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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended June 30, 2005

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

                  South Carolina                          28-2384011
           (State or other jurisdiction                (I.R.S. Employer
        of incorporation or organization)            Identification No.)

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

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

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

                                                           YES [X] NO [ ]


Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                                                           YES [ ]  NO [X]


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

       3,334,268 shares of common stock, no par value, as of July 31, 2005





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                      INDEX


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

Item 1.  Financial Statements (Unaudited)

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

         Condensed Consolidated Statements of Income - Six months ended June 30, 2005 and 2004..........................3

         Condensed Consolidated Statements of Income - Three months ended June 30, 2005 and 2004........................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Six months ended June 30, 2005 and 2004......................................................................5

         Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004......................6

Notes to Condensed Consolidated Financial Statements..................................................................7-9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................10-15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................16

Item 4.  Controls and Procedures.......................................................................................16

PART II - OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds.....................................................................17

Item 4.  Submission of Matters to a vote of Security Holders...........................................................17

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

Signatures ............................................................................................................18
</TABLE>




<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                       June 30,         December 31,
                                                                                                         2005               2004
                                                                                                         ----               ----
                                                                                                      (Unaudited)
Assets
<S>                                                                                                 <C>                 <C>
   Cash and cash equivalents:
     Cash and due from banks ...............................................................        $ 14,118,430        $ 11,853,273
     Federal funds sold ....................................................................          25,074,000           4,236,000
                                                                                                    ------------        ------------
       Total cash and cash equivalents .....................................................          39,192,430          16,089,273
   Investment securities
     Available for sale ....................................................................          24,881,933          21,738,335
     Federal Home Loan Bank Stock, at cost .................................................           3,180,100           3,093,100
                                                                                                    ------------        ------------
       Total investment securities .........................................................          28,062,033          24,831,435
   Loans held for sale .....................................................................           5,175,899          12,009,550
   Loans, net of allowance of $ 3,720,164 and $ 3,403,970 ..................................         315,756,955         293,206,968
   Property and equipment, net .............................................................          17,791,084          14,843,884
   Other assets ............................................................................           6,889,014           5,122,013
                                                                                                    ------------        ------------
       Total assets ........................................................................        $412,867,415        $366,103,123
                                                                                                    ============        ============

Liabilities
   Deposits
     Noninterest bearing ...................................................................        $ 48,152,873        $ 27,954,739
     Interest bearing ......................................................................         257,331,753         230,198,544
                                                                                                    ------------        ------------
       Total deposits ......................................................................         305,484,626         258,153,283
   Advances from Federal Home Loan Bank ....................................................          55,000,000          58,000,000
   Junior subordinated debentures ..........................................................          11,345,000          11,345,000
   Other liabilities .......................................................................           2,223,886           2,034,091
                                                                                                    ------------        ------------
       Total liabilities ...................................................................         374,053,512         329,532,374
                                                                                                    ------------        ------------
Shareholders' Equity
   Common stock (no par value; 20,000,000 shares authorized; 3,334,268 shares
     outstanding at June 30, 2005 and
     2,970,663 at December 31, 2004) .......................................................          37,837,141          34,080,782
   Retained earnings .......................................................................             953,444           2,364,340
   Accumulated other comprehensive income ..................................................              23,318             125,627
                                                                                                    ------------        ------------
       Total shareholders' equity ..........................................................          38,813,903          36,570,749
                                                                                                    ------------        ------------
       Total liabilities and shareholders' equity ..........................................        $412,867,415        $366,103,123
                                                                                                    ============        ============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       2
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                  For the Six Months Ended
                                                                                                           June 30,
                                                                                                           --------
                                                                                                    2005                    2004
                                                                                                    ----                    ----
Interest income
<S>                                                                                             <C>                      <C>
   Loans, including fees .........................................................              $ 9,963,133              $ 7,005,001
   Investment securities .........................................................                  615,895                  420,254
   Federal funds sold ............................................................                  236,450                   60,920
                                                                                                -----------              -----------
       Total interest income .....................................................               10,815,478                7,486,175
                                                                                                -----------              -----------
Interest expense
   Deposits and borrowings .......................................................                4,334,721                2,625,485
                                                                                                -----------              -----------
Net interest income ..............................................................                6,480,757                4,860,690
    Provision for loan losses ....................................................                  314,755                  245,000
                                                                                                -----------              -----------
Net interest income after provision for loan losses ..............................                6,166,002                4,615,690
                                                                                                -----------              -----------
Noninterest income
   Service fees on deposit accounts ..............................................                  445,384                  462,963
   Fees on loans sold ............................................................                  283,797                  134,691
   Gain on sale of available for sale securities .................................                   46,653                        -
   Other .........................................................................                  140,993                   75,014
                                                                                                -----------              -----------
       Total noninterest income ..................................................                  916,827                  672,668
                                                                                                -----------              -----------
Noninterest expenses
   Salaries and employment benefits ..............................................                2,488,535                2,021,978
   Occupancy .....................................................................                  340,044                  229,043
   Furniture and equipment .......................................................                  376,323                  391,721
   Advertising and public relations ..............................................                  126,062                   78,882
   Professional fees .............................................................                  179,107                  153,569
   Travel and entertainment ......................................................                  143,038                  102,239
   Telephone, postage and supplies ...............................................                  166,394                  164,463
   Other operating expenses ......................................................                  499,881                  300,128
                                                                                                -----------              -----------
       Total noninterest expenses ................................................                4,319,384                3,442,023
                                                                                                -----------              -----------
Income before income taxes .......................................................                2,763,445                1,846,335
    Income tax ...................................................................                  921,361                  573,037
                                                                                                -----------              -----------
Net income .......................................................................              $ 1,842,084              $ 1,273,298
                                                                                                ===========              ===========
Basic net income per common share ................................................              $       .56              $       .39
Diluted net income per common share ..............................................              $       .56              $       .39
Weighted average shares outstanding
   Basic .........................................................................                3,311,051                3,256,405
   Diluted .......................................................................                3,316,253                3,294,770
</TABLE>

            See notes to condensed consolidated financial statements.



                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the Three Months Ended
                                                                                                              June 30,
                                                                                                              --------
                                                                                                     2005                   2004
                                                                                                     ----                   ----
Interest income
<S>                                                                                              <C>                      <C>
   Loans, including fees .........................................................               $5,109,650               $3,687,789
   Investment securities .........................................................                  335,109                  236,622
   Federal funds sold ............................................................                  120,831                   40,184
                                                                                                 ----------               ----------
       Total interest income .....................................................                5,565,590                3,964,595
                                                                                                 ----------               ----------
Interest expense
   Deposits and borrowings .......................................................                2,231,623                1,439,365
                                                                                                 ----------               ----------
Net interest income ..............................................................                3,333,967                2,525,230
   Provision for loan losses .....................................................                  143,500                   95,000
                                                                                                 ----------               ----------
Net interest income after provision for loan losses ..............................                3,190,467                2,430,230
                                                                                                 ----------               ----------
Noninterest income
   Service fees on deposit accounts ..............................................                  223,399                  242,001
   Fees on loans sold ............................................................                  135,809                   83,554
   Gain on sale of available for sale securities .................................                   27,336                        -
   Other .........................................................................                   64,400                   32,522
                                                                                                 ----------               ----------
       Total noninterest income ..................................................                  450,944                  358,077
                                                                                                 ----------               ----------
Noninterest expenses
   Salaries and employment benefits ..............................................                1,232,470                1,045,842
   Occupancy .....................................................................                  174,120                  122,347
   Furniture and equipment .......................................................                  198,679                  216,311
   Advertising and public relations ..............................................                   77,091                   49,519
   Professional fees .............................................................                  116,921                   97,469
   Travel and entertainment ......................................................                   74,941                   58,124
   Telephone, postage and supplies ...............................................                   73,021                   76,860
   Other operating expenses ......................................................                  274,800                  171,600
                                                                                                 ----------               ----------
       Total noninterest expenses ................................................                2,222,043                1,838,072
                                                                                                 ----------               ----------
Income before income taxes .......................................................                1,419,368                  950,235
    Income tax ...................................................................                  465,924                  294,318
                                                                                                 ----------               ----------
Net income .......................................................................               $  953,444               $  655,917
                                                                                                 ==========               ==========
Basic net income per common share ................................................               $      .29               $      .20
Diluted net income per common share ..............................................               $      .29               $      .20
Weighted average shares outstanding
   Basic .........................................................................                3,331,838                3,262,094
   Diluted .......................................................................                3,337,707                3,300,419
</TABLE>

            See notes to condensed consolidated financial statements.



                                       4
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
       Condensed Consolidated Statement of Changes in Shareholders' Equity
                 For the six months ended June 30, 2005 and 2004
                                   (Unaudited)


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

   Net income for the period ...................                                         1,273,298                        1,273,298

   Other comprehensive income,
     net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                           (223,318)       (223,318)
                                                                                                                       ------------

   Comprehensive income ........................                                                                          1,049,980

   Stock dividend ..............................         269,564          617,381         (617,381)

   Exercise of stock options ...................          12,721           59,612                                            59,612

   Employee stock purchase plan ................           2,805           47,212                                            47,212
                                                    ------------     ------------     ------------     ------------    ------------

Balance, June 30, 2004 .........................       2,965,591     $ 34,022,232     $    655,917     $   (110,934)   $ 34,567,215
                                                    ============     ============     ============     ============    ============

Balance, December 31, 2004 .....................       2,970,663     $ 34,080,782     $  2,364,340     $    125,627    $ 36,570,749

   Net income for the period ...................                                         1,842,084                        1,842,084

   Other comprehensive income,
     net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                           (102,309)       (102,309)
                                                                                                                       ------------

   Comprehensive income ........................                                                                          1,739,775

   Stock dividend ..............................         302,988        3,252,980       (3,252,980)

   Exercise of stock options ...................          49,116          233,590                                           233,590

   Employee stock purchase plan ................           3,151           67,051                                            67,051

    Sale of stock ..............................           8,350          202,738                                           202,738
                                                    ------------     ------------                                      ------------

Balance, June 30, 2005 .........................       3,334,268     $ 37,837,141     $    953,444     $     23,318    $ 38,813,903
                                                    ============     ============     ============     ============    ============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       5
<PAGE>


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


<TABLE>
<CAPTION>
                                                                                                    For the Six Months Ended
                                                                                                             June 30,
                                                                                                             --------
                                                                                                   2005                      2004
                                                                                                   ----                      ----
Operating activities
<S>                                                                                           <C>                      <C>
   Net income ....................................................................            $  1,842,084             $  1,273,298
   Adjustments to reconcile net income to net
     cash provided (used) by operating activities
       Deferred income taxes .....................................................                 921,361                  573,037
       Provision for loan losses .................................................                 314,755                  245,000
       Depreciation and amortization .............................................                 342,712                  359,921
       Increase in other assets ..................................................              (1,767,001)                (827,107)
       Increase (decrease) in other liabilities ..................................                (833,875)                 623,477
                                                                                              ------------             ------------

         Net cash provided by operating activities ...............................                 820,036                2,247,626
                                                                                              ------------             ------------

Investing activities
   (Purchase) sale of Federal Home Loan Bank stock ...............................                 (87,000)                   5,000
   Purchase of investment securities available for sale ..........................              (3,143,598)             (19,291,761)
   Net increase in loans .........................................................             (16,031,091)             (38,230,692)
   Purchase of property and equipment ............................................              (3,289,912)              (5,336,266)
                                                                                              ------------             ------------

         Net cash used for investing activities ..................................             (22,551,601)             (62,853,719)
                                                                                              ------------             ------------

Financing activities
   Increase (decrease) in borrowings .............................................              (3,000,000)                (100,000)
   Proceeds from issuance of stock, net ..........................................                 503,379                  106,824
   Net increase in deposits ......................................................              47,331,343               60,902,728
                                                                                              ------------             ------------

         Net cash provided by financing activities ...............................              44,834,722               60,909,552
                                                                                              ------------             ------------

         Increase (decrease) in cash and cash equivalents ........................              23,103,157               15,643,459

Cash and cash equivalents, beginning of period ...................................              16,089,273               17,581,376
                                                                                              ------------             ------------

Cash and cash equivalents, end of period .........................................            $ 39,192,430             $ 17,884,835
                                                                                              ============             ============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       6
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


Note 1 - Basis of Presentation

The accompanying  unaudited condensed 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  rule  10-01(a)-(c)  of  Regulation  S-X  of  the  Securities  and  Exchange
Commission.  Accordingly  they do not include all information and notes required
by generally accepted accounting  principles for complete financial  statements.
However,  in the opinion of management,  all  adjustments  (consisting of normal
recurring  adjustments)  considered  necessary for a fair presentation have been
included.

Note 2 - Organization

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

Note 3 - Stock-Based Compensation

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

                                                      Six months ended June 30,
                                                      -------------------------
                                                       2005              2004
                                                       ----              ----
                                                             (Unaudited)

Net income, as reported .......................   $ 1,842,084      $   1,273,298
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ..             -             91,113
                                                  -----------      -------------

Pro forma net income ..........................   $ 1,842,084      $   1,182,185
                                                  ===========      =============

Earnings per share:
  Basic - as reported .........................   $      0.56      $        0.39
                                                  ===========      =============
  Basic - pro forma ...........................   $      0.56      $        0.37
                                                  ===========      =============

  Diluted - as reported .......................   $      0.56      $        0.39
                                                  ===========      =============
  Diluted - pro forma .........................   $      0.56      $        0.37
                                                  ===========      =============


                                       7
<PAGE>

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


Note 3 - Stock-Based Compensation - continued

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

Net income, as reported .........................   $  953,444       $   655,917
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ....            -                 -
                                                    ----------       -----------

Pro forma net income ............................   $  953,444       $   655,917
                                                    ==========       ===========

Earnings per share:
  Basic - as reported ...........................   $     0.29       $      0.20
                                                    ==========       ===========

  Basic - pro forma .............................   $     0.29       $      0.20
                                                    ==========       ===========

  Diluted - as reported .........................   $     0.29       $      0.20
                                                    ==========       ===========

  Diluted - pro forma ...........................   $     0.29       $      0.20
                                                    ==========       ===========


Note 4 - Net Income Per Share

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

On April 27,  2005,  the  Company  declared  a ten  percent  stock  dividend  to
shareholders'  of record as of May 27, 2005 and payable June 24, 2005.  The June
30, 2005  financials  reflect this  dividend.  The Company  also  declared a ten
percent stock dividend in April 2004. The weighted  average number of shares and
all other share data have been  restated  for all periods  presented  to reflect
these stock dividends.


Note 5 - Recently Issued Accounting Standards

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

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



                                       8
<PAGE>


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

Note 5 - Recently Issued Accounting Standards - continued

In April 2005,  the  Securities  and Exchange  Commission's  Office of the Chief
Accountant and its Division of Corporation Finance has released Staff Accounting
Bulletin (SAB) No. 107. SAB 107 provides  interpretive  guidance  related to the
interaction  between Statement No. 123(R) and certain SEC rules and regulations,
as well as the staff's  views  regarding the  valuation of  share-based  payment
arrangements for public companies.  SAB 107 also reminds public companies of the
importance of including disclosures within filings made with the SEC relating to
the accounting for share-based  payment  transactions,  particularly  during the
transition  to  Statement  No.  123(R).  The  Company  does not expect  that the
adoption  of SFAS No.  123(R)  will have any  material  effect on its  financial
position, results of operations and cash flows.

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

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

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



                                       9
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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 in the 2004 Annual Report Form
10-K of Southcoast Financial  Corporation.  All share numbers have been adjusted
for the 10% stock dividends  issued in 2004 and 2005.  Results of operations for
the period ending June 30, 2005 are not necessarily indicative of the results to
be attained for any other period.  Statements  included in this report which are
not  historical  in nature are  intended  to be, and are  hereby  identified  as
"forward looking statements" for purposes of the safe harbor provided by section
21E  of  the  Securities  Exchange  Act of  1934,  as  amended.  Words  such  as
"estimate," "project," "intend," "expect," "plan," "anticipate,"  "believe," and
similar expressions identify  forward-looking  statements.  The Company cautions
readers that forward looking  statements  including  without  limitation,  those
relating to the  Company's new offices,  future  business  prospects,  revenues,
allowance for loan losses, working capital,  liquidity,  capital needs, interest
costs,  and income,  are subject to certain risks and  uncertainties  that could
cause  actual  results to differ from those  indicated  in the  forward  looking
statements,  due to several important factors herein  identified,  among others,
and  other  risks and  factors  identified  from  time to time in the  Company's
reports filed with the Securities and Exchange Commission.

Results of Operations

The Company's  net income for the six months ended June 30, 2005 was  $1,842,084
or $.56 per basic share, compared to $1,273,298 or $.39 per basic share, for the
six months ended June 30, 2004.  The average number of shares for the six months
ending June 30, 2005 was  3,311,051  compared to 3,256,405 for the period ending
June 30, 2004.

The  Company's  net income for the three months ended June 30, 2005 was $953,444
or $.29 per basic share,  compared to $655,917 or $.20 per basic share,  for the
three months ended June 30, 2004.  The average  number of shares for the quarter
ending June 30, 2005 was  3,331,838  compared to 3,262,094 for the period ending
June 30, 2004.


Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets.
Net  interest  income,  the  principal  source of the  Company's  earnings,  was
$6,480,757  for the six months ended June 30, 2005,  compared to $4,860,690  for
the six months ended June 30, 2004.

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

Average  earning  assets for the six months ending June 30, 2005  increased 38.3
percent to $359.7  million from the $260.0  million  reported for the six months
ending June 30, 2004.  The increase was mainly  attributable  to the increase in
loans  supported  by a $ 93.4  million  increase  in  average  interest  bearing
liabilities  and a $9.8 million  increase in  non-interest  bearing  liabilities
which resulted from the continued growth of the Charleston  market area,  growth
in the Company's branches, and the Company's marketing efforts.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive  segments of the Company's balance sheets for the six months
ended June 30,  2005 and 2004.  The  increase in net  interest  income is due to
increased  volume of earning  assets,  partially  offset  with a 14 basis  point
decrease in the Company's net interest margin.


                                       10
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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

Net Interest Income - continued

<TABLE>
<CAPTION>
                                                     For the six months ended                    For the six months ended
                                                          June 30, 2005                               June 30, 2004
                                                          -------------                               -------------
                                                    Average        Income/     Yield/           Average        Income/     Yield/
                                                    Balance        Expense     Rate(1)          Balance        Expense     Rate(1)
                                                    -------        -------     -------          -------        -------     -------
Assets
<S>                                            <C>                <C>            <C>       <C>                <C>              <C>
   Federal funds sold ......................   $  17,782,406      $   236,450    2.66%     $  13,336,241      $    60,920      0.91%
   Investments .............................      28,339,192          615,895    4.35         28,715,588          420,254      2.93
                                               -------------      -----------              -------------      -----------
     Total investments and
       federal funds sold ..................      46,121,597          852,345    3.70         42,051,829          481,174      2.29
   Loans ...................................     313,542,437        9,963,133    6.36        217,970,140        7,005,001      6.43
                                               -------------      -----------              -------------      -----------
     Total earning assets ..................     359,664,034       10,815,478    6.01        260,021,969        7,486,175      5.76
                                                                  -----------                                 -----------
     Other assets ..........................      25,510,938                                  18,246,826
                                               -------------                               -------------
     Total assets ..........................   $ 385,174,972                               $ 278,268,795
                                               =============                               =============
Liabilities
   Interest bearing deposits ...............   $ 246,943,013      $ 3,085,347    2.50      $ 172,183,463        1,717,001      1.99
   Other borrowings ........................      62,770,448        1,249,374    3.98         45,148,613          908,484      4.02
                                               -------------      -----------              -------------      -----------
     Total interest bearing
       liabilities .........................     309,713,461        4,334,721    2.80        217,332,076        2,625,485      2.42
                                                                  -----------                                 -----------
   Non-interest bearing
     liabilities ...........................      37,917,626                                  27,082,630
                                               -------------                               -------------
     Total liabilities .....................     347,631,087        4,334,721    2.49        244,414,706        2,625,485      2.15
                                                                  -----------                                 -----------
   Equity ..................................      37,543,886                                  33,854,089
                                               -------------                               -------------
     Total liabilities
       and equity ..........................   $ 385,174,972                               $ 278,268,795
                                               =============                               =============
     Net interest
       income/margin .......................                      $ 6,480,757    3.60                         $ 4,860,690      3.74
                                                                  ===========                                 ===========
     Net interest spread ...................                                     3.21%                                         3.34%
</TABLE>

(1)  Annualized

As reflected  above, for the six months ended June 30, 2005 the average yield on
earning  assets was 6.01  percent,  while the average  cost of interest  bearing
liabilities was 2.80 percent. For the six months ended June 30, 2004 the average
yield  on  earning   assets  was  5.76   percent   and  the   average   cost  of
interest-bearing  liabilities  was 2.42  percent.  The  increase in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate increases over the last year. The net
interest margin is computed by subtracting interest expense from interest income
and dividing the resulting figure by average  interest  earning assets.  The net
interest margin for the six months ended June 30, 2005 was 3.60 percent compared
to 3.74 percent for the six months ended June 30, 2004.  The decrease in the net
interest margin is primarily attributable to the issuance of $20 million dollars
of longer term brokered certificates in December 2004, anticipating increases in
deposit rates.  These increased  deposits were invested in liquid assets earning
less then the deposit  rates for some portion of the six month period ended June
30,  2005.  The cost of total  liabilities  was 2.49  percent for the six months
ended June 30, 2005  compared to 2.15  percent for the six months ended June 30,
2004.


                                       11
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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

Net  Interest  Income -  continued

Average  earning assets for the three months ending June 30, 2005 increased 28.8
percent to $ 362.6 million from the $281.4 million reported for the three months
ending June 30, 2004.  The increase was mainly  attributable  to the increase in
loans  supported  by a  $74.4  million  increase  in  average  interest  bearing
liabilities  which resulted from the continued  growth of the Charleston  market
area, growth in the Company's branches, and the Company's marketing efforts.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended June 30,  2005 and 2004.  The  increase in net  interest  income is due to
increased volume of earning assets, coupled with a 9 basis point increase in the
Company's net interest margin.

<TABLE>
<CAPTION>
                                                    For the three months ended                    For the three months ended
                                                            June 30, 2005                                 June 30, 2004
                                                            -------------                                 -------------
                                                     Average        Income/     Yield/             Average        Income/     Yield/
                                                    Balance        Expense     Rate(1)            Balance        Expense     Rate(1)
                                                    -------        -------     -------            -------        -------     -------
Assets
<S>                                              <C>            <C>               <C>          <C>            <C>              <C>
   Federal funds sold ........................   $  16,772,844  $   120,831       2.88%        $  17,264,966  $    40,184      0.93%
   Investments ...............................      30,609,177      335,109       4.38            37,962,037      236,622      2.49
                                                 -------------  -----------                    -------------  -----------
     Total investments and
       federal funds sold ....................      47,382,021      455,940       3.85            55,227,003      276,806      2.00
   Loans .....................................     315,212,917    5,109,650       6.48           226,155,653    3,687,789      6.52
                                                 -------------  -----------                    -------------  -----------
     Total earning assets ....................     362,594,938    5,565,590       6.14           281,382,656    3,964,595      5.64
                                                                -----------                                   -----------
     Other assets ............................      26,062,417                                    19,600,041
                                                 -------------                                 -------------
     Total assets ............................   $ 388,657,355                                 $ 300,982,697
                                                 =============                                 =============
Liabilities
   Interest bearing deposits .................   $ 246,135,204  $ 1,602,613       2.60         $ 192,440,510      991,169      2.06
   Other borrowings ..........................      61,751,452      629,010       4.07            43,444,444      448,196      4.13
                                                 -------------  -----------                    -------------  -----------
     Total interest bearing
       liabilities ...........................     307,886,656    2,231,623       2.90           235,884,954    1,439,365      2.44
                                                                -----------                                   -----------
   Non-interest bearing
     liabilities .............................      42,401,407                                    31,346,448
                                                 -------------                                 -------------
     Total liabilities .......................     350,288,063    2,231,623       2.55           267,231,402    1,439,365      2.15
                                                                -----------                                   -----------
   Equity ....................................      38,369,355                                    33,751,295
                                                 -------------                                 -------------
     Total liabilities
       and equity ............................   $ 388,657,355                                 $ 300,982,697
                                                 =============                                 =============
     Net interest
       income/margin .........................                  $ 3,333,967       3.68                        $ 2,525,230      3.59
                                                                ===========                                   ===========
     Net interest spread .....................                                    3.24                                         3.20%
</TABLE>

(1)  Annualized

As reflected  above,  for the three months ended June 30, 2005 the average yield
on earning assets was 6.14 percent,  while the average cost of interest  bearing
liabilities  was 2.90  percent.  For the three  months  ended June 30,  2004 the
average  yield on  earning  assets  was 5.64  percent  and the  average  cost of
interest-bearing  liabilities  was 2.44  percent.  The  increase in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate  increases over the last year and the
maturing of lower yielding certificates of deposits. The net interest margin for
the three months  ended June 30, 2005 was 3.68 percent  compared to 3.59 percent
for the three  months  ended June 30,  2004.  The  increase in the net  interest
margin is primarily attributable to the change in the mix of earning assets, and
the rise in rates over the last  year.  The cost of total  liabilities  was 2.55
percent for the three  months  ended June 30, 2005  compared to 2.15 percent for
the three months ended June 30, 2004.


                                       12
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


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


Net Interest Income - continued

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

<TABLE>
<CAPTION>
                                                                               Analysis of Changes in Net Interest Income
                                                                                  For the six months ended June 30, 2005
(Dollars in thousands)                                                            Versus six months ended June 30, 2004*
                                                                           ----------------------------------------------
                                                                               Volume              Rate        Net Change

<S>                                                                              <C>                   <C>                   <C>
Federal funds sold ................................................              $    20               $   155               $   175
Investments .......................................................                   (6)                  202                   196
                                                                                 -------               -------               -------
Total investments and federal funds sold ..........................                   14                   357                   371
Total loans .......................................................                3,073                  (115)                2,958
                                                                                 -------               -------               -------
Total earning assets ..............................................                3,087                   242                 3,329

Total interest-bearing liabilities ................................                1,096                   613                 1,709
                                                                                 -------               -------               -------
Net interest income ...............................................              $ 1,991               $  (371)              $ 1,620
                                                                                 =======               =======               =======
</TABLE>


<TABLE>
<CAPTION>
                                                                                    Analysis of Changes in Net Interest Income
                                                                                     For the three months ended June 30, 2005
(Dollars in thousands)                                                               Versus three months ended June 30, 2004*
                                                                                     ----------------------------------------
                                                                                 Volume                  Rate             Net Change
                                                                                 ------                  ----             ----------

<S>                                                                              <C>                   <C>                   <C>
Federal funds sold ................................................              $    (1)              $    82               $    81
Investments .......................................................                  (46)                  144                    98
                                                                                 -------               -------               -------
Total investments and federal funds sold ..........................                  (47)                  226                   179
Total loans .......................................................                1,452                   (30)                1,422
                                                                                 -------               -------               -------
Total earning assets ..............................................                1,405                   196                 1,601

Total interest-bearing liabilities ................................                  552                   792
                                                                                 -------               -------               -------
Net interest income ...............................................              $   853               $   (44)              $   809
                                                                                 =======               =======               =======
</TABLE>

* Changes in rate/volume have been allocated on a consistent basis to rate

Noninterest Income and Expenses
Noninterest  income for the six months ended June 30, 2005 was $916,827 compared
to  $672,668  for the six months  ended June 30,  2004.  The  increase is mainly
attributable to a $149,106  increase in fees on loans sold and security gains of
$46,653.

Noninterest  expenses  for the six months  ended June 30, 2005 were  $4,319,384,
compared to $3,442,023  for the six months ended June 30, 2004.  The increase of
$877,361 is mainly attributable to increases in salaries and benefits, furniture
and equipment expense and  administrative  expenses.  These increases  primarily
relate to expenditures  associated with the opening of the Summerville branch in
February 2004 and the opening of the Goose Creek branch in the fourth quarter of
2004, as well as the increase in  administrative  staff to support the growth of
the Company's operations.

Noninterest  income  for the  three  months  ended  June 30,  2005 was  $450,944
compared to $358,077 for the three  months ended June 30, 2004.  The increase is
attributable to a $52,255  increase in fees on loans sold and a $27,336 increase
in security gains.



                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest Income and Expenses - continued

Noninterest  expenses for the three months ended June 30, 2005 were  $2,222,043,
compared to $1,838,072 for the three months ended June 30, 2004. The increase of
$383,971 is mainly attributable to increases in salaries and benefits, occupancy
expense,  and other  operating  expenses.  These increases  primarily  relate to
expenditures associated with the opening of the Goose Creek branch in the fourth
quarter of 2004, as well as the increase in administrative  staff to support the
growth of the Company's operations.

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation or maturity of existing  assets or the  acquisition of  liabilities.
The Company  manages both assets and  liabilities to achieve levels of liquidity
it believes are appropriate.  Cash and short-term  investments are the Company's
primary  sources  of asset  liquidity.  These  funds  provide a cushion  against
short-term  fluctuations  in  cash  flow  from  both  deposits  and  loans.  The
investment  portfolio  is the  Company's  principal  source of  secondary  asset
liquidity.  However,  the  availability of this source of funds is influenced by
market  conditions.  Individual and commercial  deposits and borrowings from the
Federal Home Loan Bank of Atlanta are the Company's  primary source of funds for
credit  activities.  The Company also has a $5.3 million line of credit with The
Bankers Bank of Atlanta and a $3.5  million line of credit with First  Tennessee
Bank.  The  Company is in the  process of opening  one new branch  office and an
operations  center. The total unexpended cost of these facilities is $1,319,000.
The  funding for these  offices  will come from  normal  operations.  Management
believes  that the Company's  liquidity  sources are adequate to meet its normal
operating needs.

On August 5, 2005, the Company issued $10 million in Trust Preferred Securities.
The  securities  pay  interest  at 3 month  Libor  plus 1.50% and have a 30 year
maturity.  Management  believes these  securities  will provide the Company with
additional liquidity and regulatory capital.

Loans

Commercial loans (most of which are incidentally  secured with real estate) made
up 47 percent of the total loan portfolio as of June 30, 2005,  totaling $ 150.0
million.  Loans  secured by real estate for  construction  and land  development
totaled $ 36.1  million  or 11 percent of the  portfolio  while all other  loans
secured by real estate  totaled $ 129.6  million or 41 percent of the total loan
portfolio,  as of June 30, 2005.  Installment  loans and other consumer loans to
individuals  comprised $ 3.8  million or 1 percent of the total loan  portfolio.
The  allowance  for loan  losses was 1.16  percent of loans as of June 30,  2005
compared to 1.15 percent as of December 31, 2004. In management's  opinion,  the
allowance  for loan losses is adequate.  At June 30,  2005,  the Company did not
have any loans 90 days  delinquent and still accruing  interest and had $578,455
of non-accruing  loans and $ 70,000 of other real estate owned.  The majority of
the non-accruing loans are secured by real estate.

Deposits

Deposits increased $ 47.3 million during the first six months of 2005 to $ 305.5
million at June 30,  2005.  The increase was  attributable  to several  factors.
Noninterest  bearing  deposits  increased  $ 20.2  million  during the first six
months as a result of,  seasonal  increases  in some  business  accounts and the
continuing  maturing  of the  branches.  Certificates  of  deposits  from retail
customers increased approximately $ 5.6 million during the first six months, and
money market and savings accounts increased $5.3 million due to normal growth of
the bank.  Brokered deposits increased $16.6 million because, in anticipation of
potentially higher interest rates, the bank purchased some longer term deposits.



                                       14
<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  $4,246,668  for the first six
months of 2005, due to operating income, and capital raised through the Employee
Stock Purchase Plan and exercise of stock options,  offset by unrealized  losses
on available for sale securities.  The Company's tier one capital  risk-weighted
to asset ratio was 13.02  percent as of June 30, 2005  compared to 13.64 percent
as of December 31, 2004.

The Federal Deposit  Insurance  Corporation has established  risk-based  capital
requirements  for  banks  and  the  Federal  Reserve  has  established   similar
requirements  for bank holding  companies.  As of June 30, 2005, the Company and
subsidiary bank exceed the capital  requirement levels that are to be maintained
as shown in the following table.

<TABLE>
<CAPTION>
                                                                                        Capital Ratios
                                                                                        Well Capitalized      Adequately Capitalized
(Dollars in thousands)                                                  Actual            Requirement                Requirement
                                                                        ------            -----------                -----------
                                                                 Amount       Ratio     Amount      Ratio         Amount       Ratio
                                                                 ------       -----     ------      -----         ------       -----
The Bank
<S>                                                             <C>           <C>      <C>          <C>          <C>           <C>
  Total capital (to risk-weighted assets) ................      $35,587       12.59%   $28,273      10.00%       $22,619       8.00%
  Tier 1 capital (to risk-weighted assets) ...............       32,312       11.43     16,964       6.00         11,309       4.00
  Tier 1 capital (to average assets) .....................       32,312        8.70     18,563       5.00         14,850       4.00
The Company
  Total capital (to risk-weighted assets) ................      $53,856       18.08%   $29,787      10.00%           N/A        N/A
  Tier 1 capital (to risk-weighted assets) ...............       50,136       16.83%    17,873       6.00%           N/A        N/A
  Tier 1 capital (to average assets) .....................       50,136       13.02%    19,259       5.00%           N/A        N/A
</TABLE>

Off-Balance Sheet Arranagements

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. At June 30, 2005,
the Company had issued  commitments to extend credit of $36,926,000  and standby
letters of credit of $1,061,000  through  various  types of  commercial  lending
arrangements.  Approximately  $30,767,000 of these  commitments to extend credit
had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at June 30, 2005.

<TABLE>
<CAPTION>
                                                                After One    After Three
                                                                 Through       Through                  Greater
                                                  Within One     Three         Twelve      Within One     Than
(Dollars in thousands)                               Month       Months        Months         Year      One Year        Total
                                                     -----       ------        ------         ----      --------        -----
<S>                                               <C>          <C>           <C>          <C>          <C>          <C>
Unused commitments to extend credit ...........   $     2,271  $     2,560   $    15,754  $    20,585  $    16,341  $    36,926
Standby letters of credit .....................           103          305           593        1,001           60        1,061
                                                  -----------  -----------   -----------  -----------  -----------  -----------
    Totals ....................................   $     2,374  $     2,865   $    16,347  $    21,586  $    16,401  $    37,987
                                                  ===========  ===========   ===========  ===========  ===========  ===========
</TABLE>

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.

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.



                                       15
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Market  risk is the risk of loss  from  adverse  changes  in market  prices  and
interest rates. The Company's market risk arises  principally from interest rate
risk  inherent in our lending,  deposit,  and borrowing  activities.  Management
actively  monitors and manages its  interest  rate risk  exposure.  Although the
Company  manages other risks,  such as credit  quality and liquidity risk in the
normal  course of business,  management  considers  interest rate risk to be its
most  significant  market  risk and this risk  could  potentially  have the most
significant  effect  on  the  Company's   financial  condition  and  results  of
operations.  Other types of market risks, such as foreign currency exchange risk
and commodity price risk do not arise in the normal course of community  banking
activities.

Achieving  consistent  growth in net interest  income is the primary goal of the
company's  asset/liability function. The Company attempts to control the mix and
maturities  of  assets  and  liabilities  to  achieve  consistent  growth in net
interest income despite  changes in market interest rates.  The Company seeks to
accomplish  this goal while  maintaining  adequate  liquidity  and capital.  The
Company's  asset/liability  mix is  sufficiently  balanced so that the effect of
interest  rates moving in either  direction is not expected to be material  over
time.

The  Bank's  Asset/Liability  Committee  uses a  simulation  model to  assist in
achieving  consistent growth in net interest income while managing interest rate
risk.  The model takes into account  interest rate changes as well as changes in
the mix and volume of assets and  liabilities.  The model  simulates  the Bank's
balance sheet and income statement under several different rate scenarios.
 The model's input (such as interest rates and levels of loans and deposits) are
updated  on a  quarterly  basis in order to obtain  the most  accurate  forecast
possible.  The forecast  presents  information  over a twelve month  period.  It
reports a base case in which  interest  rates  remain flat and  variations  that
occur when rates increase or decrease 100, 200, and 300 basis points.  According
to the model,  as of June 30, 2005 the Bank is  positioned  so that net interest
income would  increase  approximately  $642,000  and net income  would  increase
approximately $427,000 if rates were to rise 100 basis points in the next twelve
months. Conversely, net interest income would decline approximately $626,000 and
net income  would  decline  approximately  $410,000  if  interest  rates were to
decline 100 basis points.  Computation  of prospective  effects of  hypothetical
interest  rate  changes are based on numerous  assumptions,  including  relative
levels of market interest rates and loan  prepayments,  and should not be relied
upon  as  indicative  of  actual  results.  Further,  the  computations  do  not
contemplate  any  actions  the Bank could  undertake  in  response to changes in
interest  rates or the effects of responses by others,  including  borrowers and
depositors.

As of June 30,  2005 there was no  significant  change  from the  interest  rate
sensitivity  analysis for the various changes in interest rates calculated as of
December 31, 2004. The foregoing  disclosures  related to the market risk of the
Company should be read in conjunction with Management's  Discussion and Analysis
of  Financial  Position  and Results of  Operations  included in the 2004 Annual
Report on Form 10-K.

Item 4.  Controls and Procedures.

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

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




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<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

PART II - OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

During the quarter  ended June 30,  2005,  the  Registrant  sold 1,641 shares of
common stock to participating  eligible  employees  pursuant to the Registrant's
Employee Stock Purchase Plan for an aggregate  price of $34,510.  The Registrant
also sold to a director  8,350  shares at the closing  price on the day prior to
the sale for an aggregate price of $ 202,738.  The securities were sold pursuant
to the exemption  from  registration  provided by section 4(2) of the Securities
Act of 1933 because the sales did not involve a public offering.

Item 4. Submission of Matters to a vote of Security Holders

   The Company held its annual  meeting of  shareholders  on April 27, 2005. The
only matter voted on at the annual  meeting was the  election of directors  with
results as follows:

         Directors elected to serve                 Authority           Broker
           a three year term              For       Withheld          non-votes


           Paul D. Hollen, III        1,524,321        14,249             0

           James H. Sexton, Jr.       1,525,424        13,146             0

           James P. Smith             1,525,592        12,978             0


          Directors elected to serve
             a one year term


            Tommy B. Baker             1,534,096       4,474             0

            Stephen F. Hutchinson      1,534,350       4,220             0


         The  following  directors  were not voted on at the annual  meeting and
continue to serve until the years indicated:  L. Wayne Pearson - 2007; Robert M.
Scott - 2007: and William A. Coates - 2006.




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





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<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


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




                                                s/L. Wayne Pearson
Date:    August 9, 2005                     By: -----------------------------
                                                L. Wayne Pearson
                                                Chief Executive Officer


                                                s/Robert M. Scott
Date:    August 9, 2005                     By: -----------------------------
                                                Robert M. Scott
                                                Chief Financial Officer



                                       18
<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.




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