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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended March 31, 2007

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

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

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

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

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

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

                                 YES [X]  NO [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

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

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.

      5,690,747 shares of common stock, no par value, as of April 30, 2007




<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX

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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                   <C>
         Condensed Consolidated Balance Sheets - March 31, 2007 and December 31, 2006...................................2

         Condensed Consolidated Statements of Income - Three months ended March 31, 2007 and 2006.......................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Three months ended March 31, 2007 and 2006...................................................................4

         Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2007 and 2006...................5

Notes to Condensed Consolidated Financial Statements..................................................................6-8

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.......................8-15

Item 3.  Quantitative and Qualitative Disclosure about Market Risk.....................................................15

Item 4.  Controls and Procedures.......................................................................................15

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds ..................................................16

Item 6.  Exhibits .....................................................................................................16

Signatures ............................................................................................................17

Exhibit Index .........................................................................................................18
</TABLE>




<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                       March 31,        December 31,
                                                                                                         2007               2006
                                                                                                         ----               ----
                                                                                                     (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                               <C>                 <C>
     Cash and due from banks ..............................................................       $   8,457,556       $   7,008,202
     Federal funds sold ...................................................................          13,762,000          31,204,000
                                                                                                  -------------       -------------
         Total cash and cash equivalents ..................................................          22,219,556          38,212,202
   Investment securities
     Available for sale ...................................................................          42,924,592          42,577,683
     Federal Home Loan Bank Stock, at cost ................................................           4,479,200           3,882,800
                                                                                                  -------------       -------------
         Total investment securities ......................................................          47,403,792          46,460,483
   Loans held for sale ....................................................................             330,937             139,516
   Loans, net of allowance of $4,364,165 and $4,364,127 ...................................         359,625,056         363,246,406
   Property and equipment, net ............................................................          25,605,113          25,125,834
   Other assets ...........................................................................           8,818,824           8,671,099
                                                                                                  -------------       -------------

       Total assets .......................................................................       $ 464,003,278       $ 481,855,540
                                                                                                  =============       =============

Liabilities
   Deposits
     Noninterest-bearing ..................................................................       $  31,499,016       $  34,693,747
     Interest bearing .....................................................................         247,649,099         276,198,958
                                                                                                  -------------       -------------

       Total deposits .....................................................................         279,148,115         310,892,705

   Securities sold under agreements to repurchase .........................................           5,925,299           1,840,719
   Other borrowings .......................................................................          81,000,000          66,000,000
   Junior subordinated debentures .........................................................          21,655,000          21,655,000
   Other liabilities ......................................................................           3,003,141           2,664,504
                                                                                                  -------------       -------------

       Total liabilities ..................................................................         390,731,555         403,052,928
                                                                                                  -------------       -------------

Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  5,702,836 shares
     outstanding at March 31, 2007 and 6,017,348 at December 31, 2006) ....................          73,270,495          75,315,774
   Retained earnings ......................................................................                   0           3,503,162
   Accumulated other comprehensive income (loss) ..........................................               1,228             (16,324)
                                                                                                  -------------       -------------

       Total shareholders' equity .........................................................          73,271,723          78,802,612
                                                                                                  -------------       -------------
       Total liabilities and shareholders' equity .........................................       $ 464,003,278       $ 481,855,540
                                                                                                  =============       =============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       2
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                     For the Three months ended
                                                                                                              March 31,
                                                                                                              ---------
                                                                                                     2007                    2006
                                                                                                     ----                    ----
Interest income
<S>                                                                                              <C>                      <C>
   Loans, including fees .........................................................               $6,973,916               $6,733,622
   Investment securities .........................................................                  602,434                  440,355
   Federal funds sold ............................................................                  216,687                  105,191
                                                                                                 ----------               ----------
       Total interest income .....................................................                7,793,037                7,279,168
                                                                                                 ----------               ----------
Interest expense
   Deposits and borrowings .......................................................                4,151,600                3,253,034
                                                                                                 ----------               ----------
Net interest income ..............................................................                3,641,437                4,026,134
    Provision for loan losses ....................................................                        -                  319,223
                                                                                                 ----------               ----------
Net interest income after provision
   for loan losses ...............................................................                3,641,437                3,706,911
                                                                                                 ----------               ----------
Noninterest income
   Service fees on deposit accounts ..............................................                  218,587                  245,429
   Fees on loans sold ............................................................                   98,360                   92,927
   Gain on sale of available for sale securities .................................                   91,951                   32,142
   Gain on sale of property and equipment ........................................                   13,000                  377,714
   Other .........................................................................                  180,587                   37,606
                                                                                                 ----------               ----------
       Total noninterest income ..................................................                  602,485                  785,818
                                                                                                 ----------               ----------
Noninterest expenses
   Salaries and employment benefits ..............................................                1,728,354                1,477,334
   Occupancy .....................................................................                  266,931                  181,154
   Furniture and equipment .......................................................                  277,802                  206,690
   Advertising and public relations ..............................................                   59,970                   74,834
   Professional fees .............................................................                  176,255                   69,531
   Travel and entertainment ......................................................                   73,281                   64,033
   Telephone, postage and supplies ...............................................                  113,605                   89,521
   Other operating expenses ......................................................                  272,690                  242,897
                                                                                                 ----------               ----------
       Total noninterest expenses ................................................                2,968,888                2,405,994
                                                                                                 ----------               ----------
Income before income taxes .......................................................                1,275,034                2,086,735
    Income tax ...................................................................                  444,122                  750,323
                                                                                                 ----------               ----------
Net income .......................................................................               $  830,912               $1,336,412
                                                                                                 ==========               ==========
Basic net income per common share ................................................               $     0.14               $     0.22
Diluted net income per common share ..............................................               $     0.14               $     0.22
Weighted average shares outstanding
   Basic .........................................................................                5,849,085                5,996,220
   Diluted .......................................................................                5,854,599                6,002,018
</TABLE>

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                 Condensed Consolidated Statement of Changes in
                 Shareholders' Equity and Comprehensive Income
               For the three months ending March 31, 2007 and 2006
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                                                             other
                                                                Common Stock                             comprehensive
                                                                ------------             Retained            income
                                                            Shares         Amount        earnings            (loss)          Total
                                                            ------         ------        --------            ------          -----
<S>                                                        <C>          <C>             <C>             <C>            <C>
Balance, December 31, 2005 ..........................      4,954,210    $ 70,267,702    $  3,300,753    $   (253,910)  $ 73,314,545

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

   Other comprehensive loss
     net of tax benefit of $52,036
   Unrealized holding losses
     on securities available for sale ...............                                                        (92,015)       (92,015)

   Less reclassification adjustment for
      gains included in net income, net of
      taxes of $10,928 ..............................                                                        (21,214)       (21,214)
                                                                                                                       ------------

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

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

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

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

Balance, December 31, 2006 ..........................      5,470,316    $ 75,315,774    $  3,503,162    $    (16,324)  $ 78,802,612

   Net income for the period ........................                                        830,912                        830,912

   Other comprehensive income
     net of taxes of $ 42,976
    Unrealized holding gains
     on securities available for sale ...............                                                         76,401         76,401

    Less reclassification adjustment for
       gains included in net income, net of
       taxes of $33,103 .............................                                                        (58,849)       (58,849)
                                                                                                                       ------------

   Comprehensive income .............................                                                                       848,464

   Stock dividend ...................................        518,440       4,334,074      (4,334,074)                             -

   Shares repurchased and retired ...................       (287,542)     (6,407,901)                                    (6,407,901)

   Employee stock purchase plan .....................          1,622          28,548                                         28,548
                                                           ---------    ------------    ------------    ------------   ------------


Balance, March 31, 2007 .............................      5,702,836    $ 73,270,495    $          -    $      1,228   $ 73,271,723
                                                           =========    ============    ============    ============   ============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       4
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       For the three months ended
                                                                                                                 March 31,
                                                                                                                 ---------
                                                                                                        2007                 2006
                                                                                                        ----                 ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $    830,912         $  1,336,412
   Adjustments to reconcile net income to net
     cash provided (used) by operating activities
       (Increase) decrease in deferred income taxes ......................................             403,119             (430,384)
       Provision for loan losses .........................................................                   -              319,223
       Depreciation and amortization .....................................................             374,511              144,292
       Discount accretion and premium amortization .......................................              (4,301)              (9,002)
       Gain on sale of securities ........................................................             (91,951)             (32,142)
       Gain on sale of property and equipment ............................................             (13,000)            (377,714)
       Originations of loans held for sale ...............................................         (20,506,677)         (21,479,686)
       Proceeds from sales of loans held for sale ........................................          20,315,256           25,330,981
       (Increase) decrease in other assets ...............................................            (560,716)             971,726
       (Decrease) increase in other liabilities ..........................................             338,637           (1,271,943)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           1,085,790            4,501,763
                                                                                                  ------------         ------------

Investing activities
   Purchases of Federal Home Loan Bank stock .............................................            (596,400)            (657,700)
   Purchases of investment securities available-for-sale .................................          (3,371,123)         (19,790,269)
   Sales, calls, and maturities of investment securities available-for-sale ..............           3,147,890              724,197
   Proceeds from sales of premises and equipment .........................................              13,000            1,672,504
   Purchases of  premises and equipment ..................................................            (853,790)          (1,548,513)
   Net (increase) decrease in loans ......................................................           3,621,350             (410,793)
                                                                                                  ------------         ------------

         Net cash provided by (used for) investing activities ............................           1,960,927          (20,010,574)
                                                                                                  ------------         ------------

Financing activities
   Increase in borrowings ................................................................          19,084,580           10,052,443
   Proceeds from issuance of stock .......................................................              28,548               38,316
   Funds used to repurchase stock ........................................................          (6,407,901)                   -
   Net increase(decrease) in deposits ....................................................         (31,744,590)          17,427,254
                                                                                                  ------------         ------------

         Net cash provided (used) by financing activities ................................         (19,039,363)          27,518,013
                                                                                                  ------------         ------------

         (Decrease) increase in cash and cash equivalents ................................         (15,992,646)          12,009,202

Cash and cash equivalents, beginning of period ...........................................          38,212,202           31,341,737
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 22,219,556           43,350,939
                                                                                                  ============         ============

Cash paid during the year for:
    Income taxes .........................................................................        $    413,681         $    508,214
    Interest .............................................................................        $  4,264,954         $  2,147,205
</TABLE>


            See notes to condensed consolidated financial statements.


                                       5
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1 - Basis of Presentation

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

Note 2 - Organization

Southcoast Financial Corporation (the "Company") is a South Carolina corporation
organized  in 1999 for the  purpose of being a holding  company  for  Southcoast
Community Bank (the "Bank").  On April 29, 1999,  pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding shares of capital stock of
the Bank were  exchanged for shares of common stock of the Company.  The Company
presently  engages in no business other than that of owning the Bank and another
subsidiary, Southcoast Investment Corporation, 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 May 2007 and April 2006, the Company  declared ten percent stock dividends on
the Company's  common stock. The weighted average number of shares and all other
share and per share data has been restated for all periods  presented to reflect
these stock dividends.

Note 3 - Stock Repurchase

On January 23, 2007,  the Company  announced  plans to  repurchase up to 547,194
shares of its common stock, or 10% of outstanding shares. Repurchased shares are
retired into authorized but unissued  shares.  During the first quarter of 2007,
the  Company  repurchased  287,542  shares  and  in  April,  2007,  the  Company
repurchased an additional  10,990 shares.  As a result of the  repurchases,  the
Company had 5,690,747 common shares outstanding at April 30, 2007.

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 Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  ("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." FAS 155
permits  fair value  re-measurement  for any hybrid  financial  instrument  that
contains  an embedded  derivative  that  otherwise  would  require  bifurcation,
clarifies which interest  only-strips and principal-only  strips are not subject
to the  requirements  of Statement  133,  establishes a requirement  to evaluate
interests  in  securitized  financial  assets  to  identify  interests  that are
freestanding  derivatives or that are hybrid financial  instruments that contain
an embedded derivative requiring  bifurcation,  clarifies that concentrations of
credit  risk in the form of  subordination  are not  embedded  derivatives,  and
amends  Statement  140 to eliminate  the  prohibition  on a  qualifying  special
purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial  instruments acquired or issued after January
1, 2007.  The Company  does not believe  that the  adoption of SFAS No. 155 will
have a material impact on its financial position,  results of operations or cash
flows.


                                       6
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards (continued)

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.  The required adoption date for SFAS
No. 156 is January 1, 2007.  The Company  does not believe the  adoption of SFAS
No.  156 will have a  material  impact on its  financial  position,  results  of
operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for  Uncertainty  in  Income  Taxes".   FIN  48  clarifies  the  accounting  for
uncertainty in income taxes recognized in enterprises'  financial  statements in
accordance with FASB Statement No. 109,  "Accounting  for Income Taxes".  FIN 48
prescribes  a  recognition  threshold  and  measurement   attributable  for  the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosures  and  transitions.  FIN 48 is  effective  for fiscal years
beginning after December 15, 2006. The Company does not believe that FIN 48 will
have a material impact on its financial position,  results of operations or cash
flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value,  establishes  a framework  for  measuring  fair value in
generally accepted  accounting  principles,  and expands  disclosures about fair
value  measurements.   This  standard  does  not  require  any  new  fair  value
measurements,  but rather  eliminates  inconsistencies  found in  various  prior
pronouncements.  SFAS 157 is  effective  for the  Company on January 1, 2008 and
will not impact the  Company's  accounting  measurements  but it is  expected to
result in some additional disclosures.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans" ("SFAS 158"),  which
amends  SFAS  87 and  SFAS  106 to  require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The  measurement  date -
the date at which the  benefit  obligation  and plan  assets  are  measured - is
required  to be the  company's  fiscal  year  end.  SFAS  158 is  effective  for
publicly-held  companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after  December 15, 2008.  The Company does not have a defined  benefit  pension
plan.  Therefore,  SFAS 158 will not impact the Company's financial condition or
results of operations.

In  September,  2006,  The FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements".   EITF  06-4  addresses  employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in accordance  with SFAS No. 106,  "Employers'
Accounting  for  Postretirement  Benefits  Other Than  Pensions",  or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967".  EITF 06-4 is
effective for fiscal years  beginning  after December 15, 2007.  Entities should
recognize  the effects of  applying  this Issue  through  either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other  components  of equity or net assets in the  statement  of financial
position  as of the  beginning  of the  year  of  adoption  or (b) a  change  in
accounting principle through retrospective application to all prior periods. The
Company does not believe the  adoption of EITF 06-4 will have a material  impact
on its financial position, results of operations and cash flows.

                                       7
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards (continued)

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for
Purchases  of Life  Insurance."  EITF 06-5  states  that a  policyholder  should
consider  any  additional  amounts  included  in the  contractual  terms  of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for fiscal years  beginning  after  December  15, 2007.  The
Company does not believe the  adoption of EITF 06-5 will have a material  impact
on its financial position, results of operations and cash flows.

In December  2006,  the FASB issued a Staff  Position  ("FSP") on EITF  00-19-2,
"Accounting for Registration Payment Arrangements ("FSP EITF 00-19-2"). This FSP
specifies  that the contingent  obligation to make future  payments or otherwise
transfer consideration under a registration payment arrangement,  whether issued
as a separate agreement or included as a provision of a financial  instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5,  "Accounting for  Contingencies."  If the transfer of  consideration
under a  registration  payment  arrangement  is probable  and can be  reasonably
estimated at inception,  the contingent liability under the registration payment
arrangement is included in the allocation of proceeds from the related financing
transaction  (or  recorded  subsequent  to the  inception  of a prior  financing
transaction) using the measurement guidance in SFAS No. 5. This FSP is effective
immediately for registration payment arrangements and the financial  instruments
subject to those  arrangements  that are entered into or modified  subsequent to
the  issuance  of the FSP.  For prior  arrangements,  the FSP is  effective  for
financial  statements  issued for fiscal years beginning after December 15, 2006
and  interim  periods  within  those  years.  The  Company  does not believe the
adoption  of this FSP will have a  material  impact on its  financial  position,
results of operations and cash flows.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and  Financial  Liabilities  - Including  an amendment of FASB
Statement No. 115." This statement  permits,  but does not require,  entities to
measure many financial  instruments  at fair value.  The objective is to provide
entities with an opportunity to mitigate  volatility in reported earnings caused
by measuring related assets and liabilities  differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the  entity  first  recognizes  an  eligible  instrument  and  will  report
unrealized  gains and  losses on such  instruments  in  current  earnings.  This
statement 1) applies to all entities,  2) specifies  certain  election dates, 3)
can be applied on an instrument-by-instrument  basis with some exceptions, 4) is
irrevocable and 5) applies only to entire  instruments.  One exception is demand
deposit  liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS 115,  available-for-sale and held-to-maturity securities at
the  effective  date are eligible for the fair value option at that date. If the
fair  value  option is  elected  for those  securities  at the  effective  date,
cumulative  unrealized  gains and losses at that date shall be  included  in the
cumulative-effect  adjustment and thereafter,  such securities will be accounted
for as trading  securities.  SFAS 159 is effective for the Company on January 1,
2008.  The  Company  is  currently  analyzing  the  fair  value  option  that is
permitted, but not required, under SFAS 159.

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

In May 2006 the  Company  entered  into a sales  contract on two parcels of land
contiguous to its branch location on John's Island. The land has a cost basis of
$2,837,178.  Under the agreement the Company agreed to sell the land, comprising
approximately  13.21 acres,  to the  purchaser  for the sum of  $5,735,000.  The
agreement specifies a closing date on or before September 30, 2007, which can be
extended  for a cost of $15,000  per month  through  December  31,  2007.  These
monthly  payments are  nonrefundable  and not applicable to the purchase  price.
After  December  31,  2007,  the buyer may further  extend the  closing  through
December 31, 2008, by making  monthly  payments of $30,000.  Half of the monthly
extension  cost would be applicable to the purchase  price and half would not be
applicable.  The purchaser also paid the Company a nonrefundable presales fee of
$1,390,000 that is not applicable to the purchase price. The Company  recognized
the presales fee as an item of noninterest income during 2006.


                                       8
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and related notes  appearing  herein and in the Company's
Annual  Report on Form 10-K for the year ended  December  31,  2006.  Results of
operations for the period ending March 31, 2007 are not  necessarily  indicative
of the results to be attained for any other period. All share and per share data
in this discussion has been adjusted to reflect the 10% stock dividends declared
in May 2007 and April 2006.

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 prospectus and in any
          of  the  reports  that  we  file  with  the  Securities  and  Exchange
          Commission under the Securities Exchange Act of 1934.

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



                                       9
<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 three months ended March 31, 2007 was $830,912
or $0.14 per basic share,  compared to $1,336,412  or $.22 per basic share,  for
the three months ended March 31,  2006.  The basic  earnings per share for March
31, 2007 was based on 5,849,085 shares outstanding  compared to 5,996,220 shares
outstanding for the quarter ended March 31, 2006.

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
$3,641,437 for the three months ended March 31, 2007, compared to $4,026,134 for
the three months ended March 31, 2006.

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

Average  earning assets for the three months ending March 31, 2007 increased 0.6
percent to $432.2 million from the $429.6 million  reported for the three months
ending March 31, 2006.  The  increase was  attributable  to an increase of $18.4
million in investments and federal funds sold offset by a $15.8 million decrease
in average loans. The decrease in average loans was due to a decrease in average
wholesale  loans of $35.6  million to $62.5  million for the three months ending
March 31, 2007,  from $98.1  million for the three months ending March 31, 2006.
The decrease in average  wholesale  loans was due to a decision by management to
focus on core retail lending. Average internally generated,  non-wholesale loans
increased by $19.8 million due to the continued growth of the Charleston  market
area,  the expansion of the  Company's  branches,  and the  Company's  marketing
efforts.


Average interest bearing  liabilities for the three months ending March 31, 2007
increased 2.6 percent to $359.7 million from the $350.4 million reported for the
three months ending March 31, 2006. The increase was primarily  attributable  to
an  increase  in average  other  borrowings,  primarily  Federal  Home Loan Bank
Advances,  of $24.9  million,  offset by a decrease of $19.3  million in average
time deposits.  Of this decrease,  $10.7 million was attributable to a reduction
in average  wholesale and brokered  time  deposits.  The  remaining  decrease in
average time  deposits was due to a  competitive  rate market for time  deposits
driven by economic conditions and increased competition for time deposits driven
by several new competitors in our market area.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended March 31, 2007 and 2006.





                                       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 three months ended                  For the three months ended
                                                              March 31, 2007                            March 31, 2006
                                                              --------------                            --------------
                                              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 ..................   $ 16,483,600      $    216,687      5.33%     $  9,544,356      $    105,191        4.47%
   Investments - taxable ...............     42,476,641           541,538      5.17        34,718,630           417,501        4.88
   Investments- non taxable (2) ........      6,033,196            95,149      6.40         2,284,093            35,709        6.34
                                           ------------      ------------                ------------      ------------
     Total investments and
       Federal funds sold ..............     64,993,437           853,374      5.33        46,547,079           558,401        4.87
   Loans (3)(4) ........................    367,206,411         6,973,916      7.66       383,044,390         6,733,622        7.13
                                           ------------      ------------                ------------      ------------
     Total earning assets ..............    432,199,848         7,827,290      7.31       429,591,469         7,292,023        6.88
                                           ------------      ------------                                  ------------
     Other assets ......................     40,249,336                                    35,723,656
                                             ----------                                  ------------
     Total assets ......................   $472,449,184                                  $465,315,125
                                           ============                                  ============

Liabilities
   Savings and
     transaction accounts ..............   $ 57,044,553           362,444      2.58%     $ 53,361,647           212,286        1.61%
   Time deposits .......................    201,113,926         2,473,534      4.99       220,390,055         2,156,341        3.97
   Other borrowings ....................     79,863,801           900,436      4.57        55,021,969           512,476        3.78
   Subordinated debt ...................     21,655,000           415,186      7.78        21,655,000           371,931        6.97
                                           ------------      ------------                ------------      ------------
     Total interest bearing
       liabilities .....................    359,677,280         4,151,600      4.68       350,428,671         3,253,034        3.76
                                                             ------------                                  ------------
   Non-interest bearing liabilities ....     36,734,736                                    40,925,740
                                           ------------                                  ------------
     Total liabilities .................    396,412,016         4,151,600      4.25       391,354,411         3,253,034        3.37
                                           ------------      ------------                ------------      ------------
   Shareholders' equity ................     76,037,168                                    73,960,714
                                           ------------                                  ------------
     Total liabilities and
       shareholders' equity ............   $472,449,184                                  $465,315,125
                                           ============                                  ============
     Net interest
       income/margin (5) ...............                     $  3,675,690      3.42%                       $  4,038,989        3.81%
                                                             ============                                  ============
     Net interest spread (6) ...........                                       2.63%                                           3.12%
 </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 $245,138 in 2007 and $321,920 in 2006.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above, for the three months ended March 31, 2007 the average yield
on earning assets was 7.31 percent,  while the average cost of interest  bearing
liabilities  was 4.68  percent.  For the three  months  ended March 31, 2006 the
average  yield on  earning  assets  was 6.88  percent  and the  average  cost of
interest-bearing  liabilities  was 3.76  percent.  The  increase in the yield on
earning  assets is  attributable  to increases in market rates of interest.  The
increase in the cost of interest bearing liabilities is caused by maturing lower
yielding   certificates   of  deposit  being   replaced  with  higher   yielding
certificates and increases in market rates of interest.  The net interest margin
for the three  months ended March 31,  2007,  was 3.42 percent  compared to 3.81
percent  for the three  months  ended  March 31,  2006.  The  decline in the net
interest  margin is  primarily  attributable  to the  increase  in the rates and
volumes of interest  bearing  liabilities in excess of the increase in the rates
and volumes of interest  bearing  assets.  The decline in net interest margin is
further  attributable  to the fact that short term  interest  rates were greater
than or equal to long term interest rates in the first quarter of 2007.  Because
the majority of the Company's  interest  bearing  liabilities have maturities of
less  than  one  year and the  majority  of its  interest  earning  assets  have


                                       11
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

maturities of greater than one year,  the Company has  experienced  net interest
margin compression. The cost of total liabilities was 4.25 percent for the three
months ended March 31, 2007  compared to 3.37 percent for the three months ended
March 31, 2006.  The  following  table  presents  changes in the  Company's  net
interest income which are primarily a result of changes in the volumes and rates
of its interest-earning assets and interest-bearing liabilities.

<TABLE>
<CAPTION>
                                                                                   Analysis of Changes in Net Interest Income
                                                                                    For the three months ended March 31, 2007
                                                                                    Versus three months ended March 31, 2006(1)
                                                                                    -------------------------------------------
                                                                                Volume                 Rate              Net Change
                                                                                ------                 ----              ----------
Interest income:

<S>                                                                           <C>                   <C>                   <C>
   Federal funds sold ............................................            $  76,479             $  35,017             $ 111,496
   Investments - taxable .........................................               93,292                30,745               124,037
   Investments - non taxable(2) ..................................               58,613                   827                59,440
                                                                              ---------             ---------             ---------
     Total investments and federal funds sold ....................              228,384                66,589               294,973
     Net loans (3) ...............................................             (278,419)              518,713               240,294
                                                                              ---------             ---------             ---------
     Total interest income .......................................              (50,035)              585,302               535,267
                                                                              ---------             ---------             ---------
Interest expense:
   Savings and transaction accounts ..............................               14,653               135,505               150,158
   Time deposits .................................................             (188,602)              505,795               317,193
   Other borrowings ..............................................              231,377               156,583               387,960
   Subordinated debt .............................................                    -                43,255                43,255
                                                                              ---------             ---------             ---------
     Total interest expense ......................................               57,428               841,138               898,566
                                                                              ---------             ---------             ---------
     Net interest income .........................................            $(107,463)            $(255,836)            $(363,299)
                                                                              =========             =========             =========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Includes  loan fees of $ 245,138 and  $321,920  for the three  months ended
     March 31, 2007 and 2006.

Noninterest Income and Expenses

Noninterest  income for the three  months  ended  March 31,  2007 was  $602,485,
compared to $785,818 for the three months ended March 31, 2006.  The decrease is
attributable  to a combined  $364,714  decrease in gains on sale of property and
equipment,  offset by an increase of $59,809 in gains on sales of available  for
sale securities and an increase of $142,981 in other income, which was primarily
attributable to an award of $125,000 from a lawsuit.

Noninterest  expenses for the three months ended March 31, 2007 were $2,968,888,
compared to $2,405,994  for the three months ended March 31, 2006.  The increase
of $562,894 is  attributable  to several  factors,  most  notably  increases  in
salaries and benefits,  occupancy expenses,  furniture and fixture expenses, and
professional fees. The opening of our Corporate Operations Center in April 2006,
the  acquisition of  Charlestowne  Mortgage in June 2006, and the opening of our
Sam Rittenberg  branch location in January 2007 contributed to increased salary,
occupancy,  and furniture and fixtures expenses for the three months ended March
2007  when  compared  to the  three  months  ended  March  2006.  The  Company's
compliance with provisions of the Sarbanes Oxley Act that first became effective
for the Company at the end of 2006, the more extensive  disclosure  requirements
for the 2007 proxy  statement,  and the  engagements  of an external loan review
firm and an external strategic  consultant were all factors  contributing to the
increase in professional fees between the two periods.


                                       12
<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 $140.5 million,  or 50.3% of
total  deposits as of March 31, 2007.  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.

Loans

Nonfarm,  nonresidential  loans  totaling  $83.1  million made up 22.9% of total
loans at March 31, 2007.  Construction and land development  loans totaled $84.4
million, or 23.2% of the loan portfolio.  All other real estate loans (primarily
mortgage loans) comprised $163.0 million, or 44.7% of the portfolio.  Commercial
and  industrial  loans totaled $29.8 million,  or 8.2% of total loans.  Finally,
installment,  consumer,  and other loans totaled $3.6 million,  or 1.0% of total
loans.  The  allowance  for loan losses was 1.20% of total loans as of March 31,
2007,  compared to 1.19% as of December 31, 2006. In management's  opinion,  the
allowance for loan losses is adequate to absorb estimated losses inherent in our
Bank's loan  portfolio.  Total loans  decreased by $3.6 million during the first
quarter,  due to a decrease of $6.6 in wholesale  loans.  At March 31, 2007, the
Company had $1.1 million in loans 90 days past due and still accruing  interest.
Based on information  currently available to management,  these loans are deemed
to be well  secured  and  collectible.  It had no other  real  estate  owned and
$420,000 of  non-accruing  loans.  There were no other loans that management had
determined to be potential  problem loans at March 31, 2007. The following table
provides a year to date  analysis  of  activity  within the  allowance  for loan
losses:

Balance at December 31, 2006 .................................        $4,364,127
Current Year Loan Loss Provision .............................                 -
Charge- offs:
     Domestic:
       Commercial, financial, and agricultural ...............                 -
       Installment loans to individuals ......................                 -
     Foreign: ................................................                 -
Recoveries:
       Installment loans to individuals ......................                38
                                                                      ----------
Balance at March 31, 2007 ....................................        $4,364,165
                                                                      ==========

Deposits

Deposits decreased $31.7 million during the first three months of 2007 to $279.1
million at March 31, 2007. The decrease was  attributable  to decreases of $34.3
million in brokered and  wholesale  deposits,  and $3.2 million in non- interest
bearing  deposits,  offset by an overall  increase  of $5.8  million in interest
bearing checking,  savings,  money market, and retail time deposit accounts. The
continuing  maturity of the Company's branch network and the Company's marketing
efforts are attributed for the overall growth in retail deposits.





                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Other Borrowings

Other   borrowings   include  FHLBA   advances   (below).   FHLBA  Advances  are
collateralized  by pledged FHLBA stock and certain  residential  mortgage loans.
FHLBA advances are summarized as follows:

              Maturity                        Rate                    Balance
              --------                        ----                    -------
           June 2007                         5.37%               $     5,500,000
           June 2008                         5.40%                     5,500,000
           November 2008                     5.50%                     2,000,000
           September 2010                    5.55%                     7,000,000
           February 2011                     5.36%                     4,500,000
           November 2011                     4.86%                     2,000,000
           March 2013                        2.91%                     7,500,000
           September 2013                    4.79%                    10,000,000
           June 2014                         3.92%                     2,000,000
           October 2016                      4.25%                     5,000,000
           October 2016                      4.17%                     5,000,000
           November 2016                     4.08%                     5,000,000
           January 2017                      4.35%                     5,000,000
           January 2017                      4.40%                     5,000,000
           January 2017                      4.46%                     5,000,000
           January 2017                      4.60%                     5,000,000
                                                                 ---------------

           Balance                                               $    81,000,000
                                                                 ===============

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  $21.7  million  qualify as Tier 1
capital under Federal Reserve Board guidelines, subject to limitations. See Note
11 to the  consolidated  financial  statements and the  information set forth in
Exhibit 13 under the caption "Management's  Discussion and Analysis of Financial
Condition and Results of  Operations- - Junior  Subordinated  Debentures"  filed
with our Form 10-K for the year ended  December 31, 2006,  for more  information
about the terms of the junior subordinated debentures.

Capital Resources

The capital  base for the Company  decreased by $5.5 million for the first three
months of 2007,  due to our  repurchase of 287,542 shares of common stock for an
aggregate  purchase  price of $6.4  million,  partially  offset by net income of
$830,912,  other  comprehensive  income of  $17,552,  and  proceeds  from  stock
issuances of $28,548  through our Employee  Stock  Purchase  Plan. The Company's
tier one capital to average  assets ratio was 20.08 percent as of March 31, 2007
compared to 20.87 percent as of December 31, 2006.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into  two  tiers.   Our  Tier  1  capital   consists  of  common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt  subject  to  certain  limitations.  Our  Tier 2  capital  consists  of the
allowance  for  loan  losses  subject  to  certain  limitations  and our  junior
subordinated debt in excess of 25% of our Tier 1 capital for the Company. A bank
holding company's qualifying capital base for purposes of its risk-based capital
ratio  consists  of the sum of its Tier 1 and  Tier 2  capital.  The  regulatory
minimum  requirements are 4% for Tier 1 and 8% for total risk-based capital. The
Company and 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


                                       14
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

200 basis points above the  minimum.  As of March 31, 2007,  the Company and the
Bank exceeded our capital requirements levels as shown in the following table.

<TABLE>
<CAPTION>
                                                                                     Capital Ratios
                                                                                     --------------
                                                                                     Well Capitalized      Adequately Capitalized
(Dollars in thousands)                                            Actual                Requirement             Requirement
                                                                  ------                -----------             -----------
                                                           Amount       Ratio      Amount         Ratio       Amount     Ratio
                                                           ------       -----      ------         -----       ------     -----
The Bank
<S>                                                       <C>          <C>        <C>             <C>        <C>         <C>
  Total capital (to risk-weighted assets) .............   $55,149      16.62%     $33,185         10.00%     $26,548     8.00%
  Tier 1 capital (to risk-weighted assets) ............    51,091      15.40%      19,911          6.00%      13,274     4.00%
  Tier 1 capital (to average assets) ..................    51,091      11.27%      22,675          5.00%      18,140     4.00%
The Company
  Total capital (to risk-weighted assets) .............   $99,241      28.27%         N/A           N/A      $28,082     8.00%
  Tier 1 capital (to risk-weighted assets) ............    94,877      27.03%         N/A           N/A       14,041     4.00%
  Tier 1 capital (to average assets) ..................    94,877      20.08%         N/A           N/A       18,900     4.00%
</TABLE>

Off Balance Sheet Risk

We make  contractual  commitments to extend credit and issue standby  letters of
credit in the ordinary course of our business activities.  These commitments are
legally binding agreements to lend money to customers at predetermined  interest
rates for a  specified  period of time.  In addition  to  commitments  to extend
credit,  we also issue standby letters of credit which are assurances to a third
party  that  they  will  not  suffer  a loss  if our  customer  fails  to meet a
contractual  obligation  to the third party.  At March 31,  2007,  we had issued
commitments  to extend credit of $42.2 million and standby  letters of credit of
$1.2  million  through  various  types  of  commercial   lending   arrangements.
Approximately  $36.1 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 March 31, 2007.

<TABLE>
<CAPTION>
                                                                 After One     After Three
                                                                  Through        Through                    Greater
                                                    Within One     Three          Twelve      Within One      Than
                                                      Month        Months         Months         Year       One Year        Total
                                                      -----        ------         ------         ----       --------        -----
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 4,647,618   $ 2,961,177   $20,064,000   $27,672,795   $14,508,853   $42,181,648
Standby letters of credit ......................        60,000         2,800     1,107,943     1,170,743             -     1,170,743
                                                   -----------   -----------   -----------   -----------   -----------   -----------

    Totals .....................................   $ 4,707,618   $ 2,963,977   $21,171,943   $28,843,538   $14,508,853   $43,352,391
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

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

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

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

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2006, which was filed
with the Securities and Exchange  Commission on March 16, 2007.  There have been
no material  quantitative  or qualitative  changes in market risk exposure since
the date of that filing.


                                       15
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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 2.  Unregistered Sales of Equity Securities and Use of Proceeds

        (c) Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>
                                               (a) Total Number    (b) Average     (c) Total Number of          Maximum Number
                                                    of Shares       Price Paid     Shares Purchased as     of Shares that May yet be
        Period                                      Purchased        Per Share  Part of Publicly Announced    Purchased Under the
                                                                                 Plans or Programs (1)         Plans or Programs
                                               ----------------    -----------     -------------------          --------------

<C>                                                 <C>                <C>              <C>                          <C>
1/1/07- 1/31/07 .............................         1,789        $   20.96              1,789                      545,405
2/1/07-2/28/07 ..............................       264,380            22.27            264,380                      281,025
3/1/07-3/31/07 ..............................        21,373            22.60             21,373                      259,652
</TABLE>

(1)  On January 19, 2007, the Board of Directors authorized the repurchase of up
     to 547,194  shares,  or 10%, of the  Company's  common  stock.  The Company
     announced the repurchase  plan on January 23, 2007.  Purchases will be made
     in the open market and block trades will be  permitted,  all in  accordance
     with Rule 10b-18 under the  Securities  Exchange Act of 1934. The plan does
     not have a termination date.


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




                                       16
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                                   SIGNATURES


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





Date:    May 7, 2007                        By:s/L. Wayne Pearson
                                               ---------------------------------
                                               L. Wayne Pearson
                                               Chief Executive Officer



Date:    May 7, 2007                        By:s/William C. Heslop
                                               ---------------------------------
                                               William C. Heslop
                                               Senior Vice President and Chief
                                               Financial Officer



                                       17
<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.




                                       18