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 September 30, 2005

                                       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)

                                  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 an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).


                                 YES [ ] NO [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.

     4,738,160 shares of common stock, no par value, as of October 31, 2005





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - September 30, 2005 and December 31, 2004...............................2

         Condensed  Consolidated  Statements  of  Income  -  Nine  months  ended September 30, 2005 and 2004
           and three months ended September 30, 2005 and 2004...........................................................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Nine months ended September 30, 2005 and 2004................................................................4

         Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and 2004................5

Notes to Condensed Consolidated Financial Statements..................................................................6-9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................10-17

Item 3.  Controls and Procedures.......................................................................................17

PART II - OTHER INFORMATION

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


Item 6.  Exhibits .....................................................................................................18

Signatures ............................................................................................................19
</TABLE>




<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION

                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

<TABLE>
<CAPTION>
                                                                                                   September 30,        December 31,
                                                                                                        2005                2004
                                                                                                        ----                ----
                                                                                                     (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                               <C>                  <C>
     Cash and due from banks ..............................................................       $  13,262,848        $  11,853,273
     Federal funds sold ...................................................................           3,296,000            4,236,000
                                                                                                  -------------        -------------
         Total cash and cash equivalents ..................................................          16,558,848           16,089,273
   Investment securities
     Available for sale ...................................................................          30,288,803           21,738,335
     Federal Home Loan Bank Stock, at cost ................................................           3,450,100            3,093,100
                                                                                                  -------------        -------------
         Total investment securities ......................................................          33,738,903           24,831,435
   Loans held for sale ....................................................................          10,163,418           12,009,550
   Loans, net of allowance of $3,985,671 and $3,403,970 ...................................         340,606,587          293,206,968
   Property and equipment, net ............................................................          18,749,694           14,843,884
   Other assets ...........................................................................           8,031,935            5,122,013
                                                                                                  -------------        -------------
       Total assets .......................................................................       $ 427,849,385        $ 366,103,123
                                                                                                  =============        =============
Liabilities
   Deposits
     Noninterest-bearing ..................................................................       $  43,939,671        $  27,954,739
     Interest bearing .....................................................................         259,554,818          230,198,544
                                                                                                  -------------        -------------
       Total deposits .....................................................................         303,494,489          258,153,283
   Advances from Federal Home Loan Bank ...................................................          61,000,000           58,000,000
   Junior subordinated debentures .........................................................          21,655,000           11,345,000
   Other liabilities ......................................................................           1,880,277            2,034,091
                                                                                                  -------------        -------------
       Total liabilities ..................................................................         388,029,766          329,532,374
                                                                                                  -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares authorized; 3,336,079 shares
     outstanding at September 30, 2005 and
     2,970,663 at December 31, 2004) ......................................................          37,871,749           34,080,782
   Retained earnings ......................................................................           1,987,805            2,364,340
   Accumulated other comprehensive income (loss) ..........................................             (39,935)             125,627
                                                                                                  -------------        -------------
       Total shareholders' equity .........................................................          39,819,619           36,570,749
                                                                                                  -------------        -------------
       Total liabilities and shareholders' equity .........................................       $ 427,849,385        $ 366,103,123
                                                                                                  =============        =============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       2
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      For the Nine months ended          For the Three months ended
                                                                            September 30,                        September 30,
                                                                            -------------                        -------------
                                                                       2005              2004                2005             2004
                                                                       ----              ----                ----             ----
Interest income
<S>                                                                <C>               <C>               <C>               <C>
   Loans, including fees ...................................       $15,799,169       $11,036,073       $ 5,836,036       $ 4,031,072
   Investment securities ...................................           939,296           712,399           323,401           292,145
   Federal funds sold ......................................           267,709            73,737            31,259            12,817
                                                                   -----------       -----------       -----------       -----------
       Total interest income ...............................        17,006,174        11,822,209         6,190,696         4,336,034
                                                                   -----------       -----------       -----------       -----------
Interest expense
   Deposits and borrowings .................................         6,932,889         4,162,778         2,598,168         1,537,293
                                                                   -----------       -----------       -----------       -----------
Net interest income ........................................        10,073,285         7,659,431         3,592,528         2,798,741
   Provision for loan losses ...............................           579,755           467,000           265,000           222,000
                                                                   -----------       -----------       -----------       -----------
Net interest income after provision
   for loan losses .........................................         9,493,530         7,192,431         3,327,528         2,576,741
                                                                   -----------       -----------       -----------       -----------
Noninterest income
   Service fees on deposit accounts ........................           672,300           716,289           226,916           253,326
   Fees on loans sold ......................................           417,246           275,849           133,449           141,158
   Gain on sale of available for sale securities ...........            79,794                 -            33,141                 -
   Other ...................................................           207,370           123,588            66,377            48,574
                                                                   -----------       -----------       -----------       -----------
       Total noninterest income ............................         1,376,710         1,115,726           459,883           443,058
                                                                   -----------       -----------       -----------       -----------
Noninterest expenses
   Salaries and employment benefits ........................         3,896,213         3,202,654         1,407,678         1,180,676
   Occupancy ...............................................           458,437           347,391           118,393           118,348
   Furniture and equipment .................................           537,382           611,386           161,059           219,665
   Advertising and public relations ........................           189,737           138,419            63,675            59,537
   Professional fees .......................................           280,336           241,148           101,229            87,579
   Travel and entertainment ................................           201,312           179,304            58,274            77,065
   Telephone, postage and supplies .........................           244,839           234,659            78,445            70,196
   Other operating expenses ................................           740,011           473,007           240,130           172,879
                                                                   -----------       -----------       -----------       -----------
       Total noninterest expenses ..........................         6,548,267         5,427,968         2,228,883         1,985,945
                                                                   -----------       -----------       -----------       -----------
Income before income taxes .................................         4,321,973         2,880,189         1,558,528         1,033,854
    Income tax .............................................         1,445,528           900,430           524,167           327,393
                                                                   -----------       -----------       -----------       -----------
Net income .................................................       $ 2,876,445       $ 1,979,759       $ 1,034,361       $   706,461
                                                                   ===========       ===========       ===========       ===========
Basic net income per common share ..........................       $      0.87       $      0.61       $      0.31       $      0.22
Diluted net income per common share ........................       $      0.87       $      0.60       $      0.31       $      0.21
Weighted average shares outstanding
   Basic ...................................................         3,318,987         3,258,890         3,334,859         3,263,862
   Diluted .................................................         3,325,012         3,304,209         3,340,815         3,309,550
</TABLE>

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

       Condensed Consolidated Statement of Changes in Shareholders' Equity
                            and Comprehensive Income
             For the nine months ending September 30, 2005 and 2004
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                              Common Stock                           comprehensive
                                                              ------------             Retained          income
                                                         Shares          Amount        earnings           (loss)          Total
                                                         ------          ------        --------           ------          -----
<S>                                                    <C>           <C>              <C>              <C>             <C>
Balance, December 31, 2003 .....................       2,680,501     $ 33,298,027     $          -     $    112,384    $ 33,410,411

   Net income for the period ...................                                         1,979,759                        1,979,759

   Other comprehensive income, net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                           105,886          105,886
                                                                                                                       ------------
   Comprehensive income ........................                                                                          2,085,645
   Stock dividend ..............................         269,592          617,381         (617,381)                               -
   Exercise of stock options ...................          12,820           60,287                                            60,287
   Employee stock purchase plan ................           4,267           72,914                                            72,914
                                                       ---------     ------------     ------------     ------------    ------------

Balance, September 30, 2004 ....................       2,967,180     $ 34,048,609     $  1,362,378     $    218,270    $ 35,629,257
                                                       =========     ============     ============     ============    ============
Balance, December 31, 2004 .....................       2,970,663     $ 34,080,782     $  2,364,340     $    125,627    $ 36,570,749

   Net income for the period ...................                                         2,876,445                        2,876,445

   Other comprehensive income, net of tax
       Unrealized holding losses
         on securities available for sale ......                                                          (165,562)        (165,562)
                                                                                                                       ------------
   Comprehensive income ........................                                                                          2,710,883
   Stock dividend ..............................         302,988        3,252,980       (3,252,980)
   Exercise of stock options ...................          49,116          233,590                                           233,590
   Employee stock purchase plan ................           4,962          101,659                                           101,659
   Issuance of common stock ....................           8,350          202,738                                           202,738
                                                       ---------     ------------     ------------     ------------    ------------

Balance, September 30, 2005 ....................       3,336,079     $ 37,871,749     $  1,987,805     $    (39,935)   $ 39,819,619
                                                       =========     ============     ============     ============    ============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       4
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                      For the nine months ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                     2005                  2004
                                                                                                     ----                  ----
Operating activities
<S>                                                                                             <C>                    <C>
   Net income ........................................................................          $  2,876,445           $  1,979,759
   Adjustments to reconcile net income to net
     cash provided (used) by operating activities
       Deferred income taxes .........................................................               921,361                900,430
       Provision for loan losses .....................................................               579,755                467,000
       Depreciation and amortization .................................................               617,215                545,504
       Increase in other assets ......................................................            (2,599,922)              (903,475)
       Increase (decrease) in other liabilities ......................................              (982,047)                65,158
                                                                                                ------------           ------------
         Net cash provided by operating activities ...................................             1,412,807              3,054,376
                                                                                                ------------           ------------
Investing activities
   Net sale (purchase) of Federal Home Loan Bank stock ...............................              (357,000)              (595,000)
   Net sale (purchase) of investment securities available for sale ...................            (8,801,795)            (4,446,849)
   Net increase in loans .............................................................           (46,133,242)           (69,891,714)
   Purchase of property and equipment ................................................            (4,530,388)            (6,027,980)
                                                                                                ------------           ------------
         Net cash used for investing activities ......................................           (59,822,425)           (80,961,543)
                                                                                                ------------           ------------
Financing activities
   Increase in borrowings ............................................................             3,000,000             13,400,000
   Increase in junior subordinated debentures ........................................            10,000,000                      -
   Proceeds from issuance of stock ...................................................               537,987                133,201
   Net increase in deposits ..........................................................            45,341,206             61,372,983
                                                                                                ------------           ------------
         Net cash provided by financing activities ...................................            58,879,193             74,906,184
                                                                                                ------------           ------------
         Increase (decrease) in cash and cash equivalents ............................               469,575             (3,000,983)

Cash and cash equivalents, beginning of period .......................................            16,089,273             17,581,376
                                                                                                ------------           ------------
Cash and cash equivalents, end of period .............................................          $ 16,558,848           $ 14,580,393
                                                                                                ============           ============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       5
<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
item  310 (b) of  Regulation  S-B 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 and has no employees.

Note 3 - Stock-Based Compensation

We have a stock-based  employee  compensation  plan which is accounted for under
the  recognition  and  measurement  principles  of Accounting  Principles  Board
("APB")  Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income, as all stock options granted under this plan had an exercise price equal
to the market value of the  underlying  common  stock on the date of grant.  The
following  table  illustrates the effect on net income and earnings per share as
if we had applied the fair value recognition  provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, Accounting for Stock-Based  Compensation,
to stock-based employee compensation.

                                                       Nine months ended
                                                          September 30,
                                                          -------------
                                                     2005                2004
                                                     ----                ----
                                                           (Unaudited)

Net income, as reported .......................   $ 2,876,445        $ 1,979,759
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ..             -             91,113
                                                  -----------        -----------

Pro forma net income ..........................   $ 2,876,445        $ 1,888,646
                                                  ===========        ===========

Earnings per share:
  Basic - as reported .........................   $      0.87        $      0.61
                                                  ===========        ===========
  Basic - pro forma ...........................   $      0.87        $      0.58
                                                  ===========        ===========

  Diluted - as reported .......................   $      0.87        $      0.60
                                                  ===========        ===========
  Diluted - pro forma .........................   $      0.87        $      0.57
                                                  ===========        ===========


                                       6
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


Note 3 - Stock-Based Compensation - continued

                                                        Three months ended
                                                            September 30,
                                                            -------------
                                                        2005           2004
                                                        ----           ----
                                                            (Unaudited)

Net income, as reported .........................   $ 1,034,361        $ 706,461
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ....             -                -
                                                    -----------        ---------
Pro forma net income ............................   $ 1,034,361        $ 706,461
                                                    ===========        =========
Earnings per share:
  Basic - as reported ...........................   $      0.31        $    0.22
                                                    ===========        =========
  Basic - pro forma .............................   $      0.31        $    0.22
                                                    ===========        =========
  Diluted - as reported .........................   $      0.31        $    0.21
                                                    ===========        =========
  Diluted - pro forma ............................  $      0.31        $    0.21
                                                    ===========        =========

Note 4 - 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 2005 and April 2004, 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 5 - Stock Offering

On October 26, 2005, we agreed to sell  1,400,000  shares of our common stock to
Morgan  Keegan  and  Company,  Inc.  at $20.21  per  share in a firm  commitment
underwritten  offering to the public at $21.50.  The agreement  also granted the
underwriter a 30-day option to purchase an additional 210,000 shares at the same
price to cover over  allotments.  The sale was closed on October 31, 2005 and we
received net proceeds  from the offering of  approximately  $28.1  million after
deducting  expenses.  We  plan to use the net  proceeds  for  general  corporate
purposes, which include, among other things, providing additional capital to our
bank to support our asset growth.




                                       7
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 6 - 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 December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment"  ("SFAS  No.  123(R)").  Statement  No.123(R)  covers  a wide  range of
share-based compensation arrangements including share options,  restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase plans.  SFAS No. 123(R) will require  companies to measure all employee
stock-based  compensation  awards  using a fair value  method  and  record  such
expense in its  financial  statements.  In  addition,  the  adoption of SFAS No.
123(R) requires  additional  accounting and disclosure related to the income tax
and cash flow effects resulting from share-based payment arrangements.  SFAS No.
123(R) is  effective  beginning  within the first  interim  or annual  reporting
period of a company's first fiscal year beginning on or after June 15, 2005.

In April 2005,  the  Securities  and Exchange  Commission's  Office of the Chief
Accountant and its Division of  Corporation  Finance  released Staff  Accounting
Bulletin (SAB) No.107.  SAB 107 provides  interpretive  guidance  related to the
interaction  between SFAS  No.123(R) and certain SEC rules and  regulations,  as
well as the  staff's  views  regarding  the  valuation  of  share-based  payment
arrangements for public companies.  SAB 107 also reminds public companies of the
importance of including disclosures within filings made with the SEC relating to
the accounting for share-based  payment  transactions,  particularly  during the
transition  to  Statement  No.123(R).  The Company is currently  evaluating  the
impact that the adoption of SFAS No. 123(R) will have on its financial position,
results of operations and cash flows.

In  December  2003,  the FASB  issued FIN No. 46  (revised),  "Consolidation  of
Variable Interest Entities" ("FIN No. 46(R)"), which addresses  consolidation by
business  enterprises of variable  interest  entities.  FIN No. 46(R) requires a
variable  interest  entity to be  consolidated  by a company if that  company is
subject to a majority of the risk of loss from the  variable  interest  entity's
activities or entitled to receive a majority of the entity's  residual  returns,
or both.  FIN No.  46(R)  also  requires  disclosures  about  variable  interest
entities  that a company is not required to  consolidate,  but in which it has a
significant  variable interest.  FIN No. 46(R) provides guidance for determining
whether an entity qualifies as a variable interest entity by considering,  among
other  considerations,  whether the entity lacks sufficient equity or its equity
holders lack adequate decision-making ability. The consolidation requirements of
FIN No. 46(R) applied  immediately to variable  interest  entities created after
January  31,  2003.  The  consolidation  requirements  applied to the  Company's
existing  variable  interest entities in the first reporting period ending after
March 15, 2004. Certain of the disclosure  requirements applied to all financial
statements  issued  after  December 31,  2003,  regardless  of when the variable
interest  entity was  established.  The adoption of FIN No. 46(R) did not have a
material impact on the Company's financial position or results of operations.

In November  2003, the Emerging  Issues Task Force ("EITF")  reached a consensus
that certain  quantitative  and qualitative  disclosures  should be required for
debt and marketable equity  securities  classified as available for sale or held
to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance
sheet  date  but  for  which   other-than-temporary   impairment  has  not  been
recognized.  Accordingly  the  EITF  issued  EITF  No.  03-1,  "The  Meaning  of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments."
This issue  addresses  the meaning of  other-than-temporary  impairment  and its
application  to investments  classified as either  available for sale or held to
maturity  under  SFAS  No.  115  and  provides   guidance  on  quantitative  and
qualitative  disclosures.  The  disclosure  requirements  of EITF  No.  03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement  and  recognition  guidance of EITF
No. 03-1 has been delayed.  The FASB staff has issued a proposed  Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a,  "Implementation  Guidance for the
Application  of Paragraph 16 of Issue No.  03-1." The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due   to   interest    rates   and/or   sector    spreads   and   analyzed   for
other-than-temporary   impairment   under  the   measurement   and   recognition
requirements  of  EITF  No.  03-1.  The  delay  of the  effective  date  for the
measurement  and  recognition  requirements  of EITF No. 03-1 will be superseded
concurrent  with the final issuance of FSP EITF 03-1-a.  Adopting the disclosure
provisions of EITF No. 03-1 did not have any impact on the  Company's  financial
position or results of operations.  The company cannot presently predict whether
FSP EITF 03-1-a,  when issued in final form will have any material effect on the
company.


                                       8
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
No. 154).  SFAS No. 154  establishes  retrospective  application as the required
method  for   reporting  a  change  in  accounting   principle,   unless  it  is
impracticable,  in which  case the  changes  should  be  applied  to the  latest
practicable  date presented.  SFAS No. 154 also requires that a correction of an
error be  reported  as a prior  period  adjustment  by  restating  prior  period
financial  statements.  SFAS No. 154 is  effective  for  accounting  changes and
corrections of errors made in fiscal years beginning after December 15, 2005.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on the  consolidated  financial
statements upon adoption.




                                       9
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                           FORWARD LOOKING STATEMENTS

Statements  included  in this  report  which are not  historical  in nature  are
intended to be, and are hereby  identified as "forward  looking  statements" for
purposes of the safe harbor  provided by section 21E of the Securities  Exchange
Act of  1934,  as  amended.  Words  such  as  "estimate,"  "project,"  "intend,"
"expect,"  "plan,"  "anticipate,"  "believe," and similar  expressions  identify
forward-looking  statements.  The Company  cautions readers that forward looking
statements  including  without  limitation,  those relating to the Company's new
offices, future business prospects, revenues, allowance for loan losses, working
capital,  liquidity,  capital needs,  interest costs, and income, are subject to
certain risks and  uncertainties  that could cause actual results to differ from
those  indicated in the forward  looking  statements,  due to several  important
factors herein identified,  among others, and other risks and factors identified
from  time to time in the  Company's  reports  filed  with  the  Securities  and
Exchange Commission.

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 2004 Annual
Report on Form 10-K of Southcoast Financial  Corporation.  Results of operations
for the period ending  September 30, 2005 are not necessarily  indicative of the
results  to be  attained  for  any  other  period.  All per  share  data in this
discussion  has been  adjusted  to reflect the 10% stock  dividends  declared in
April 2005 and 2004.

Results of Operations

The  Company's  net income for the nine  months  ended  September  30,  2005 was
$2,876,445  or $0.87 per basic share,  compared to  $1,979,759 or $.61 per basic
share, for the nine months ended September 30, 2004.

The  Company's  net income for the three  months  ended  September  30, 2005 was
$1,034,361  or $0.31 per basic  share,  compared  to  $706,461 or $.22 per basic
share, for the three months ended September 30, 2004.


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
$10,073,285 for the nine months ended September 30, 2005, compared to $7,659,431
for the nine months ended September 30, 2004.

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

Average  earning assets for the nine months ending  September 30, 2005 increased
34.5 percent to $ 365.0  million from the $271.3  million  reported for the nine
months ending  September 30, 2004. The increase was mainly  attributable  to the
$92.7  million  increase in loans  supported by an 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 nine months
ended September 30, 2005 and 2004. The increase in net interest income is due to
increased  volume  of  earning  assets,  partially  offset  by an 8 basis  point
decrease 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 nine months ended                     For the nine months ended
                                                          September 30, 2005                            September 30, 2004
                                                          ------------------                            ------------------
                                                 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 ..................    $  12,976,883    $    267,709       2.75%       $  10,099,783    $    73,737      0.97%
   Investments- taxable ................       28,342,348         924,507       4.35           24,199,165        658,957      3.63
   Investments- non taxable ............          499,100          14,789       3.95            6,521,246         53,442      1.09
                                            -------------    ------------                   -------------    -----------
     Total investments and
       Federal funds sold ..............       41,818,331       1,207,005       3.85           40,820,194        786,136      2.57
   Loans (2)(3) ........................      323,222,207      15,799,169       6.52          230,517,105     11,036,073      6.38
                                            -------------    ------------                   -------------    -----------
     Total earning assets ..............      365,040,538      17,006,174       6.21          271,337,299     11,822,209      5.81
                                            -------------    ------------                   -------------    -----------
     Other assets ......................       27,029,265                                      19,537,926
                                            -------------                                   -------------
     Total assets ......................    $ 392,069,803                                   $ 290,875,225
                                            =============                                   =============
Liabilities
   Savings .............................    $  59,626,683    $    630,481       1.41        $  49,467,821        469,296      1.26
   Time deposits .......................      187,946,334       4,259,678       3.02          129,801,934      2,265,432      2.33
   FHLB advances .......................       53,464,388       1,411,032       3.52           36,964,176      1,025,734      3.70
   Subordinated debt ...................       13,497,637         631,698       6.24           11,345,000        402,316      4.73
                                            -------------    ------------                   -------------    -----------
     Total interest bearing
       liabilities .....................      314,535,042       6,932,889       2.94          227,578,931      4,162,778      2.44
                                                             ------------                                    -----------
   Non-interest bearing
     liabilities .......................       39,435,860                                      29,041,403
                                            -------------                                   -------------
     Total liabilities .................      353,970,902       6,932,889       2.61          256,620,334      4,162,778      2.16
                                            -------------    ------------                   -------------    -----------
   Shareholders' equity ................       38,098,901                                      34,254,891
                                            -------------                                   -------------
     Total liabilities and
       shareholders' equity ............    $ 392,069,803                                   $ 290,875,225
                                            =============                                   =============
     Net interest
       income/margin (4) ...............                     $ 10,073,285       3.68%                        $ 7,659,431      3.76%
                                                             ============                                    ===========
     Net interest spread (5) ...........                                        3.27%                                         3.37%
</TABLE>
(1)  Annualized
(2)  Does not include non-accruing loans
(3)  Includes loan fees of $1,034,700 in 2005 and $905,294 in 2004.
(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above,  for the nine months ended  September  30, 2005 the average
yield on earning  assets was 6.21  percent,  while the average  cost of interest
bearing  liabilities  was 2.94 percent.  For the nine months ended September 30,
2004 the average  yield on earning  assets was 5.81 percent and the average cost
of interest-bearing  liabilities was 2.44 percent.  The increase in the yield on
earning assets is  attributable  to change in the mix of the assets and the rise
in market  rates of  interest  over the last year.  The  increase in the cost of
interest  bearing  liabilities  is caused by maturing  lower yield  certificates
being replaced by higher yields and the increases in market  interest rates 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 nine months  ended
September 30, 2005 was 3.68 percent compared to 3.76 percent for the nine months
ended September 30, 2004. The decrease in the  net-interest  margin is primarily
attributable  the excess  liquidity  carried in the first half of 2005 generated
from short term escrow accounts.  The cost of total liabilities was 2.61 percent
for the nine months ended  September  30, 2005  compared to 2.16 percent for the
nine months ended September 30, 2004.



                                       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  September 30, 2005 increased
27.8 percent to $375.8  million from the $294.0  million  reported for the three
months ending  September 30, 2004. The increase was mainly  attributable  to the
increase in loans  supported  by a $76.1  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 September 30, 2005 and 2004. The increase in net interest income is due to
increased  volume of earning  assets,  helped by a 1 basis point increase in the
Company's net interest margin.

<TABLE>
<CAPTION>
                                                      For the three months ended                    For the three months ended
                                                          September 30, 2005                            September 30, 2004
                                                          ------------------                            ------------------
                                                 Average        Income/       Yield/           Average         Income/       Yield/
                                                 Balance        Expense       Rate(1)          Balance         Expense       Rate(1)
                                                 -------        -------       -------          -------         -------       -------
Assets
<S>                                          <C>               <C>               <C>        <C>               <C>              <C>
   Federal funds sold .....................  $   3,365,837     $    31,259       3.71%      $   3,626,868     $    12,817      1.41%
   Investments - taxable ..................     29,153,704         316,544       4.34          26,960,935         271,043      4.02
   Investments- non taxable ...............        692,258           6,857       3.96           7,869,122          21,102      1.09
                                             -------------     -----------                  -------------     -----------
     Total investments and
       Federal funds sold .................     33,211,799         354,660       4.27          38,356,925         304,962      3.18
   Loans (2)(3) ...........................    342,581,748       5,836,036       6.81         255,611,035       4,031,072      6.31
                                             -------------     -----------                  -------------     -----------
     Total earning assets .................    375,793,547       6,190,696       6.59         293,967,960       4,336,034      5.90
                                             -------------     -----------                                    -----------
     Other assets .........................     30,065,920                                     22,120,126
                                             -------------                                  -------------
     Total assets .........................  $ 405,859,467                                  $ 316,088,086
                                             =============                                  =============
Liabilities
   Savings ................................  $  52,850,006     $   167,869       1.27%      $  54,207,451         172,757      1.27
   Time deposits ..........................    195,982,804       1,636,943       3.34         139,234,888         844,970      2.43
   FHLB advances ..........................     57,542,268         512,504       3.56          43,285,301         376,497      3.48
   Subordinated debt ......................     17,802,912         280,852       6.31          11,345,000         143,069      5.04
                                             -------------     -----------                  -------------     -----------
     Total interest bearing
       liabilities ........................    324,177,990       2,598,168       3.21         248,072,640       1,537,293      2.48
                                                               -----------                                    -----------
   Non-interest bearing
     liabilities ..........................     42,472,547                                     32,958,948
                                             -------------                                  -------------
     Total liabilities ....................    366,650,537       2,598,168       2.83         281,031,588       1,537,293      2.19
                                             -------------     -----------                  -------------     -----------
   Shareholders' equity ...................     39,208,930                                     35,056,498
                                             -------------                                  -------------
     Total liabilities and
       shareholders' equity ...............  $ 405,859,467                                  $ 316,088,086
                                             =============                                  =============
     Net interest
       income/margin (4) ..................                    $ 3,592,528       3.82%                        $ 2,798,741      3.81%
                                                               ===========                                    ===========
     Net interest spread (5) ..............                                      3.38%                                         3.42%
</TABLE>
(1)  Annualized
(2)  Does not include non-accruing loans.
(3)  Includes loan fees of $417,631 in 2005 and $331,254 in 2004.
(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above,  for the three months ended  September 30, 2005 the average
yield on earning  assets was 6.59  percent,  while the average  cost of interest
bearing  liabilities was 3.21 percent.  For the three months ended September 30,
2004 the average  yield on earning  assets was 5.90 percent and the average cost
of interest-bearing  liabilities was 2.48 percent.  The increase in the yield on
earning assets is  attributable to the increases in market rates of interest and
the percentage of higher yielding  earning  assets.  The increase in the cost of
interest bearing liabilities is caused by maturing lower yield certificates of


                                       12
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued


deposits  being  replaced  with higher  yields and  increases in market rates of
interest. The net interest margin for the three months ended September 30, 2005,
was 3.82 percent  compared to 3.81 percent for the three months ended  September
30, 2004. The increase in the net-interest  margin is primarily  attributable to
the balance of interest  bearing  assets and  liabilities  that adjust with rate
increases.  The cost of total  liabilities was 2.83 percent for the three months
ended  September  30, 2005  compared to 2.19  percent for the three months ended
September 30, 2004.


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


<TABLE>
<CAPTION>
                                                                                  Analysis of Changes in Net Interest Income
                                                                                 For the nine months ended September 30, 2005
                                                                                 Versus nine months ended September 30, 2004(1)
                                                                                 ----------------------------------------------
                                                                               Volume                 Rate               Net Change
                                                                               ------                 ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $   209,309           $   (15,337)          $   193,972
   Investments - taxable .........................................              112,821               152,729               265,550
   Investments - non taxable .....................................              (49,352)               10,699               (38,653)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              272,778               148,091               420,869
     Net loans(2) ................................................            4,435,939               327,157             4,763,096
                                                                            -----------           -----------           -----------
     Total interest income .......................................            4,708,717               475,248             5,183,965
                                                                            -----------           -----------           -----------
Interest Expense:

   Savings deposits ..............................................               96,376                64,809               161,185
   Time deposits .................................................            1,014,794               979,452             1,994,246
   FHLB advances .................................................              457,871               (72,573)              385,298
   Subordinated debt .............................................               76,337               153,045               229,382
                                                                            -----------           -----------           -----------
     Total interest expense ......................................            1,645,378             1,124,733             2,770,111
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $ 3,063,339           $  (649,485)          $ 2,413,854
                                                                            ===========           ===========           ===========
</TABLE>














                                       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 September 30, 2005
                                                                                 Versus three months ended September 30, 2004(1)
                                                                                 -----------------------------------------------
                                                                               Volume                Rate               Net Change
                                                                               ------                ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $      (920)          $    19,362           $    18,442
   Investments - taxable .........................................               22,044                23,457                45,501
   Investments - non taxable .....................................              (19,222)                4,977               (14,245)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................                1,902                47,796                49,698
     Net loans (2) ...............................................            1,371,963               433,001             1,804,964
                                                                            -----------           -----------           -----------
     Total interest income .......................................            1,373,865               480,797             1,854,662
                                                                            -----------           -----------           -----------
Interest expense:
   Savings deposits ..............................................               (4,326)                 (562)               (4,888)
   Time deposits .................................................              344,384               447,589               791,973
   FHLB advances .................................................              124,008                11,999               136,007
   Subordinated debt .............................................               81,439                56,344               137,783
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              545,505               515,370             1,060,875
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $   828,360           $   (34,573)          $   793,787
                                                                            ===========           ===========           ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Includes  loan fees of $ 1,034,700  and  $905,294 for the nine months ended
     September  30, 2005 and 2004 and $417,631 and $331,254 for the three months
     ended September 30, 2005 and 2004.


Noninterest Income and Expenses

Noninterest  income for the nine months ended  September 30, 2005 was $1,376,710
compared to  $1,115,726  for the nine  months  ended  September  30,  2004.  The
increase  is  attributable  to a  $141,397  increase  in fees on loans  sold,  a
$144,792  increase in  security  gains and other real  estate  owned,  partially
offset by a $ $43,989 decrease in service fees on deposit accounts.

Noninterest  expenses  for the nine  months  ended  September  30,  2005  were $
6,548,267,  compared to $5,427,968 for the nine months ended September 30, 2004.
The increase of $ 1,120,299 is mainly  attributable to increases in salaries and
benefits,  furniture and equipment expense and  administrative  expenses.  These
increases  primarily  relate to expenditures  associated with the opening of the
Goose  Creek  branch  in  December  2004  and  the  anticipated  opening  of the
Dorchester  Road  branch in the  November  of 2005,  as well as the  increase in
administrative staff to support the growth of the Company's operations.

Noninterest  income for the three months ended  September 30, 2005 was $459,883,
compared to $443,058 for the three months ended September 30, 2004. The increase
is attributable  to a $102,667  increase in security gains and other real estate
owned offset by a decrease of $ 34,119 in service  fees on deposit  accounts and
fees on loans sold.

Noninterest  expenses  for the  three  months  ended  September  30,  2005  were
$2,228,883,  compared to  $1,985,945  for the three months ended  September  30,
2004. The increase of $242,938 is mainly  attributable  to increases in salaries
and benefits, furniture and equipment expense and administrative expenses. These
increases  primarily  relate to  expenditures  associated  with the  anticipated
opening of the  Dorchester  branch in November  2005 as well as the  increase in
administrative staff to support the growth of the Company's operations.


                                       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 our 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 50.1% of total deposits as
of  September  30, 2005.  Asset  liquidity  is provided  from  several  sources,
including  amounts due from banks and federal funds sold and funds from maturing
loans.  Our 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. We also have 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.  We are in  the  process  of  opening  one  new  branch  office  and a new
operations  center.  The  total  unexpended  cost of  these  facilities  is $1.6
million.  The  funding  for these  offices  will come  from  normal  operations.
Management  believes that our liquidity  sources are adequate to meet our normal
operating needs.

Loans

Commercial  loans  (most of which are  incidentally  secured  with real  estate)
totaling  $156.3  million made up 45.4 percent of the total loan portfolio as of
September  30,  2005.  Loans  secured by real estate for  construction  and land
development  totaled $39.3 million,  or 11.4 percent, of the portfolio while all
other loans secured by real estate totaled $145.6 million,  or 42.2 percent,  of
the total loan portfolio,  as of September 30, 2005. Installment loans and other
consumer loans to individuals  comprised  $3.5 million,  or 1.0 percent,  of the
total loan portfolio. The allowance for loan losses was 1.16 percent of loans as
of  September  30, 2005,  compared to 1.15  percent as of December 31, 2004.  In
management's  opinion,  the  allowance  for loan  losses is  adequate  to absorb
anticipated losses inherent in our bank's loan portfolio. At September 30, 2005,
the  Company  did not  have any  loans 90 days  delinquent  and  still  accruing
interest or any other real  estate  owned and had $1.1  million of  non-accruing
loans. The majority of the non-accruing loans are secured by real estate.  There
were no loans that  management had  determined to be potential  problem loans at
September 30, 2005.


Deposits

Deposits  increased $45.3 million during the first nine months of 2005 to $303.5
million at September 30, 2005. The increase was attributable to several factors:
non-interest  bearing  deposits  increased  $16.0 million  during the first nine
months  as  a  result  of  the  continuing  maturing  of  our  bank's  branches;
certificates  of deposit from retail  customers  increased  approximately  $17.6
million  during  the  first  nine  months;   and  brokered  deposits   increased
approximately $11.9 million because our bank purchased some longer term deposits
in anticipation of potentially higher interest rates.



                                       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.   Advances  from  the  FHLBA  are
collateralized by FHLBA stock and pledges of certain residential mortgage loans.
At September 30, 2005 FHLBA advances are summarized as follows:

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

           June 2006                        4.05%              $     9,000,000
           September 2006                   2.91%                   10,000,000
           September 2008                   3.01%                   10,000,000
           June 2010                        3.33%                   11,000,000
           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                                          $    61,000,000
                                                               ===============

Junior Subordinated Debentures

In August 2005,  we formed  Southcoast  Capital Trust III to sell $10 million of
trust  preferred  securities to an  institutional  investor.  We  simultaneously
issued $10.3 million of junior subordinated notes to the trust for $10.0 million
in cash and $310,000 in liquidation value of the trust's common securities.  The
junior  subordinated notes mature in 30 years, are callable after five years and
provide for a variable interest rate per annum, reset quarterly,  equal to three
months LIBOR plus 1.50%.  Quarterly  payments of interest may be deferred for up
to five consecutive  years without default.  Payments to the trust are passed on
to the holders of the preferred  securities and common  securities of the trust.
The trust  preferred  securities  meet current  Federal  Reserve  guidelines for
inclusion in our Tier 1 capital subject to certain  limitations  which presently
apply to us.

Capital Resources

The capital  base for the Company  increased  by $3.2 million for the first nine
months of 2005,  due to operating  income,  capital  raised through the Employee
Stock  Purchase  Plan  and  exercise  of  stock  options,  partially  offset  by
unrealized  losses on  available-for-sale  securities.  The  Company's  tier one
capital to average  assets  ratio was 13.05  percent as of  September  30,  2005
compared to 13.64 percent as of December 31, 2004.

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-base standard,  capital
is  classified  into  two  tiers.   Our  Tier  1  capital   consists  of  common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt  subject  to  certain  limitations.  Our  Tier 2  capital  consists  of the
allowance  for  loan  losses  subject  to  certain  limitations  and our  junior
subordinated debt in excess of 25% of our 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 our bank are also required to maintain capital at a minimum level
based on quarterly  average assets,  which is known as the leverage ratio.  Only
the strongest bank holding  companies and banks are allowed to maintain  capital
at the minimum requirement.  All others are subject to maintaining ratios 100 to
200 basis points above the minimum.  As of September  30, 2005,  we and the bank
exceeded our 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) ...............   $  37,046       12.50%    $  29,628       10.00%    $   23,702     8.00%
  Tier 1 capital (to risk-weighted assets) ..............      33,505       11.31%       17,777        6.00%        11,851     4.00%
  Tier 1 capital (to average assets) ....................      33,505        8.58%       19,515        5.00%        15,612     4.00%
The Company
  Total capital (to risk-weighted assets) ...............   $  65,432       20.92%          N/A          N/A    $   25,016     8.00%
  Tier 1 capital (to risk-weighted assets) ..............      53,146       17.00%          N/A          N/A        12,508     4.00%
  Tier 1 capital (to average assets) ....................      53,146       13.05%          N/A          N/A        16,293     4.00%
</TABLE>

Off Balance Sheet Risk

We make  contractual  commitments to extend credit and issue standby  letters of
credit in the ordinary course of our 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,  we also issue standby letters of credit which are assurances to a third
party  that  they  will  not  suffer  a loss  if our  customer  fails  to meet a
contractual  obligation to the third party. At September 30, 2005, we had issued
commitments  to extend credit of $44.4 million and standby  letters of credit of
$789,391 through various types of commercial lending arrangements. Approximately
$37.2 million of these commitments to extend credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments  to extend  credit and standby  letters of credit at  September  30,
2005.
<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 ........   $ 2,341,849  $ 2,365,941  $  20,371,215  $  25,079,005   $  19,299,880  $  44,378,885
Standby letters of credit ..................       305,193       84,601        339,537        729,391          60,000        789,391
                                               -----------  -----------  -------------  -------------   -------------  -------------

    Totals .................................   $ 2,647,042  $ 2,450,542  $  20,710,812  $  25,808,396   $  19,359,880  $  45,168,276
                                               ===========  ===========  =============  =============   =============  =============
</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 our various  sources of  liquidity,  we believe  that we will be able to
fund these obligations as they arise.

The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary upon extension of credit,
is based on the company's credit  evaluation of the borrower.  Collateral varies
but may include accounts receivable,  inventory,  property, plant and equipment,
commercial and residential real estate.

Item 3. - 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.

                                       17
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

PART II - OTHER INFORMATION

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

During the quarter ended September 30, 2005, the registrant sold 1,811 shares of
common stock to participating  eligible  employees  pursuant to the Registrant's
Employee Stock Purchase Plan for an aggregate  price of $34,608.  The securities
were sold pursuant to the exemption from  registration  provided by section 4(2)
of the Securities Act 1933 because the sales did not involve a public offering.

Item 6.  Exhibits

    10    Underwriting Agreement between Registrant and Morgan Keegan & Company,
          Inc.
  31-1    Rule 13a-14(a) Certifications of CEO
  31-2    Rule 13a-14(a) Certifications of CFO
    32    Section 1350 Certification






                                       18
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.





Date:    November 11, 2005               By:s/L. Wayne Pearson
                                            ------------------------------------
                                            L. Wayne Pearson
                                            Chief Executive Officer



Date:    November 11, 2005               By:s/Robert M. Scott
                                            ------------------------------------
                                            Robert M. Scott
                                            Executive Vice President and Chief
                                            Financial Officer



                                       19
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


Exhibit Index

10       Underwriting  Agreement between Registrant and Morgan Keegan & Company,
         Inc.

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.



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