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," "projection," "predict,"
"could," "intend," "target," "potential," and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

o future economic and business conditions;

o lack of sustained growth and disruptions in the economy of the Greater Charleston area, including, but not limited to, continued falling real estate values and increasing levels of unemployment;

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 the effects of credit rating downgrades on the value of investment securities issued or guaranteed by various governments and government agencies, including the United States of America;

o credit risks;

o higher than anticipated levels of defaults on loans;

o perceptions by depositors about the safety of their deposits;

o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;

o changes in assumptions underlying allowances on deferred tax assets;

o changes in assumptions underlying, or accuracy of, analysis relating to other-than-temporary impairment of assets;

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 and deposit insurance assessments;

o the effect of agreements with regulatory authorities, which restrict various activities and impose additional administrative requirements without commensurate benefits;

o changes in the requirements of regulatory agencies;

o changes in accounting policies, rules and practices;

o changes in technology or products may be more difficult or costly, or less effective than anticipated;

o the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence;

o ability to continue to weather the current economic downturn;

o loss of consumer or investor confidence; and

o other factors and information described in any of the reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

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

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, 2012 was approximately $1,243,000 or $0.23 per basic share, compared to a net loss of approximately $579,000, or $.11 per basic share, for the three months ended March 31, 2011. The average number of basic shares outstanding for the three months ended March 31, 2012 was 5,316,633 compared to 5,270,053 for the three months ended March 31, 2011.

Net Interest Income

Net interest income is the difference between the interest earned on interest earning assets and the interest paid for funds acquired to support those assets, and is the principal source of the Company's earnings. Net interest income was approximately $3.2 million for the three months ended March 31, 2012, compared to approximately $3.2 million for the three months ended March 31, 2011.

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. The Company's net interest income for the three months ended March 31, 2012 and 2011was approximately the same due to nearly equal declines in total interest income and total interest expense. The decreases in interest income and interest expense were both driven by declines in volume and rates, though volume declines played a larger role in the decrease in interest income while rates played a larger role in the decrease in interest expense.

Average earning assets for the three months ended March 31, 2012 decreased 7.9 percent to $367.5 million from the $398.8 million reported for the three months ended March 31, 2011. The decrease was attributable to decreases of $12.3 million in average loans and $19 million in average total investments, cash, and federal funds sold. The decrease in average loans between the two periods was primarily due to loan chargeoffs and foreclosures during 2011, which totaled $9.3 million and $9.4 million, respectively. Additionally, the slow lending environment resulting from the continued sluggish economy has caused the volume of new loans to lag behind loan paydowns.

Average interest bearing liabilities for the three months ended March 31, 2012 decreased 10 percent to $356.7 million from the $396.5 million reported for the three months ended March 31, 2011. The decrease was attributable to decreases of $46.4 million and $5.4 million in average time deposits and average other borrowings, respectively. These decreases were partially offset by an increase of $16.4 million in average savings and transaction accounts. The decrease in average time deposits was attributable to a decrease of $24.2 million in average retail time deposits, and a decrease of $22.2 million in average brokered and wholesale time deposits. The decrease in average other borrowings was primarily attributable to a decrease of $2.7 million and $3.1 million in average Federal Home Loan Bank Borrowings and average retail repurchase agreements, respectively. These changes in the funding mix are consistent with the Company's efforts to build its core deposits while reducing its reliance on wholesale funding sources and retail time deposits.

                        SOUTHCOAST FINANCIAL CORPORATION


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

Net Interest Income - (continued)

The following table compares the average balances, yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended March 31, 2012 and 2011.

                                For the three months ended                      For the three months ended
                                      March 31, 2012                                  March 31, 2011
                          Average        Income/          Yield/          Average        Income/         Yield/
                          Balance        Expense         Rate(1)          Balance        Expense         Rate(1)
Assets
Cash and Federal
funds sold              $    12,882     $        6             0.19 %   $    13,669     $        7            0.21 %
Investments - taxable        45,725            237             2.07          58,415            389            2.70
Investments -
nontaxable (2)                6,643             67             4.04          12,263            123            4.06
Total investments and
federal funds sold           65,250            310             1.90          84,347            519            2.50
Loans (3)(4)                302,222          4,155             5.51         314,476          4,491            5.76
Total earning assets/
      interest income       367,472          4,465             4.87 %       398,823          5,010            5.07 %
Other assets                 60,291                                          71,349
Total assets            $   427,763                                     $   470,172
Liabilities
Savings and
transaction accounts    $   111,783            189             0.68 %   $    95,384            305            1.30 %
Time deposits               173,640            504             1.17         220,032            848            1.56
Other borrowings             61,048            542             3.56          66,449            579            3.53
Subordinated debt            10,310             53             2.05          10,310             45            1.77
Total interest
bearing
 liabilities/interest
expense                     356,781          1,288             1.45         392,175          1,777            1.84
Non-interest bearing
liabilities                  39,672                                          32,117
Total liabilities           396,453                                         424,292
Equity                       31,310                                          45,880
Total liabilities
and equity              $   427,763                                     $   470,172
Net interest
income/margin (5)                       $    3,177             3.46 %                   $    3,233            3.27 %
Net interest spread
(6)                                                            3.43 %                                         3.24 %

(1) Annualized
(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.
(3) Does not include nonaccruing loans.
(4) Income includes loan fees of $205,541 in 2012 and $193,335 in 2011.
(5) Net interest income divided by total earning assets.
(6) Total interest earning assets yield less interest bearing liabilities rate.

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

Net Interest Income - (continued)

As shown above, for the three months ended March 31, 2012 the average yield on earning assets was 4.87 percent, while the average cost of interest bearing liabilities was 1.45 percent. For the three months ended March 31, 2011 the average yield on earning assets was 5.07 percent and the average cost of interest-bearing liabilities was 1.84 percent. The decrease in the asset yields and average rates paid is due to market rate decreases over the last year. The net interest margin was 3.46 percent and 3.27 percent for the three months ended March 31, 2012 and 2011, respectively. The increase in the net interest margin is primarily attributable to a $56,000 decrease in net interest income along with a $31.4 million decrease in average interest earning assets between the two periods. The decrease in net interest income was the result of a $545,000 decrease in interest income, partially offset by a $489,000 decrease in interest expense. The decrease in interest expense was driven by maturities of higher cost time deposits and other borrowings and the partial replacement of these time deposits and other borrowings with core deposits consisting of lower cost savings and transaction accounts.

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.

                                                        Analysis of Changes in Net Interest Income
                                                        For the three months ended March 31, 2012
                                                       Versus three months ended March 31, 2011 (1)
                                                   Volume                 Rate                Net Change
Interest income:

Cash and Federal funds sold                    $            -         $          (1 )       $            (1 )
Investments - taxable                                     (84 )                 (68 )                  (152 )
Investments - non taxable (2)                             (57 )                   1                     (56 )
Total investments and federal funds sold                 (141 )                 (68 )                  (209 )
Net loans (3)(4)                                         (174 )                (162 )                  (336 )
Total interest income                                    (315 )                (230 )                  (545 )
Interest expense:
Savings and transaction accounts                           52                  (168 )                  (116 )
Time deposits                                            (179 )                (165 )                  (344 )
Other borrowings                                          (47 )                  10                     (37 )
Subordinated debt                                           -                     8                       8
Total interest expense                                   (174 )                (315 )                  (489 )
Net interest income                            $         (141 )       $          85         $           (56 )

(1) Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume.

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Income includes loan fees of $205,541 in 2012 and $193,335 in 2011.

(4) Does not include nonaccruning loans.

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

Noninterest Income and Expenses
Noninterest income for the three months ended March 31, 2012 was approximately $906,000, compared to approximately $342,000 for the three months ended March 31, 2011, an increase of approximately $564,000. This was primarily due to increases of approximately $193,000 and $124,000 in gains on sales of available for sale securities and gains on the sale of premises and equipment, respectively. The Company's noninterest income also increased between the two periods due to the recognition of approximately $176,000 of other-than-temporary impairment on available for sale securities during the three months ended March 31, 2011, compared to no other-than-temporary impairment for the three months ended March 31, 2012. Also contributing to the increase in noninterest income between the two periods was a $44,000 increase in service fees on deposit accounts, which totaled approximately $378,000 and $334,000 for the three months ended March 31, 2012 and 2011, respectively. The increase in service fees was attributable to a $16.4 million increase in average savings and interest bearing transaction accounts between the two periods. Growth in these types of core deposit accounts commonly generates additional deposit fee income.

Noninterest expenses for the three months ended March 31, 2012 were approximately $2,652,000, compared to approximately $3,428,000 for the three months ended March 31, 2011, a decrease of approximately $776,000. This decrease was primarily due to an approximate $734,000 increase in gains on the sale of other real estate owned. These gains totaled approximately $736,000 and $2,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. Of the $736,000 of gains for the three months ended March 31, 2012, approximately $550,000 was related to the sale of one property. The Company did not finance the purchase of this property for the buyer.

Income Taxes

For the period ended June 30, 2011, as referenced in Note 7, due to its recent loss history and the potential negative impact of the economy on its future earnings, the Company provided for a full valuation allowance of its deferred tax asset. The gross amount of the Company's deferred tax asset totaled approximately $8.8 million at March 31, 2012. During the three months ended March 31, 2012, the Company recorded expense of $88,000 related to state taxes for South Carolina.

Liquidity
Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity is ensured by maintaining assets which may be immediately converted into cash at minimal cost (amounts due from banks and federal funds sold). However, the most manageable sources of liquidity are composed of liabilities, with the primary focus of liquidity management being on the ability to obtain deposits within the Bank's service area. Core deposits (total deposits less certificates of deposit $100,000 or more, wholesale and brokered deposits) provide a relatively stable funding base, and were equal to 75.7% of total deposits as of March 31, 2012. Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold and funds from maturing loans. The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such has the ability to borrow against pledges of its 1-4 family residential mortgage loans and its commercial real estate loans. Available borrowings under this line totaled $38 million at March 31, 2012. The Company also has federal funds accommodations of $10 million with Alostar Bank of Commerce, and $5 million with Center State Bank. These accommodations may be withdrawn at any time at the sole discretion of these institutions. Additionally, the Company has a borrowing line with the Federal Reserve Bank of Richmond's discount window. The Company has pledged its portfolios of construction and land development loans and commercial and industrial loans against this borrowing line. Total available borrowings under this line were $30.1 million at March 31, 2012.

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

Loans
Gross loans totaled approximately $323,376,000 and $319,740,000 at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012, the Company had $19.9 million of nonaccrual loans, and no loans 90 days delinquent and still accruing interest. Of these, $19.1 million are secured by real estate. The primary risk of loss on these loans is a potential deterioration of real estate collateral values. At December 31, 2011, the Company had $21.3 million of nonaccrual loans and no loans 90 days past due and still accruing interest. At March 31, 2011, the Company had $17.5 million of nonaccrual loans and no loans 90 days past due and still accruing interest. The allowance for loan losses was 2.96 percent of loans as of March 31, 2012, compared to 3.34 percent as of December 31, 2011 and 2.66 percent as of March 31, 2011.

For the three months ended March 31, 2012 the Company recorded a loan loss provision of $100,000 compared to a loan loss provision of $1,150,000 during the first three months of 2011. Net loan chargeoffs for the three months ended March 31, 2012 totaled approximately $1.2 million. However, $942,000 of these chargeoffs were for two loans already specifically reserved for at December 31, 2011. Therefore, no new provision was needed to replace these chargeoffs. Additionally, due primarily to an approximate $3.8 million decline in past due loans, the Company's total general reserves declined by $876,000. The need for future loan loss provisions will be influenced by loan delinquency levels, loan chargeoffs beyond what has already been provided for on individual loans, and the need for additional specific reserves on loans individually evaluated for impairment, among other factors. In reviewing the adequacy of the allowance for loan losses at each quarter end, management takes into consideration the historical loan losses we experienced, current levels of past due loans by loan type, the historical severity of loan losses by loan type, loan to value exceptions present in our loan portfolio, and collateral values of impaired loans deemed to be collateral dependent. In 2011, management adjusted the length of the historical loss period used from four years to one year in order to better reflect recent loss trends. After charging off all known losses, management considers the allowance for loan losses adequate to cover its estimate of inherent losses in the loan portfolio as of March 31, 2012.

For the three months ended March 31, 2012, net chargeoffs to average loans outstanding totaled 1.60% on an annualized basis while the allowance for loan losses to gross loans totaled 2.96% at March 31, 2012.

Management identifies and maintains a list of potential problem loans. These are loans that are internally risk graded substandard or below but which are not included in nonaccrual status and are not past due 90 days or more. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of the borrower which raises serious doubts as to the ability of such borrower to comply with the current loan repayment terms. At March 31, 2012 potential problem loans totaled $37.1 million. The Company's potential problem loans are comprised of $3.1 million of construction and land development real estate loans, $16.7 million of nonfarm, nonresidential real estate loans, $10.7 million of 1-4 family mortgage loans, $1.2 million of multifamily real estate loans, and $5.4 million of various loan types not secured by real estate, primarily commercial and industrial loans. As the majority of potential problem loans are real estate secured, management closely tracks the current values of real estate collateral when assessing the collectibility of these loans.

Other Real Estate Owned
Other real estate owned totaled approximately $7.1 million as of March 31, 2012, $9.3 million at December 31, 2011, and $9.5 million as of March 31, 2011, net of a valuation reserve. Sales of other real estate owned totaled approximately $3.4 million and $531,000 for the three months ended March 31, 2012, and 2011, respectively. Impairment charges on other real estate owned totaled approximately $228,000 and $13,000 for the three months ended March 31, 2012, and 2011, respectively.

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

Deposits
Deposits increased $11.6 million during the first three months of 2012 to $327.8 million at March 31, 2012. Included in this amount were increases of $6.4 million in noninterest bearing transaction accounts, and $8.8 million in time deposits, partially offset by a decrease of $1.9 million in interest bearing transaction accounts, and a decrease of $1.7 million in savings and money market accounts. The increase in noninterest bearing transaction accounts during the first three months of 2012 was primarily attributable to the conversion of a high balance repurchase agreement to a noninterest bearing transaction account. The balance of the account was $5.2 million at March 31, 2012. Brokered and wholesale time deposits totaled $43.1 million and $42.9 million at March 31, 2012 and December 31, 2011, respectively.

Federal Home Loan Bank Borrowings

Other borrowings are primarily comprised of FHLBA advances. FHLBA advances are
collateralized by pledged FHLBA stock and certain residential mortgage and
commercial real estate loans. FHLBA advances outstanding at March 31, 2012 are
summarized as follows:

Maturity           Rate        Balance

February 2013      0.36 %   $  5,000,000
September 2013     4.75 %     10,000,000
June 2014          3.92 %      2,000,000
October 2016       4.25 %      5,000,000
November 2016      4.08 %      5,000,000
January 2017       4.35 %      5,000,000
January 2017       4.40 %      5,000,000
January 2017       4.46 %      5,000,000
January 2017       4.60 %      5,000,000
March 2018         2.33 %      5,000,000
April 2018         3.03 %      5,000,000

Balance                     $ 57,000,000

Junior Subordinated Debentures

On August 5, 2005 Southcoast Capital Trust III (the "Capital Trust"), a non-consolidated subsidiary of the Company, issued and sold a total of 10,310 floating rate securities, with a $1,000 liquidation amount per security (the "Capital Securities"). Institutional buyers bought 10,000 of the Capital Securities denominated as preferred securities and the Company bought the other 310 Capital Securities which are denominated as common securities. The proceeds of those sales, $10.3 million, were used by the Capital Trust to buy $10.3 million of junior subordinated debentures from the Company which are reported on its consolidated balance sheets. The Capital Securities mature or are mandatorily redeemable upon maturity on September 30, 2035, or upon earlier . . .