair  value  of the  noncontrolling  equity
investment  on  the  deconsolidation  date.  SFAS  160  also  includes  expanded
disclosure   requirements   regarding  the  interests  of  the  parent  and  its
noncontrolling  interests.  SFAS 160 is effective  for the Company on January 1,
2009. Earlier adoption is prohibited.  The Company does not believe the adoption
of SFAS 160 will have a material  impact on its financial  position,  results of
operations or cash flows.

In March  2008,  the FASB issued SFAS No.  161,  "Disclosures  about  Derivative
Instruments and Hedging  Activities"  ("SFAS 161").  SFAS 161 requires  enhanced
disclosures  about an entity's  derivative  and hedging  activities  and thereby
improves the transparency of financial reporting.  It is intended to enhance the
current disclosure  framework in SFAS 133 by requiring that objectives for using
derivative  instruments be disclosed in terms of underlying  risk and accounting
designation.  This  disclosure  better  conveys the purpose of derivative use in
terms of the risks that the entity intends to manage.  SFAS 161 is effective for
the Company on January 1, 2009. This  pronouncement  does not impact  accounting
measurements  but will  result  in  additional  disclosures  if the  Company  is
involved in material derivative and hedging activities at that time.

In February 2008, the FASB issued FASB Staff Position No. 140-3, "Accounting for
Transfers of  Financial  Assets and  Repurchase  Financing  Transactions"  ("FSP
140-3").  This FSP provides guidance on accounting for a transfer of a financial
asset and the transferor's  repurchase financing of the asset. This FSP presumes
that an initial  transfer of a financial  asset and a repurchase  financing  are
considered part of the same arrangement (linked transaction) under SFAS No. 140.
However,  if certain  criteria  are met,  the initial  transfer  and  repurchase
financing are not evaluated as a linked transaction and are evaluated separately
under Statement 140. FSP 140-3 will be effective for financial statements issued
for fiscal years  beginning  after November 15, 2008, and interim periods within
those fiscal years and earlier application is not permitted.  Accordingly,  this
FSP is  effective  for the Company on January 1, 2009.  The Company is currently
evaluating  the  impact,  if any,  the  adoption  of FSP 140-3  will have on its
financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3,  "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized  intangible  asset under SFAS No. 142,
"Goodwill and Other Intangible Assets". The intent of this FSP is to improve the
consistency between the useful life of a recognized  intangible asset under SFAS
No. 142 and the period of expected  cash flows used to measure the fair value of
the asset  under  SFAS No.  141(R),  "Business  Combinations,"  and  other  U.S.
generally accepted  accounting  principles.  This FSP is effective for financial
statements  issued for fiscal years  beginning  after  December  15,  2008,  and
interim  periods  within those fiscal  years and early  adoption is  prohibited.
Accordingly,  this FSP is  effective  for the  Company on  January 1, 2009.  The
Company does not believe the  adoption of FSP 142-3 will have a material  impact
on its financial position, results of operations or cash flows.

In May, 2008, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted  Accounting  Principles," ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting  principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP  hierarchy).  SFAS No. 162 is effective  November
15,  2008.  The FASB has stated that it does not expect SFAS No. 162 will result
in a change in current  practice.  The  application of SFAS No. 162 will have no
effect on the Company's financial position, results of operations or cash flows.

SFAS No. 163,  "Accounting  for  Financial  Guarantee  Insurance  Contracts,  an
Interpretation of FASB Statement No. 60," ("SFAS 163") was issued by the FASB in
May, 2008 to alleviate diversity in accounting for financial guarantee insurance
contracts.  SFAS 163  requires  an  insurance  enterprise  to  recognize a claim
liability  prior to an event of default  (insured  event) when there is evidence
that credit deterioration has occurred in an insured financial  obligation.  The
Statement also modifies  premium revenue and claim  liabilities  recognition and
measurement. SFAS 163 is effective for fiscal years beginning after December 15,
2008,  and all interim  periods  within those fiscal years with the exception of
disclosures  related to the insurance  enterprise's  risk-management  activities
which are effective for the first period (including  interim periods)  beginning
after  issuance  of  this  Statement.  Except  for  those  disclosures,  earlier
application  is not  permitted.  The  adoption  of this  Statement  will have no
material effect on the Company's  financial  position,  results of operations or
cash flows.


                                       8
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Note 5 - Recently Issued Accounting Standards- (continued)

The FASB issued FASB Staff Position No. APB 14-1,  "Accounting  for  Convertible
Debt Instruments That May Be Settled in Cash upon Conversion  (Including Partial
Cash  Settlement),"  ("FSP APB 14-1"). The Staff Position specifies that issuers
of  convertible  debt  instruments  that may be settled in cash upon  conversion
should  separately  account for the liability and equity  components in a manner
that will reflect the entity's  nonconvertible debt borrowing rate when interest
cost is  recognized in subsequent  periods.  FSP APB 14-1 provides  guidance for
initial and subsequent  measurement  as well as  derecognition  provisions.  The
Staff  Position is effective  for financial  statements  issued for fiscal years
beginning  after  December 15,  2008,  and interim  periods  within those fiscal
years. Early adoption is not permitted. The adoption of this Staff Position will
have  no  material  effect  on the  Company's  financial  position,  results  of
operations or cash flows.

In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether   Instruments   Granted  in   Share-Based   Payment   Transactions   are
Participating Securities," ("FSP EITF 03-6-1"). The Staff Position provides that
unvested  share-based  payment  awards  that  contain  nonforfeitable  rights to
dividends  or dividend  equivalents  are  participating  securities  and must be
included in the earnings per share computation. FSP EITF 03-6-1 is effective for
financial  statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively.  Early application is not permitted.
The  adoption  of this  Staff  Position  will  have no  material  effect  on the
Company's financial position, results of operations or cash flows.

Effective  January 1, 2008,  the  Company  adopted  SFAS No.  157,  "Fair  Value
Measurements"  ("SFAS  157")  which  provides  a  framework  for  measuring  and
disclosing fair value under generally accepted accounting  principles.  SFAS 157
requires  disclosures about the fair value of assets and liabilities  recognized
in the balance sheet in periods subsequent to initial  recognition,  whether the
measurements  are made on a  recurring  basis (for  example,  available-for-sale
investment securities) or on a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value as the exchange  price that would be received for an
asset or paid to transfer a liability  (an exit price) in the  principal or most
advantageous market for the asset or liability in an orderly transaction between
market  participants on the measurement  date. SFAS 157 also  establishes a fair
value  hierarchy  which  requires  an entity to maximize  the use of  observable
inputs and minimize the use of  unobservable  inputs when  measuring fair value.
The standard  describes  three levels of inputs that may be used to measure fair
value:


Level 1   Quoted prices in active markets for identical  assets or  liabilities.
          Level 1 assets and liabilities  include debt and equity securities and
          derivative  contracts that are traded in an active exchange market, as
          well as U.S. Treasuries, and money market funds.

Level 2   Observable  inputs other than Level 1 prices such as quoted prices for
          similar assets or  liabilities;  quoted prices in markets that are not
          active;  or other inputs that are observable or can be corroborated by
          observable  market data for  substantially the full term of the assets
          or liabilities. Level 2 assets and liabilities include debt securities
          with   quoted   prices   that  are   traded   less   frequently   than
          exchange-traded  instruments,  mortgage- backed securities,  municipal
          bonds, corporate debt securities, and derivative contracts whose value
          is determined using a pricing model with inputs that are observable in
          the  market or can be  derived  principally  from or  corroborated  by
          observable  market data.  This  category  generally  includes  certain
          derivative contracts and impaired loans.

Level 3   Unobservable inputs that are supported by little or no market activity
          and  that  are  significant  to  the  fair  value  of  the  assets  or
          liabilities.   Level  3  assets  and  liabilities   include  financial
          instruments whose value is determined using pricing models, discounted
          cash flow methodologies, or similar techniques, as well as instruments
          for  which  the  determination  of  fair  value  requires  significant
          management  judgment  or  estimation.   For  example,   this  category
          generally  includes  certain  private  equity  investments,   retained
          residual interests in securitizations,  residential mortgage servicing
          rights, and highly-structured or long-term derivative contracts.



                                       9
<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Recently Issued Accounting Standards- (continued)

Assets  and  liabilities  measured  at fair  value on a  recurring  basis are as
follows as of September 30, 2008:

<TABLE>
<CAPTION>
                                                               Quoted market price    Significant other     Significant unobservable
                                                                in active markets     observable inputs            inputs
                                                                    (Level 1)             (Level 2)               (Level 3)
                                                               -------------------    -----------------     ------------------------
<S>                                                               <C>                    <C>                     <C>
Available-for-sale
 investment securities ............................               $         -            $ 63,285,654            $  369,400

Interest rate swap
 derivative instrument ............................               $         -            $   (291,587)           $        -
</TABLE>


The Company has no  liabilities  carried at fair value or measured at fair value
on a nonrecurring basis.

The Company is  predominantly  an asset based lender with real estate serving as
collateral  on a  substantial  majority  of loans.  Loans which are deemed to be
impaired are primarily valued on a nonrecurring  basis at the fair values of the
underlying  real  estate  collateral.   Such  fair  values  are  obtained  using
independent  appraisals,  which the Company considers to be level 2 inputs.  The
aggregate  carrying  amount  of  impaired  loans  at  September  30,  2008 was $
12,419,623.

FASB Staff  Position No. FAS 157-2 delays the  implementation  of SFAS 157 until
the first  quarter of 2009 with respect to goodwill,  other  intangible  assets,
real  estate  and  other  assets   acquired   through   foreclosure   and  other
non-financial assets measured at fair value on a nonrecurring basis.

FSP SFAS 133-1 and FIN 45-4,  "Disclosures  about Credit Derivatives and Certain
Guarantees:  An Amendment of FASB Statement No. 133 and FASB  Interpretation No.
45; and  Clarification  of the Effective  Date of FASB Statement No. 161," ("FSP
SFAS 133-1 and FIN 45-4") was issued  September  2008,  effective  for reporting
periods  (annual or interim)  ending after November 15, 2008. FSP SFAS 133-1 and
FIN 45-4 amends SFAS 133 to require the seller of credit derivatives to disclose
the nature of the credit  derivative,  the  maximum  potential  amount of future
payments,  fair  value  of the  derivative,  and  the  nature  of  any  recourse
provisions.  Disclosures  must be made for entire hybrid  instruments  that have
embedded credit derivatives.

The staff  position  also  amends FIN 45 to require  disclosure  of the  current
status of the payment/performance risk of the credit derivative guarantee. If an
entity  utilizes  internal  groupings as a basis for the risk, how the groupings
are determined must be disclosed as well as how the risk is managed.

The staff position  encourages that the amendments be applied in periods earlier
than the effective  date to facilitate  comparisons at initial  adoption.  After
initial  adoption,  comparative  disclosures  are required  only for  subsequent
periods.

FSP SFAS 133-1 and FIN 45-4  clarifies the effective  date of SFAS 161 such that
required  disclosures  should be provided for any  reporting  period  (annual or
quarterly interim) beginning after November 15, 2008. The adoption of this Staff
Position  will have no  material  effect on the  Company's  financial  position,
results of operations or cash flows.

The SEC's Office of the Chief  Accountant and the staff of the FASB issued press
release   2008-234  on  September   30,  2008   ("Press   Release")  to  provide
clarifications on fair value accounting.  The press release includes guidance on
the use of management's  internal assumptions and the use of "market" quotes. It
also reiterates the factors in SEC Staff  Accounting  Bulletin  ("SAB") Topic 5M
which should be considered when determining other-than-temporary impairment: the
length of time and  extent to which the  market  value has been less than  cost;
financial  condition and near-term  prospects of the issuer;  and the intent and
ability of the holder to retain its investment  for a period of time  sufficient
to allow for any anticipated recovery in market value.



                                       10
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

Note 5 - Recently Issued Accounting Standards- (continued)

On October 10, 2008, the FASB issued FSP SFAS 157-3, "Determining the Fair Value
of a Financial  Asset When the Market for That Asset Is Not  Active"  ("FSP SFAS
157-3").  This FSP  clarifies  the  application  of SFAS No.  157,  "Fair  Value
Measurements"  in a  market  that is not  active  and  provides  an  example  to
illustrate key considerations in determining the fair value of a financial asset
when  the  market  for that  asset  is not  active.  The FSP is  effective  upon
issuance,  including prior periods for which financial  statements have not been
issued.  For the Company,  this FSP is effective for the quarter ended September
30, 2008.

The Company  considered  the guidance in the Press Release and in FSP SFAS 157-3
when conducting its review for  other-than-temporary  impairment as of September
30,  2008 and  determined  that it did not result in a change to its  impairment
estimation techniques.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.





                                       11
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and related notes  appearing  herein and in the Company's
Annual  Report on Form 10-K for the year ended  December  31,  2007.  Results of
operations  for the  period  ending  September  30,  2008  are  not  necessarily
indicative of the results to be attained for any other period.

This Report on Form 10-Q may contain forward-looking statements relating to such
matters as anticipated financial performance, business prospects,  technological
developments,  new products and similar  matters.  All  statements  that are not
historical  facts  are  "forward-looking  statements."  The  Private  Securities
Litigation  Reform  Act of  1995  provides  a safe  harbor  for  forward-looking
statements.  In order to comply with terms of the safe harbor, the Company notes
that a  variety  of  factors  could  cause  the  Company's  actual  results  and
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations   expressed   in   the   Company's   forward-looking    statements.
Forward-looking  statements  include  statements  with  respect to  management's
beliefs, plans, objectives,  goals,  expectations,  anticipations,  assumptions,
estimates,  intentions,  and future  performance,  and involve known and unknown
risks,  uncertainties  and other  factors,  which may be  beyond  the  Company's
control,  and which may cause actual results,  performance or achievements to be
materially different from future results,  performance or achievements expressed
or  implied  by such  forward-looking  statements.  All  statements  other  than
statements  of  historical  fact are  statements  that could be  forward-looking
statements.  These  forward-looking  statements can be identified through use of
words  such as "may,"  "will,"  "anticipate,"  "assume,"  "should,"  "indicate,"
"would," "believe,"  "contemplate,"  "expect," "seek,"  "estimate,"  "continue,"
"plan,"  "point  to,"  "project,"   "predict,"   "could,"  "intend,"   "target,"
"potential,"  and other  similar  words and  expressions  of the  future.  These
forward-looking  statements  may not be  realized  due to a variety of  factors,
including, without limitation:

     o    future economic and business conditions;
     o    lack of  sustained  growth in the  economy of the  Greater  Charleston
          area;
     o    government monetary and fiscal policies;
     o    the  effects of changes in interest  rates on the levels,  composition
          and costs of deposits, loan demand, and the values of loan collateral,
          securities, and interest sensitive assets and liabilities;
     o    the effects of  competition  from a wide  variety of local,  regional,
          national and other providers of financial,  investment,  and insurance
          services;
     o    credit risks;
     o    higher than anticipated levels of defaults on loans;
     o    perceptions by depositors about the safety of their deposits;
     o    the  failure  of  assumptions  underlying  the  establishment  of  the
          allowance for loan losses and other estimates;
     o    the risks of opening new offices,  including,  without limitation, the
          related  costs  and  time  of  building  customer   relationships  and
          integrating  operations as part of these  endeavors and the failure to
          achieve  expected  gains,  revenue growth and/or expense  savings from
          such endeavors;
     o    changes in laws and regulations, including tax, banking and securities
          laws and regulations;
     o    changes in accounting policies, rules and practices;
     o    changes in technology or products may be more difficult or costly,  or
          less effective than anticipated;
     o    the  effects of war or other  conflicts,  acts of  terrorism  or other
          catastrophic  events that may affect general  economic  conditions and
          economic confidence;
     o    ability to weather the current economic downturn;
     o    loss of consumer or investor confidence; and
     o    other factors and information  described in any of the reports that we
          file with the Securities and Exchange  Commission under the Securities
          Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this
cautionary  notice.  The Company has no obligation,  and does not undertake,  to
update,  revise or correct any of the forward-looking  statements after the date
of this  report.  The  Company  has  expressed  its  expectations,  beliefs  and
projections  in good faith and believes they have a reasonable  basis.  However,
there is no  assurance  that these  expectations,  beliefs or  projections  will
result or be achieved or accomplished.


                                       12
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Results of Operations

The  Company's  net income for the nine  months  ended  September  30,  2008 was
$625,474,  or $.13 per basic share,  compared to  $2,705,642,  or $.49 per basic
share, for the nine months ended September 30, 2007. The average number of basic
shares  outstanding for the nine months ending  September 30, 2008 was 4,641,649
compared to 5,554,195 for the nine months ending September 30, 2007.

The  Company's  net loss for the  three  months  ended  September  30,  2008 was
$888,973 or $.20 per basic share, compared to net income of $1,010,698,  or $.19
per basic  share,  for the three months ended  September  30, 2007.  The average
number of basic shares outstanding for the quarter ending September 30, 2008 was
4,542,304 compared to 5,217,249 for the quarter ending September 30, 2007.

Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets,
and is the principal source of the Company's  earnings.  Net interest income was
$11,298,437  for  the  nine  months  ended  September  30,  2008,   compared  to
$10,838,134 for the nine months ended September 30, 2007.

Changes  that affect net  interest  income  include  changes in the average rate
earned on interest earning assets,  changes in the average rate paid on interest
bearing  liabilities,  and changes in the volumes of interest earning assets and
interest bearing liabilities.

Average  earning assets for the nine months ending  September 30, 2008 increased
9.3 percent to $463.8  million  from the $424.4  million  reported  for the nine
months ending  September 30, 2007. The increase was attributable to increases of
$24.1  million and $15.3  million,  respectively,  in average  loans and average
total  investments and federal funds sold. The increase in average loans was due
to the continued growth of our commercial lending and branch network areas.

Average  interest  bearing  liabilities  for the nine months ended September 30,
2008 increased  16.7 percent to $429.3 million from the $367.9 million  reported
for the nine months ended  September 30, 2007. The increase was  attributable to
increases in average time deposits,  savings and transaction accounts, and other
borrowings of $52.7  million,  $7.6 million,  and $10.3  million,  respectively,
offset by a decrease of $9.3 million in average  subordinated debt. The increase
in average  interest  bearing  liabilities  was  primarily a result of a limited
offering  of  higher  than  market  interest  rates  on time  deposits,  and was
necessitated  by the growth in average assets and the early  retirement of $11.3
million in subordinated debt during 2007.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive segments of the Company's balance sheets for the nine months
ended September 30, 2008 and 2007.


                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued
<TABLE>
<CAPTION>
                                                     For the nine months ended                     For the nine months ended
                                                          September 30, 2008                            September 30, 2007
                                                          ------------------                            ------------------
                                                 Average        Income/       Yield/        Average          Income/       Yield/
                                                Balance        Expense       Rate(1)        Balance          Expense       Rate(1)
                                                -------        -------       -------        -------          -------       -------
Assets
<S>                                      <C>               <C>                 <C>     <C>               <C>                 <C>
   Federal funds sold ................   $      2,063,225  $      35,194       2.28%   $      9,136,582  $     358,259       5.24%
   Investments - taxable .............         53,778,927      2,022,588       5.03          41,114,024      1,704,878       5.54
   Investments - nontaxable (2) ......         18,356,038        957,548       6.97           8,668,969        413,050       6.37
                                         ----------------  -------------               ----------------  -------------
     Total investments and
       federal funds sold ............         74,198,190      3,015,330       5.43          58,919,575      2,476,187       5.62
   Loans (3) (4) .....................        389,589,708     20,596,901       7.04         365,518,948     21,470,899       7.85
                                         ----------------  -------------               ----------------  -------------
     Total interest earning assets ...        463,787,898     23,612,231       6.79%        424,438,523     23,947,086       7.54%
                                                           -------------                                 -------------
     Other assets ....................         62,611,288                                    51,656,955
                                         ----------------                              ----------------
     Total assets ....................   $    526,399,186                              $    476,095,478
                                         ================                              ================
Liabilities
   Savings and
     transaction accounts ............   $     76,173,656      1,094,124       1.92    $     68,528,696      1,505,648       2.94
   Time Deposits .....................        248,604,398      7,778,254       4.18         195,862,210      7,432,786       5.07
   Other borrowings ..................         94,190,669      2,634,075       3.74          83,894,536      2,853,164       4.55
   Subordinated Debt .................         10,310,000        478,550       6.21          19,592,500      1,168,656       7.97
                                         ----------------  -------------               ----------------  -------------
     Total interest bearing
       liabilities ...................        429,278,723     11,985,003       3.73         367,877,942     12,960,254       4.71
                                                           -------------                                 -------------
   Non-interest bearing
     liabilities .....................         37,747,366                                    37,811,829
                                         ----------------                              ----------------
     Total liabilities ...............        467,026,089     11,985,003       3.43         405,689,771     12,960,254       4.27
                                                           -------------                                 -------------
   Equity ............................         59,373,097                                    70,405,707
                                         ----------------                              ----------------
     Total liabilities
       and equity ....................   $    526,399,186                              $    476,095,478
                                         ================                              ================
     Net interest
       income/margin (5) .............                     $  11,627,228       3.33                      $  10,986,832       3.45
                                                           =============                                 =============
     Net interest spread (6) .........                                         3.06%                                         2.83%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans.
(4)  Income includes loan fees of $1,002,492 in 2008 and $851,171 in 2007.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.

As shown above,  for the nine months ended  September 30, 2008 the average yield
on earning assets was 6.79 percent,  while the average cost of interest  bearing
liabilities  was 3.73 percent.  For the nine months ended September 30, 2007 the
average  yield on  earning  assets  was 7.54  percent  and the  average  cost of
interest-bearing  liabilities was 4.71 percent. The decrease in the asset yields
and average rates paid is due to market  interest rate  decreases  over the last
year. The net interest  margin is computed by annualizing  year to date interest
income and interest expense,  taking the difference,  and dividing the resulting
figure by average interest earning assets.  The net interest margin for the nine
months ended  September  30, 2008 was 3.33 percent  compared to 3.45 percent for
the nine months  ended  September  30,  2007.  The  decrease in the net interest
margin is attributable to an increase in average interest bearing liabilities of
$61.4 million  between the two periods,  compared with an increase of only $39.3
million in interest bearing assets, a difference of $22.1 million. The Company's
purchase of $17.3  million of Company Owned Life  Insurance  during 2007 and its
stock repurchases totaling $7.0 million between September


                                       14
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest  Income - continued

30, 2007 and  September  30, 2008  absorbed  the extra  funding  provided by the
increase in average interest  bearing  liabilities in excess of average interest
earning assets.

The cost of total  liabilities  was 3.43  percent and 4.27  percent for the nine
months ending September 30, 2008 and 2007, respectively.

Average earning assets for the three months ending  September 30, 2008 increased
15.93 percent to $485.2 million from the $418.5  million  reported for the three
months ending  September 30, 2007. The increase was attributable to increases of
$25.4 million and $41.3 million,  respectively, in average total investments and
federal funds sold and average loans.

Average interest  bearing  liabilities for the three months ending September 30,
2008 increased 18.15 percent to $450.2 million from the $381.0 million  reported
for the three months ending  September 30, 2007. This increase was primarily due
to an increase of $87.7  million in average  time  deposits,  which  included an
increase of $26.8 million in average brokered and wholesale time deposits.














                                       15
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended September 30, 2008 and 2007.

<TABLE>
<CAPTION>
                                                       For the three months ended                For the three months ended
                                                            September 30, 2008                        September 30, 2007
                                                            ------------------                        ------------------
                                                Average         Income/       Yield/         Average        Income/          Yield/
                                                Balance        Expense        Rate(1)        Balance        Expense          Rate(1)
                                                -------        -------        -------        -------        -------          -------
Assets
<S>                                       <C>               <C>                 <C>     <C>               <C>                 <C>
   Federal funds sold ..................  $      3,217,589  $      16,390       2.04%   $      4,779,016  $      61,358       5.09%
   Investments - taxable ...............        59,735,874        728,649       4.89          38,341,399        633,048       6.55
   Investments - nontaxable (2) ........        18,481,856        290,675       6.31          12,923,453        202,912       6.23
                                          ----------------  -------------               ----------------  -------------
     Total investments and
       federal funds sold ..............        81,435,319      1,035,714       5.10          56,043,868        897,318       6.35
   Loans (3) (4) .......................       403,761,400      6,794,215       6.64         362,500,322      7,248,499       7.93
                                          ----------------  -------------               ----------------  -------------
     Total earning assets ..............       485,196,719      7,829,929       6.47         418,544,190      8,145,817       7.72
                                                            -------------                                 -------------
     Other assets ......................        58,066,396                                    63,067,583
                                          ----------------                              ----------------
     Total assets ......................  $    543,263,115                              $    481,611,773
                                          ================                              ================
Liabilities
   Savings and
     transaction accounts ..............  $     62,541,534  $     247,658       1.59    $     77,653,982  $     652,027       3.33
   Time Deposits .......................       290,880,654      2,749,767       3.79         203,191,002      2,656,356       5.19
   Other Borrowings ....................        86,422,469        813,210       3.77          82,642,120        952,580       4.57
   Subordinated Debt ...................        10,310,000        161,518       6.28          17,530,000        338,100       7.65
                                          ----------------  -------------               ----------------  -------------
     Total interest bearing
       liabilities .....................       450,154,657      3,972,153       3.54         381,017,104      4,599,063       4.79
                                                            -------------                                 -------------
   Non-interest bearing
     liabilities .......................        36,243,118                                    39,187,603
                                          ----------------                              ----------------
     Total liabilities .................       486,397,775      3,972,153       3.28         420,204,707      4,599,063       4.34
                                                            -------------                                 -------------
   Equity ..............................        56,865,340                                    61,407,066
                                          ----------------                              ----------------
     Total liabilities
       and equity ......................  $    543,263,115                              $    481,611,773
                                          ================                              ================
     Net interest
       income/margin (5) ...............                    $   3,857,776       3.19                      $   3,546,754       3.36
                                                            =============                                 =============
     Net interest spread (6) ...........                                        2.93%                                         2.93%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans. (
4)   Income includes loan fees of $330,370 in 2008 and $272,127 in 2007.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.



                                       16
<PAGE>



SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest  Income - continued

As reflected  above,  for the three months ended  September 30, 2008 the average
yield on earning  assets was 6.47  percent,  while the average  cost of interest
bearing  liabilities was 3.54 percent.  For the three months ended September 30,
2007 the average  yield on earning  assets was 7.72 percent and the average cost
of interest-bearing  liabilities was 4.79 percent.  The decrease in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate decreases over the last year. The net
interest  margin for the three months ended  September 30, 2008 was 3.19 percent
compared to 3.36  percent for the three  months ended  September  30, 2007.  The
decrease in the net interest  margin is primarily  attributable to the growth of
interest bearing liabilities in excess of the growth in interest bearing assets.
The cost of total  liabilities  was 3.28  percent  for the  three  months  ended
September  30,  2008,  compared  to 4.34  percent  for the  three  months  ended
September 30, 2007.

The following  tables present changes in the Company's net interest income which
are   primarily   a  result  of   changes   in  the  volume  and  rates  of  its
interest-earning assets and interest-bearing liabilities.

<TABLE>
<CAPTION>
                                                                                   Analysis of Changes in Net Interest Income
                                                                                  For the nine months ended September 30, 2008
                                                                                versus nine months ended September 30, 2007 (1)
                                                                                -----------------------------------------------
                                                                               Volume                 Rate              Net Change
                                                                               ------                 ----              ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $  (277,221)          $   (45,844)          $  (323,065)
   Investments - taxable .........................................              524,785              (207,075)              317,710
   Investments - non taxable (2) .................................              461,532                82,966               544,498
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              709,096              (169,953)              539,143
     Net loans (3) ...............................................            1,413,283            (2,287,281)             (873,998)
                                                                            -----------           -----------           -----------
     Total interest income .......................................            2,122,379            (2,457,234)             (334,855)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................              168,110              (579,634)             (411,524)
   Time deposits .................................................            2,000,027            (1,654,559)              345,468
   Other borrowings ..............................................              350,393              (569,482)             (219,089)
   Subordinated debt .............................................             (553,341)             (136,765)             (690,106)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................            1,965,189            (2,940,440)             (975,251)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $   157,190           $   483,206           $   640,396
                                                                            ===========           ===========           ===========
</TABLE>

(1) Changes in rate/volume  have been  allocated on a consistent  basis to rate.
(2) Tax equivalent  yields for nontaxable  investments  assuming a 36% tax rate.
(3) Income includes loan fees of $1,002,492 in 2008 and $851,171 in 2007.



                                       17
<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued
<TABLE>
<CAPTION>
                                                                                  Analysis of Changes in Net Interest Income
                                                                                For the three months ended September 30, 2008
                                                                               Versus three months ended September 30, 2007 (1)
                                                                               ------------------------------------------------
                                                                                Volume               Rate                Net Change
                                                                                ------               ----                ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $   (19,597)          $   (25,371)          $   (44,968)
   Investments - taxable .........................................              345,535              (249,934)               95,601
   Investments - non taxable (2) .................................               85,386                 2,377                87,763
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              411,324              (272,928)              138,396
     Net loans (3) ...............................................              806,795            (1,261,079)             (454,284)
                                                                            -----------           -----------           -----------
     Total interest income .......................................            1,218,119            (1,534,007)             (315,888)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................             (124,088)             (280,281)             (404,369)
   Time deposits .................................................            1,122,187            (1,028,776)               93,411
   Other borrowings ..............................................               42,599              (181,969)             (139,370)
   Subordinated debt .............................................             (136,191)              (40,391)             (176,582)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              904,507            (1,531,417)             (626,910)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $   313,612           $    (2,590)          $   311,022
                                                                            ===========           ===========           ===========
</TABLE>

(1) Changes in rate/volume  have been  allocated on a consistent  basis to rate.
(2) Tax equivalent  yields for nontaxable  investments  assuming a 36% tax rate.
(3) Income includes loan fees of $330,370 in 2008 and $272,127 in 2007.

Noninterest Income and Expenses

Noninterest  income for the nine months ended September 30, 2008 was $1,646,244,
compared to $1,920,824 for the nine months ended  September 30, 2007, a decrease
of $274,580.  The Company had two large  nonrecurring  items which  impacted the
nine months ended September 30, 2008. One was an impairment charge of $2,878,096
taken on the Company's  holdings of Fannie Mae and Freddie Mac Preferred  Stock.
The  other  was a gain on the  sale of  premises  and  equipment  of  $2,330,246
resulting  from the sale of land adjacent to the Company's  John's Island branch
location.  The  collective  effect  of these  two  items  was a  pretax  loss of
$547,850.  Company owned life insurance  earnings  increased by $284,228 between
the two periods, with these earnings totaling $639,313 and $355,085 for the nine
months  ended  September  30, 2008 and  September  30, 2007,  respectively.  The
increased  earnings on company owned life insurance were due to $17.3 million of
additional Company owned life insurance purchased throughout 2007. Additionally,
the  Company  had a  $44,161  increase  in  gains  on  the  sale  of  investment
securities,  with gains totaling $300,115 and $255,954 for the nine months ended
September 30, 2008 and September 30, 2007, respectively. Service fees on deposit
accounts  increased by $75,549 to $856,365  for the nine months ended  September
30, 2008 from  $780,816 for the nine months  ended  September  30, 2007,  due to
deposit  growth  achieved by our branch  network.  Fees on loans sold  decreased
$76,694  between the two  periods,  totaling  $186,549 and $263,243 for the nine
months  ended  September  30, 2008 and  September  30, 2007,  respectively.  The
decrease is attributable to a continued slowdown in the mortgage market.

Noninterest  expenses  for  the  nine  months  ended  September  30,  2008  were
$9,943,723, compared to $8,748,656 for the nine months ended September 30, 2007,
an increase of $1,195,067.  The majority of this increase was due to an increase
in salaries  and  employee  benefits of $891,192  between the two  periods.  The
increase in salaries  and  benefits  was  primarily  the result of adoption of a
Salary  Continuation Plan during 2008. Total accruals under this plan during the
nine months ended September 30, 2008 totaled $568,508.  Other operating expenses
increased  by $307,731  between the two  periods,  largely due to an increase of
$150,562 in insurance expense, mostly the result of an increase in premiums paid
to the Federal Deposit  Insurance  Corporation.  Counteracting  this increase in
other  operating  expenses  was a decline  of $81,558  in  advertising  expense,
largely a result of the  Company's  decision  to  decrease  its  television  and
billboard advertising.


                                       18
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest Income and Expenses

Noninterest  income for the three months ended  September 30, 2008 was $137,923,
compared to $756,704 for the three months ended September 30, 2007, a difference
of $618,781.  The decrease is primarily  attributable to the combined effects of
the  $2,878,096  impairment  charge on the Fannie Mae and Freddie Mac  Preferred
Stock and the gain on sale of land of $2,330,246,  a combined negative effect of
$547,850  on  total  noninterest  income.   Additionally,   gains  on  sales  of
available-for-sale  securities  decreased by $88,306 between the two periods, to
$75,697 for the three months ended September 30, 2008,  compared to $164,003 for
the three months ended September 30, 2007.

Noninterest  expenses  for the  three  months  ended  September  30,  2008  were
$3,921,221,  compared to  $2,785,077  for the three months ended  September  30,
2007,  an increase of  $1,136,144  between the two  periods.  Of this  increase,
$878,569  was due to an increase  in  salaries  and  benefits.  The  increase in
salaries  and benefits  was  primarily  the result of the adoption of the Salary
Continuation  Plan during the quarter,  which had total accruals of $568,508 for
the quarter.

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively  stable  funding base, and were equal to 54.5% of total deposits as
of  September  30, 2008.  Asset  liquidity  is provided  from  several  sources,
including  amounts due from banks and federal funds sold and funds from maturing
loans.  The Bank is a member of the Federal Home Loan Bank of Atlanta  ("FHLBA")
and,  as such has the  ability  to borrow  against  a pledge  of its 1-4  family
residential  mortgage loans. The Company also has a $17.0 million line of credit
with Nexity Bank, a $10.0  million line of credit with  Silverton  Bank, a $10.0
million line of credit with First  Tennessee  Bank,  and a $10.0 million line of
credit with US Bank. Additionally the Company has a $3.0 million holding company
line of credit with First Tennessee  Bank.  Although the Company has experienced
some activity in deposit accounts that appears to be related to current economic
conditions,  it has  had  adequate  liquidity  to  comfortably  deal  with  such
activity.  Management believes that the Company's liquidity sources are adequate
to meet normal operating needs.

Loans

Nonfarm, nonresidential real estate loans comprised 24 percent of the total loan
portfolio as of September 30, 2008,  totaling  $96.3  million.  Loans secured by
real estate for construction and land development  totaled $93.8 million,  or 23
percent of the portfolio  while 1-4 family mortgage loans totaled $173.4 million
or 42 percent of the total loan  portfolio,  as of September 30, 2008. All other
real estate loans totaled $6.0 million or 1 percent of the total loan portfolio.
Commercial and industrial loans comprised $35.2 million, or 9% of the total loan
portfolio.  Installment loans and other consumer loans to individuals  comprised
$3.8 million or 1 percent of the total loan portfolio.  Total loans increased by
$30.2 million during the nine months ended  September 30, 2008, due primarily to
increases  of $12.0  million,  $17.8  million,  and $1.0  million in 1- 4 family
residential  loans,  construction  loans,  and commercial and industrial  loans,
respectively.

At September 30, 2008, the Company had $1.5 million in loans 90 days  delinquent
and still accruing  interest and $12.4 million of nonaccrual  loans. The Company
had $487,000 of other real estate owned at that date. The majority of nonaccrual
loans are secured by real  estate,  and the overall  value of real estate in the
Company's market area has remained relatively stable.  There were no other loans
that  management had  determined to be potential  problem loans at September 30,
2008.  At December 31, 2007,  the Company had $3.5 million of loans 90 days past
due and still  accruing  interest,  $194,000  in other real  estate  owned,  and
$893,000 of  nonaccrual  loans.  At  September  30,  2007,  the Company had $1.9
million in loans 90 days past due and still accruing interest, $122,731 of other
real estate owned, and $2.6 million of nonaccrual  loans. The allowance for loan
losses was 1.43  percent of loans as of  September  30,  2008,  compared to 1.14
percent as of December 31, 2007 and 1.17 percent as of September  30, 2007.  For
the nine  months  ended  September  30,  2008 the  Company  recorded a loan loss
provision of  $2,594,000  compared to no loan loss  provision  during 2007.  The
current year's loan loss provision is the result of an increase of $30.2 million
in total loans  during the first nine  months of the year,  an increase of $11.5
million in total  nonaccrual loans during the first nine months of the year, and
current year loan charge-offs totaling $1,096,000. During

                                       19
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Loans - continued

2007,  the  Company's  average  loans  outstanding  decreased  by $12.0  million
compared with 2006 due primarily to payoffs of brokered and wholesale loans. Due
to this  contraction  in its loan portfolio the Company did not make a provision
for loan losses during 2007.

At September 30, 2008,  the Company had  specifically  reserved  $3,410,982  for
impaired loans.

In  management's  opinion,  the  allowance for loan losses is adequate to absorb
estimated  losses  inherent in our Company's  loan  portfolio.  In reviewing the
adequacy of the allowance for loan losses at each quarter end,  management takes
into  consideration  the  historical  loan losses we have  experienced,  current
economic conditions  affecting the ability of our borrowers to repay, the volume
of loans and the  trends in  delinquent,  non-accruing,  and  potential  problem
loans, and the quality of collateral  securing  nonperforming and problem loans.
After charging off all known losses, management considers the allowance for loan
losses  adequate to cover its estimate of inherent  losses in the loan portfolio
as of September 30, 2008. However,  management expects further  deterioration of
economic  conditions in the Company's  market areas is likely in the short-term,
especially  with respect to real estate  related  activities  and real  property
values.  Consequently,  management  expects that further increases in provisions
for loan losses will likely be needed in the future.

The  following  table  provides a year to date  analysis of activity  within the
allowance for loan losses:

Balance at December 31, 2007 ...................................    $ 4,297,337
Current Year Loan Loss Provision ...............................      2,594,297
Charge- offs:
     Domestic:
       Commercial, financial, and agricultural .................        553,808
       Real estate- mortgage ...................................        477,500
       Installment loans to individuals ........................         64,227
     Foreign: ..................................................              -
Recoveries:
       Commercial, financial, and agricultural .................          5,000
       Real estate- mortgage ...................................         44,130
       Installment loans to individuals ........................             90
                                                                  -------------
Balance at September 30, 2008 ..................................  $   5,845,319
                                                                  =============


Deposits

Deposits  increased $43.6 million during the first nine months of 2008 to $386.3
million at September 30, 2008. The increase was attributable to several factors.
Noninterest  bearing  deposits  decreased  $3.4  million  and  interest  bearing
deposits  increased  by $47.0  million  during  the first  nine  months of 2008.
Certificates  of deposit from retail  customers  increased  approximately  $66.9
million  during  the  first  nine  months,  largely  as the  result  of  several
certificate  of  deposit  rate  specials  offered  during  the  second and third
quarters of 2008.  Savings and interest bearing  transaction  accounts decreased
approximately  $28.6 million due to a decrease in our municipal deposits and the
movement of funds to time deposit  accounts due to the higher  market rates paid
on time  deposits.  Finally,  brokered and  wholesale  deposits  increased  $8.7
million  during the nine  month  period.  Because  these  higher  rate funds are
particularly rate sensitive,  they are more volatile and are not treated as core
deposits.



                                       20
<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION

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

Other Borrowings

Other borrowings are primarily  comprised of FHLBA advances.  FHLBA Advances are
collateralized  by pledged  FHLBA stock and  certain  residential  mortgage  and
commercial loans. FHLBA advances are summarized as follows:

       Maturity                          Rate                   Balance
      -----------------               ---------             ---------------
      November 2008                     2.25%               $     2,000,000
      September 2010                    5.55%                     7,000,000
      February 2011                     2.81%                     4,500,000
      March 2011                        2.96%                     7,500,000
      September 2013                    4.75%                    10,000,000
      June 2014                         3.92%                     2,000,000
      October 2016                      4.25%                     5,000,000
      November 2016                     4.08%                     5,000,000
      January 2017                      4.35%                     5,000,000
      January 2017                      4.40%                     5,000,000
      January 2017                      4.46%                     5,000,000
      January 2017                      4.60%                     5,000,000
      March 2018                        2.33%                     5,000,000
      April 2018                        3.03%                     5,000,000
                                                            ---------------

      Balance                                               $    73,000,000
                                                            ===============

During the quarter ended  September 30, 2008, the Company repaid $1.5 million of
debt  outstanding on a holding company line of credit with First Tennessee Bank.
The  Company  has  $3.0  million  available  for  borrowing  on this  line as of
September 30, 2008.

Junior Subordinated Debentures

 On May 3, 2002,  December  16,  2002,  and August 5,  2005,  in three  separate
transactions,  Southcoast  Capital Trust I, II, and III (the "Capital  Trusts"),
non-consolidated  subsidiaries of the Company, issued and sold a total of 21,655
floating rate  securities,  with a $1,000  liquidation  amount per security (the
"Capital  Securities").  Institutional  buyers  bought  21,000  of  the  Capital
Securities  denominated as preferred securities and the Company bought the other
655 Capital Securities which are denominated as common securities. The aggregate
proceeds of those sales,  $21.7 million,  were used by the Capital Trusts to buy
$21.7  million of junior  subordinated  debentures  from the Company  which were
reported on its consolidated  balance sheets.  The Capital  Securities mature or
are mandatorily  redeemable  upon maturity on June 30, 2032,  December 16, 2032,
and September 30, 2035,  respectively,  or upon earlier  optional  redemption as
provided in the indenture.  The Company  had/has the right to redeem the Capital
Securities  in whole or in part,  on or after June 30, 2007,  December 30, 2007,
and September 30, 2010. The Company also had/has the right to redeem the capital
securities  prior to such dates upon occurrence of specified  conditions and the
payment of a redemption premium.  During 2007 the Company exercised its right to
redeem  the  Capital  Securities  issued  by  Southcoast  Capital  Trust  I  and
Southcoast  Capital Trust II. As a result the Company retired total debt related
to these securities of $11,345,000.  See Note 11 to the  consolidated  financial
statements  and the  information  set  forth in  Exhibit  13 under  the  caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-  Junior  Subordinated  Debentures"  filed with our Form 10-K for the
year ended December 31, 2007, for more information about the terms of the junior
subordinated debentures.

The securities issued by Southcoast Capital Trust III were effectively converted
from a floating  rate to a fixed rate  through the use of an interest  rate swap
agreement.  The  agreement  provides for the Company to make payments at a fixed
rate of 6.32% in exchange for receiving payments at a variable rate (three month
LIBOR  plus  150  basis  points).  See  Note  12 to the  consolidated  financial
statements  filed with our Form 10-K for the year ended  December 31, 2007,  for
more information about the terms of the rate swap agreement.



                                       21
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources

The capital  base for the Company  decreased  by $7.7 million for the first nine
months of 2008,  due to our  repurchase of 483,593 shares of common stock for an
aggregate  purchase  price of $6.7  million,  and  other  comprehensive  loss of
$1,682,339  partially  offset by net income of $625,474 and proceeds  from stock
issuances of $110,741  through our Employee  Stock  Purchase Plan. The Company's
Tier 1 capital to average  assets ratio was 12.77  percent as of  September  30,
2008 compared to 15.16 percent as of December 31, 2007.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into two tiers.  The Bank's  Tier 1 capital  consists  of common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt subject to certain  limitations.  The Bank's Tier 2 capital consists of the
allowance for loan losses subject to certain  limitations  and the Bank's junior
subordinated debt in excess of 25% of the Bank's Tier 1 capital.  A bank holding
company's  qualifying  capital base for purposes of its risk-based capital ratio
consists  of the sum of its Tier 1 and Tier 2 capital.  The  regulatory  minimum
requirements are 4% for Tier 1 and 8% for total risk-based  capital.  Southcoast
and the Bank are also  required to maintain  capital at a minimum level based on
quarterly  average  assets,  which  is  known as the  leverage  ratio.  Only the
strongest  bank holding  companies and banks are allowed to maintain  capital at
the minimum requirement. All others are subject to maintaining ratios 100 to 200
basis points above the minimum.  As of September  30, 2008,  the Company and the
Bank exceeded their capital requirements as shown in the following table.

<TABLE>
<CAPTION>
                                                                                         Capital Ratios
                                                                 -------------------------------------------------------------------
                                                                                        Well Capitalized      Adequately Capitalized
(Dollars in thousands)                                                 Actual             Requirement              Requirement
                                                                 -----------------     ------------------     ----------------------
                                                                 Amount      Ratio     Amount       Ratio     Amount         Ratio
                                                                 ------      -----     ------       -----     ------         -----
The Bank
<S>                                                             <C>          <C>       <C>          <C>       <C>            <C>
  Total capital (to risk-weighted assets) ................      $55,595      14.15%    39,292       10.00%    31,433         8.00%
  Tier 1 capital (to risk-weighted assets) ...............       50,672      12.90%    23,575        6.00%    15,717         4.00%
  Tier 1 capital (to average assets) .....................       50,672       9.59%    26,444        5.00%    21,155         4.00%
The Company
  Total capital (to risk-weighted assets) ................      $72,338      17.69%       N/A         N/A     32,718         8.00%
  Tier 1 capital (to risk-weighted assets) ...............       67,214      16.43%       N/A         N/A     16,359         4.00%
  Tier 1 capital (to average assets) .....................       67,214      12.77%       N/A         N/A     21,054         4.00%
</TABLE>

Off Balance Sheet Risk

The Company makes  contractual  commitments  to extend credit and issues standby
letters  of credit in the  ordinary  course of its  business  activities.  These
commitments  are  legally  binding  agreements  to lend  money to  customers  at
predetermined  interest  rates for a  specified  period of time.  In addition to
commitments to extend credit,  the Company also issues standby letters of credit
which are  assurances  to a third  party  that it will not  suffer a loss if the
customer fails to meet a contractual obligation to the third party. At September
30, 2008, the Company had issued commitments to extend credit of $34,267,537 and
standby  letters  of credit of  $494,078  through  various  types of  commercial
lending arrangements.  Approximately  $28,442,929 of these commitments to extend
credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments  to extend  credit and standby  letters of credit at  September  30,
2008.
<TABLE>
<CAPTION>
                                                                  After One    After Three
                                                                   Through       Through                    Greater
                                                    Within One      Three         Twelve      Within One      Than
                                                       Month        Months        Months         Year        One Year        Total
                                                       -----        ------        ------         ----        --------        -----
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 3,796,020   $ 4,829,386   $ 9,790,732   $18,416,138   $15,851,399   $34,267,537
Standby letters of credit ......................       308,411        25,000       131,637       465,048        29,030       494,078
                                                   -----------   -----------   -----------   -----------   -----------   -----------
    Totals .....................................   $ 4,104,431   $ 4,854,386   $ 9,922,369   $18,881,186   $15,880,429   $34,761,615
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>


                                       22
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Off Balance Sheet Risk

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.  Further,
through its various sources of liquidity,  the Company  believes it will be able
to fund these  obligations as they arise. The Company  evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed  necessary  upon  extension of credit,  is based on the company's  credit
evaluation  of  the  borrower.   Collateral  varies  but  may  include  accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.

Item 3. - Quantitative and Qualitative Disclosures About Market Risk.

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2007, which was filed
with the Securities and Exchange Commission on March 7, 2008. There have been no
material  quantitative or qualitative  changes in market risk exposure since the
date of that filing.

Item 4. - Controls and Procedures.

Based  on  the  evaluation  required  by 17  C.F.R.  Sections  240.13a-15(b)  or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Section 240.13a-15(e) and 240.15d-15(e), the Company's chief executive
officer and chief financial officer concluded that such controls and procedures,
as of the end of the period covered by this quarterly report, were effective.

There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.











                                       23
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

PART II - OTHER INFORMATION

Item 1A.  Risk Factors

The  following  are  additional  risk  factors  for the  Company,  to be read in
conjunction  with Item 1A, "Risk Factors - Risks Related to Our Industry" in the
Company's Form 10-K for the year ended December 31, 2007.

1. There can be no assurance that recent government  actions will help stabilize
the U.S. financial system.

In response to the financial  crises  affecting the banking system and financial
markets  and going  concern  threats  to  investment  banks and other  financial
institutions,  various branches and agencies of the U.S.  government have put in
place laws,  regulations and programs to address capital and liquidity issues in
the banking system. There can be no assurance,  however, as to the actual impact
that such laws,  regulations  and programs will have on the  financial  markets,
including the extreme levels of volatility,  liquidity and confidence issues and
limited credit  availability  currently being  experienced.  The failure of such
laws,  regulations  and programs to help  stabilize the financial  markets and a
continuation  or  worsening  of  current   financial  market   conditions  could
materially and adversely affect our business,  financial  condition,  results of
operations, access to credit or the trading price of our common stock.

2. Current levels of market volatility are unprecedented.

Although  many markets have been  experiencing  volatility  and  disruption  for
months,  in the past few weeks,  the  volatility and disruption of financial and
credit markets has reached unprecedented levels for recent times. In some cases,
the  markets  have  produced  downward  pressure  on  stock  prices  and  credit
availability  for certain  issuers  without regard to those issuers'  underlying
financial  strength.  If  current  levels of market  disruption  and  volatility
continue or worsen,  there can be no assurance  that we will not  experience  an
adverse effect,  which may be material,  on our ability to access capital and on
our business, financial condition and results of operations.

3. The soundness of other financial institutions could adversely affect us.

Financial  services  institutions  are  interrelated  as a  result  of  trading,
clearing,  counterparty,  or  other  relationships.  We  have  exposure  to many
different  industries and counterparties,  and we routinely execute transactions
with  counterparties  in the financial  services  industry,  including  brokers,
dealers,   commercial  banks,   investment   banks,  and  government   sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our  counterparty.  In addition,  our credit risk may be  exacerbated
when the collateral held by us cannot be realized or is liquidated at prices not
sufficient  to recover the full amount of the loan or other  obligation  due us.
There is no assurance  that any such losses would not  materially  and adversely
affect our results of operations or earnings.

4. Current market  developments may adversely affect our industry,  business and
results of operations.

Dramatic declines in the housing market during the prior year, with falling home
prices  and  increasing   foreclosures  and   unemployment,   have  resulted  in
significant  write-downs  of asset values by financial  institutions,  including
government-sponsored  entities and major commercial and investment banks.  These
write-downs,  initially of  mortgage-backed  securities  but spreading to credit
default  swaps  and other  derivative  securities  have  caused  many  financial
institutions  to seek  additional  capital,  to merge with  larger and  stronger
institutions and, in some cases, to fail. Reflecting concern about the stability
of the  financial  markets  generally and the strength of  counterparties,  many
lenders and institutional  investors have reduced,  and in some cases, ceased to
provide  funding to  borrowers,  including  other  financial  institutions.  The
resulting lack of available credit,  lack of confidence in the financial sector,
increased  volatility in the  financial  markets and reduced  business  activity
could  materially  and adversely,  directly or indirectly,  affect our business,
financial condition and results of operations.



                                       24
<PAGE>










Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

        (c) Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>
                         (a) Total Number      (b) Average         (c) Total Number of            Maximum Number
                            of Shares           Price Paid          Shares Purchased as       of Shares that May yet be
    Period                  Purchased           Per Share       Part of Publicly Announced       Purchased Under the
                                                                     Plans or Programs (1)        Plans or Programs

<C>                          <C>                  <C>                     <C>                          <C>
7/1/08-7/31/08               73,220               13.53                   73,220                       169,598
</TABLE>

(1)  On July 24, 2007, the Board of Directors authorized the repurchase of up to
     547,556 shares of the Company's  outstanding  stock. The Company  announced
     the repurchase plan on July 25, 2007. The Company  completed the repurchase
     authorized  under this  announcement  during  January  2008. On January 14,
     2008,  the  Board  of  Directors  authorized  the  repurchase  of  up to an
     additional  484,527  shares,  or 10%, of the Company's  common  stock.  The
     Company  announced the repurchase plan on January 18, 2008. Stock dividends
     occurring   subsequent   to  the   authorizations   are   included  in  the
     authorizations.  Purchases will be made in the open market and block trades
     will be permitted,  all in accordance with Rule 10b-18 under the Securities
     Exchange Act of 1934. The plan does not have a termination date.

Item 6.  Exhibits

10-1 Amended and  Restated  Employment  Agreement,  dated as of August 14, 2008,
     among Southcoast Financial  Corporation,  Southcoast Community Bank, and L.
     Wayne  Pearson  (incorporated  by  reference  to exhibits to Form 8-K filed
     August 20, 2008)

10-2 Salary  Continuation  Agreement  dated  as  of  August  14,  2008,  between
     Southcoast  Community Bank and L. Wayne Pearson  (incorporated by reference
     to exhibits to Form 8-K filed August 20, 2008)

10-3 Endorsement  Split Dollar Agreement,  dated as of August 14, 2008,  between
     Southcoast  Financial  Corporation  and L. Wayne Pearson  (incorporated  by
     reference to exhibits to Form 8-K filed August 20, 2008)

31-1 Rule 13a-14(a) Certifications of CEO

31-2 Rule 13a-14(a) Certifications of CFO

32   Section 1350 Certification





                                       25
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


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





Date:    November 6, 2008                   By:      s/ L. Wayne Pearson
                                                 ---------------------------
                                                     L. Wayne Pearson
                                                     Chief Executive Officer



Date:    November 6, 2008                 By:        s/ William C. Heslop
                                                 ---------------------------
                                                     William C. Heslop
                                                     Chief Financial Officer



                                       26
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

Exhibit Index

10-1 Amended and  Restated  Employment  Agreement,  dated as of August 14, 2008,
     among Southcoast Financial  Corporation,  Southcoast Community Bank, and L.
     Wayne  Pearson  (incorporated  by  reference  to exhibits to Form 8-K filed
     August 20, 2008)

10-2 Salary  Continuation  Agreement  dated  as  of  August  14,  2008,  between
     Southcoast  Community Bank and L. Wayne Pearson  (incorporated by reference
     to exhibits to Form 8-K filed August 20, 2008)

10-3 Endorsement  Split Dollar Agreement,  dated as of August 14, 2008,  between
     Southcoast  Financial  Corporation  and L. Wayne Pearson  (incorporated  by
     reference to exhibits to Form 8-K filed August 20, 2008)

31-1 Rule 13a-14(a) Certifications of CEO

31-2 Rule 13a-14(a) Certifications of CFO

32   Section 1350 Certification




                                       27