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 September 30, 2009

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

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

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

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

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

                                 YES [X] NO [ ]

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

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

Large accelerated filer   [ ]      Accelerated filer          [ ]

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.

     4,542,023 shares of common stock, no par value, as of October 31, 2009


<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                      INDEX

<TABLE>
<CAPTION>

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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - September 30, 2009 and December 31, 2008...............................2

         Condensed Consolidated Statements of Income - Nine months ended September 30, 2009 and 2008....................3

         Condensed Consolidated Statements of Income - Three months ended September 30, 2009 and 2008...................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Nine months ended September 30, 2009 and 2008................................................................5

         Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2009 and 2008................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 4T. 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>
                                                                                                September 30,           December 31,
                                                                                                     2009                  2008
                                                                                                     ----                  ----
                                                                                                  (Unaudited)
<S>                                                                                              <C>                  <C>
Assets
   Cash and cash equivalents:
     Cash and due from banks .............................................................       $  23,872,980        $  10,659,268
     Federal funds sold ..................................................................               8,409           11,902,302
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................          23,881,389           22,561,570
   Investment securities
     Available for sale ..................................................................          47,635,071           57,772,257
     Federal Home Loan Bank Stock, at cost ...............................................           4,266,200            4,509,500
                                                                                                 -------------        -------------
       Total investment securities .......................................................          51,901,271           62,281,757
   Loans held for sale ...................................................................           1,061,296              417,000
   Loans, net of allowance of $6,796,398 and $7,410,116 ..................................         371,946,022          397,123,072
   Property and equipment, net ...........................................................          23,076,402           23,812,981
   Other real estate owned ...............................................................           9,457,993            2,074,147
   Company owned life insurance ..........................................................          19,053,256           18,492,955
   Other assets ..........................................................................          10,191,337            8,201,432
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 510,568,966        $ 534,964,914
                                                                                                 =============        =============


Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  27,368,476        $  27,931,650
     Interest bearing ....................................................................         315,159,708          338,879,046
                                                                                                 -------------        -------------
       Total deposits ....................................................................         342,528,184          366,810,696
   Federal funds purchased ...............................................................           4,924,383            5,978,800
   Federal Reserve Bank Discount Window Borrowings .......................................           7,000,000                    -
   Securities sold under agreements to repurchase ........................................          11,895,596           10,611,537
   Federal Home Loan Bank Borrowings .....................................................          74,000,000           81,000,000
   Junior subordinated debentures ........................................................          10,310,000           10,310,000
   Other liabilities .....................................................................           4,347,286            5,020,777
                                                                                                 -------------        -------------
       Total liabilities .................................................................         455,005,449          479,731,810
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value; 20,000,000 shares authorized; 4,535,274 shares
     outstanding at September 30, 2009 and
     4,513,463 at December 31, 2008) .....................................................          53,550,078           53,441,978
   Retained earnings .....................................................................           3,843,696            2,814,566
   Accumulated other comprehensive loss ..................................................          (1,830,257)          (1,023,440)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          55,563,517           55,233,104
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 510,568,966        $ 534,964,914
                                                                                                 =============        =============
</TABLE>



                                       2
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the Nine Months Ended
                                                                                                           September 30,
                                                                                                           -------------
                                                                                                  2009                     2008
                                                                                                  ----                     ----
<S>                                                                                           <C>                     <C>
Interest income
   Loans, including fees ...........................................................          $  17,321,288           $  20,596,901
   Investment securities ...........................................................              1,996,536               2,651,345
   Federal funds sold ..............................................................                  1,859                  35,194
                                                                                              -------------           -------------
       Total interest income .......................................................             19,319,683              23,283,440
                                                                                              -------------           -------------
Interest expense
   Deposits and borrowings .........................................................              9,248,914              11,985,003
                                                                                              -------------           -------------
Net interest income ................................................................             10,070,769              11,298,437
Provision for loan losses ..........................................................              1,550,000               2,594,297
                                                                                              -------------           -------------
Net interest income after provision for loan losses ................................              8,520,769               8,704,140
                                                                                              -------------           -------------
Noninterest income
    Service fees on deposit accounts ...............................................                869,795                 856,365
    Fees on loans sold .............................................................                247,604                 186,549
    Gain on sale of available for sale securities ..................................              1,310,043                 300,115
    Other than temporary impairment charge on GSE preferred stock ..................                      -              (2,878,096)
    Gain on sale of premises and equipment .........................................                  5,413               2,330,246
    Rental fee income ..............................................................                280,006                  10,263
    Company owned life insurance earnings ..........................................                560,301                 639,313
    Other ..........................................................................                114,200                 201,489
                                                                                              -------------           -------------
       Total noninterest income ....................................................              3,387,362               1,646,244
                                                                                              -------------           -------------
Noninterest expenses
   Salaries and employment benefits ................................................              5,553,170               5,826,220
   Occupancy .......................................................................              1,050,960                 894,417
   Furniture and equipment .........................................................                985,537                 887,476
   Impairment provision on other real estate owned .................................                240,441                       -
   Insurance .......................................................................                952,824                 298,931
   Professional fees ...............................................................                589,590                 468,692
   Software expenses ...............................................................                258,240                 221,152
   Telephone, postage and supplies .................................................                277,471                 306,334
   Other operating expenses ........................................................                974,855               1,040,501
                                                                                              -------------           -------------
       Total noninterest expenses ..................................................             10,883,088               9,943,723
                                                                                              -------------           -------------
Income before income taxes .........................................................              1,025,043                 406,661
Income tax benefit .................................................................                 (4,087)               (218,813)
                                                                                              -------------           -------------
Net income .........................................................................          $   1,029,130           $     625,474
                                                                                              =============           =============

Basic net income per common share ..................................................          $         .23           $         .13
Diluted net income per common share ................................................          $         .23           $         .13
Weighted average shares outstanding
   Basic ...........................................................................              4,528,821               4,641,649
   Diluted .........................................................................              4,528,821               4,641,649
</TABLE>



                                       3
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       For the Three Months Ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                     2009                   2008
                                                                                                     ----                   ----
Interest income
<S>                                                                                            <C>                    <C>
   Loans, including fees ............................................................          $   5,525,107          $   6,794,215
   Investment securities ............................................................                559,737                917,090
   Federal funds sold ...............................................................                    903                 16,390
                                                                                               -------------          -------------
       Total interest income ........................................................              6,085,747              7,727,695
                                                                                               -------------          -------------
Interest expense
   Deposits and borrowings ..........................................................              2,644,885              3,972,153
                                                                                               -------------          -------------
Net interest income .................................................................              3,440,862              3,755,542
Provision for loan losses ...........................................................              1,000,000              1,484,250
                                                                                               -------------          -------------
Net interest income after provision for loan losses .................................              2,440,862              2,271,292
                                                                                               -------------          -------------
Noninterest income
   Service fees on deposit accounts .................................................                272,569                308,068
   Fees on loans sold ...............................................................                 82,100                 49,706
   Gain on sale of available for sale securities ....................................                424,439                 75,697
   Other than temporary impairment charge on GSE preferred stock ....................                      -             (2,878,096)
   Gain on sale of premises and equipment ...........................................                  5,413              2,330,246
   Rental fee income ................................................................                122,084                  4,488
   Company owned life insurance earnings ............................................                186,408                211,663
   Other ............................................................................                 15,675                 36,151
                                                                                               -------------          -------------
       Total noninterest income .....................................................              1,108,688                137,923
                                                                                               -------------          -------------
Noninterest expenses
   Salaries and employment benefits .................................................              1,759,278              2,390,269
   Occupancy ........................................................................                337,892                320,687
   Furniture and equipment ..........................................................                313,119                295,164
   Impairment provision on other real estate owned ..................................                 47,000                      -
   Professional fees ................................................................                140,418                150,796
   Insurance ........................................................................                198,484                118,657
   Software expenses ................................................................                 83,583                 70,042
   Telephone, postage, and supplies .................................................                 88,084                104,726
   Other operating expenses .........................................................                275,517                470,880
                                                                                               -------------          -------------
       Total noninterest expenses ...................................................              3,243,375              3,921,221
                                                                                               -------------          -------------
Income (loss) before income taxes ...................................................                306,175             (1,512,006)
Income tax(benefit)expense ..........................................................                  1,778               (623,033)
                                                                                               -------------          -------------
Net income (loss) ...................................................................          $     304,397          $    (888,973)
                                                                                               =============          =============
Basic net income (loss) per common share ............................................          $         .07          $        (.20)
Diluted net income (loss) per common share ..........................................          $         .07          $        (.20)
Weighted average shares outstanding
   Basic ............................................................................              4,535,274              4,542,304
   Diluted ..........................................................................              4,535,274              4,542,304
</TABLE>






                                       4
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
          Condensed Consolidated Statement of Changes in Shareholders'
                         Equity and Comprehensive Income
              For the nine months ended September 30, 2009 and 2008
                                   (Unaudited)

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

   Net income for the period ........................                                        625,474                        625,474

   Other comprehensive loss,
     net of tax
   Unrealized holding losses
     on securities available for sale ...............                                                    (3,332,247)     (3,332,247)

   Less reclassification adjustment for
     losses included in net income, net of
     taxes of $ 928,073 .............................                                                     1,649,908       1,649,908
                                                                                                                       ------------
   Comprehensive income .............................                                                                    (1,056,865)

   Shares repurchased and retired ...................       (483,593)     (6,730,886)                                    (6,730,886)

   Employee stock purchase plan .....................          7,779         110,741                                        110,741
                                                           ---------    ------------    ------------    ------------   -------------

Balance, September 30, 2008 .........................      4,534,089    $ 53,537,239    $  3,223,188    $ (1,696,130)  $ 55,064,297
                                                           =========    ============    ============    ============   ============


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

   Net income for the period ........................                                      1,029,130                      1,029,130

   Other comprehensive loss,
     net of tax
   Unrealized holding gains
     on securities available for sale ...............                                                        31,611          31,611

   Less reclassification adjustment for
     gains included in net income, net of
     taxes of $ 471,615 .............................                                                      (838,428)       (838,428)
                                                                                                                        ------------


   Comprehensive income .............................                                                                       222,313

   Employee stock purchase plan .....................         21,811         108,100                                        108,100
                                                           ---------    ------------    ------------    ------------    ------------

Balance, September 30, 2009 .........................      4,535,274    $ 53,550,078    $  3,843,696    $ (1,830,257)   $ 55,563,517
                                                           =========    ============    ============    ============    ============
</TABLE>





                                       5
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                      For the nine months ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                      2009                  2008
                                                                                                      ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  1,029,130         $    625,474
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
     Increase in deferred income taxes ...................................................          (1,556,428)          (1,426,766)
     Provision for loan losses ...........................................................           1,550,000            2,594,297
     Depreciation and amortization .......................................................             903,346              858,931
     Discount accretion and premium amortization .........................................              14,317              (50,921)
     Other than temporary impairment charge on GSE preferred stock .......................                   -            2,878,096
     Gain on sale of securities ..........................................................          (1,310,043)            (300,115)
     Gain on sale of premises and equipment ..............................................              (5,413)          (2,330,246)
     Loss on disposal of premises and equipment ..........................................                   -               14,955
     Deferred gain on disposal of premises and equipment .................................            (185,879)                   -
     Loss on sale of other real estate owned .............................................              33,845                1,739
     Impairment provision on other real estate owned .....................................             240,441                    -
     Originations of loans held for sale .................................................         (56,376,382)         (36,162,715)
     Proceeds from sales of loans held for sale ..........................................          55,732,086           36,396,715
     Increase in value of Company owned life insurance ...................................            (560,301)            (639,313)
     (Increase) decrease in other assets .................................................             292,704             (839,425)
     Increase (decrease) in other liabilities ............................................            (673,491)             578,612
                                                                                                  ------------         ------------
         Net cash provided by (used for) operating activities ............................            (872,068)           2,199,318
                                                                                                  ------------         ------------
Investing activities
   (Purchases) sales of Federal Home Loan Bank stock .....................................             243,300               (7,800)
   Purchases of investment securities available-for-sale .................................         (33,986,354)         (33,580,470)
   Sales, calls, and maturities of investment securities available-for-sale ..............          43,886,268           23,284,118
   Proceeds from sales of premises and equipment .........................................             665,377            5,795,459
   Purchases of premises and equipment ...................................................            (355,348)          (1,417,406)
   Proceeds from sales of other real estate owned ........................................           2,474,938                    -
   Capital expenditures for other real estate owned ......................................             (77,292)                   -
   Net (increase) decrease in loans ......................................................          13,285,768          (31,704,212)
                                                                                                  ------------         ------------
         Net cash provided by (used for) investing activities ............................          26,136,657          (37,630,311)
                                                                                                  ------------         ------------
Financing activities
   Increase in borrowings ................................................................             229,642            4,255,785
   Proceeds from issuances of stock ......................................................             108,100              110,741
   Funds used to repurchase stock ........................................................                   -           (6,730,886)
   Net increase (decrease) in deposits ...................................................         (24,282,512)          43,580,082
                                                                                                  ------------         ------------
         Net cash provided (used) by financing activities ................................         (23,944,770)          41,215,722
                                                                                                  ------------         ------------
         Increase in cash and cash equivalents ...........................................           1,319,819            5,784,729

Cash and cash equivalents, beginning of period ...........................................          22,561,570           10,807,156
                                                                                                  ------------         ------------
Cash and cash equivalents, end of period .................................................        $ 23,881,389         $ 16,591,885
                                                                                                  ============         ============
Cash paid during the year for:
   Income taxes ..........................................................................        $  1,001,779         $  1,219,345
   Interest ..............................................................................        $ 10,829,277         $ 11,778,576
</TABLE>




                                       6
<PAGE>

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

Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
for interim  financial  information  and with the  instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange  Commission.  Accordingly  they do
not include all information and notes required by generally accepted  accounting
principles  for  complete  financial  statements.  However,  in 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 ASC  260-10-45,
"Earnings  per  Share"  ("ASC  260").   ASC  260   specifies  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.

The standard specifies 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.

Note 4 - Stock Repurchase

On January 18, 2008,  the Company  announced  plans to  repurchase up to 484,527
shares of its  outstanding  common  stock.  Repurchased  shares are retired into
authorized  unissued shares.  During the first nine months of 2009 and 2008, the
Company repurchased 0 and 483,593 shares, respectively.

Note 5 - Recently Issued Accounting Standards

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

In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No.  168,  "The FASB  Accounting
Standards  Codification  TM and the Hierarchy of Generally  Accepted  Accounting
Principles - a replacement  of FASB  Statement No. 162," ("SFAS 168").  SFAS 168
establishes the FASB Accounting  Standards  Codification TM  ("Codification") as
the source of authoritative  generally accepted  accounting  principles ("GAAP")
for nongovernmental entities. The Codification does not change GAAP. Instead, it
takes the thousands of individual  pronouncements  that currently  comprise GAAP
and reorganizes them into  approximately 90 accounting  Topics, and displays all
Topics  using a  consistent  structure.  Contents  in  each  Topic  are  further
organized first by Subtopic,  then Section and finally Paragraph.  The Paragraph
level is the only level that contains  substantive  content.  Citing  particular
content in the Codification  involves  specifying the unique numeric path to the
content  through the Topic,  Subtopic,  Section and  Paragraph  structure.  FASB
suggests  that all  citations  begin  with  "FASB  ASC,"  where ASC  stands  for
Accounting  Standards  Codification.  Changes to the ASC  subsequent to June 30,
2009 are referred to as Accounting Standards Updates ("ASU").

In  conjunction  with the  issuance of SFAS 168,  the FASB also issued its first
Accounting   Standards  Update  No.  2009-1,   "Topic  105  -Generally  Accepted
Accounting Principles" ("ASU 2009-1") which includes SFAS 168 in its entirety as
a transition to the ASC. ASU 2009-1 is effective for interim and annual  periods


                                       7
<PAGE>

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

Note 5 - Recently Issued Accounting Standards- (continued)

ending  after  September  15, 2009 and will not have an impact on the  Company's
financial  position or results of  operations  but will  change the  referencing
system for accounting  standards.  Certain of the following  pronouncements were
issued  prior to the  issuance  of the ASC and  adoption  of the ASUs.  For such
pronouncements,  citations to the applicable Codification by Topic, Subtopic and
Section are provided where applicable in addition to the original  standard type
and number.

In December 2008 the FASB issued FASB Staff Position ("FSP") SFAS 132(R)-1 (FASB
ASC  715-20-65),  "Employers'  Disclosures  about  Postretirement  Benefit  Plan
Assets,"  ("FSP SFAS  132(R)-1").  This FSP provides  guidance on an  employer's
disclosures   about  plan  assets  of  a  defined   benefit   pension  or  other
postretirement  plan.  The  objective  of the FSP is to  provide  the  users  of
financial  statements with an  understanding  of: (a) how investment  allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies;  (b) the major categories of plan assets;
(c) the inputs and valuation  techniques  used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period;  and (e)  significant
concentrations  of risk within plan  assets.  The FSP also  requires a nonpublic
entity, as defined in Statement of Financial  Accounting  Standard ("SFAS") 132,
to disclose net  periodic  benefit cost for each period for which a statement of
income is  presented.  FSP SFAS  132(R)-1 is  effective  for fiscal years ending
after  December 15, 2009. The Staff Position will require the Company to provide
additional disclosures related to its benefit plan.

The FASB  issued  SFAS 166 (not yet  reflected  in FASB  ASC),  "Accounting  for
Transfers of Financial  Assets - an amendment of FASB Statement No. 140," ("SFAS
166") in June 2009. SFAS 166 limits the circumstances in which a financial asset
should be  derecognized  when the  transferor  has not  transferred  the  entire
financial  asset  by  taking  into  consideration  the  transferor's  continuing
involvement.  The standard  requires  that a transferor  recognize and initially
measure at fair value all assets obtained  (including a transferor's  beneficial
interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying  special-purpose  entity is
removed from SFAS 140 along with the  exception  from  applying  FIN 46(R).  The
standard is effective  for the first annual  reporting  period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter.  Earlier application is
prohibited.  The Company  does not expect the standard to have any impact on the
Company's financial statements.

SFAS 167 (not yet reflected in FASB ASC), "Amendments to FASB Interpretation No.
46(R)," ("SFAS 167") was also issued in June 2009. The standard amends FIN 46(R)
to require a company to analyze  whether  its  interest  in a variable  interest
entity ("VIE") gives it a controlling  financial interest. A company must assess
whether  it has an  implicit  financial  responsibility  to ensure  that the VIE
operates as  designed  when  determining  whether it has the power to direct the
activities  of the VIE  that  significantly  impact  its  economic  performance.
Ongoing  reassessments  of whether a company is the primary  beneficiary is also
required by the  standard.  SFAS 167 amends the criteria to qualify as a primary
beneficiary  as well as how to  determine  the  existence of a VIE. The standard
also eliminates certain exceptions that were available under FIN 46(R). SFAS 167
is  effective  as of the  beginning  of each  reporting  entity's  first  annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter.  Earlier application is prohibited.  Comparative disclosures will be
required for periods after the effective  date.  The Company does not expect the
standard to have any impact on the Company's financial position.

The FASB issued ASU 2009-05,  "Fair Value  Measurements  and Disclosures  (Topic
820) - Measuring  Liabilities at Fair Value" in August, 2009 to provide guidance
when estimating the fair value of a liability.  When a quoted price in an active
market for the  identical  liability  is not  available,  fair  value  should be
measured using (a) the quoted price of an identical  liability when traded as an
asset;  (b) quoted prices for similar  liabilities or similar  liabilities  when
traded  as  assets;  or (c)  another  valuation  technique  consistent  with the
principles of Topic 820 such as an income  approach or a market  approach.  If a
restriction  exists that  prevents  the  transfer of the  liability,  a separate
adjustment  related to the  restriction  is not required  when  estimating  fair
value.  The ASU was  effective  October 1, 2009 for the Company and will have no
impact on financial position or operations.

ASU 2009-12,  "Fair Value Measurements and Disclosures (Topic 820) - Investments
in  Certain   Entities  That  Calculate  Net  Asset  Value  per  Share  (or  Its
Equivalent),"  issued in September,  2009,  allows a company to measure the fair
value of an investment that has no readily determinable fair market value on the
basis of the  investee's  net asset value per share as provided by the investee.
This  allowance  assumes  that the investee  has  calculated  net asset value in
accordance with the GAAP measurement principles of Topic 946 as of the reporting

                                       8
<PAGE>

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

Note 5 - Recently Issued Accounting Standards- (continued)

entity's  measurement date.  Examples of such investments include investments in
hedge funds,  private equity funds, real estate funds and venture capital funds.
The update also  provides  guidance on how the  investment  should be classified
within the fair value  hierarchy based on the value for which the investment can
be redeemed.  The amendment is effective for interim and annual  periods  ending
after December 15, 2009 with early adoption permitted. The Company does not have
investments  in such  entities  and,  therefore,  there will be no impact to our
financial statements.

ASU 2009-13,  "Revenue  Recognition  (Topic 605):  Multiple-Deliverable  Revenue
Arrangements - a consensus of the FASB Emerging Issues Task Force" was issued in
October,  2009 and  provides  guidance on  accounting  for  products or services
(deliverables)  separately  rather than as a combined  unit  utilizing a selling
price  hierarchy to determine  the selling price of a  deliverable.  The selling
price is based on vendor-specific  evidence,  third-party  evidence or estimated
selling  price.  The  amendments in the update are effective  prospectively  for
revenue  arrangements  entered  into or  materially  modified  in  fiscal  years
beginning on or after June 15, 2010 with early adoption  permitted.  The Company
does not expect the update to have an impact on its financial statements.

Issued  October,   2009,  ASU  2009-15,   "Accounting   for  Own-Share   Lending
Arrangements in  Contemplation  of Convertible Debt Issuance or Other Financing"
amends ASC Topic 470 and provides  guidance for  accounting  and  reporting  for
own-share  lending  arrangements  issued in  contemplation of a convertible debt
issuance.  At the date of issuance, a share-lending  arrangement entered into on
an entity's own shares should be measured at fair value in accordance with Topic
820 and  recognized as an issuance  cost,  with an offset to additional  paid-in
capital.  Loaned shares are excluded  from basic and diluted  earnings per share
unless default of the  share-lending  arrangement  occurs.  The amendments  also
require  several  disclosures  including  a  description  and the  terms  of the
arrangement  and the reason for entering  into the  arrangement.  The  effective
dates  of  the  amendments  are  dependent  upon  the  date  the   share-lending
arrangement  was  entered  into  and  include   retrospective   application  for
arrangements  outstanding  as of the  beginning of fiscal years  beginning on or
after December 15, 2009. The Company has no plans to issue convertible debt and,
therefore,  does not  expect  the  update  to have an  impact  on its  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.
























                                       9
<PAGE>


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

Note 6 - Investment Securities

The amortized cost and fair value of investment securities are as follows:

<TABLE>
<CAPTION>
                                                                                     September 30, 2009
                                                                                      Gross Unrealized
                                                       Amortized                      ----------------                   Estimated
                                                           Cost                  Gains                Losses             Fair Value
                                                           ----                  -----                ------             ----------
Available for sale
<S>                                                    <C>                   <C>                   <C>                   <C>
   Mortgage backed .........................           $38,077,586           $   780,202           $   608,958           $38,248,830
   Municipal securities ....................             7,179,731               167,960                52,111             7,295,580
   GSE* preferred stock ....................                73,200               132,000                     -               205,200
   Other ...................................             4,648,734                     -             2,763,273             1,885,461
                                                       -----------           -----------           -----------           -----------
     Total .................................           $49,979,251           $ 1,080,162           $ 3,424,342           $47,635,071
                                                       ===========           ===========           ===========           ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                     December 31, 2008
                                                                                      Gross Unrealized
                                                        Amortized                     ----------------                   Estimated
                                                           Cost                 Gains                 Losses             Fair Value
                                                           ----                 -----                 ------             ----------
Available for sale
<S>                                                    <C>                   <C>                   <C>                   <C>
   Mortgage backed .........................           $36,954,498           $   916,961           $   177,493           $37,693,966
   Municipal securities ....................            16,904,796                95,748               356,173            16,644,371
   GSE* preferred stock ....................                73,200                     -                     -                73,200
   Other ...................................             4,650,946                     -             1,290,226             3,360,720
                                                       -----------           -----------           -----------           -----------
     Total .................................           $58,583,440           $ 1,012,709           $ 1,823,892           $57,772,257
                                                       ===========           ===========           ===========           ===========
</TABLE>

* Government Sponsored Enterprises

The following table shows 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 September 30, 2009.

Available for Sale
<TABLE>
<CAPTION>
                                                  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 ....................      $        -      $        -      $2,899,872      $  608,958      $2,899,872      $  608,958
Municipal securities ...............         448,864          16,969       1,436,792          35,142       1,885,656          52,111
Other ..............................         440,420       1,344,515         485,040       1,418,758         925,460       2,763,273
                                          ----------      ----------      ----------      ----------      ----------      ----------


  Total ............................      $  889,284      $1,361,484      $4,821,704      $2,062,858      $5,710,988      $3,424,342
                                          ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>

Securities classified as  available-for-sale  are recorded at fair market value.
Approximately  60% of the unrealized  losses,  or seven  individual  securities,
consisted of securities in a continuous loss position for twelve months or more.
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  and  credit  ratings  that  the   deterioration  in  value  is
attributable  to changes in market  interest rates or lack of liquidity in these
securities and not in the credit quality of the issuer and therefore,  this loss
is not considered other-than-temporary.





                                       10
<PAGE>




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

Note 6 - Investment Securities- (continued)

The amortized costs and fair values of investment  securities available for sale
at September 30, 2009 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.

                                                        Amortized        Fair
                                                           Cost          Value
                                                           ----          -----
Due after one but within five years ...............    $         -   $         -
Due after five but within ten years ................       820,855       862,112
Due after ten years ................................    10,930,810     8,374,129
Mortgage backed ....................................    38,077,586    38,248,830
Equity securities with no maturity .................       150,000       150,000
                                                       -----------   -----------
  Total investment securities available-for-sale ...   $49,979,251   $47,635,071
                                                       ===========   ===========

Note 7 - Fair Value of Financial Instruments

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

<TABLE>
<CAPTION>
                                                                               September 30,                      December 31,
                                                                                   2009                              2008
                                                                                   ----                              ----
                                                                      Carrying            Fair             Carrying           Fair
                                                                       Amount             Value             Amount            Value
                                                                       ------             -----             ------            -----
Financial assets:
<S>                                                                   <C>               <C>               <C>               <C>
   Cash and due from banks .................................          $ 23,873          $ 23,873          $ 10,659          $ 10,659
   Federal funds sold ......................................                 8                 8            11,902            11,902
   Investment securities ...................................            51,901            51,901            62,282            62,282
   Loans held for sale .....................................             1,061             1,061               417               417
   Loans, gross ............................................           378,742           381,756           404,533           408,098

Financial liabilities:
   Deposits ................................................           342,528           344,643           366,811           369,807
   Short term borrowings ...................................            23,820            23,820            16,590            16,590
   Advances from Federal Home Loan Bank ....................            74,000            68,506            81,000            73,772
   Junior subordinated debentures ..........................            10,310            10,310            10,310            10,310
</TABLE>

<TABLE>
<CAPTION>
                                                                  Notional             Fair              Notional            Fair
                                                                   Amount              Value              Amount             Value
                                                                   ------              -----              ------             -----
Financial instruments with off-
Balance sheet risk:
<S>                                                               <C>                <C>                 <C>                <C>
   Commitments to extend credit ......................            $26,642            $     -             $29,759            $    -
   Standby letters of credit .........................                687                  -                 941                 -
   Derivative instruments ............................             10,000               (428)             10,000              (602)
</TABLE>

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


                                       11
<PAGE>


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

Note 7 - 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.

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.

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.

Assets  measured  at fair  value  on a  recurring  basis  are as  follows  as of
September 30, 2009 (amounts in thousands):

<TABLE>
<CAPTION>
                                              Quoted market price              Significant other          Significant unobservable
                                               in active markets               observable inputs                 inputs
                                                   (Level 1)                     (Level 2)                      (Level 3)
                                              -------------------              -----------------          ------------------------
<S>                                                <C>                              <C>                         <C>
Available-for-sale
 investment securities ...................         $        -                       $ 46,210                    $  1,425

Loans held for sale ......................         $        -                       $  1,061                    $      -

Interest rate swap
 derivative instrument ...................         $        -                       $   (428)                   $      -

</TABLE>



                                       12
<PAGE>

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

The  following  table  reconciles  the  changes in  recurring  Level 3 financial
instruments  for the nine months ended  September 30, 2009 and  2008(amounts  in
thousands):

                                                            September 30,
                                                            -------------
                                                        2009              2008
                                                        ----              ----
Beginning of Year Balance ..................          $ 2,901           $ 4,018
Discount Accretion .........................                4                 4
Principal paydowns .........................               (7)                -
Unrealized Loss ............................           (1,473)           (1,372)
Ending Balance .............................          $ 1,425           $ 2,650

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

The Company is  predominantly  an asset based lender with real estate serving as
collateral  on a  substantial  majority  of loans.  Loans which are deemed to be
impaired are primarily valued on a nonrecurring  basis at the fair values of the
underlying  real  estate  collateral.   Such  fair  values  are  obtained  using
independent  appraisals,  which the Company considers to be level 2 inputs.  The
aggregate   carrying  amount  of  impaired  loans  at  September  30,  2009  was
$23,623,544.

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.  The aggregate  carrying  amount of other real estate owned at September
30, 2009 was $9,457,993.

Note 8 - 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  November 13, 2009, the date the financial  statements
were issued and no subsequent events 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,  2008.  Results of
operations  for the  period  ending  September  30,  2009  are  not  necessarily
indicative of the results to be attained for any other period.

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

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

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




                                       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 nine  months  ended  September  30,  2009 was
$1,029,130,  or $.23 per basic share,  compared to  $625,474,  or $.13 per basic
share, for the nine months ended September 30, 2008. The average number of basic
shares  outstanding for the nine months ending  September 30, 2009 was 4,528,821
compared to 4,641,649 for the nine months ending September 30, 2008.

The  Company's  net income for the three  months  ended  September  30, 2009 was
$304,397 or $.07 per basic share,  compared to net loss of $888,973, or $.20 per
basic share,  for the three months ended  September 30, 2008. The average number
of basic  shares  outstanding  for the  quarter  ending  September  30, 2009 was
4,535,274 compared to 4,542,304 for the quarter ending September 30, 2008.

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
$10,070,769  for  the  nine  months  ended  September  30,  2009,   compared  to
$11,298,437 for the nine months ended September 30, 2008.

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

Average  earning assets for the nine months ending  September 30, 2009 decreased
3.7 percent to $446.4  million  from the $463.8  million  reported  for the nine
months ending  September 30, 2008. The decrease was attributable to decreases of
$16.0 million and $1.4 million, respectively, in average loans and average total
investments  and federal  funds sold.  The decrease in average  loans was due to
fewer loan  originations  resulting from a slower lending  environment,  coupled
with increased foreclosures.

Average  interest  bearing  liabilities  for the nine months ended September 30,
2009 increased 0.2 percent to $430.0  million from the $429.3  million  reported
for the nine months ended  September 30, 2008. The increase was  attributable to
an increase in average time  deposits of $15.3  million,  offset by decreases in
savings and transaction accounts, and other borrowings of $11.9 million and $2.6
million, respectively. The increase in average time deposits was attributable to
increases in average  retail time  deposits and average  brokered and  wholesale
time deposits of $6.1 million and $9.2 million,  respectively.  These  increases
were  fueled by retail  rate  specials  and the  Company's  strategic  wholesale
funding decisions.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive segments of the Company's balance sheets for the nine months
ended September 30, 2009 and 2008.




                                       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 nine months ended                  For the nine months ended
                                                    September 30, 2009                         September 30, 2008
                                                    ------------------                         ------------------
                                        Average             Income/         Yield/       Average            Income/          Yield/
                                        Balance             Expense         Rate(1)      Balance            Expense          Rate(1)
                                        -------             -------         -------      -------            -------          -------
Assets
<S>                                 <C>                 <C>                  <C>     <C>                 <C>                   <C>
   Federal funds sold ............  $      1,171,421    $       1,859        0.21%   $      2,063,225    $      35,194         2.28%
   Investments - taxable .........        56,020,711        1,500,200        3.58          53,778,927        2,022,588         5.03
   Investments - nontaxable (2) ..        15,557,884          775,525        6.66          18,356,038          957,548         6.97
                                    ----------------    -------------                ----------------    -------------
     Total investments and
       federal funds sold ........        72,750,016        2,277,584        4.19          74,198,190        3,015,330         5.43
   Loans (3)(4) ..................       373,606,927       17,321,288        6.19         389,589,708       20,596,901         7.04
                                    ----------------    -------------                ----------------    -------------
     Total interest
       earning assets ............       446,356,943       19,598,872        5.87%        463,787,898       23,612,231         6.79%
                                                        -------------                                    -------------
     Other assets ................        72,769,845                                       62,611,288
                                    ----------------                                 ----------------
     Total assets ................  $    519,126,788                                 $    526,399,186
                                    ================                                 ================
Liabilities
   Savings and
     transaction accounts ........  $     64,258,684          646,727        1.35    $     76,173,656        1,094,124         1.92
   Time Deposits .................       263,896,916        5,728,807        2.90         248,604,398        7,778,254         4.18
   Other borrowings ..............        91,579,521        2,393,697        3.49          94,190,669        2,634,075         3.74
   Subordinated Debt .............        10,310,000          479,683        6.22          10,310,000          478,550         6.21
                                    ----------------    -------------                ----------------    -------------
     Total interest bearing
       liabilities ...............       430,045,121        9,248,914        2.88         429,278,723       11,985,003         3.73
                                                        -------------                                    -------------
   Non-interest bearing
     liabilities .................        33,683,357                                       37,747,366
                                    ----------------                                 ----------------
     Total liabilities ...........       463,728,478        9,248,914        2.67         467,026,089       11,985,003         3.43
                                                        -------------                                    -------------
   Equity ........................        55,398,310                                       59,373,097
                                    ----------------                                 ----------------
     Total liabilities
       and equity ................  $    519,126,788                                 $    526,399,186
                                    ================                                 ================
     Net interest
       income/margin (5) .........                      $  10,349,958        3.10                        $  11,627,228         3.33
                                                        =============                                    =============
     Net interest spread (6) .....                                           2.99%                                             3.06%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans.
(4)  Income includes loan fees of $500,686 in 2009 and $1,002,492 in 2008.
(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 nine months ended  September 30, 2009 the average yield
on earning assets was 5.87 percent,  while the average cost of interest  bearing
liabilities  was 2.88 percent.  For the nine months ended September 30, 2008 the
average  yield on  earning  assets  was 6.79  percent  and the  average  cost of
interest-bearing  liabilities was 3.73 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 nine
months ended  September  30, 2009 was 3.10 percent  compared to 3.33 percent for
the nine months  ended  September  30,  2008.  The  decrease in the net interest
margin is  attributable  to an increase in average other assets of $10.2 million
between the two periods.  This  increase in average other assets was caused by a
combined increase of $13.4 million between the two periods in average nonaccrual
loans and other real estate  owned.  The cost of average total  liabilities  was
2.67 percent and 3.43 percent for the nine months ending  September 30, 2009 and
2008, respectively.

                                       16
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Net  Interest  Income -  continued

Average earning assets for the three months ending  September 30, 2009 decreased
11.54 percent to $429.2 million from the $485.2  million  reported for the three
months ending  September 30, 2008. The decrease was attributable to decreases of
$15.9 million and $40.1 million,  respectively, in average total investments and
federal funds sold and average loans.

Average interest  bearing  liabilities for the three months ending September 30,
2009 decreased  7.30 percent to $417.3 million from the $450.2 million  reported
for the three months ending  September 30, 2008. This decrease was primarily due
to a decrease in average time  deposits of $50.4  million,  partially  offset by
increases of $10.9 million and $6.6 million,  respectively,  in average  savings
and transaction accounts and other borrowed funds.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended September 30, 2009 and 2008.

<TABLE>
<CAPTION>
                                                For the three months ended                  For the three months ended
                                                    September 30, 2009                         September 30, 2008
                                                    ------------------                         ------------------
                                        Average             Income/         Yield/       Average          Income/          Yield/
                                        Balance             Expense         Rate(1)      Balance          Expense          Rate(1)
                                        -------             -------         -------      -------          -------          -------
<S>                                 <C>                 <C>                 <C>     <C>                 <C>                 <C>
Assets
   Federal funds sold ............  $      1,202,105    $         903       0.30%   $      3,217,589    $      16,390       2.04%
   Investments - taxable .........        52,368,157          431,191       3.27          59,735,874          728,649       4.89
   Investments - nontaxable (2) ..        12,017,236          200,853       6.63          18,481,856          290,675       6.31
                                    ----------------    -------------               ----------------    -------------
     Total investments and
       federal funds sold ........        65,587,498          632,947       3.83          81,435,319        1,035,714       5.10
   Loans (3)(4) ..................       363,638,083        5,525,107       6.03         403,761,400        6,794,215       6.64
                                    ----------------    -------------               ----------------    -------------
     Total earning assets ........       429,225,581        6,158,054       5.69         485,196,719        7,829,929       6.47
                                                        -------------                                   -------------
     Other assets ................        78,436,600                                      58,066,396
                                    ----------------                                ----------------
     Total assets ................  $    507,662,181                                $    543,263,115
                                    ================                                ================
Liabilities
   Savings and
     transaction accounts ........  $     73,486,586    $     285,756       1.54    $     62,541,534    $     247,658       1.59
   Time Deposits .................       240,451,010        1,405,020       2.32         290,880,654        2,749,767       3.79
   Other Borrowings ..............        93,071,569          792,600       3.38          86,422,469          813,210       3.77
   Subordinated Debt .............        10,310,000          161,509       6.22          10,310,000          161,518       6.28
                                    ----------------    -------------               ----------------    -------------
     Total interest bearing
       liabilities ...............       417,319,165        2,644,885       2.51         450,154,657        3,972,153       3.54
                                                        -------------                                   -------------
   Non-interest bearing
     liabilities .................        33,670,546                                      36,243,118
                                    ----------------                                ----------------
     Total liabilities ...........       450,989,711        2,644,885       2.33         486,397,775        3,972,153       3.28
                                                        -------------                                   -------------
   Equity ........................        56,672,470                                      56,865,340
                                    ----------------                                ----------------
     Total liabilities
       and equity ................  $    507,662,181                                $    543,263,115
                                    ================                                ================
     Net interest
       income/margin (5) .........                      $   3,513,169       3.25                        $   3,857,776       3.19
                                                        =============                                   =============
     Net interest spread (6) .....                                          3.18%                                           2.93%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans.
(4)  Income includes loan fees of $144,510 in 2009 and $330,370 in 2008.
(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  September 30, 2009 the average
yield on earning  assets was 5.69  percent,  while the average  cost of interest
bearing  liabilities was 2.51 percent.  For the three months ended September 30,
2008 the average  yield on earning  assets was 6.47 percent and the average cost
of interest-bearing  liabilities was 3.54 percent.  The decrease in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate decreases over the last year. The net
interest  margin for the three months ended  September 30, 2009 was 3.25 percent
compared to 3.19  percent for the three  months ended  September  30, 2008.  The
increase in the net  interest  margin is primarily  attributable  to the drop in
average  rates  paid  on  interest  bearing  liabilities,  fueled  primarily  by
maturities  of  higher  yielding  retail  time  deposits.   The  cost  of  total
liabilities  was 2.33  percent for the three months  ended  September  30, 2009,
compared to 3.28 percent for the three months ended September 30, 2008.

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

<TABLE>
<CAPTION>
                                                                                 Analysis of Changes in Net Interest Income
                                                                                For the nine months ended September 30, 2009
                                                                                versus nine months ended September 30, 2008 (1)
                                                                                -----------------------------------------------
                                                                               Volume                 Rate               Net Change
                                                                               ------                 ----               ----------
<S>                                                                         <C>                   <C>                   <C>
Interest income:
   Federal funds sold ............................................          $   (15,212)          $   (18,123)          $   (33,335)
   Investments - taxable .........................................               84,312              (606,700)             (522,388)
   Investments - non taxable (2) .................................             (145,967)              (36,056)             (182,023)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................              (76,867)             (660,879)             (737,746)
     Net loans (3) ...............................................             (840,994)           (2,434,619)           (3,275,613)
                                                                            -----------           -----------           -----------
     Total interest income .......................................             (917,861)           (3,095,498)           (4,013,359)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................             (171,141)             (276,256)             (447,397)
   Time deposits .................................................              478,467            (2,527,914)           (2,049,447)
   Other borrowings ..............................................              (73,022)             (167,356)             (240,378)
   Subordinated debt .............................................                    -                 1,133                 1,133
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              234,304            (2,970,393)           (2,736,089)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $(1,152,165)          $   125,105           $(1,277,270)
                                                                            ===========           ===========           ===========
</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 $500,686 in 2009 and $1,002,492 in 2008.




                                       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 September 30, 2009
                                                                                Versus three months ended September 30, 2008 (1)
                                                                                ------------------------------------------------
                                                                               Volume                Rate                Net Change
                                                                               ------                ----                ----------
<S>                                                                         <C>                   <C>                   <C>
Interest income:
   Federal funds sold ............................................          $   (10,379)          $    (5,108)          $   (15,487)
   Investments - taxable .........................................              (90,858)             (206,600)             (297,458)
   Investments - non taxable (2) .................................             (102,790)               12,968               (89,822)
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................             (204,027)             (198,740)             (402,767)
     Net loans (3) ...............................................             (671,716)             (597,392)           (1,269,108)
                                                                            -----------           -----------           -----------
     Total interest income .......................................             (875,743)             (796,132)           (1,671,875)
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................               43,818                (5,720)               38,098
   Time deposits .................................................             (481,963)             (862,784)           (1,344,747)
   Other borrowings ..............................................               63,254               (83,864)              (20,610)
   Subordinated debt .............................................                    -                    (9)                   (9)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................             (374,891)             (952,377)           (1,327,268)
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (500,852)          $   156,245           $  (344,607)
                                                                            ===========           ===========           ===========
</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 $144,510 in 2009 and $330,370 in 2008.


Noninterest Income and Expenses

Noninterest  income for the nine months ended September 30, 2009 was $3,387,362,
compared to $1,646,244 for the nine months ended September 30, 2008, an increase
of  $1,741,118.  Gains  on  sales  of  available  for  sale  securities  totaled
$1,310,043 for the nine months ended September 30, 2009,  compared with $300,115
for the nine months ended  September  30, 2008, an increase of  $1,009,928.  The
Company had two large  nonrecurring  items which  impacted the nine months ended
September  30, 2008.  One was an impairment  charge of  $2,878,096  taken on the
Company's  holdings of Fannie Mae and Freddie Mac Preferred Stock. The other was
a gain on the sale of premises and  equipment of $2,330,246  resulting  from the
sale of land  adjacent to the  Company's  John's  Island  branch  location.  The
collective  effect of these  items  accounts  for  $547,850  of the  increase in
noninterest  income  between the two  periods.  Rental fee income  increased  by
$269,743  between the two periods,  with these  earnings  totaling  $280,006 and
$10,263 for the nine months ended  September  30, 2009 and  September  30, 2008,
respectively.  This  increase  was due  primarily  to  rental  income  on leased
properties   acquired  through   foreclosures.   These  leased  properties  were
commercial  office  properties with values totaling $4.8 million.  Earnings from
company owned life insurance  decreased by $79,012  between the two periods,  to
$560,301 for the nine months  ending  September  30, 2009 from  $639,313 for the
nine months ending  September 30, 2008, a result of declining market returns and
the  liquidation  of policies with cash surrender  values  totaling $2.8 million
during the fourth quarter of 2008.

Noninterest  expenses  for  the  nine  months  ended  September  30,  2009  were
$10,883,088,  compared to  $9,943,723  for the nine months ended  September  30,
2008,  an increase of  $939,365.  The  majority of this  increase  was due to an
increase in insurance expense of $653,893 between the two periods, primarily due
to an  increase  in FDIC  premium  rates,  as well as a  special  one time  FDIC
assessment  of  $230,000.   Additionally,   the  Company  recorded  $240,441  in
impairment  charges on other real estate  owned  during the first nine months of
2009,  compared  to no such  charges  during  the  first  nine  months  of 2008.
Occupancy expenses  increased by $156,543 between the two periods,  largely as a
result of the additional other real estate owned during the first nine months of
2009. Other real estate owned totaled $9,458,000 at September 30, 2009, compared
to $487,000 at  September  30, 2008.  Other real estate  owned at September  30,
2009,  was  comprised  of $4.8 million in  commercial  office  properties,  $3.0
million in  residential  1-4 family lots,  and $1.7 million in 1-4 family homes.
Other real  estate  owned at  September  30,  2008,  was  comprised  entirely of
residential 1-4 family lots.

                                       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 income for the three months ended September 30, 2009 was $1,108,688,
compared to $137,923 for the three months ended September 30, 2008, a difference
of $970,765.  The increase is primarily  attributable to the combined effects of
the  $2,878,096  impairment  charge on the Fannie Mae and Freddie Mac  Preferred
Stock and the gain on sale of land of $2,330,246,  a combined negative effect of
$547,850 on total noninterest income during the three months ended September 30,
2008. Additionally, gains on sales of available-for-sale securities increased by
$348,742  between  the two  periods,  to  $424,439  for the three  months  ended
September 30, 2009, compared to $75,697 for the three months ended September 30,
2008.

Noninterest  expenses  for the  three  months  ended  September  30,  2009  were
$3,243,375,  compared to  $3,921,221  for the three months ended  September  30,
2008, a decrease of $677,846 between the two periods. Of this decrease, $630,991
was due to a decrease in salaries  and  benefits.  The  decrease in salaries and
benefits  was  primarily  the result of an  amendment  to the  Company's  Salary
Continuation  Plan. The amendment  deferred the retirement age for the Company's
Chief  Executive  Officer from age 65 to age 70,  thereby  extending the accrual
period for this  deferred  benefit  and  providing  for a lower  annual  accrual
expense.  During the three months ended September 30, 2009 and 2008, the Company
accrued  $36,112  and  $568,508,   respectively,   in  relation  to  its  Salary
Continuation Plan, a decrease of $532,396 between the two periods.

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 50.8% of total deposits as
of  September  30, 2009.  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 federal funds  accommodations  of $12.5  million with Nexity Bank,  $10
million with First  Tennessee  Bank,  $10 million with US Bank, $10 million with
Fifth Third Bank, and $5 million with Zions 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 totaled $40.5 million at September 30, 2009.

Loans

Nonfarm, nonresidential real estate loans comprised 26 percent of the total loan
portfolio as of September 30, 2009,  totaling  $99.7  million.  Loans secured by
real estate for construction and land development  totaled $78.4 million,  or 21
percent of the portfolio  while 1-4 family mortgage loans totaled $161.6 million
or 42 percent of the total loan  portfolio,  as of September 30, 2009. All other
real estate loans totaled $6.3 million or 2 percent of the total loan portfolio.
Commercial and industrial loans comprised $29.3 million, or 8% of the total loan
portfolio.  Installment loans and other consumer loans to individuals  comprised
$3.5 million or 1 percent of the total loan portfolio.  Total loans decreased by
$25.8 million during the nine months ended  September 30, 2009, due primarily to
decreases of $9.0 million,  $6.9 million,  and $5.1 million in construction  and
land  development  loans, 1-4 family loans,  and nonfarm  nonresidential  loans,
respectively.

At September 30, 2009, the Company had $1.6 million in loans 90 days  delinquent
and still accruing  interest and $20.8 million of nonaccrual  loans. The Company
had $9.5  million  of other real  estate  owned at that date.  The  majority  of
nonaccrual  loans are secured by real estate.  The  Company's  total  balance of
problem loans consists primarily of construction and land development loans. The
primary risk of loss on these loans is a potential  deterioration of real estate
collateral  values.  At December 31, 2008, the Company had $5.4 million of loans
90 days past due and still accruing interest,  $2.1 million in other real estate
owned, and $8.9 million of nonaccrual  loans. At September 30, 2008, the Company
had $1.5 million in loans 90 days past due and still accruing interest, $487,000
of other real estate owned, and $12.4 million of nonaccrual loans. The allowance
for loan losses was 1.79 percent of loans as of September 30, 2009,  compared to
1.83 percent as of December 31, 2008 and 1.43 percent as of September  30, 2008.
For the nine months ended  September  30, 2009 the Company  recorded a loan loss
provision of $1,550,000  compared to a loan loss provision of $2,594,000  during
the first nine months of 2008.  The current  year's loan loss  provision  is the
result of an increase of $11.9 million in nonaccrual loans during the first nine

                                       20
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Loans - continued

months of the year,  as well as an  increase  in total  nonperforming  loans and
current year  chargeoffs  totaling  $2.2 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
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
September 30, 2009.

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, 2008 ...................................          $7,410
Current Year Loan Loss Provision ...............................           1,550
Charge- offs:
     Domestic:
       Construction and land development .......................             446
       1-4 family residential ..................................             911
       Nonfarm, nonresidential .................................               -
       Commercial and industrial ...............................             774
       Installment loans to individuals ........................              78
     Foreign: ..................................................               -
Recoveries:
       1-4 family residential ..................................               7
       Commercial and industrial ...............................              38
                                                                          ------
Balance at September 30, 2009 ..................................          $6,796
                                                                          ======

<TABLE>
<CAPTION>
                                                                                              Allowance For Loan Loss
                                                                                              Allocation as a Percentage
Balance at September 30, 2009 Applicable to:                             Amount               of the whole
                                                                         ------               ------------
<S>                                                                  <C>                            <C>
       Domestic:
             Real estate- commercial and agricultural                $         806                   11.86%
             Real estate- construction and land development                  2,697                   39.69
             Real estate- 1-4 family residential and multifamily             1,801                   26.50
             Commercial and industrial                                       1,108                   16.30
             Installment loans to individuals and other                         60                    0.88
       Foreign                                                                   -                       -
       Unallocated                                                             324                    4.77
                                                                     -------------                    ----
       Total                                                         $       6,796                  100.00%
                                                                     =============                  ======
</TABLE>

Management identifies and maintains a list of potential problem loans. These are
loans that are still accruing interest and are not included in nonaccrual status
and are not past due 90 days or more. A loan is added to the  potential  problem
list when management becomes aware of information about possible credit problems
of the borrower  which raises  serious doubts as to the ability of such borrower
to comply with the current loan repayment terms. At September 30, 2009 potential
problem loans totaled $11,802,394.  Management closely tracks the current values
of real estate collateral when assessing the collectibility of problem loans.


                                       21
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Deposits

Deposits  decreased $24.3 million during the first nine months of 2009 to $342.5
million at September  30, 2009.  The decrease was nearly fully  attributable  to
interest  bearing  deposits,  which  decreased  $23.7 million.  Certificates  of
deposit from retail customers  decreased  approximately $59.3 million during the
first nine  months,  largely as the result of the  Company's  decision to forego
rate  specials  during the first nine months of the year.  Savings and  interest
bearing  transaction  accounts increased  approximately $18.7 million due to the
Company's  introduction of a high interest checking  product,  Rewards Checking,
which had total  balances of $29.4 million at September  30, 2009.  Brokered and
wholesale  deposits  increased  $16.9 million during the nine month period.  The
Company uses brokered and wholesale  deposits as a supplement to retail  funding
sources. During the first nine months of 2009 rates on brokered time deposits of
all maturity terms were  significantly  lower than rates on retail time deposits
with comparable terms. Consequently,  the Company elected to replace some of its
maturing retail time deposits with brokered time deposits.

Federal Home Loan Bank(FHLBA) 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               0.37%                      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  Trusts 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, 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 11 to the consolidated  financial  statements and the information set forth
in  Exhibit  13 under the  caption  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations- Junior  Subordinated  Debentures"
filed  with  our Form  10-K  for the year  ended  December  31,  2008,  for more
information about the terms of the junior subordinated debentures.

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



                                       22
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources

The capital base for the Company increased by $330,413 for the first nine months
of 2009,  due to net income of $1,029,130  and proceeds from stock  issuances of
$108,100  through our Employee Stock Purchase  Plan,  partially  offset by other
comprehensive  loss of $806,817.  The Company's Tier 1 capital to average assets
ratio was 13.33 percent as of September 30, 2009 compared to 12.54 percent as of
December 31, 2008.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into two tiers.  The Bank's  Tier 1 capital  consists  of common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt subject to certain  limitations.  The Bank's Tier 2 capital consists of the
allowance for loan losses subject to certain  limitations  and the Bank's junior
subordinated debt in excess of 25% of the Bank's Tier 1 capital.  A bank holding
company's  qualifying  capital base for purposes of its risk-based capital ratio
consists  of the sum of its Tier 1 and Tier 2 capital.  The  regulatory  minimum
requirements are 4% for Tier 1 and 8% for total risk-based  capital.  Southcoast
and the Bank are also  required to maintain  capital at a minimum level based on
quarterly  average  assets,  which  is  known as the  leverage  ratio.  Only the
strongest  bank holding  companies and banks are allowed to maintain  capital at
the minimum requirement. All others are subject to maintaining ratios 100 to 200
basis points above the minimum.  As of September  30, 2009,  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
                                                              ------     -----       ------       -----         ------     -----
<S>                                                          <C>         <C>         <C>          <C>           <C>        <C>
The Bank
  Total capital (to risk-weighted assets) ................   $55,733     15.23%      36,604       10.00%        29,283     8.00%
  Tier 1 capital (to risk-weighted assets) ...............    51,117     13.96%      21,962        6.00%        14,641     4.00%
  Tier 1 capital (to average assets) .....................    51,117     10.42%      24,523        5.00%        19,619     4.00%

The Company
  Total capital (to risk-weighted assets) ................   $72,489     18.93%         N/A         N/A         30,640     8.00%
  Tier 1 capital (to risk-weighted assets) ...............    67,657     17.67%         N/A         N/A         15,320     4.00%
  Tier 1 capital (to average assets) .....................    67,657     13.33%         N/A         N/A         20,304     4.00%
</TABLE>
Off Balance Sheet Risk

The Company makes  contractual  commitments  to extend credit and issues standby
letters  of credit in the  ordinary  course of its  business  activities.  These
commitments  are  legally  binding  agreements  to lend  money to  customers  at
predetermined  interest  rates for a  specified  period of time.  In addition to
commitments to extend credit,  the Company also issues standby letters of credit
which are  assurances  to a third  party  that it will not  suffer a loss if the
customer fails to meet a contractual obligation to the third party. At September
30, 2009, the Company had issued commitments to extend credit of $26,642,158 and
standby  letters  of credit of  $686,934  through  various  types of  commercial
lending arrangements.  Approximately  $23,732,397 of these commitments to extend
credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments  to extend  credit and standby  letters of credit at  September  30,
2009.
<TABLE>
<CAPTION>
                                                                 After One     After Three
                                                                  Through        Through                     Greater
                                                    Within One     Three         Twelve      Within One       Than
                                                      Month        Months        Months         Year        One Year        Total
                                                   -----------   -----------   -----------   ----------    -----------   -----------
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 4,557,988   $ 3,867,358   $10,524,937   $18,950,283   $ 7,691,875   $26,642,158
Standby letters of credit ......................       311,939        76,240       285,743       673,922        13,012       686,934
                                                   -----------   -----------   -----------   -----------   -----------   -----------
    Totals .....................................   $ 4,869,927   $ 3,943,598   $10,810,680   $19,624,205   $ 7,704,887   $27,329,092
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</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

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, 2008, which was filed
with the Securities and Exchange Commission on March 5, 2009. There have been no
material  quantitative or qualitative  changes in market risk exposure since the
date of that filing.

Item 4T. - 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.




                                                     s/L. Wayne Pearson
Date:    November 13, 2009                  By:      ---------------------------
                                                     L. Wayne Pearson
                                                     Chief Executive Officer


                                                     s/William C. Heslop
Date:    November 13, 2009                  By:      ---------------------------
                                                     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