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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended June 30, 2010

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

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

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

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

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

                                 YES [X] NO [ ]

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

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

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

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

                                YES [ ] NO [X]

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

       4,569,826 shares of common stock, no par value, as of July 31, 2010


<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                      INDEX

<TABLE>
<CAPTION>

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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - June 30, 2010 and December 31, 2009....................................2

         Condensed Consolidated Statements of Income - Six months ended June 30, 2010 and 2009..........................3

         Condensed Consolidated Statements of Income - Three months ended June 30, 2010 and 2009........................4

         Condensed Consolidated Statements Changes in Shareholders' Equity and Comprehensive Income (Loss) -
           Six months ended June 30, 2010 and 2009......................................................................5

         Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2010 and 2009......................6

         Notes to Condensed Consolidated Financial Statements........................................................7-13

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................14-24

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................24

Item 4.  Controls and Procedures.......................................................................................24

PART II - OTHER INFORMATION

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

Signatures ............................................................................................................25

Exhibit Index..........................................................................................................26
</TABLE>



<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                      June 30,          December 31,
                                                                                                       2010                 2009
                                                                                                       ----                 ----
                                                                                                    (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $  40,834,223        $  40,790,143
     Federal funds sold ..................................................................             532,353              108,587
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................          41,366,576           40,898,730
   Investment securities
     Available for sale ..................................................................          68,692,147           60,775,809
     Federal Home Loan Bank Stock, at cost ...............................................           4,266,200            4,266,200
                                                                                                 -------------        -------------
       Total investment securities .......................................................          72,958,347           65,042,009
   Loans held for sale ...................................................................                   -              320,079
   Loans, net of allowance of $10,281,403 and $10,041,920 ................................         332,763,013          346,870,313
   Premises and equipment, net ...........................................................          22,957,726           22,692,344
   Other real estate owned, net ..........................................................           6,374,659            9,789,410
   Company owned life insurance ..........................................................          11,312,018           19,234,080
   Other assets ..........................................................................          10,780,428           16,560,328
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 498,512,767        $ 521,407,293
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  29,166,722        $  25,921,641
     Interest bearing ....................................................................         321,136,723          342,615,299
                                                                                                 -------------        -------------
       Total deposits ....................................................................         350,303,445          368,536,940
   Securities sold under agreements to repurchase ........................................          14,565,424            9,404,218
   Borrowings on cash value of Company owned life insurance ..............................                   -            7,640,636
   Federal Home Loan Bank Borrowings .....................................................          74,000,000           74,000,000
   Junior subordinated debentures ........................................................          10,310,000           10,310,000
   Other liabilities .....................................................................           2,840,121            6,434,707
                                                                                                 -------------        -------------
       Total liabilities .................................................................         452,018,990          476,326,501
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  4,557,748 shares
     outstanding at June 30, 2010 and
     4,542,023 at December 31, 2009) .....................................................          53,637,455           53,583,283
   Retained deficit ......................................................................          (5,366,694)          (6,108,846)
   Accumulated other comprehensive loss ..................................................          (1,776,984)          (2,393,645)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          46,493,777           45,080,792
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 498,512,767        $ 521,407,293
                                                                                                 =============        =============
</TABLE>







            See Notes to Condensed Consolidated Financial Statements


                                       2
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                     For the Six Months Ended
                                                                                                             June 30,
                                                                                                             --------
                                                                                                2010                       2009
                                                                                                ----                       ----
Interest income
<S>                                                                                         <C>                       <C>
   Loans, including fees ......................................................             $   9,550,362             $  11,796,181
   Investment securities ......................................................                 1,396,236                 1,432,091
   Cash and federal funds sold ................................................                    23,041                     5,664
                                                                                            -------------             -------------
       Total interest income ..................................................                10,969,639                13,233,936
                                                                                            -------------             -------------
Interest expense
   Deposits and borrowings ....................................................                 5,055,024                 6,604,029
                                                                                            -------------             -------------
Net interest income ...........................................................                 5,914,615                 6,629,907
Provision for loan losses .....................................................                 1,800,000                   550,000
                                                                                            -------------             -------------
Net interest income after provision for loan losses ...........................                 4,114,615                 6,079,907
                                                                                            -------------             -------------
Noninterest income
   Service fees on deposit accounts ...........................................                   543,652                   597,226
   Fees on loans sold .........................................................                    63,377                   165,504
   Gain on sale of available for sale securities ..............................                 1,618,959                   885,604
   Gain (loss) on sale of other real estate owned .............................                   640,113                   (11,936)
   Gain on sale of premises and equipment .....................................                   123,318                     5,413
   Rental income ..............................................................                   199,928                   157,922
   Company owned life insurance earnings ......................................                   207,905                   373,893
   Other ......................................................................                   112,072                   105,018
                                                                                            -------------             -------------
       Total noninterest income ...............................................                 3,509,324                 2,278,674
                                                                                            -------------             -------------
Noninterest expenses
   Salaries and employment benefits ...........................................                 3,320,558                 3,793,892
   Occupancy ..................................................................                   711,181                   713,068
   Furniture and equipment ....................................................                   727,761                   672,418
   Software ...................................................................                   197,546                   174,657
   Insurance ..................................................................                   394,421                   754,340
   Professional fees ..........................................................                   400,231                   449,172
   Travel and entertainment ...................................................                    84,501                   107,458
   Telephone, postage and supplies ............................................                   177,734                   189,387
   Impairment charges on other real estate owned ..............................                         -                   193,441
   Other operating expenses ...................................................                   630,129                   591,880
                                                                                            -------------             -------------
       Total noninterest expenses .............................................                 6,644,062                 7,639,713
                                                                                            -------------             -------------
Income before income taxes ....................................................                   979,877                   718,868
Income tax expense (benefit) ..................................................                   237,725                    (5,865)
                                                                                            -------------             -------------
Net income ....................................................................             $     742,152             $     724,733
                                                                                            =============             =============
Basic net income per common share .............................................             $         .16             $         .16
Diluted net income per common share ...........................................             $         .16             $         .16
Weighted average shares outstanding
   Basic ......................................................................                 4,553,903                 4,525,542
   Diluted ....................................................................                 4,553,903                 4,525,542
</TABLE>



            See Notes to Condensed Consolidated Financial Statements



                                       3
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                   For the Three Months Ended
                                                                                                            June 30,
                                                                                                            --------
                                                                                                  2010                    2009
                                                                                                  ----                    ----
Interest income
<S>                                                                                          <C>                       <C>
   Loans, including fees .......................................................             $   4,776,239             $   5,777,374
   Investment securities .......................................................                   708,724                   722,732
   Cash and federal funds sold .................................................                     9,322                     1,927
                                                                                             -------------             -------------
       Total interest income ...................................................                 5,494,285                 6,502,033
                                                                                             -------------             -------------
Interest expense
   Deposits and borrowings .....................................................                 2,461,572                 3,159,640
                                                                                             -------------             -------------
Net interest income ............................................................                 3,032,713                 3,342,393
Provision for loan losses ......................................................                   800,000                   450,000
                                                                                             -------------             -------------
Net interest income after provision for loan losses ............................                 2,232,713                 2,892,393
                                                                                             -------------             -------------
Noninterest income
   Service fees on deposit accounts ............................................                   285,465                   286,779
   Fees on loans sold ..........................................................                    44,906                    54,333
   Gain on sale of available for sale securities ...............................                   783,547                   885,604
   Gain (loss) on sale of other real estate owned ..............................                    77,813                         -
   Gain on sale of premises and equipment ......................................                   123,318                     5,413
   Rental income ...............................................................                    84,936                   123,615
   Company Owned Life Insurance earnings .......................................                   100,919                   188,537
   Other .......................................................................                    77,228                    47,210
                                                                                             -------------             -------------
       Total noninterest income ................................................                 1,578,132                 1,591,491
                                                                                             -------------             -------------
Noninterest expenses
   Salaries and employment benefits ............................................                 1,656,904                 1,727,623
   Occupancy ...................................................................                   316,185                   375,205
   Furniture and equipment .....................................................                   355,534                   344,987
   Software ....................................................................                   100,097                    91,551
   Insurance ...................................................................                   197,837                   630,957
   Professional fees ...........................................................                   214,491                   260,351
   Travel and entertainment ....................................................                    45,141                    63,610
   Telephone, postage, and supplies ............................................                    86,968                    86,908
   Impairment charges on other real estate owned ...............................                         -                   147,441
Other operating expenses .......................................................                   377,495                   295,152
                                                                                             -------------             -------------
       Total noninterest expenses ..............................................                 3,350,652                 4,023,785
                                                                                             -------------             -------------
Income before income taxes .....................................................                   460,193                   460,099
Income tax .....................................................................                    80,951                    38,500
                                                                                             -------------             -------------
Net income .....................................................................             $     379,242             $     421,599
                                                                                             =============             =============
Basic net income per common share ..............................................             $         .08             $         .09
Diluted net income per common share ............................................             $         .08             $         .09
Weighted average shares outstanding
   Basic .......................................................................                 4,557,748                 4,529,153
   Diluted .....................................................................                 4,557,748                 4,529,153
</TABLE>



            See Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
          Condensed Consolidated Statement of Changes in Shareholders'
                     Equity and Comprehensive Income (Loss)
                 For the six months ended June 30, 2010 and 2009
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                              Common Stock               Retained      comprehensive
                                                              ------------               earnings         income
                                                         Shares          Amount         (deficit)          (loss)          Total
                                                         ------          ------         ---------          ------          -----
<S>                                                    <C>           <C>              <C>              <C>             <C>
Balance, December 31, 2008 .....................       4,513,463     $ 53,441,978     $  2,814,566     $ (1,023,440)   $ 55,233,104

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

   Other comprehensive loss
     net of taxes of $660,883
   Unrealized holding losses
     on securities available for sale ..........                                                         (1,174,904)     (1,174,904)

   Less reclassification adjustment for
     gains included in net income, net of
     taxes of $318,818 .........................                                                          (566,786)        (566,786)
                                                                                                                       ------------

   Comprehensive loss ..........................                                                                         (1,016,957)

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

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

Balance, December 31, 2009 .....................       4,542,023     $ 53,583,283     $ (6,108,846)    $ (2,393,645)   $ 45,080,792

   Net income for the period ...................                                           742,152                          742,152

   Other comprehensive income
     net of taxes of $929,696
   Unrealized holding gains
     on securities available for sale ..........                                                          1,652,795       1,652,795

   Less reclassification adjustment for
     gains included in net income, net of
     taxes of $ 582,825 ........................                                                        (1,036,134)      (1,036,134)
                                                                                                                       ------------


   Comprehensive income ........................                                                                          1,358,813

   Employee stock purchase plan ................          15,725           54,172                                            54,172
                                                    ------------     ------------     ------------     ------------    ------------

Balance, June 30, 2010 .........................       4,557,748     $ 53,637,455     $ (5,366,694)    $ (1,776,984)   $ 46,493,777
                                                    ============     ============     ============     ============    ============
</TABLE>











            See Notes to Condensed Consolidated Financial Statements


                                       5
<PAGE>


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


<TABLE>
<CAPTION>
                                                                                                        For the six months ended
                                                                                                                June 30,
                                                                                                                --------
                                                                                                        2010                  2009
                                                                                                        ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $    742,152         $    724,733
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
       (Increase) decrease in deferred income taxes ......................................             330,459           (1,394,279)
       Provision for loan losses .........................................................           1,800,000              550,000
       Depreciation and amortization .....................................................             544,564              637,477
       Discount accretion and premium amortization .......................................             175,079              (33,171)
       Gain on sale of securities ........................................................          (1,618,959)            (885,604)
       Gain on sale of premises and equipment ............................................            (123,318)              (5,413)
       (Gain) loss on sale of other real estate owned ....................................            (640,113)              11,936
       Impairment charges on other real estate owned .....................................                   -              193,441
       Originations of loans held for sale ...............................................         (15,942,036)         (34,883,866)
       Proceeds from sales of loans held for sale ........................................          16,262,115           34,320,809
       Increase in value of Company Owned Life Insurance .................................            (207,905)            (373,893
       (Increase) decrease in other assets ...............................................           5,412,758          (12,102,612)
       Increase (decrease) in other liabilities ..........................................          (3,594,586)             280,589
                                                                                                  ------------         ------------

         Net cash provided by (used for) operating activities ............................           3,140,210          (12,959,853)
                                                                                                  ------------         ------------

Investing activities
   Sales of Federal Home Loan Bank stock .................................................                   -              243,300
   Purchases of investment securities available-for-sale .................................         (82,675,376)         (26,222,778)
   Sales, calls, and maturities of investment securities available-for-sale ..............          76,856,262           28,973,699
   Proceeds from sales of premises and equipment .........................................             823,318               10,433
   Purchases of premises and equipment ...................................................          (1,509,946)            (290,911)
   Proceeds from sales of other real estate owned ........................................           6,605,686              838,421
   Proceeds from liquidation of Company Owned Life Insurance .............................           8,129,967                    -
   Capital expenditures to other real estate owned .......................................                   -              (37,191)
   Net decrease in loans .................................................................           9,756,478           11,601,402
                                                                                                  ------------         ------------

         Net cash provided by investing activities .......................................          17,986,389           15,116,375
                                                                                                  ------------         ------------

Financing activities
   Decrease in borrowings ................................................................          (2,479,430)          (7,908,975)
   Proceeds from issuances of stock ......................................................              54,172               73,210
   Net decrease in deposits ..............................................................         (18,233,495)          (6,765,302)
                                                                                                  ------------         ------------

         Net cash used for financing activities ..........................................         (20,658,753)         (14,601,067)
                                                                                                  ------------         ------------

         Increase (decrease) in cash and cash equivalents ................................             467,846          (12,444,545)

Cash and cash equivalents, beginning of period ...........................................          40,898,730           22,561,570
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 41,366,576         $ 10,117,025
                                                                                                  ============         ============

Cash paid during the year for:
   Income taxes ..........................................................................        $    596,367         $  1,001,779
   Interest ..............................................................................        $  4,786,578         $  6,997,722
</TABLE>


                                       6
<PAGE>

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

Note 1 - Basis of Presentation

The accompanying unaudited condensed consolidated 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

The Company calculates  earnings per share in accordance with generally accepted
accounting  principles,  which  specify  the  computation,   presentation,   and
disclosure  requirements for earnings per share (EPS) for entities with publicly
held  common  stock  or  potential  common  stock  such  as  options,  warrants,
convertible securities, or contingent stock agreements if those securities trade
in a public market.

They also specify the computation and  presentation  requirements for both basic
EPS and diluted EPS for entities with complex capital structures. Basic earnings
per share are computed by dividing  net income or loss by the  weighted  average
common  shares  outstanding.  Diluted  earnings  per  share  is  similar  to the
computation of basic earnings per share except that the denominator is increased
to  include  the  number  of  additional  common  shares  that  would  have been
outstanding  if the  dilutive  potential  common  shares  had been  issued.  The
dilutive effect of options  outstanding under the Company's stock option plan is
reflected in diluted  earnings per share by  application  of the treasury  stock
method.  These options have expired and the Company has no dilutive  instruments
outstanding.

Note 4 - 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 March 2010, guidance related to derivatives and hedging was amended to exempt
embedded credit derivative  features related to the transfer of credit risk from
potential  bifurcation and separate  accounting.  Embedded  features  related to
other types of risk and other embedded credit derivative features are not exempt
from  potential  bifurcation  and  separate  accounting.   The  amendments  were
effective for the Company on July 1, 2010. These amendments had no impact on the
financial statements.

Income  Tax  guidance  was  amended  in  April  2010  to  reflect  an SEC  Staff
Announcement   after  the  President   signed  the  Health  Care  and  Education
Reconciliation  Act of 2010  on  March  30,  2010,  which  amended  the  Patient
Protection  and Affordable  Care Act signed on March 23, 2010.  According to the
announcement,  although  the bills were  signed on  separate  dates,  regulatory
bodies would not object if the two Acts were considered  together for accounting
purposes.  This view is based on the SEC staff's understanding that the two Acts
together  represent  the current  health care  reforms as passed by Congress and
signed  by  the  President.  The  amendment  had  no  impact  on  the  financial
statements.


In April 2010,  guidance was issued related to accounting for acquired  troubled
loans that are subsequently  modified. The guidance provides that if these loans
meet the  critieria to be accounted for within a pool,  modifications  to one or
more of these loans does not result in the removal of the modified loan from the
pool even if the  modification  would  otherwise be  considered a troubled  debt
restructuring. The pool of assets in which the loan is included will continue to
be considered for  impairment.  The amendments do not apply to loans not meeting



                                       7
<PAGE>

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

Note 4 - Recently Issued Accounting Standards- (continued)

the criteria to be accounted for within a pool.  These  amendments are effective
for  modifications  of loans  accounted for within pools  occurring in the first
interim or annual period ending on or after July 15, 2010.  These amendmends had
no impact on the financial statements.

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 5 - Investment Securities

The amortized cost and fair value of investment securities are as follows:
<TABLE>
<CAPTION>
                                                                                        June 30, 2010
                                                                                        -------------
                                                        Amortized                      Gross Unrealized                 Estimated
                                                           Cost                  Gains                 Losses           Fair Value
                                                           ----                  -----                 ------           ----------
Available for sale
<S>                                                    <C>                   <C>                   <C>                   <C>
   Mortgage backed .........................           $58,799,413           $   289,074           $   313,604           $58,774,883
   Municipal securities ....................             7,894,280               109,757                97,299             7,906,738
   Other ...................................             4,655,554                     -             2,645,028             2,010,526
                                                       -----------           -----------           -----------           -----------
     Total .................................           $71,349,247           $   398,831           $ 3,055,931           $68,692,147
                                                       ===========           ===========           ===========           ===========
<CAPTION>
                                                                                      December 31, 2009
                                                                                      -----------------
                                                        Amortized                      Gross Unrealized                 Estimated
                                                           Cost                  Gains                 Losses           Fair Value
                                                           ----                  -----                 ------           ----------
Available for sale
<S>                                                    <C>                   <C>                   <C>                   <C>
   Mortgage backed .........................           $52,239,896           $   415,749           $   801,319           $51,854,326
   Municipal securities ....................             7,195,637               101,185                81,095             7,215,727
   Other ...................................             4,650,721                     -             2,944,965             1,705,756
                                                       -----------           -----------           -----------           -----------
     Total .................................           $64,086,254           $   516,934           $ 3,827,379           $60,775,809
                                                       ===========           ===========           ===========           ===========
</TABLE>

The following tables show gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at June 30, 2010 and December 31, 2009.
<TABLE>
<CAPTION>
Available for Sale                                                           June 30, 2010
                                                                             -------------
                                            Less than                        Twelve months
                                          twelve months                         or more                           Total
                                          -------------                         -------                           -----
                                                       Unrealized                       Unrealized                        Unrealized
                                     Fair value          losses        Fair value         losses         Fair value          losses
                                     ----------          ------        ----------         ------         ----------          ------
<S>                                 <C>              <C>              <C>              <C>              <C>              <C>
  Mortgage backed ............      $ 4,978,658      $    21,476      $ 3,028,745      $   292,128      $ 8,007,403      $   313,604
  Municipal securities .......          921,813           57,072        1,430,990           40,227        2,352,803           97,299
  Other ......................                -                -        1,049,798        2,645,028        1,049,798        2,645,028
                                    -----------      -----------      -----------      -----------      -----------      -----------
      Total ..................      $ 5,900,471      $    78,548      $ 5,509,533      $ 2,977,383      $11,410,004      $ 3,055,931
                                    ===========      ===========      ===========      ===========      ===========      ===========
<CAPTION>
                                                                           December 31, 2009
                                                                           -----------------
                                            Less than                        Twelve months
                                          twelve months                         or more                           Total
                                          -------------                         -------                           -----
                                                       Unrealized                       Unrealized                        Unrealized
                                     Fair value          losses        Fair value         losses         Fair value          losses
                                     ----------          ------        ----------         ------         ----------          ------
<S>                                 <C>              <C>              <C>              <C>              <C>              <C>
  Mortgage backed ............      $15,072,875      $   454,116      $ 3,090,849      $   347,203      $18,163,724      $   801,319
  Municipal securities .......        2,025,865           25,516        1,416,119           55,579        3,441,984           81,095
  Other ......................                -                -          745,756        2,944,965          745,756        2,944,965
                                    -----------      -----------      -----------      -----------      -----------      -----------
      Total ....................    $17,098,740      $   479,632      $ 5,252,724      $ 3,347,747      $22,351,464      $ 3,827,379
                                    ===========      ===========      ===========      ===========      ===========      ===========
</TABLE>

                                       8
<PAGE>

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

Note 5 - Investment Securities - (continued)

Securities classified as  available-for-sale  are recorded at fair market value.
Unrealized  losses on securities in a continuous loss position for twelve months
or  more  totaled  $2,977,383,  or  eight  securities  comprising  97% of  total
unrealized losses, and $3,347,747,  or eight securities  comprising 87% of total
unrealized  losses,  at June 30, 2010 and December 31, 2009,  respectively.  The
Company does not intend to sell these  securities and it is more likely than not
that the Company will not be required to sell these  securities  before recovery
of their  amortized  cost.  The  Company  believes,  based on  industry  analyst
reports,  credit  ratings,  and its  own  other-than-temporary  loss  impairment
evaluations, that the deterioration in value is attributable to a combination of
changes in market  interest  rates and, in some cases,  the lack of liquidity in
these  securities  and is not in the credit quality of the issuer and therefore,
these losses are not considered other-than-temporary.

The  unrealized  loss  attributable  to  other  securities   relates  to  market
valuations on two individual pooled trust preferred securities. These securities
are  considered  Level 3 securities  in the fair value  hierarchy,  as they both
trade in less than liquid markets.  The valuations of these  securities  reflect
the  lack of  liquidity  in  these  securities.  One of the  securities  with an
amortized  cost  of $1.8  million  and  fair  value  of  $727,000  is  receiving
contractual  interest  payments,  while the other with an amortized cost of $1.9
million and fair value of $323,000 is receiving  payment-in-kind interest, which
consists of capitalization of interest amounts due on the security.  The Company
evaluates these securities each quarter for other-than-temporary loss impairment
based on projected cash flows. Due to the over-collateralized credit position of
the security  currently  receiving interest  payments,  no  other-than-temporary
impairment was recognized on this security.  The Company  performed a discounted
cash flow analysis on the security receiving  payment-in-kind  interest in order
to arrive at its conclusion of no  other-than-temporary  impairment.  Though the
Company  has  not  recorded  impairment  expense  on  either  security,  it  has
discontinued the accrual of interest on the security  receiving  payment-in-kind
interest and accounts for this security as a nonaccrual  asset. If , at a future
date,  contractual  principal and interest  payments resume on this security and
the  Company's  cash flow  analysis  continues  to show no  other-than-temporary
impairment,  this security may become eligible to be returned to accrual status.
The credit  quality of these  securities  is directly  related to the  financial
strength and ability to make  contractual  interest  payments of the  underlying
issuers in these securities,  most of which are banks. As such, these securities
may show  other-than-temporary  impairment  in future  periods if the  financial
condition of these underlying issuers deteriorates.

The amortized costs and fair values of investment  securities available for sale
at June 30,  2010 by  contractual  maturity  are shown in the  following  table.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
                                                                                                Amortized                    Fair
                                                                                                   Cost                      Value
                                                                                                   ----                      -----
<S>                                                                                            <C>                       <C>
  Due after one but within five years ..........................................               $         -               $         -
  Due after five but within ten years ..........................................                 1,829,921                 1,893,047
  Due after ten years ..........................................................                10,569,913                 7,874,217
  Mortgage backed ..............................................................                58,799,413                58,774,883
  Equity securities with no maturity ...........................................                   150,000                   150,000
                                                                                               -----------               -----------
    Total investment securities available-for-sale .............................               $71,349,247               $68,692,147
                                                                                               ===========               ===========
</TABLE>

Note 6 - Fair Value of Financial Instruments

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

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

Level 2 - Observable  inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities;  quoted prices in markets that are not active; or
other inputs that are  observable or can be  corroborated  by observable  market
data for  substantially  the full  term of the  assets or  liabilities.  Level 2

                                       9
<PAGE>

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

Note 6 - Fair Value of Financial Instruments - (continued)

assets and  liabilities  include  debt  securities  with quoted  prices that are
traded  less  frequently  than  exchange-traded  instruments,   mortgage  backed
securities, municipal bonds, corporate debt securities, and derivative contracts
whose value is determined  using a pricing model with inputs that are observable
in the market or can be derived  principally  from or corroborated by observable
market data. This category generally  includes certain derivative  contracts and
impaired loans.

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

Assets measured at fair value on a recurring basis are as follows as of June 30,
2010 and December 31, 2009 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                      June 30, 2010
                                                                                      -------------
                                                          Quoted market price       Significant other   Significant unobservable
                                                           in active markets        observable inputs            inputs
                                                              (Level 1)                 (Level 2)              (Level 3)
                                                              ---------                 ---------              ---------

<S>                                                           <C>                       <C>                    <C>
Mortgage backed securities ...........................        $          -              $ 58,775               $      -

Municipal securities .................................                   -                 7,907                      -

Other securities .....................................                   -                   460                  1,550

Loans held for sale ..................................                   -                     -                      -

Interest rate swap
 derivative instrument ...............................                   -                  (109)                     -
                                                              ------------              --------               --------
Total assets at fair value ...........................        $          -              $ 67,033               $  1,550
                                                              ============              ========               ========

<CAPTION>
                                                                                 December 31, 2009
                                                                                 -----------------
                                                          Quoted market price       Significant other   Significant unobservable
                                                           in active markets        observable inputs            inputs
                                                              (Level 1)                 (Level 2)              (Level 3)
                                                              ---------                 ---------              ---------

<S>                                                           <C>                       <C>                    <C>
Mortgage backed securities ...........................        $          -              $ 51,855               $      -

Municipal securities .................................                   -                 7,216                      -

Other securities .....................................                   -                   460                  1,245

Loans held for sale ..................................                   -                   320                      -

Interest rate swap
 derivative instrument ...............................                   -                  (329)                     -
                                                              ------------              --------               --------
Total assets at fair value ...........................        $          -              $ 59,522               $  1,245
                                                              ============              ========               ========
</TABLE>

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


                                       10
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)
Note 6 - Fair Value of Financial Instruments - (continued)
--------------------------------------------

Assets measured at fair value on a nonrecurring  basis are as follows as of June
30, 2010 and December 31, 2009 (amounts in thousands):
<TABLE>
<CAPTION>
                                                                                      June 30, 2010
                                                                                      -------------
                                                          Quoted market price       Significant other   Significant unobservable
                                                           in active markets        observable inputs            inputs
                                                              (Level 1)                 (Level 2)              (Level 3)
                                                              ---------                 ---------              ---------
<S>                                                           <C>                       <C>                    <C>
Impaired Loans .......................................        $          -              $ 24,710               $      -

Other Real
Estate Owned .........................................                   -                 6,375                      -
                                                              ------------              --------               --------
Total assets at fair value ...........................        $          -              $ 31,085               $
                                                              ============              ========               ========
<CAPTION>

                                                                                 December 31, 2009
                                                                                 -----------------
                                                          Quoted market price       Significant other   Significant unobservable
                                                           in active markets        observable inputs            inputs
                                                              (Level 1)                 (Level 2)              (Level 3)
                                                              ---------                 ---------              ---------
<S>                                                           <C>                       <C>                    <C>
Impaired Loans .......................................        $          -              $ 23,478               $      -

Other Real
Estate Owned .........................................                   -                 9,789                      -
                                                              ------------              --------               --------
Total assets at fair value ...........................        $          -              $ 33,267               $
                                                              ============              ========               ========
</TABLE>

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

The  following  table  reconciles  the  changes in  recurring  Level 3 financial
instruments  for  the six  months  ended  June  30,  2010  and  2009(amounts  in
thousands):

                                                               June 30,
                                                               --------
                                                         2010             2009
                                                         ----             ----
Beginning of Year Balance ...................          $ 1,245          $ 2,901
Discount Accretion ..........................                5                3
Principal Paydowns ..........................                -                4
Unrealized Gain (Loss) ......................              300           (1,820)
                                                       -------          -------
Ending Balance ..............................          $ 1,550          $ 1,088
                                                       =======          =======

The following is a description  of the valuation  methodologies  used for assets
and liabilities recorded at fair value.

Available for Sale Investment Securities

Investment  securities  available-for-sale  are  recorded  at  fair  value  on a
recurring  basis.  Fair  value  measurement  is based  upon  quoted  prices,  if
available.  If quoted prices are not  available,  fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows,  adjusted for the security's  credit rating,
prepayment assumptions and other factors such as credit loss assumptions.  Level
1 securities  include those traded on an active  exchange,  such as the New York
Stock Exchange,  U.S. Treasury  securities that are traded by dealers or brokers
in active  over-the-counter  markets and money market funds.  Level 2 securities
include  mortgage-backed  securities  issued by government  sponsored  entities,
municipal bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets.

                                       11
<PAGE>

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

Note 6 - Fair Value of Financial Instruments - (continued)

Loans Held for Sale

Mortgage  loans held for sale are carried at the lower of cost or market  value.
The  fair  value of  mortgage  loans  held  for sale is based on what  secondary
markets are currently offering for portfolios with similar  characteristics.  As
such,  the  Company  classifies  loans  subjected  to  nonrecurring  fair  value
adjustments as Level 2.

Derivative Financial Instruments

Currently,  the Company uses  interest  rate swaps and  interest  rate floors to
manage its interest rate risk. The valuation of these  instruments is determined
using  widely  accepted  valuation  techniques  including  discounted  cash flow
analysis on the expected cash flows of each derivative.  This analysis  reflects
the contractual terms of the derivatives,  including the period to maturity, and
uses observable market-based inputs,  including interest rate curves and implied
volatilities.  The fair values of interest rate swaps are  determined  using the
market standard methodology of netting the discounted future fixed cash receipts
and the discounted variable cash payments.  The variable cash payments are based
on an  expectation  of future  interest  rates  (forward  curves)  derived  from
observable  market  interest rate curves.  The Company has determined that these
inputs  used to value its  derivatives  fall  within  Level 2 of the fair  value
hierarchy.

The following is a description  of the valuation  methodologies  used for assets
and liabilities  that are not recorded at fair value,  but whose fair value must
be estimated and disclosed:

Loans

For  certain  categories  of loans,  such as variable  rate loans which  reprice
frequently and have no significant  change in credit risk, fair values are based
on the carrying amounts.  The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would  be made  to  borrowers  with  similar  credit  ratings  and for the  same
remaining  maturities.  Loans for which it is probable  that payment of interest
and principal will not be made in accordance with the  contractual  terms of the
loan agreement are considered impaired. Impaired loans are carried at the lesser
of their principal balance or their fair value. The Company considers individual
problem loans with principal balances of $250,000 or greater for impairment. The
fair  value of  impaired  loans  is  estimated  using  one of  several  methods,
including the present value of expected cash flows, market price of the loan, if
available,   or  value  of  the  underlying   collateral.   At  June  30,  2010,
substantially  all impaired loans were evaluated  based on the fair value of the
collateral.  Those  impaired  loans not  requiring an allowance  for loan losses
allocation   represent   loans  with  fair  values   exceeding   their  recorded
investments.  Impaired loans for which an allowance is established  based on the
fair value of collateral  require  classification  in the fair value  hierarchy.
When the fair value of collateral  is based on an  observable  market price or a
current  appraised  value, the Company records the impaired loan as nonrecurring
Level 2.

Other Real Estate Owned

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

 Deposits

 The fair value of demand  deposits,  savings,  and money market accounts is the
 amount payable on demand at the reporting date. The fair value of time deposits
 is estimated  using a discounted  cash flow  calculation  that applies  current
 interest rates to a schedule of aggregated expected maturities.


                                       12
<PAGE>


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

Note 6 - Fair Value of Financial Instruments - (continued)

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

<TABLE>
<CAPTION>
                                                                             June 30,                             December 31,
                                                                               2010                                  2009
                                                                               ----                                  ----
                                                                   Carrying             Fair              Carrying            Fair
                                                                    Amount              Value              Amount             Value
                                                                    ------              -----              ------             -----
Financial assets:
<S>                                                                <C>                <C>                <C>                <C>
   Cash and due from banks .............................           $ 40,834           $ 40,834           $ 40,790           $ 40,790
   Federal funds sold ..................................                532                532                109                109
   Investment securities ...............................             72,958             72,958             65,042             65,042
   Loans held for sale .................................                  -                  -                320                320
   Loans, gross ........................................            343,044            340,310            356,912            358,618
   Other Real Estate Owned, net ........................              6,375              6,375              9,789              9,789
Financial liabilities:
   Deposits ............................................            350,303            344,013            368,537            360,805
   Short term borrowings ...............................             14,565             14,565             17,045             17,045
   Advances from Federal Home Loan Bank ................             74,000             68,189             74,000             69,363
   Junior subordinated debentures ......................             10,310             10,310             10,310             10,310

                                                                    Notional             Fair             Notional            Fair
                                                                     Amount              Value             Amount             Value
                                                                     ------              -----             ------             -----
Financial instruments with off-
Balance sheet risk:
   Commitments to extend credit ..........................           $21,949             $   -            $21,996             $   -
   Standby letters of credit .............................               569                 -                767                 -
   Derivative instruments ................................            10,000              (109)            10,000              (329)
</TABLE>

Note 7 - Subsequent Events

Subsequent  events are events or transactions that occur after the balance sheet
date but before financial  statements are issued.  Recognized  subsequent events
are events or transactions  that provide  additional  evidence about  conditions
that existed at the date of the balance sheet,  including the estimates inherent
in the  process of  preparing  financial  statements.  Nonrecognized  subsequent
events are events that provide  evidence about  conditions that did not exist at
the date of the balance sheet but arose after that date. Management has reviewed
events  occurring  through the date the financial  statements were issued and no
subsequent events have occurred requiring accrual or disclosure.



                                       13
<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,  2009.  Results of
operations for the period ending June 30, 2010 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    the effect of agreements with regulatory  authorities,  which restrict
          various activities and impose additional  administrative  requirements
          without commensurate benefits;
     o    changes in the requirements of regulatory agencies;
     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 continue 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.

                                       14
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Results of Operations

The Company's net income for the six months ended June 30, 2010 was $742,152, or
$.16 per basic share, compared to $724,733, or $.16 per basic share, for the six
months ended June 30, 2009. The average number of basic shares  outstanding  for
the six months ending June 30, 2010 was 4,553,903  compared to 4,525,542 for the
six months ending June 30, 2009.

The  Company's net income for the three months ended June 30, 2010 was $379,242,
or $.08 per basic share,  compared to $421,599, or $.09 per basic share, for the
three months ended June 30, 2009. The average number of basic shares outstanding
for the three months  ending June 30, 2010 was  4,557,748  compared to 4,529,153
for the three months ending June 30, 2009.

Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets,
and is the principal source of the Company's  earnings.  Net interest income was
$5,914,615  for the six months ended June 30, 2010,  compared to $6,629,907  for
the six months ended June 30, 2009.

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

Average  earning  assets for the six months  ending June 30, 2010  decreased 6.6
percent to $425.1  million from the $454.9  million  reported for the six months
ending June 30,  2009.  The  decrease  was  attributable  to a decrease of $55.2
million in average  loans,  partially  offset by an increase of $25.4 million in
average total  investments and federal funds sold. The decrease in average loans
between the two periods was due to a slower  lending  environment  brought on by
the  economic  downturn  and  increased  nonaccrual  loans and other real estate
owned.  Average nonaccrual loans totaled $23.8 million and $12.8 million for the
six months  ending  June 30,  2010 and 2009,  respectively.  Average  other real
estate owned  totaled  $9.2  million and $3.2 million for the six months  ending
June 30,  2010 and 2009,  respectively.  Additionally,  the Company had net loan
chargeoffs of $11.9 million during 2009,  further reducing  average  outstanding
loan balances.

Average  interest  bearing  liabilities  for the six months  ended June 30, 2010
decreased 1.9 percent to $428.2 million from the $436.4 million reported for the
six months ended June 30, 2009.  The decrease was  attributable  to decreases of
$22.3  million and $5.0 million in average time  deposits and other  borrowings,
respectively.  These  decreases  were  partially  offset by an increase of $19.0
million in average  savings and  transaction  accounts.  The decrease in average
time deposits was primarily  attributable to a $20.9 million decrease in average
brokered and  wholesale  time  deposits.  The decrease in other  borrowings  was
primarily  attributable to decreases of $2.4 million and $2.3 million in Federal
Home Loan Bank Borrowings and federal funds purchased, respectively.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive  segments of the Company's balance sheets for the six months
ended June 30, 2010 and 2009.


                                       15
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - (continued)
<TABLE>
<CAPTION>
                                                      For the six months ended                         For the six months ended
                                                          June 30, 2010                                    June 30, 2009
                                                          -------------                                    -------------
                                         Average             Income/        Yield/        Average             Income/       Yield/
                                         Balance             Expense       Rate(1)        Balance             Expense       Rate(1)
                                         -------             -------       -------        -------             -------       -------
Assets
<S>                                 <C>                  <C>                <C>      <C>                  <C>                 <C>
   Cash and Federal funds sold .... $    18,366,869      $      23,041      0.25%    $      9,315,334     $       5,664       0.12%
   Investments - taxable ..........      75,859,098          1,233,045      3.28           49,687,933         1,064,301       4.32
   Investments - nontaxable (2) ...       7,547,882            254,986      6.81           17,328,208           574,672       6.69
                                    ---------------      -------------               ----------------     -------------

     Total investments and
       federal funds sold .........     101,773,849          1,511,072      2.99           76,331,275         1,644,637       4.34
   Loans (3) (4) ..................     323,352,663          9,550,362      5.94          378,591,349        11,796,181       6.26
                                      -------------      -------------                  -------------      ------------

     Total interest earning assets      425,126,512         11,061,434      5.23%         454,922,624        13,440,818       5.94%
                                                         -------------                                    -------------
     Other assets .................      82,818,049                                        69,936,467
                                    ---------------                                  ----------------
     Total assets ................. $   507,944,561                                  $    524,859,091
                                    ===============                                  ================
Liabilities
   Savings and
     transaction accounts ......... $    78,689,163            615,202      1.58%    $     59,644,733           360,971       1.22%
   Time Deposits ..................     253,355,162          2,560,174      2.04          275,619,869         4,323,787       3.16
   Other borrowings ...............      85,811,993          1,561,928      3.67           90,833,497         1,601,297       3.56
   Subordinated Debt ..............      10,310,000            317,720      6.21           10,310,000           317,974       6.22
                                    ---------------      -------------               ----------------     -------------
     Total interest bearing
       liabilities ................     428,166,318          5,055,024      2.38          436,408,099         6,604,029       3.05
                                                         -------------                                    -------------
   Non-interest bearing
     liabilities ..................      33,990,958                                        33,689,761
                                    ---------------                                  ----------------
     Total liabilities ............     462,157,276          5,055,024      2.21         470,097,860          6,604,029       2.83
                                                         -------------                                    -------------
   Equity .........................      45,787,285                                        54,761,231
                                    ---------------                                  ----------------
     Total liabilities
       and equity ................. $   507,944,561                                  $    524,859,091
                                    ===============                                  ================
     Net interest .................
       income/margin (5) ..........                      $   6,006,410      2.85%                         $   6,836,789       2.92%
                                                         =============                                    =============
     Net interest spread (6) ......                                         2.85%                                             2.89%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include nonaccruing loans.
(4)  Income includes loan fees of $225,121 in 2010 and $356,176 in 2009.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.

As shown  above,  for the six months  ended June 30, 2010 the  average  yield on
earning  assets was 5.23  percent,  while the average  cost of interest  bearing
liabilities was 2.38 percent. For the six months ended June 30, 2009 the average
yield  on  earning   assets  was  5.94   percent   and  the   average   cost  of
interest-bearing  liabilities was 3.05 percent. The decrease in the asset yields
and average rates paid is due to market  interest rate  decreases  over the last
year. The net interest  margin is computed by annualizing  year to date interest
income and interest expense,  taking the difference,  and dividing the resulting
figure by average interest  earning assets.  The net interest margin for the six
months ended June 30, 2010 was 2.85 percent compared to 2.92 percent for the six
months ended June 30, 2009. The decrease in the net interest margin is primarily
attributable to a decrease in average  interest  earning assets of $29.8 million
between the two periods which was partially  offset by an $8.2 million  decrease
in average interest bearing  liabilities  between the two periods.  The combined
increase of $17.0 million  between the two periods in average  nonaccrual  loans

                                       16
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

and other real  estate  owned was the primary  cause of the  decrease in average
interest  earning  assets  between the two  periods.  The cost of average  total
liabilities was 2.21 percent and 2.83 percent for the six months ending June 30,
2010 and 2009, respectively.  Average earning assets for the three months ending
June 30, 2010  decreased 5.0 percent to $423.3  million from the $445.3  million
reported  for  the  three  months  ending  June  30,  2009.   The  decrease  was
attributable to a decrease of $51.0 million in average loans,  partially  offset
by a $29.0 million increase in average investments and federal funds sold.

Average interest  bearing  liabilities for the three months ending June 30, 2010
decreased 1.6 percent to $424.8 million from the $431.5 million reported for the
three months  ending June 30,  2009.  The change was due to decreases in average
time  deposits  and  other   borrowings  of  $22.0  million  and  $2.4  million,
respectively,  between  the two  periods,  partially  offset by an  increase  in
average savings and transaction accounts of $17.7 million.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended June 30, 2010 and 2009.

<TABLE>
<CAPTION>
                                              For the three months ended                     For the three months ended
                                                       June 30, 2010                                 June 30, 2009
                                                       -------------                                 -------------
                                          Average        Income/       Yield/          Average          Income/        Yield/
                                          Balance        Expense       Rate(1)         Balance          Expense        Rate(1)
                                          -------        -------       -------         -------          -------        -------
Assets
<S>                                  <C>               <C>               <C>        <C>               <C>               <C>
   Cash and Federal funds sold ....  $  20,909,295     $     9,322       0.18%      $   7,999,531     $     1,927       0.10%
   Investments - taxable ..........     77,116,488         624,820       3.25          51,317,628         538,603       4.21
   Investments - nontaxable (2) ...      7,693,207         131,100       6.84          17,382,433         287,702       6.64
                                     -------------     -----------                  -------------     -----------
     Total investments and
       federal funds sold .........    105,718,990         765,242       2.90          76,699,592         828,232       4.33
   Loans (3) (4) ..................    317,588,028       4,776,238       6.03         368,557,412       5,777,374       6.29
                                     -------------     -----------                  -------------     -----------
     Total earning assets .........    423,307,018       5,541,480       5.25         445,257,004       6,605,606       5.95
                                                       -----------                                    -----------
     Other assets .................     82,455,800                                     74,405,904
                                     -------------                                  -------------
     Total assets .................  $ 505,762,818                                  $ 519,662,908
                                     =============                                  =============
Liabilities
   Savings and
     transaction accounts .........  $  80,845,097     $   306,183       1.52       $  63,166,680     $   214,027       1.36
   Time Deposits ..................    246,313,374       1,222,520       1.99         268,273,542       1,996,909       2.99
   Other Borrowings ...............     87,371,764         773,658       3.55          89,783,465         788,880       3.52
   Subordinated Debt ..............     10,310,000         159,211       6.19          10,310,000         159,824       6.22
                                     -------------     -----------                  -------------     -----------
     Total interest bearing
       liabilities ................    424,840,235       2,461,572       2.32         431,533,687       3,159,640       2.94
                                                       -----------                                    -----------
   Non-interest bearing
     liabilities ..................     34,899,138                                     33,546,630
                                     -------------                                  -------------
     Total liabilities ............    459,739,373       2,461,572       2.15         465,080,317       3,159,640       2.72
                                                       -----------                                    -----------
   Equity .........................     46,023,445                                     54,582,591
                                     -------------                                  -------------
     Total liabilities
       and equity .................  $ 505,762,818                                  $ 519,662,908
                                     =============                                  =============
     Net interest .................
       income/margin (5) ..........                    $ 3,079,908       2.92                         $ 3,445,966       3.10
                                                       ===========                                    ===========
     Net interest spread (6) ......                                      2.93%                                          3.01%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include nonaccruing loans.
(4)  Income includes loan fees of $96,830 in 2010 and $179,603 in 2009.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.

                                       17
<PAGE>
                         SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest  Income - continued

As reflected  above,  for the three months ended June 30, 2010 the average yield
on earning assets was 5.25 percent,  while the average cost of interest  bearing
liabilities  was 2.32  percent.  For the three  months  ended June 30,  2009 the
average  yield on  earning  assets  was 5.95  percent  and the  average  cost of
interest-bearing  liabilities  was 2.94  percent.  The  decrease in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to market  interest  rate  decreases  over the last year.  The net
interest  margin  for the three  months  ended  June 30,  2010 was 2.92  percent
compared to 3.10 percent for the three months ended June 30, 2009.  The decrease
in the net  interest  margin is  attributable  to an increase  in average  other
assets(which  are not earning  assets) of $8.0 million  between the two periods.
The cost of total  liabilities  was 2.15 percent for the three months ended June
30, 2010, compared to 2.72 percent for the three months ended June 30, 2009.

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

<TABLE>
<CAPTION>
                                                                                    Analysis of Changes in Net Interest Income
                                                                                       For the six months ended June 30, 2010
                                                                                     Versus six months ended June 30, 2009 (1)
                                                                                     -----------------------------------------
                                                                              Volume                 Rate              Net Change
                                                                              ------                 ----              ----------
Interest income:

<S>                                                                         <C>                   <C>                   <C>
   Cash and Federal funds sold ...................................          $     5,504           $    11,873           $    17,377
   Investments - taxable .........................................              560,585              (391,841)              168,744
   Investments - non taxable (2) .................................             (324,354)                4,668              (319,686)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              241,735              (375,300)             (133,565)
     Net loans (3) ...............................................           (1,716,069)             (529,750)           (2,245,819)
                                                                            -----------           -----------           -----------
     Total interest income .......................................           (1,474,334)             (905,050)           (2,379,384)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................              115,257               138,974               254,231
   Time deposits .................................................             (349,278)           (1,414,335)           (1,763,613)
   Other borrowings ..............................................              (88,524)               49,155               (39,369)
   Subordinated debt .............................................                    -                  (254)                 (254)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................             (322,545)           (1,226,460)           (1,549,005)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $(1,151,789)          $   321,410           $  (830,379)
                                                                            ===========           ===========           ===========
</TABLE>

(1) Changes in rate/volume  have been  allocated on a consistent  basis to rate.
(2) Tax equivalent  yields for nontaxable  investments  assuming a 36% tax rate.
(3) Income includes loan fees of $225,121 in 2010 and $356,176 in 2009.

                                       18
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued
<TABLE>
<CAPTION>
                                                                                    Analysis of Changes in Net Interest Income
                                                                                      For the three months ended June 30, 2010
                                                                                   Versus three months ended June 30, 2009 (1)
                                                                                   -------------------------------------------
                                                                               Volume                 Rate               Net Change
                                                                               ------                 ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $     3,110           $     4,285           $     7,395
   Investments - taxable .........................................              270,771              (184,554)               86,217
   Investments - non taxable (2) .................................             (160,369)                3,767              (156,602)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              113,512              (176,502)              (62,990)
     Net loans (3) ...............................................             (798,978)             (202,158)           (1,001,136)
                                                                            -----------           -----------           -----------
     Total interest income .......................................             (685,466)             (378,660)           (1,064,126)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................               59,900                32,256                92,156
   Time deposits .................................................             (163,462)             (610,927)             (774,389)
   Other borrowings ..............................................              (21,190)                5,968               (15,222)
   Subordinated debt .............................................                    -                  (613)                 (613)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................             (124,752)             (573,316)             (698,068)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (560,714)          $   194,656           $  (366,058)
                                                                            ===========           ===========           ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Income includes loan fees of $96,830 in 2010 and $179,603 in 2009.

Noninterest Income and Expenses

Noninterest  income  for the six  months  ended  June 30,  2010 was  $3,509,324,
compared to  $2,278,674  for the six months ended June 30, 2009,  an increase of
$1,230,650.  Gains on sales of available for sale securities  totaled $1,618,959
for the six months  ended June 30,  2010,  compared  with  $885,604  for the six
months ended June 30, 2009.  The Company had gains on sales of other real estate
owned of $640,113 for the six months ended June 30, 2010, compared to net losses
of $11,936 for the six months ended June 30,  2009,  a  difference  of $652,049.
Rental income increased by $42,006 between the two periods,  with these earnings
totaling  $199,928  and $157,922 for the six months ended June 30, 2010 and June
30, 2009,  respectively.  This  increase was due  primarily to rental  income on
leased properties acquired through foreclosure. Earnings from company owned life
insurance decreased by $165,988 between the two periods, to $207,905 for the six
months  ending June 30, 2010 from  $373,893  for the six months  ending June 30,
2009, a result of declining  market returns and the liquidation of policies with
cash surrender values totaling $8.1 million during the first quarter of 2010.

Noninterest  expenses  for the six months  ended June 30, 2010 were  $6,644,062,
compared to  $7,639,713  for the six months  ended June 30,  2009, a decrease of
$995,651.  The  majority of this  decrease was due to a decrease in salaries and
employment  benefits of $473,334  between the two periods,  primarily due to the
Company's not hiring  replacements for a number of departed employees during the
last twelve  months.  Insurance  expense  decreased by $359,919  between the two
periods,  largely the result of a special  one-time FDIC  assessment paid by the
Company during the first six months of 2009, partially offset by higher premiums
paid for FDIC  insurance  during 2010.  Impairment  charges on other real estate
owned  totaled $0 and  $193,441  for the six months ended June 30, 2010 and June
30, 2009, respectively.

Noninterest  income for the three  months  ended June 30,  2010 was  $1,578,132,
compared to  $1,591,491  for the three months ended June 30, 2009, a decrease of
$13,359.  The decrease was primarily  attributable  to decreases of $102,057 and
$87,618 in gains on sales of available  for sale  securities  and company  owned
life insurance earnings, respectively. These decreases were largely offset by an
increase of $201,131 in combined  gains on sales of other real estate  owned and
premises and equipment.

                                       19
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest Income and Expenses - continued

Noninterest  expenses for the three months ended June 30, 2010 were  $3,350,652,
compared to  $4,023,785  for the three months ended June 30, 2009, a decrease of
$673,133  between the two periods.  The decrease is  primarily  attributable  to
decreases of $433,120 and $147,441 in insurance costs and impairment  charges on
other real estate owned, respectively.

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively  stable  funding base, and were equal to 59.7% of total deposits as
of June 30, 2010.  Asset liquidity is provided from several  sources,  including
amounts due from banks and federal funds sold and funds from maturing loans. The
Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such
has the ability to borrow against pledges of its 1-4 family residential mortgage
loans and its commercial real estate loans. The Company also has a federal funds
accommodation  of $5 million with Nexity Bank.  Additionally,  the Company has a
borrowing line with the Federal Reserve Bank of Richmond  discount  window.  The
Company has pledged its portfolios of construction  and land  development  loans
and commercial and industrial loans against this borrowing line. Total available
borrowings under this line were $34.4 million at June 30, 2010.

Loans

Nonfarm, nonresidential real estate loans comprised 29 percent of the total loan
portfolio as of June 30, 2010,  totaling $100.9  million.  Loans secured by real
estate for  construction  and land  development  totaled  $52.4  million,  or 15
percent of the portfolio while 1-4 family mortgage loans totaled $153.9 million,
or 45 percent of the total loan  portfolio,  as of June 30, 2010. All other real
estate loans  totaled $6.1  million,  or 2 percent of the total loan  portfolio.
Commercial and industrial loans comprised $26.9 million, or 8% of the total loan
portfolio.  Installment loans and other consumer loans to individuals  comprised
$2.9 million, or 1 percent of the total loan portfolio. Total loans decreased by
$13.9  million  during the six months  ended June 30,  2010,  due  primarily  to
decreases of $9.8 million and $3.3 million in construction  and land development
loans and 1-4 family loans, respectively.

At June 30, 2010, the Company had no loans 90 days delinquent and still accruing
interest and $24.7 million of nonaccrual  loans. The Company had $6.4 million of
other real  estate  owned at that date.  The  majority of  nonaccrual  loans are
secured by real estate. The Company has 74 loans on nonaccrual status, and 21 of
these loans totaling $8.4 million have been partially  charged off by a total of
$4.3 million. These partially charged off loans had aggregate principal balances
totaling $12.7 million prior to chargeoff.  The Company's  nonaccrual  loans are
comprised  of $8.0  million of  construction  and land  development  real estate
loans, $9.2 million of nonfarm,  nonresidential  real estate loans, $5.5 million
of 1-4 family mortgage loans, $1.4 million of multifamily real estate loans, and
$600,000 of various loan types not secured by real estate,  primarily commercial
and  industrial  loans.  The primary  risk of loss on these loans is a potential
deterioration  of real estate  collateral  values.  At December  31,  2009,  the
Company had no loans 90 days past due and still accruing interest,  $9.8 million
in other real estate owned,  and $19.3 million of nonaccrual  loans. At June 30,
2009,  the Company had $1.4 million in loans 90 days past due and still accruing
interest,  $4.7  million  in other  real  estate  owned,  and $15.0  million  of
nonaccrual  loans. The allowance for loan losses was 3.00 percent of loans as of
June 30, 2010, compared to 2.81 percent as of December 31, 2009 and 1.70 percent
as of June 30, 2009. For the six months ended June 30, 2010 the Company recorded
a loan  loss  provision  of  $1,800,000  compared  to a loan loss  provision  of
$550,000  during  the first six months of 2009.  The  current  year's  loan loss
provision  is the result of an  increase  of $5.4  million in  nonaccrual  loans
during the first six months of the year, as well as current year net  chargeoffs
of $1.6 million. Due to the current depressed state of the economy and declining
real  estate  values  in  the   Company's   market  area,   management   expects
nonperforming assets to remain at elevated levels for the foreseeable future.

In  management's  opinion,  the  allowance for loan losses is adequate to absorb
estimated  losses  inherent in our Company's  loan  portfolio.  In reviewing the
adequacy of the allowance for loan losses at each quarter end,  management takes
into  consideration the historical loan losses we experienced,  current economic
conditions  affecting the ability of our borrowers to repay, the volume of loans
and the trends in delinquent,  nonaccruing, and potential problem loans, and the
quality of collateral  securing  nonperforming and problem loans. After charging

                                       20
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Loans - (continued)

off all  known  losses,  management  considers  the  allowance  for loan  losses
adequate to cover its  estimate of inherent  losses in the loan  portfolio as of
June 30, 2010.

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):

(Amounts in thousands)
Balance at December 31, 2009 ..................................          $10,042
Current Year Loan Loss Provision ..............................            1,800
Charge- offs:
       Construction and land development ......................              978
       1-4 family residential .................................              452
       Multifamily ............................................               35
       Commercial and industrial ..............................               29
       Installment loans to individuals .......................              118
Recoveries:
       1-4 family residential .................................               15
       Nonfarm, nonresidential ................................               17
       Commercial and industrial ..............................               16
       Installment loans to individuals .......................                3
                                                                         -------
Balance at June 30, 2010 ......................................          $10,281
                                                                         =======

For the six  months  ended  June 30,  2010,  net  chargeoffs  to  average  loans
outstanding totaled 0.90% on an annualized basis.

Detail of Allowance for Loan Losses Allocation
<TABLE>
<CAPTION>
                                                                                              Period Ended June 30, 2010
                                                                                              --------------------------
                                                                             General Reserve        Specific Reserve          Total
                                                                             ---------------        ----------------          -----
 (Dollars in thousands)
<S>                                                                              <C>                   <C>                   <C>
Construction and Land Development ................................               $ 1,915               $   762               $ 2,677
Farmland .........................................................                     2                     -                     2
1-4 Family Residential ...........................................                 1,727                   160                 1,887
Multi-Family Residential .........................................                    91                   297                   388
Commercial Real Estate ...........................................                   811                 1,748                 2,559
Commercial and Industrial ........................................                   575                     -                   575
Consumer and Other ...............................................                   199                     -                   199
Other General Reserves ...........................................                 1,313                     -                 1,313
    Unallocated ..................................................                   681                     -                   681
                                                                                 -------               -------               -------
Total Allowance ..................................................               $ 7,314               $ 2,967               $10,281
                                                                                 =======               =======               =======
</TABLE>

Allocations  to  the  allowance  for  loan  losses  for  construction  and  land
development,  1-4 family  residential,  and  commercial  real estate  loans as a
percentage  of  the  total  allowance  totaled  26.04%,   18.35%,   and  24.89%,
respectively. Allocations for all other loan types totaled 11.33%. Other general
reserves  related to risk factors not  segregated  by loan type totaled  12.77%.
Unallocated  general  reserves  totaled 6.62%.  One of the components of general
reserves is a historical  loss factor  which takes into  account  losses by loan
type for our Company and other banks in our FDIC peer group dating back to 2007.
The data used in this  calculation  for the most recent period lags by a quarter
and uses annualized  chargeoff data from the first quarter of 2010, as peer loss
data is not  published  by the FDIC  until the  quarter  following  call  report
filings.  In order to  maintain  comparability  between  our data and our peers'
data, we use prior  quarter data in computing  both our Company's and our peers'
most recent  periods'  historical  loss data.  When we prepare our September 30,
2010,  allowance for loan losses calculation,  we will use annualized  chargeoff
data for our Company and our peers  through June 30, 2010.  In the past, we have
used only three years of historical chargeoff data in our calculation.  However,
beginning  this  quarter,  we are  using  four  years of  chargeoff  data in our
calculation  because we believe the inclusion of chargeoffs from 2007 produces a
more realistic outcome of probable future losses.  Average historical chargeoffs
using four years of data back to 2007 produces  0.71%  required  reserves;  when
omitting 2007 and taking into account only three years of historical  chargeoffs
the  required  reserves are 0.94%.  Annualized  historical  chargeoffs  for 2010
produce  required  reserves of 0.68%,  which is closer to the four year  average
than the three year average.

                                       21
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Loans - (continued)

Historical  chargeoffs  for the 2009 year produced  required  reserves of 1.97%,
which skewed the calculation  upwards when only taking an average of three years
of data. For these reasons we believe that using a four year  chargeoff  history
for purposes of the general reserve calculation is appropriate at this time.

Management identifies and maintains a list of potential problem loans. These are
loans that are  internally  risk graded  substandard  or below but which are not
included in  nonaccrual  status and are not past due 90 days or more.  A loan is
added to the potential problem list when management becomes aware of information
about possible credit problems of the borrower which raises serious doubts as to
the ability of such borrower to comply with the current loan repayment terms. At
June 30, 2010  potential  problem  loans totaled  $24.2  million.  The Company's
potential  problem loans are comprised of $4.4 million of construction  and land
development  real estate loans,  $12.6 million of nonfarm,  nonresidential  real
estate  loans,  $4.7  million  of 1-4 family  mortgage  loans,  $1.3  million of
multifamily  real  estate  loans,  and $1.2  million of  various  loan types not
secured by real  estate,  primarily  commercial  and  industrial  loans.  As the
majority of potential problem loans are real estate secured,  management closely
tracks  the  current  values  of  real  estate  collateral  when  assessing  the
collectibility of these loans.

Deposits

Deposits  decreased  $18.2 million during the first six months of 2010 to $350.3
million at June 30, 2010.  The decrease was primarily  attributable  to interest
bearing deposits, which decreased $21.5 million. Brokered and wholesale deposits
decreased $21.3 million during the six month period, as the Company made efforts
to decrease  its  reliance  on  wholesale  funding.  Partially  offsetting  this
decrease in brokered  and  wholesale  deposits  was a $7.3  million  increase in
interest bearing savings and transaction  accounts.  This increase was primarily
attributable to continued growth in the Company's  Rewards Checking  product,  a
high interest  rate checking  account  offered to retail  customers  designed to
increase the  Company's  market share in  transaction  accounts and increase its
core deposits.  Retail time deposits decreased by $7.5 million in the six months
ended June 30, 2010, from $161.5 million at December 31, 2009, to $154.0 million
at June 30, 2010.

Federal Home Loan Bank Borrowings

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

              Maturity                     Rate                     Balance
           -----------------           ------------           ---------------
           September 2010                  5.55%              $     7,000,000
           November 2010                   3.24%                    3,000,000
           February 2011                   0.54%                    4,500,000
           March 2011                      2.96%                    7,500,000
           September 2013                  4.75%                   10,000,000
           June 2014                       3.92%                    2,000,000
           October 2016                    4.25%                    5,000,000
           November 2016                   4.08%                    5,000,000
           January 2017                    4.35%                    5,000,000
           January 2017                    4.40%                    5,000,000
           January 2017                    4.46%                    5,000,000
           January 2017                    4.60%                    5,000,000
           March 2018                      2.33%                    5,000,000
           April 2018                      3.03%                    5,000,000
                                                              ---------------

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

Junior Subordinated Debentures

On  August  5, 2005  Southcoast  Capital  Trust  III (the  "Capital  Trust"),  a
non-consolidated  subsidiary  of the Company,  issued and sold a total of 10,310
floating rate  securities,  with a $1,000  liquidation  amount per security (the
"Capital  Securities").  Institutional  buyers  bought  10,000  of  the  Capital
Securities  denominated as preferred securities and the Company bought the other
310 Capital Securities which are denominated as common securities.  The proceeds
of those  sales,  $10.3  million,  were used by the  Capital  Trust to buy $10.3
million of junior subordinated debentures from the Company which are reported on
its  consolidated   balance  sheets.   The  Capital  Securities  mature  or  are
mandatorily  redeemable  upon maturity on September  30,

                                       22
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Junior Subordinated Debentures - (continued)

2035,  or upon earlier  optional  redemption as provided in the  indenture.  The
Company has the right to redeem the Capital  Securities  in whole or in part, on
or after September 30, 2010. The Company may also redeem the capital  securities
prior to such date upon occurrence of specified  conditions and the payment of a
redemption premium. See Note 12 to the consolidated financial statements for the
year ended December 31, 2009, 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, 2009, 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, which expires
September 30, 2010, 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 13 to the  consolidated  financial  statements
filed  with  our Form  10-K  for the year  ended  December  31,  2009,  for more
information about the terms of the rate swap agreement.

Capital Resources
The  capital  base for the Company  increased  by  $1,412,985  for the first six
months of 2010,  due to net income of $742,152,  other  comprehensive  income of
$616,661,  and proceeds  from stock  issuances  of $54,172  through our Employee
Stock  Purchase  Plan.  The Company's Tier 1 capital to average assets ratio was
11.11  percent as of June 30, 2010  compared to 11.34 percent as of December 31,
2009.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into two tiers.  The  Company's  and the  Bank's  Tier 1 capital
consists of common  shareholders'  equity minus a portion of deferred tax assets
plus, in the case of the Company,  junior  subordinated  debt subject to certain
limitations.  The  Company's  and the  Bank's  Tier 2  capital  consists  of the
allowance for loan losses subject to certain limitations and, in the case of the
Company,  its junior subordinated debt in excess of 25% of its Tier 1 capital. A
bank holding  company's  qualifying  capital base for purposes of its risk-based
capital  ratio  consists  of the  sum of its  Tier  1 and  Tier 2  capital.  The
regulatory  minimum  requirements  are 4% for Tier 1 and 8% for total risk-based
capital.  The  Company and the Bank are also  required to maintain  capital at a
minimum level based on quarterly average assets,  which is known as the leverage
ratio.  Only the  strongest  bank  holding  companies  and banks are  allowed to
maintain  capital  at  the  minimum  requirement.  All  others  are  subject  to
maintaining  ratios 100 to 200 basis points  above the  minimum.  As of June 30,
2010, the Company and the Bank exceeded their capital  requirements  as shown in
the following table.

<TABLE>
<CAPTION>
                                                                                          Capital Ratios
                                                                                          --------------
                                                                                         Well Capitalized     Adequately Capitalized
(Dollars in thousands)                                                 Actual               Requirement            Requirement
                                                                      ------               -----------            -----------
                                                                 Amount       Ratio     Amount        Ratio    Amount       Ratio
                                                                 ------       -----     ------        -----    ------       -----
The Bank
<S>                                                             <C>           <C>       <C>          <C>       <C>          <C>
  Total capital (to risk-weighted assets) ................      $52,202       15.95%    32,719       10.00%    26,176       8.00%
  Tier 1 capital (to risk-weighted assets) ...............       48,036       14.68%    19,632        6.00%    13,088       4.00%
  Tier 1 capital (to average assets) .....................       48,036        9.77%    24,571        5.00%    19,657       4.00%
The Company
  Total capital (to risk-weighted assets) ................      $60,132       18.03%       N/A         N/A     26,678       8.00%
  Tier 1 capital (to risk-weighted assets) ...............       55,888       16.76%       N/A         N/A     13,339       4.00%
  Tier 1 capital (to average assets) .....................       55,888       11.11%       N/A         N/A     20,123       4.00%
</TABLE>

                                       23
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

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

Off  Balance  Sheet Risk

The Company makes  contractual  commitments  to extend credit and issues standby
letters  of credit in the  ordinary  course of its  business  activities.  These
commitments  are  legally  binding  agreements  to lend  money to  customers  at
predetermined  interest  rates for a  specified  period of time.  In addition to
commitments to extend credit,  the Company also issues standby letters of credit
which are  assurances  to a third  party  that it will not  suffer a loss if the
customer fails to meet a contractual  obligation to the third party. At June 30,
2010, the Company had issued  commitments  to extend credit of  $21,949,023  and
standby  letters  of credit of  $569,162  through  various  types of  commercial
lending arrangements.  Approximately  $18,948,981 of these commitments to extend
credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at June 30, 2010.

<TABLE>
<CAPTION>
                                                                   After One    After Three
                                                                   Through       Through                    Greater
                                                    Within One      Three         Twelve     Within One       Than
                                                       Month        Months        Months         Year       One Year         Total
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 3,241,238   $   969,858   $ 7,459,890   $11,670,986   $10,278,037   $21,949,023
Standby letters of credit ......................        40,000       305,810       218,239       564,049         5,113       569,162
                                                   -----------   -----------   -----------   -----------   -----------   -----------
    Totals .....................................   $ 3,281,238   $ 1,275,668   $ 7,678,129   $12,235,035   $10,283,150   $22,518,185
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.  Further,
through its various sources of liquidity,  the Company  believes it will be able
to fund these  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, 2009, which was filed
with the Securities and Exchange  Commission on March 16, 2010.  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.

                                       24
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION

PART II - OTHER INFORMATION

Item 6.  Exhibits

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

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

32     Section 1350 Certification


                                   SIGNATURES


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





Date:    August 13, 2010                    By: s/L. Wayne Pearson
                                                ------------------------------
                                                L. Wayne Pearson
                                                Chief Executive Officer



Date:    August 13, 2010                    By: s/William C. Heslop
                                                ------------------------------
                                                William C. Heslop
                                                Chief Financial Officer



                                       25
<PAGE>

                         SOUTHCOAST FINANCIAL CORPORATION


Exhibit Index

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

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

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





                                       26