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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended March 31, 2006

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

                  South Carolina                          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 is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

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

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

                                    YES  [ ] NO [X]

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

      5,451,885 shares of common stock, no par value, as of April 30, 2006




<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - March 31, 2006 and December 31, 2005...................................2

         Condensed Consolidated Statements of Income - March 31, 2006 and March 31, 2005................................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Three months ended March 31, 2006 and 2005...................................................................4

         Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2006 and 2005...................5

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

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

Item 3.  Quantitative and Qualitative Disclosure about market risk.....................................................17

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

PART II - OTHER INFORMATION

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

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




<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                      Condensed Consolidated Balance Sheets

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                   March 31,            December 31,
                                                                                                     2006                   2005
                                                                                                     ----                   ----
                                                                                                  (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $  19,316,939        $  14,377,737
     Federal funds sold ..................................................................          24,034,000           16,964,000
                                                                                                 -------------        -------------
         Total cash and cash equivalents .................................................          43,350,939           31,341,737
   Investment securities
     Available for sale ..................................................................          50,443,383           31,482,927
     Federal Home Loan Bank Stock, at cost ...............................................           4,377,800            3,720,100
                                                                                                 -------------        -------------
         Total investment securities .....................................................          54,821,183           35,203,027
   Loans held for sale ...................................................................           5,424,197            9,275,492
   Loans, net of allowance of $4,525,082 and $4,269,564 ..................................         371,747,624          371,656,054
   Property and equipment, net ...........................................................          20,007,619           19,898,188
   Other assets ..........................................................................           8,717,056            9,224,867
                                                                                                 -------------        -------------

       Total assets ......................................................................       $ 504,068,618        $ 476,599,365
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  42,217,043        $  38,753,579
     Interest bearing ....................................................................         286,764,160          272,800,370
                                                                                                 -------------        -------------

       Total deposits ....................................................................         328,981,203          311,553,949

   Other borrowings ......................................................................          77,052,443           67,000,000
   Junior subordinated debentures ........................................................          21,655,000           21,655,000
   Other liabilities .....................................................................           1,803,928            3,075,871
                                                                                                 -------------        -------------

       Total liabilities .................................................................         429,492,574          403,284,820
                                                                                                 -------------        -------------

Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  5,451,885 shares
     outstanding at March 31, 2006 and
     5,449,631 at December 31, 2005) .....................................................          74,943,183           70,267,702
   Retained earnings .....................................................................                   0            3,300,753
   Accumulated other comprehensive income (loss) .........................................            (367,139)            (253,910)
                                                                                                 -------------        -------------

       Total shareholders' equity ........................................................          74,576,044           73,314,545
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 504,068,618        $ 476,599,365
                                                                                                 =============        =============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       2
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

                                                      For the Three months ended
                                                              March 31,
                                                              ---------
                                                          2006            2005
                                                          ----            ----
Interest income
   Loans, including fees ...........................    $6,733,622    $4,853,483
   Investment securities ...........................       440,355       280,786
   Federal funds sold ..............................       105,191       115,619
                                                        ----------    ----------
       Total interest income .......................     7,279,168     5,249,888
                                                        ----------    ----------
Interest expense
   Deposits and borrowings .........................     3,253,034     2,103,098
                                                        ----------    ----------
Net interest income ................................     4,026,134     3,146,790
    Provision for loan losses ......................       319,223       171,255
                                                        ----------    ----------
Net interest income after provision
   for loan losses .................................     3,706,911     2,975,535
                                                        ----------    ----------
Noninterest income
   Service fees on deposit accounts ................       245,429       221,985
   Fees on loans sold ..............................        92,927       147,988
   Gain on sale of available for sale securities ...        32,142        19,317
   Gain on sale of property and equipment ..........       377,714             -
   Other ...........................................        37,606        76,593
                                                        ----------    ----------
       Total noninterest income ....................       785,818       465,883
                                                        ----------    ----------
Noninterest expenses
   Salaries and employment benefits ................     1,477,334     1,256,065
   Occupancy .......................................       181,154       165,924
   Furniture and equipment .........................       206,690       177,644
   Advertising and public relations ................        74,834        48,971
   Professional fees ...............................        69,531        62,186
   Travel and entertainment ........................        64,033        68,097
   Telephone, postage and supplies .................        89,521        93,373
   Other operating expenses ........................       242,897       225,081
                                                        ----------    ----------
       Total noninterest expenses ..................     2,405,994     2,097,341
                                                        ----------    ----------
Income before income taxes .........................     2,086,735     1,344,077
    Income tax .....................................       750,323       455,437
                                                        ----------    ----------
Net income .........................................    $1,336,412    $  888,640
                                                        ==========    ==========
Basic net income per common share ..................    $     0.25    $     0.25
Diluted net income per common share ................    $     0.24    $     0.24
Weighted average shares outstanding
   Basic ...........................................     5,451,109     3,614,602
   Diluted .........................................     5,456,380     3,639,813

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
       Condensed Consolidated Statement of Changes in Shareholders' Equity
                            and Comprehensive Income
               For the three months ending March 31, 2006 and 2005
                                   (Unaudited)

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

   Net income for the period ........................                                        888,640                        888,640

   Other comprehensive income, net of tax
   Unrealized holding losses
     on securities available for sale ...............                                                       (286,865)      (286,865)
                                                                                                                           --------

   Comprehensive income .............................                                                                       601,775

   Stock dividend ...................................        301,601       3,252,980      (3,252,980)                             -

   Exercise of stock options ........................         43,843         186,268                                        186,268

   Employee stock purchase plan .....................          1,510          32,540                                         32,540
                                                           ---------    ------------   -------------    ------------   ------------

Balance, March 31, 2005 .............................      3,317,617    $ 37,552,570    $          -    $   (161,238)  $ 37,391,332

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

   Net income for the period ........................                                      1,336,412                      1,336,412

   Other comprehensive loss
     net of tax benefit of $52,036
       Unrealized holding losses
         on securities available for sale ...........                                                        (92,015)       (92,015)
       Less reclassification adjustment for
       Gains included in net income, next of
          taxes of $10,928 ..........................                                                        (21,214)       (21,214)
                                                                                                                            -------

   Comprehensive income .............................                                                                     1,223,183

   Stock dividend ...................................        495,626       4,637,165      (4,637,165)

   Employee stock purchase plan .....................          2,049          38,316                                         38,316
                                                           ---------    ------------   -------------    ------------   ------------


Balance, March 31, 2006 .............................      5,451,885    $ 74,943,183   $           -    $   (367,139)  $ 74,576,044
                                                           =========    ============   =============    ============   ============
</TABLE>

            See notes to condensed consolidated financial statements.




                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                     For the three months ended
                                                                                                              March 31,
                                                                                                              ---------
                                                                                                      2006                   2005
                                                                                                      ----                   ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  1,336,412         $    888,640
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
       (Increase) decrease in deferred income taxes ......................................            (430,384)             455,437
       Provision for loan losses .........................................................             319,223              171,255
       Depreciation and amortization .....................................................             144,292              169,840
       Discount accretion and premium amortization .......................................              (9,002)               9,239
       Gain on sale of securities ........................................................             (32,142)             (19,317)
       Gain on sale of property and equipment ............................................            (377,714)                   -
       Originations of loans held for sale ...............................................         (21,479,686)         (15,820,404)
       Proceeds from sales of loans held for sale ........................................          25,330,981           19,430,420
       (Increase) decrease in other assets ...............................................             971,726           (1,018,193)
       Decrease in other liabilities .....................................................          (1,271,943)            (602,313)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           4,501,763            3,664,604
                                                                                                  ------------         ------------

Investing activities
   Sales (purchases) of Federal Home Loan Bank stock .....................................            (657,700)              93,000
   Purchases of investment securities available-for-sale .................................         (19,790,269)          (4,898,115)
   Sales, calls, and maturities of investment securities available-for-sale ..............             724,197            1,752,358
   Proceeds from sales of premises and equipment .........................................           1,672,504                    -
   Purchases of  premises and equipment ..................................................          (1,548,513)          (2,172,007)
   Net increase in loans .................................................................            (410,793)         (11,298,783)
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (20,010,574)         (16,523,547)
                                                                                                  ------------         ------------

Financing activities
   Increase in borrowings ................................................................          10,052,443           (7,000,000)
   Proceeds from issuance of stock .......................................................              38,316              218,808
   Net increase in deposits ..............................................................          17,427,254           33,550,785
                                                                                                  ------------         ------------

         Net cash provided by financing activities .......................................          27,518,013           26,769,593
                                                                                                  ------------         ------------

         Increase in cash and cash equivalents ...........................................          12,009,202           13,910,650

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

Cash and cash equivalents, end of period .................................................        $ 43,350,939         $ 29,999,923
                                                                                                  ============         ============

Cash paid during the year for:
    Income taxes .........................................................................        $    508,214         $    428,300
    Interest .............................................................................        $  2,147,205         $  3,319,059
</TABLE>


            See notes to condensed consolidated financial statements.


                                       5
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1 - Basis of Presentation

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

Note 2 - Organization

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

Note 3 - Net Income Per Share

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

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

Note 4 - Recently Issued Accounting Standards

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

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

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  An entity should adopt SFAS No. 156
as of the  beginning of its first fiscal year that begins  after  September  15,
2006. We do not believe the adoption of SFAS No. 156 will have a material impact
on its financial position, results of operations and cash flows.


                                       6
<PAGE>

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

Note 4 - Recently Issued Accounting Standards(continued)

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

Note 5- Commitments and Contingencies

During the first quarter of 2006 we entered into a contract for the construction
of a branch facility in the Park West area of Mt.  Pleasant.  The contract price
for the construction project is $1.4 million.

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

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements and related notes appearing  herein and in the 2005 Annual
Report on Form 10-K of Southcoast Financial  Corporation.  Results of operations
for the period  ending  March 31,  2006 are not  necessarily  indicative  of the
results  to be  attained  for  any  other  period.  All per  share  data in this
discussion  has been  adjusted  to reflect the 10% stock  dividends  declared in
April 2006 and 2005.

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

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


                                       7
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

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

Results of Operations

The  Company's  net  income  for the  three  months  ended  March  31,  2006 was
$1,336,412  or $0.25 per basic  share,  compared  to  $888,640 or $.25 per basic
share,  for the three months  ended March 31,  2005.  The earnings per share for
March 31,2006 was based on 5,451,109  shares  outstanding  compared to 3,614,602
shares  outstanding for the quarter ended March 31, 2005. The additional  shares
are the result of the stock offering completed in the fourth quarter of 2005.

Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets.
Net  interest  income,  the  principal  source of the  Company's  earnings,  was
$4,026,134 for the three months ended March 31, 2006, compared to $3,146,790 for
the three months ended March 31, 2005.

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


Average earning assets for the three months ending March 31, 2006 increased 20.4
percent to $429.6 million from the $356.7 million  reported for the three months
ending March 31, 2005. The increase was mainly  attributable  to the increase in
loans  supported  by a  $39.3  million  increase  in  average  interest  bearing
liabilities  and a $37.2  million  increase in average  equity.  The increase in
loans and average  interest  bearing  liabilities  resulted  from the  continued
growth of the Charleston market area, growth in the Company's branches,  and the
Company's marketing efforts. The increase in average equity is mainly due to the
stock offering completed in the fourth quarter of 2005.


















                                       8
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued


The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended March 31, 2006 and 2005.  The  increase in net  interest  income is due to
increased  volume  of  earning  assets,  and a 22 basis  point  increase  in the
Company's net interest margin.

<TABLE>
<CAPTION>
                                                         For the three months ended                   For the three months ended
                                                                March 31, 2006                               March 31, 2005
                                                                --------------                               --------------
                                                    Average        Income/     Yield/             Average        Income/     Yield/
                                                    Balance        Expense     Rate(1)            Balance        Expense     Rate(1)
                                                    -------        -------     -------            -------        -------     -------
Assets
<S>                                         <C>               <C>                 <C>     <C>               <C>                <C>
   Federal funds sold ...................   $      9,544,356  $     105,191       4.41%   $     18,791,967  $     115,619      2.46%
   Investments - taxable ................         34,718,630        417,501       4.81          25,667,779        276,814      4.31
   Investments- non taxable .............          2,284,093         22,854       4.00             401,427          3,972      3.96
                                            ----------------  -------------               ----------------  -------------
     Total investments and
       Federal funds sold ...............         46,547,079        545,546       4.69          44,861,173        396,405      3.53
   Loans (2)(3) .........................        383,044,390      6,733,622       7.03         311,871,957      4,853,483      6.22
                                            ----------------  -------------               ----------------  -------------
     Total earning assets ...............        429,591,469      7,279,168       6.78         356,733,130      5,249,888      5.89
                                            ----------------  -------------               ----------------  -------------
     Other assets .......................         35,723,656                                    24,959,460
                                            ----------------                              ----------------
     Total assets .......................   $    465,315,125                              $    381,692,590
                                            ================                              ================
Liabilities
   Savings ..............................   $     53,361,647        212,286       1.59%   $     57,627,552        192,931      1.34
   Time deposits ........................        220,390,055      2,156,341       3.91         189,669,850      1,289,803      2.72
   Other borrowings .....................         55,021,969        512,476       3.73          52,444,444        452,732      3.45
   Subordinated debt ....................         21,655,000        371,931       6.87          11,345,000        167,632      5.91
                                            ----------------  -------------               ----------------  -------------
     Total interest bearing
       liabilities ......................        350,428,671      3,253,034       3.71         311,086,846      2,103,098      2.70
                                                              -------------                                 -------------
   Non-interest bearing
     liabilities ........................         40,925,740                                    33,887,264
                                            ----------------                              ----------------
     Total liabilities ..................        391,354,411      3,253,034       3.32         344,974,110      2,103,098      2.44
                                            ----------------  -------------               ----------------  -------------
   Shareholders' equity .................         73,960,714                                    36,718,480
                                            ----------------                              ----------------
     Total liabilities and
       shareholders' equity .............   $    465,315,125                              $    381,692,590
                                            ================                              ================
     Net interest
       income/margin (4) ................                     $   4,026,134       3.75%                     $   3,146,790      3.53%
                                                              =============                                 =============
      Net interest spread (5) ...........                                         3.07%                                        3.19%
</TABLE>

(1)  Annualized
(2)  Does not include non-accruing loans.
(3)  Income includes loan fees of $321,920 in 2006 and $229,840 in 2005.
(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above, for the three months ended March 31, 2006 the average yield
on earning assets was 6.78 percent,  while the average cost of interest  bearing
liabilities  was 3.71  percent.  For the three  months  ended March 31, 2005 the
average  yield on  earning  assets  was 5.89  percent  and the  average  cost of
interest-bearing  liabilities  was 2.70  percent.  The  increase in the yield on


                                       9
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

earning assets is  attributable to the increases in market rates of interest and
the percentage of higher yielding  earning  assets.  The increase in the cost of
interest bearing  liabilities is caused by maturing lower yield  certificates of
deposits being replaced with higher yield  certificates  and increases in market
rates of interest.  The net interest margin for the three months ended March 31,
2006, was 3.75 percent compared to 3.53 percent for the three months ended March
31, 2005. The increase in the net interest  margin is primarily  attributable to
the  additional  equity  raised in the fourth  quarter of 2005 and the favorable
balance  of  interest  bearing  assets and  liabilities  that  adjust  with rate
increases.  The cost of total  liabilities was 3.32 percent for the three months
ended March 31, 2006  compared to 2.44  percent for the three months ended March
31, 2005.

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

<TABLE>
<CAPTION>
                                                                                  Analysis of Changes in Net Interest Income
                                                                                   For the three months ended March 31, 2006
                                                                                  Versus three months ended March 31, 2005(1)
                                                                                  -------------------------------------------
                                                                                Volume                Rate              Net Change
                                                                                ------                ----              ----------
Interest income:

<S>                                                                          <C>                   <C>                  <C>
   Federal funds sold .............................................          $   (57,016)          $    46,588          $   (10,428)
   Investments - taxable ..........................................              108,867                31,820              140,687
   Investments - non taxable ......................................               18,383                   499               18,882
                                                                             -----------           -----------          -----------
     Total investments and federal funds sold .....................               70,234                78,907              149,141
     Net loans (2) ................................................            1,076,931               803,208            1,880,139
                                                                             -----------           -----------          -----------
     Total interest income ........................................            1,147,165               882,115            2,029,280
                                                                             -----------           -----------          -----------
Interest expense:
   Savings deposits ...............................................              (15,991)               35,346               19,355
   Time deposits ..................................................              205,190               661,348              866,538
   FHLB advances ..................................................               21,842                37,902               59,744
   Subordinated debt ..............................................              164,226                40,073              204,299
                                                                             -----------           -----------          -----------
     Total interest expense .......................................              375,267               774,669            1,149,936
                                                                             -----------           -----------          -----------
     Net interest income ..........................................          $   771,898           $   107,446          $   879,344
                                                                             ===========           ===========          ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Includes  loan fees of $ 321,920 and  $229,840  for the three  months ended
     March 31, 2006 and 2005.

Noninterest Income and Expenses

Noninterest  income for the three  months  ended  March 31,  2006 was  $785,818,
compared to $465,883 for the three months ended March 31, 2005.  The increase is
attributable  to a combined  $390,539  increase in gains on sale of property and
equipment and gains on sales of  securities,  partially  offset by a decrease of
$55,061 on fees on loans sold and a $38,987 decrease in other income.

Noninterest  expenses for the three months ended March 31, 2006 were $2,405,994,
compared to $2,097,341  for the three months ended March 31, 2005.  The increase
of $308,653 is mainly  attributable  to  increases  in  salaries  and  benefits,
furniture and equipment  expense and  administrative  expenses.  These increases
primarily  relate to expenditures  associated with the opening of the Dorchester
branch in December  2005,  as well as the  increase in  administrative  staff to
support the growth of the Company's operations.


                                       10
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within our Bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively  stable  funding base, and were equal to 49.6% of total deposits as
of March 31, 2006. Asset liquidity is provided from several  sources,  including
amounts due from banks and federal funds sold and funds from maturing loans. Our
Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such
has the  ability  to  borrow  against  a pledge  of its 1-4  family  residential
mortgage loans. We also have a $5.3 million line of credit with the Bankers Bank
of Atlanta and a $3.5  million  line of credit with First  Tennessee  Bank.  The
Company is in the  process of opening a new branch  office in the Park West area
of Mt. Pleasant. The total unexpended cost of this facility is $1.4 million. The
funding of this  office will come from normal  operations.  Management  believes
that our liquidity sources are adequate to meet our normal operating needs.

Loans

Commercial  loans  (most of which are  incidentally  secured  with real  estate)
totaling  $172.2  million made up 45.8 percent of the total loan portfolio as of
March  31,  2006.  Loans  secured  by real  estate  for  construction  and  land
development  totaled $33.6 million,  or 8.9 percent,  of the portfolio while all
other loans secured by real estate totaled $167.1 million,  or 44.4 percent,  of
the total loan  portfolio,  as of March 31,  2006.  Installment  loans and other
consumer loans to  individuals  comprised  $3.4 million,  or .9 percent,  of the
total loan  portfolio.  Total loans as of March 31, 2006  reflect  only a slight
increase  over the  December  31, 2005  balance.  Growth  during the quarter was
negated by some  unexpected  payoffs.  The  allowance  for loan  losses was 1.21
percent of loans as of March 31,  2006,  compared to 1.15 percent as of December
31, 2005. In management's  opinion, the allowance for loan losses is adequate to
absorb  estimated  losses  inherent in our Bank's loan  portfolio.  At March 31,
2006,  the Company did not have any loans 90 days  delinquent and still accruing
interest or any other real estate owned and had $491,000 of non-accruing  loans.
The majority of the non-accruing loans are secured by real estate. There were no
loans that management had determined to be potential  problem loans at March 31,
2006.

Deposits

Deposits increased $17.4 million during the first three months of 2006 to $329.0
million at March 31, 2006.  The increase was  attributable  to several  factors:
non-interest  bearing  deposits  increased  $3.4  million and  interest  bearing
checking  and money  market  accounts  and retail  certificates  increased  $2.8
million during the first three months as a result of the continuing  maturing of
our bank's branches; and brokered deposits increased approximately $11.2 million
because  our Bank  purchased  some  longer  term  deposits  in  anticipation  of
potentially higher interest rates.

Other Borrowings

Other  borrowings  include FHLBA  advances(below)  and repurchase  agreements of
$52,443.  FHLBA Advances are  collateralized  by pledged FHLBA stock and certain
residential mortgage loans. FHLBA advances are summarized as follows:

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

         June 2006                        5.00%               $    25,000,000
         September 2006                   2.91%                    10,000,000
         September 2008                   3.01%                    10,000,000
         June 2010                        4.31%                    11,000,000
         September 2010                   5.55%                     7,000,000
         February 2011                    4.31%                     4,500,000
         March 2013                       2.91%                     7,500,000
         June 2014                        3.92%                     2,000,000
                                                              ---------------

         Balance                                              $    77,000,000
                                                              ===============

                                       11
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Junior Subordinated Debentures

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

Capital Resources

The capital  base for the Company  increased by $1.2 million for the first three
months of 2006, due to operating  income,  partially offset by unrealized losses
on  available-for-sale  securities.  The  Company's  tier one capital to average
assets ratio was 13.05 percent as of March 31, 2006 compared to 13.64 percent as
of December 31, 2005.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into  two  tiers.   Our  Tier  1  capital   consists  of  common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt  subject  to  certain  limitations.  Our  Tier 2  capital  consists  of the
allowance  for  loan  losses  subject  to  certain  limitations  and our  junior
subordinated debt in excess of 25% of our Tier 1 capital for Southcoast.  A bank
holding company's qualifying capital base for purposes of its risk-based capital
ratio  consists  of the sum of its Tier 1 and  Tier 2  capital.  The  regulatory
minimum  requirements  are 4% for Tier 1 and 8% for  total  risk-based  capital.
Southcoast and our Bank are also required to maintain capital at a minimum level
based on quarterly  average assets,  which is known as the leverage ratio.  Only
the strongest bank holding  companies and banks are allowed to maintain  capital
at the minimum requirement.  All others are subject to maintaining ratios 100 to
200 basis  points  above the  minimum.  As of March  31,  2006,  we and the bank
exceeded our capital requirements levels as shown in the following table.

<TABLE>
<CAPTION>
                                                                                         Capital Ratios
                                                                                         --------------
                                                                                         Well Capitalized     Adequately Capitalized
(Dollars in thousands)                                                Actual                Requirement             Requirement
                                                                      ------                -----------             -----------
                                                              Amount         Ratio     Amount         Ratio      Amount       Ratio
                                                              ------         -----     ------         -----      ------       -----
The Bank
<S>                                                          <C>             <C>      <C>             <C>      <C>             <C>
  Total capital (to risk-weighted assets) .............      $ 50,438        15.12%   $ 33,359        10.00%   $ 26,687        8.00%
  Tier 1 capital (to risk-weighted assets) ............        46,439        13.92%     20,015         6.00%     13,343        4.00%
  Tier 1 capital (to average assets) ..................        46,439        10.41%     22,308         5.00%     17,847        4.00%
The Company
  Total capital (to risk-weighted assets) .............      $101,123        28.80%        N/A          N/A    $ 28,090        8.00%
  Tier 1 capital (to risk-weighted assets) ............        96,598        27.51%        N/A          N/A      14,045        4.00%
  Tier 1 capital (to average assets) ..................        96,598        20.76%        N/A          N/A      18,613        4.00%

</TABLE>

Off Balance Sheet Risk

We make  contractual  commitments to extend credit and issue standby  letters of
credit in the ordinary course of our business activities.  These commitments are
legally binding agreements to lend money to customers at predetermined  interest
rates for a  specified  period of time.  In addition  to  commitments  to extend
credit,  we also issue standby letters of credit which are assurances to a third
party  that  they  will  not  suffer  a loss  if our  customer  fails  to meet a
contractual  obligation  to the third party.  At March 31,  2006,  we had issued
commitments  to extend credit of $47.4 million and standby  letters of credit of
$722,131 through various types of commercial lending arrangements. Approximately
$39.3 million of these commitments to extend credit had variable rates.


                                       12
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Off Balance Sheet Risk- continued

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at March 31, 2006.

<TABLE>
<CAPTION>
                                                                   After One    After Three
                                                                    Through       Through                  Greater
                                                    Within One       Three         Twelve     Within One     Than
                                                       Month        Months         Months        Year       One Year        Total
                                                       -----        ------         ------        ----       --------        -----
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 2,807,446   $ 3,189,705   $17,934,439   $23,931,590   $23,460,761   $47,392,351
Standby letters of credit ......................        76,765       125,762       459,604       662,131        60,000       722,131
                                                   -----------   -----------   -----------   -----------   -----------   -----------

    Totals .....................................   $ 2,884,211   $ 3,315,467   $18,394,043   $24,593,721   $23,520,761   $48,114,482
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.  Further,
through our various  sources of  liquidity,  we believe  that we will be able to
fund these obligations as they arise.

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

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

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2005, which was filed
with the Securities and Exchange  Commission on March 29, 2006.  There have been
no material  quantitative  or qualitative  changes in market risk exposure since
the date of that filing.

Item 4. - Controls and Procedures.

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

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

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






                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


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





Date:    May 12, 2006           By:      s/L. Wayne Pearson
                                   ---------------------------------------------
                                   L. Wayne Pearson
                                   Chief Executive Officer



Date:    May 12, 2006            By:      s/Robert M. Scott
                                    --------------------------------------------
                                    Robert M. Scott
                                    Executive Vice President and Chief Financial
                                    Officer



                                       14
<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.




                                       15