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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended June 30, 2006

                                       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                          28-2384011
         (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)
                                   (Zip Code)
                                  843-884-0504
              (Registrant's telephone number, including area code)
                ------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.

                                 YES [X] NO [ ]


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

   Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]

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.

       5,468,724 shares of common stock, no par value, as of July 31, 2006


<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, 2006 and December 31, 2005....................................2

         Condensed Consolidated Statements of Income - Six months ended June 30, 2006 and 2005..........................3

         Condensed Consolidated Statements of Income - Three months ended June 30, 2006 and 2005........................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Six months ended June 30, 2006 and 2005......................................................................5

         Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2005......................6

Notes to Condensed Consolidated Financial Statements..................................................................7-8

Item 2.  Management's Discussion of Financial Condition and Results of Operations....................................9-17

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................18

Item 4.  Controls and Procedures.......................................................................................18

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds...................................................19

Item 4.  Submission of Matters to a vote of Security Holders...........................................................19

Item 6.  Exhibits......................................................................................................19

Signatures ............................................................................................................20
</TABLE>



<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                     June 30,           December 31,
                                                                                                       2006                2005
                                                                                                       ----                ----
                                                                                                   (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $  14,149,262        $  14,377,737
     Federal funds sold ..................................................................          11,682,000           16,964,000
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................          25,831,262           31,341,737
   Investment securities
     Available for sale ..................................................................          66,180,802           31,482,927
     Federal Home Loan Bank Stock, at cost ...............................................           3,927,800            3,720,100
                                                                                                 -------------        -------------
       Total investment securities .......................................................          70,108,602           35,203,027
   Loans held for sale ...................................................................           1,664,934            9,275,492
   Loans, net of allowance of $ 4,830,236 and $ 4,269,564 ................................         386,538,597          371,656,054
   Property and equipment, net ...........................................................          21,182,882           19,898,188
   Other assets ..........................................................................           9,256,172            9,224,867
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 514,582,449        $ 476,599,365
                                                                                                 =============        =============
Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  39,922,981        $  38,753,579
     Interest bearing ....................................................................         299,894,073          272,800,370
                                                                                                 -------------        -------------
       Total deposits ....................................................................         339,817,054          311,553,949

   Advances from Federal Home Loan Bank ..................................................          67,000,000           67,000,000
   Junior subordinated debentures ........................................................          21,655,000           21,655,000
   Repurchase agreements .................................................................           7,601,687                    -
   Other liabilities .....................................................................           2,624,480            3,075,871
                                                                                                 -------------        -------------
       Total liabilities .................................................................         438,698,221          403,284,820
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  5,466,517 shares
     outstanding at June 30, 2006 and 5,449,631 at December 31, 2005) ....................          75,249,433           70,267,702
   Retained earnings .....................................................................           1,479,243            3,300,753
   Accumulated other comprehensive loss ..................................................            (844,448)            (253,910)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          75,884,228           73,314,545
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 514,582,449        $ 476,599,365
                                                                                                 =============        =============
</TABLE>

            See notes to condensed consolidated financial statements.

                                       2
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                   Condensed Consolidated Statements of Income
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                      For the Six Months Ended
                                                                                                                June 30,
                                                                                                                --------
                                                                                                     2006                    2005
                                                                                                     ----                    ----
 Interest income
<S>                                                                                             <C>                      <C>
   Loans, including fees .........................................................              $13,751,594              $ 9,963,133
   Investment securities .........................................................                1,195,322                  615,895
   Federal funds sold ............................................................                  262,864                  236,450
                                                                                                -----------              -----------
       Total interest income .....................................................               15,209,780               10,815,478
                                                                                                -----------              -----------
Interest expense
   Deposits and borrowings .......................................................                6,964,227                4,334,721
                                                                                                -----------              -----------
Net interest income ..............................................................                8,245,553                6,480,757
Provision for loan losses ........................................................                  624,883                  314,755
                                                                                                -----------              -----------
Net interest income after provision for loan losses ..............................                7,620,670                6,166,002
                                                                                                -----------              -----------
Noninterest income
   Service fees on deposit accounts ..............................................                  491,830                  445,384
   Fees on loans sold ............................................................                  155,216                  283,797
   Gain on sale of available for sale securities .................................                   39,095                   46,653
   Gain on sale of premises and equipment ........................................                  377,714                        -
   Presales fee on property under sales contract .................................                1,390,000                        -
   Other .........................................................................                  122,567                  140,993
                                                                                                -----------              -----------
       Total noninterest income ..................................................                2,576,422                  916,827
                                                                                                -----------              -----------
Noninterest expenses
   Salaries and employment benefits ..............................................                3,423,522                2,488,535
   Occupancy .....................................................................                  391,043                  340,044
   Furniture and equipment .......................................................                  502,281                  376,323
   Advertising and public relations ..............................................                  165,304                  126,062
   Professional fees .............................................................                  180,701                  179,107
   Travel and entertainment ......................................................                  157,493                  143,038
   Telephone, postage and supplies ...............................................                  199,248                  166,394
   Other operating expenses ......................................................                  617,588                  499,881
                                                                                                -----------              -----------
       Total noninterest expenses ................................................                5,637,180                4,319,384
                                                                                                -----------              -----------
Income before income taxes .......................................................                4,559,912                2,763,445
Income tax .......................................................................                1,744,257                  921,361
                                                                                                -----------              -----------
Net income .......................................................................              $ 2,815,655              $ 1,842,084
                                                                                                ===========              ===========
Basic net income per common share* ...............................................              $       .52              $       .51
Diluted net income per common share* .............................................              $       .52              $       .50
Weighted average shares outstanding*
   Basic .........................................................................                5,452,100                3,642,156
   Diluted .......................................................................                5,457,386                3,647,879
</TABLE>

*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2006 and 2005.

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                   Condensed Consolidated Statements of Income
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                    For the Three Months Ended
                                                                                                             June 30,
                                                                                                             --------
                                                                                                    2006                     2005
                                                                                                    ----                     ----
Interest income
<S>                                                                                              <C>                      <C>
   Loans, including fees .........................................................               $7,017,972               $5,109,650
   Investment securities .........................................................                  754,967                  335,109
   Federal funds sold ............................................................                  157,673                  120,831
                                                                                                 ----------               ----------
       Total interest income .....................................................                7,930,612                5,565,590
                                                                                                 ----------               ----------
Interest expense
   Deposits and borrowings .......................................................                3,711,193                2,231,623
                                                                                                 ----------               ----------
Net interest income ..............................................................                4,219,419                3,333,967
Provision for loan losses ........................................................                  305,660                  143,500
                                                                                                 ----------               ----------
Net interest income after provision for loan losses ..............................                3,913,759                3,190,467
                                                                                                 ----------               ----------
Noninterest income
   Service fees on deposit accounts ..............................................                  246,401                  223,399
   Fees on loans sold ............................................................                   62,289                  135,809
   Gain on sale of available for sale securities .................................                    6,953                   27,336
   Presales fee on property under sales contract .................................                1,390,000                        -
   Other .........................................................................                   84,961                   64,400
                                                                                                 ----------               ----------
       Total noninterest income ..................................................                1,790,604                  450,944
                                                                                                 ----------               ----------
Noninterest expenses
   Salaries and employment benefits ..............................................                1,946,188                1,232,470
   Occupancy .....................................................................                  209,889                  174,120
   Furniture and equipment .......................................................                  295,591                  198,679
   Advertising and public relations ..............................................                   90,470                   77,091
   Professional fees .............................................................                  111,170                  116,921
   Travel and entertainment ......................................................                   93,460                   74,941
   Telephone, postage and supplies ...............................................                  109,727                   73,021
   Other operating expenses ......................................................                  374,691                  274,800
                                                                                                 ----------               ----------
       Total noninterest expenses ................................................                3,231,186                2,222,043
                                                                                                 ----------               ----------
Income before income taxes .......................................................                2,473,177                1,419,368
Income tax .......................................................................                  993,934                  465,924
                                                                                                 ----------               ----------
Net income .......................................................................               $1,479,243               $  953,444
                                                                                                 ==========               ==========
Basic net income per common share* ...............................................               $      .27               $      .26
Diluted net income per common share* .............................................               $      .27               $      .26
Weighted average shares outstanding*
   Basic .........................................................................                5,453,091                3,665,022
   Diluted .......................................................................                5,458,392                3,671,478
</TABLE>

*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2006 and 2005.

            See notes to condensed consolidated financial statements.


                                       4
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

       Condensed Consolidated Statement of Changes in Shareholders' Equity
                 For the six months ended June 30, 2006 and 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                                Common Stock                          comprehensive
                                                                ------------            Retained          income
                                                         Shares         Amount          earnings          (loss)          Total
                                                         ------         ------          --------          ------          -----
<S>                                                 <C>              <C>              <C>              <C>              <C>
Balance, December 31, 2004 .....................       2,970,663     $ 34,080,782     $  2,364,340     $    125,627     $ 36,570,749

   Net income for the period ...................                                         1,842,084                        1,842,084

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                           (102,309)       (102,309)
                                                                                                                       ------------

   Comprehensive income ........................                                                                          1,739,775

   Stock dividend ..............................         302,988        3,252,980       (3,252,980)                               -

   Exercise of stock options ...................          49,116          233,590                                           233,590

   Employee stock purchase plan ................           3,151           67,051                                            67,051

   Sale of stock ...............................           8,350          202,738                                           202,738
                                                    ------------     ------------     ------------     ------------    ------------

Balance, June 30, 2005 .........................       3,334,268     $ 37,837,141     $    953,444     $     23,318    $ 38,813,903
                                                    ============     ============     ============     ============    ============

Balance, December 31, 2005 .....................       4,954,210     $ 70,267,702     $  3,300,753     $   (253,910)   $ 73,314,545

   Net income for the period ...................                                         2,815,655                        2,815,655

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                           (590,538)       (590,538)
                                                                                                                       ------------

   Comprehensive income ........................                                                                          2,225,117

   Stock dividend ..............................         495,843        4,637,165       (4,637,165)                               -

   Employee stock purchase plan ................           3,638           70,731                                            70,731

   Issuance of common stock ....................          12,826          273,835                                           273,835
                                                    ------------     ------------     ------------     ------------     ------------

Balance, June 30, 2006 .........................       5,466,517     $ 75,249,433     $  1,479,243     $   (844,448)    $ 75,884,228
                                                    ============     ============     ============     ============     ============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       5
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                     For the six months ended
                                                                                                               June 30,
                                                                                                               --------
                                                                                                       2006                  2005
                                                                                                       ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  2,815,655         $  1,842,084
   Adjustments to reconcile net income to net
    cash provided (used) by operating activities
       Decrease in deferred income taxes .................................................           1,042,067              921,361
       Provision for loan losses .........................................................             624,883              314,755
       Depreciation and amortization .....................................................             406,848              342,712
       Discount accretion and premium amortization .......................................             (15,029)             (25,051)
       Gain on sale of securities ........................................................             (39,095)             (46,653)
       Gain on sale of property and equipment ............................................            (377,714)                   -
       Originations of loans held for sale ...............................................         (54,133,888)         (26,651,408)
     Proceeds from sales of loans held for sale ..........................................          61,744,446           33,485,059
       Increase in other assets ..........................................................            (825,111)          (1,767,001)
       Decrease in other liabilities .....................................................            (451,391)            (833,875)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................          10,791,671            7,581,983
                                                                                                  ------------         ------------

Investing activities
   Purchases of Federal Home Loan Bank stock .............................................            (207,700)             (87,000)
   Purchases of investment securities available-for-sale .................................         (52,828,634)          (8,287,527)
   Sales, calls, and maturities of investment securities available-for-sale ..............          17,306,990            4,993,176
   Proceeds from sales of premises and equipment .........................................           1,672,504                    -
   Purchases of  premises and equipment ..................................................          (2,986,332)          (3,289,912)
   Net increase in loans .................................................................         (15,507,426)         (22,642,385)
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (52,550,598)         (29,313,648)
                                                                                                  ------------         ------------

Financing activities
   Increase(decrease) in borrowings ......................................................           7,601,687           (3,000,000)
   Proceeds from issuances of stock ......................................................             344,566              503,379
   Net increase in deposits ..............................................................          28,263,105           47,331,343
                                                                                                  ------------         ------------

         Net cash provided by financing activities .......................................          36,209,358           44,834,722
                                                                                                  ------------         ------------

         Increase in cash and cash equivalents ...........................................          12,009,202           23,103,157

Cash and cash equivalents, beginning of period ...........................................          31,341,737           16,089,273
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 43,350,939         $ 39,192,430
                                                                                                  ============         ============

Cash paid during the year for:
    Income taxes .........................................................................        $  1,552,111         $    974,602
    Interest .............................................................................        $  6,649,329         $  4,053,794
</TABLE>

            See notes to condensed consolidated financial statements.



                                       6
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1 - Basis of Presentation

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

Note 2 - Organization

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

Note 3 - Net Income Per Share

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

In April 2006 and April 2005, the Company  declared ten percent stock  dividends
on the Company's  common stock.  The weighted  average  number of shares and all
other share data has been  restated for all periods  presented to reflect  these
stock dividends.

Note 4 - Recently Issued Accounting Standards

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

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial  Instruments--an  amendment of FASB  Statements No. 133 and 140." This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities," and SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement resolves
issues addressed in SFAS No. 133  Implementation  Issue No. D1,  "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No.
155 is  effective  for all  financial  instruments  acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The  Company  does not  believe  that the  adoption  of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash flows.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  An entity should adopt SFAS No. 156


                                       7
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

             Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards- (continued)

as of the  beginning of its first fiscal year that begins  after  September  15,
2006.  The Company  does not  believe  the  adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations and cash flows.


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 and cash flows.

Note 5 - Commitments and Contingencies

During the first quarter of 2006 we entered into contracts with several  vendors
for the construction and upfitting of a branch facility in the Park West area of
Mt. Pleasant.  The contract amounts  aggregated $1.7 million.  At June 30, 2006,
our remaining commitment under these contracts was $1.6 million.





























                                       8
<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 2005 Annual
Report on Form 10-K of Southcoast Financial  Corporation.  Results of operations
for the  period  ending  June 30,  2006 are not  necessarily  indicative  of the
results  to be  attained  for  any  other  period.  All per  share  data in this
discussion reflects the 10% stock dividends declared in April 2006 and 2005.

                           FORWARD- LOOKING STATEMENTS

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

     o    future economic and business conditions;
     o    lack of  sustained  growth in the  economy of the  Greater  Charleston
          area;
     o    government monetary and fiscal policies;
     o    the  effects of changes in interest  rates on the levels,  composition
          and costs of deposits, loan demand, and the values of loan collateral,
          securities, and interest sensitive assets and liabilities;
     o    the effects of  competition  from a wide  variety of local,  regional,
          national and other providers of financial,  investment,  and insurance
          services;
     o    credit risks;
     o    the failure of assumptions  underlying the  establishment of 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; and
     o    other  factors  and  information  described  in this report and in any
          other 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.




                                       9
<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, 2006 was $ 2,815,655
or $ .52 per basic share,  compared to $1,842,084  or $.51 per basic share,  for
the six months  ended June 30,  2005.  The average  number of shares for the six
months ending June 30, 2006 was  5,452,100  compared to 3,642,156 for the period
ending June 30, 2005.

The  Company's  net  income  for the  three  months  ended  June 30,  2006 was $
1,479,243 or $.27 per basic share, compared to $953,444 or $.26 per basic share,
for the three months ended June 30, 2005.  The average  number of shares for the
quarter ending June 30, 2006 was 5,453,091 compared to 3,665,022 for the quarter
ending June 30, 2005.

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.
Net interest  income,  the  principal  source of the Company's  earnings,  was $
8,245,553 for the six months ended June 30, 2006, compared to $6,480,757 for the
six months ended June 30, 2005.

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, 2006  increased 22.7
percent to $441.2  million from the $359.7  million  reported for the six months
ending June 30, 2005.  The increase  was mainly  attributable  to an increase in
loans largely supported by a $ 48.7 million increase in average interest bearing
liabilities  which resulted from the continued  growth of the Charleston  market
area, growth in the Company's branches, and the Company's marketing efforts.

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, 2006 and 2005. The increase in net interest  income is due to the
increased volume of interest earning assets in excess of the increased volume in
interest  bearing  liabilities.  The excess of growth in interest earning assets
over the  growth in  interest  bearing  liabilities  is also a reason for the 17
basis point increase in the Company's net interest margin.





                                       10
<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, 2006                        June 30, 2005
                                                                     -------------                        -------------
                                                       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 ..........................    $ 11,454,497   $    262,864      4.63%   $ 17,782,405  $    236,450    2.66%
   Investments .................................      49,444,436      1,195,322      4.88      28,339,192       615,895    4.35
                                                    ------------   ------------              ------------  ------------
      Total investments and
       federal funds sold ......................      60,898,933      1,458,186      4.83      46,121,597       852,345    3.70
   Loans (2) (3) ...............................     380,302,156     13,751,594      7.29     313,542,437     9,963,133    6.36
                                                    ------------   ------------              ------------  ------------
     Total earning assets ......................     441,201,089     15,209,780      6.95     359,664,034    10,815,478    6.01
                                                                   ------------                            ------------
     Other assets ..............................      35,938,137                               25,510,938
                                                    ------------                             ------------
     Total assets ..............................    $477,139,226                             $385,174,972
                                                    ============                             ============
Liabilities
   Savings .....................................    $ 53,070,321        429,713      1.63    $ 63,014,914       462,612    1.48
   Time Deposits ...............................     224,372,831      4,601,607      4.14     183,928,099     2,622,735    2.88
   Other borrowings ............................      59,290,240      1,162,171      3.95      51,425,448       898,528    3.52
   Subordinated Debt ...........................      21,655,000        770,736      7.18      11,345,000       350,846    6.24
                                                    ------------   ------------              ------------  ------------
     Total interest bearing liabilities ........     358,388,392      6,964,227      3.92     309,713,461     4,334,721    2.80
                                                                   ------------                            ------------
   Non-interest bearing liabilities ............      44,151,448                               37,917,626
                                                    ------------                             ------------
     Total liabilities .........................     402,539,840      6,964,227      3.49     347,631,087     4,334,721    2.49
                                                                   ------------                            ------------
   Equity ......................................      74,599,386                               37,543,885
                                                    ------------                             ------------
     Total liabilities and equity ..............    $477,139,226                             $385,174,972
                                                    ============                             ============
     Net interest
       income/margin (4) .......................                   $  8,245,553      3.77                  $  6,480,757    3.60
                                                                   ============                            ============
     Net interest spread (5) ...................                                     3.03%                                3.21%
</TABLE>

(1)  Annualized
(2)  Does not include non- accruing loans.
(3)  Income includes loan fees of $719,810 in 2006 and $566,059 in 2005.
(4)  Net interest income divided by total earning assets.
(5)  Total interest earning assets yield less interest bearing liabilities rate.

As reflected  above, for the six months ended June 30, 2006 the average yield on
earning  assets was 6.95  percent,  while the average  cost of interest  bearing
liabilities was 3.92 percent. For the six months ended June 30, 2005 the average
yield  on  earning   assets  was  6.01   percent   and  the   average   cost  of
interest-bearing  liabilities  was 2.80  percent.  The  increase in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate increases over the last year. The net
interest margin is computed by subtracting interest expense from interest income
and dividing the resulting figure by average  interest  earning assets.  The net
interest margin for the six months ended June 30, 2006 was 3.77 percent compared
to 3.60 percent for the six months ended June 30, 2005.  The increase in the net
interest  margin is  primarily  attributable  to an increase in average  earning
assets of $81.5  million  between the two periods,  compared to a  corresponding
increase of only $48.7 million in average interest bearing  liabilities  between
the two  periods.  The cost of total  liabilities  was 3.49  percent for the six
months  ended June 30, 2006  compared to 2.49  percent for the six months  ended
June 30, 2005.


                                       11
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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, 2006 increased 24.9
percent to $ 452.8 million from the $362.6 million reported for the three months
ending June 30, 2005. The increase was mainly  attributable  to the increases in
loans and investments  supported by a $58.4 million increase in average interest
bearing  liabilities  which resulted from the continued growth of the Charleston
market area,  growth in the  Company's  branches,  and the  Company's  marketing
efforts.

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, 2006 and 2005. The increase in net interest  income is due to the
increased volume of interest earning assets in excess of the increased volume in
interest  bearing  liabilities.  The excess of growth in interest earning assets
over the growth in interest bearing liabilities is also a reason for the 6 basis
point increase in the Company's net interest margin.

<TABLE>
<CAPTION>
                                                              For the three months ended          For the three months ended
                                                                     June 30, 2006                         June 30, 2005
                                                                     -------------                         -------------
                                                         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 ...........................    $ 13,364,638   $    157,673   4.73%   $   16,772,844    $    120,831      2.88%
   Investments ..................................      61,886,148        754,967   4.89        30,609,177         335,109      4.38
                                                     ------------   ------------           --------------    ------------
     Total investments and
       federal funds sold .......................      75,250,786        912,640   4.86        47,382,021         455,940      3.85
   Loans (2) (3) ................................     377,559,922      7,017,972   7.46       315,212,917       5,109,650      6.48
                                                     ------------   ------------           --------------    ------------
     Total earning assets .......................     452,810,708      7,930,612   7.02       362,594,938       5,565,590      6.14
                                                                    ------------                             ------------
     Other assets ...............................      36,152,618                              26,062,417
                                                     ------------                            ------------
     Total assets ...............................    $488,963,326                            $388,657,355
                                                     ============                            ============
Liabilities
   Savings ......................................    $ 52,778,995        217,427   1.65   $    68,402,276         269,681      1.58
   Time Deposits ................................     228,355,607      2,445,266   4.30       177,732,928       1,332,932      3.01
   Other Borrowings .............................      63,558,511        649,695   4.10        50,406,452         445,796      3.55
   Subordinated Debt ............................      21,655,000        398,805   7.39        11,345,000         183,214      6.48
                                                     ------------   ------------           --------------    ------------
     Total interest bearing liabilities .........     366,348,113      3,711,193   4.06       307,886,656       2,231,623      2.90
                                                                    ------------                             ------------
   Non-interest bearing liabilities .............      47,377,155                              42,401,407
                                                     ------------                            ------------
     Total liabilities ..........................     413,725,268      3,711,193   3.60       350,288,063       2,231,623      2.55
                                                                    ------------                             ------------      ----
   Equity .......................................      75,238,058                              38,369,292
                                                     ------------                            ------------
     Total liabilities and equity ...............    $488,963,326                            $388,657,355
                                                     ============                            ============
     Net interest income/margin (4) .............                   $  4,219,419   3.74                      $  3,333,967      3.68
                                                                    ============                             ============
     Net interest spread (5) ....................                                  2.96%                                       3.24%
</TABLE>

(1)  Annualized
(2)  Does not include non- accruing loans.
(3)  Income includes loan fees of $397,850 in 2006 and $336,219 in 2005.
(4)  Net interest income divided by total earning assets.
(5)  Total interest earning assets yield less interest bearing liabilities rate.

As reflected  above,  for the three months ended June 30, 2006 the average yield
on earning assets was 7.02 percent,  while the average cost of interest  bearing
liabilities  was 4.06  percent.  For the three  months  ended June 30,  2005 the
average  yield on  earning  assets  was 6.14  percent  and the  average  cost of
interest-bearing  liabilities  was 2.90  percent.  The  increase in the yield on

                                       12
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate  increases over the last year and the
maturing of lower rate certificates of deposits. The net interest margin for the
three months  ended June 30, 2006 was 3.74 percent  compared to 3.68 percent for
the three  months ended June 30,  2005.  The increase in net interest  margin is
primarily attributable to an increase in average earning assets of $90.2 million
between  the two  periods  compared  to a  corresponding  increase of only $58.5
million in average interest  bearing  liabilities  between the two periods.  The
cost of total  liabilities  was 3.60 percent for the three months ended June 30,
2006, compared to 2.55 percent for the three months ended June 30, 2005.

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, 2006
                                                                                      Versus six months ended June 30, 2005(1)
                                                                                      ----------------------------------------
                                                                                   Volume                Rate            Net Change
                                                                                   ------                ----            ----------
Interest income:
<S>                                                                            <C>                  <C>                 <C>
       Federal funds sold ............................................         $   (84,141)         $   110,555         $    26,414
       Investments - taxable .........................................             402,030              124,393             526,423
       Investments - non taxable .....................................              51,855                1,149              53,004
                                                                               -----------          -----------          ----------
         Total investments and federal funds sold ....................             369,744              236,097             605,841
Net loans (2) ........................................................           2,121,359            1,667,102           3,788,461
                                                                               -----------          -----------          ----------
Total interest income ................................................           2,491,103            1,903,199           4,394,302

Interest expense:
        Savings deposits .............................................             (73,006)              40,107             (32,899)
        Time Deposits ................................................             576,723            1,402,149           1,978,872
        Other borrowings .............................................             133,215              130,428             263,643
        Subordinated debt ............................................             318,838              101,052             419,890
                                                                               -----------          -----------         -----------
Total interest expense ...............................................             955,770            1,673,736           2,629,506
                                                                               -----------          -----------         -----------
Net interest income ..................................................         $ 1,535,332          $   229,463         $ 1,764,795
                                                                               ===========          ===========         ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Income includes loan fees of $719,810 in 2006 and $566,059 in 2005.












                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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

Net Interest Income - continued

<TABLE>
<CAPTION>
                                                                                    Analysis of Changes in Net Interest Income
                                                                                     For the three months ended June 30, 2006
                                                                                    Versus three months ended June 30, 2005(1)
                                                                                    ------------------------------------------
                                                                                  Volume               Rate             Net Change
                                                                                  ------               ----             ----------

Interest income:
<S>                                                                           <C>                  <C>                  <C>
       Federal funds sold ...........................................         $   (21,855)         $    58,697          $    36,842
       Investments - taxable ........................................             268,943              120,765              389,708
       Investments - non taxable ....................................              59,310              (29,160)              30,150
                                                                              -----------          -----------          -----------
         Total investments and federal funds sold ...................             306,398              150,302              456,700
Net loans (2) .......................................................             899,594            1,008,728            1,908,322
                                                                              -----------          -----------          -----------
         Total interest income ......................................           1,205,992            1,159,030            2,365,022

Interest expense:
        Savings deposits ............................................             (54,827)               2,573              (52,254)
        Time Deposits ...............................................             337,932              774,402            1,112,334
        Other borrowings ............................................             103,535              100,364              203,899
        Subordinated debt ...........................................             148,203               67,388              215,591
                                                                              -----------          -----------          -----------
Total interest expense ..............................................             534,843              944,727            1,479,570
                                                                              -----------          -----------          -----------
Net interest income .................................................         $   671,149          $   214,303          $   885,452
                                                                              ===========          ===========          ===========
</TABLE>


(1) Changes in rate/volume  have been  allocated on a consistent  basis to rate.
(2) Income includes loan fees of $397,850 in 2006 and $336,219 in 2005.

Noninterest Income and Expenses

Noninterest  income  for the six  months  ended  June 30,  2006 was $  2,576,422
compared to $916,827  for the six months  ended June 30,  2005.  Included in the
current year's  noninterest  income is a $1,390,000  presales fee on a parcel of
our property  currently under contract to be sold in the fourth quarter of 2007.
The fee is not  applicable to the purchase price of the property in question and
is nonrefundable in the event the sale does not occur.  Although the Company has
reported  income in a number of recent  periods  related to sales of excess real
estate and may  continue to do so in future  periods,  the number and amounts of
such transactions are likely to be irregular and shareholders  should not expect
to see such  transactions  or  resulting  income  in each  future  period.  Also
included in this  year's  noninterest  income is a $377,714  gain on the sale of
premises and equipment related to a sale of real estate.  These items,  combined
with a decrease  of $128,581 in fees on loans sold due to a slowdown in mortgage
originations,  substantially  account for the difference in  noninterest  income
between the two periods.

Noninterest  expenses  for the six months  ended June 30, 2006 were $ 5,637,180,
compared to $4,319,384  for the six months ended June 30, 2005.  The increase of
$1,317,796  is mainly  attributable  to  increases  in salaries  and benefits of
$934,987 and combined  increases of $176,957 for  furniture  and  equipment  and
occupancy expenses.  These increases primarily relate to expenditures associated
with the staffing,  depreciation,  and furnishing  expenses  associated with the
opening of the Dorchester Road branch in December 2005 and the Operations Center
in March 2006. The increased number of administrative  staff associated with the
Company's  growth and salary  increases to existing  employees  are also factors
included in the increased salaries and benefit expenses.

Noninterest  income for the three  months  ended June 30,  2006 was $  1,790,604
compared to $450,944 for the three  months ended June 30, 2005.  The increase is
primarily attributable to the aforementioned pre-sales fee of $1,390,000.

Noninterest  expenses for the three months ended June 30, 2006 were $ 3,231,186,
compared to $2,222,043 for the three months ended June 30, 2005. The increase of
$1,009,143  is mainly  attributable  to  increases  in  salaries  and  benefits,
furniture and  equipment  expense and occupancy  expenses.  These  increases are
attributable  to the same  factors  cited in the six  months  ended  noninterest
expense discussion.


                                       14
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

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 43.7% of total deposits as
of June 30, 2006.  Asset liquidity is provided from several  sources,  including
amounts due from banks and federal funds sold and funds from maturing loans. The
Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such
has the  ability  to  borrow  against  a pledge  of its 1-4  family  residential
mortgage  loans.  The Company  also has a $5.3  million  line of credit with the
Bankers Bank of Atlanta and a $3.5  million line of credit with First  Tennessee
Bank.  The Company is in the process of opening a new branch  office in the Park
West area of Mt.  Pleasant.  The  remaining  unexpended  contract  costs of this
facility  is $1.6  million.  The  funding of this  office  will come from normal
operations.  Management  believes  that  the  Company's  liquidity  sources  are
adequate to meet normal operating needs.

Loans

Nonfarm,  nonresidential  real estate loans made up 19 percent of the total loan
portfolio as of June 30, 2006,  totaling $ 74.5  million.  Loans secured by real
estate for  construction  and land  development  totaled $ 106.2 million,  or 27
percent of the portfolio  while all other loans secured by real estate totaled $
178.5  million or 46 percent of the total loan  portfolio,  as of June 30, 2006.
Commercial and industrial loans comprised $29.8 million, or 8% of the total loan
portfolio. Installment loans and other consumer loans to individuals comprised $
2.3 million or less than 1 percent of the total loan  portfolio.  The  allowance
for loan losses was 1.23 percent of loans as of June 30, 2006,  compared to 1.14
percent as of December 31, 2005. In management's opinion, the allowance for loan
losses is adequate to absorb estimated losses inherent in the loan portfolio. At
June 30, 2006,  the Company had $120,000 in loans 90 days  delinquent  and still
accruing interest and $2.2 million of nonaccrual loans. The Company had no other
real  estate  owned at this date.  The  majority of the  non-accruing  loans are
secured by real estate.

Deposits

Deposits increased $ 28.2 million during the first six months of 2006 to $ 339.8
million at June 30,  2006.  The increase was  attributable  to several  factors.
Noninterest  bearing  deposits  increased  $ 1.2 million  and  interest  bearing
transaction  accounts increased by $2.2 million during the first six months as a
result of the continuing  growth and maturity of the branches.  Certificates  of
deposit from retail customers  increased  approximately $ 2.8 million during the
first six months,  largely as the result of a six month  certificate  of deposit
special  offered  during the second  quarter of 2006.  Money  market and savings
accounts  experienced  a slight  decline in balance of  approximately  $300,000,
likely  caused by the unchanged  advertised  rates for these  accounts  during a
rising rate environment. Brokered and wholesale deposits increased $22.3 million
due to the Company's  anticipation  of rising interest rates for the short term,
and the competitiveness of the local market for retail certificates of deposit.










                                       15
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Other Borrowings

Other  borrowings  include FHLBA advances  (below) and repurchase  agreements of
$7,601,687. FHLBA Advances are collateralized by pledged FHLBA stock and certain
residential mortgage loans. FHLBA advances are summarized as follows:

            Maturity                      Rate              Balance
            --------                      ----              -------

           June 2007                     5.00%          $    15,000,000
           September 2006                2.91%               10,000,000
           September 2008                3.01%               10,000,000
           June 2007                     5.37%                5,500,000
           June 2008                     5.40%                5,500,000
           September 2010                5.55%                7,000,000
           February 2011                 4.31%                4,500,000
           March 2013                    2.91%                7,500,000
           June 2014                     3.92%                2,000,000
                                                        ---------------

           Balance                                      $    67,000,000
                                                        ===============

Junior Subordinated Debentures

In two  separate  transactions  in 2002 and  another  transaction  in  2005,  we
established  Southcoast Capital Trusts I, II and III (the "Capital Trusts"),  as
non-consolidated  subsidiaries.  The Capital  Trusts  issued and sold a total of
21,655 floating rate securities,  with $1,000  liquidation  amount per security.
Institutional  buyers bought 21,000 of the floating rate securities  denominated
as preferred  securities  and we bought the other 655 floating  rate  securities
which are denominated as common  securities.  The proceeds of those sales, $21.7
million,  were  used by the  Capital  Trusts  to buy  $21.7  million  of  junior
subordinated  debentures from us which are reported on our consolidated  balance
sheets.  Our $655,000  investment in the common securities of the Capital Trusts
is included in "Other assets" on our consolidated  balance sheets. The preferred
securities  of the  Capital  Trusts  totaling  $21.0  million  qualify as Tier 1
capital under Federal Reserve Board guidelines, subject to limitations. See Note
10 to the  consolidated  financial  statements  in our 2005  Form  10-K for more
information about the terms of the junior subordinated debentures.

Capital Resources

The capital  base for the Company  increased  by $2.6  million for the first six
months of 2006, due to operating income,  the issuance of stock for the purchase
of  Charlestowne  Mortgage,  and the capital  raised  through the Employee Stock
Purchase Plan, offset by unrealized losses on available for sale securities. The
Company's  tier one capital to average  asset ratio was 20.61 percent as of June
30, 2006 compared to 21.36 percent as of December 31, 2005.

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 for Southcoast.
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,
2006, the Company and the bank exceeded the capital requirements levels as shown
in the following table.



                                       16
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources - (continued)

<TABLE>
<CAPTION>
                                                                                                                  Capital Ratios
                                                                                        Well Capitalized      Adequately Capitalized
(Dollars in thousands)                                              Actual                  Requirement             Requirement
                                                                    ------                  -----------             -----------
                                                              Amount         Ratio      Amount         Ratio      Amount       Ratio
                                                              ------         -----      ------         -----      ------       -----
The Bank
<S>                                                          <C>             <C>      <C>             <C>      <C>             <C>
  Total capital (to risk-weighted assets) .............      $ 51,619        14.59%   $ 35,387        10.00%   $ 28,310        8.00%
  Tier 1 capital (to risk-weighted assets) ............        47,195        13.34      21,232         6.00      14,155        4.00
  Tier 1 capital (to average assets) ..................        47,195        10.03      25,538         5.00      18,830        4.00
The Company
  Total capital (to risk-weighted assets) .............      $103,081        27.44%        N/A          N/A      30,053        8.00%
  Tier 1 capital (to risk-weighted assets) ............        98,384        26.19%        N/A          N/A      15,026        4.00%
  Tier 1 capital (to average assets) ..................        98,384        20.61%        N/A          N/A      19,091        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 they will not suffer a loss if the
customer fails to meet a contractual  obligation to the third party. At June 30,
2006, the Company had issued  commitments  to extend credit of  $47,235,000  and
standby  letters  of credit of  $700,000  through  various  types of  commercial
lending arrangements.  Approximately  $39,299,000 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, 2006.

<TABLE>
<CAPTION>
                                                                     After One    After Three
                                                                      Through       Through                   Greater
                                                      Within One       Three        Twelve     Within One       Than
(Dollars in thousands)                                   Month         Months        Months       Year         One Year       Total
                                                         -----         ------        ------       ----         --------       -----
<S>                                                    <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............       $ 2,668       $ 4,225       $18,598       $25,491       $21,744       $47,235
Standby letters of credit ......................           177           315           208           700             -           700
                                                       -------       -------       -------       -------       -------       -------
    Totals .....................................       $ 2,845       $ 4,540       $18,806       $26,191       $21,744       $47,935
                                                       =======       =======       =======       =======       =======       =======
</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.



                                       17
<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, 2005, which was filed
with the Securities and Exchange  Commission on March 29, 2006.  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.





                                       18
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


PART II - OTHER INFORMATION

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

On June 30, 2006,  the Company  issued 12,826 shares of its common stock with an
aggregate  market  value of $273,835 as  consideration  for the  purchase of the
assets of Charles Towne Mortgage Corporation of Mount Pleasant and Charles Towne
Credit  Corporation.  Issuance  of the shares was exempt  from the  registration
requirements  of the  Securities  Act of 1933  pursuant to Section  4(2) thereof
because no public offering was involved.

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

The Company held its annual  meeting of  shareholders  on April 7, 2006, and two
matters were voted upon. The first matter voted on at the annual meeting was the
election of directors with results as follows:

Director elected to serve                          Authority    Broker
a three year term                     For          Withheld     non-votes
-----------------                     ---          --------     ---------
Tommy B. Baker                     2,364,465        56,149        -

Stephen F. Hutchinson              2,381,280        39,334        -

William A. Coates                  2,383,142        37,472        -


The following  directors were not voted on at the annual meeting and continue to
serve  until the years  indicated:  L. Wayne  Pearson - 2008;  Robert M. Scott -
2008; Paul D. Hollen III- 2008; James H. Sexton,  Jr. - 2008; and James P. Smith
- 2008.

The second matter voted on was the adoption of the 2005 Employee  Stock Purchase
Plan. Results of the vote were as follows:

                                                                     Broker
                         For            Against      Abstaining    non-votes
                         ---            -------      ----------    ---------

                      2,295,216        123,974          -            -

Item 6.  Exhibits

10-1 Description of employment agreement with William C. Heslop (incorporated by
     reference to Item 5.02 (c) of Form 8-K filed May 15, 2006).

10-2 Employment  agreement  between  the Company and William C. Heslop

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

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

32   Section 1350 Certification





                                       19
<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.




                                         s/L. Wayne Pearson
Date:    August 14, 2006              By:---------------------------------------
                                         L. Wayne Pearson
                                         Chief Executive Officer


                                          s/William C. Heslop
Date:    August 14, 2006             By: ---------------------------------------
                                          William C. Heslop
                                          Chief Financial Officer



                                       20
<PAGE>



Exhibit Index

10-1      Description   of   employment   agreement   with   William  C.  Heslop
          (incorporated  by reference to Item 5.02 (c) of Form 8-K filed May 15,
          2006).

10-2      Employment Agreement between the Company and William C. Heslop

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.




                                       21