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 September 30, 2006

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

               South Carolina                          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 a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer.  See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

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

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

                                 YES [ ] NO [X]

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

     5,470,316 shares of common stock, no par value, as of October 31, 2006





<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - September 30, 2006 and December 31, 2005...............................2

         Condensed Consolidated Statements of Income - Nine months ended September 30, 2006 and 2005
           and three months ended September 30, 2006 and 2005...........................................................3

         Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
           Nine months ended September 30, 2006 and 2005................................................................4

         Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2006 and 2005................5

Notes to Condensed Consolidated Financial Statements..................................................................6-7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.......................8-16

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................17

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

PART II - OTHER INFORMATION

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

Signatures ............................................................................................................18

Exhibit Index .........................................................................................................19
</TABLE>




<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                    September 30,       December 31,
                                                                                                        2006                2005
                                                                                                        ----                ----
                                                                                                     (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                               <C>                 <C>
     Cash and due from banks ..............................................................       $  14,073,651       $  14,377,737
     Federal funds sold ...................................................................           2,775,000          16,964,000
                                                                                                  -------------       -------------
       Total cash and cash equivalents ....................................................          16,848,651
                                                                                                                         31,341,737
   Investment securities
     Available for sale ...................................................................          59,779,146          31,482,927
     Federal Home Loan Bank Stock, at cost ................................................           3,522,800           3,720,100
                                                                                                  -------------       -------------
       Total investment securities ........................................................          63,301,946          35,203,027
   Loans held for sale ....................................................................             582,000           9,275,492
   Loans, net of allowance of $ 4,395,778 and $ 4,269,564 .................................         370,644,154         371,656,054
   Property and equipment, net ............................................................          23,251,811          19,898,188
   Other assets ...........................................................................           9,298,951           9,224,867
                                                                                                  -------------       -------------
       Total assets .......................................................................       $ 483,927,513       $ 476,599,365
                                                                                                  =============       =============

Liabilities
   Deposits
     Noninterest-bearing ..................................................................       $  39,756,150       $  38,753,579
     Interest bearing .....................................................................         281,743,476         272,800,370
                                                                                                  -------------       -------------
       Total deposits .....................................................................         321,499,626         311,553,949
   Advances from Federal Home Loan Bank ...................................................          58,000,000          67,000,000
   Junior subordinated debentures .........................................................          21,655,000          21,655,000
   Repurchase agreements ..................................................................           1,575,092                   -

   Other liabilities ......................................................................           3,343,563           3,075,871
                                                                                                  -------------       -------------
       Total liabilities ..................................................................         406,073,281         403,284,820
                                                                                                  -------------       -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  5,468,724 shares
     outstanding at September 30, 2006 and 5,449,631 at December 31, 2005) ................          75,287,019          70,267,702
   Retained earnings ......................................................................           2,536,279           3,300,753
   Accumulated other comprehensive loss ...................................................              30,934            (253,910)
                                                                                                  -------------       -------------
       Total shareholders' equity .........................................................          77,854,232          73,314,545
                                                                                                  -------------       -------------
       Total liabilities and shareholders' equity .........................................       $ 483,927,513       $ 476,599,365
                                                                                                  =============       =============
</TABLE>


            See notes to condensed consolidated financial statements.



                                       2
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     For the Nine months ended           For the Three months ended
                                                                           September 30,                        September 30,
                                                                           -------------                        -------------
                                                                      2006              2005                2006             2005
                                                                      ----              ----                ----             ----
Interest income
<S>                                                                <C>               <C>               <C>               <C>
   Loans, including fees ...................................       $20,952,717       $15,799,169       $ 7,106,293       $ 5,836,036
   Investment securities ...................................         2,113,996           939,296           918,674           323,401
   Federal funds sold ......................................           322,324           267,709            59,460            31,259
                                                                   -----------       -----------       -----------       -----------
       Total interest income ...............................        23,389,037        17,006,174         8,084,427         6,190,696
                                                                   -----------       -----------       -----------       -----------
Interest expense
   Deposits and borrowings .................................        11,106,217         6,932,889         4,141,990         2,598,168
                                                                   -----------       -----------       -----------       -----------
Net interest income ........................................        12,282,820        10,073,285         3,942,437         3,592,528
    Provision for loan losses ..............................           722,465           579,755            97,582           265,000
                                                                   -----------       -----------       -----------       -----------
Net interest income after provision
   for loan losses .........................................        11,560,355         9,493,530         3,844,855         3,327,528
                                                                   -----------       -----------       -----------       -----------
Noninterest income
   Service fees on deposit accounts ........................           721,323           672,300           229,493           226,916
   Fees on loans sold ......................................           257,633           417,246           102,417           133,449
   Gain on sale of available for sale securities ...........            88,128            79,794            49,033            33,141
   Gain on sale of premises and equipment ..................           377,714                 -                 -                 -
   Presales fee on property under sales contract ...........         1,390,000                 -                 -                 -
   Other ...................................................           294,026           207,370           266,289            66,377
                                                                   -----------       -----------       -----------       -----------
       Total noninterest income ............................         3,128,824         1,376,710           647,232           459,883
                                                                   -----------       -----------       -----------       -----------
Noninterest expenses
   Salaries and employment benefits ........................         4,890,341         3,896,213         1,466,819         1,407,678
   Occupancy ...............................................           641,927           458,437           250,884           118,393
   Furniture and equipment .................................           774,543           537,382           272,262           161,059
   Advertising and public relations ........................           257,712           189,737            92,408            63,675
   Professional fees .......................................           350,134           280,336           169,433           101,229
   Travel and entertainment ................................           328,997           201,312           171,504            58,274
   Telephone, postage and supplies .........................           324,984           244,839           125,736            78,445
   Other operating expenses ................................           891,066           740,011           273,478           240,130
                                                                   -----------       -----------       -----------       -----------
       Total noninterest expenses ..........................         8,459,704         6,548,267         2,822,524         2,228,883
                                                                   -----------       -----------       -----------       -----------
Income before income taxes .................................         6,229,475         4,321,973         1,669,563         1,558,528
    Income tax .............................................         2,356,784         1,445,528           612,527           524,167
                                                                   -----------       -----------       -----------       -----------
Net income .................................................       $ 3,872,691       $ 2,876,445       $ 1,057,036       $ 1,034,361
                                                                   ===========       ===========       ===========       ===========
Basic net income per common share ..........................       $      0.72       $      0.79       $      0.19       $      0.28
Diluted net income per common share ........................       $      0.72       $      0.79       $      0.19       $      0.28
Weighted average shares outstanding
   Basic ...................................................         5,347,180         3,650,886         5,468,724         3,668,345
   Diluted .................................................         5,352,222         3,657,513         5,473,251         3,674,897
</TABLE>


*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2006 and 2005.

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
       Condensed Consolidated Statement of Changes in Shareholders' Equity
                            and Comprehensive Income
             For the nine months ending September 30, 2006 and 2005
                                   (Unaudited)

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

   Net income for the period ...............                                        2,876,445                           2,876,445

   Other comprehensive income
     net of tax,
       Unrealized holding losses
        on securities available for sale ...                                                           (165,562)         (165,562)
                                                                                                                    -------------

   Comprehensive income ....................                                                                            2,710,883

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

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

   Employee stock purchase plan ............       4,962           101,659                                                101,659

   Issuance of common stock ................       8,350           202,738                                                202,738
                                               ---------     -------------      -------------       -----------     -------------

Balance, September 30, 2005 ................   3,336,079     $  37,871,749      $   1,987,805       $   (39,935)    $  39,819,619
                                               =========     =============      =============       ===========     =============

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

   Net income for the period ...............                                        3,872,691                           3,872,691

   Other comprehensive income ..............
     net of tax,
       Unrealized holding gains
        on securities available for sale ...                                                            284,844           284,844
                                                                                                                    -------------

   Comprehensive income ....................                                                                            4,157,535

   Stock dividend ..........................     495,843         4,637,165         (4,637,165)                                  -

   Employee stock purchase plan ............       5,845           108,317                                                108,317

   Issuance of common stock ................      12,826           273,835                                                273,835
                                               ---------     -------------      -------------       -----------     -------------

Balance, September 30, 2006 ................   5,468,724     $  75,287,019      $   2,536,279       $    30,934     $  77,854,232
                                               =========     =============      =============       ===========     =============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                      For the nine months ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                       2006                  2005
                                                                                                       ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  3,872,691         $  2,876,445
   Adjustments to reconcile net income to net
     cash provided (used) by operating activities
       Decrease(increase) in deferred income taxes .......................................             835,629             (863,343)
       Provision for loan losses .........................................................             722,465              579,755
       Depreciation and amortization .....................................................             640,375              443,181
       Discount accretion and premium amortization .......................................            (100,988)              (7,363)
       Gain on sale of securities ........................................................             (88,128)             (79,794)
       Gain on sale of property and equipment ............................................            (377,714)                   -
       Originations of loans held for sale ...............................................         (77,159,768)         (45,435,182)
       Proceeds from sales of loans held for sale ........................................          85,853,260           47,281,314
       Increase in other assets ..........................................................          (1,114,920)          (2,712,758)
       Increase(decrease) in other liabilities ...........................................             267,692             (153,814)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................          13,350,594            1,928,441
                                                                                                  ------------         ------------

Investing activities
   (Purchases) sales of Federal Home Loan Bank stock .....................................             197,300             (357,000)
   Purchases of investment securities available-for-sale .................................         (53,203,846)         (18,119,128)
   Sales, calls, and maturities of investment securities available-for-sale ..............          25,586,794            9,217,284
   Proceeds from sales of premises and equipment .........................................           1,001,298                    -
   Purchases of premises and equipment ...................................................          (4,617,582)          (4,348,991)
   Net (increase) decrease in loans ......................................................             289,435          (47,979,374)
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (30,746,601)         (61,587,209)
                                                                                                  ------------         ------------

Financing activities
   Increase(decrease) in borrowings ......................................................          (7,424,908)           3,000,000
   Increase in junior subordinated debentures ............................................                   -           10,310,000
   Proceeds from issuances of stock ......................................................             382,152              537,987
   Net increase in deposits ..............................................................           9,945,677           45,341,206
                                                                                                  ------------         ------------

         Net cash provided by financing activities .......................................           2,902,921           59,189,193
                                                                                                  ------------         ------------

         Increase(decrease) in cash and cash equivalents .................................         (14,493,086)             469,575

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

Cash and cash equivalents, end of period .................................................        $ 16,848,651         $ 16,558,848
                                                                                                  ============         ============

Cash paid during the year for:
    Income taxes .........................................................................        $  2,919,325         $  2,522,402
    Interest .............................................................................        $ 10,308,453         $  6,757,401
</TABLE>


            See notes to condensed consolidated financial statements.



                                       5
<PAGE>

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


Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
for interim  financial  information  and with the  instructions to Form 10-Q and
item  310 (b) of  Regulation  S-B of the  Securities  and  Exchange  Commission.
Accordingly  they do not include all information and notes required by generally
accepted accounting  principles for complete financial  statements.  However, in
the opinion of  management,  all  adjustments  (consisting  of normal  recurring
adjustments) considered necessary for a fair presentation have been included.

Note 2 - Organization

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

Note 3 - Net Income Per Share

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

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

Note 4 - Recently Issued Accounting Standards

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

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

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  An entity should adopt SFAS No. 156

                                       6
<PAGE>

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

Note 4 - Recently Issued Accounting Standards- (continued)

as of the  beginning of its first fiscal year that begins  after  September  15,
2006.  The Company  does not  believe  the  adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations and cash flows.

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

Note 5 - Commitments and Contingencies

During 2006 we entered into contracts with several vendors for the  construction
and upfitting of a branch facility in the Park West area of Mt. Pleasant and the
renovation of a leased  facility on Sam Rittenberg  Boulevard in the West Ashley
area. The contract amounts  aggregated $1.7 million.  At September 30, 2006, our
remaining commitment under these contracts was $1.3 million.




























                                       7
<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 2005 Annual
Report on Form 10-K of Southcoast Financial  Corporation.  Results of operations
for the period ending  September 30, 2006 are not necessarily  indicative of the
results  to be  attained  for  any  other  period.  All per  share  data in this
discussion  has been  adjusted  to reflect the 10% stock  dividends  declared in
April 2006 and 2005.

                           FORWARD- LOOKING STATEMENTS

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

     o    future economic and business conditions;
     o    lack of  sustained  growth in the  economy of the  Greater  Charleston
          area;
     o    government monetary and fiscal policies;
     o    the  effects of changes in interest  rates on the levels,  composition
          and costs of deposits, loan demand, and the values of loan collateral,
          securities, and interest sensitive assets and liabilities;
     o    the effects of  competition  from a wide  variety of local,  regional,
          national and other providers of financial,  investment,  and insurance
          services;
     o    credit risks;
     o    the  failure  of  assumptions  underlying  the  establishment  of  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; and
     o    other  factors  and  information  described  in this report and in any
          other 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.


                                       8
<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,  2006 was
$3,872,691  or $0.72 per basic share,  compared to  $2,876,445 or $.79 per basic
share,  for the nine months ended September 30, 2005. The reduction in per share
income is the result of the issuance of 1,610,000  shares of common stock in the
fourth quarter of 2005.

The  Company's  net income for the three  months  ended  September  30, 2006 was
$1,057,036  or $0.19 per basic share,  compared to  $1,034,361 or $.28 per basic
share, for the three months ended September 30, 2005. The reduction in per share
income is the result of the issuance of 1,610,000  shares of common stock in the
fourth quarter of 2005.

Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets.
Net  interest  income,  the  principal  source of the  Company's  earnings,  was
$12,282,820  for  the  nine  months  ended  September  30,  2006,   compared  to
$10,073,285 for the nine months ended September 30, 2005.

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

Average  earning assets for the nine months ending  September 30, 2006 increased
22.2 percent to $ 445.9  million from the $365.0  million  reported for the nine
months ending  September 30, 2005. The increase was mainly  attributable  to the
$57.0  million  increase in loans  supported by an increase in average  interest
bearing  liabilities  which resulted from the continued growth of the Charleston
market area, growth in the Company's branches,  the Company's marketing efforts,
and  alternative  funding  sources,  as well as the  proceeds  of the 2005 stock
offering.

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, 2006 and 2005. The increase in net interest income is due to
increased  volume of earning  assets  and the  proceeds  of the stock  offering,
leading to a 2 basis point increase in the Company's net interest margin.





                                       9
<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, 2006                            September 30, 2005
                                                             ------------------                            ------------------
                                                    Average        Income/     Yield/             Average        Income/     Yield/
                                                    Balance        Expense     Rate(1)            Balance        Expense     Rate(1)
                                                    -------        -------     -------            -------        -------     -------
Assets
<S>                                             <C>              <C>             <C>          <C>             <C>              <C>
   Federal funds sold .......................   $  9,105,608     $  322,324      4.73%        $ 12,976,883    $    267,709     2.75
   Investments- taxable .....................     52,629,941      1,993,485      5.06           28,342,348         924,507     4.35
   Investments- non taxable (2) .............      3,995,623        163,895      5.48              499,100          20,113     5.37
                                                ------------     ----------                   ------------    ------------

     Total investments and ..................     65,731,172      2,479,704      5.04           41,818,331       1,212,329     3.87
       Federal funds sold
   Loans (3) (4) ............................    380,182,844     20,952,717      7.37          323,222,207      15,799,169     6.52
                                                ------------    -----------                   ------------    ------------
     Total earning assets ...................    445,914,016     23,432,421      7.03          365,040,538      17,011,498     6.21
                                                                -----------                                   ------------
   Other assets .............................     37,409,471                                    27,029,265
                                               -------------                                  ------------
     Total assets ...........................  $ 483,323,487                                  $392,069,803
                                               =============                                  ============
Liabilities
   Savings and
       transaction accounts .................  $  52,837,210       $665,889      1.68         $ 59,626,683        630,481      1.41
   Time deposits ............................    228,435,634      7,332,370      4.29          187,946,334      4,259,678      3.02
   Other borrowings .........................     61,972,791      1,905,364      4.11           53,464,388      1,411,032      3.52
   Subordinated debt ........................     21,655,000      1,202,594      7.42           13,497,637        631,698      6.24
                                               -------------    -----------                   ------------    -----------
     Total interest bearing
       liabilities ..........................    364,900,635     11,106,217      4.07          314,535,042      6,932,889      2.94
                                                                -----------                                   -----------
   Non-interest bearing
     liabilities ............................     42,837,851                                    39,435,860
                                               -------------                                  ------------
     Total liabilities ......................    407,738,486     11,106,217      3.64          353,970,902      6,932,889      2.61
                                                                -----------                                   -----------
   Shareholders' equity .....................     75,585,000                                    38,098,901
                                               -------------                                  ------------
     Total liabilities and
       shareholders' equity .................  $ 483,323,486                                  $392,069,803
                                               =============                                  ============
     Net interest
       income/margin (5) ....................                 $  12,326,204      3.70%                        $10,078,609      3.68%
                                                              =============                                   ===========
     Net interest spread (6) ................                                    2.96%                                         3.27%
</TABLE>
(1)  Annualized
(2)  Tax equivalent  yield for nontaxable  investments  assuming a 36% tax rate.
(3)  Does not include non-accruing loans
(4)  Includes loan fees of $1,002,602 in 2006 and $1,034,700 in 2005.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above,  for the nine months ended  September  30, 2006 the average
yield on earning  assets was 7.03  percent,  while the average  cost of interest
bearing  liabilities  was 4.07 percent.  For the nine months ended September 30,
2005 the average  yield on earning  assets was 6.21 percent and the average cost
of interest-bearing  liabilities was 2.94 percent.  The increase in the yield on
earning assets is  attributable to the rise in market rates of interest over the
last year. The increase in the cost of interest bearing  liabilities is a result
of maturing  lower yield  certificates  and other  borrowings  being replaced by
higher  yield  certificates  and other  borrowings  and the  increases in market
interest  rates 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 nine
months ended  September  30, 2006 was 3.70 percent  compared to 3.68 percent for
the nine months ended  September 30, 2005.  The margin  increased 2 basis points
between the two periods  despite a 113 basis point increase in rates on interest
bearing  liabilities  from 2.94% to 4.07%  between the two periods,  as compared
with an increase of only 82 basis  points in rates on  interest  earning  assets
from 6.21% to 7.03%. The mitigating factor  responsible for limiting the decline
in margin was the increase in earning assets funded by the $32.3 million in net

                                       10
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

funds raised by the secondary stock offering  completed in the fourth quarter of
2005. The cost of total  liabilities  was 3.64 percent for the nine months ended
September 30, 2006 compared to 2.61 percent for the nine months ended  September
30, 2005.

Average earning assets for the three months ending  September 30, 2006 increased
21.2 percent to $455.3  million from the $375.8  million  reported for the three
months ending  September 30, 2005. The increase was mainly  attributable  to the
increase in loans  supported  by a $53.7  million  increase in average  interest
bearing  liabilities  which resulted from the continued growth of the Charleston
market area, growth in the Company's branches,  the Company's marketing efforts,
alternative funding sources, as well as the proceeds of the 2005 stock offering.

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, 2006 and 2005. The increase in net interest income is due to
increased  volume  of  earning  assets,  partially  offset  by a 36 basis  point
decrease in the Company's net interest margin.

<TABLE>
<CAPTION>
                                                        For the three months ended                    For the three months ended
                                                             September 30, 2006                            September 30, 2005
                                                             ------------------                            ------------------
                                                    Average        Income/     Yield/             Average        Income/     Yield/
                                                    Balance        Expense     Rate(1)            Balance        Expense     Rate(1)
                                                    -------        -------     -------            -------        -------     -------
Assets
<S>                                            <C>              <C>              <C>       <C>                <C>              <C>
   Federal funds sold .....................    $   4,407,830    $    59,460      5.35%     $     3,365,837    $    31,259      3.71%
   Investments - taxable ..................       65,068,941        859,099      5.24           29,153,704        316,544      4.34
   Investments- non taxable(2) ............        5,918,879        102,959      6.90              692,258          9,326      5.39
                                               -------------    -----------                ---------------    -----------
     Total investments and ................       75,395,650      1,021,518      5.38           33,211,799        357,129      4.27
       Federal funds sold
   Loans (3)(4) ...........................      379,944,220      7,106,293      7.42          342,581,748      5,836,036      6.81
                                               -------------    -----------                ---------------    -----------
     Total earning assets .................      455,339,870      8,127,811      7.08          375,793,547      6,193,165      6.59
                                                                -----------                                   -----------
     Other assets .........................       40,352,137                                    30,065,920
                                               -------------                               ---------------
     Total assets .........................    $ 495,692,007                               $   405,859,467
                                               =============                               ===============
Liabilities
   Savings and
       transaction accounts ...............    $  52,370,989    $   236,176     1.79%      $    52,850,006    $   167,869      1.27%
   Time deposits ..........................      236,561,240      2,730,763     4.58           195,982,804      1,636,943      3.34
   FHLB advances ..........................       67,337,893        743,193     4.38            57,542,268        512,504      3.56
   Subordinated debt ......................       21,655,000        431,858     7.91            17,802,912        280,852      6.31
                                               -------------    -----------                ---------------    -----------
     Total interest bearing
       liabilities ........................      377,925,122      4,141,990     4.35           324,177,990      2,598,168      3.21
                                                                -----------                                   -----------
   Non-interest bearing
     liabilities ..........................       40,210,658                                    42,472,547
                                               -------------                               ---------------
     Total liabilities ....................      418,135,780      4,141,990     3.93           366,650,537     2,598,168       2.83
                                                                -----------                                   ----------
   Shareholders' equity ...................       77,556,227                                    39,208,930
                                               -------------                               ---------------
     Total liabilities and
       shareholders' equity ...............    $ 495,692,007                               $   405,859,467
                                               =============                               ===============
     Net interest
       income/margin (5) ..................                     $3,985,821     3.47%                          $3,594,997       3.83%
                                                                ==========                                    ==========
     Net interest spread (6) ..............                                    2.73%                                           3.38%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non-accruing loans.
(4)  Includes loan fees of $282,792 in 2006 and $417,631 in 2005.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

                                       11
<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, 2006 the average
yield on earning  assets was 7.08  percent,  while the average  cost of interest
bearing  liabilities was 4.35 percent.  For the three months ended September 30,
2005 the average  yield on earning  assets was 6.59 percent and the average cost
of interest-bearing  liabilities was 3.21 percent.  The increase in the yield on
earning assets is attributable to the increases in market rates of interest over
the last 12 months. The increase in the cost of interest bearing  liabilities is
a result of maturing lower yield  certificates of deposits and other  borrowings
being replaced with higher yield certificates and other borrowings and increases
in market rates of interest.  The net interest margin for the three months ended
September  30,  2006,  was 3.47  percent  compared to 3.83 percent for the three
months  ended  September  30, 2005.  The decrease in the net interest  margin is
primarily  attributable  to the  maturities  of lower priced retail and brokered
time deposits and other borrowings during the third quarter. These time deposits
and other  borrowings were replaced with deposits and other  borrowings  bearing
much higher interest  rates,  and the increase in average rates paid on interest
bearing  liabilities was 114 basis points between the two quarters,  as compared
to an increase of only 49 basis points yield on interest  earning  assets.  This
compression of the net interest margin was partially offset by the $32.3 million
of net proceeds from the 2005 stock offering.  The cost of total liabilities was
3.93  percent for the three  months ended  September  30, 2006  compared to 2.83
percent for the three months ended September 30, 2005.

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

<TABLE>
<CAPTION>
                                                                              Analysis of Changes in Net Interest Income
                                                                            For the nine months ended September 30, 2006
                                                                         Versus nine months ended September 30, 2005 (1)
                                                                         -----------------------------------------------
                                                                           Volume               Rate           Net Change
                                                                           ------               ----           ----------
Interest income:
<S>                                                                  <C>                <C>                 <C>
   Federal funds sold .........................................      $     (79,644)     $     134,259       $      54,615
   Investments - taxable ......................................            790,073            278,905           1,068,978
   Investments - non taxable ..................................            140,519              3,263             143,782
                                                                     -------------      -------------       -------------
     Total investments and federal funds sold .................            850,948            416,427           1,267,375

     Net loans(2) .............................................          2,776,621          2,376,927           5,153,548
                                                                     -------------      -------------       -------------
     Total interest income ....................................          3,627,569          2,793,354           6,420,923
                                                                     -------------      -------------       -------------

Interest Expense:

   Savings and transaction accounts ...........................            (71,594)           107,002              35,408
   Time deposits ..............................................            915,149          2,157,543           3,072,692
   FHLB advances ..............................................            178,619            315,713             494,332
   Subordinated debt ..........................................            380,724            190,172             570,896
                                                                     -------------      -------------       -------------

     Total interest expense ...................................          1,402,898          2,770,430           4,173,328
                                                                     -------------      -------------       -------------
     Net interest income ......................................      $   2,224,671      $      22,924       $   2,247,595
                                                                     =============      =============       =============
</TABLE>




                                       12
<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, 2006
                                                                         Versus three months ended September 30, 2005(1)
                                                                         -----------------------------------------------
                                                                           Volume               Rate           Net Change
                                                                           ------               ----           ----------
Interest income:

<S>                                                                  <C>                <C>                 <C>
   Federal funds sold ...........................................    $       9,757      $      18,444       $      28,201
   Investments - taxable ........................................          393,164            149,391             542,555
   Investments - non taxable ....................................           70,987             22,646              93,633
                                                                     -------------      -------------       -------------
     Total investments and federal funds sold ...................          473,908            190,481             664,389
     Net loans (2) ..............................................          641,718            723,368           1,365,086
                                                                     -------------      -------------       -------------
     Total interest income ......................................        1,115,626            913,849           2,029,475
                                                                     -------------      -------------       -------------
Interest expense:
   Savings and transaction accounts .............................           (1,534)            69,841              68,307
   Time deposits ................................................          341,716            752,104           1,043,820
   FHLB advances ................................................           45,896            184,793             230,689
   Subordinated debt ............................................           61,269             89,737             151,006
                                                                     -------------      -------------       -------------
     Total interest expense .....................................          447,347          1,096,475           1,543,822
                                                                     -------------      -------------       -------------
     Net interest income ........................................    $     668,279      $    (182,626)      $     485,653
                                                                     =============      ==============      =============
</TABLE>
(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Includes loan fees of $1,002,602  and  $1,034,700 for the nine months ended
     September  30, 2006 and 2005 and $282,792 and $417,631 for the three months
     ended September 30, 2006 and 2005.

Noninterest Income and Expenses

Noninterest  income for the nine months ended  September 30, 2006 was $3,128,824
compared to  $1,376,710  for the nine  months  ended  September  30,  2005.  The
increase is largely  attributable to two non-regularly  recurring  transactions.
The first is receipt of a  $1,390,000  presales  fee on a parcel of our property
currently  under  contract to be sold in the fourth  quarter of 2007. The fee is
not applicable to the purchase price of the property and is nonrefundable in the
event the sale does not occur. The second non-regularly recurring transaction is
a $377,714 gain on the sale of premises and equipment  related to a sale of real
estate.  Although the Company has reported  income in a number of recent periods
related  to sales of excess  real  estate  and may  continue  to do so in future
periods,  the number and amounts of such transactions are likely to be irregular
and shareholders should not expect such transactions or resulting income in each
future period.

Noninterest  expenses  for the nine  months  ended  September  30,  2006  were $
8,459,704,  compared to $6,548,267 for the nine months ended September 30, 2005.
The increase of $ 1,911,437 is attributable to the increased overhead created by
the  opening  of our  Operations  Center in March 2006 and our  Dorchester  Road
branch in December  2005, as well as  additional  overhead  attributable  to the
business of Charlestowne Mortgage, which was acquired on June 30th of this year.
We have also incurred additional staffing and consulting expenses in preparation
for  compliance  with  Sarbanes  Oxley Section 404. Our  advertising  and public
relations and travel and  entertainment  expenses have  increased as a result of
our entry into the Hilton Head  marketplace and our continued  efforts to expand
our local market share in and around Charleston.

Noninterest  income for the three months ended  September 30, 2006 was $647,232,
compared to $459,883 for the quarter ended  September 30, 2005. This increase is
mainly  attributable  to a $117,647  dividend  we received on shares we own in a
mezzanine  financing  investment  fund. We have held a $500,000  equity stake in
this fund for  several  years,  but this is the first  time we have  received  a
dividend on our investment.

Noninterest  expenses  for the  three  months  ended  September  30,  2006  were
$2,822,524,  compared to  $2,228,883  for the three months ended  September  30,
2005. The increase of $593,641 is mainly  attributable  to increases in salaries
and benefits,  furniture and equipment expense and administrative  expenses. The
reasons for the increases are  essentially  the same as those for the nine month
periods discussed above.



                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within our bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively stable funding base, and were equal to $142.0 million,  or 44.1% of
total  deposits as of September  30,  2006.  Asset  liquidity  is provided  from
several  sources,  including  amounts due from banks and federal  funds sold and
funds from maturing loans. Our Bank is a member of the Federal Home Loan Bank of
Atlanta ("FHLBA") and, as such has the ability to borrow against a pledge of its
1-4 family residential mortgage loans. We also have a $15 million line of credit
with the Bankers  Bank of Atlanta  and a $10  million  line of credit with First
Tennessee  Bank.  We are in the process of opening two new branch  offices.  The
total unexpended cost of these facilities is $1.3 million. The funding for these
offices will come from normal operations. Management believes that our liquidity
sources are adequate to meet our normal operating needs.

Loans

Nonfarm,  nonresidential  loans  totaling  $79.0  million made up 21.1% of total
loans at September 30, 2006.  Construction  and land  development  loans totaled
98.4  million,  or 26.2% of the loan  portfolio.  All other  real  estate  loans
(primarily  mortgage loans) comprised $165.5 million, or 44.1% of the portfolio.
Commercial and industrial  loans totaled $29.0 million,  or 7.7% of total loans.
Finally,  installment and consumer loans totaled $3.2 million,  or 0.9% of total
loans.  The  allowance  for loan losses was 1.17% of total loans as of September
30, 2006,  compared to 1.14% as of December 31, 2005. In  management's  opinion,
the allowance for loan losses is adequate to absorb  anticipated losses inherent
in our bank's loan  portfolio.  At September 30, 2006,  the Company did not have
any loans 90 days  delinquent  and still  accruing  interest  or any other  real
estate  owned and had $1.4  million  of  non-accruing  loans.  The  majority  of
non-accruing  loans are secured by real  estate.  There were no other loans that
management had  determined to be potential  problem loans at September 30, 2006.
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
between the various loan categories:

Balance at December 31, 2005 ..............................   $4,269,564
Current Year Loan Loss Provision ..........................      722,465
Charge- offs:
     Domestic:
       Commercial, financial, and agricultural ............     (568,418)
       Installment loans to individuals ...................      (28,065)
     Foreign: .............................................            -
Recoveries:
       Installment loans to individuals ...................          232
                                                              ----------
Balance at September 30, 2006 .............................    4,395,778

<TABLE>
<CAPTION>
                                                                                                    Allowance For Loan
                                                                                                    Loss Allocation as a
Balance at End of Period Applicable to:        (in thousands)                       Amount          Percentage of the whole
                                                                                    ------          -----------------------
Domestic:
<S>                                                                                  <C>                  <C>
  Commercial, financial, and agricultural .......................................    $1,831                41.7%
  Real estate- construction .....................................................       984                22.4
  Real estate- mortgage .........................................................     1,468                33.4
    Installment loans to individuals and all other domestic loans ...............        93                 2.1
Foreign .........................................................................         0                   -
Unallocated .....................................................................        20                 0.4
                                                                                     ------               -----
Total ...........................................................................    $4,396               100.0
                                                                                     ======
</TABLE>


                                       14
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Deposits

Deposits  increased  $9.9 million during the first nine months of 2006 to $321.5
million at September  30, 2006.  The increase was primarily  attributable  to an
increase of $14.1  million in brokered  and  wholesale  deposits,  as well as an
increase of $1.0 million in noninterest  bearing deposits.  These increases were
offset by  decreases  in  interest  bearing  transaction,  savings,  and  retail
certificate accounts totaling $5.2 million.

Other Borrowings

Other   borrowings   include  FHLBA  advances.   Advances  from  the  FHLBA  are
collateralized by FHLBA stock and pledges of certain residential mortgage loans.
At September 30, 2006 FHLBA advances are summarized as follows:

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

           June 2007                   5.37%             $     5,500,000
           July 2007                   5.48%                  16,000,000
           June 2008                   5.40%                   5,500,000
           September 2010              5.55%                   7,000,000
           February 2011               5.40%                   4,500,000
           March 2013                  2.91%                   7,500,000
           September 2013              4.84%                  10,000,000
           June 2014                   3.92%                   2,000,000
                                                         ---------------

              Balance                                    $    58,000,000
                                                         ===============

Junior Subordinated Debentures

In two  separate  transactions  in 2002 and  another  transaction  in  2005,  we
established  Southcoast Capital Trusts I, II and III (the "Capital Trusts"),  as
non-consolidated  subsidiaries.  The Capital  Trusts  issued and sold a total of
21,655 floating rate securities,  with $1,000  liquidation  amount per security.
Institutional  buyers bought 21,000 of the floating rate securities  denominated
as preferred  securities  and we bought the other 655 floating  rate  securities
which are denominated as common  securities.  The proceeds of those sales, $21.7
million,  were  used by the  Capital  Trusts  to buy  $21.7  million  of  junior
subordinated  debentures from us which are reported on our consolidated  balance
sheets.  Our $655,000  investment in the common securities of the Capital Trusts
is included in "Other assets" on our consolidated  balance sheets. The preferred
securities  of the  Capital  Trusts  totaling  $21.0  million  qualify as Tier 1
capital under Federal Reserve Board guidelines, subject to limitations. See Note
10 to the  consolidated  financial  statements  in our 2005  Form  10-K for more
information about the terms of the junior subordinated debentures.

Capital Resources

Our Company's  capital base  increased by $4.5 million for the first nine months
of 2006,  due to operating  income,  capital  raised  through the Employee Stock
Purchase Plan, and unrealized  holding gains, net of tax, on  available-for-sale
securities.  Our  Company's  Tier 1 capital  to average  assets  ratio was 20.62
percent as of September  30, 2006  compared to 21.36  percent as of December 31,
2005.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into  two  tiers.   Our  Tier  1  capital   consists  of  common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt  subject  to  certain  limitations.  Our  Tier 2  capital  consists  of the
allowance  for  loan  losses  subject  to  certain  limitations  and our  junior
subordinated  debt  in  excess  of 25% of our  Tier 1  capital.  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.  We and our
bank are also required to maintain capital at a minimum level based on quarterly
average assets,  which is known as the leverage  ratio.  Only the strongest bank
holding  companies  and banks are  allowed to  maintain  capital at the  minimum
requirement.  All others  are  subject  to  maintaining  ratios 100 to 200 basis
points above the minimum. As of September 30, 2006, we and the bank exceeded our
capital requirements levels as shown in the following table.


                                       15
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital Resources- continued

<TABLE>
<CAPTION>
                                                                                      Capital Ratios
                                                                                      --------------
                                                                                      Well Capitalized      Adequately Capitalized
(Dollars in thousands)                                             Actual               Requirement                Requirement
                                                                   ------               -----------                -----------
                                                            Amount      Ratio         Amount     Ratio          Amount       Ratio
                                                            ------      -----         ------     -----          ------       -----
The Bank
<S>                                                       <C>           <C>         <C>          <C>          <C>            <C>
  Total capital (to risk-weighted assets) ..........      $ 52,851      15.42%      $ 34,281     10.00%       $ 27,425       8.00%
  Tier 1 capital (to risk-weighted assets) .........        48,762      14.22%        20,569      6.00%         13,713       4.00%
  Tier 1 capital (to average assets) ...............        48,762      10.21%        23,878      5.00%         19,102       4.00%
The Company
  Total capital (to risk-weighted assets) ..........      $103,937      28.86%           N/A       N/A        $ 28,810       8.00%
  Tier 1 capital (to risk-weighted assets) .........        99,541      27.64%           N/A       N/A          14,405       4.00%
   Tier 1 capital (to average assets) ..............        99,541      20.62%           N/A       N/A          19,313       4.00%
</TABLE>

Off Balance Sheet Risk

We make  contractual  commitments to extend credit and issue standby  letters of
credit in the ordinary course of our business activities.  These commitments are
legally binding agreements to lend money to customers at predetermined  interest
rates for a  specified  period of time.  In addition  to  commitments  to extend
credit,  we also issue standby letters of credit which are assurances to a third
party that it will not suffer a loss if our customer fails to meet a contractual
obligation to the third party. At September 30, 2006, we had issued  commitments
to extend  credit of $43.3  million  and  standby  letters of credit of $523,471
through various types of commercial lending  arrangements.  Approximately  $34.5
million of these commitments to extend credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments  to extend  credit and standby  letters of credit at  September  30,
2006.

<TABLE>
<CAPTION>
                                                    After One       After Three
                                                     Through          Through                             Greater
                                   Within One         Three           Twelve        Within One             Than
                                      Month          Months           Months            Year             One Year           Total
                                      -----          ------           ------            ----             --------           -----
<S>                               <C>             <C>             <C>              <C>                <C>              <C>
Unused commitments
   to extend credit ............  $ 1,008,393     $ 2,091,514     $ 20,474,879     $  23,574,786      $ 19,692,436     $  43,267,222
Standby letters of credit ......            -          69,601          453,870           523,471                 -           523,471
                                  -----------     -----------     ------------     -------------      ------------     -------------

    Totals .....................  $ 1,008,393     $ 2,161,115     $ 20,928,749     $  24,098,257      $ 19,692,436     $  43,790,693
                                  ===========     ===========     ============     =============      ============     =============
</TABLE>

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

We evaluate 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 our  credit  evaluation  of the  borrower.  Collateral  varies  but may
include  accounts  receivable,   inventory,   property,   plant  and  equipment,
commercial and residential real estate.


                                       16
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

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

Item 4. - Controls and Procedures.

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

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

PART II - OTHER INFORMATION

Item 6.  Exhibits

    31-1    Rule 13a-14(a) Certifications of CEO
    31-2    Rule 13a-14(a) Certifications of CFO
    32      Section 1350 Certification






                                       17
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


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





Date:    November 14, 2006                  By: s/L. Wayne Pearson
                                               ---------------------------------
                                                L. Wayne Pearson
                                                Chief Executive Officer



Date:    November 14, 2006                  By: s/William C. Heslop
                                               ---------------------------------
                                                William C. Heslop
                                                Senior Vice President and 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.




                                       19