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 March 31, 2009

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

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

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

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

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

                                 YES [X]    NO [ ]

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

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

Large accelerated filer  [ ]                   Accelerated filer      [X]

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

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

                                 YES [ ]    NO [X]

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

      4,521,890 shares of common stock, no par value, as of April 30, 2009


<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


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

Item 1.  Financial Statements (Unaudited)
<S>                                                                                                                  <C>
         Condensed Consolidated Balance Sheets - March 31, 2009 and December 31, 2008...................................2

         Condensed Consolidated Statements of Income - Three months ended March 31, 2009 and 2008.......................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Three months ended March 31, 2009 and 2008...................................................................4

         Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2009 and 2008...................5

Notes to Condensed Consolidated Financial Statements..................................................................6-8

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

Item 3.  Quantitative and Qualitative Disclosure about Market Risk.....................................................17

Item 4.   Controls and Procedures......................................................................................17

PART II - OTHER INFORMATION

Item 6.  Exhibits .....................................................................................................17

Signatures ............................................................................................................17

Exhibit Index .........................................................................................................18
</TABLE>




<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                    March 31,          December 31,
                                                                                                      2009                2008
                                                                                                   (Unaudited)          (Audited)
                                                                                                   -----------          ---------
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $  19,903,287        $  10,659,268
     Federal funds sold ..................................................................             364,199           11,902,302
                                                                                                 -------------        -------------
         Total cash and cash equivalents .................................................          20,267,486           22,561,570
   Investment securities
     Available for sale ..................................................................          59,995,426           57,772,257
     Federal Home Loan Bank Stock, at cost ...............................................           4,266,200            4,509,500
                                                                                                 -------------        -------------
         Total investment securities .....................................................          64,261,626           62,281,757
   Loans held for sale ...................................................................             984,313              417,000
   Loans, net of allowance of $6,697,881 and $7,410,116 ..................................         384,912,605          397,123,072
   Property and equipment, net ...........................................................          27,773,570           23,812,981
   Company owned life insurance ..........................................................          18,678,311           18,492,955
   Other assets ..........................................................................          12,251,684           10,275,579
                                                                                                 -------------        -------------

       Total assets ......................................................................       $ 529,129,595        $ 534,964,914
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  30,507,930        $  27,931,650
     Interest bearing ....................................................................         342,810,900          338,879,046
                                                                                                 -------------        -------------

       Total deposits ....................................................................         373,318,830          366,810,696

   Federal funds purchased ...............................................................                   -            5,978,800
   Securities sold under agreements to repurchase ........................................          11,084,358           10,611,537
   Advances from Federal Home Loan Bank ..................................................          74,000,000           81,000,000
   Junior subordinated debentures ........................................................          10,310,000           10,310,000
   Other liabilities .....................................................................           5,769,770            5,020,777
                                                                                                 -------------        -------------

       Total liabilities .................................................................         474,482,958          479,731,810
                                                                                                 -------------        -------------

Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  4,521,890 shares
     outstanding at March 31, 2009 and
     4,513,463 at December 31, 2008) .....................................................          53,477,203           53,441,978
   Retained earnings .....................................................................           3,117,700            2,814,566
   Accumulated other comprehensive loss ..................................................          (1,948,266)          (1,023,440)
                                                                                                 -------------        -------------

       Total shareholders' equity ........................................................          54,646,637           55,233,104
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 529,129,595        $ 534,964,914
                                                                                                 =============        =============
</TABLE>

            See notes to condensed consolidated financial statements.




                                      -2-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                   For the Three months ended
                                                                                                           March 31,
                                                                                                           ---------
                                                                                                2009                       2008
                                                                                                ----                       ----
Interest income
<S>                                                                                        <C>                         <C>
   Loans, including fees ....................................................              $   6,018,807               $   6,834,242
   Investment securities ....................................................                    712,505                     818,167
   Federal funds sold .......................................................                        591                      11,677
                                                                                           -------------               -------------
       Total interest income ................................................                  6,731,903                   7,664,086
                                                                                           -------------               -------------
Interest expense
   Deposits and borrowings ..................................................                  3,444,389                   4,210,892
                                                                                           -------------               -------------
Net interest income .........................................................                  3,287,514                   3,453,194
    Provision for loan losses ...............................................                    100,000                     381,047
                                                                                           -------------               -------------
Net interest income after provision
   for loan losses ..........................................................                  3,187,514                   3,072,147
                                                                                           -------------               -------------
Noninterest income
   Service fees on deposit accounts .........................................                    310,447                     268,667
   Fees on loans sold .......................................................                    111,171                      75,242
   Gain on sale of available for sale securities ............................                          -                     153,465
   Company owned life insurance earnings ....................................                    185,356                     205,187
   Other ....................................................................                     34,209                      91,984
                                                                                           -------------               -------------
       Total noninterest income .............................................                    641,183                     794,545
                                                                                           -------------               -------------
Noninterest expenses
   Salaries and employment benefits .........................................                  2,066,269                   1,723,443
   Occupancy ................................................................                    337,863                     282,386
   Furniture and equipment ..................................................                    327,431                     292,403
   Advertising and public relations .........................................                     18,742                      10,476
   Professional fees ........................................................                    188,821                      95,388
   Travel and entertainment .................................................                     43,848                      53,627
   Telephone, postage and supplies ..........................................                    102,479                     104,282
   Other operating expenses .................................................                    484,475                     360,832
                                                                                           -------------               -------------
       Total noninterest expenses ...........................................                  3,569,928                   2,922,837
                                                                                           -------------               -------------
Income before income taxes ..................................................                    258,769                     943,855
    Income tax expense (benefit) ............................................                    (44,365)                    199,509
                                                                                           -------------               -------------
Net income ..................................................................              $     303,134               $     744,346
                                                                                           =============               =============
Basic net income per common share ...........................................              $        0.07               $        0.16
Diluted net income per common share .........................................              $        0.07               $        0.16
Weighted average shares outstanding
   Basic ....................................................................                  4,521,890                   4,792,108
   Diluted ..................................................................                  4,521,890                   4,792,108
</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 three months ending March 31, 2009 and 2008
                                   (Unaudited)


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

   Net income for the period ........................                                        744,346                        744,346

   Other comprehensive income net
     of taxes of $98,900:
       Unrealized holding gains
       on securities available for sale .............                                                       175,823         175,823

   Less reclassification adjustment for
      gains included in net income, net of
      taxes of $55,247 ..............................                                                       (98,218)        (98,218)
                                                                                                                       ------------

   Comprehensive income .............................                                                                       821,951

   Shares repurchased and retired ...................       (295,152)     (4,097,630)                                    (4,097,630)

   Employee stock purchase plan .....................          2,749          39,173                                         39,173
                                                        ------------    ------------    ------------    ------------   ------------

Balance, March 31, 2008 .............................      4,717,500    $ 56,098,927    $  3,342,060    $     63,814   $ 59,504,801
                                                        ============    ============    ============    ============   ============

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

   Net income for the period ........................                                        303,134                        303,134

   Other comprehensive loss net
      of taxes of $520,215:
          Unrealized holding losses
          on securities available for sale ..........                                                      (924,826)       (924,826)
                                                                                                                       ------------


   Comprehensive loss ...............................                                                                      (621,692)

   Employee stock purchase plan .....................          8,427          35,225                                         35,225
                                                        ------------    ------------    ------------    ------------   ------------

Balance, March 31, 2009 .............................      4,521,890    $ 53,477,203    $  3,117,700    $ (1,948,266)  $ 54,646,637
                                                        ============    ============    ============    ============   ============
</TABLE>





            See notes to condensed consolidated financial statements.



                                      -4-
<PAGE>





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

<TABLE>
<CAPTION>
                                                                                                        For the three months ended
                                                                                                                 March 31,
                                                                                                                 ---------
                                                                                                       2009                  2008
                                                                                                       ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $    303,134         $    744,346
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
       Deferred income taxes .............................................................            (535,628)              45,767
       Provision for loan losses .........................................................             100,000              381,047
       Depreciation and amortization .....................................................             310,630              257,667
       Discount accretion and premium amortization .......................................             (22,628)              (8,910)
       Gain on sale of securities ........................................................                   -             (153,465)
       Losses and impairment provision on Other Real Estate Owned ........................              57,936                    -
       Originations of loans held for sale ...............................................         (23,738,334)         (14,972,238)
       Proceeds from sales of loans held for sale ........................................          23,171,021           15,356,238
       Increase in value of Company Owned Life Insurance .................................            (185,356)            (205,187)
       Increase in other assets ..........................................................            (162,590)            (376,868)
       Increase in other liabilities .....................................................             748,993              322,295
                                                                                                  ------------         ------------


         Net cash provided by operating activities .......................................              47,178            1,390,692
                                                                                                  ------------         ------------


Investing activities
   (Purchases) sales of Federal Home Loan Bank stock .....................................             243,300             (592,800)
   Purchases of investment securities available-for-sale .................................          (5,027,989)         (12,134,327)
   Sales, calls, and maturities of investment securities available-for-sale ..............           1,413,841            8,028,805
   Proceeds from sales of Other Real Estate Owned ........................................             838,421                    -
   Purchases of  premises and equipment ..................................................             (97,503)            (209,791)
   Net (increase) decrease in loans ......................................................           6,251,288           (7,687,435)
                                                                                                  ------------         ------------

         Net cash provided by (used for) investing activities ............................           3,621,358          (12,595,548)
                                                                                                  ------------         ------------

Financing activities
   Increase(decrease) in borrowings ......................................................         (12,505,979)          15,650,058
   Proceeds from issuance of stock .......................................................              35,225               39,173
   Funds used to repurchase stock ........................................................                   -           (4,097,630)
   Net increase in deposits ..............................................................           6,508,134           12,309,420
                                                                                                  ------------         ------------

         Net cash provided (used) by financing activities ................................          (5,962,620)          23,901,021
                                                                                                  ------------         ------------

         Increase (decrease) in cash and cash equivalents ................................          (2,294,084)          12,696,165

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

Cash and cash equivalents, end of period .................................................        $ 20,267,486         $ 23,503,321
                                                                                                  ============         ============

Cash paid during the period for:
    Income taxes .........................................................................        $    503,849         $    623,345
    Interest .............................................................................        $  3,006,323         $  4,146,568
</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
Regulation S-X of the Securities and Exchange  Commission.  Accordingly  they do
not include all information and notes required by generally accepted  accounting
principles  for  complete  financial  statements.  However,  in the  opinion  of
management,   all  adjustments  (consisting  of  normal  recurring  adjustments)
considered necessary for a fair presentation have been included.

Note 2 - Organization

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

Note 3 - Net Income Per Share

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

Note 4 - Stock Repurchase

On January 18, 2008,  the Company  announced  plans to  repurchase up to 484,527
shares of its  outstanding  common  stock.  Repurchased  shares are retired into
authorized unissued shares.  During the first three months of 2009 and 2008, the
Company repurchased 0 and 295,152 shares, respectively.

Note 5 - Recently Issued Accounting Standards

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

In December 2008 the Financial  Accounting  Standards Board ("FASB") issued FASB
Staff   Position   ("FSP")  SFAS   132(R)-1,   "Employers'   Disclosures   about
Postretirement  Benefit Plan Assets," ("FSP SFAS  132(R)-1").  This FSP provides
guidance on an  employer's  disclosures  about plan assets of a defined  benefit
pension or other postretirement plan. The objective of the FSP is to provide the
users of  financial  statements  with an  understanding  of: (a) how  investment
allocation  decisions  are made,  including the factors that are pertinent to an
understanding of investment policies and strategies; (b) the major categories of
plan assets;  (c) the inputs and valuation  techniques  used to measure the fair
value  of  plan  assets;  (d)  the  effect  of  fair  value  measurements  using
significant  unobservable  inputs  (Level 3) on changes  in plan  assets for the
period;  and (e) significant  concentrations of risk within plan assets. The FSP
also  requires  a  nonpublic  entity,  as  defined  in  Statement  of  Financial
Accounting Standard ("SFAS") 132, to disclose net periodic benefit cost for each
period  for which a  statement  of income is  presented.  FSP SFAS  132(R)-1  is
effective for fiscal years ending after  December 15, 2009.  The Staff  Position
will  require  the  Company to  provide  additional  disclosures  related to its
benefit plans.

FSP EITF  99-20-1,  "Amendments  to the  Impairment  Guidance  of EITF Issue No.
99-20,"  ("FSP EITF  99-20-1")  was issued in  January  2009.  Prior to the FSP,
other-than-temporary  impairment was determined by using either  Emerging Issues
Task  Force  ("EITF")  Issue No.  99-20,  "Recognition  of  Interest  Income and
Impairment on Purchased  Beneficial  Interests  and  Beneficial  Interests  that
Continue to be Held by a Transferor in  Securitized  Financial  Assets,"  ("EITF
99-20") or SFAS No. 115,  "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS 115") depending on the type of security. EITF 99-20 required
the use of market participant  assumptions regarding future cash flows regarding
the  probability of collecting  all cash flows  previously  projected.  SFAS 115
determined  impairment  to be other than  temporary if it was probable  that the
holder would be unable to collect all amounts due  according to the  contractual
terms.  To  achieve  a more  consistent  determination  of  other-than-temporary
impairment,  the FSP amends  EITF 99-20 to  determine  any  other-than-temporary


                                      -6-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Recently Issued Accounting Standards  - (continued)

impairment  based on the guidance in SFAS 115,  allowing  management to use more
judgment  in  determining  any  other-than-temporary  impairment.  The  FSP  was
effective for reporting  periods ending after December 15, 2008.  Management has
reviewed the  Company's  security  portfolio and evaluated the portfolio for any
other-than-temporary impairments.

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

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

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

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

The three staff  positions are effective for periods ending after June 15, 2009,
with early adoption  permitted for periods ending after March 15, 2009, in which
case all three must be adopted.  The Company will adopt the staff  positions for
its  second  quarter  10-Q but does not  expect  the staff  positions  to have a
material impact on the consolidated financial statements.

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


                                      -7-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Recently Issued Accounting Standards  - (continued)

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

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

Note 6 - Fair Value of Financial Instruments

Assets  and  liabilities  measured  at fair  value on a  recurring  basis are as
follows as of March 31, 2009:

<TABLE>
<CAPTION>
                                                   Quoted market price    Significant other         Significant unobservable
                                                   in active markets      observable inputs                inputs
                                                          (Level 1)          (Level 2)                    (Level 3)
                                                   -------------------    -----------------         ------------------------
<S>                                                   <C>                 <C>                         <C>
Available-for-sale
 investment securities ..........................     $         -         $ 58,963,745                $  1,031,681

Loans held for sale .............................     $         -         $    984,313                $          -

Interest rate swap
 derivative instrument ..........................     $         -         $   (538,220)               $          -
</TABLE>


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

The Company is  predominantly  an asset based lender with real estate serving as
collateral  on a  substantial  majority  of loans.  Loans which are deemed to be
impaired are primarily valued on a nonrecurring  basis at the fair values of the
underlying  real  estate  collateral.   Such  fair  values  are  obtained  using
independent  appraisals,  which the Company considers to be level 2 inputs.  The
aggregate carrying amount of impaired loans at March 31, 2009 was $ 17,475,559.

The following table reconciles the changes in Level 3 financial  instruments for
the three months ended March 31, 2009 and 2008:

                                                           March 31,
                                                           ---------
                                                    2009                 2008
                                                    ----                 ----
Beginning of Year Balance ..............        $ 2,900,720         $ 4,017,675
Discount Accretion .....................              1,636                 966
Principal Paydowns .....................             (6,776)                  -
Unrealized Loss ........................         (1,863,899)           (162,747)
                                                -----------         -----------
Ending Balance .........................        $ 1,031,681         $ 3,855,894
                                                ===========         ===========


                                      -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 Company's
Annual  Report on Form 10-K for the year ended  December  31,  2008.  Results of
operations for the period ending March 31, 2009 are not  necessarily  indicative
of the results to be attained for any other period.

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

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

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

Results of Operations

The Company's net income for the three months ended March 31, 2009 was $303,134,
or $0.07 per basic share, compared to $744,346, or $.16 per basic share, for the
three months ended March 31,  2008.  The basic  earnings per share for March 31,
2009 was  based on  4,521,890  average  basic  shares  outstanding  compared  to
4,792,108 average basic shares outstanding for the quarter ended March 31, 2008.

                                      -9-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income

Net interest  income,  the principal  source of the Company's  earnings,  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
was $3,287,514 for the three months ended March 31, 2009, compared to $3,453,194
for the three months ended March 31, 2008.

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

Average  earning assets for the three months ending March 31, 2009 increased 4.6
percent to $464.6 million from the $444.0 million  reported for the three months
ending March 31,  2008.  The  increase  was  attributable  to increases of $12.4
million and $8.2  million,  respectively,  in average  taxable  investments  and
average  loans  between  the two  periods.  The  increase  in average  loans was
primarily  due to the  expansion of the  Company's  branches  and the  Company's
marketing efforts.

Average interest bearing  liabilities for the three months ending March 31, 2009
increased 8.6 percent to $441.3 million from the $406.4 million reported for the
three months ending March 31, 2008. The $34.9 million  increase was attributable
to increases in average time deposits of $63.9  million,  offset by decreases in
average savings and transaction accounts of $29.0 million. The increase in total
average  interest  bearing  liabilities  was  necessitated by the need to fund a
$23.2 million  increase in average  assets,  the funding of the Company's  stock
repurchase  over the final  nine  months of 2008,  which  contributed  to a $6.2
million decrease in average  shareholders' equity between the two periods, and a
decrease in average noninterest bearing liabilities of $5.5 million.

































                                      -10-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended March 31, 2009 and 2008.

<TABLE>
<CAPTION>
                                                     For the three months ended                    For the three months ended
                                                            March 31, 2009                                 March 31, 2008
                                                            --------------                                 --------------
                                              Average           Income/        Yield/        Average            Income/      Yield/
                                              Balance           Expense        Rate(1)       Balance            Expense      Rate(1)
                                              -------           -------        -------       -------            -------      -------
Assets
<S>                                       <C>               <C>                <C>        <C>               <C>               <C>
   Federal funds sold ..................  $  1,747,488      $        591       0.14%      $  1,660,451      $     11,677      2.85%
   Investments - taxable ...............    56,941,486           528,844       3.77         44,516,499           593,458      5.41
   Investments- non taxable (2) ........    17,273,983           286,970       6.74         17,459,355           339,110      7.88
                                          ------------      ------------                  ------------      ------------
      Total investments and
       Federal funds sold ..............    75,962,957           816,405       4.36         63,636,305           944,245      6.02
   Loans (3)(4) ........................   388,625,286         6,018,807       6.25        380,397,091         6,834,242      7.25
                                          ------------      ------------                  ------------      ------------
     Total earning assets ..............   464,588,243         6,835,212       5.94        444,033,396         7,778,487      7.08
                                          ------------      ------------                  ------------      ------------
     Other assets ......................    65,467,030                                      62,803,255
                                          ------------                                    ------------
     Total assets ......................  $530,055,273                                    $506,836,651
                                          ============                                    ============
Liabilities
   Savings and
     transaction accounts ..............  $ 56,122,785           146,944       1.06%      $ 85,093,163           504,726      2.41%
   Time deposits .......................   282,966,196         2,326,878       3.33        219,100,830         2,613,501      4.84
   Other borrowings ....................    91,883,529           896,515       3.96         91,931,060           935,692      4.13
   Subordinated debt ...................    10,310,000            74,052       2.91         10,310,000           156,973      6.17
                                          ------------      ------------                  ------------      ------------
     Total interest bearing
       liabilities .....................   441,282,510         3,444,389       3.17        406,435,053         4,210,892      4.20
                                                            ------------                                    ------------
   Non-interest bearing
     liabilities .......................    33,832,893                                      39,278,543
                                          ------------                                    ------------
     Total liabilities .................   475,115,403         3,444,389       2.94        445,713,596         4,210,892      3.83
                                          ------------      ------------                  ------------      ------------
   Shareholders' equity ................    54,939,870                                      61,123,055
                                          ------------                                    ------------
     Total liabilities and
       shareholders' equity ............  $530,055,273                                    $506,836,651
                                          ============                                    ============
     Net interest
       income/margin (5) ...............                    $  3,390,823       2.84%                        $  3,567,595      3.13%
                                                            ============                                    ============
     Net interest spread (6) ...........                                       2.77%                                          2.88%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non-accruing loans.
(4)  Includes loan fees of $176,576 in 2009 and $254,658 in 2008.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected above, for the three months ended March 31, 2009, the average yield
on earning assets was 5.94 percent,  while the average cost of interest  bearing
liabilities  was 3.17  percent.  For the three months ended March 31, 2008,  the
average  yield on  earning  assets  was 7.08  percent  and the  average  cost of
interest  bearing  liabilities  was 4.20 percent.  The decreases in the yield on
earning assets and the cost of interest  bearing  liabilities is attributable to
decreases  in market rates of  interest.  The net interest  margin for the three
months  ended March 31, 2009 was 2.84  percent  compared to 3.13 percent for the
three Item 2. - Management's  Discussion and Analysis of Financial Condition and


                                      -11-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Results of Operations - continued

Net Interest Income - continued

months ended March 31, 2008. The decline in the net interest margin is primarily
attributable  to increases in average  nonaccrual  loans and average  other real
estate owned of $9.1  million and $2.4  million,  respectively,  between the two
periods.

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

<TABLE>
<CAPTION>
                                                                                    Analysis of Changes in Net Interest Income
                                                                                     For the three months ended March 31, 2009
                                                                                   Versus three months ended March 31, 2008(1)
                                                                                   -------------------------------------------
                                                                              Volume                  Rate               Net Change
                                                                              ------                  ----               ----------
Interest income:

<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $       612           $   (11,698)          $   (11,086)
   Investments - taxable .........................................              165,640              (230,254)              (64,614)
   Investments - non taxable(2) ..................................               (3,600)              (48,540)              (52,140)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              162,652              (290,492)             (127,840)
     Net loans (3) ...............................................              147,093              (962,528)             (815,435)
                                                                            -----------           -----------           -----------
     Total interest income .......................................              309,745            (1,253,020)             (943,275)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................             (171,836)             (185,946)             (357,782)
   Time deposits .................................................              761,805            (1,048,428)             (286,623)
   Other borrowings ..............................................                 (484)              (38,693)              (39,177)
   Subordinated debt .............................................                    -               (82,921)              (82,921)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              589,485            (1,355,988)             (766,503)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (279,740)          $   102,968           $  (176,772)
                                                                            ===========           ===========           ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Includes  loan fees of $ 176,576 and  $254,658  for the three  months ended
     March 31, 2009 and 2008.

Noninterest Income and Expenses

Noninterest  income for the three  months  ended  March 31,  2009 was  $641,183,
compared to $794,545 for the three months ended March 31, 2008.  The decrease is
primarily  attributable to a decrease of $153,000 in gains on sales of available
for sale securities, due to there being no sales of such securities in 2009.

Noninterest  expenses for the three months ended March 31, 2009 were  $3,569,228
compared to $2,922,837  for the three months ended March 31, 2008.  The increase
is due  primarily  to increases in salaries  and  employment  benefits  totaling
$343,000,  increases in  professional  fees totaling  $93,000,  and increases in
other  expenses  totaling  $124,000.  The  increase in salaries  and  employment
benefits is due primarily to a $309,000 severance payout to the Company's former
Chief Operating  Officer  accrued for during the first quarter.  The increase in
professional fees is primarily due to increased consulting fees during the first
three  months of 2009.  The  increase  in other  expenses  is due  primarily  to
increases of $74,000 in deposit related chargeoffs,  $34,000 in costs associated
with loan foreclosures, and $29,000 in FDIC insurance costs.


                                      -12-
<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 $206.1 million,  or 55.2% of
total  deposits as of March 31, 2009.  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 federal funds  accommodation
lines totaling $17 million with Nexity Bank,  $10 million with Silverton  Bridge
Bank,  $10 million with First  Tennessee  Bank,  $10 million  with US Bank,  $10
million with Fifth Third Bank, and $5 million with Zions Bank.

Loans
Nonfarm,  nonresidential  real estate loans totaling $98.1 million made up 25.0%
of total  loans at March  31,  2009.  Construction  and land  development  loans
totaled $81.8  million,  or 20.9% of the loan  portfolio.  All other real estate
loans (primarily 1-4 family  residential  loans)  comprised  $177.4 million,  or
45.3% of the portfolio.  Commercial and industrial  loans totaled $30.7 million,
or 7.8% of total loans. Finally, installment,  consumer, and other loans totaled
$3.6  million,  or 1.0% of total loans.  Total loans  decreased by $12.9 million
during the first  quarter,  due  primarily to decreases of $6.7 million and $5.6
million in nonfarm,  nonresidential  real estate loans and construction and land
development loans, respectively.

At March 31,  2009,  the Company had $1.5  million in loans 90 days past due and
still  accruing  interest,  $2.9 million in other real estate  owned,  and $11.4
million of non-accruing loans. The majority of non-accruing loans are secured by
real estate.  The Company's total balance of problem loans consists primarily of
construction and land development loans, loans secured by 1-4 family residences,
commercial real estate loans,  and commercial and industrial  loans. The primary
risk of  loss  in  these  loans  is a  potential  deterioration  of real  estate
collateral  values.  At December 31, 2008, the Company had $5.4 million of loans
90 days past due and still accruing interest,  $2.1 million in other real estate
owned,  and $8.9 million of  non-accruing  loans. At March 31, 2008, the Company
had no loans 90 days past due and still  accruing  interest,  $347,000  in other
real estate owned,  and $5.3 million of  non-accruing  loans.  The allowance for
loan losses was 1.71% of total loans as of March 31, 2009,  compared to 1.83% as
of December 31, 2008 and 1.10% as of March 31, 2008. For the quarter ended March
31, 2009, the Company  recorded a loan loss provision of $100,000  compared to a
loan loss  provision  of $381,000  for the quarter  ended  March 31,  2008.  The
current  year's loan loss provision is the result of an increase of $2.4 million
in nonaccrual loans during the first quarter,  as well as first quarter net loan
chargeoffs totaling $812,000. During the first quarter of 2008, the Company made
a loan loss provision of $381,000 due to increases in total loans outstanding of
$6.9 million and nonaccrual  loans of $4.4 million during the first quarter,  in
addition to $439,000 in first quarter loan chargeoffs.

In  management's  opinion,  the  allowance for loan losses is adequate to absorb
estimated  losses  inherent in our Company's  loan  portfolio.  In reviewing the
adequacy of the allowance for loan losses at each quarter end,  management takes
into  consideration the historical loan losses we experienced,  current economic
conditions  affecting the ability of our borrowers to repay, the volume of loans
and the trends in delinquent,  nonaccruing, and potential problem loans, and the
quality of collateral  securing  nonperforming  and problem loans. In estimating
the amount needed in the  allowance,  management  relies  heavily on real estate
appraisals,  which are themselves  estimates  prepared by third  parties.  After
charging off all known  losses,  management  considers  the  allowance  for loan
losses  adequate to cover its estimate of inherent  losses in the loan portfolio
as of March 31, 2009.


                                      -13-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Loans - continued

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

Balance at December 31, 2008 ................................       $ 7,410,116
Current Year Loan Loss Provision ............................           100,000
Charge- offs:
     Domestic:
       Construction and land development ....................          (179,078)
       1-4 family residential ...............................          (527,622)
       Commercial and industrial ............................          (101,204)
       Installment loans to individuals .....................            (4,736)
     Foreign: ...............................................                 -
Recoveries:
       Commercial, financial, and agricultural ..............               405
                                                                    -----------
Balance at March 31, 2009 ...................................       $ 6,697,881
                                                                    ===========

<TABLE>
<CAPTION>
                                                                                                          Allowance For Loan Loss
                                                                                                         Allocation as a Percentage
Balance at March 31, 2009 Applicable to:                                               Amount                 of the whole
                                                                                     ----------         ----------------------------
<S>                                                                                  <C>                         <C>
        Real estate- commercial .............................................        $  700,950                   10.47%
        Real estate- construction and land development ......................         3,331,105                   49.73
        Real estate- 1-4 family residential .................................         1,187,197                   17.72
        Commercial and industrial ...........................................         1,117,125                   16.68
        Installment loans to individuals and other ..........................            63,587                    0.95
Foreign .....................................................................                 -                       -
Unallocated .................................................................           297,917                    4.45
                                                                                     ----------                  ------
Total .......................................................................        $6,697,881                  100.00%
                                                                                     ==========                  ======
</TABLE>

Management identifies and maintains a list of potential problem loans. These are
loans that are still accruing interest and are not included in nonaccrual status
and are not past due 90 days or more. A loan is added to the  potential  problem
list when management becomes aware of information about possible credit problems
of the borrower  which raises  serious doubts as to the ability of such borrower
to comply with the current loan  repayment  terms.  At March 31, 2009  potential
problem loans totaled $10,175,559.  Management closely tracks the current values
of real estate collateral when assessing the collectibility of problem loans.

Deposits

Deposits  increased $6.5 million during the first three months of 2009 to $373.3
million at March 31, 2009.  The increase was  attributable  to increases of $5.2
million and $2.6 million in interest bearing and noninterest bearing transaction
accounts, respectively, as well as decreases of $2.4 million and $2.1 million in
retail  time  deposits  and money  market and  savings  accounts,  respectively.
Additionally, brokered deposits increased by $3.2 million during the period. The
changes were  consistent  with the  Company's  strategy to build its base of fee
generating  transaction  accounts while decreasing its reliance on more interest
rate sensitive retail time deposits.  Most of the Company's money market deposit
account balance is rate sensitive,  as it is tied to the federal funds rate, and
the decline in total money  market and saving  accounts is  attributable  to the
continued historically low federal funds rate of 25 basis points seen throughout
the first quarter of the year.

                                      -14-
<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).   FHLBA  Advances  are
collateralized  by pledged FHLBA stock and certain  residential  mortgage loans.
FHLBA advances are summarized as follows:

               Maturity                      Rate                    Balance
           -----------------                ------              ---------------
           September 2010                    5.55%              $     7,000,000
           November 2010                     3.24%                    3,000,000
           February 2011                     1.26%                    4,500,000
           March 2011                        2.96%                    7,500,000
           September 2013                    4.75%                   10,000,000
           June 2014                         3.92%                    2,000,000
           October 2016                      4.25%                    5,000,000
           November 2016                     4.08%                    5,000,000
           January 2017                      4.35%                    5,000,000
           January 2017                      4.40%                    5,000,000
           January 2017                      4.46%                    5,000,000
           January 2017                      4.60%                    5,000,000
           March 2018                        2.33%                    5,000,000
           April 2018                        3.03%                    5,000,000
                                                                ---------------

           Balance                                              $    74,000,000
                                                                ===============

Junior Subordinated Debentures

On May 3,  2002,  December  16,  2002,  and August 5,  2005,  in three  separate
transactions,  Southcoast  Capital Trust I, II, and III (the "Capital  Trusts"),
non-consolidated  subsidiaries of the Company, issued and sold a total of 21,655
floating rate  securities,  with a $1,000  liquidation  amount per security (the
"Capital  Securities").  Institutional  buyers  bought  21,000  of  the  Capital
Securities  denominated as preferred securities and the Company bought the other
655 Capital Securities which are denominated as common securities.  The proceeds
of those  sales,  $21.7  million,  were used by the Capital  Trusts to buy $21.7
million of junior subordinated debentures from the Company which are reported on
its  consolidated   balance  sheets.   The  Capital  Securities  mature  or  are
mandatorily  redeemable  upon maturity on June 30, 2032,  December 16, 2032, and
September  30,  2035,  respectively,  or upon  earlier  optional  redemption  as
provided  in the  indenture.  The  Company  had or has the right to  redeem  the
Capital Securities in whole or in part, on or after June 30, 2007,  December 30,
2007, and September 30, 2010. The Company may also redeem the capital securities
prior to such dates upon occurrence of specified conditions and the payment of a
redemption  premium.  During 2007 the Company  exercised its right to redeem the
Capital  Securities issued by Southcoast  Capital Trust I and Southcoast Capital
Trust II. As a result the Company retired total debt related to these securities
of $11,345,000.  See Note 11 to the  consolidated  financial  statements and the
information set forth in Exhibit 13 under the caption  "Management's  Discussion
and  Analysis  of  Financial   Condition  and  Results  of  Operations-   Junior
Subordinated  Debentures"  filed with our Form 10-K for the year ended  December
31,  2008,  for more  information  about  the terms of the  junior  subordinated
debentures.

The securities issued by Southcoast Capital Trust III were effectively converted
from a floating  rate to a fixed rate  through the use of an interest  rate swap
agreement.  The  agreement  provides for the Company to make payments at a fixed
rate of 6.32% in exchange for receiving payments at a variable rate (three month
LIBOR  plus  150  basis  points).  See  Note  12 to the  consolidated  financial
statements  filed with our Form 10-K for the year ended  December 31, 2008,  for
more information about the terms of the rate swap agreement.


                                      -15-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources

The capital  base for the  Company  decreased  by  $587,000  for the first three
months of 2009, due primarily to other comprehensive loss of $925,000, which was
partially  offset by net income of $303,000 and proceeds from stock issuances of
$35,000  through our Employee  Stock Purchase Plan. The Company's Tier 1 capital
to average assets ratio was 12.57 percent as of March 31, 2009 compared to 12.54
percent as of December 31, 2008.

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.   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 the Company. 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. The
Company 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 March 31, 2009,  the Company and the
Bank exceeded our capital requirements levels as shown in the following table.

<TABLE>
<CAPTION>
                                                                                        Capital Ratios
                                                                 ---------------------------------------------------------------
                                                                                      Well Capitalized    Adequately Capitalized
(Dollars in thousands)                                                 Actual             Requirement          Requirement
                                                                       ------             -----------          -----------
                                                                 Amount      Ratio     Amount      Ratio    Amount       Ratio
                                                                 ------      -----     ------      -----    ------       -----
The Bank
<S>                                                             <C>          <C>      <C>          <C>      <C>          <C>
  Total capital (to risk-weighted assets) ................      $55,788      14.75%   $37,834      10.00%   $30,267      8.00%
  Tier 1 capital (to risk-weighted assets) ...............       51,035      13.49%    22,700       6.00%    15,133      4.00%
  Tier 1 capital (to average assets) .....................       51,035       9.93%    25,709       5.00%    20,567      4.00%
The Company
  Total capital (to risk-weighted assets) ................      $66,677      18.13%       N/A        N/A    $31,605      8.00%
  Tier 1 capital (to risk-weighted assets) ...............       71,637      16.88%       N/A        N/A     15,802      4.00%
  Tier 1 capital (to average assets) .....................       71,637      12.57%       N/A        N/A     21,221      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 March 31,  2009,  we had issued
commitments  to extend credit of $25.8 million and standby  letters of credit of
$1.0  million  through  various  types  of  commercial   lending   arrangements.
Approximately  $23.1 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 March 31, 2009.

<TABLE>
<CAPTION>
                                                                   After One     After Three
                                                                    Through        Through                  Greater
                                                     Within One      Three         Twelve     Within One      Than
                                                       Month        Months        Months        Year        One Year         Total
                                                   -----------   -----------   -----------   -----------   -----------   -----------
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 2,682,829   $ 3,019,738   $ 9,662,915   $15,365,482   $10,433,885   $25,799,367
Standby letters of credit ......................       409,097         9,500       545,019       963,616         7,900       971,516
                                                   -----------   -----------   -----------   -----------   -----------   -----------

    Totals .....................................   $ 3,091,926   $ 3,029,238   $10,207,934   $16,329,098   $10,441,785   $26,770,883
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>


                                      -16-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Off Balance Sheet Risk - continued

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. - Quantitative and Qualitative Disclosures About Market Risk.

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2008, which was filed
with the Securities and Exchange Commission on March 5, 2009. There have been no
material  quantitative or qualitative  changes in market risk exposure since the
date of that filing.

Item 4. - Controls and Procedures.

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

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

PART II - OTHER INFORMATION

Item 6.  Exhibits

     10    Amended Salary Continuation Agreement between Southcoast Community
           Bank and L. Wayne Pearson (Incorporated by reference to Exhibit 99
           filed with Registrant's Current Report on Form 8-K filed April 3,
           2009).
     31-1  Rule 13a-14(a) Certifications of CEO
     31-2  Rule 13a-14(a) Certifications of CFO
     32    Section 1350 Certification

                                   SIGNATURES


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





Date:    May 8, 2009       By: s/L. Wayne Pearson
                              --------------------------------------------------
                              L. Wayne Pearson
                           Chief Executive Officer



Date:    May 8, 2009       By: s/William C. Heslop
                              --------------------------------------------------
                              William C. Heslop
                              Senior Vice President and Chief Financial Officer



                                      -17-
<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION

Exhibit Index

10       Amended Salary  Continuation  Agreement  between  Southcoast  Community
         Bank and L. Wayne  Pearson  (Incorporated  by  reference  to Exhibit 99
         filed  with  Registrant's  Current  Report on  Form 8-K filed  April 3,
         2009).


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.




                                      -18-