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

                                    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 June 30, 2009

                                       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 has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted  and posted  pursuant to Rule 405 of  Regulation  S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to  submit  and  post  such  files).  Yes  [ ] No [ ]  (Not  yet  applicable  to
Registrant)

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  [ ]

Non-accelerated filer  [ ]                      Smaller reporting company  [X]
(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.

       4,535,274 shares of common stock, no par value, as of July 31, 2009


<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                                                     Page No.
                                                                                                                   --------

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - June 30, 2009 and December 31, 2008....................................2

         Condensed Consolidated Statements of Income - Six months ended June 30, 2009 and 2008..........................3

         Condensed Consolidated Statements of Income - Three months ended June 30, 2009 and 2008........................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Six months ended June 30, 2009 and 2008......................................................................5

         Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2009 and 2008......................6

Notes to Condensed Consolidated Financial Statements.................................................................7-12

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................13-22

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

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

PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a vote of Security Holders...........................................................23

Item 6.  Exhibits......................................................................................................23

Signatures ............................................................................................................24

Exhibit Index..........................................................................................................25
</TABLE>





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                    June 30,           December 31,
                                                                                                      2009                2008
                                                                                                      ----                ----
                                                                                                  (Unaudited)
<S>                                                                                              <C>                  <C>
Assets
   Cash and cash equivalents:
     Cash and due from banks .............................................................       $  10,108,405        $  10,659,268
     Federal funds sold ..................................................................               8,620           11,902,302
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................          10,117,025           22,561,570
   Investment securities
     Available for sale ..................................................................          53,061,366           57,772,257
     Federal Home Loan Bank Stock, at cost ...............................................           4,266,200            4,509,500
                                                                                                 -------------        -------------
       Total investment securities .......................................................          57,327,566           62,281,757
   Loans held for sale ...................................................................             980,057              417,000
   Loans, net of allowance of $6,505,747 and $7,410,116 ..................................         377,195,491          397,123,072
   Property and equipment, net ...........................................................          27,635,111           23,812,981
   Other real estate owned ...............................................................           4,670,003            2,074,147
   Company owned life insurance ..........................................................          18,866,848           18,492,955
   Other assets ..........................................................................          22,835,378            8,201,432
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 519,627,479        $ 534,964,914
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  29,596,569        $  27,931,650
     Interest bearing ....................................................................         330,448,825          338,879,046
                                                                                                 -------------        -------------
       Total deposits ....................................................................         360,045,394          366,810,696
   Federal funds purchased ...............................................................                   -            5,978,800
   Securities sold under agreements to repurchase ........................................          15,681,362           10,611,537
   Other borrowings ......................................................................          74,000,000           81,000,000
   Junior subordinated debentures ........................................................          10,310,000           10,310,000
   Other liabilities .....................................................................           5,301,366            5,020,777
                                                                                                 -------------        -------------
       Total liabilities .................................................................         465,338,122          479,731,810
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  4,529,153 shares
     outstanding at June 30, 2009 and
     4,513,463 at December 31, 2008) .....................................................          53,515,188           53,441,978
   Retained earnings .....................................................................           3,539,299            2,814,566
   Accumulated other comprehensive loss ..................................................          (2,765,130)          (1,023,440)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          54,289,357           55,233,104
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 519,627,479        $ 534,964,914
                                                                                                 =============        =============
</TABLE>



                                      -2-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                    For the Six Months Ended
                                                                                                            June 30,
                                                                                                            --------
                                                                                                  2009                       2008
                                                                                                  ----                       ----
Interest income
<S>                                                                                         <C>                        <C>
   Loans, including fees ......................................................             $  11,796,181              $  13,802,686
   Investment securities ......................................................                 1,436,799                  1,734,255
   Federal funds sold .........................................................                       956                     18,804
                                                                                            -------------              -------------
       Total interest income ..................................................                13,233,936                 15,555,745
                                                                                            -------------              -------------
Interest expense
   Deposits and borrowings ....................................................                 6,604,029                  8,012,850
                                                                                            -------------              -------------
Net interest income ...........................................................                 6,629,907                  7,542,895
Provision for loan losses .....................................................                   550,000                  1,110,047
                                                                                            -------------              -------------
Net interest income after provision for loan losses ...........................                 6,079,907                  6,432,848
                                                                                            -------------              -------------
Noninterest income
   Service fees on deposit accounts ...........................................                   597,226                    548,297
   Fees on loans sold .........................................................                   165,504                    136,843
   Gain on sale of available for sale securities ..............................                   885,604                    224,418
   Company Owned Life Insurance earnings ......................................                   373,893                    427,650
   Rental income ..............................................................                   157,922                      5,775
   Other ......................................................................                    98,525                    165,338
                                                                                            -------------              -------------
       Total noninterest income ...............................................                 2,278,674                  1,508,321
                                                                                            -------------              -------------
Noninterest expenses
   Salaries and employment benefits ...........................................                 3,793,892                  3,435,951
   Occupancy ..................................................................                   713,068                    573,730
   Furniture and equipment ....................................................                   672,418                    592,312
   Advertising and public relations ...........................................                    53,219                     20,059
   Professional fees ..........................................................                   449,172                    317,896
   Travel and entertainment ...................................................                   107,458                    105,042
   Telephone, postage and supplies ............................................                   189,387                    201,608
   Insurance ..................................................................                   754,340                    180,274
   Impairment charges on other real estate owned ..............................                   193,441                          -
   Other operating expenses ...................................................                   713,318                    595,630
                                                                                            -------------              -------------
       Total noninterest expenses .............................................                 7,639,713                  6,022,502
                                                                                            -------------              -------------
Income before income taxes ....................................................                   718,868                  1,918,667
Income tax ....................................................................                    (5,865)                   404,220
                                                                                            -------------              -------------
Net income ....................................................................             $     724,733              $   1,514,447
                                                                                            =============              =============
Basic net income per common share .............................................             $         .16              $         .32
Diluted net income per common share ...........................................             $         .16              $         .32
Weighted average shares outstanding
   Basic ......................................................................                 4,525,542                  4,691,867
   Diluted ....................................................................                 4,525,542                  4,692,028
</TABLE>


                                      -3-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the Three Months Ended
                                                                                                              June 30,
                                                                                                              --------
                                                                                                   2009                     2008
                                                                                                   ----                     ----
Interest income
<S>                                                                                          <C>                       <C>
   Loans, including fees .......................................................             $   5,777,374             $   6,968,444
   Investment securities .......................................................                   724,294                   916,088
   Federal funds sold ..........................................................                       365                     7,127
                                                                                             -------------             -------------
       Total interest income ...................................................                 6,502,033                 7,891,659
                                                                                             -------------             -------------
Interest expense
   Deposits and borrowings .....................................................                 3,159,640                 3,801,958
                                                                                             -------------             -------------
Net interest income ............................................................                 3,342,393                 4,089,701
Provision for loan losses ......................................................                   450,000                   729,000
                                                                                             -------------             -------------
Net interest income after provision for loan losses ............................                 2,892,393                 3,360,701
                                                                                             -------------             -------------
Noninterest income
   Service fees on deposit accounts ............................................                   286,779                   279,630
   Fees on loans sold ..........................................................                    54,333                    61,601
   Gain on sale of available for sale securities ...............................                   885,604                    70,953
   Company Owned Life Insurance earnings .......................................                   188,537                   222,463
   Rental income ...............................................................                   123,615                     2,888
   Other .......................................................................                    52,623                    76,241
                                                                                             -------------             -------------
       Total noninterest income ................................................                 1,591,491                   713,776
                                                                                             -------------             -------------
Noninterest expenses
   Salaries and employment benefits ............................................                 1,727,623                 1,712,508
   Occupancy ...................................................................                   375,205                   291,344
   Furniture and equipment .....................................................                   344,987                   299,909
   Advertising and public relations ............................................                    34,477                     9,583
   Professional fees ...........................................................                   260,351                   222,508
   Travel and entertainment ....................................................                    63,610                    51,415
   Telephone, postage, and supplies ............................................                    86,908                    97,326
   Insurance ...................................................................                   630,957                    94,138
   Impairment charges on other real estate owned ...............................                   147,441                         -
   Other operating expenses ....................................................                   352,226                   320,934
                                                                                             -------------             -------------
       Total noninterest expenses ..............................................                 4,023,785                 3,099,665
                                                                                             -------------             -------------
Income before income taxes .....................................................                   460,099                   974,812
Income tax .....................................................................                    38,500                   204,711
                                                                                             -------------             -------------
Net income .....................................................................             $     421,599             $     770,101
                                                                                             =============             =============
Basic net income per common share ..............................................             $         .09             $         .17
Diluted net income per common share ............................................             $         .09             $         .17
Weighted average shares outstanding
   Basic .......................................................................                 4,529,153                 4,665,247
   Diluted .....................................................................                 4,529,153                 4,665,696
</TABLE>


                                      -4-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
          Condensed Consolidated Statement of Changes in Shareholders'
                         Equity and Comprehensive Income
                 For the six months ended June 30, 2009 and 2008
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                                           other
                                                              Common Stock                             comprehensive
                                                              ------------            Retained             income
                                                         Shares         Amount        earnings             (loss)          Total
                                                         ------         ------        --------             ------          -----
<S>                                                    <C>           <C>              <C>              <C>              <C>
Balance, December 31, 2007 .....................       5,009,903     $ 60,157,384     $  2,597,714     $    (13,791)    $ 62,741,307

   Net income for the period ...................                                         1,514,447                        1,514,447

   Other comprehensive loss,
     net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                          (873,516)        (873,516)

   Less reclassification adjustment for
     gains included in net income, net of
     taxes of $ 80,790 .........................                                                          (143,628)        (143,628)
                                                                                                                        ------------
   Comprehensive income ........................                                                                            497,303

   Shares repurchased and retired ..............        (410,373)      (5,740,170)                                       (5,740,170)

   Employee stock purchase plan ................           5,108           73,615                                             73,615
                                                       ---------     ------------     ------------     ------------     ------------

Balance, June 30, 2008 .........................       4,604,638     $ 54,490,829     $  4,112,161     $ (1,030,935)    $ 57,572,055
                                                       =========     ============     ============     ============     ============

Balance, December 31, 2008 .....................       4,513,463     $ 53,441,978     $  2,814,566     $ (1,023,440)    $ 55,233,104

   Net income for the period ...................                                           724,733                          724,733

   Other comprehensive loss,
     net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                        (1,174,804)      (1,174,804)

   Less reclassification adjustment for
     gains included in net income, net of
     taxes of $ 318,718 ........................                                                          (566,886)        (566,886)
                                                                                                                        ------------
   Comprehensive loss ..........................                                                                         (1,016,957)

   Employee stock purchase plan ................          15,690           73,210                                            73,210
                                                       ---------     ------------     ------------     ------------     ------------

Balance, June 30, 2009 .........................       4,529,153     $ 53,515,188     $  3,539,299     $ (2,765,130)    $ 54,289,357
                                                       =========     ============     ============     ============     ============
</TABLE>


                                      -5-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                         For the six months ended
                                                                                                                June 30,
                                                                                                                --------
                                                                                                        2009                  2008
                                                                                                        ----                  ----
<S>                                                                                               <C>                  <C>
Operating activities
   Net income ............................................................................        $    724,733         $  1,514,447
   Adjustments to reconcile net income to net
     cash provided (used) by operating activities
       Increase in deferred income taxes .................................................          (1,394,279)            (223,733)
       Provision for loan losses .........................................................             550,000            1,110,047
       Depreciation and amortization .....................................................             637,477            1,199,800
       Discount accretion and premium amortization .......................................             (33,171)             (26,983)
       Gain on sale of securities ........................................................            (885,604)            (224,418)
       (Gain) loss on sale or disposal of property and equipment .........................              (5,413)              14,954
       Loss on sale of other real estate owned ...........................................              11,936                    -
       Impairment charges on other real estate owned .....................................             193,441                    -
       Originations of loans held for sale ...............................................         (34,883,866)         (24,932,048)
       Proceeds from sales of loans held for sale ........................................          34,320,809           24,993,048
       Increase in value of Company Owned Life Insurance .................................            (373,893)            (427,650)
       Increase in other assets ..........................................................         (12,102,612)            (123,356)
       Increase (decrease) in other liabilities ..........................................             280,589             (415,333)
                                                                                                  ------------         ------------

         Net cash provided by (used for) operating activities ............................         (12,959,853)           2,458,775
                                                                                                  ------------         ------------

Investing activities
   (Purchases) sales of Federal Home Loan Bank stock .....................................             243,300               (7,800)
   Purchases of investment securities available-for-sale .................................         (26,222,778)         (31,598,595)
   Sales, calls, and maturities of investment securities available-for-sale ..............          28,973,699           15,981,559
   Proceeds from sales of premises and equipment .........................................              10,433                    -
   Purchases of premises and equipment ...................................................            (290,911)          (1,072,974)
   Proceeds from sales of other real estate owned ........................................             838,421                    -
   Capital expenditures to other real estate owned .......................................             (37,191)                   -
   Net (increase) decrease in loans ......................................................          11,601,402          (19,938,073)
                                                                                                  ------------         ------------

         Net cash provided by (used for) investing activities ............................          15,116,375          (36,635,883)
                                                                                                  ------------         ------------

Financing activities
   Increase (decrease) in borrowings .....................................................          (7,908,975)           9,053,120
   Proceeds from issuances of stock ......................................................              73,210               73,615
   Funds used to repurchase stock ........................................................                   -           (5,740,170)
   Net increase (decrease) in deposits ...................................................          (6,765,302)          32,971,036
                                                                                                  ------------         ------------

         Net cash provided by (used for) financing activities ............................         (14,601,067)          36,357,601
                                                                                                  ------------         ------------

         Increase (decrease) in cash and cash equivalents ................................         (12,444,545)           2,180,493

Cash and cash equivalents, beginning of period ...........................................          22,561,570           10,807,156
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 10,117,025         $ 12,987,649
                                                                                                  ============         ============

Cash paid during the year for:
   Income taxes ..........................................................................        $  1,001,779         $    677,905
   Interest ..............................................................................        $  6,997,722         $  8,267,726
</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 the  opinion  of
management,   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, Southcoast Investment Corporation, 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.  During the first six months of 2009 and 2008, the
Company repurchased 0 and 410,373 shares, respectively.

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 June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No.  168,  "The FASB  Accounting
Standards  Codification  TM and the Hierarchy of Generally  Accepted  Accounting
Principles - a replacement  of FASB  Statement No. 162," ("SFAS 168").  SFAS 168
establishes the FASB Accounting  Standards  Codification TM  ("Codification") as
the source of authoritative  generally accepted  accounting  principles ("GAAP")
for nongovernmental entities. The Codification does not change GAAP. Instead, it
takes the thousands of individual  pronouncements  that currently  comprise GAAP
and reorganizes them into  approximately 90 accounting  Topics, and displays all
Topics  using a  consistent  structure.  Contents  in  each  Topic  are  further
organized first by Subtopic,  then Section and finally Paragraph.  The Paragraph
level is the only level that contains  substantive  content.  Citing  particular
content in the Codification  involves  specifying the unique numeric path to the
content  through the Topic,  Subtopic,  Section and  Paragraph  structure.  FASB
suggests  that all  citations  begin  with  "FASB  ASC,"  where ASC  stands  for
Accounting Standards  Codification.  SFAS 168, (FASB ASC 105-10-05,  10, 15, 65,
70) is effective for interim and annual periods ending after  September 15, 2009
and will not have an impact on the Company's  financial position but will change
the referencing system for accounting  standards.  The following  pronouncements
provide citations to the applicable  Codification by Topic, Subtopic and Section
in addition to the original standard type and number.

In December 2008 the FASB issued FASB Staff Position ("FSP") SFAS 132(R)-1 (FASB
ASC  715-20-65),  "Employers'  Disclosures  about  Postretirement  Benefit  Plan
Assets,"  ("FSP SFAS  132(R)-1").  This FSP provides  guidance on an  employer's
disclosures   about  plan  assets  of  a  defined   benefit   pension  or  other
postretirement  plan.  The  objective  of the FSP is to  provide  the  users  of
financial  statements with an  understanding  of: (a) how investment  allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies;  (b) the major categories of plan assets;
(c) the inputs and valuation  techniques  used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes  in plan assets for the period;  and (e) significant




                                      -7-
<PAGE>

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

Note 5 - Recently Issued Accounting Standards- (continued)

concentrations  of risk within plan  assets.  The FSP also  requires a nonpublic
entity, as defined in Statement of Financial  Accounting  Standard ("SFAS") 132,
to disclose net  periodic  benefit cost for each period for which a statement of
income is  presented.  FSP SFAS  132(R)-1 is  effective  for fiscal years ending
after  December 15,  2009.  The Staff  Position  will not require the Company to
provide additional disclosures related to its benefit plans.

FSP EITF  99-20-1,  "Amendments  to the  Impairment  Guidance  of EITF Issue No.
99-20," (FASB ASC  325-40-65)  ("FSP EITF  99-20-1") was issued in January 2009.
Prior to the FSP, other-than-temporary impairment was determined by using either
Emerging  Issues Task Force ("EITF") Issue No. 99-20,  "Recognition  of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that  Continue to be Held by a  Transferor  in  Securitized  Financial  Assets,"
("EITF 99-20") or SFAS No. 115,  "Accounting for Certain Investments in Debt and
Equity Securities,"  ("SFAS 115") depending on the type of security.  EITF 99-20
required the use of market participant  assumptions  regarding future cash flows
regarding the  probability  of collecting all cash flows  regarding  future cash
flows  regarding  the  probability  of  collecting  all  cash  flows  previously
projected.  SFAS 115 determined  impairment to be other than temporary if it was
probable that the holder would be unable to collect all amounts due according to
the  contractual   terms.  To  achieve  a  more  consistent   determination   of
other-than-temporary  impairment,  the FSP amends  EITF 99-20 to  determine  any
other-than-temporary  impairment  based on the  guidance  in SFAS 115,  allowing
management  to  use  more  judgment  in  determining  any   other-than-temporary
impairment.  The FSP was effective for reporting  periods  ending after December
15, 2008. Management has reviewed the Company's security portfolio and evaluated
the portfolio for any other-than-temporary impairments.

On April 9, 2009,  the FASB issued three staff  positions  related to fair value
which are discussed below.

FSP  SFAS  115-2  and  SFAS  124-2  (FASB  ASC  320-10-65),   "Recognition   and
Presentation  of  Other-Than-Temporary  Impairments,"  ("FSP SFAS 115-2 and SFAS
124-2")   categorizes   losses   on  debt   securities   available-for-sale   or
held-to-maturity determined by management to be other-than-temporarily  impaired
into  losses  due to credit  issues and  losses  related  to all other  factors.
Other-than-temporary  impairment  (OTTI)  exists when it is more likely than not
that the security will mature or be sold before its amortized  cost basis can be
recovered.  An OTTI  related  to  credit  losses  should be  recognized  through
earnings.  An OTTI  related  to other  factors  should  be  recognized  in other
comprehensive   income.  The  FSP  does  not  amend  existing   recognition  and
measurement  guidance  related  to  other-than-temporary  impairments  of equity
securities.  Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS
124-1 are also required for interim  periods  (including the aging of securities
with unrealized losses).

FSP SFAS 157-4 (FASB ASC 820-10-65), "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability  Have  Significantly  Decreased and
Identifying Transactions That are Not Orderly" recognizes that quoted prices may
not be determinative of fair value when the volume and level of trading activity
has significantly  decreased.  The evaluation of certain factors may necessitate
that fair value be determined using a different valuation technique.  Fair value
should be the price that would be  received to sell an asset or paid to transfer
a liability in an orderly  transaction,  not a forced  liquidation or distressed
sale. If a transaction is considered to not be orderly,  little,  if any, weight
should  be  placed  on  the  transaction  price.  If  there  is  not  sufficient
information  to conclude as to whether or not the  transaction  is orderly,  the
transaction  price should be considered  when estimating fair value. An entity's
intention  to hold an asset or liability  is not  relevant in  determining  fair
value.  Quoted  prices  provided  by  pricing  services  may  still be used when
estimating  fair value in accordance with SFAS 157;  however,  the entity should
evaluate whether the quoted prices are based on current  information and orderly
transactions.  Inputs and valuation  techniques  are required to be disclosed in
addition to any changes in valuation techniques.

FSP SFAS 107-1 and APB 28-1 (FASB ASC  825-10-65),  "Interim  Disclosures  about
Fair Value of Financial  Instruments"  requires disclosures about the fair value
of  financial  instruments  for interim  reporting  periods of  publicly  traded
companies as well as in annual  financial  statements  and also  requires  those
disclosures in summarized  financial  information at interim reporting periods A
publicly traded company  includes any company whose securities trade in a public
market on either a stock  exchange  or in the  over-the-counter  market,  or any
company that is a conduit bond  obligor.  Additionally,  when a company  makes a
filing with a regulatory  agency in preparation  for sale of its securities in a
public market it is considered a publicly traded company for this purpose.

The three staff  positions are effective for periods ending after June 15, 2009,
with early  adoption of all three  permitted for periods  ending after March 15,
2009. The Company  adopted the staff  positions for its second quarter 10-Q. The
staff



                                      -8-
<PAGE>

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

Note 5 - Recently Issued Accounting Standards- (continued)

positions  had no  material  impact  on  the  financial  statements.  Additional
disclosures have been provided where applicable.

Also on April 1, 2009,  the FASB issued FSP SFAS 141(R)-1  (FASB ASC  805-20-25,
30, 35,  50),  "Accounting  for Assets  Acquired  and  Liabilities  Assumed in a
Business  Combination  That Arise from  Contingencies."  The FSP  requires  that
assets acquired and  liabilities  assumed in a business  combination  that arise
from a  contingency  be  recognized  at fair  value.  If fair  value  cannot  be
determined  during the  measurement  period as  determined  in SFAS 141 (R), the
asset or liability can still be  recognized  if it can be determined  that it is
probable  that the asset  existed or the  liability  had been incurred as of the
measurement  date and if the amount of the asset or liability  can be reasonably
estimated.  If it is not  determined  to be  probable  that the  asset/liability
existed/was  incurred or no  reasonable  amount can be  determined,  no asset or
liability  is  recognized.  The entity  should  determine  a rational  basis for
subsequently  measuring the acquired assets and assumed liabilities.  Contingent
consideration  agreements  should  be  recognized  initially  at fair  value and
subsequently  reevaluated  in accordance  with guidance found in paragraph 65 of
SFAS 141 (R). The FSP is effective for business combinations with an acquisition
date on or after the beginning of the Company's  first annual  reporting  period
beginning on or after  December 15, 2008.  The Company will assess the impact of
the FSP if and when a future acquisition occurs.

The Securities and Exchange  Commission ("SEC") issued Staff Accounting Bulletin
("SAB")  No. 111 (FASB ASC  320-10-S99-1)  on April 9, 2009 to amend Topic 5.M.,
"Other  Than  Temporary  Impairment  of Certain  Investments  in Debt and Equity
Securities"  and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains
the staff's previous views related to equity securities; however debt securities
are  excluded  from its  scope.  The SAB  provides  that  "other-than-temporary"
impairment is not  necessarily  the same as  "permanent"  impairment  and unless
evidence  exists to support a value equal to or greater than the carrying  value
of the equity security investment, a write-down to fair value should be recorded
and accounted for as a realized  loss.  The SAB was effective  upon issuance and
had no impact on the Company's financial position.

SFAS 165 (FASB ASC 855-10-05,  15, 25, 45, 50, 55),  "Subsequent Events," ("SFAS
165") was issued in May 2009 and provides  guidance on when a  subsequent  event
should be recognized in the financial statements. Subsequent events that provide
additional  evidence  about  conditions  that existed at the date of the balance
sheet should be  recognized at the balance  sheet date.  Subsequent  events that
provide  evidence about  conditions  that arose after the balance sheet date but
before financial  statements are issued, or are available to be issued,  are not
required to be recognized.  The date through which  subsequent  events have been
evaluated  must be  disclosed  as well as whether  it is the date the  financial
statements were issued or the date the financial statements were available to be
issued.  For  nonrecognized  subsequent events which should be disclosed to keep
the financial  statements from being misleading,  the nature of the event and an
estimate of its financial effect, or a statement that such an estimate cannot be
made,  should be  disclosed.  The  standard is  effective  for interim or annual
periods ending after June 15, 2009.

The FASB  issued  SFAS 166 (not yet  reflected  in FASB  ASC),  "Accounting  for
Transfers of Financial  Assets - an amendment of FASB Statement No. 140," ("SFAS
166") in June 2009. SFAS 166 limits the circumstances in which a financial asset
should be  derecognized  when the  transferor  has not  transferred  the  entire
financial  asset  by  taking  into  consideration  the  transferor's  continuing
involvement.  The standard  requires  that a transferor  recognize and initially
measure at fair value all assets obtained  (including a transferor's  beneficial
interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying  special-purpose  entity is
removed from SFAS 140 along with the  exception  from  applying  FIN 46(R).  The
standard is effective  for the first annual  reporting  period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter.  Earlier application is
prohibited.  The Company  does not expect the standard to have any impact on the
Company's financial position.

SFAS 167 (not yet reflected in FASB ASC), "Amendments to FASB Interpretation No.
46(R)," ("SFAS 167") was also issued in June 2009. The standard amends FIN 46(R)
to require a company to analyze  whether  its  interest  in a variable  interest
entity ("VIE") gives it a controlling  financial interest. A company must assess
whether  it has an  implicit  financial  responsibility  to ensure  that the VIE
operates as  designed  when  determining  whether it has the power to direct the
activities  of the VIE  that  significantly  impact  its  economic  performance.
Ongoing  reassessments  of whether a company is the primary  beneficiary is also
required by the  standard.  SFAS 167 amends the criteria to qualify as a primary
beneficiary  as well as how to  determine  the  existence of a VIE. The standard
also eliminates certain exceptions that were available under FIN 46(R). SFAS 167
is  effective  as of the  beginning  of each  reporting  entity's  first  annual
reporting period that begins after November


                                      -9-
<PAGE>

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

Note 5 - Recently Issued Accounting Standards- (continued)

15, 2009, for interim periods within that first annual reporting period, and for
interim  and  annual  reporting  periods  thereafter.   Earlier  application  is
prohibited.  Comparative  disclosures  will be required  for  periods  after the
effective  date.  The Company does not expect the standard to have any impact on
the Company's financial position.

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.

Note 6 - Investment Securities

The amortized cost and fair value of investment securities are as follows:
<TABLE>
<CAPTION>
                                                                                       June 30, 2009
                                                                                     Gross Unrealized
                                                         Amortized                   ----------------                    Estimated
                                                           Cost                 Gains                 Losses             Fair Value
                                                           ----                 -----                 ------             ----------
<S>                                                    <C>                   <C>                   <C>                   <C>
Available for sale
   Mortgage backed .........................           $35,476,091           $   351,298           $   848,559           $34,978,830
   Municipal securities ....................            16,543,745               141,253               304,554            16,380,444
   GSE* preferred stock ....................                73,200                81,000                     -               154,200
   Other ...................................             4,658,258                     -             3,110,366             1,547,892
                                                       -----------           -----------           -----------           -----------
     Total .................................           $56,751,294           $   573,551           $ 4,263,479           $53,061,366
                                                       ===========           ===========           ===========           ===========
</TABLE>

   * Government Sponsored Enterprises

<TABLE>
<CAPTION>
                                                                                     December 31, 2008
                                                                                     Gross Unrealized
                                                         Amortized                   ----------------                    Estimated
                                                           Cost                 Gains                 Losses             Fair Value
                                                           ----                 -----                 ------             ----------
<S>                                                    <C>                   <C>                   <C>                   <C>
Available for sale
  Mortgage backed ..........................           $36,954,498           $   916,961           $   177,493           $37,693,966
  Municipal securities .....................            16,904,796                95,748               356,173            16,644,371
  GSE* preferred stock .....................                73,200                     -                     -                73,200
  Other ....................................             4,650,946                     -             1,290,226             3,360,720
                                                       -----------           -----------           -----------           -----------
    Total ..................................           $58,583,440           $ 1,012,709           $ 1,823,892           $57,772,257
                                                       ===========           ===========           ===========           ===========
</TABLE>

The following table shows gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at June 30, 2009.

<TABLE>
<CAPTION>
                                              Less than                     Twelve months
                                             twelve months                     or more                          Total
                                             -------------                     -------                          -----
                                                      Unrealized                        Unrealized                       Unrealized
                                     Fair value         losses         Fair value         losses         Fair value        losses
                                     ----------         ------         ----------         ------         ----------        ------
<S>                                 <C>              <C>              <C>              <C>              <C>              <C>
Available for Sale
  Mortgage backed ............      $ 5,413,002      $    43,488      $ 2,786,332      $   805,071      $ 8,199,334      $   848,559
  Municipal securities .......        5,718,441          167,829        1,335,449          136,725        7,053,890          304,554
  Other ......................          413,600        1,370,090          174,292        1,740,276          587,892        3,110,366
                                    -----------      -----------      -----------      -----------      -----------      -----------
    Total ....................      $11,545,043      $ 1,581,407      $ 4,296,073      $ 2,682,072      $15,841,116      $ 4,263,479
                                    ===========      ===========      ===========      ===========      ===========      ===========
</TABLE>

Securities classified as  available-for-sale  are recorded at fair market value.
Approximately  63% of the unrealized  losses,  or seven  individual  securities,
consisted of securities in a continuous loss position for twelve months or more.
The Company does not intend to sell these  securities and it is more likely than
not that the  Company  will not be  required  to sell  these  securities  before
recovery  of their  amortized  cost.  The  Company  believes,  based on industry
analyst  reports  and  credit  ratings  that  the   deterioration  in  value  is
attributable to changes in

                                      -10-
<PAGE>

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

Note 6 - Investment Securities- (continued)

market interest rates or lack of liquidity in these securities and is not in the
credit  quality  of the  issuer  and  therefore,  this  loss  is not  considered
other-than-temporary.

The amortized costs and fair values of investment  securities available for sale
at June 30,  2009 by  contractual  maturity  are shown in the  following  table.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.

                                                         Amortized       Fair
                                                           Cost          Value
                                                           ----          -----
Due after one but within five years ................   $   366,725   $   380,608
Due after five but within ten years ................     2,397,435     2,411,760
Due after ten years ................................    18,361,043    15,140,168
Mortgage backed ....................................    35,476,091    34,978,830
 Equity securities with no maturity ................       150,000       150,000
                                                       -----------   -----------
  Total investment securities available-for-sale ...   $56,751,294   $53,061,366
                                                       ===========   ===========

Note 7 - Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments were as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                                                                                June 30,                        December 31,
                                                                                  2009                             2008
                                                                                  ----                             ----
                                                                       Carrying           Fair            Carrying            Fair
                                                                        Amount            Value            Amount            Value
                                                                        ------            -----            ------            -----
<S>                                                                   <C>               <C>               <C>               <C>
Financial assets:
   Cash and due from banks .................................          $ 10,117          $ 10,117          $ 10,659          $ 10,659
   Federal funds sold ......................................                 9                 9            11,902            11,902
   Investment securities ...................................            57,328            57,328            62,282            62,282
   Loans held for sale .....................................               980               980               417               417
   Loans, gross ............................................           383,701           387,193           404,533           408,098
Financial liabilities:
   Deposits ................................................           360,045           361,793           366,811           369,807
   Short term borrowings ...................................            15,681            15,681            16,590            16,590
   Advances from Federal Home Loan Bank ....................            74,000            74,726            81,000            73,772
   Junior subordinated debentures ..........................            10,310            10,310            10,310            10,310
</TABLE>

<TABLE>
<CAPTION>
                                                                       Notional           Fair            Notional           Fair
                                                                        Amount           Value             Amount            Value
                                                                        ------           -----             ------            -----
<S>                                                                     <C>             <C>                <C>              <C>
Financial instruments with off-
Balance sheet risk:
   Commitments to extend credit ............................            $26,003         $     -            $29,759          $     -
   Standby letters of credit ...............................                684               -                941                -
   Derivative instruments ..................................             10,000            (481)            10,000             (602)
</TABLE>

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.


                                      -11-
<PAGE>

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

Note 7 - Fair Value of Financial Instruments- (continued)

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.

Assets measured at fair value on a recurring basis are as follows as of June 30,
2009 (amounts in thousands):

<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 ...........................         $        -                  $ 51,973                   $1,088

Loans held for sale ..............................         $        -                  $    980                   $    -

Interest rate swap
 derivative instrument ...........................         $        -                  $   (481)                  $    -

</TABLE>

The  following  table  reconciles  the  changes in  recurring  Level 3 financial
instruments  for  the six  months  ended  June  30,  2009  and  2008(amounts  in
thousands):

                                                                June 30,
                                                                --------
                                                          2009            2008
                                                          ----            ----
Beginning of Year Balance                               $2,901           $4,018
Discount Accretion                                           3                2
Principal increases from capitalized interest                4                -
Unrealized Loss                                        (1,820)            (473)
                                                        ------           ------
Ending Balance                                          $1,088           $3,547
                                                        ======           ======

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 June 30, 2009 was $ 16,999,328.

Other real estate owned (OREO) is adjusted to fair value less costs to sell upon
transfer  of a loan to  OREO.  Subsequently,  OREO is  carried  at the  lower of
carrying  value or fair value less costs to sell and is valued on a nonrecurring
basis. Fair value is generally based upon current appraisals,  comparable sales,
and other  estimates of value obtained  principally  from  independent  sources,
adjusted for estimated selling costs,  which the Company considers to be level 2
inputs.  The  aggregate  carrying  amount of other real estate owned at June 30,
2009 was $4,670,003.


                                      -12-
<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,  2008.  Results of
operations for the period ending June 30, 2009 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 and  disruptions  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.



                                      -13-
<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 six months ended June 30, 2009 was $724,733, or
$.16 per basic share,  compared to $1,514,447,  or $.32 per basic share, for the
six months ended June 30, 2008. The average number of shares outstanding for the
six months ending June 30, 2009 was 4,525,542  compared to 4,691,867 for the six
months ending June 30, 2008.

The  Company's  net income for the three months ended June 30, 2009 was $421,599
or $.09 per basic share,  compared to $770,101 or $.17 per basic share,  for the
three months ended June 30, 2008. The average number of shares  outstanding  for
the quarter  ending June 30, 2009 was  4,529,153  compared to 4,665,247  for the
quarter ending June 30, 2008.

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
$6,629,907  for the six months ended June 30, 2009,  compared to $7,542,895  for
the six months ended June 30, 2008.

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 six months  ending June 30, 2009  increased 0.4
percent to $454.9  million from the $453.1  million  reported for the six months
ending June 30,  2008.  The  increase  was  attributable  to an increase of $5.7
million in  average  total  investments  and  federal  funds  sold,  offset by a
decrease of $3.9 million in average  loans.  The  decrease in average  loans was
reflective of slowing economic conditions in the company's market area.

Average  interest  bearing  liabilities  for the six months  ended June 30, 2009
increased 4.2 percent to $436.4 million from the $418.9 million reported for the
six months ending June 30, 2008. The increase was  attributable  to increases in
average time deposits of $48.1 million,  offset by decreases in average  savings
and transaction accounts and other borrowings of $23.3 million and $7.3 million,
respectively.  Average money market accounts  decreased by $26.5 million between
the two  periods due to lower  market  rates paid on these  accounts  during the
first six months of 2009. The increase in average interest  bearing  liabilities
was  necessitated by a $6.9 million  increase in average assets and decreases of
$4.8 million and $5.8 million in average  non-interest  bearing  liabilities and
average  equity,  respectively.  The  decrease in average  non-interest  bearing
liabilities was due to lower average non-interest bearing deposits.  This can be
attributed  to the Company's  introduction  of a  competitive  interest  bearing
checking product during 2009 which caused a shift in balances from  non-interest
bearing checking to interest bearing checking. The decrease in average equity is
primarily  reflective of $6.9 million in stock repurchases executed during 2008,
as well as a $1.7 million  deterioration in the after tax value of the Company's
securities  portfolio  between June 30, 2008, and June 30, 2009, due to changing
market conditions.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive  segments of the Company's balance sheets for the six months
ended June 30, 2009 and 2008.


                                      -14-
<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 six months ended                      For the six months ended
                                                             June 30, 2009                                 June 30, 2008
                                                             -------------                                 -------------
                                                   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 .................    $      1,156,079  $         956     0.17%   $      1,486,043  $      18,804       2.55%
   Investments - taxable ..............          57,846,988      1,069,009     3.73          50,800,453      1,293,939       5.14
   Investments - nontaxable (2) .......          17,328,208        574,672     6.69          18,293,129        666,873       7.35
                                           ----------------  -------------             ----------------  -------------
     Total investments and
       federal funds sold .............          76,331,275      1,644,637     4.34          70,579,625      1,979,616       5.66
   Loans (3) (4) ......................         378,591,349     11,796,181     6.26         382,503,862     13,802,686       7.24
                                           ----------------  -------------             ----------------  -------------
     Total interest earning assets ....         454,922,624     13,440,818     5.94%        453,083,487     15,782,302       7.00%
                                                             -------------                               -------------
     Other assets .....................          69,936,467                                  64,883,734
                                           ----------------                            ----------------
     Total assets .....................    $    524,859,091                            $    517,967,221
                                           ================                            ================
Liabilities
   Savings and
     transaction accounts .............    $     59,644,733        360,971     1.22    $     82,989,717        846,466       2.06
   Time Deposits ......................         275,619,869      4,323,787     3.16         227,466,270      5,028,487       4.46
   Other borrowings ...................          90,833,497      1,776,368     3.94          98,074,769      1,820,865       3.74
   Subordinated Debt ..................          10,310,000        142,903     2.80          10,310,000        317,032       6.20
                                           ----------------  -------------             ----------------  -------------
     Total interest bearing
       liabilities ....................         436,408,099      6,604,029     3.05         418,840,756      8,012,850       3.86
                                                             -------------                               -------------
   Non-interest bearing
     liabilities ......................          33,689,761                                  38,499,490
                                           ----------------                            ----------------
     Total liabilities ................         470,097,860      6,604,029     2.83         457,340,246      8,012,850       3.53
                                                             -------------                               -------------
   Equity .............................          54,761,231                                  60,626,975
                                           ----------------                            ----------------
     Total liabilities
       and equity .....................    $    524,859,091                            $    517,967,221
                                           ================                            ================
     Net interest
       income/margin (5) ..............                      $   6,836,789     2.92                      $   7,769,452       3.43
                                                             =============                               =============
     Net interest spread (6) ..........                                        2.89%                                         3.14%
</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 $356,176 in 2009 and $672,122 in 2008.
     (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 six months  ended June 30, 2009 the  average  yield on
earning  assets was 5.94  percent,  while the average  cost of interest  bearing
liabilities was 3.05 percent. For the six months ended June 30, 2008 the average
yield  on  earning   assets  was  7.00   percent   and  the   average   cost  of
interest-bearing  liabilities was 3.86 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 six
months ended June 30, 2009 was 2.92 percent compared to 3.43 percent for the six
months  ended  June  30,  2008.  The  decrease  in the net  interest  margin  is
attributable  to  increases  in average  nonearning  assets of $5.1  million and
average interest  bearing  liabilities of $17.6 million between the two periods,
compared  with an  increase  of only $1.8  million in average  interest  bearing
assets, a difference of $20.9 million.

The cost of total  liabilities  was 2.83  percent  and 3.53  percent for the six
months  ending  June 30,  2009 and 2008,  respectively.

                                      -15-
<PAGE>

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

Net Interest  Income - continued

Average  earning  assets for the three months ending June 30, 2009 decreased 3.7
percent to $445.2 million from the $462.1 million  reported for the three months
ending June 30,  2008.  The  decrease  was  attributable  to  decreases of $16.1
million and $0.8 million,  respectively,  in average loans and  investments  and
federal funds sold.

Average interest  bearing  liabilities for the three months ending June 30, 2009
increased 0.1 percent to $431.5 million from the $431.2 million reported for the
three months ending June 30, 2008.  The change was due to an increase in average
time deposits of $32.4 million  between the two periods,  offset by decreases in
average savings and transaction  accounts and other  borrowings of $17.7 million
and $14.4 million, respectively.

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 June 30, 2009 and 2008.

<TABLE>
<CAPTION>
                                                        For the three months ended                 For the three months ended
                                                               June 30, 2009                             June 30, 2008
                                                               -------------                             -------------
                                                   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 ...................  $        564,670  $         365     0.26%   $      1,311,635  $       7,127       2.18%
   Investments - taxable ................        58,752,489        540,165     3.69          57,084,407        700,481       4.92
   Investments - nontaxable (2) .........        17,382,433        287,702     6.64          19,126,903        327,763       6.87
                                           ----------------  -------------             ----------------  -------------
     Total investments and
       federal funds sold ...............        76,699,592        828,232     4.33          77,522,945      1,035,371       5.36
   Loans (3) (4) ........................       368,557,412      5,777,374     6.29         384,610,633      6,968,444       7.23
                                           ----------------  -------------             ----------------  -------------
     Total earning assets ...............       445,257,004      6,605,606     5.95         462,133,578      8,003,815       6.95
                                                             -------------                               -------------
     Other assets .......................        74,405,904                                  66,964,213
                                           ----------------                            ----------------
     Total assets .......................  $    519,662,908                            $    529,097,791
                                           ================                            ================
Liabilities
   Savings and
     transaction accounts ...............  $     63,166,680  $     214,027     1.36    $     80,886,271  $     341,741       1.69
   Time Deposits ........................       268,273,542      1,996,909     2.99         235,831,710      2,414,986       4.11
   Other Borrowings .....................        89,783,465        879,853     3.93         104,218,478        885,173       3.41
   Subordinated Debt ....................        10,310,000         68,851     2.68          10,310,000        160,058       6.23
                                           ----------------  -------------             ----------------  -------------
     Total interest bearing
       liabilities ......................       431,533,687      3,159,640     2.94         431,246,459      3,801,958       3.54
                                                             -------------                               -------------
   Non-interest bearing
     liabilities ........................        33,546,630                                  37,720,436
                                           ----------------                            ----------------
     Total liabilities ..................       465,080,317      3,159,640     2.72         468,966,895      3,801,958       3.25
                                                             -------------                               -------------
   Equity ...............................        54,582,591                                  60,130,896
                                           ----------------                            ----------------
     Total liabilities
       and equity .......................  $    519,662,908                            $    529,097,791
                                           ================                            ================
     Net interest
       income/margin (5) ................                   $   3,445,966     3.10                      $   4,201,857       3.65
                                                             =============                               =============
     Net interest spread (6) ............                                     3.01%                                         3.41%
</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 $179,603 in 2009 and $417,464 in 2008.
     (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 June 30, 2009 the average yield
on earning assets was 5.95 percent,  while the average cost of interest  bearing
liabilities  was 2.94  percent.  For the three  months  ended June 30,  2008 the
average  yield on  earning  assets  was 6.95  percent  and the  average  cost of
interest-bearing  liabilities  was 3.54  percent.  The  decrease in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to market  interest  rate  decreases  over the last year.  The net
interest  margin  for the three  months  ended  June 30,  2009 was 3.10  percent
compared to 3.65 percent for the three months ended June 30, 2008.  The decrease
in the net interest  margin is primarily  attributable  to a decrease in average
earning assets with little change in average interest bearing  liabilities.  The
cost of total  liabilities  was 2.72 percent for the three months ended June 30,
2009, compared to 3.25 percent for the three months ended June 30, 2008.

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 six months ended June 30, 2009
                                                                                    Versus six months ended June 30, 2008 (1)
                                                                                    -----------------------------------------
                                                                                 Volume                Rate             Net Change
                                                                                 ------                ----             ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $    (4,175)          $   (13,673)          $   (17,848)
   Investments - taxable .........................................              179,482              (404,412)             (224,930)
   Investments - non taxable (2) .................................              (35,176)              (57,025)              (92,201)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              140,131              (475,110)             (334,979)
     Net loans ((3)) .............................................             (140,469)           (1,866,036)           (2,006,505)
                                                                            -----------           -----------           -----------
     Total interest income .......................................                 (338)           (2,341,146)           (2,341,484)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................             (238,111)             (247,384)             (485,495)
   Time deposits .................................................            1,064,508            (1,769,208)             (704,700)
   Other borrowings ..............................................             (134,442)               89,945               (44,497)
   Subordinated debt .............................................                    -              (174,129)             (174,129)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              691,955            (2,100,776)           (1,408,821)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (692,293)          $  (240,370)          $  (932,663)
                                                                            ===========           ===========           ===========
</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 $356,176 in 2009 and $672,122 in 2008.


                                      -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 June 30, 2009
                                                                                   Versus three months ended June 30, 2008 (1)
                                                                                   -------------------------------------------
                                                                               Volume                 Rate               Net Change
                                                                               ------                 ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $    (4,059)          $    (2,703)          $    (6,762)
   Investments - taxable .........................................               20,469              (180,785)             (160,316)
   Investments - non taxable (2) .................................              (29,893)              (10,168)              (40,061)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              (13,483)             (193,656)             (207,139)
     Net loans ((3)) .............................................             (289,413)             (901,657)           (1,191,070)
                                                                            -----------           -----------           -----------
     Total interest income .......................................             (302,896)           (1,095,313)           (1,398,209)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................              (74,864)              (52,850)             (127,714)
   Time deposits .................................................              332,214              (750,291)             (418,077)
   Other borrowings ..............................................             (122,603)              117,283                (5,320)
   Subordinated debt .............................................                    -               (91,207)              (91,207)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              134,747              (777,065)             (642,318)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (437,643)          $  (318,248)          $  (755,891)
                                                                            ===========           ===========           ===========
</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 $179,603 in 2009 and $417,464 in 2008.

Noninterest Income and Expenses
Noninterest  income  for the six  months  ended  June 30,  2009 was  $2,278,674,
compared to  $1,508,321  for the six months ended June 30, 2008,  an increase of
$770,353.  Gains on sales of investment securities increased by $661,186 between
the two periods,  with these earnings totaling $885,604 and $224,418 for the six
months  ended June 30, 2009 and June 30,  2008,  respectively.  Service  fees on
deposit accounts  increased by $48,929 to $597,226 for the six months ended June
30,  2009 from  $548,297  for the six  months  ended  June 30,  2008,  due to an
increase  in  interest  bearing  transaction  accounts  related  to our  Rewards
Checking  program  implemented  during the first quarter of 2009.  Company owned
life insurance earnings decreased by $53,757 between the two periods, with these
earnings  totaling  $373,893 and $427,650 for the six months ended June 30, 2009
and June 30, 2008,  respectively.  This decrease in earnings is  attributable to
lower  market  rates of  return  on the  underlying  investments  on these  life
policies  experienced  during the first half of 2009 as compared to 2008. Rental
income increased by $152,147 to $157,922 for the six months ended June 30, 2009,
from  $5,775  for the six months  ended June 30,  2008.  This  increase  was due
primarily to rental income on leased properties  acquired by the Company through
foreclosure during 2009.

Noninterest  expenses were  $7,639,713  and  $6,022,502 for the six months ended
June 30,  2009 and June 30,  2008,  respectively,  an  increase  of  $1,617,211.
Salaries and  employment  benefits  increased by  $357,941,  primarily  due to a
$309,000  severance  payout to the  Company's  former Chief  Operating  Officer.
Insurance expenses increased by $574,066 between the two periods,  primarily due
to an  increase  in FDIC  premium  rates,  as well as a  special  one time  FDIC
assessment of $230,000 accrued for during the second quarter.  Additionally, the
Company  recorded  $193,441 in  impairment  charges on other real  estate  owned
during  the first six months of 2009,  compared  to no such  charges  during the
first six months of 2008.  Occupancy  expense also increased by $139,338 between
the two periods,  primarily due to extra  expenses  associated  with  foreclosed
properties.  Other  operating  expenses  increased  by $117,688  between the two
periods,  primarily the result of an increase in expenses  associated with loans
of $154,992 between the two periods.  These loan costs were primarily related to
charges incurred during the foreclosure process,  such as legal fees, insurance,
appraisals, taxes, and homeowners dues.


                                      -18-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest  income for the three  months  ended June 30,  2009 was  $1,591,491,
compared to $713,776 for the three  months ended June 30, 2008, a difference  of
$877,715.  The increase is primarily  attributable to an increase of $814,651 in
gains on sales of available for sale securities.

Noninterest  expenses for the three months ended June 30, 2009 were  $4,023,785,
compared to $3,099,665  for the three months ended June 30, 2008, an increase of
$924,120  between the two periods.  The increase is  primarily  attributable  to
increases of $536,819 and $147,441 in insurance and impairment  charges on other
real estate owned, respectively, between the two periods.

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 50.2% of total deposits as
of June 30, 2009.  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 pledges of its 1-4 family residential mortgage
loans and its commercial  real estate loans.  The Company also has federal funds
accommodations  of $12.5  million  with  Nexity  Bank,  $10  million  with First
Tennessee Bank, $10 million with US Bank, $10 million with Fifth Third Bank, and
$5 million with Zions Bank.

Loans

Nonfarm, nonresidential real estate loans comprised 26 percent of the total loan
portfolio as of June 30, 2009,  totaling  $99.8  million.  Loans secured by real
estate for  construction  and land  development  totaled  $72.4  million,  or 19
percent of the portfolio  while 1-4 family mortgage loans totaled $171.3 million
or 44 percent of the total loan  portfolio,  as of June 30, 2009. All other real
estate  loans  totaled  $6.0  million or 2 percent of the total loan  portfolio.
Commercial and industrial  loans  comprised  $30.8 million,  or 8 percent of the
total loan portfolio.  Installment loans and other consumer loans to individuals
comprised  $3.4  million or 1 percent of the total loan  portfolio.  Total loans
decreased  by $20.8  million  during the six months  ended  June 30,  2009,  due
primarily  to decreases of $15.0  million and $5.0 million in  construction  and
land  development   loans  and  nonfarm,   nonresidential   real  estate  loans,
respectively.

At June 30, 2009,  the Company had $1.4 million in loans 90 days  delinquent and
still accruing  interest and $15.0 million of nonaccrual  loans. The Company had
$4.7 million of other real estate owned at this date. The majority of nonaccrual
loans are secured by real estate.  The Company's  total balance of problem loans
consists  primarily of construction and land development loans. The primary risk
of loss on these loans is a potential  deterioration  of real estate  collateral
values. At December 31, 2008, the Company had $5.4 million of loans 90 days past
due and still accruing  interest,  $2.1 million in other real estate owned,  and
$8.9 million of nonaccrual loans. At June 30, 2008, the Company had $3.7 million
in loans 90 days past due and still  accruing  interest,  $553,000 of other real
estate  owned,  and $5.8 million of  nonaccrual  loans.  The  allowance for loan
losses was 1.70 percent of loans as of June 30,  2009,  compared to 1.83 percent
as of December 31, 2008 and 1.25 percent as of June 30, 2008. For the six months
ended June 30,  2009 the  Company  recorded a loan loss  provision  of  $550,000
compared to a loan loss  provision of $1,110,047  during the first six months of
2008.  The current  year's loan loss  provision  is the result of an increase of
$6.1 million in  nonaccrual  loans  during the first six months of the year,  as
well as net loan chargeoffs totaling $1.5 million during the same period. During
the first  six  months  of 2008,  the  Company  made a loan  loss  provision  of
$1,110,047  due to an increase of $18.9  million in total loans during the first
six months of the year, as well as an increase in total  nonperforming loans and
loan chargeoffs totaling $451,000.

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 experienced,  current economic
conditions  affecting the ability of our borrowers to repay, the volume of loans
and the trends in delinquent,  nonaccruing, 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
June 30, 2009.

                                      -19-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Loans - continued

The  following  tables  provide a year to date  analysis of activity  within the
allowance  for loan losses and an  allocation  for the allowance for loan losses
among the various loan categories  (notwithstanding  the allocation,  the entire
allowance is available to absorb losses regardless of category):

Balance at December 31, 2008 ................................       $ 7,410,116
Current Year Loan Loss Provision ............................           550,000
Charge- offs:
     Domestic:
       Construction and land development ....................          (157,078)
       1-4 family residential ...............................          (898,482)
       Nonfarm, nonresidential ..............................           (22,000)
       Commercial and industrial ............................          (416,913)
       Installment loans to individuals .....................            (5,252)
     Foreign: ...............................................                 -
Recoveries:
       Commercial, financial, and agricultural ..............            37,743
       1-4 family residential ...............................             7,300
       Installment loans to individuals .....................               313
                                                                    -----------
Balance at June 30, 2009 ....................................       $ 6,505,747
                                                                    ===========

<TABLE>
<CAPTION>
                                                                                                      Allowance For Loan Loss
                                                                                                     Allocation as a Percentage
Balance at June 30, 2009 Applicable to:                                              Amount                of the whole
                                                                                     ------          --------------------------
<S>                                                                                <C>                         <C>
Domestic:
      Real estate- commercial .............................................        $  611,383                    9.40%
      Real estate- construction and land development ......................         2,951,939                   45.37
      Real estate- 1-4 family residential .................................         1,486,075                   22.84
      Commercial and industrial ...........................................         1,077,702                   16.57
      Installment loans to individuals and other ..........................            36,631                    0.56
Foreign ...................................................................                 -                       -
Unallocated ...............................................................           342,017                    5.26
                                                                                   ----------                  ------
Total .....................................................................        $6,505,747                  100.00%
                                                                                   ==========                  ======
</TABLE>

Management identifies and maintains a list of potential problem loans. These are
loans that are still accruing interest and are not included in nonaccrual status
and are not past due 90 days or more. A loan is added to the  potential  problem
list when management becomes aware of information about possible credit problems
of the borrower  which raises  serious doubts as to the ability of such borrower
to comply with the current  loan  repayment  terms.  At June 30, 2009  potential
problem loans totaled $12,756,008.  Management closely tracks the current values
of real estate collateral when assessing the collectibility of problem loans.

Deposits

Deposits  decreased  $6.8 million  during the first six months of 2009 to $360.0
million at June 30,  2009.  The decrease was  attributable  to several  factors.
Noninterest  bearing  deposits  increased by $1.6  million and interest  bearing
deposits  decreased  by $8.4  million  during  the  first  six  months  of 2009.
Certificates  of deposit from retail  customers  decreased  approximately  $42.6
million  during the first six  months of the year,  largely as the result of the
Company's  decision to forego rate  specials  during the first six months of the
year. Savings and interest bearing transaction accounts increased  approximately
$12.7 million due to the  Company's  introduction  of a high  interest  checking
product, Rewards Checking, which had total balances of $19.4 million at June 30,
2009.  Finally,  brokered and wholesale  deposits increased $21.5 million during
the first six months of 2009.  The Company uses brokered  deposits as a means to
supplement retail funding sources.  During the first six months of 2009 rates on
brokered time deposits of all maturity terms were significantly lower than rates
on retail time deposits with comparable terms. Consequently, the Company elected
to  replace  some of its  maturing  retail  time  deposits  with  brokered  time
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 loans.
FHLBA advances are summarized as follows:

           Maturity                         Rate                 Balance
           --------                         ----                 -------
           September 2010                   5.55%           $     7,000,000
           November 2010                    3.24%                 3,000,000
           February 2011                    0.66%                 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                                          $    74,000,000
                                                            ===============

Junior Subordinated Debentures

On  August  5, 2005  Southcoast  Capital  Trust  III (the  "Capital  Trust"),  a
non-consolidated  subsidiary  of the Company,  issued and sold a total of 10,310
floating rate  securities,  with a $1,000  liquidation  amount per security (the
"Capital  Securities").  Institutional  buyers  bought  10,000  of  the  Capital
Securities  denominated as preferred securities and the Company bought the other
310 Capital Securities which are denominated as common securities.  The proceeds
of those  sales,  $10.3  million,  were used by the Capital  Trusts to buy $10.3
million of junior subordinated debentures from the Company which are reported on
its  consolidated   balance  sheets.   The  Capital  Securities  mature  or  are
mandatorily  redeemable  upon  maturity on September  30, 2035,  or upon earlier
optional  redemption as provided in the indenture.  The Company has the right to
redeem the Capital  Securities  in whole or in part,  on or after  September 30,
2010. The Company may also redeem the capital securities prior to such date upon
occurrence of specified  conditions and the payment of a redemption premium. 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,  2008,  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, 2008,  for
more information about the terms of the rate swap agreement.

Capital Resources

The capital base for the Company  decreased by $944,000 for the first six months
of 2009, due to other comprehensive loss of $1,741,690,  offset by net income of
$724,733 and proceeds from stock issuances of $73,210 through our Employee Stock
Purchase  Plan.  The Company's  Tier 1 capital to average assets ratio was 12.80
percent as of June 30, 2009 compared to 12.54 percent as of December 31, 2008.


                                      -21-
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources - continued

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 June 30, 2009,  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
                                                                 ------       -----    ------         -----    ------       -----
<S>                                                             <C>           <C>       <C>          <C>       <C>          <C>
The Bank
  Total capital (to risk-weighted assets) ................      $56,649       14.94%    37,921       10.00%    30,337       8.00%
  Tier 1 capital (to risk-weighted assets) ...............       51,891       13.68%    22,752        6.00%    15,168       4.00%
  Tier 1 capital (to average assets) .....................       51,891       10.31%    25,174        5.00%    20,139       4.00%
The Company
  Total capital (to risk-weighted assets) ................      $72,241       18.25%       N/A         N/A     31,670       8.00%
  Tier 1 capital (to risk-weighted assets) ...............       67,273       16.99%       N/A         N/A     15,935       4.00%
  Tier 1 capital (to average assets) .....................       67,273       12.80%       N/A         N/A     21,016       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 June 30,
2009, the Company had issued  commitments  to extend credit of  $26,002,978  and
standby  letters  of credit of  $684,435  through  various  types of  commercial
lending arrangements.  Approximately  $23,060,425 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 June 30, 2009.

<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 ............   $ 3,604,320   $ 2,086,630   $10,839,436   $16,530,386   $ 9,472,592   $26,002,978
Standby letters of credit ......................        56,638       318,612       281,173       656,423        28,012       684,435
                                                   -----------   -----------   -----------   -----------   -----------   -----------
    Totals .....................................   $ 3,660,958   $ 2,405,242   $11,120,609   $17,186,809   $ 9,500,604   $26,687,413
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

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  obligation 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.

                                      -22-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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, 2008, which was filed
with the Securities and Exchange Commission on March 5, 2009. 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.

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a vote of Security Holders

  The Company held its annual meeting of shareholders on May 21, 2009. The first
  matter  voted on at the annual  meeting  was the  election of  directors  with
  voting results as follows:

<TABLE>
<CAPTION>
Directors elected to serve                                                                         Authority              Broker
a three year term                                                          For                     Withheld              non-votes
                                                                           ---                     --------              ---------
<S>                                                                     <C>                          <C>                      <C>
Tommy B. Baker ............................................             4,055,139                    119,711                  -

William A. Coates .........................................             4,069,989                    104,861                  -

Stephen F. Hutchinson .....................................             4,098,212                     76,638                  -
</TABLE>

The following  directors were not voted on at the annual meeting and continue to
serve  until the years  indicated:  L. Wayne  Pearson - 2010;  Robert M. Scott -
2010, and James P. Smith - 2011.

The  second  matter  voted on was an  amendment  to the  Company's  Articles  of
Incorporation  to allow for the issuance of preferred  stock.  The amendment did
not receive sufficient votes to be adopted. Voting results were as follows:

<TABLE>
<CAPTION>
Articles of Incorporation                                                                                         Broker
amendment                                    For                  Against               Abstained               non-votes
-------------------------                    ---                  -------               ---------               ---------

<S>                                         <C>                  <C>                      <C>                    <C>
                                            1,711,417            1,219,597                23,839                 1,219,997
</TABLE>

Item 6.  Exhibits

31-1 Rule 13a-14(a) Certifications of CEO
31-2 Rule 13a-14(a) Certifications of CFO
32   Section 1350 Certification


                                      -23-
<PAGE>
<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:    August 13, 2009                    By: s/L. Wayne Pearson
                                               --------------------------------
                                                  L. Wayne Pearson
                                                  Chief Executive Officer



Date:    August 13, 2009                    By: s/William C. Heslop
                                               ---------------------------------
                                                  William C. Heslop
                                                  Chief Financial Officer


                                      -24-
<PAGE>



Exhibit Index

31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

32       Certification  of Chief Executive  Officer and Chief Financial  Officer
         pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit
         is not "filed" for  purposes of Section 18 of the  Securities  Exchange
         Act of 1934 but is instead furnished as provided by applicable rules of
         the Securities and Exchange Commission.





                                      -25-